Fifth Circuit Tells District Court It Has No “Inherent Authority” To Impose Sanctions For Actions Arising Out Of An Arbitration Proceedings

By Stephen P. Groves, Sr.

In Positive Software Solutions, Inc. v. New Century Mortgage, et. al. v. Camina, ___ F.3d ___ (5th Cir. 2010) (Docket No. 09-10355, filed 13 September 2010), the United States Court of Appeals for the Fifth Circuit concluded a Federal District Court did not have the “inherent authority” to impose monetary sanctions for actions allegedly occurring during an arbitration proceeding, even though the District Court had ordered the arbitration to take place.

Positive Software Solutions sued New Century Mortgage for allegedly infringing on certain software patents associated with telemarketing software licensed to New Century. Camina, a partner in Susman Godfrey, LLP, represented New Century in a court-ordered contractual arbitration even though Positive Software opposed the proceeding.

During the arbitration Camina advised New Century on discovery issues. After an award was rendered, the District Court vacated due to an alleged undisclosed relationship between Camina and the arbitrator. In an initial appeal, the Fifth Circuit reversed the vacatur and remanded the case. After remand, New Century declared bankruptcy. Positive Software ultimately settled its dispute with New Century and, as an interesting part of the settlement, “New Century waived and assigned to Positive Software its attorney-client and work-product rights.” The District Court later ordered Susman Godfrey LLP to turn over its files to Positive Software for sanctions investigation purposes.

Positive Software subsequently moved for sanctions against Camina and other under, Rule 37, F.R.Civ.P., 28 U.S.C. § 1927 (counsel’s liability for excessive costs, expenses, and attorneys’ fees), and the District Court’s “inherent authority”. In February 2009, the District Court sanctioned Camina $10,000.00 via the District Court’s “inherent authority”.

On appeal, the Fifth Circuit recognized that a District Court had the “inherent authority” to impose sanctions in order to (a) control the litigation before it, (b) sanction conduct in direct defiance of the sanctioning court, and (c) sanction conduct which constitutes disobedience to court orders. Nevertheless, the Court of Appeals noted such “inherent authority” must only be used when essential to preserve the court’s authority.

The District Court had imposed the sanctions on Camina based upon a theory that the arbitration proceeding was an “annex” to litigation. The District Court believed, since it had ordered the arbitration to proceed, it retained the authority to impose sanctions for conduct occurring during the arbitration. The Fifth Circuit easily dismissed this theory, noting arbitration is an alternative means of dispute resolution – separate from litigation. In fact, the Court of Appeals concluded if the District Court was correct and arbitration was a mere “annex” of litigation, then the very purpose of such private (i.e.; non-judicial) ADR/arbitration would be completely undermined. Consequently, the Court of Appeals acknowledged “[p]arties agree to avoid litigation; they voluntarily surrender judicial remedies in favor of an extrajudicial process.” (Emphasis in original).

Interestingly, Positive Software argued that the sanctions were appropriate in a court-ordered arbitration, but agreed that sanctions would not have been proper had the parties voluntarily entered into the arbitration. The Fifth Circuit found this to be an unjustifiable “significant and perverse asymmetry”.

Additionally, the Court of Appeals concluded the sanctions order likely violated the Federal Arbitration Act, 9 U.S.C. §§ 1, et. seq., which significantly limits a court’s ability to interfere with an arbitration proceeding. Furthermore, the Fifth Circuit did not want a District Court to “become a roving commission to supervise private method[s] of dispute resolution and exert authority that is reserved, by statute, caselaw, and longstanding practice, to the arbitrator.”

To Heir Is Human, To Do It Too Late Is Fatal

By Stephen P. Groves, Sr.

In a series of four cases, released on 16 August 2010, the South Carolina Supreme Court affirmed the Court of Appeals’ prior decisions to uphold a summary judgment in four 2005 actions to set aside a 1966 quite title decision. See Robinson v. Estate of Harris, ___ S.C. ___, ___ S.E.2d ___ (2010) (Four cases) (Opinion Nos. 26862, 26863, 26864, and 26865).

Simeon B. Pinckney died intestate in 1921. He was survived by his wife, Laura, and his two sons, Herbert and Ellis. At the time of his death he owned 20 acres of land on James Island in Charleston County. For various reasons, not important herein, the relevant property was “whittled down” to 4.3 acres and deeded to Mr. Pinckney’s son, Herbert Pinckney, in 1946. After Herbert passed his wife, Laura Pinckney Heyward, filed a quiet title action in 1966. None of the appealing parties to this action or any of their predecessors-in-interest responded to the 1966 action and the title was resolved in Ms. Heyward’s favor.

Due to a number of subsequent conveyances, the 4.3-acre tract was eventually divided into four separate lots owned by (a) The Converse Company, (b) Martine A. Hutton, (c) David Savage and Lisa M. Shogry-Savage, and (d) Debbie (Shogry) Dinovo. Each lot owner was a Defendant-Respondent in one of the four Robinson v. Estate of Harris cases.

In February 2005, Sara Mae Robinson and others (“Petitioners”) filed their own quiet title action involving several tracts of land located on James Island, including the 4.3-acre tract. They sought “ ‘to establish their legitimate relationship as lineal descendants and heirs’ " of Mr. Pinckney. The first 25 named Petitioners claimed they were Mr. Pinckney’s heirs and “the remaining Petitioners claimed they purchased interests in the property and were the legitimate owners of those interests.”

In bringing the cases, the Petitioners asserted the 4.3 acre tract was fraudulently transferred to Herbert and, in turn, Ms. Heyward fraudulently obtained the property deed through the 1966 action. Moreover, the Petitioners asserted they did not learn of the 1946 deed or the 1966 quiet title action until 2004. After the issues were joined the Lot Owners all moved for summary judgment. The Petitioners countered with several detailed affidavits delineating their alleged evidence of extrinsic fraud. The Trial Court granted the Lot Owners’ motion and the Court of Appeals affirmed. On certiorari appeal, the Supreme Court agreed.

In order to resolve these cases, the Supreme Court was required to determine if S. C. Code Ann. § 15-67-90 constituted an "absolute bar" to Petitioners' action or whether their claim of extrinsic fraud superseded the applicable statute of limitations set forth therein. This provision contains a three year statute of limitations after which a court is prohibited from setting aside a quiet title action “for any reason”.

The Supreme Court agreed with the Petitioners that S. C. Code Ann. § 15-67-90 gave either the trial court and/or the appellate courts “the inherent authority to set aside the 1966 quiet title action and the underlying 1946 cross-deeds if in fact they were procured as the result of extrinsic fraud.” Nevertheless, since the Petitioners waited 39 years to challenge the 1996 action, the doctrine of laches applied to bar their claims. Moreover, notwithstanding the laches bar, the Supreme Court, in a “it just ain’t fair” moment, noted the innocent purchasers would be significantly prejudiced since they had (a) purchased the lots for significant monetary consideration, (b) generally been in possession of the property for a number of years, and (c) some of the Respondents had even constructed family residences thereon.

The united Supreme Court affirmed the Court of Appeals in all four cases.

Water, Water Everywhere, but not a Drop to Drink

By Stephen P. Groves, Sr.

In M & M Corporation of South Carolina v. Auto-Owners Insurance Company, ___ S.C. ___, ___ S.E.2d ___ (2010) (Sup. Ct. Op. No. 26883, filed 11 October 2010), a divided South Carolina Supreme Court (3-2), answered several certified questions from the United States District Court for the District of South Carolina. The Supreme Court determined Auto-Owners was required to provide property damage insurance coverage to its insured hotel for damages caused by overflowing water.
Auto-Owners issued M&M Corporation a commercial all-risk insurance policy for its hotel property located in Blythewood, South Carolina. In August 2006, the South Carolina Department of Transportation (“SCDOT”) initiated a road improvement project near the hotel which involved, in part, installation of a new underground stormwater drainage system. Before the system could be completed the Blythewood area sustained a significant rain event during which more than four inches of rain fell in a single day. As noted by the Supreme Court:

The incomplete stormwater drainage system comprised 1,600 feet of pipes and collected water from an area of approximately 15.9 acres, terminating at an exposed, above-ground [30]-inch pipe [50’] from the edge of the hotel property line and [150’] from [the] hotel building. The total volume of water discharged from the pipe on the day at issue was over 830,000 gallons at a rate of 6.3 feet per second.

Unfortunately, the discharged water filled the hotel’s parking lot to a level sufficient to allow water to enter into the interior of the hotel building and, in turn, cause significant property damage. M&M Corporation sued Auto-Owners for the damages. Auto-Owners denied and defended the claim on the basis of the insurance policy’s “flood” and “surface water” exclusions. After the parties filed their respective cross-summary judgment motions, the District Court certified three questions to the Supreme Court.

1. Under an all-risk Commercial Property Policy of insurance, does "surface water" encompass rainwater collected and channeled in a stormwater collection system?

The Supreme Court noted that since the insurance policy did not define either the term “surface water” or “flood water” then it was free to use the “plain, ordinary, and popular meaning[s]” of those terms. Moreover, the Supreme Court noted insurance policies are construed in favor of coverage with all exclusions, such as those asserted by Auto-Owners, interpreted against the insurer.

Looking to a definition of “surface water” reached in 1901, the Supreme Court concluded that “[o]nce surface water is deliberately contained, concentrated, and cast onto an adjoining landowner's property, it is no longer naturally flowing, diffuse water. Water spewing in an unnatural concentration from a stormwater drainage system lacks the identifiable characteristics of surface water . . . .” . The Supreme Court therefore answered the first certified question with a rather emphatic “No”.

2. If the answer to Question I is no, can such non-surface water reacquire its classification as surface water upon exit from the stormwater collection system and, if so, under what circumstances?

Following, in essence, the same 100+ year old definition, the Supreme Court also answered the second certified question with a similar rather emphatic “No”. The Court stated once the rampaging waters had lost their “surface water” characteristics when expelled from the pipe, the unnatural flow cannot be transformed back into “surface water”.

3. Under an all-risk Commercial Property Policy of insurance, does "flood water" encompass water discharged from a stormwater collection system in concentrated form, pooled, and that thereafter enters a building?

Finally, interpreting Auto-Owners’ “flood water” exclusion, the Supreme Court noted South Carolina had not yet defined the term. Looking to an Idaho case, the Supreme Court impliedly approved a definition reading “ ‘[f] waters are waters which escape, because of their height, from the confinement of a stream and overflow adjoining territory; implicit in the definition is the element of abnormality.’ ” See Milbert v. Carl Carbon, Inc., 406 P.2d 113, 117 (Idaho 1965). Since the waters in this case did not “breach” the containment of a stream or other natural land formation, but was intentionally channeled, then the waters cannot be defined as “flood waters”.

Chief Justice Toal authored the opinion and was joined by Justices Beatty and Kittredge. Justices Pleicones authored a dissenting opinion joined in by Justice Hearn.

1. See Lawton v. South Bound Railroad Co., 61 S.C. 548, 39 S.E. 752 (1901). The Supreme Court defined “surface water” as:

waters of a casual and vagrant character, which ooze through the soil or diffuse or squander themselves over the surface, following no definite course. They are waters which, though customarily and naturally flowing in a known direction and course, have nevertheless no banks or channels in the soil, and include waters which are diffused over the surface of the ground, and which are derived from rains and melting snows . . . .

Lawton v. South Bound Railroad Co., 61 S.C. 548, 552, 39 S.E. 752, 753.