Baella-Silva v. Hulsey

United States Court of Appeals
For the First Circuit
________________
No. 05-1214

RAFAEL BAELLA-SILVA;
LAURA CARUNCHO-MARCANO;
CONJUGAL PARTNERSHIP BAELLA-CARUNCHO,

Plaintiffs, Appellants,

v.

PAUL H. HULSEY;
JANE DOE;
CONJUGAL PARTNERSHIP HULSEY-DOE;
JOHN DOE;
CHERIE K. DURAND;
CONJUGAL PARTNERSHIP DOE-DURAND;
HULSEY LITIGATION GROUP, LLC;
PALMAS DEL SOL, S.E.;
RAUL RODRÍGUEZ;
SILVIA LETICIA BORBOLLA-GONZÁLEZ;
CONJUGAL PARTNERSHIP RODRÍGUEZ-BORBOLLA;
ARTURO BAELLA;
FRANCISCO RULLÁN;
ROSITA RULLÁN;
CONJUGAL PARTNERSHIP RULLÁN-RULLÁN,

Defendants, Appellees.

UNITED STATES FIDELITY & GUARANTY COMPANY,

Defendant.
________________

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Jaime Pieras, Jr., U.S. Senior District Judge]

_______________
 Before

Torruella, Circuit Judge,
Hansen,* Senior Circuit Judge,
Lynch, Circuit Judge.

________________

José A. Andréu-García, with whom Andréu & Sagardía Law Office,
was on brief for appellants.
Paul H. Hulsey, with whom Cherie K. Durand, William J. Cook,
and Hulsey Litigation Group, LLC, were on brief for appellees.

________________

June 30, 2006
________________

*
Of the United States Court of Appeals for the Eighth Circuit,
sitting by designation.

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 HANSEN, Senior Circuit Judge. Rafael Baella-Silva, Laura

Caruncho-Marcano, and the Conjugal Partnership Baella-Caruncho

(collectively "Baella-Silva") appeal the district court's judgment

assessing liquidated damages and an additional monetary sanction

against Baella-Silva.

The sanctions order at issue here was entered after the

district court determined that Baella-Silva had breached a prior

settlement agreement which had been completely incorporated into

the district court's earlier dismissal judgment. The settlement

resolved a dispute concerning the allocation of attorneys' fees

between Rafael Baella-Silva, an attorney, and the Hulsey Litigation

Group, LLC, including attorneys Paul H. Hulsey and Cherie K. Durand

(collectively "Hulsey").

The fee dispute arose over an award of attorneys' fees

resulting from their joint efforts in representing a Puerto Rican

company, Palmas del Sol, S.E., in litigation against United States

Fidelity and Guaranty Company (USF&G) (hereinafter referred to as

"the USF&G litigation"). Baella-Silva began as the lead attorney

for Palmas del Sol, but when the USF&G litigation was removed to

federal court, he retained the aid of the Hulsey Group. Later,

Baella-Silva completely withdrew from the case, but before his

withdrawal, he secured an agreement for his accrued fees. In the

arrangement, Hulsey agreed to remit to Baella-Silva a certain

percentage of any attorneys' fees awarded in the USF&G litigation.

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The USF&G litigation produced a settlement in favor of Palmas del

Sol, triggering the attorneys' contingent fee arrangement with

their client.

Baella-Silva filed this breach of contract action in the local

court of the Commonwealth of Puerto Rico on September 2, 2004,

alleging that Hulsey had refused to pay him the agreed upon

percentage of the contingent fee. On September 10, 2004, Hulsey

removed the case to federal court, asserting the existence of

complete diversity between the real parties in interest for

purposes of federal jurisdiction. Hulsey simultaneously asserted

that although nondiverse parties appear in the caption, they had

been fraudulently joined by Baella-Silva in an attempt to defeat

diversity jurisdiction.

Baella-Silva opposed the removal and requested that the case

be remanded back to the Commonwealth court due to a lack of

complete diversity. USF&G deposited the disputed funds with the

clerk of court. The district court held a hearing on the motion to

remand on Friday, October 1, 2004, but did not rule on the motion

because the parties entered into a settlement agreement concerning

the attorneys' fee litigation on the same day. The district court

incorporated the settlement into its judgment (hereinafter "the

settlement judgment") and filed it under seal.

The settlement judgment resolved the attorneys' fee issue by

awarding a specified sum to Baella-Silva and allocating to Hulsey

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the remainder of the amount deposited with the clerk. In addition

to settling the fee dispute, the settlement judgment included a

confidentiality clause providing for liquidated damages in the

amount of $50,000 in the event either party disclosed the terms of

the settlement agreement, and Baella-Silva expressly relinquished

all claims against his former client, Palmas del Sol, and its

partners relating to the USF&G litigation and agreed to have no

contact with anyone working for or on behalf of Hulsey, Palmas del

Sol, or its partners. The settlement judgment states that all

parties agree to accept the district court's jurisdiction and that

the district court "shall retain jurisdiction to enforce the terms

of this [a]greement." No party appealed the settlement judgment.

On the following Monday, October 4, 2004, Baella-Silva

electronically filed on the federal district court's public docket

a motion for disbursement of funds, which disclosed some of the

details of the sealed settlement judgment. Baella-Silva also filed

two lawsuits in the local Commonwealth court against Palmas del Sol

and its individual partners for amounts allegedly owed to him.

Hulsey immediately filed a motion to suspend disbursement of all

funds and to impose sanctions, asserting that Baella-Silva's

actions breached the express terms of the settlement judgment by

disclosing its confidential terms as well as by suing and harassing

Palmas del Sol and its partners.

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 Following a hearing, the district court entered a sanctions

order on December 22, 2004, concluding that Baella-Silva had

breached the confidentiality clause by filing the motion for

disbursement electronically, where it was posted live on the

clerk's public docket for approximately one hour before he

requested the clerk to seal the motion. Accordingly, the court

entered judgment against Baella-Silva in the amount of $50,000 for

liquidated damages as set forth in the settlement judgment. The

district court also found that Baella-Silva had breached the

settlement judgment a second time by filing two separate lawsuits

against Palmas del Sol and its individual partners, seeking damages

totaling $20,320. The district court assessed an additional

sanction of $20,320 for this breach. The district court denied

Baella-Silva's motion to reconsider, and Baella-Silva timely

appealed the district court's sanctions order.

On appeal, Baella-Silva argues that the district court lacked

subject-matter jurisdiction to enter the settlement judgment and

the sanctions order due to a lack of complete diversity.

Alternatively, Baella-Silva argues that the district court erred in

assessing liquidated damages and the additional sanctions.

I. Jurisdiction

Because the parties settled the underlying dispute, the

district court did not explicitly rule on the jurisdictional issues

raised in Baella-Silva's motion to remand. By incorporating the

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settlement completely into a final judgment, however, the district

court assumed it had jurisdiction to enter the settlement judgment.

In the settlement judgment, the parties acknowledged and agreed to

that jurisdiction as well as the court's continuing jurisdiction to

enforce the agreement. The parties did not bring a direct appeal

challenging the district court's jurisdiction or any other aspect

of the settlement judgment within the time period provided for

appeal. See Lipman v. Dye, 294 F.3d 17, 20 (1st Cir. 2002) (noting

that "[w]ithout appeal, the court's prior Settlement Order of

Dismissal became final thus barring any further attempt to reopen

the case in ordinary course"). Now, as part of his appeal of the

sanctions order, Baella-Silva attempts to collaterally attack the

jurisdictional basis for the settlement judgment, asserting a lack

of complete diversity.

"It has long been settled that a lack of complete diversity

between the parties deprives the federal courts of jurisdiction

over the lawsuit." Casas Office Machs., Inc. v. Mita Copystar Am.,

Inc., 42 F.3d 668, 673 (1st Cir. 1994) (internal marks omitted).

Furthermore, "[a] court without subject-matter jurisdiction may not

acquire it by consent of the parties." Fafel v. DiPaola, 399 F.3d

403, 410 (1st Cir. 2005). "Weighing against this seemingly

'inflexible' jurisdictional requirement, however, is a strong

interest in the finality of judgments." Id. (internal citation

omitted). A district court's express or implicit determination

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that it has jurisdiction is open to direct review, but it is res

judicata when collaterally attacked. Id.

In an effort to balance the competing policies of observing

limits on federal jurisdiction and respecting the finality of

judgments, "this court has established a high bar for collaterally

vacating a judgment for lack of subject-matter jurisdiction." Id.

Namely, the judgment must be void in order to be vacated for lack

of subject-matter jurisdiction on collateral review:

A void judgment is to be distinguished from an erroneous
one, in that the latter is subject only to direct attack.
A void judgment is one which, from its inception, was a
complete nullity and without legal effect. . . . While
absence of subject matter jurisdiction may make a
judgment void, such total want of jurisdiction must be
distinguished from an error in the exercise of
jurisdiction . . . [which] will not render the judgment
void. Only in the rare instance of a clear usurpation of
power will a judgment be rendered void.

Id. (internal marks omitted) (quoting Lubben v. Selective Serv.

Sys. Local Bd. No. 27, 453 F.2d 645, 649 (1st Cir. 1972)). Under

this standard, if the record supports an "arguable basis" for

concluding that subject-matter jurisdiction existed, a final

judgment cannot be collaterally attacked as void. Id. at 411.

The district court implicitly found it had jurisdiction to

enter the settlement judgment. We will therefore treat Baella-

Silva's collateral attack on the settlement judgment in this appeal

as we would treat an appeal from the denial of a motion for relief

from a void judgment pursuant to Federal Rule of Civil Procedure

60(b)(4). See id. at 409. Accordingly, we will independently

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examine the record to determine whether there is an arguable basis

for concluding that subject-matter jurisdiction existed or whether

the judgment is void as a clear usurpation of power. See id. at

410 (applying de novo review). See also Nemaizer v. Baker, 793

F.2d 58, 65 (2d Cir. 1986) ("When a district court has not

explicitly noted why it assumed jurisdiction over a suit, appellate

courts will independently examine the record to determine whether

a reasonable basis existed for the lower court's implicit finding

that it had jurisdiction.").

Our review of the record convinces us that there is an

arguable basis for concluding that subject matter jurisdiction

existed to enter the settlement judgment. The complaint indicates

that the citizenship of the parties is not completely diverse

because Palmas del Sol and its partners are citizens of Puerto

Rico, as is Baella-Silva. The notice of removal, however, avers

that complete diversity exists and specifically asserts that the

nondiverse parties listed on the complaint are not real parties in

interest but were in fact fraudulently joined in an effort to

preclude removal to federal court.

There are grounds for crediting the averments of the notice of

removal. The fee dispute that resulted in the settlement judgment

involved a fee arrangement entered into only between Hulsey and

Baella-Silva, between whom complete diversity exists. USF&G had

deposited the amount of the disputed fees with the clerk of court

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in fulfillment of its settlement in the USF&G litigation with

Palmas del Sol. Puerto Rico law does not recognize an attorneys'

lien, which would have made Palmas del Sol a necessary party, see

Martinez v. Hernandez, 456 F.2d 262, 264 (1st Cir. 1972), and

Baella-Silva had withdrawn from his representation of Palmas del

Sol in the USF&G litigation. He had contracted for his accrued

fees directly with Hulsey, not Palmas del Sol or its partners.

Thus, the notice of removal, asserting that Baella-Silva had no

claim against the nondiverse parties of Palmas del Sol and its

partners and that they were fraudulently joined, provides an

arguable basis for diversity jurisdiction. Because an arguable

basis for subject matter jurisdiction exists in the record, the

judgment is not void, and Baella-Silva's collateral attack on the

settlement judgment must fail.

Baella-Silva also argues that the district court lacked

subject matter jurisdiction to enter the sanctions order. The

notice of appeal is timely as to the sanctions order. "[W]e review

de novo the district court's legal conclusion that it had subject-

matter jurisdiction to enforce its judgment." Fafel, 399 F.3d at

410. "Subject matter jurisdiction may be independent or

ancillary." Lipman, 294 F.3d at 20. Ancillary jurisdiction exists

where the district court has ensured its continuing jurisdiction to

enforce a settlement agreement either by "including a provision

explicitly retaining [enforcement] jurisdiction" or "by

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incorporating the terms of the settlement agreement in the court's

order." Id. (citing Kokkonen v. Guardian Life Ins. Co. of Am., 511

U.S. 375, 380-81 (1994)). See also Fafel, 399 F.3d at 413;

Municipality of San Juan v. Rullan, 318 F.3d 26, 30 (1st Cir.

2003). The district court here clearly ensured its continuing

ancillary jurisdiction to enforce the settlement agreement by doing

both. We thus turn to the merits of Baella-Silva's challenges to

the sanctions order.

II. Sanctions

Following a hearing, the district court assessed $50,000 in

liquidated damages against Baella-Silva for breaching the

confidentiality clause of the settlement judgment, and the court

imposed an additional $20,320 sanction for Baella-Silva's

subsequent act of filing two separate lawsuits in Commonwealth

court against Palmas del Sol and its partners, in violation of the

settlement judgment. Baella-Silva appeals the imposition of both

sanctions.

First, Baella-Silva argues that he did not breach the

confidentiality clause by electronically filing an unsealed motion

for disbursement of funds on the district court's public docket web

site. The confidentiality clause of the settlement judgment

provides that the "[a]greement and its terms are confidential and

shall not be disclosed to any person." The clause acknowledges

that "[c]onfidentiality is the substantial consideration for th[e]

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compromise" and provides that "[a]ny violation of confidentiality

. . . will result in liquidated damages of Fifty Thousand Dollars

($50,000.00) to be assessed by this Honorable Court after notice

and hearing." (Id. (emphasis in original).) Baella-Silva asserts

that absent proof that a third party actually viewed the

information in the motion, the electronic filing does not in itself

amount to "disclosure."

The district court found that there was disclosure in

violation of the agreement, because the information had been posted

on a public website and was accessible to the general public for

nearly an hour. The district court noted, "Indeed, the very

essence of disclosure is present in this case, even if no third

party viewed it." We agree.

A breach of a settlement agreement incorporated into an order

is a violation of the court order. Kokkonen, 511 U.S. at 381. As

with civil contempt actions, we review the district court's

ultimate finding that a clause in the settlement judgment was

breached for an abuse of discretion. See United States v.

Saccoccia, 433 F.3d 19, 27 (1st Cir. 2005) ("In civil contempt

cases, we first look to the text of the order to determine whether

it is clear. As to findings of fact, we review for clear error,

while the trial court's ultimate finding on contempt is reviewed

for abuse of discretion.") (internal marks omitted); see also

Eureka Broadband Corp. v. Wentworth Leasing Corp., 400 F.3d 62, 67

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(1st Cir. 2005) (noting that "we review the district court's legal

conclusions de novo and its findings of fact for clear error"). We

bear in mind that an abuse of discretion may arise from either "a

mistake of law [or] a clearly erroneous finding of fact." Rodger

Edwards, LLC v. Fiddes & Son Ltd., 437 F.3d 140, 142 (1st Cir.

2006) (internal marks omitted).

We see no clear error in the district court's determination

that Baella-Silva violated the confidentiality clause of the

agreement. Baella-Silva and his attorney actively participated in

negotiating and drafting the agreement, its terms were clear, the

settlement was incorporated into the district court's judgment, and

that judgment was never appealed. Filing a document on the

district court's electronic filing system is not consistent with

keeping information confidential. Documents filed electronically

are immediately available electronically over the Internet, and the

court's website provides 24-hour access to the court's electronic

docket. The website sets forth a separate procedure for filing a

motion under seal, and that procedure does not include an option

for electronic filing. We think it is fair to presume in this day

and age that every attorney understands that an electronic filing

is immediately available to the public and is not a sealed

document. See Mirpuri v. ACT Mfg., Inc., 212 F.3d 624, 631 (1st

Cir. 2000) (stating that it is not excusable neglect for an

attorney to choose to read an unambiguous judicial decree "through

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rose-colored glasses" and thus cause a misunderstanding); United

States v. Magana, 127 F.3d 1, 5-6 (1st Cir. 1997) (noting it is

reasonable for a court to presume an attorney knows the local rules

of practice, even including those unwritten rules that have become

an established custom).

The settlement judgment was itself filed under seal for the

purpose of preventing it from being available to anyone accessing

the court's electronic filing system. The district court stated

that the settlement judgment included specific instructions to the

clerk of court concerning the disbursement of the funds "so as to

preclude any of the parties from having to file a motion for

disbursement, and the parties so understood.” (Id.) Yet, Baella-

Silva filed the motion electronically, thereby presenting the

confidential terms of the agreement to the general public. Also,

USF&G's counsel, a party who was not privy to the settlement and

with whom Hulsey was still involved in litigation, received an

automatic electronic mail notification of the filing. The district

court was not convinced that no one had seen the motion, and in any

event, concluded that public disclosure had occurred by the filing.

The district court's findings that Baella-Silva's filing

disclosed confidential terms of the settlement in violation of the

settlement judgment are not clearly erroneous. Nor did the court

abuse its discretion in assessing $50,000 in liquidated damages.

The parties had agreed that this would be the proper sanction for

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a breach of the confidentiality clause, and that agreement had been

incorporated into the settlement judgment, which was not appealed.

Second, Baella-Silva argues that the district court erred by

imposing a $20,320 sanction for his filing of two lawsuits in the

Commonwealth court against Palmas del Sol and its partners. The

parties agreed that the district court would retain enforcement

authority over the settlement judgment, and, contrary to Baella-

Silva's assertions, no state-law limitations affect the district

court's inherent power to fashion an equitable remedy to punish a

violation of its decree. "A trial court has wide discretion in its

choice of sanctions," and "[o]nce the trial court has chosen a

particular sanction, appellate review is for abuse of discretion."

Goya Foods, Inc. v. Wallack Mgmt. Co., 290 F.3d 63, 77-78 (1st

Cir.), cert. denied, 537 U.S. 974 (2002). See Whitney Bros. Co. v.

Sprafkin, 60 F.3d 8, 11-12 (1st Cir. 1995) (recognizing "that the

district court is better situated than the court of appeals to

marshal the pertinent facts and apply the fact-dependent legal

standard" involved in determining whether to impose sanctions

(internal marks omitted)). When a monetary sanction is chosen, we

likewise review the amount of the sanction only for an abuse of

discretion. See Goya Foods, Inc., 290 F.3d at 78.

The settlement judgment explicitly prohibited Baella-Silva

from having further contact with any of the partners of Palmas del

Sol, unless Palmas initiated the contact, and Baella-Silva and his

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wife expressly relinquished any basis they may have had or ever

would have to file suit against Palmas or its partners "for any

reason whatsoever related to the underlying facts of [the USF&G

litigation]." The settlement judgment is clearly worded. The

evidence at the hearing demonstrated that the first of the two

post-settlement suits was an attempt to recover fees for work done

specifically to secure standing for Palmas del Sol in the USF&G

litigation. The second suit, seeking fees for unrelated work

performed over ten years earlier when there are no grounds for such

a claim in Puerto Rico law, is easily seen as a transparent attempt

to intimidate and harass the defendants in violation of the

agreement. The district court did not commit clear error in

finding that Baella-Silva breached the settlement judgment by

filing the Commonwealth suits.

Finally, we conclude that the amount of the sanction, which is

equal to the amount that Baella-Silva sought in the Commonwealth

court in violation of the settlement judgment, is not excessive.

"[A] party who seeks to overturn a monetary sanction on grounds of

excessiveness bears a heavy burden." Goya Foods, Inc. v. Wallack

Mgmt. Co., 344 F.3d 16, 19 (1st Cir. 2003). "[S]o long as a

sanction is reasonably proportionate to the offending conduct, the

trial court's quantification of it ought not to be disturbed." Id.

at 20. Compensation for losses is not the only factor to be

considered, however, because "[s]anctions stem, in part, from a

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need to regulate conduct during litigation." Id. Thus, setting

the amount of an effective sanction may include punitive concerns

as well as considerations of deterrence. Id. at 20-21. In light

of these multiple purposes and Baella-Silva's apparent willingness

to disregard the terms of the settlement judgment, we cannot say

that the district court abused its discretion in setting the amount

of the additional sanction.

We find no abuse of discretion in the district court's

sanctions order.

Affirmed. Costs are awarded to the appellees.

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