Federal Deposit Insurance v. Maxxam, Inc.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT United States Court of Appeals

Fifth Circuit

FILED

April 3, 2008

No. 05-20808

Charles R. Fulbruge III

Clerk

FEDERAL DEPOSIT INSURANCE CORPORATION, As manager of the

FSLIC Resolution Fund;

Plaintiff-Appellant

v.

MAXXAM, INC

Intervenor Plaintiff-Appellee

v.

CHARLES E. HURWITZ, et al

Defendants

CHARLES E. HURWITZ;

Defendants-Appellees

FEDERATED DEVELOPMENT CO.

Intervenor Defendant-Appellee

Appeal from the United States District Court

for the Southern District of Texas

USDC No. H-95-3956

Before HIGGINBOTHAM, GARZA, and BENAVIDES, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

No. 05-20808

This case arises from the failure of the United Savings Association of

Texas in 1988, estimated to have cost taxpayers $1.6 billion.1 The Federal

Deposit Insurance Corporation sued Charles Hurwitz in federal district court for

his alleged involvement in the failure of the large Texas thrift. At the behest of

the FDIC, the Office of Thrift Supervision pursued similar allegations against

Hurwitz and others in an administrative proceeding that concluded with a

holding that the claims were meritless. When the FDIC then moved to dismiss

its suit in the district court, the court found that the FDIC’s claims were baseless

and had an improper purpose of gaining government ownership of approximately

3,800 acres2 of California redwoods owned by MAXXAM, Inc. (“Maxxam”) and

harassing Defendants.3 It assessed large sanctions. The FDIC timely appealed.

I

In 1983, United Financial Group and First American Financial of Texas

– two savings and loan companies – merged. UFG became the holding company

of USAT, holding 100% of USAT’s stock.4 USAT, with a core business of lending

to homeowners, expanded its business as it struggled to stay afloat during the

thrift crisis when more than 1,000 thrifts failed throughout the United States.5

While there was variation among them, all faced a system-wide squeeze in

1

Memorandum from Jack D. Smith, FDIC Deputy General Counsel, and Stephen N.

Graham, Associate Director, to the FDIC Board of Directors, at 8 (May 20, 1994).

2

The acreage estimates for the redwoods (the “Headwaters”) differ but are not material.

The district court found that it was a 4,400-acre tract. FDIC v. Hurwitz, 384 F. Supp. 2d 1039,

1048 (S.D. Tex. 2005).

3

Maxxam owned the Headwaters through its Pacific Lumber Company.

4

This ownership interest triggered a statutory duty to provide sufficient capital to

USAT for it to meet its required minimum net worth.

5

See, e.g., William A. Lovett, Conflicts in American Banking Regulation: Renewed

Prudence, Retrenchment, and Struggles Over Growth Potential, 12 ANN. REV. BANKING L. 443,

444 (1993) (describing how “between 1982 and 1992, more than 1500 banks and at least 1000

thrift institutions (mostly S&Ls) failed”).

2

No. 05-20808

interest rate differentials – between earnings on fixed-interest long-term

mortgages and rising market rates. UFG had several substantial stakeholders,

including MCO Holdings, Inc., later Maxxam, Inc.,6 and Federated Development

Company. A prominent Texas businessman, Charles Hurwitz, was Chairman

and CEO of these two stakeholders as well as the Chairman of UFG, and he

owned 52.5% of Federated’s shares; Federated in turn owned at least 60% of

Maxxam voting stock. By 1984, Federated and Maxxam (then MCO) owned

23.5% of UFG’s outstanding shares.7 Maxxam and Federated applied to acquire

up to 35% of the shares of UFG. FHLBB approved the application on the

condition that, inter alia, Maxxam and Federated commit to maintaining the net

worth of USAT.8 This net worth commitment arose because by statute, an entity

acquiring 25% or more voting power in an insured institution becomes obligated

to contribute to the institution’s minimum required capital.9 Maxxam and

Federated tried to negotiate changes to the obligation but ultimately declined

it,10 and UFG remained as the guarantor of USAT’s minimum capital. In turn,

6

MCO Holdings, Inc. merged with the subsidiary MAXXAM Group, Inc. to form

MAXXAM, Inc.

7

Charles E. Hurwitz’s Response to the FDIC’s Requests for Admissions, at 45 (item

9.20). As of January 4, 1984, Federated owned 801,941 shares of common stock and Maxxam

owned 1,104,098 shares of common stock, or a total of 1,906,039 (23.5%) of the outstanding

shares.

8

The December 6, 1984, resolution required, “For as long as they directly or indirectly

control United Savings, applicants shall contribute a pro rata share based on their UFG

holdings, of any additional infusion of capital . . . that may become necessary for the insured

institution to maintain its net worth at the level required by the Corporation’s Net Worth

Regulation.”

9

See 12 C.F.R. § 563.18-2 (as revised in 1982).

10

The FDIC and OTS argued that once the FHLBB issued this obligation, it became

binding on the applicants when they later entered transactions that gave them potential

control over UFG. They alleged that FHLBB resolutions are not private contracts that require

signatures by both parties in order to be binding. The administrative and district courts

rejected this theory.

3

No. 05-20808

Maxxam and Drexel Burnham Lambert, a company owning stock in UFG,

entered into a “call-put” contract.11 The agreement allowed Maxxam to call

UFG’s shares held by Drexel, a total of 300,000 outstanding shares.12 Maxxam

indemnified Drexel for the risk of loss associated with the agreement. Through

this stock arrangement with a shareholder of UFG – the company that controlled

USAT – Maxxam gained at least potential control over USAT,13 as did

Federated, in turn, with its approximate 60% stake in Maxxam and its

ownership with Maxxam of nearly 25% of UFG’s shares. In other words,

Hurwitz owned the majority of Federated’s stock, Federated owned a majority

of Maxxam, and Maxxam and Federated had a measure of control over UFG and

USAT through Maxxam’s stock arrangement with Drexel and Maxxam and

Federated’s combined ownership of UFG shares.14 An FDIC investigation also

11

The arrangement required MCO to give Drexel a put option if MCO did not exercise

the call option for the 300,000 shares.

12

The FDIC investigation suggested, and its complaint argued, that this was an end-

run around Hurwitz’s control obligations. The FDIC alleged that the arrangement gave

Hurwitz control over additional UFG shares, thus exceeding the 25% threshold.

13

Whether the “option” constituted ownership of the shares or a mere interest in the

shares was disputed. The administrative and district courts concluded that the option was not

ownership.

14

The district court concluded that Hurwitz did not control a “significant percentage”

of USAT, contrary to the assertions of the “regulators.” Rather, it found that “Hurwitz himself

actually owned 0.006% of the holding company’s stock. He owned a slight majority of stock in

Federated, which owned a majority of Maxxam. Based on his involvement in Federated and

Maxxam, Hurwitz’s indirect, tertiary personal interest in United Financial was less than 10%.

Whether looking at his personal interest in United Financial or Federated and Maxxam’s

ownership of less than 25% in the company, Hurwitz did not control a ‘significant percentage’

of it.” FDIC v. Hurwitz, 384 F. Supp. 2d 1039, 1055 (S.D. Tex. 2005). This observation is

correct, but it fails to address the fact that Hurwitz had control of Federated and Maxxam,

which in turn had control of nearly 24% of UFG shares – just below the trigger point for control

of USAT, accompanied by the responsibility of maintaining USAT’s net worth. In turn, the

call-put arrangement for UFG shares potentially allowed Maxxam and Federated to exceed the

trigger point through indirect means. It was disputed whether the call option, if exercised,

would have required Maxxam to combine its UFG stocks with the Maxxam-Federated stocks

and therefore whether the 25% ownership threshold would be triggered by the option.

4

No. 05-20808

indicated that in 1985, Maxxam and Federated acquired shares in UFG that,

when converted two years later, could give Maxxam and Federated an additional

15% of ownership in Federated. Maxxam and Federated allegedly exchanged

these shares for another series of Federated stock to postpone the conversion

date and avoid any potential control obligations.15

The FDIC investigation also concluded that USAT, Federated, and

Maxxam had common management and that Hurwitz participated in UFG’s and

USAT’s Investment Committee meetings and UFG/USAT’s joint board meetings.

Hurwitz was a member of UFG’s Executive Committee and of UFG/USAT’s

Strategic Planning Committee. USAT’s investment manager reported his trade

decisions to Hurwitz,16 and Hurwitz often recommended investment strategies

to USAT.17 An employee of Federated also established USAT’s investment

department.18

The FDIC and OTS focused on two transactions involving Hurwitz as

likely contributors to USAT’s demise. First, USAT made a real estate loan to a

close friend of Hurwitz’s, the “Park 410 loan,” resulting in a loss of

approximately $57 million. Second, USAT, struggling with a changing home

lending market, sought additional revenue in mortgage backed securities and

junk bonds. These investments were funded by sales of parts of USAT’s

15

See infra note 72.

16

See, e.g., Memoranda from Arthur S. Berner to Charles Hurwitz, Barry Munitz,

Jenard Gross, and others, describing, inter alia, potential business decisions such as debt

restructuring, acquiring stocks, other entities’ willingness to sell back their debt. The

memoranda indicate that Hurwitz attended the Management Committee and Strategic

Planning Committee meetings at which these decisions were initially discussed.

17

The minutes of the Investment Committee meetings were not recorded during the

meetings.

18

Brill, Sinex & Stephenson, Hutchinson & Grundy, Report and Litigation

Recommendations on Director, Officer, and Professional Liability Claims Arising out of the

United Savings Association of Texas Receivership.

5

No. 05-20808

business, with financing by Drexel of approximately $1.8 billion of its junk bond

acquisitions.19 This, according to the FDIC, evidenced Hurwitz’s indirect control

over USAT’s investments.

Through United MBS, a USAT subsidiary that Hurwitz helped form,

USAT invested nearly $180 million in mortgage backed securities, resulting in

losses of nearly $97 million. The FDIC later labeled USAT investments in

mortgage backed securities as “Joe’s Portfolio,” for the USAT junk bond analyst

who managed the investments. Rather than unwinding the portfolio when

interest rates rapidly fell and more homeowners began prepaying mortgages

with the decline in mortgage rates, USAT decided to sell the mortgage backed

securities before prepayment and buy other mortgage backed securities in a

hasty “roll down” strategy. According to the FDIC, this strategy resulted in very

large losses. As USAT’s losses increased, the Federal Home Loan Bank Board

informed UFG that it must help USAT meet its minimum capital obligation.

UFG did not contribute capital. In February 1988 Hurwitz resigned from UFG’s

Board. FHLBB closed USAT on December 30, 1988, and designated as receiver

the Federal Savings and Loan Insurance Corporation in its corporate capacity.

With the Federal Institutions Reform, Recovery, and Enforcement Act of 1989,

the FDIC succeeded the FLSIC as receiver for USAT.

Working with OTS, which oversees the enforcement of thrifts and the

activities underlying their failure, the investigation by the FDIC of USAT’s

downfall took much of the next six years. To avoid losing potential legal claims,

the FDIC entered into several tolling agreements with Hurwitz and others

involved in the failure.

19

One memorandum to the FDIC listed “Bonds Underwritten by Drexel for Companies

Affiliated with Hurwitz” for 1984 through 1989 based on information gathered from Maxxam

Group, Inc.’s Prospectus and 10-K’s. See Memorandum from Tom Manick, Adorno & Zeder,

P.A., to Robert J. Dehenzel, Jr., FDIC (July 31, 1995).

6

No. 05-20808

In 1993 – at least four years after commencing its investigations of

Hurwitz’s involvement in USAT and two years before suing Hurwitz – the FDIC

began to receive communications from environmental groups, and later members

of Congress, encouraging it to settle with Hurwitz for his California redwood

lands, called the “California Headwaters.” These environmental groups and

several government agencies wanted to ensure preservation of the Headwaters.20

By a November 17, 1993, memorandum to the FDIC Board of Directors,

Jack D. Smith, Deputy General Counsel, and Stephen N. Graham, Associate

Director, recommended that the FDIC “file suit by December 31, 1993 for at

least $418 million in damages” against individuals involved in USAT’s failure,

including Hurwitz. However, the FDIC’s lawyers later recommended that it not

sue due to hurdles posed by the statute of limitations as well as difficulties in

demonstrating Hurwitz’s indirect management of USAT through Maxxam’s

agreement with Drexel.21 As the FDIC investigation continued, members of

Congress urged the FDIC to proceed, stating,

We understand that there has still been no formal action initiated

to recover the taxpayers’ losses in the estimated amount of $1.6

billion resulting from this fifth most expensive savings and loan

failure . . . . In light of the continued passage of time without action,

we are concerned that the ability to recover these very significant

losses is being jeopardized. Many of the possible targets whose

conduct the FDIC has alleged contributed to USAT’s failure,

20

See, e.g., Memorandum from Jack D. Smith, Acting General Counsel to Andrew C.

Hove, Jr., Acting Chairman (Dec. 21, 1993) (“We are also reviewing a suggestion by ‘Earth

First’ that the FDIC trade its claims against Hurwitz for 3000 acres of redwood forests owned

by Pacific Lumber, a subsidiary of Maxxam.”).

21

A July 24, 1995 memorandum from Jack D. Smith and Stephen N. Graham to the

Board of Directors expressed concerns that RTC v. Acton, 49 F.3d 1086 (5th Cir. 1995), “further

weakened” the FDIC’s case because it found that self-dealing and fraudulent conduct were

required to toll the statute of limitations for adverse domination suits and that gross

negligence was not sufficient.

7

No. 05-20808

continue to enjoy vast personal wealth. Justice for the Federal

taxpayer requires resolution of this matter.22

The chairwoman of the FDIC – Ricki Tigert, later Ricki Helfer – similarly

expressed concern regarding the “egregious” actions that may have contributed

to the thrift’s failure and pushed for legal action against Hurwitz. Following a

meeting between two FDIC lawyers and chairwoman Helfer, where she

encouraged them “to take another look” at their recommendation not to sue, staff

hastily revised their initial memorandum recommending against suit.23

The pressure on FDIC regarding the redwoods issue also increased as the

end of the tolling agreement neared. On July 24, 1995, Congressmen Pete Stark

and George Brown wrote a letter to Helfer asking “the FDIC to pursue the

possibility of a debt-for-nature swap which would apply the debt arising from the

failure of USAT towards the purchase of the Headwaters Forest.”

Persuaded that a parallel administrative proceeding by OTS enhanced its

chances at obtaining restitution, the FDIC paid OTS approximately $2.89

million to defray the costs of investigating and prosecuting an administrative

enforcement action24 against Hurwitz, Maxxam, Federated, and others, an

arrangement found legal by an internal memorandum.25 The payment

22

Letter from Representatives George Brown, Esteban Torres, Pete Stark, Lucille

Roybal-Allard, Ron Dellums, Nancy Pelosi, Bruce Vento, Elizabeth Furse, Lynn Woolsey,

Anthony Beilenson, Tom Lantos, Edward Markey, and Maurice Hinchey to Mrs. Ricki R.

Tigert-Helfer, Chair, FDIC Board of Directors (March 30, 1995).

23

There were “four drafts [of the July 24, 1995 ATS memorandum] that [did] not

recommend suit,” followed by a July 27 memorandum recommending suit.

24

A March 23, 1999, resolution of the FDIC Board of Directors authorized “the FDIC

to pay OTS up to $3.43 million as reimbursement of the OTS costs associated with the

continuation and completion of the administrative proceeding addressing misconduct arising

out of the USAT receivership,” but it appears that OTS did not request all of the authorized

funds.

25

Memorandum from Carolyn B. Lieberman, Chief Counsel, OTS to Kenneth J. Guido,

Jr., Special Enforcement Counsel, FDIC and Bryan T. Veis, Special Counsel (undated). The

8

No. 05-20808

responded to OTS advice that it lacked the resources to pursue the action and

that any money OTS won in restitution would flow to FDIC as USAT’s corporate

receiver. Without financial assistance, OTS was unlikely to act.26 The OTS

commenced is official investigation on October 25, 1994, almost a year before the

FDIC filed suit.

The FDIC was unsure of whether the OTS investigation would culminate

in official administrative proceedings and was concerned that the USAT failure

might conclude with no restitution to the FDIC.27 The FDIC approved its suit

at a board meeting where several board members expressed concerns about the

difficulties of the case;28 and when Hurwitz would not agree to further extend the

statute of limitations period, the FDIC filed suit against Hurwitz on August 2,

1995. The OTS formally commenced its proceedings on December 26, 1995.29

The FDIC declined to sue George Kozmetsky, another senior member of

USAT’s management, concluding that any claims against him would be barred

by the statute of limitations and that a suit against a popular charitable figure

district court, on the other hand, believed that the arrangement was illegal, observing, “After

an adverse ruling or two from this court, the FDIC illegally paid the Office of Thrift

Supervision to bring an administrative action.” Hurwitz, 384 F.Supp. 2d at 1047.

26

Some documents suggest that the FDIC wanted a parallel OTS action to increase the

costs of Hurwitz’s defense. However, the FDIC twice moved unsuccessfully to stay the district

court proceeding to avoid duplicative work. Defendants argue that “the FDIC wanted the OTS

case to ‘go first’ because it preferred” the OTS proceeding to district court.

27

See, e.g., Testimony of FDIC General Counsel Kroener, stating, “But the Board

simply, we had no assurances that anything was going to happen at the OTS, that they would

ever bring any charges.”

28

See e-mail from Jack D. Smith to Stephen N. Graham, et al. (July 26, 1995) (“The

Chairman and General Counsel have decided to recommend suit in Hurwitz. Therefore, we

should distribute a signed ATS by 2:00 tomorrow.”).

29

Notice of Charges and of Hearing for Cease and Desist Order (Dec. 26, 1995).

9

No. 05-20808

would be unwise.30 Other individuals implicated in the failure with whom the

FDIC had renewed tolling agreements also escaped suit.31

The original complaint alleged that (1) Hurwitz indirectly maintained

control of USAT through the call-put arrangement with Drexel for UFG shares

and breached his duty of loyalty to USAT by taking actions that “aggravated

USAT’s losses and further decreased its net worth,” taking “no steps to ensure

that UFG did not dissipate its assets or otherwise compromise its obligations to

USAT,” and by failing to cause other institutions he controlled to infuse net

worth into USAT when it dipped below its obligations; (2) Hurwitz, through his

involvement with USAT’s Board, irresponsibly approved sales and acquisitions

of mortgage backed securities for a USAT portfolio despite the knowledge of

large losses from the portfolio;32 and (3) Hurwitz, “active in the affairs of

[USAT’s] Investment Committee” obtained its approval of a “grossly negligent

and reckless gamble” of acquiring “substantial amounts of mortgage backed

securities” “financed by reverse repurchase agreements,” rejecting “an adequate

hedging program in favor of a purely speculative series of bets on interest rate

movements.”33 All claims alleged a breach of Hurwitz’s fiduciary duty of loyalty,

30

The district court broadly concluded, on the other hand, that the FDIC declined to sue

Kozmetsky because he had no control over redwoods that the Government wished to acquire.

Hurwitz, 384 F. Supp. 2d at 1066.

31

The record shows that the FDIC carefully considered who to sue and not sue. One

memorandum contained a section on “Persons Who Signed Tolling Agreements But Should Not

Be Sued” because of, inter alia, their “cooperation,” their “relative culpability,” and because

“they were not closely involved in the gains trading activities.” Memorandum from Robert J.

DeHenzel, Professional Liability Section, and Eileen M. Avila, Professional Liability Section,

to John F. Bovenzi, Deputy to the Chairman, at 23-24 (Aug. 19, 1992).

32

The complaint pointed to mark-to-market losses of $122 million as of November 1986

and alleged that USAT and Hurwitz authorized further sales and acquisitions for the portfolio

through 1987 despite this knowledge.

33

The complaint alleged that “[i]n September, Hurwitz was advised that with no change

in interest rates USAT would lose $40 to $60 million in each of the next three years,” and that

“[i]n November, 1986 Gerald Williams advised Hurwitz that USAT’s base operation was losing

10

No. 05-20808

while claims II and III also alleged that Hurwitz aided and abetted gross

negligence.

The FDIC twice moved the district court to stay its case pending

completion of the administrative proceeding prosecuted by OTS, urging that a

stay would avoid duplicating issues pending in the OTS case. The court found

that the “FDIC wanted to stay because it preferred the administrative forum,”34

advising that it would not “hold[] Mr. Hurwitz up at [the FDIC’s] request so [the

FDIC] can hit him here while the O.T.S. is doing things to him that I might not

let you do here . . . .”35 The district court at Hurwitz’s request also joined OTS

as an involuntary plaintiff in the federal suit on November 29, 1996. The

Government filed an amended complaint, dropping its claims that related to

OTS’s administrative proceedings, and the court then dismissed OTS on October

23, 1997.

The Government acquired the Headwaters property in 1999, but by

purchase and not as part of any settlement of FDIC or OTS claims. Those claims

were not faring well. Five respondents in the OTS case had settled on February

10, 1999, before the administrative court conducted oral hearings in the case,

leaving Hurwitz, Maxxam, and Federated as the remaining respondents. The

administrative court dismissed the remaining respondents’ motion for summary

disposition, finding that there were “material facts in issue,” including

“[w]hether respondents obtained control of UFG”; “[t]he meaning of terms

contained in the net worth maintenance provision”; “[w]hether respondents were

unjustly enriched, or committed a violation . . . involving a reckless disregard for

money at a rate of $77 million per year – up from $40 million per year twelve months earlier.”

34

384 F. Supp. 2d at 1060 (finding that a memo from FDIC’s attorney Williams stating

“OTS’ case broader bec/not constrained by [Texas’s statute of limitations], [business judgment]

. . . may be in our [interest] to stay” indicated that the FDIC lied about its motives for the

stay).

35

Hearing Before Lynn H. Hughes at 8 (Nov. 16, 1995).

11

No. 05-20808

the law”; and “[w]hether MAXXAM and Federated were holding companies.”36

The court concluded that “these matters can be fairly and responsibly resolved

only upon a full evidentiary record of factual and expert testimony.”37 After

lengthy hearings held over 119 days, the administrative court on September 12,

2001, recommended dismissal of all remaining claims against Hurwitz, Maxxam,

and Federated in a lengthy opinion, finding them meritless. With this collapse

of the case, Hurwitz, Maxxam, and Federated settled some of the claims with

OTS, agreeing to pay $206,000 and to not participate as a controlling

shareholder of any insured financial institution for three years. This agreement

also incorporated a

written release . . . of the OTS, its officers, directors, agents,

servants, employees, attorneys and other representatives, but not

the FDIC, from all claims and counterclaims that may have been

asserted against them arising out of or in any way related to the

Respondents, USAT, UFG, Maxxam, or Federated, including, but

not limited to the subject matter of the administrative proceeding

. . . and in FDIC v. Hurwitz, et al., Civil No. H-95-3956, in the

United States District Court for the Southern District of Texas,

including all claims and counterclaims against the OTS (as defined

in the Release) for costs, fees and sanctions.38

The FDIC moved to dismiss with prejudice its suit pending in district

court. Hurwitz had counterclaimed, however, arguing that the Government’s

litigation had been a disguised effort to force a redwoods settlement. He

requested sanctions.

36

Id.

37

Id.

38

Opinion and Order Accepting Offer of Settlement by MAXXAM, Inc., Federated

Development Co. and Charles E. Hurwitz, OTS Order No. AP-2002-2 (Oct. 18, 2002) (emphasis

added).

12

No. 05-20808

After a two-day hearing in June of 2004, the district court found that the

FDIC had acted in bad faith – that its suit was part of a larger government

conspiracy to extort the redwoods from Hurwitz. The court found that the

Government pursued claims “like Soviet threats;”39 acted as a “secret society of

extortionists;”40 filed “imaginary claims;”41 used “slander as legal leverage;”42

embodied the “progressive,” bureaucratic “nightmare on 17th Street;”43 engaged

in a personal vendetta against Hurwitz arising from “bureaucrats’ and their

like-thinking co-conspirators’ appreciation of a successful entrepreneur as the

personification of what they opposed in America;”44 and fought a “political

guerrilla war at the behest of interest groups and the administration.”45 The

court concluded that the FDIC’s employees, attorneys, and chairwoman who

testified that the FDIC had a legitimate interest unrelated to the redwoods had

all lied.46 The court also discussed the congressional investigation led by

39

Hurwitz, 384 F. Supp. 2d at 1065.

40

Id. at 1122.

41

Id. at 1111.

42

Id. at 1050.

43

Id. at 1121.

44

Id. at 1048.

45

Id. at 1049.

46

The district court found, “During his deposition, Jeffrey Williams, the head of

professional-liability, swore that ‘it was completely fortuitous’ that Lambert [an environmental

lawyer] was at Hopkins & Sutter [a firm hired by the FDIC for the Hurwitz case]. Williams

swore that Lambert’s presence in no way influenced the decision to hire the firm . . . Perjury

by a lawyer is especially ugly.” Id. at 1059. The district court concluded that Williams had

perjured himself based on an FDIC interview of the law firm that had noted that Lambert had

“[l]umber experience in Washington.” Id. The record contains evidence that the FDIC was

aware of these connections and that it would benefit from them. An e-mail from Eric J.

Splitter to Jack D. Smith of FDIC (Feb. 4, 1994) stated: “My advice from the political

perspective is that the ‘C’ firm is still politically risky. We would catch less political heat for

another firm, perhaps one with some environmental connections.” It is not clear, however,

13

No. 05-20808

Congressman Tom DeLay that chastised the FDIC for its involvement in the

redwoods issue47 and a Connecticut district court’s criticism of the FDIC’s

“questionable actions.”48 The court awarded Maxxam more than $72 million in

sanctions under Rule 11,49 for discovery abuses under Fed. R. Civ. Pro. 37,50 and

under the court’s “inherent power” to “sanction conduct beyond the reach of

other rules.”51 Approximately $58 million of this award was for Maxxam’s costs

related to the OTS proceeding and other expenses that did not arise in the

district court action, and approximately $37 million52 of the award was for

prejudgment interest assessed at an 11% rate,53 which the court described as a

“delay factor.”54 Both parties agree that discovery sanctions are improper here,

as they may only be levied against an individual attorney. The FDIC argues

that sanctions under Rule 11 and the court’s inherent power are also

inappropriate.

II

whether the FDIC hired Hopkins & Sutter for this reason specifically, or whether Williams was

aware of the FDIC’s interest in Lambert’s environmental expertise. The district court also

concluded that “Ricki Helfer lied as much as Williams did,” id. at 1103; that FDIC employees

used “their agency’s authority to compel an illegal result . . . and they lied about it all under

oath,” id. at 1121; “the FDIC has lied to Charles Hurwitz, the public, and this court,” id. at

1049; that the FDIC legal division told Congress “other lies,” id. at 1085; that the FDIC lied

when it said that “it was merely coordinating or cooperating with the OTS to avoid duplication,

confusion, and delays,” id. at 1089 (internal quotations omitted); and that in depositions,

“witnesses lied, rambled evasively, or testified with the party line,” id. at 1100.

47

Id. at 1086.

48

Id. at 1118.

49

Id. at 1109.

50

Id. at 1110.

51

Id. at 1110-11.

52

The actual amount assessed by the district court was $37,011,181.27. Id. at 1119.

53

Id. at 1118.

54

Id. at 1119.

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No. 05-20808

The court awarded Defendants $7,182,190.20 in principal and

$6,959,876.96 in interest for sanctions that it assessed under the FDIC action.

Generally, we apply “an abuse of discretion standard across-the-board to all

issues in Rule 11 cases.”55 The questions of whether litigation is frivolous,

baseless, or has an “improper purpose” within Rule 11 or under the auspices of

a court’s broader “inherent power” and whether the court may sanction for this

purpose, however, are mixed questions of fact and law.56 We review the facts

underlying the district court’s decision to sanction for clear error and “its

underlying conclusions of law de novo.”57

A district court may impose sanctions after a party or parties voluntarily

dismiss their claims,58 as the FDIC did here, since “Rule 11 is designed to punish

a party who has already violated the court’s rules.”59 Once a limited bar to

unsigned pleadings and rarely used by parties,60 Rule 11 gained bite in an

expanded version, requiring that a party, when signing a pleading or any other

55

Thomas v. Capital Sec. Servs., 836 F.2d 866, 871 (5th Cir. 1988); see also Skidmore

Energy, Inc. v. KPMG, 455 F.3d 564, 567 (5th Cir. 2006) (quoting Am. Airlines, Inc. v. Allied

Pilots Ass’n, 968 F.2d 523, 529 (5th Cir. 1992)) (“‘We review all aspects of the district court’s

decision to invoke Rule 11 and accompanying sanctions under the abuse of discretion

standard.’”).

56

See, e.g., Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 399 (1990) (“Determining

whether an attorney has violated Rule 11 involves a consideration of three types of issues. The

court must consider factual questions regarding the nature of the attorney’s prefiling inquiry

and the factual basis of the pleading or other paper. Legal issues are raised in considering

whether a pleading is ‘warranted by existing law or a good faith argument’ for changing the

law and whether the attorney’s conduct violated Rule 11. Finally, the district court must

exercise its discretion to tailor an ‘appropriate sanction.’”).

57

United States v. City of Jackson, 359 F.3d 727, 731 (5th Cir. 2004).

58

Willy v. Coastal Corp., 503 U.S. 131, 134 (1992).

59

Id. at 139 (citing Cooter & Gell, 496 U.S. at 396).

60

William W. Schwarzer, Sanctions Under the New Federal Rule 11 - A Closer Look,

194 F.R.D. 181, 182-83 (1985) (discussing how Rule 11 “originally provided for the striking of

pleadings not signed by an attorney of record or signed with intent to defeat the purpose of the

rule”).

15

No. 05-20808

paper before the court, certify four specific representations: that the party is not

filing the paper “for any improper purpose, such as to harass or to cause

unnecessary delay or needless increase in the cost of litigation”; its claims or

defenses are plausible under existing or potential future law; the allegations are

supported by evidence or likely to be supported with further investigation; and

that any denials of allegations are so supported.61 A violation of any one of

these, including filing for an improper purpose, can merit sanctions. Under the

current version, courts may in rare circumstances sanction parties for pleadings

like those here that, although having plausible legal theories based in fact, have

an underlying improper purpose. The Rule was amended “precisely because the

subjective bad-faith standard was difficult to establish and courts were therefore

reluctant to invoke it as a means of imposing sanctions.”62 As Judge Schwarzer

explains in his paper describing the broader version of Rule 11 that emerged in

1983:

[T]he rule reaches [those pleadings] which, although not without

merit, constitute an abuse of legal purpose because brought for an

improper purpose such as causing harassment, unnecessary delay

or needless increase in the cost of litigation. As the Advisory

Committee Notes state, the rule “should discourage dilatory or

abusive tactics and help . . . streamline the litigation process.”63

We have similarly verified that “[e]ach obligation [of Rule 11] must be satisfied;

violation of either justifies sanctions,”64 and “Subparts (b)(1) and (2) of Rule 11

provide independent bases for sanctions.”65

61

Fed. R. Civ. P. 11(b)(1)-(4) (emphasis added).

62

Chambers v. NASCO, 501 U.S. 32, 47 n.11 (1991) (citing Advisory Committee’s Notes

on 1983 Amendment to Rule 11, 28 U.S.C. App., 575-76).

63

Schwarzer, 104 F.R.D. at 185.

64

Whitehead v. Food Max of Miss., 332 F.3d 796, 802 (5th Cir. 2003).

65

Id. at 803 (emphasis added).

16

No. 05-20808

The district court based its sanctions on a finding of legally and factually

frivolous pleadings in addition to improper purpose. As we will explain, the

finding of frivolous pleadings is not supportable.

As for the de facto director claim, the FDIC argues that the court

misperceived that claim as a technical corporate de facto director claim, which

applies only to individuals’ misrepresentations to third parties about their role

in a corporation. The FDIC’s complaint, although using the term “de facto

director,” did not rely on this limited doctrine but rather on the broader principle

that Hurwitz was not an official director of USAT but exercised substantial

control over USAT and violated his fiduciary duties to USAT arising as a result

of this indirect control.66 The FDIC alleged and presented evidence that

Hurwitz, instead of obtaining direct control and the associated obligations of that

control, used indirect means to influence USAT’s investment activities. He

participated in board and real estate meetings, helped push along a large real

estate loan from USAT to a close friend over the warnings of several state

financial institutions, and entered into shareholding agreements with the option

66

The FDIC alleged in its original complaint that Hurwitz “was a de facto senior officer

and director and controlling person.” This claim could be interpreted as a narrow technical

doctrine of de facto director control. But the record and the evidence cited in the FDIC’s

complaint indicates that the FDIC intended to make a broader claim. One of the FDIC’s

outside lawyers had warned the FDIC of the possibility that the court would reject a technical

de facto argument, stating, “Use of the term de facto director may cause problems down the

road” for the very reasons later cited by the district court. Memorandum from Tom Manick,

Adorno and Zeder, P.A., to Robert DeHenzel, Jr., FDIC and John Rogers, Hopkins & Sutter

(July 31, 1995). The FDIC was likely aware of this warning when writing its pleadings and

therefore careful to not rely on that narrow claim. The ATS Memorandum from May 20, 1994,

for example, explains in further detail how the FDIC envisioned Hurwitz’s involvement under

its broader theory of de facto control, stating, “Hurwitz acted as a de facto officer and director

of USAT – he was Chairman of UFG, which had virtually no operations independent of USAT,

and caused USAT to hold joint USAT/UFG Board meetings, which he attended; he attended

certain SLC meetings . . . and selected Investment and Executive Committee meetings; and

he was a member of the UFG/USAT Strategic Planning Committee . . . Hurwitz devised and

approved USAT business strategies. He worked with other MCO/FDC employees to direct

USAT’s securities investments.”

17

No. 05-20808

to obtain a substantial percentage of USAT’s shares.67 Specifically, the original

complaint alleged,

He was the Chairman of the Board and Chief Executive Officer of

UFG, MCO [Maxxam] and Federated. He also served as UFG’s

President and was a member of UFG’s Executive Committee and

the UFG/USAT Strategic Planning Committee. Hurwitz was also

a de facto director and senior officer of USAT and voluntarily

assumed the responsibilities of an officer and director of the

institution. He functioned as an active member of the USAT Board,

if not its de facto chairman. He directed and controlled USAT’s

investment activity; he regularly attended Board and Committee

meetings; he selected USAT officers and directors; he controlled and

dominated virtually all of USAT’s activities. No significant decision

concerning USAT’s affairs was undertaken without his approval.68

As FDIC attorneys then stated, this claim had a legitimate basis in law69 and

had evidentiary support.70

The claim regarding Hurwitz’s involvement in mismanaging the mortgage

backed securities portfolio and other mortgage backed securities decisions were

67

The district court found that Hurwitz could not have obtained more than 25% of

UFG’s shares because it disagreed with the FDIC’s view of the call-put arrangement, stating,

“The FDIC distorted the 1985 Drexel option to make its claim. The parties agree that Maxxam

had an option to buy United Financial stock from Drexel. Only if the option to buy stock were

the same as having bought stock would Maxxam -- and therefore indirectly Federated -- have

owned more than 25% of United Financial’s stock. The FDIC said that (1) having the option

was the same as owning the stock and (2) the option gave Maxxam -- and therefore Federated

-- more than 25% of United Financial, triggering the net-worth obligation -- the one that they

had rejected.” Hurwitz, 384 F. Supp. 2d at 1077. The fact remains, however, that Federated

and Maxxam owned nearly 25% of UFG’s stock, and the call-put arrangement would have

allowed Maxxam to gain up to 9.7% of its stocks, therefore triggering the net worth obligations

associated with 25% ownership. The FDIC also provided other evidence of Hurwitz’s indirect

venues of control, such as his involvement in USAT meetings and investment decisions.

68

Original Complaint and Jury Demand at 5.

69

FDIC lawyers stated in the 1994 ATS Memorandum: “Under Texas law, secondary

liability theories, such as knowing participation in or aiding and abetting breach of fiduciary

duty, can be used to reach the activities of culpable persons, like Hurwitz or Rosenberg, who

were neither officers nor directors of USAT . . . Hurwitz should be sued for his knowing

participation in breaches of fiduciary duty by the officer and director defendants.”

70

See supra note 66; infra note 71.

18

No. 05-20808

similarly challenging – as it was likely to invoke the business judgment rule –

but the FDIC alleged that USAT’s investment staff reported their decisions to

Hurwitz and that Hurwitz influenced some of USAT’s major investment

decisions through his involvement. These allegations had evidentiary support.71

Finally, the FDIC argued that Hurwitz, because of his substantial control

over USAT, had a fiduciary duty to cause his company, UFG, and others with

control over USAT to infuse net worth into USAT when it was failing. This

claim also had evidentiary support.72 The FDIC’s claims, although creative in

71

A 1988 FDIC document stated, “The controlling shareholder of United through its

holding company is Charles Hurwitz . . . He is currently the object of a congressional

investigation to determine whether SEC violations have occurred . . . United has been

scrutinized as a possible source of funds for Hurwitz’s outside activities. Evidence is currently

inconclusive.” Memorandum from Neil Twomey, Supervisory Agent, to Ginger Baugh,

Regulatory Analyst (May 5, 1988). Other evidence establishes stronger support for the FDIC’s

claims of Hurwitz’s broad influence in USAT and its controlling institutions. A confidential

memorandum to Charles Hurwitz, Barry Munitz, Jenard Gross, and Mike Crow from Arthur

S. Berner (Nov. 18, 1987) reports on a meeting with Neil Twomey and discusses how “United

will be going below its minimum regulatory net worth either during 1987 or early 1988 . . . as

a result of all these [points considered in the discussion] I believe that we should begin to gear

up for taking on additional operating burdens during 1988.” In this meeting, Berner and

Twomey referred to (albeit positively) Hurwitz as one of the “smart business people running

Texas thrifts . . . .” (emphasis added); Board meeting minutes indicated that Maxxam made

investment presentations to the Board.

72

See, e.g., supra note 71 (memo to Hurwitz indicating that USAT would drop below its

net worth); Charles E. Hurwitz’s Response to the FDIC’s Requests for Admissions, at 39 (item

8.2) (Hurwitz stipulated to the fact that when FHLBB approved UFG’s acquisition of USAT,

it required UFG to cause USAT’s net worth to meet the required minimum in 563.13(b) of the

Rules and Regulations for Insurance of Accounts); a November 17, 1993 ATS memorandum

suggested several venues through which Hurwitz may have indirectly owned and/or controlled

more than 25% of UFG, including the call-put arrangement with Drexel and UFG’s 1985

issuance of 750,000 shares to Maxxam and Federated. These Series C preferred shares were

convertible into two shares of UFG common stock (approximately 15% of UFG) after June 15,

1987. This might have pushed Maxxam and Federated’s ownership over the 25% threshold

and triggered net worth obligations because Maxxam and Federated already owned more than

23% of UFG’s stock. Maxxam and Federated “exchanged the Series C preferred [shares] for

Series D, which postponed the date of conversion” and allowed them to avoid having

unauthorized control of a savings and loan institution. An early investigation memorandum

from Ginger Baugh to Neil Twomey and Danny Thomas concluded, “It has been determined

that if MCO [Maxxam] and Federated (1) increase their ownership to 35% of UFG common

stock, (2) convert all of their preferred stock to common stock, and (3) exercize [sic] the call

option for 300,000 shares of UFG common stock, then MCO and Federated will have a

combined ownership of UFG of 46.8%.” Memorandum from Ginger Baugh to Neil Twomey and

19

No. 05-20808

that they targeted an individual who was not officially part of USAT’s

directorship, were a plausible if not ultimately sustainable attack upon an

unusual business arrangement, which, the theory posited, allowed Hurwitz to

avoid obligations of official control while maintaining practical control over that

thrift. As in FDIC v. Calhoun, “while the FDIC’s claim was doomed after the

court made its factual findings, the FDIC’s pleading was at least colorable at the

time of the signing of the first amended complaint.”73 The FDIC knew that its

claims faced an uphill battle, particularly in the Fifth Circuit, but it was also

aware of $1.6 billion in losses to the public as a result of the thrift’s failure, and

the evidence suggested that Hurwitz may have contributed to these losses. The

FDIC’s claims had a logical theory for Hurwitz’s involvement in the failure and

met the minium threshold required for Rule 11’s pleadings. We must conclude

that the district court was clearly erroneous in its factual findings and erred in

its legal conclusions supporting Rule 11 sanctions for factually baseless and

frivolous pleadings, as it determined that “[t]he FDIC was unable to define its

legal theories or its factual support, much less connect the two.”74 We turn then

Danny Thomas (Sept. 3, 1987).

73

34 F.3d 1291, 1299 (5th Cir. 1994).

74

384 F. Supp. 2d at 1109. The court overstated the implications of at least one

document supporting this conclusion. The court found, “ Despite a learned opinion from its

private counsel that it had no viable claim against Hurwitz and the others, the FDIC sued here

and later illegally hired the Office of Thrift Supervision to bring identical, baseless claims.”

Id. at 1048 (emphasis added). A report from Brill, Sinex & Stephenson and Hutcheson &

Grundy did conclude that “we cannot estimate the probability of success at being greater than

50% on liability and damages.” But that report also found, in relevant part, “We did find

evidence that Charles Hurwitz may have used USAT in connection with insider trading or

stock manipulation, and those findings have been turned over to the appropriate task force in

Washington. Specifically, our review disclosed evidence of acts and omissions which could form

the basis of negligence, breach of fiduciary duty, or fraud claims . . . . To the extent it is

acknowledged at all, the officers and directors justify their willingness to consult with Hurwitz

on the basis of Hurwitz’s expertise in the securities area and his status as the ultimate

controlling shareholder . . . our review disclosed that the officers and directors approved

transactions designed to defeat or evade safety and soundness regulations.” The report

concluded that “Hurwitz is an affiliated person, a control person, or the alter ego of USAT

and/or UFGI, and thus is liable for gross negligence and breaches of fiduciary duty . . . and that

20

No. 05-20808

to the issue of improper purpose, an issue not resolved by the conclusion that the

FDIC’s claims were not frivolous or baseless.

The court’s discretion to impose sanctions for an improper purpose under

Rule 11 and its inherent power is bounded. “[G]enerally, district courts do not

sanction attorneys who make nonfrivolous representations. . . . [They] may do

so, however, where it is objectively ascertainable that an attorney submitted a

paper to the court for an improper purpose.”75 Furthermore, “[a]lthough a

district court is not to read an ulterior motive into a document ‘well grounded in

fact and law’, it may do so in exceptional cases . . . where the improper purpose

is objectively ascertainable.”76 “[I]n determining compliance vel non with each

obligation [of Rule 11], ‘the standard under which an attorney is measured is an

objective, not subjective, standard of reasonableness under the circumstances.’”77

Our emphasis on an objective inquiry has been emphatic; we have expressly

rejected any subjective inquiries into the motivation behind a filing, explaining,

The history of the Rule . . . indicates that “subjective bad faith” is no

longer an element in Rule 11 inquiries. Instead, the court must focus

on objectively ascertainable circumstances that support an inference

that a filing harassed the defendant or caused unnecessary delay. .

. . [P]urely subjective elements should not be reintroduced into the

determination concerning “improper purpose.”78

he engaged in a conspiracy to defraud the institution.” Report and Litigation

Recommendations on Director, Officer and Professional Liability Claims Arising out of the

United Savings Association of Texas Receivership at 14-17, 36 (undated).

75

Whitehead, 332 F.3d at 805 (citations omitted).

76

Id. (citing Sheets v. Yamaha Motors Corp., U.S.A., 891 F.2d 533, 537-38 (5th Cir.

1990)) (emphasis added).

77

Id. at 802 (quoting Childs v. State Farm Mut. Auto. Ins. Co., 29 F.3d 1018, 1024 (5th

Cir.1994)).

78

Nat’l Ass’n of Gov’t Employees, Inc. v. Nat’l Fed’n of Fed. Employees, 844 F.2d 216, 224

(5th Cir. 1988).

21

No. 05-20808

Doubtless many plaintiffs have multiple purposes in pursuing litigation.

And so long as the merits of their claim, viewed objectively, are supported by a

good-faith belief that the allegations are well founded and not frivolous, the

subjective motivation for pursuing the claim and the multiple purposes are

ordinarily of no moment.79 As the Supreme Court held in Hartman v. Moore, “It

may be dishonorable to act with an unconstitutional motive and perhaps in some

instances be unlawful, but action colored by some degree of bad motive does not

amount to a constitutional tort if that action would have been taken anyway.”80

A federal agency plays by the same rules as private litigants, albeit with

strictures upon its litigation goals located in its statutory authority – its mission.

Within the broad compass of their statutory missions, federal agencies are no

different than private litigants. As creatures of Congress with broadly-stated

mandates, many of the agencies, including the FDIC, make law, enforce law, and

often resolve disputes. In discharging these duties, federal agencies are, as a

part of our governance, rightfully mindful of “political views” attending their

decision.81 It follows that any finding that this litigation was pursued for an

“improper” purpose must find footing in this soft matrix. An “improper” purpose

connotes a purpose defying a normative standard.

Hurwitz maintains that Congress gave neither the FDIC nor the OTS

authority to protect the Headwaters, however much in the public interest it may

be. This location of normative footing sees “improper” as exceeding statutory

authority. As a simple challenge to the “power” of the FDIC or the OTS to

79

We recognize the difficulty in identifying an “improper purpose” objectively, as an

“improper purpose” connotes intent. However, we have consistently emphasized that we must

follow an objective inquiry. See, e.g., Whitehead, 332 F.3d at 802; Nat’l Ass’n of Gov’t

Employees, Inc., 844 F.2d at 224.

80

547 U.S. 250, 260 (2006).

81

See, e.g., In re FDIC, 58 F.3d 1055, 1062 (5th Cir. 1995) (“the fact that agency heads

considered the preferences (even political ones) of other government officials concerning how

. . . discretion should be exercised does not establish the required degree of bad faith or

improper behavior”).

22

No. 05-20808

regulate redwoods, its effort to regulate these privately owned lands is

“improper,” and brought with that single-minded purpose would be illegal;82

persisting in that effort would be sanctionable by the court, likely under Rule 11

as baseless. The FDIC could not, for example, itself conduct a criminal

prosecution of Hurwitz – it would have to recommend to the DOJ that it do so.

But the FDIC and OTS cannot fairly be said to have acted with the single

purpose of redwoods acquisition, and any such finding of fact by the district

court is clearly erroneous.83

82

See, e.g., In re Kuntsler, 914 F.2d 505, 520 (4th Cir. 1990) (where there is “no proper

purpose for appellants’ filing suit,” a court’s delving into evidence of the improper purpose and

issuing sanctions is acceptable (emphasis added)). That court, however, also affirmed that the

case was not well grounded in law and that “a district court should consider the first two

prongs of Rule 11 before making a determination of improper purpose.” Id. at 518.

83

The district court found, for example, “The agency wanted to placate

environmentalists and politicians, not redress the failure of the thrift.” Hurwitz, 384 F. Supp.

2d at 1111. The Government provides concrete examples of errors in the court’s factfinding.

The court found, relying upon the notes of an FDIC staff attorney, that FDIC General Counsel

Kroener met with Vice President Gore to discuss the redwoods. Id. at 1080. Kroener testified

that the notes were not his and that Gore was not at the meeting (responding “Correct” to

Attorney Nickens’s question that, “you indicated that no meeting with Vice Present Gore

actually occurred. Correct?”). The court also cited to FDIC notes that, according to the court,

stated, “we have no claim against Kozmetsky that can survive stat. of limitations.” Id. at

1065. The court viewed these notes as showing that if the FDIC had brought the case for any

reasons other than the redwoods, it would also have sued Kozmetsky and that “[t]his was a

concession from its [the FDIC’s] earlier position that George Kozmetsky needed to be sued

because he was a member of the ‘Hurwitz’ core group.’” Id. These notes were in fact a

summary of statements made by opposing counsel, not by the FDIC. The notes state, “They

[Kozmetsky’s counsel] want to bring Kozmetsky to closure – They said that . . . we have no

claim against Kozmetsky that can survive stat. of limitations.” The FDIC staff who were

deposed repeatedly insisted that the debt-for-nature swap was not the reason for their suit.

Kroener, for example, stated that “there were a number of communications between the FDIC

staff and the Hill with respect to our claims against Mr. Hurwitz. And there were a number

of suggestions made by Congressmen and by environmental groups with respect to the claims

we might make directly against the trees, a constructive trust, all sorts of things. And the staff

looked at those, explored those, in the course of its investigation. And that ultimately the

corporation brought a different suit and those were not a factor.” When Nickens asked

Williams, “Does it remain your testimony that the debt for nature idea as advanced by the

Rose Foundation and others had no effect on the decision to sue Mr. Hurwitz,?” Williams

responded, “Absolutely so.”

23

No. 05-20808

That said, a finding that acquiring the Headwaters was one of the

purposes of the FDIC and OTS’s prosecution would not be clearly erroneous. So

we are left to either conclude that a valid purpose – within the compass of its

statutory charge and adequately grounded in fact and law, viewed objectively,

leaves the improper purpose irrelevant – at least so long as the litigation would

have been pursued by the government agencies with no redwood acquisition in

the picture, or that by some measure, acquiring the Headwaters was a dominant

purpose. Yet determining improper purpose by the strength of the various

motivations – proper and improper – in bringing suit would lead us too far into

the territory of subjective inquiry.

We shy from inquiry into the “motivation” of Congress and are wary of

searching its proceedings for it, looking instead to language of statutory text.

Much of the focus on the primary use of text in learning congressional purpose

rests on the hazards of any other course. But agencies are not the Congress and

searching inquiry into the purpose of acts by large corporate bodies is daily

fodder in the courts. There are strong arguments that for kindred reasons

judicial inquiry ought to end at the conclusion that while there were multiple

purposes, at least one of which was the “improper” purpose of acquiring the

redwoods, the litigation would have been pursued, the redwoods aside. Locating

purposes is a difficult task itself, but gauging the substantiality of one over the

other beyond the sine qua non inquiry pursues an abstraction – an evil thought

that animated no act.84

To be more specific: The agencies were well within their statutory mission

in seeking money damages from Hurwitz. If this effort would have been made,

again, redwoods aside, accepting trees for dollars alone would be unusual but not

functionally different in result from a government purchase of the redwoods and

84

See, e.g., Schwarzer, 104 F.R.D. at 196 (“Were a court to entertain inquiries into

subjective bad faith, it would invite a number of potentially harmful consequences, such as

generating satellite litigation, inhibiting speech and chilling advocacy.”).

24

No. 05-20808

a cash settlement of the Government’s suit against Hurwitz. Indeed, the FDIC

made it clear that if it participated in a redwoods settlement, it would still insist

upon cash to restore taxpayer coffers. The pressure upon Hurwitz to deal the

Headwaters generated by the litigation and desired by some has no independent

meaning if the suit would have been pursued without that possibility.

The analogous test in Hartman shows both the logic and the necessary role

of a sine qua non standard for purpose-based inquiries. Hartman required that

an individual claiming retaliatory prosecution show that the Postal Service and

the government prosecutor lacked probable cause in bringing a claim against

him85 – that the “prosecution would not have occurred but for the officials’

retaliatory animus.”86 While the Government may have had illegitimate reasons

for prosecuting someone who lobbied against its policies, the plaintiff had to

allege and show a lack of legitimate reasons to prove retaliatory behavior on the

Government’s part.87 Without this requirement, the causal connection between

animus and initiation of legal action would be vague, creating a lower bar of

proof and violating the “presumption that a prosecutor has legitimate grounds

for the action he takes.”88 We apply a similar standard to sanctions assessed for

an improper purpose: while the presence of probable cause weakens the

relevance of other bad motives in a malicious prosecution case, a good faith basis

for bringing suit is proof of a proper purpose and increases the difficulty of

proving that the suit would not have been filed but for an improper purpose. As

we will explain, insisting that a claim of improper purpose in the prosecuting of

a claim contain an element of causation – that the claim would not otherwise

85

547 U.S. at 1704.

86

Id. at 1704 n.7

87

Id. at 1706 (“The connection, to be alleged and shown, is the absence of probable

cause.”).

88

Id.

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No. 05-20808

have been pursued – in no way undermines this court’s insistence that improper

purpose is an independent requirement of Rule 11. It rather insists that an

improper purpose cannot stand on its own if it lacks this but-for causative force.

Having rejected a balancing inquiry into the relative strength of improper

and proper motivations behind the filing of a suit, the resulting questions are

whether 1) the suit at the outset would have been pursued sine qua non, and 2)

whether the methods and manner of prosecuting the claim after the initial filing

was to impose unnecessary costs of defense upon Hurwitz. If the invalid

purpose, within a mix of other proper purposes, manifests itself in the continuing

of litigation for the objectively ascertainable purposes of harassment or delay,

sanctions are warranted under the plain text of the Rule or simply under a

court’s inherent power to control the proceedings before it. Pursuit of the

Headwaters would not be an independent tainting factor. Rather, it would be

evidence to be coupled with evidence that the case (while not sanctionable for

filing) did not pose a threat of liability sufficient to bring Hurwitz to the

bargaining table, at least one with the Headwaters in play – that this want of

strength was met by prosecuting the claims in a manner calculated to impose

high costs.89 In other words, the FDIC would violate Rule 11 if it filed a case

that it reasonably thought had merit, but pursued it in a manner calculated to

increase the costs of defense, and it is here where the able district court’s

findings of improper purpose, grounded in needless harassment and delay, find

accord with the Rule. Although the case had sufficient merit to surpass the bar

of non-frivolous factual and legal pleading as well as a proper purpose for filing

suit, the court recognized that as the case proceeded, the FDIC began to exert

89

See, e.g., Davis v. Veslan Enters., 765 F.2d 494, 500 (5th Cir. 1985) (affirming Rule

11 sanctions for improper purpose where a party brought a removal petition solely to delay the

judgment in a case); Morley v. CIBA-Giegy Corp., 66 F.3d 21, 25 (2d Cir. 1995) (holding that

filing a supplemental complaint to “intimidate the defendant into a large settlement” was an

improper purpose, while also finding other Rule 11 violations (internal quotations omitted));

see also Georgene M. Vairo, Rule 11 Sanctions: Case Law, Perspectives and Preventive Measures

262-63 (2004) (discussing these cases and others).

26

No. 05-20808

other pressures upon realizing that sheer exposure to liability might be

insufficient to force negotiation. As we found in National Association of

Government Employees v. National Federation of Federal Employees,

we do not hold that the filing of a paper for an improper purpose is

immunized from Rule 11 sanctions simply because it is well

grounded in fact and law. The case can be made, for example . . .

that the filing of excessive motions, even if each is “well grounded,”

may under some circumstances constitute “harassment”

sanctionable under the Rule.90

Litigation calculated to harass or increase costs warrants sanctions, the merits

of the case notwithstanding.

Where we have upheld sanctions for “improper purpose,” our analysis has

followed a similar path. In Whitehead v. Food Max, we upheld Rule 11 sanctions

when a party filed a paper with “an improper purpose,”91 finding improper

purpose to be the sole motivating factor of the filing – no mix of improper and

proper purposes could be divined. The sanctioned party “did not dispute” that

the purpose behind his actions, deemed improper by the district court, was “to

embarrass” the defendant and to “seek[] personal recognition.”92 In so doing, as

we have discussed, we recognized that “[a]lthough a district court is not to read

an ulterior motive into a document ‘well grounded in fact and law,’ it may do so

in exceptional cases . . . where the improper purpose is objectively

ascertainable.”93 In ascertaining this purpose, we implied that the sanctioned

party would not have acted as he did in the absence of the improper purpose.

Entering a Kmart store with two marshals and demanding money was not for

the proper purpose of collecting the sanctioned party’s judgment, as the cash in

90

844 F.2d at 224.

91

332 F.3d at 805 (emphasis added).

92

Id. at 807.

93

Id. at 806.

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Kmart’s registers offered little toward a $3.4 million judgment; and “the

execution was unnecessary to secure the judgment,” as the judgment imposed

a lien against Kmart’s property.94 Nor did the sanctioned party act with the

arguably proper purpose of leveraging settlement, as he had only requested

settlement in one letter, and there was no indication that Kmart had avoided

settlement communication.95 In other words, the sanctioned party would not

have pursued the actions in dispute but for his improper purpose of

embarrassing Kmart and bringing public attention to himself.

In National Association of Government Employees, we also alluded to a

sine qua non-type inquiry in holding, “‘If a reasonably clear legal justification

can be shown for the filing of the paper in question, no improper purpose can be

found and sanctions are inappropriate.’”96 We emphasized:

Rule 11 focuses on an attorney’s obligation “at the time a ‘pleading,

motion, or other paper’ is signed,” and sanctions “should not amount

to an ‘accumulation of all perceived misconduct, from filing through

trial,’ resulting in a ‘single post-judgment retribution in the form of

a massive sanctions award.’” Rule 11, therefore does not permit the

imposition of sanctions simply for bringing a meritless lawsuit . . .

.97

In Sheets v. Yamaha Motor Corp. we made a similar inquiry. We found

that one potentially illegitimate purpose was “certainly not adequate to

overcome the defendants’ legitimate interest”98 and held that the district court

94

Id.

95

Id.

96

844 F.2d at 224 (quoting Schwarzer, 104 F.R.D. at 181).

97

Id. at 222 (quoting Thomas v. Capital Security Servs., Inc., 836 F.2d 866, 874, 881

(5th Cir. 1988) (en banc)).

98

891 F.2d 533, 538 (5th Cir. 1990).

28

No. 05-20808

abused its discretion in imposing sanctions for an improper purpose under Rule

11.99

Where an improper purpose was not necessarily the “but for” cause of a

party’s decision to file, the Supreme Court has upheld sanctions for a party’s bad

faith manner of pursuing the case. In Chambers, the defendant “attempted, by

. . . tactics of delay, oppression, harassment and massive expense to reduce

plaintiff to exhausted compliance.”100 We have similarly held. In Natural Gas

Pipeline Co. v. Energy Gathering, the party’s “evasiveness and intransigence”

in disobeying court orders “justified sanctions” under a court’s inherent power.101

In asking whether a party pursued an illegitimate purpose to increase

costs or to harass a party – regardless of the weight of that purpose in filing suit

– we have determined that we must identify “‘unusual circumstances’” that show

such purposes.102 In so doing, we look to “objectively ascertainable circumstances

rather than subjective intent,”103 one example of which is excessive filing.104

Hurwitz failed to prove that the agencies would not reasonably have

pursued this case even in the absence of the redwoods issue and any implicit

similar finding by the district court is in error – whether measured by the clearly

erroneous, abuse of discretion, or do novo error standards. The FDIC was under

pressure from Congress to prosecute one of the largest savings and loan failures

of that period, and Chairwoman Helfer expressed concern regarding the

“egregious” nature of the failure and individuals’ involvement in that failure. An

99

Id.

100

501 U.S. at 41 (internal quotations omitted); see also id. at 56 n.20 (“Chambers’ bad

faith conduct in the course of the litigation caused the delay for which damages were sought”).

101

Natural Gas Pipeline Co. v. Energy Gathering, 2 F.3d 1397, 1410 (5th Cir. 1993).

102

Calhoun, 34 F.3d at 1300 (quoting Sheets, 891 F.2d at 538).

103

Sheets, 891 F.2d at 538.

104

Id. (citing Nat’l Assoc. of Gov’t Employees, 844 F.2d at 224).

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No. 05-20808

early memorandum – authored long before the much-discussed board meeting

eventually recommending suit – itself recommended that the FDIC pursue

claims against Hurwitz and other FDIC directors. This also occurred before the

bulk of the outside pressure on the FDIC to get involved in a redwoods

settlement. A later memorandum recommended against suit – not because the

attorneys believed the claims were without merit, an abandonment of its earlier

view, but rather due to then-recent Fifth Circuit and Texas decisions on the

fraud or self-dealing necessary to toll the statute of limitations, raising a

potential bar to many of the FDIC’s claims. The attachment introducing the

memorandum recognized that other case law developments “further weakened

the viability” of claims. It also recognized that a decision not to sue “is likely to

attract media coverage and considerable criticism from environmental groups

and Congress . . . We plan to pursue . . . settlement discussions [regarding the

debt-for-nature swap suggested by the Department of the Interior] in the coming

weeks.”105 Notably, the introductory memorandum specifically disconnected the

possibility of settlement from the suit. After discussing the settlement options,

it moved back to its summary of the prospects for a successful suit, stating, “It

[the ATS memo recommending against suit] should be considered for Board

approval only if the board decides, as a matter of public policy, that it wants the

Texas courts to decide the statute of limitations and standard of care issues

rather than FDIC staff.”106

The revised Authority to Sue (ATS) memo, which recommended suit,

recognized the high risk of the litigation but wrestled with the alleged

mismanagement that had contributed to USAT’s failure. The introduction to the

memo stated:

105

Memorandum from Jack D. Smith, Deputy General Counsel and Stephen N.

Graham, Associate Director (Operations) to Board of Directors, FDIC at 4 (July 24, 1995).

106

Id.

30

No. 05-20808

In our view, Hurwitz and other proposed defendants were grossly

negligent. However, we also estimate a 70% probability that most

or all of the conventional claims that could be made in the FDIC’s

case would be dismissed on statute of limitations grounds.

Hurwitz’s failure to cause compliance with the NWM [net worth

maintenance] agreements has a better probability on the statute of

limitations issue, but there are numerous obstacles to successful

prosecution of that claim. Nonetheless, we believe the litigation

risks are worth taking because of the egregious character of the

underlying behavior in this case which caused enormous losses, and

to further our ongoing efforts to shape the law evolving in this

area.107

We must conclude that a finding that the FDIC would not have brought suit

absent the redwoods issue is against the great weight of the evidence. The

district court’s findings, that the FDIC “suit was about the redwoods – not

compensating the taxpayers for United Saving’s failure through Hurwitz’s legal

obligations;”108 that “[t]he record shows that the swap was the only reason for

this suit”109; and that “[t]he FDIC’s improper purpose in suing Hurwitz is

objectively ascertainable. . . . [and that] the agency wanted to placate

environmentalists and politicians, not redress the failure of the thrift,” are

clearly erroneous.110

Despite the lack of an improper purpose as the “but for” motivation behind

the suit, we affirm the district court’s finding of improper purpose because its

finding that the FDIC pursued the litigation with redwoods in mind and with a

motivation of increasing the costs of litigation and forcing settlement was not

clearly erroneous. The court found, for example, that the FDIC “did not admit

107

Memorandum from Jack D. Smith, Deputy General Counsel and Stephen N.

Graham, Associate Director (Operations) to Board of Directors, FDIC at 2 (July 27, 1995).

108

Hurwitz, 384 F. Supp. 2d at 1080.

109

Id. at 1108 (emphasis added).

110

Id. at 1111.

31

No. 05-20808

that it was withholding documents” initially, delayed producing a privilege log,

failed to identify many documents and disclosures that it kept in a warehouse,

and “impeded the depositions of its officials.”111 Indeed, there is evidence in the

record showing that the FDIC engaged in various strategies in several fora to

“pressure” Defendants. Not all of these strategies attempted to pressure

Defendants improperly, but some did.

In a July 15, 1994 memorandum, the FDIC’s lawyers wrote,

At the most recent “summit” meeting between FDIC and the target

defendants and their counsel, . . . Hurwitz’s attorney made an

impassioned argument that FDIC had not done a thorough job

investigating the proposed claims . . . These probative (albeit we

believe exaggerated) remarks were the genesis of the idea to defer

submission of the ATS memo to FDIC’s Board for some extended

period . . . Given this background, it is essential that we keep the

“pressure” on defendants to make, in a timely fashion, their

submissions and to identify witnesses who supposedly have

relevant information [regarding the unsubstantiated nature of the

claims].112

The FDIC’s attorneys explained later in the memorandum that dual

actions by the FDIC and OTS would be effective because “OTS can avoid some

of the adverse Texas precedent” and its “reach is broader and the standards for

liability less.” They concluded that “having the defendants confront two agencies

in different venues adds significant pressure.”113 They made no mention of

pressure to settle for the redwoods, however. Other communications indicated

that groups lobbying the FDIC wanted Hurwitz to “feel some pain by giving

FDIC some Headwaters forest”114 in a possible debt-for-nature settlement, but

111

Id. at 1096-97, 1100.

112

Memorandum from Robert W. Patterson, John L. Rogers, and F. Thomas Hecht,

FDIC Attorneys, to Jeff Williams, FDIC Head of Professional-Liability, at 3-4 (July 15, 1994).

113

Id. at 24.

114

E-mail forwarded to William F. Kroener, III, et al. with Comments by Jack D. Smith

(Sept. 6, 1996).

32

No. 05-20808

the FDIC itself did not make this statement. Soon after FDIC had filed suit,

FDIC attorneys demonstrated their opposition to any involvement in the

redwoods matter, stating,

On August 2, 1995, the FDIC sued Charles Hurwitz . . . Yesterday

the Rose Foundation . . . wrote urging the FDIC/OTS/DOJ to act

immediately to block logging in the Headwaters Forest . . . The

Legal Division does not believe the FDIC or OTS should intervene

in the logging matters for the following reasons . . . MAXXAM is not

a defendant in the FDIC suit . . . neither the FDIC nor OTS could

demonstrate to any court that [logging in Headwaters] compromises

any contingent interest the FDIC or OTS might have . . . neither the

owner of the asset, Pacific Lumber, nor even its owner, MAXXAM,

is being sued by the FDIC.115

There is also evidence that Chairwoman Helfer opposed FDIC involvement

in the redwoods. In a September 19, 1995, letter to the Rose Foundation, an

environmental group, she wrote,

I understand and appreciate the interest in a debt-for-nature swap

and other relief to preserve the Headwaters Forest. Neither

Maxxam nor Pacific Lumber Company, however, are defendants in

the FDIC’s lawsuit . . . While Mr. Hurwitz, through his significant

stock ownership in Maxxam, may be in a position to influence . . .

a debt-for-nature swap, our recently filed lawsuit against Mr.

Hurwitz does not provide a legal basis for compelling that result.

Chairwoman Helfer wrote a nearly identical letter to Congressman David E.

Skaggs on October 2, 1995, and to at least four other members of Congress on

September 28, 1995.116

But there is evidence that the FDIC saw the litigation and a related

administrative forum both as a discharge of its statutory duty and as an

opportunity to pressure settlement for redwoods by increasing costs and

115

Memorandum from William F. Kroener, II, General Counsel, FDIC to Chairman

Helfer, FDIC (Sept. 12, 1995) (MAXXAM became a party at a later point).

116

Chairwoman Helfer sent these letters to Lucille Roybal-Allard, Zoe Lofgren, George

E. Brown, Jr., and Pete Stark.

33

No. 05-20808

harassing Hurwitz through continued litigation, despite opposition from several

of its lawyers. Jeff Williams of the FDIC e-mailed Jack Smith (also with the

FDIC) on April 3, 1995, about a meeting with the Department of Defense,

describing “our brief discussion [with DOD] on Charles Hurwitz and exploring

creative options that may induce a settlement involving the sequoia redwoods in

the FDIC/OTS case.”117 Although this only relayed the communication of

another agency and the “creative options” discussed involved base closure and

land swap options – not harassment through lawsuits – it shows that the FDIC

was aware of the importance of its suit in gaining settlement. A memorandum

prepared by the FDIC and other agencies stated that “it is clear that the FDIC

and OTS claims combined would not have enough value to swing a trade for the

redwoods.”118 The direct evidence that the FDIC continued the litigation with

an improper purpose of harassment or increased costs arises in another

statement from Williams, where he declared, “As I suggested many months ago,

it may be advantageous to tie him [Hurwitz] up in lengthy depositions and

commence a moderately aggressive discovery plan of our own that

inconveniences him and strengthens our case.”119 This persuades us that the

district court’s finding of improper purpose with respect to the FDIC’s manner

in prosecuting the suit was not clearly erroneous. Several of FDIC’s tactics

support the court’s finding that the FDIC improperly used the court to delay the

case and harass Hurwitz. Although many of the proceedings under the district

court case involved Hurwitz’s motions to dismiss, requests for discovery, and

motions for sanctions, there is evidence that the FDIC made many motions to

117

E-mail from Jeffrey Williams, FDIC to Jack Smith, FDIC (Apr. 3, 1995).

118

384 F. Supp. 2d at 1082.

119

Id. at 1083 (emphasis added).

34

No. 05-20808

protect privileged documents and to resist discovery.120 It also attempted to stall

the case by requesting two stays. These tactics may have legitimately been

pursued to avoid duplicative proceedings, as the FDIC alleged that it was, and

is not independently improper as discussed infra in the context of the OTS

proceeding, but the district court’s finding that the FDIC’s actions, considered

collectively, directly interfered with its proceedings and caused harassment and

delay is not clearly erroneous or an abuse of discretion – excessiveness animated

at least in part by the redwoods.

To recapitulate, we affirm the court’s sanctions for the costs of the case

before it on the narrow grounds that, under Rule 11, the FDIC improperly

pursued the case to delay the case and increase the costs of litigation. Because

the court grounded its sanctions for the FDIC and ancillary proceedings in its

findings that the FDIC filed frivolous pleadings with an improper purpose and

120

See, e.g., Federal Deposit Insurance Corporation’s Response to Maxxam’s Motion to

Compel Pre-Suit Materials Because of Waiver (May 19, 2003) (arguing that “while many of the

documents sought are covered by the attorney-client privilege, they are also covered by the

attorney work-product privilege”); Federal Deposit Insurance Corporation’s Motion to Exclude

Evidence (Jan. 15, 2003) (moving “to exclude from this Court’s consideration on both the

Defendant’s pending sanctions motion and counterclaim any evidence pertaining to the

allegations of a ‘debt-for-nature’ conspiracy or transaction”); Federal Deposit Insurance

Corporation’s Motion for a Protective Order (Apr. 25, 2001) (requesting the court to “enter a

Protective Order . . . quashing the Deposition Notice that has been issued for William F.

Kroener, III, the FDIC’s general counsel”); FDIC Responses to Hurwitz First Set of Discovery

Requests Regarding Counterclaim (July 13, 2000) (objecting to multiple discovery requests);

FDIC’s Response to Hurwitz’s Renewed Motion to Compel Production fo the Draft ATS

Memorandum (May 20, 1998) (arguing that “[t]he document constitutes attorney work product

and is also protected by the attorney-client privilege and deliberative process privileges”);

Federal Deposit Insurance Corporation’s Motion for a Protective Order and Request for

Expedited Consideration (Apr. 21, 1998) (moving to quash “the deposition notices that have

been issued for Nicholas P. Retsinas and Jonathan L. Fiechter”); Federal Deposit Insurance

Corporation’s Motion for a Protective Order and Request for Expedited Consideration (Apr. 9,

1998) (moving to “quash the deposition notice that has been issued for Andrew C. Hove”);

Declaration of Andrew C. Hove (asserting privilege for the “tape recording, transcript, and

minutes” from the board meeting, which Hurwitz requested) (Mar. 18, 1998); FDIC’s

Memorandum in Opposition to Defendant Charles E. Hurwitz’s Motion to Compel Discovery

and for Sanctions (Apr. 4, 1996) (arguing that Hurwitz “has received or is receiving all of the

non-privileged documents he has requested. He has no right to privileged documents”);

Memorandum of Law of the Federal Deposit Insurance Corporation in Support of its Motion

for an Order Directing Return of Privileged Documents and Other Relief (Apr. 1, 1996).

35

No. 05-20808

prosecuted the suit to delay the case and increase costs,121 we VACATE and

REMAND this portion of the sanction for further proceedings consistent with

this opinion.

III

In addition to issuing sanctions for improper purpose under Rule 11 and

its inherent power, the district court rested on its inherent power to sanction the

FDIC for the costs of the OTS proceeding, totaling $56,920,241.53.122 We review

de novo a district court’s invocation of its inherent power and the sanctions

granted under its inherent power for an abuse of discretion,123 recognizing that

“[a] court should invoke its inherent power to award attorney’s fees only when

it finds that ‘fraud has been practiced upon it, or that the very temple of justice

121

The court parsed its sanctions with respect to the various proceedings in the case,

including the FDIC, ancillary, and OTS administrative proceedings. For example, the district

court held, “If only the expenses in this case [not the expenses arising from OTS's

administrative proceeding] are recoverable, this court makes that contingent finding that the

FDIC must pay $15,334,905.98.” 384 F. Supp. 2d at 1119. The court did not parse the costs

with respect to its reasons for the sanctions; it did not find, for example, that of the

approximate $15 million in damages arising from the FDIC proceeding, a certain portion was

for filing the case in bad faith, and another portion was for delaying and harassing Defendants

after the suit was filed. The court’s basis for sanctions included mixed reasons of bad faith and

delay; it held, “The FDIC’s improper purpose in suing Hurwitz is objectively ascertainable.

The agency wanted to placate environmentalists and politicians, not redress the failure of th

thrift. . . . Besides suing for an improper purpose, the FDIC’s sanctionable conduct includes:

Filing imaginary claims, unfounded in law and fact. Objectively and subjectively, the FDIC

sued in bad faith; Suing despite its extensive investigation that concluded that Hurwitz was

not guilty of actionable conduct; Engaging in abusive investigation that in at least one instance

involved an FDIC attorney asking a witness to ‘rethink’ his testimony to avoid a personal suit;

Pursuing this case -- in the face of its and its internal and external lawyers’ opinions about the

lack of merit -- either to extort environmental concessions or appease those in and out of

government . . . ; Trying to delay the case at each opportunity; Failing to pursue its claims and

seek meaningful discovery; Trying to thwart nearly all depositions of its officials; Repeatedly

obstructing documentary discovery . . . .; Trying to avoid dismissal on the merits by amending

its complaint and leaving only an unripe – but equally bad – claim; Suing here first and then

instigating, paying for and supervising – and hiding its role in – a second proceeding . . . ;

Trying to hide its illegal arrangement; and Engaging in an open war of attrition.” Id. at 1111-

12.

122

Id. at 1119.

123

Chambers, 501 U.S. at 54.

36

No. 05-20808

has been defiled.’”124 We upheld the inherent power of courts to issue sanctions

beyond those available in sanctions rules in NASCO v. Calcasieu Television &

Radio,125 which the Supreme Court subsequently affirmed in Chambers.126 In

Calcasieu, we found that “federal courts enjoy a zone of implied power incident

to their judicial duty,”127 and that this inherent power is “‘governed not by rule

or statute but by the control necessarily vested in courts to manage their own

affairs.’”128 However, like the power to sanction vested in courts by Rule 11,

[t]o the extent that inherent power is seen as a product of necessity,

it contains its own limits. It is not a broad reservoir of power, ready

at an imperial hand, but a limited source; an implied power

squeezed from the need to make the court function.129

The purpose of the inherent power is to “control the litigation before . . .

[the court].”130 In Chambers, the Supreme Court held that a district court may

sanction parties for conduct that occurs in portions of the court proceeding that

are not part of the trial itself.131 We have qualified Chambers by emphasizing

that its rule allows sanctions for conduct beyond that occurring in trial when a

party engages in “bad-faith conduct” which is “in direct defiance of the

124

Boland Marine & Mfg. Co. v. Rihner, 41 F.3d 997, 1005 (5th Cir. 1995) (quoting

Chambers, 501 U.S. at 46).

125

Nasco, Inc. v. Calcasieu Tel. & Radio, 894 F.2d 696, 703-04 (5th Cir. 1990) (holding

that “the rules of civil procedure did not displace a district court’s power to shift fees for bad

faith wanton and vexatious conduct in the prosecution of the case”).

126

Chambers, 501 U.S. at 58.

127

894 F.2d at 702.

128

Id. (quoting Link v. Wabash R. Co., 370 U.S. 626, 630 (1962)).

129

Id. at 702.

130

Id. at 703.

131

Chambers, 501 U.S. at 44.

37

No. 05-20808

sanctioning court.”132 Additionally, the Chambers Court authorized sanctions

reaching “beyond the court’s confines” expressly with the purpose of allowing

courts to sanction parties for conduct that was not “‘merely the disruption of

court proceedings’” and not limited to “disobedience [that] interfered with the

conduct of trial’” – to address problems arising from “disobedience to the orders

of the Judiciary.”133 Although the FDIC paid for OTS’s investigation and

proceeding, and suggested causes of action in that proceeding, this did not

constitute disobedience of the district court’s orders or “direct defiance” of the

sanctioning court.

Maxxam contends that the sanction properly “reached the FDIC’s use of

OTS as a stalking horse to pursue the Appellees in its preferred forum for

improper reasons” and the district court found similarly,134 but the FDIC also

had legitimate purposes for supporting actions in both the district court and the

administrative forum. First, OTS operates under a six-year statute of

limitations, thus allowing it to pursue individuals responsible for thrift failures

after thoroughly investigating those failures. The FDIC operates under a tighter

two-year statute of limitations, and has worked with OTS in the past on thrift

failures for this very reason.135 The FDIC has also historically reimbursed OTS

for its investigative costs in matters that resulted in restitution to the FDIC,

although it has not typically paid the “ongoing” costs of OTS investigation and

132

CJC Holdings, 898 F.2d at 794 (emphasis added).

133

Chambers, 501 U.S. at 44 (emphasis added) (quoting Young v. United States ex rel.

Vuitton et Fils S.A., 481 U.S. 787, 798 (1987)).

134

The district court concluded that the arrangement between the FDIC and OTS was

illegal. The administrative law judge had earlier rejected Maxxam’s similar challenge to OTS

authority, which contested OTS’s authority to bring suit.

135

Memorandum from Kenneth J. Guido, Jr., Special Enforcement Counsel, and Bryan

T. Veis, Special Counsel, OTS, to Carolyn B. Lieberman, Chief Counsel, FDIC, at 1 (undated).

38

No. 05-20808

enforcement.136 But the board meeting and memoranda leading up to the board

meeting where the FDIC decided to sue, show that the FDIC faced a difficult

decision: it was unsure of whether OTS would pursue an administrative

proceeding related to the thrift’s failure, yet Hurwitz had refused to sign another

tolling agreement with FDIC for the statute of limitations.137 If the FDIC did not

file suit and OTS decided not to pursue the case, it would have lost all claims

against Hurwitz, whom the FDIC believed was directly involved in the thrift’s

failure. And the FDIC was aware that Congress was concerned about the

failure.138 Furthermore, the administrative court in the OTS proceeding rejected

Maxxam’s “arguments challenging the statutory authority of OTS to bring the

proceeding,”139 finding those arguments to be “without merit.”140

Nor did the OTS action directly interfere with the district court’s

authority. The administrative court in the OTS matter held long hearings and

invested numerous hours in that case, concluding with a lengthy opinion

dismissing the claims.141 This did not require the efforts or resources of the

district court, despite that court’s joining OTS as a party in the federal suit and

soon after dismissing OTS when FDIC dropped some of its claims. Additionally,

the FDIC twice requested and the district court twice rejected that the court stay

136

Id.

137

Williams testified that “the FDIC from the beginning [when] it filed that civil case

against Mr. Hurwitz made it abundantly clear to Mr. Hurwitz and its representatives, as well

as the federal judge, that we had no option but to file against Mr. Hurwitz in August of 1995

when he surprisingly refused to extend the tolling agreement with the FDIC to preserve its

civil claims against him. Subsequently, we gave Mr. Hurwitz two opportunities [to stay the

case]: responding directly to his or his agents’ vigorous representations of how difficult it would

be for him to defend himself in two forums at the same time . . . both of which he rejected.”

138

See supra note 22 and accompanying text.

139

USAT v. Maxxam, OTS AP 95-40, Recommended Decision, Arthur L. Shipe,

Administrative Law Judge, at 12.

140

Id.

141

Id. at 247-48.

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No. 05-20808

the case until the administrative proceeding concluded. Although this stalled

the district court’s case, to that court’s displeasure, it is a common practice for

agencies to bring parallel proceedings, and agencies may also request a stay of

one proceeding pending the outcome of another. In SEC v. First Financial

Group of Texas, we held,

There is no general federal constitutional, statutory, or common law

rule barring the simultaneous prosecution of separate civil and

criminal actions by different federal agencies against the same

defendant involving the same transactions. Parallel civil and

criminal proceedings instituted by different federal agencies are not

uncommon occurrences because of the overlapping nature of federal

civil and penal laws. The simultaneous prosecution of civil and

criminal actions is generally unobjectionable because the federal

government is entitled to vindicate the different interests promoted

by different regulatory provisions even though it attempts to

vindicate several interests simultaneously in different forums. The

Supreme Court recognized that the federal government may pursue

civil and criminal actions either ‘simultaneously or successively’ in

1912 in Standard Sanitary Manufacturing Co. v. United States, 226

U.S. 20, 52 (1912) and reaffirmed this principle in 1970 in United

States v. Kordel . . . .”142

“In ‘special circumstances’ . . . a district court should stay one of the proceedings

pending completion of the other to prevent a party from suffering substantial

and irreparable prejudice.”143 District courts have also recognized parallel

agency actions. In Newby v. Enron Corporation, for example, the court noted

that “the alleged scheme to defraud investors and the public with the same

actions by Defendants has given rise to the parallel civil, criminal, and even

administrative (SEC enforcement) proceedings.”144

142

659 F.2d 660, 666-67 (5th Cir. 1981).

143

Id. at 668 (citations omitted).

144

391 F. Supp. 2d 541, 570 (S.D. Tex. 2005).

40

No. 05-20808

Chambers does not grant such broad inherent power to support the district

court’s imposition of more than $50 million in sanctions for a proceeding that

was not before the district court and did not challenge the district court’s

authority in the FDIC suit, particularly because that court rejected the FDIC’s

efforts to stay its case pending the OTS proceedings’ outcome. The OTS

proceeding addressed different legal issues and prosecuted six defendants who

were not involved in the FDIC case. If anything, the OTS proceeding verifies

that the FDIC and OTS also had a legitimate purpose in bringing the suit – by

pursuing multiple individuals who were involved in USAT’s downfall and were

not involved in the redwoods deal, OTS attempted to obtain restitution for U.S.

taxpayers and to prevent certain individuals involved in the USAT downfall

from directing other banking institutions.

Chambers expressly upheld the court’s “inherent power to police itself,

thus serving the . . . purpose of ‘vindicat[ing] judicial authority’”145 but did not

grant a district court the power to police the administrative courts – where the

OTS is statutorily required to pursue enforcement matters – when those courts

do not threaten the court’s own judicial authority or proceedings. Moreover, we

have found that the court’s inherent power to sanction does not extend to “‘the

underlying conduct that gives rise to a . . . claim.’”146 To the extent that the

FDIC engaged in underlying conduct that the district court found distasteful,

such as paying the OTS to bring a case in administrative court,147 it is not within

the court’s power to sanction such conduct. The district court was aware that at

145

Id. at 46 (emphasis added) (quoting Hutto v. Finley, 437 U.S. 678, 689 n.14 (1978)).

146

Galveston County Navigation Dist. No. 1 v. Hopson Towing Co., 92 F.3d 353, 359

n.13 (5th Cir. 1996) (quoting Guevara v. Maritime Overseas Corp., 59 F.3d 1496, 1503 (1995));

see also Towerridge, Inc. v. T.A.O., Inc., 111 F.3d 758, 766 (10th Cir. 1997) (citing, inter alia,

Galveston County, 92 F.3d at 359 n.13)) (“Our sister circuits that have squarely addressed this

issue have also held the [bad faith] exception [to the American Rule] does not reach purely

prelitigation bad-faith conduct.”).

147

The district court described this conduct as illegal. 384 F. Supp. 2d at 1047.

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No. 05-20808

best, sanctions for the OTS proceeding were at the outer reach of its inherent

power, properly making an alternative award of expenses. It held that “[i]f only

the expenses in this case are recoverable, this court makes the contingent

finding that the FDIC must pay $15,334,905.98.”148 We are persuaded that in

imposing the $50 million in sanctions for an administrative proceeding in

Washington, DC, the district court abused its discretion, and that only the costs

related to the district court proceedings are sustainable.

For the $1,192,838.82 in costs imposed for “ancillary” proceedings, the

court determined that the proceedings “were necessary because the government

refused to produce documents to which Hurwitz was entitled. Though most of

those actions were against OTS, they related directly to the FDIC’s case here.”149

We are unable to determine from the opinion which of these costs related solely

to the OTS proceedings, and which were directly intertwined with or interfered

with the district court’s proceedings. The district court is in a better position to

delineate these costs; we therefore VACATE and REMAND this portion of the

sanction for further proceedings consistent with this opinion.

IV

For the sanctions that arose from the district court proceedings, the court

awarded $6,959,876.96 in interest on the cost of attorney’s fees. We review a

district court’s imposition of sanctions for abuse of discretion, but we review de

novo whether sovereign immunity prevents sanctions assessed against a

government entity.150 The district court assessed an interest award under its

inherent powers based on “the cost of the delay for the fees and expenses,”151

148

Id. at 1119; see also id. at 1120 (“If the court of appeals allows recovery for the costs

of only this action, the FDIC will pay Maxxam $15,334,905.98.”).

149

Id. at 1119-20 (emphasis added).

150

See, e.g., United States v. Woodley, 9 F.3d 774, 781 (9th Cir. 1993).

151

384 F.Supp. 2d at 1119.

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determining that it would use “current pricing” of the award “to compensate for

harm inflicted through the suit itself.”152 In other words, the court based part of

its sanctions award on “Maxxam’s cost of borrowing the money that it needed to

cover defense costs,” or the “attorney fees actually paid . . . [adjusted] for the

delay in repayment.”153

The FDIC argues that this was an award of prejudgment interest and that

sovereign immunity prevents the district court from assessing prejudgment

interest as part of its sanctions.154 Hurwitz argues that, even if the FDIC were

acting as a government entity rather than a receiver, the court could assess

prejudgment interest against the FDIC because of the broad scope of the court’s

inherent power, relying on United States v. Woodley155 and Bradley v. United

States.156 The district court found that “including the measure of the costs of

delay is not the same as granting prejudgment interest in an ordinary case,”157

and that even if the award were labeled as prejudgment interest, the FDIC did

not act in its governmental capacity here but rather its institutional capacity as

a receiver,158 thereby making it liable for the costs even if they were labeled as

152

Id. at 1120.

153

Id. at 1118-19.

154

The FDIC also contests the court’s method of determining the costs, arguing that

the costs are “unsupported and excessive.” The district court relied on detailed spreadsheets

of invoiced amounts for Defendants’ legal services and provided reasons for the amount of the

award.

155

See supra note 150.

156

866 F.2d 120 (5th Cir. 1989).

157

Hurwitz, 384 F.Supp. 2d at 1120.

158

The FDIC argues that it was acting in its corporate capacity, not as a receiver, since

“FLSIC transferred all of its claims as receiver against Hurwitz to FSLIC in its corporate

capacity. When FSLIC was abolished, FDIC acquired that assets of FSLIC in its corporate

capcity [not in its receivership capacity].” (emphasis added). The FDIC cites to 12 U.S.C. §

1823(d)(1) in support of its claim. Section 1823 (d)(1) provides, “Any conservator, receiver, or

liquidator appointed for any insured depository institution in default, including the

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“prejudgment interest.”159 The district court did not abuse its discretion in so

holding; nor did it err in assessing interest against a government entity with

limited sovereign immunity.160

The question of the scope of a waiver of sovereign immunity falls away

when a court acts under its sanctioning powers and does not abuse its discretion

in so doing. The threshold question in a sanctions case is whether the court has

the power to sanction a party for frustrating its Article III functions. The

government, as a party to a lawsuit, is subject to the same ethical and

procedural rules as a private litigant, and risks the same sanctions if it fails to

abide by these rules.161 As discussed above, the district court did not abuse its

Corporation acting in such capacity, shall be entitled to offer the assets of such depository

institutions for sale to the Corporation or as security for loans from the Corporation.” The

FDIC also cites to FDIC v. Henderson, which determined that where FLSIC acted as a receiver

and “sold certain of the institutions’ assets to the FSLIC in its corporate capacity,” its assets

vested in the FDIC and the FDIC could then sue “pursuant to its authority under FIRREA.”

61 F.3d 421, 422 n.1 (5th Cir. 1995). Because our holding does not rest on the FDIC’s acting

in its capacity as a receiver, we do not address this question.

159

Hurwitz, 384 F.Supp. 2d. at 1120. The court again asserts, however, that the “delay”

award is not ordinary prejudgment interest, stating, “Since the FDIC sued in its capacity as

the thrift’s receiver, it is liable for prejudgment interest, but that is not what is happening

here.” Id.

160

The FDIC’s organic statute allows the agency “to sue and be sued, and complain and

defend, in any court of law or equity, State or Federal.” 12 U.S.C. § 1819 (a) (cited in FDIC v.

Meyer, 510 U.S. 471, 475 n. 3 (1994)). The Supreme Court has since interpreted this as “a

‘broad’ waiver of FSLIC’s [now FDIC’s] immunity from suit.” Meyer, 510 U.S. at 475 (citing

United States v. Nordic Village, Inc., 503 U.S. 30, 34 (1992)). A general waiver of immunity,

however, does not automatically waive an agency’s immunity from prejudgment interest. See,

e.g., United States v. Thayer-West Point Hotel Co., 329 U.S. 585, 588 (1947) (discussing “the

traditional rule that interest cannot be recovered against the United States upon unpaid

accounts or claims in the absence of an express provision to the contrary in a relevant statute

or contract”). But see Spawn v. Western Bank–Westheimer, 989 F.2d 830, 833 (5th Cir. 1993)

(discussing exceptions to the “no interest” rule).

161

See, e.g., Bradley, 866 F.2d at 126 (“All parties are expected to conform their conduct

to these rules [‘the rules by which all parties must operate when appearing before federal

district courts’], or face sanctions for their failure to do so; this is even more true for the federal

government, a party that regularly appears before the federal courts, knows the rules by which

they operate, and is even at times a special beneficiary of those rules.”).

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discretion in assessing sanctions against the FDIC for prosecuting the case with

at least the intent to delay and increase Hurwitz’s costs.

Although neither Woodley nor Bradley held that a court may pierce

sovereign immunity to assess sanctions for interest specifically, they affirmed

the broad supervisory powers of a court to sanction a government entity. Where

the court has provided an explanation of the costs it assessed in sanctions, we

are hesitant to parse those costs artificially into portions that are or are not

barred by sovereign immunity. Provided that the amount of the sanctions

relates to the purpose of those sanctions – controlling the proceedings before the

court – the bulk of our inquiry is complete.

In Woodley, the Ninth Circuit held that “[s]overeign immunity does not bar

a court from imposing monetary sanctions under an exercise of its supervisory

powers,”162 even where a government entity has not expressly waived sovereign

immunity.163 We similarly authorized monetary sanctions in Bradley, finding

that the court should not have left “unsanctioned” the government’s conduct of

introducing late expert witnesses that prejudiced the case164 and instructing the

district court on remand that “pursuant to its inherent power to enforce its own

rules” it should consider “requiring the government to compensate the Bradleys

and their counsel for their expenses attributable to the government’s conduct.”165

The district court’s sanctions in this case in the form of the cost of

attorney’s fees, including the cost of money to pay for those fees, are no different

from an assessment of the expenses “attributable to the government’s conduct.”

162

9 F.3d at 782.

163

See id. at 781. But see id. at 782 (finding that “the court identified no violation of

any statute, constitutional or other recognized right except, perhaps, Rule 16 as a basis for

exercising its supervisory powers” and reversing the court’s monetary sanctions against the

government).

164

Bradley, 866 F.2d at 127.

165

Id. at 128.

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As the First Circuit held in Goya Foods, Inc. v. Wallack Management Co., where

the court acts under its inherent powers to issue sanctions against a private

party for contempt,

[i]f the purpose of remedial contempt sanctions is to make an

aggrieved party whole, then it follows that a court should be able

to fashion sanctions that take into account not only the actual loss

stemming from the contumacious conduct but also the time value

of any associated deprivation of funds.166

The court’s inherent powers are of course not unlimited.

Because of their very potency, inherent powers must be exercised

with restraint and discretion. A primary aspect of that discretion

is the ability to fashion an appropriate sanction for conduct which

abuses the judicial process.167

The assessment of attorneys’ fees and interest on those fees is an

appropriate sanction in this case. “[A] court’s discretion [in sanctioning for

contempt] . . . permits the court to impose as part of the fine attorney’s fees

representing the entire cost of the litigation.”168 The district court’s assessment

of costs is unlike a traditional award of prejudgment interest,169 such as a pre-

existing debt that a defendant failed to pay to a plaintiff, wherein the non-

payment of money deprived the plaintiff of funds and the interest on those funds.

Rather, it captures the actual costs of the attorney’s fees by including the cost

of a loan that might be required to pay those fees – i.e., the opportunity cost of

166

290 F.3d 63, 79 (1st Cir. 2002); see also id. (holding that “prejudgment interest, as

a theoretical matter, is an acceptable component of a remedial sanction for civil contempt” and

quoting the holding in McComb v. Jacksonville Paper Co., 336 U.S. 187, 193 (1949), that “[t]he

measure of the court’s power in civil contempt proceedings is determined by the requirements

of full remedial relief”).

167

Chambers, 501 U.S. at 44-45.

168

Id. at 45 (citing Toledo Scale Co. v. Computing Scale Co., 261 U.S. 399, 428 (1923)).

169

But see Gore, Inc. v. Glickman, 137 F.3d 863, 868 (5th Cir. 1998) (“Prejudgment

interest, like any other interest, is to compensate one for the time value of money.”).

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money that could have been used for other purposes but instead went to the

payment of fees.170

Even if we were to label the costs as “prejudgment interest” and to address

the question of the extent to which the FDIC waived sovereign immunity, if

FDIC were acting in its capacity as a receiver,171 it would not likely be immune

from an assessment of prejudgment interest. Since we address the costs of delay

awarded as part of sanctions, rather than traditional prejudgment interest, we

leave that issue for another day.172

170

We have addressed the costs of delay only in the context of a judgment, rather than

a sanctions award, holding in Shaw that a government entity with sovereign immunity cannot

be held liable for “claims grounded on the belated receipt of funds, even when characterized

as compensation for delay.” 478 U.S. at 322. Although we have not addressed a court’s

sanction award for the costs of delay, the Supreme Court and the Seventh Circuit have in

awarding fees under Rule 11 and other statutory provisions for fees. In Missouri v. Jenkins,

the Supreme Court held that when awarding attorney’s fees under 42 U.S.C. § 1988, “an

appropriate adjustment for delay in payment–whether by the application of current rather

than historic hourly rates or otherwise” is permissible. 491 U.S. 274, 283-84 (1989). The

Seventh Circuit in Brandt v. Schal Assoc., Inc. upheld a district court’s award of interest on

attorney’s fees for the “delay factor” and affirmed the district court’s holding that awarding

delay damages does not violate Cooter & Gell v. Hartmax Corp. 960 F.2d 640, 645, 649 (7th

Cir. 1992) (citing 496 U.S. 384 (1990)).

171

The FDIC disputes that it acted as a receiver here. See supra note 158.

172

See, e.g., Spawn, 989 F.2d at 833 (quoting McGehee v. Panama Canal Comm’n, 872

F.2d 1213, 1215 (5th Cir.1989)) (holding that a government agency may lose its immunity to

interest sanctions if “‘Congress has shed the cloak of sovereignty and given an agency the

status of a commercial operation’”); see also Meyer, 510 U.S. at 482 (1994) (quoting Franchise

Tax Bd. v. United States Postal Serv., 467 U.S. 512, 520 (1984)) (where “claimant . . . was

seeking to hold the agency liable just like ‘any other business,’ it was only natural for the Court

to look to the liability of private businesses for guidance”); O’Melveny & Myers v. FDIC, 512

U.S. 79, 86 (1994) (finding that “Section 1821(d)(2)(A)(I), which is part of a title captioned

‘Powers and duties of [the FDIC] as . . . receiver,’ states that ‘the [FDIC] shall, . . . by operation

of law, succeed to–all rights, titles, powers, and privileges of the insured depository institution

. . . .’ 12 U.S.C. § 1821(d)(2)(A)(I) (1988 ed., Supp. IV). This language appears to indicate that

the FDIC as receiver ‘steps into the shoes’ of the failed S&L”); Loeffler v. Frank, 486 U.S. 549,

554-55 (1988)) (holding that “sue and be sued” provisions of agencies should be liberally

construed and that “‘authorization of suits against federal entities engaged in commercial

activities may waive sovereign immunity from awards of interest as an incident of suit’”); N.

Bank v. Fed. Deposit Ins. Corp., 496 N.W.2d 459, 467 (Neb. 1993) (holding that there is a

“significant distinction” between FDIC in its corporate capacity and its receivership capacity;

where FDIC acts as a receiver, it is not immune from prejudgment interest).

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V

We therefore REVERSE the district court’s award of $56,920,241.53 in

principal and interest for the OTS action. We VACATE and REMAND the

award of $1,192,838.82 of principal and interest for the ancillary actions for the

court to determine which of the costs were for actions that interfered with the

court’s proceedings. Finally, we VACATE and REMAND the award of

$14,142,067.16 in principal and interest for the FDIC suit for the court to

determine which of the costs resulted from the FDIC’s manner of prosecuting the

suit to cause harassment and delay.

48