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.
-2-
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.
-3-
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
-4-
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.
-5-
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
-6-
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
-7-
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
-8-
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
-9-
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
-10-
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]
-11-
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
-12-
(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
-13-
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
-14-
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
-15-
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
-16-
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.
-17-
Baella-Silva v. Hulsey
Court: Court of Appeals for the First Circuit
Date filed: 2006-06-30
Citations: 454 F.3d 5
Copy Citations