United States Court of Appeals
For the First Circuit
No. 08-1576
F.A.C., INC.
d/b/a FINANCIAL ADVISORS AND CONSULTANTS, INC.,
Plaintiff, Appellee,
v.
COOPERATIVA DE SEGUROS DE VIDA DE PUERTO RICO,
Defendant/Third-Party Plaintiff, Appellant,
GABRIEL DOLAGARAY; MARIA CRISTINA ORTIZ; JOSE A. BRULL;
ANDRES RODRIGUEZ; ARCILIO RIVAS; DANIEL SANTIAGO,
Defendants/Third-Party Plaintiffs,
INSURANCE COMPANY X,
Defendant,
v.
JOSE RAMON GONZALES; ANTONIO MARRERO; WILLIAM SORIA,
Third-Party Defendants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Jaime Pieras, Jr., U.S. District Judge]
Before
Lynch, Chief Judge,
Leval* and Lipez, Circuit Judges.
*
Of the Second Circuit, sitting by designation.
Alan I. Horowitz with whom Miller & Chevalier Chartered, Lydia
M. Ramos Cruz, and Carlo Law Offices, P.S.C. were on brief for
appellant.
Cherie K. Durand with whom Paul H. Hulsey, Reynaldo Quiñones,
and Hulsey Litigation Group, LLC were on brief for appellee.
April 9, 2009
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LYNCH, Chief Judge. Pursuant to its inherent powers to
issue sanctions for conduct undertaken in bad faith, the district
court found one party to a settlement deserving of sanctions and
ordered it to pay $469,000 in attorneys' fees and costs. That
party, Cooperativa de Seguros de Vida de Puerto Rico ("COSVI"),
foolishly had filed a token opposition to the sanctions motion
filed by its opponent, F.A.C., Inc. ("FAC"). Only when the court
allowed sanctions did COSVI belatedly produce, on motion for
reconsideration, evidence and argument that its conduct was a
reasonable interpretation of its settlement obligations. The
district court, in our view, was justified in not giving weight to
the belated evidence and argument that sanctions were
inappropriate.
Still, the court could not issue a sanctions order unless
FAC had met its burden of showing COSVI had "acted in bad faith,
vexatiously, wantonly, or for oppressive reasons." Chambers v.
NASCO, Inc., 501 U.S. 32, 45-46 (1991) (quoting Alyeska Pipeline
Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 258-59 (1975)). The
court was bound by this court's prior opinion in F.A.C., Inc. v.
Cooperativa de Seguros de Vida de Puerto Rico (F.A.C. I), 449 F.3d
185 (1st Cir. 2006).
The court gave four reasons in support of its finding
that COSVI acted in bad faith. We find three of the four to have
been erroneous, and need not reach the fourth. First, the court
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relied on COSVI's initial delay in writing a letter acknowledging
fraud, which the district court found to be in violation of its
obligations under an oral settlement agreement. However, as we
held in F.A.C. I, it was unclear that the terms of the settlement
included an obligation on COSVI to write such a letter. While we
affirmed the district court's finding that such a letter was
compelled by the settlement agreement, F.A.C. I, 449 F.3d at 192-
93, our discussion of the question showed that the settlement terms
were unclear on this point. Second, the district court concluded
that COSVI "disobeyed" the court's order to write the letter. In
fact, COSVI obtained a stay of the order pending appeal and wrote
the letter promptly at the conclusion of its unsuccessful efforts
to appeal. Nor was there a basis for the court's finding that five
years of "protracted" litigation delays were attributable to
COSVI's bad faith; the major part of this delay resulted from the
lack of clarity of the unwritten terms of settlement, and most of
the remainder of the delay resulted from COSVI's reasonable
decision to appeal on a close question. We also hold that COSVI's
appeal, which led to our earlier opinion in F.A.C. I, was not
undertaken in bad faith and that there was prompt compliance with
the district court's order once it was affirmed in the F.A.C. I
appeal. These holdings undercut the primary bases for the
sanctions award. We vacate and remand for further proceedings
consistent with this opinion.
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I.
The factual background of this case is described in
F.A.C. I. Id. at 187-89. Briefly stated, FAC is a consulting firm
that contracted with the Puerto Rico Department of Health to
recover from a federal agency unreimbursed or under-reimbursed
Medicare claims, in exchange for a percentage of the recovery.
COSVI is a fiscal intermediary which evaluates Medicare claims on
behalf of the Centers for Medicare and Medicaid Services ("CMS"),
the federal agency ultimately responsible for payment. CMS is
within the U.S. Department of Health and Human Services. On May
29, 1998, FAC sued COSVI and six of its officers under RICO, 18
U.S.C. § 1962(a), (d), and Puerto Rico law for allegedly attempting
to extort funds in exchange for favorable action by COSVI on
reimbursement requests FAC had made.
At issue in part was whether any fraud (alleged extortion
demands by COSVI Assistant Vice President Andres Rodriguez) which
occurred was the responsibility of COSVI. The parties orally
settled the case on April 17, 2002, the third day of trial. They
agree that the settlement obligated COSVI to write a letter to CMS
in connection with FAC's reopening requests. The sanctions order
stems from a disagreement, later raised, over what the letter was
required to say. The language was important because CMS will not
reopen claims older than three years unless "it is established that
the determination or decision was procured by fraud or similar
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fault of any party to the determination or decision." 42 C.F.R.
§ 405.1885(b)(3) (then codified at id. § 405.1885(d)).
COSVI sent a letter to CMS on May 24, 2002 that said,
"[t]his request is based on facts learned by COSVI as a result of
its litigation with FAC, Inc., and pursuant to 42 CFR Section
405.1885(d)." This was an oblique reference to the fraud language
of the regulation. COSVI was interested in avoiding any admission
that it had responsibility for fraud.1 On June 20, 2002, CMS sent
COSVI a letter stating that it refused to reopen the claims.
Starting in May 2002, FAC began to protest that COSVI was
not meeting its obligations under the settlement agreement. FAC
and COSVI each filed motions in the district court seeking
enforcement of the settlement agreement in May and June 2002
respectively. FAC alleged that COSVI had not made the settlement
payment to FAC as agreed and had not complied with other terms set
forth in a post-settlement letter from FAC's counsel, while COSVI
sought to compel FAC to dismiss claims it had brought in state
court. COSVI wrote a second letter on July 19, 2002 that went no
further in its admissions but again mentioned § 405.1885(d). That
too did not procure reopening from CMS. On August 29, 2002, the
1
At the outset of the trial, COSVI's own counsel admitted
that COSVI's Assistant Vice President "Andres Rodriguez . . . is
the gentleman who may have been involved in bribes, may have been
involved in illegal activities[,] and I think the evidence will
show it." COSVI's counsel, however, disclaimed any corporate
responsibility for Rodriguez's fraud.
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court entered an Amended Final Judgment, noting that it had
"actively participated in the settlement discussions" and that it
"understood the agreements reached" to include "[t]he sending of a
letter by COSVI to [CMS], on behalf of FAC, Inc., requesting the
reopening of the Medicare Part A reimbursement claims." The
court's amended judgment also compelled FAC to dismiss the state
lawsuit. No party appealed and the sums COSVI had deposited for
the settlement were paid out.
In 2003, CMS apparently was given information about an
FBI investigation into the kickbacks. In late 2003, FAC filed
motions to reopen the case. See F.A.C. I, 449 F.3d at 189. FAC's
argument was that the settlement required COSVI itself to reopen
the claims and that the court should order COSVI to show cause why
it had not done so. The court entered an order on September 28,
2004 denying all pending motions because it considered all claims
disposed of due to the parties' settlement.
FAC filed a motion for reconsideration, arguing that
COSVI was in breach of the settlement agreement because it had not
fully informed CMS that fraud had occurred within COSVI.
On August 10, 2005, the court held that COSVI's May 2002
letter had failed to satisfy the settlement obligations because it
was "silent on the reasons for the request for reopening." It
ordered COSVI to send a new letter to CMS and required that letter
to include the following sentence: "It has come to our attention
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that fraudulent activities took place within our organization with
regards to the claims at issue, and, pursuant to 42 CFR Section
405.1885(a) and (d), we request that you reopen and reassess the
claims in question due to a finding of fraud or similar fault."
This was the first time there was an order from the court that
COSVI use specific language in its letter and that the language
specifically admit there was fraud within COSVI. COSVI appealed,
and was granted a stay of the district court's order pending
appeal.
On May 1, 2006, this court affirmed the order in F.A.C.
I. We first addressed the question of whether the district court
had jurisdiction to enter the 2005 order and concluded that while
the court's participation in the April 2002 settlement did not
provide a basis for continuing jurisdiction, its August 2002
amended judgment, which incorporated the terms of the parties'
agreement and demonstrated an intention to retain jurisdiction,
did. F.A.C. I, 449 F.3d at 189-90 (citing Kokkonen v. Guardian
Life Ins. Co. of Am., 511 U.S. 375, 379-80 (1994)).
Turning to the merits of the order to COSVI, we held that
some deference was due to the district court's views and "the
district judge's assessment of COSVI's obligation is reasonable and
more likely right than wrong." Id. at 194. We noted, however,
that "FAC's case for its reading is hardly air tight," id. at 193,
for several reasons. A "term sheet" that the parties had
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circulated during settlement negotiations made no mention of a
letter. Further, FAC did not protest after COSVI sent its initial
letter, which FAC later said was inadequate. See id. COSVI filed
a petition for certiorari seeking review of F.A.C. I, which the
Supreme Court denied on December 4, 2006. 549 U.S. 1089.
Less than two weeks after the denial of certiorari, on
December 15, COSVI sent a letter to CMS consisting entirely of the
court-ordered language. CMS again declined to reopen the claims.
On July 5, 2006, after this court's opinion in F.A.C. I
but before the denial of certiorari, FAC filed a motion for
sanctions against COSVI in the district court. It claimed COSVI
had acted in bad faith, misrepresented facts to the court, and
unnecessarily protracted the litigation by refusing to send a
letter complying with its settlement obligations, stonewalling
FAC's attempts to have COSVI comply, and filing a time-consuming,
unsuccessful appeal. FAC alleged that COSVI had done so to avoid
admitting that it had been involved in fraud so that it could
recover on an insurance policy that contained an exception for
payments made as a result of fraudulent acts.2
2
FAC alleged that COSVI had not informed the insurer of
the settlement terms as it had represented to the court it had. It
based this on the insurer's special appearance to request that the
court authorize FAC to discuss the terms of the settlement. COSVI
argues that it did inform its insurer of the settlement, that the
admission of fraud was irrelevant to its insurance litigation, and
that the fact that the insurer eventually paid COSVI showed this.
We need not resolve this dispute because the primary grounds on
which the district court relied do not support an award of
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In response, COSVI filed a "Brief Response to Motion for
Sanctions," which said only:
FAC's July 5, 2006 motion for sanctions . . .
fails on its face to advance any valid reason
for the Court to impose sanctions on COSVI.
Should the Court understand that COSVI is
incorrect in its appreciation of the
inadequacy of FAC's motion, it is respectfully
requested that the Court grant COSVI ten days
from notification of that fact to further
respond to the motion.
The court did not hold a hearing on the motion.
On May 28, 2007, the court entered an order sanctioning
COSVI under its inherent powers. It concluded that COSVI had
"acted in bad faith, vexatiously and for oppressive reasons"
because it
failed to fulfill the terms of the April 2002
settlement, disobeyed a Court order to write a
letter with "fraud or similar fault" language,
misrepresented to Plaintiff and this Court
that it exposed the terms of the settlement to
[its insurer], and . . . unnecessarily
protracted this litigation for five years
after signing the April 2002 settlement
agreement.
That order did not set the amount of the sanctions and instructed
FAC to file a motion documenting its attorneys' fees and costs.
FAC did so.
COSVI filed a motion for reconsideration which for the
first time contained argument and evidence. COSVI filed a separate
sanctions and a remand is required.
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reply to FAC's filing on the sum sought as sanctions. The court
denied COSVI's motion for reconsideration on June 25, 2007.
The court entered an order setting the amount of the
sanctions on March 25, 2008. The court awarded FAC its costs and
attorneys' fees for the period between April 23, 2002, the date the
court dismissed the case due to the settlement, and May 28, 2007,
the date on which it ordered sanctions. FAC had requested
approximately $670,000 in costs and attorneys' fees. The court,
having considered COSVI's arguments that the amount sought was
excessive, reduced the requested amount because it found some of
the listed costs excessive and the requested rates for several of
FAC's attorneys too high.
COSVI again moved unsuccessfully for reconsideration.
II.
We review a district court's grant of sanctions under its
inherent power for abuse of discretion. Chambers, 501 U.S. at 55.
We have vacated sanctions awards, nonetheless. See United States
v. Figueroa-Arenas, 292 F.3d 276, 282 (1st Cir. 2002); Whitney
Bros. Co. v. Sprafkin, 60 F.3d 8, 15 (1st Cir. 1995). "We . . .
remain mindful that a 'district court would necessarily abuse its
discretion if it based its ruling on an erroneous view of the law
or on a clearly erroneous assessment of the evidence.'" Whitney
Bros., 60 F.3d at 12 (quoting Cooter & Gell v. Hartmarx Corp., 496
U.S. 384, 405 (1990)).
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A court may award sanctions upon finding that a party has
"acted in bad faith, vexatiously, wantonly, or for oppressive
reasons." Chambers, 501 U.S. at 45-46 (quoting Alyeska Pipeline,
421 U.S. at 258-59). Because of its potency, "a court's inherent
power to shift attorneys' fees 'should be used sparingly and
reserved for egregious circumstances.'" Whitney Bros., 60 F.3d at
13 (quoting Jones v. Winnepesaukee Realty, 990 F.2d 1, 3 (1st Cir.
1993)). A district court exercising this power "must describe the
bad faith conduct with 'sufficient specificity,' accompanied by a
'detailed explanation of the reasons justifying the award.'" Id.
(quoting Gradmann & Holler GMBH v. Cont'l Lines, S.A., 679 F.2d
272, 274 (1st Cir. 1982)).
The district court acted within its discretion in
considering only the facts that FAC had submitted with its motion
for sanctions, given the insufficiency of COSVI's opposition.
COSVI had the opportunity to present its own version of the facts
before the court ruled on FAC's motion for sanctions, but it chose
not to do so. See generally McCoy v. Mass. Inst. of Tech., 950
F.2d 13, 22 n.7 (1st Cir. 1991) ("Courts are entitled to expect
represented parties to incorporate all relevant arguments in the
papers that directly address a pending motion.").3 However, the
3
COSVI's argument that the court violated its due process
rights by assessing sanctions without holding a hearing lacks
merit. The court was required to provide "fair notice and an
opportunity for a hearing on the record" before assessing
sanctions. Roadway Express, Inc. v. Piper, 447 U.S. 752, 767
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district court could not sanction COSVI unless the facts that it
did consider supported a finding that COSVI had acted in bad faith,
vexatiously, wantonly, or for oppressive reasons.
As said, the court gave four reasons in support of its
finding of bad faith: 1) COSVI's failure to fulfill its obligations
under the April 2002 settlement, 2) its disobedience of the court's
order to write a letter acknowledging fraud, 3) the fact that it
"unnecessarily protracted the litigation" for five years after
making the settlement, and 4) its misrepresentation to FAC and to
the court that it had disclosed the settlement to its insurer. The
first three grounds are not supported by the record; we do not
reach the fourth ground.
We turn first to the court's finding that COSVI had acted
in bad faith by failing (until it finally did so in response to the
court's order) to perform its obligation under the settlement
agreement to write a letter to CMS explicitly acknowledging fraud.
A review of our opinion in F.A.C. I demonstrates that it was
unclear whether the 2002 settlement required that COSVI acknowledge
fraud in its letter. There, we noted first that no testimony was
provided about what the lawyers for either side or the principals
had said in the original settlement negotiations. "Because the
parties did not put their precise understanding in writing,
(1980); see also Jensen v. Phillips Screw Co., 546 F.3d 59, 64-65
(1st Cir. 2008). It did so. COSVI simply failed to take advantage
of that opportunity.
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anything done to reduce to precise language what was probably only
a concept has to be an approximation." F.A.C. I, 449 F.3d at 194.
The amended judgment entered in August 2002 by this same judge also
reflected the parties' understanding, but that judgment by its
terms required no admission from COSVI and no particular wording in
the letter. FAC did not request the inclusion of language
admitting fraud had occurred in any correspondence with COSVI until
October 2004. We upheld the district court's 2005 interpretation
of the April 2002 agreement as requiring a letter by COSVI
expressly admitting fraud, but we did so largely in deference to
the district court's fact finding relating to negotiations in which
the district court had itself participated. We expressly noted
that FAC's interpretation, which the district court adopted, was
"hardly air tight," for the reasons stated earlier. Id. at 193.
In view of the uncertainty whether the terms of the oral settlement
agreement required such a letter, the fact of COSVI's failure to
write the letter does not support the conclusion that COSVI was
acting in bad faith.4
Second, there was no basis for the district court's
finding that COSVI had disobeyed its 2005 order that it write the
letter acknowledging fraud. Upon ordering that such a letter be
4
While in F.A.C. I we ultimately upheld the district
court's conclusion that a letter including language directly
admitting fraud was required by the settlement agreement, we in no
way intimated that COSVI's prior failure to write such a letter had
evidenced bad faith.
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written, the district court granted COSVI's motion to stay the
order pending the appeal. Once COSVI's appeal from the order was
final, COSVI promptly complied. The Supreme Court denied COSVI's
petition for certiorari on December 4, 2006. COSVI notified the
court of the denial on December 7 and sent the letter approximately
one week later on December 15, 2006. The record shows that once
COSVI's obligations were clear, it met them promptly.
Third, there was no basis for the district court's
finding that COSVI was responsible for five years of inappropriate
delay after making the settlement agreement. The first three years
of delay following the settlement agreement, until the district
court found that the agreement required such a letter and ordered
that it be written (April 17, 2002 to August 10, 2005), resulted
from a lack of clarity, documented in F.A.C. I, as to whether the
terms of the unwritten agreement required such an acknowledgment.
The next sixteen months were consumed by COSVI's altogether
justified, although ultimately unsuccessful, appeal of a close
question. Our F.A.C. I opinion makes clear that the appeal was not
frivolous but presented reasonably controverted issues. Cf.
Chambers, 501 U.S. at 40 (upholding award of sanctions based in
part on party's filing of appeal found to be frivolous by appellate
court). A district court's inherent power cannot include the power
to sanction a party for reasonably taking an appeal. See
Figueroa-Arenas, 292 F.3d at 280-81 (reversing entry of sanctions
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against attorney where filing that formed basis of award was
erroneous but not made in bad faith).
In conclusion, three of the four grounds that the
district court cited as justification for its finding of bad faith
fail.
We have reached no conclusion one way or the other
whether the fourth ground cited has merit. The nature of our
reasoning that no bad faith was shown on the other three grounds
will require the district court to reevaluate its reliance on a
supposed motive for the "bad faith." To the extent the question is
not motivation for bad faith but an alleged misrepresentation that
the settlement terms had been disclosed to the insurer, the issue
arises of its relevance to FAC's motion for sanctions and whether
any harm resulted to FAC. Nonetheless, even assuming the district
court would reaffirm the fourth ground, it is by no means clear
that the court would have imposed sanctions on that basis alone.
We therefore vacate the sanctions and remand.
In the event that FAC continues to press its application
for sanctions on remand, our ruling does not preclude the district
court from reconsidering whether to grant sanctions on the basis of
the fourth ground, and we imply no view one way or the other
whether such an order could stand. We do not suggest by any means
that COSVI's actions have been admirable, only that three of the
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four grounds cited by the court as justification for sanctions
cannot stand.
We vacate the entry of the sanctions award and remand for
any further proceedings consistent with this opinion.5
5
Although this case was initially filed under seal, the
parties have consented to the public release of this opinion.
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