Positive Software Solutions v. New Century Mortgage

Filing

PUBLISHED OPINION FILED. [09-10355 Reversed and Remanded ] Judge: JES , Judge: JLW , Judge: JWE Mandate pull date is 10/04/2010 [09-10355]

Positive Software Solutions v. New Century Mortgage

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Case: 09-10355

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Date Filed: 09/13/2010

IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED
N o . 09-10355 September 13, 2010 Lyle W. Cayce Clerk

P O S I T I V E SOFTWARE SOLUTIONS, INC., P la in t if f -A p p e lle e C r o s s - A p p e lla n t , versu s N E W CENTURY MORTGAGE CORPORATION; ET AL., D e fe n d a n t s , versu s O P H E L I A F. CAMIŅA, R e s p o n d e n t -A p p e lla n t C r o s s - A p p e lle e .

A p p e a l from the United States District Court fo r the Northern District of Texas

Dockets.Justia.com

Case: 09-10355

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No. 09-10355 B e fo r e SMITH, WIENER, and ELROD, Circuit Judges. J E R R Y E. SMITH, Circuit Judge:

O p h e lia Camiņa appeals the district court's imposition of sanctions for her c o n d u c t during arbitration. Because that court lacked inherent authority to imp o s e those sanctions, we reverse and remand.

I. I n 2003, Positive Software Solutions, Inc. ("Positive Software"), sued New C e n t u r y Mortgage Corporation ("New Century") for allegedly infringing telemark e t in g software licensed to New Century. Ophelia Camiņa, a partner at Susman G o d fr e y LLP, appeared as attorney for New Century. Over Positive Software's o b je c t io n , the district court ordered the case to arbitration in accordance with the p a r tie s ' contract. During arbitration, Camiņa advised New Century on various discovery m a t t e r s . In September 2004, the district court vacated the award because the a r b it r a t o r had failed to disclose his previous professional relationship with Cam iņ a . This court reversed the vacatur and remanded. Positive Software Solutio n s , Inc. v. New Century Mortg. Corp., 476 F.3d 278 (5th Cir. 2007) (en banc). A fte r remand, New Century declared bankruptcy. In the course of the b a n k r u p t c y proceedings, Positive Software settled its claims against New Cent u r y , and the case was administratively closed. Under the settlement, New Cent u r y waived and assigned to Positive Software its attorney-client and work-produ c t rights. The district court granted Positive Software's demand that Susman G o d fr e y LLP turn over its files for use by Positive Software in pursuing sanctio n s . In March 2008, Positive Software moved for sanctions against Camiņa, B a r r y Barnett, and Susman Godfrey LLP under Federal Rule of Civil Procedure 2

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No. 09-10355 3 7 , 28 U.S.C. § 1927, and the court's inherent authority. In February 2009, usin g its purported inherent authority, the court sanctioned Camiņa $10,000, repr e s e n t in g a portion of Positive Software's attorneys' fees. Camiņa appeals the s a n ctio n .

II. " W e review de novo a district court's invocation of its inherent power and t h e sanctions granted under its inherent power for an abuse of discretion . . . ." FDIC v. Maxxam, Inc., 523 F.3d 566, 590 (5th Cir. 2008) (citation omitted). We r e v ie w the factual findings underlying those sanctions, however, only for clear e r r o r . See Crowe v. Smith, 151 F.3d 217, 239 (5th Cir. 1998).

III. C a m iņ a claims that the district court lacked inherent authority to impose s a n c t io n s for her conduct during arbitration. In the alternative, she argues that t h e court employed the wrong standard of proof in finding that she acted in bad fa it h , and that the sanctions were not supported by the evidence. Because the c o u r t lacked inherent authority to sanction Camiņa for her actions during arbit r a t io n , we need not address her alternative claims.

A. A district court has the inherent authority to impose sanctions "in order t o control the litigation before it." NASCO, Inc. v. Calcasieu Television & Radio, I n c ., 894 F.2d 696, 703 (5th Cir. 1990), aff'd sub nom. Chambers v. NASCO, Inc., 5 0 1 U.S. 32 (1991). The court may also use that power to sanction conduct, see C h a m b e r s , 501 U.S. at 44, if it is "in direct defiance of the sanctioning court," C J C Holdings, Inc. v. Wright & Lato, Inc., 989 F.2d 791, 794 (5th Cir. 1993), or c o n s t it u t e s "disobedience to the orders of the Judiciary," Chambers, 501 U.S. 32, 3

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No. 09-10355 4 4 (1991). Inherent power, however, "may be exercised only if essential to pres e r v e the authority of the court . . . ." Natural Gas Pipeline Co. of Am. v. Energy G a th e r in g , Inc., 86 F.3d 464, 467 (5th Cir. 1996). In Maxxam, we confirmed the limited reach of the court's inherent authorit y . There the FDIC sued Charles Hurwitz, alleging that he was responsible for t h e failure of a savings and loan association. The FDIC also encouraged the Offic e of Thrift Supervision ("OTS") to pursue similar claims in an administrative p r o c e e d in g . The FDIC moved that the district court stay its case pending comp le t io n of the OTS proceeding. When the district court denied that motion, the F D I C continued to support the administrative action. Invoking its inherent powe r s , the court sanctioned the FDIC for Hurwitz's expenses in defending the OTS a c t io n . We reversed part of those sanctions on the ground that the inherent p o w e r does not extend to collateral proceedings that "do not threaten the court's o w n judicial authority or proceedings." Maxxam, 523 F.3d at 593. Inherent aut h o r it y "is not a broad reservoir of power, ready at an imperial hand, but a limite d source; an implied power squeezed from the need to make the court function." Id. at 591 (citation omitted). H e r e the district court distinguished Maxxam, positing that arbitration is n o t a collateral proceeding but instead an "annex" to litigation. It reasoned that b e c a u s e the court ordered the parties to arbitrate, it retained the authority to im p o s e sanctions for conduct committed in arbitration. That approach is puzzlin g . To begin with, arbitration is not an annex to litigation, but an alternative m e t h o d for dispute resolution.1 Treating arbitration as if it were an appendage t o adjudication is a mistake that would undermine the very purpose of arbitrat io n S S "t h e provision of a relatively quick, efficient and informal means of private

This opinion deals only with traditional arbitration, which is contractual in nature, and not with so-called "judicial" or "court-annexed" arbitration or mediation, which is often compulsory.

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No. 09-10355 d is p u t e settlement . . . ." Antwine v. Prudential Bache Sec., Inc., 899 F.2d 410, 4 1 2 (5th Cir. 1990) (emphasis added). Parties agree to arbitration to avoid litig a t io n ; they voluntarily surrender judicial remedies in favor of an extrajudicial process. Furthermore, the notion that the court's inherent authority turns on w h e t h e r the arbitration was "court-ordered" is untenable. Positive Software cla im s that the district court retained significant supervisory authority by virtue o f ordering the parties to arbitrate. When asked, in oral argument, whether the court would have had inherent authority to sanction Camiņa if the parties had c h o s e n to enter arbitration at the outset, Positive Software's counsel candidly s t a t e d , "of course notSSthat's Maxxam." Positive Software's distinction, then, w o u ld allow trial courts to oversee arbitrations in which one party had to be comp e lle d to arbitrate but not those in which both parties complied with their arbit r a t io n agreement. Such a significant and perverse asymmetry cannot be just ifie d , and Positive Software's efforts to distinguish this case from Maxxam are u n a v a ilin g . I n an attempt to rescue the sanctions order, Positive Software additionally c la im s that the sanctions are based on Camiņa's direct defiance of the prelimin a r y injunction and protective order. That assertion, however, is belied by the c o u r t's own explicit explanation that the sanctioned conduct "took place in conn e c t io n with the arbitration, not in connection with discovery under the Court's s u p e r v is io n ." In other words, the court imposed sanctions not on account of any d ir e c t violation of a court order, but only because it found that Camiņa had exh ib it e d four particular instances of bad faith during arbitration. Positive Software's argument, therefore, fails according to the court's own fin d in g s . Because Camiņa's conduct was neither before the district court nor in d ir e c t defiance of its orders, the conduct is beyond the reach of the court's inhere n t authority to sanction. 5

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No. 09-10355 B. N o t only are the sanctions at odds with our caselaw on inherent authority, b u t they also are in serious tension with the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq. Under the FAA, the district court has the authority to determ in e (1) whether arbitration should be compelled, see §§ 2-4, and (2) whether an a r b it r a t io n award should be confirmed, vacated, or modified, see §§ 9-11. Beyond th o s e narrowly defined procedural powers, the court has no authority to interfere w it h an arbitration proceeding. See Smith, Barney, Harris Upham & Co. v. Robi n s o n , 12 F.3d 515, 520-21 (5th Cir. 1994) (per curiam). Because both parties a g r e e that their contract gave the arbitrator authority to sanction Camiņa for b a d -fa it h conduct, the FAA counsels against the district court's assigning itself t h a t task. P o s i t i v e Software cites LaPrade v. Kidder Peabody & Co., 146 F.3d 899 (D .C . Cir. 1998), to resolve the apparent tension between the sanction order and t h e FAA. In LaPrade, the district court stayed an action brought by Linda LaP r a d e against her former employer because the dispute was covered by a valid a r b it r a t io n agreement. While the arbitration was pending, LaPrade's attorney w e n t into state court and obtained an ex parte order staying the arbitration witho u t informing that court of the district court's previous order. On the employer's m o t io n , the district court lifted the state court's stay and imposed sanctions a g a in s t LaPrade's attorneys under 28 U.S.C. § 1927 for their "vexatious and dilat o r y tactics." LaPrade, 146 F.3d at 900. On appeal, the District of Columbia Circ u it upheld the sanctions, concluding that the FAA did not divest the district c o u r t of jurisdiction to enter the sanctions order. Id. at 903. L a P ra d e, however, does not support the district court's exercise of inherent p o w e r against Camiņa. First, LaPrade held only that the FAA does not affect t h e district court's jurisdiction over a case stayed pending arbitration. Id. But ju r is d ic t io n alone does not create the inherent power to sanction arbitration con6

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No. 09-10355 d u c t. That power must be grounded in some threat to the court's authority or it s ability to function and must not be contrary to statute. Unlike the court in L a P r a d e , which involved sanctions under a specific statutory provision, the dist r ic t court here relied only on its inherent authority, which, as noted, was not up t o the task. F u r t h e r m o r e , it is misleading to suggest that LaPrade's attorneys were s a n c t io n e d for conduct in arbitration. Instead, the court imposed sanctions for t h e direct violation of its order. Id. In staying the federal suit, the court mand a t e d that LaPrade seek redress of her employment-related grievances only t h r o u g h arbitration. By obtaining a stay of arbitration in state court, her attorn e y s disregarded that order, thereby posing a threat to the federal district c o u r t's authority. That conduct might have been analogous to what happened h e r e if Camiņa's sanctions had rested on her violation of the preliminary injunct io n or the protective order. But as already discussed, the district court found n o such violation.

C. F in a lly , and perhaps most importantly, the sanctions order threatens und u ly to inflate the judiciary's role in arbitration. The FAA provides for minimal ju d ic ia l involvement in resolving an arbitrable dispute; the court is limited to only a few narrowly defined, largely procedural tasks. But by using its power to s a n c t io n , a court could seize control over substantive aspects of arbitration. The c o u r t would, in effect, become a roving commission to supervise a private method o f dispute resolution and exert authority that is reserved, by statute, caselaw, a n d longstanding practice, to the arbitrator. That supervision is inconsistent w it h the scope of inherent authority and with federal arbitration policy, which a im s to prevent courts from delaying the resolution of disputes through altern a t iv e means. 7

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No. 09-10355 I n response, Positive Software claims that expansion of district court aut h o r it y is necessary here, because Positive Software did not discover some of Cam iņ a 's alleged misdeeds until after the case had been settled and administrat iv e ly closed. Positive Software argues that without the district court's assertion o f inherent authority, there would have been no means to redress Camiņa's supp o s e d wrongdoing. That argument, however, ignores at least two other proced u r e s that were available to Positive Software. First, it could have asked the American Arbitration Association to re-open t h e proceedings so it could request sanctions from the arbitrator. See American A r b it r a t io n Association, Commercial Arbitration Rule 36, 38 (2009). Second, it c o u ld have relied on the grievance process. In fact, it did: Its counsel filed a g r ie v a n c e against Camiņa, which was dismissed as lacking just cause. Contrary t o Positive Software's contentions, then, there was no particular need for the dist r ic t court to expand its inherent authority to prevent misdeeds from falling t h r o u g h the cracks.

IV. I n sum, the district court lacked inherent authority to sanction Camiņa for h e r conduct during arbitration. That conduct was neither before the district c o u r t nor in direct defiance of its orders. If inherent authority were expanded t o cover Camiņa's conduct, there would be nothing to prevent courts from insertin g themselves into the thicket of arbitrable issuesSSprecisely where they do not b e lo n g . Such an expansion would also threaten the integrity of federal arbitrat io n law in the name of filling a gap that does not exist. We therefore REVERSE t h e sanctions2 and REMAND for any further proceedings that may be needed.3

We do not condone Camiņa's complained-of actions as they are alleged to have occurred. The clerk is directed to send a copy of this opinion to the Office of the General Counsel (continued...)

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(...continued) of the State Bar of Texas. We are mindful that the State Bar declined to act on this matter in response to Positive Software's request, and we express no view on whether the State Bar should consider this matter further or, if it does, on what action it should take. We opine only that the federal courts are without power to issue sanctions under these particular facts. We apply the correct law to the facts at hand and do not speculate on whether a district court might ever have the power to sanction for conduct in arbitration. We might have reached a different result but for the district court's specific factual finding that the discovery issues "took place in connection with the arbitration, not in connection with discovery under the Court's supervision pursuant to the Federal Rules of Civil Procedure." Here, New Century affirmatively sought the entry of a protective order governing discovery both before the district court and in the arbitration proceedings; New Century also petitioned the court for sanctions against Positive Software on multiple occasions. Accordingly, had the alleged conduct arisen in connection with discovery before the district court or the protective order or preliminary injunction, it might have "threaten[ed] the court's own judicial authority or proceedings." Maxxam, 523 F.3d at 593, so the court might have been within its inherent authority to sanction Camiņa, see NASCO, 894 F.2d at 703. We express no ultimate view on this hypothetical, which is not before us.
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