Fifth Circuit Reverses Sua Sponte Imposition of Rule 11 Monetary Sanctions for Failure to Comply with Proper Procedure

Per Marlin v. Moody Nat. Bank, N.A., --- F.3d ----, 2008 WL 2568823 (5th Cir. June 30, 2008):

In awarding summary judgment to Defendants, the district court, sua sponte, ruled that sanctions would be imposed against Plaintiffs M. Gene Marlin and Old National Bank; subsequently, after ordered filings and a hearing, it set the amount at approximately $640,000. Plaintiffs maintain the sanctions were improper under Federal Rule of Civil Procedure 11. . . . The district court failed in several instances to comply with the mandatory procedure set by Rule 11. Each of those instances constitutes an abuse of discretion, requiring the sanctions to be vacated . . . .

Although Moody National served Plaintiffs with a Rule 11 letter requesting the dismissal of all claims, the attached motion was never filed. It was not until the summary judgment was granted that, as part of that order, the district court, on its initiative, ruled it would impose costs “as simple equity”, and, soon thereafter, ordered Defendants to submit their fees-and-costs statements. Therefore, contrary to Rule 11, the district court did not “determine[ ] that Rule 11(b) ha[d] been violated” “ after [first giving Plaintiffs] notice and a reasonable opportunity to respond”. Fed.R.Civ.P. 11(c)(1) (emphasis added). . . . This alone constituted an abuse of discretion. . . .

[A]lthough sanctions may be awarded on the court's initiative, it is required first to “order [the] attorney, law firm, or party to show cause why conduct specifically described in the order has not violated Rule 11(b)”. Fed.R.Civ.P. 11(c)(3). The district court, however, did not issue the required show-cause order. As a result, this is another reason why the sanctions constituted an abuse of discretion. . . .

Additionally, Rule 11 limits the types of sanctions that may be imposed. . . . Sanctions imposed on the district court's initiative, as in this instance, are limited to nonmonetary sanctions or a monetary penalty payable to the court. Fed.R.Civ.P. 11(c)(4). Therefore, this is yet another basis for the sanctions constituting an abuse of discretion. . . .