SEC v. McGinn, et al., No. 11-3843 (2d Cir. 2013)
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This appeal arose out of a proceeding brought to remedy securities fraud and recover assets that were the fruits of the fraud. The issues on appeal related to enforcement of, and compliance with, an order freezing various assets. The Trust and various individuals appealed from the magistrate judge's sanctioning of certain individuals. The court dismissed the appeals of Jill Dunn and David Wojeski for lack of jurisdiction, affirmed the sanction order as to Lynn Smith, and remanded to allow the Trust to contest the court's order regarding the disposition of trust property and for the magistrate judge to give additional guidance to the receiver as to disposition of the Trust property.
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11-3843-cv (L) SEC v. Lynn A. Smith, et al. 1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 August Term, 2011 4 (Argued: March 13, 2012 Decided: March 18, 2013) 5 Docket Nos. 11-3843-cv(L), 11-3845-cv(con), 11-3848-cv (con), 6 11-3851-cv(con), 11-4238-cv(con) 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. LYNN A. SMITH, LAUREN T. SMITH, GEOFFREY R. SMITH, TRUSTEE OF THE DAVID L. AND LYNN A. SMITH IRREVOCABLE TRUST U/A 8/04/04, Defendants-Appellants, JILL A. DUNN, DAVID M. WOJESKI, Non-Party Appellants, MCGINN, SMITH & COMPANY, INCORPORATED, MCGINN, SMITH ADVISORS, LLC, MCGINN SMITH CAPITAL HOLDINGS CORPORATION, FIRST ADVISORY INCOME NOTES, LLC, FIRST EXCELSIOR INCOME NOTES, LLC, FIRST INDEPENDENT INCOME NOTES, LLC, THIRD ALBANY INCOME NOTES, LLC, TIMOTHY M. MCGINN, DAVID L. SMITH, NANCY MCGINN, Defendants.* - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - B e f o r e: WINTER, LIVINGSTON, Circuit Judges, and RAKOFF, District Judge.** __________ *The clerk of court is instructed to conform the caption in accordance herewith. **The Honorable Jed S. Rakoff of the United States District Court for the Southern District of New York, sitting by designation. 1 1 Appeal from an order of the United States District Court 2 for the Northern District of New York (David Homer, Magistrate 3 Judge) imposing sanctions against several individual appellants 4 and authorizing a receiver to dispose of property owned by an 5 irrevocable trust. 6 remand with regard to the disposition of the trust s real 7 property. We dismiss in part, affirm in part, and 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 JAMES D. FEATHERSTONHAUGH, Featherstonhaugh, Wiley & Clyne, LLP, Albany, New York, for DefendantAppellant Lynn A. Smith. STEPHEN B. HANSE, Featherstonhaugh, Wiley & Clyne, LLP, Albany, New York, for Defendants-Appellants Geoffrey R. Smith, Trustee of the David L. and Lynn A. Smith Irrevocable Trust U/A 8/04/04, Lauren T. Smith and Geoffrey R. Smith. BENJAMIN ZELERMYER, Steinberg & Cavaliere, LLP, White Plains, New York, for Non-Party Appellant Jill A. Dunn, Esq. FRED N. KNOPF, Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, White Plains, New York, for Non-Party Appellant David M. Wojeski. KEVIN P. MCGRATH, Senior Trial Counsel, Securities and Exchange Commission, New York, New York, (Mark D. Cahn, General Counsel, Michael A. Conley, Deputy General Counsel, Jacob H. Stillman, Solicitor, Christopher Paik, Securities and Exchange Commission, Washington, D.C. on the brief), for Plaintiff-Appellee. 2 1 2 WINTER, Circuit Judge: This appeal arises out of a proceeding brought to remedy 3 securities fraud and recover assets -- to be distributed to 4 victims -- that were the fruits of the fraud. 5 before us relate to enforcement of, and compliance with, an 6 order freezing various assets. The issues 7 Appellants, the David L. and Lynn A. Smith Irrevocable 8 Trust U/A 8/04/04 (the Trust ) and various individuals, appeal 9 from Magistrate Judge Homer s1 order directing the disposition 10 of the Trust s assets and sanctioning: 11 defendant in the action, and (ii) non-parties Jill Dunn, 12 attorney for the Trust, and David M. Wojeski, one-time trustee 13 of the Trust. 14 the event of her failure to satisfy the sanctions against her, 15 a receiver would dispose of a piece of real property owned by 16 the Trust if doing so would maximize the return on that 17 property. 18 (i) Lynn Smith, a The order against Lynn Smith provided that, in This appeal raises questions concerning our jurisdiction 19 to hear interlocutory appeals of sanctions orders; the 20 propriety of the sanctions imposed; and whether it was error 21 for the magistrate judge to give the receiver authority to 22 dispose of Trust assets without first providing notice and an 23 opportunity for the Trust to be heard. 1 The parties consented to have the issue of the asset freeze decided by a magistrate as provided by 28 U.S.C. § 636(c). 3 1 We dismiss the appeals of Jill Dunn and David Wojeski for 2 lack of jurisdiction, affirm the sanction order as to Lynn 3 Smith, and remand to allow the Trust to contest the court s 4 order regarding the disposition of Trust property and for the 5 magistrate judge to give additional guidance to the receiver as 6 to disposition of the Trust property. 7 BACKGROUND 8 9 The origins and provisions of the Trust, which was created in August 2004, are central to the issues on appeal. David and 10 Lynn Smith created the Trust with themselves as donors and 11 their adult children as beneficiaries. 12 100,000 shares of stock held in Lynn Smith s name. 13 were worth approximately $4.5 million. 14 given outright to the Trust but were transferred pursuant to an 15 annuity agreement that would pay the Smiths approximately 16 $490,000 per year beginning in 2015 and ending either when both 17 David and Lynn Smith died or when the Trust s assets were 18 exhausted. 19 court s orders, the existence of this annuity was not revealed 20 until late July 2010, and its discovery gave rise to the 21 sanctions imposed. 22 The Trust was funded by The shares The shares were not As discussed infra, contrary to the district In April 2010, the SEC filed the present complaint against 23 David Smith and various related individuals and corporations 24 alleging violations of the securities laws. 4 Lynn Smith, his 1 wife, was included in the action as a relief defendant2 and 2 later as a defendant under New York law who had received a 3 fraudulent conveyance. 4 of all of the defendants. 5 issued an order that, inter alia, froze Lynn Smith s assets and 6 directed her to provide an accounting [of her] own personal 7 assets, liabilities and general financial condition. 8 The SEC also moved to freeze the assets In response, the district court Lynn Smith s April 29 statement of accounts and list of 9 assets included no mention of any interest in the Trust or in 10 the annuity that was to be paid to her and David Smith by the 11 Trust. 12 that she and David Smith had no interest in or expectation of 13 an interest in the [Trust]. 14 permanently for the benefit of our children. 15 hearing concerning the asset freeze on June 10, Lynn Smith 16 stated that she had no ownership interest in the stock that was 17 transferred to the trust and that the funds in the Trust were 18 solely for the benefit of her children. 19 On May 26, she filed an affidavit stating explicitly It exists solely, exclusively and Finally, at a On July 7, 2010, after considering the blatantly 20 misleading information before it, the court released the freeze 21 on the Trust s assets, concluding that David Smith had no 2 A relief defendant is an individual who holds the subject matter of the litigation in a . . . possessory capacity. Commodities Futures Trading Comm n v. Walsh, 618 F.3d 218, 225 (2d Cir. 2010) (quoting SEC v. Colello, 139 F.3d 674, 676 (9th Cir. 1998)). In the context of securities enforcement actions, relief defendants are individuals who are not accused of having violated the securities laws themselves, but who are believed to be in possession of profits from such violations. They are named as parties to aid the recovery of funds to be paid to victims. See id. 5 1 beneficial ownership in the trust. 2 of the freeze, the Trust made several expenditures. 3 the Trust s attorney, received $101,096 for lawyer s fees and 4 costs; David Wojeski, then the sole trustee, received $8,098.50 5 in fees for his work as trustee; and the Trust purchased a 6 vacation home in New York from Lynn Smith for $600,000. 7 Shortly after the lifting Jill Dunn, On July 20, Wojeski received a fax containing an e-mail 8 from an individual at Southtowns Financial Group that stated, 9 [t]he first four pages [attached] are from the annuity 10 contract. The three pages after that are documents that were 11 in the file that I thought might be relevant. 12 followed included a Policy Delivery Receipt for a PRIVATE 13 ANNUITY CONTRACT, which was signed by David Smith; the first 14 page of a private annuity agreement, which identified David and 15 Lynn Smith as annuitants; and a page providing the key terms of 16 the contract. 17 to Dunn via e-mail. The pages that The next day, July 21, Wojeski forwarded the fax 18 On July 22, during a teleconference with the court to 19 discuss the SEC s intended motion to re-freeze the Trust s 20 assets, the SEC attorneys informed the court that they were 21 going to offer evidence that the Smiths owed a significant 22 amount in gift taxes for transferring the stock to the Trust 23 and that the Trust also owed a capital gains tax. 24 that no gift tax was owed, but provided no supporting details 25 for that assertion. Dunn argued The SEC attorneys, David Stoelting and 6 1 Kevin McGrath, then called Dunn to inquire as to why she 2 believed that the Smiths did not owe gift taxes from the 3 transfer to the Trust. 4 that no tax was owed because of a private annuity agreement. 5 Dunn, on the other hand, asserted that she told the attorneys 6 that the Trust was a private annu-ity trust. 3 7 call, the SEC attorneys contacted the original trustee for more 8 information, who sent a copy of the full annuity agreement to 9 the SEC and Dunn on July 27. 10 Stoelting testified that Dunn told them After the After receiving the agreement, the SEC sought 11 reconsideration of the prior order lifting the freeze on the 12 Trust s assets in view of the Smiths interest in the Trust. 13 The Trust challenged the motion, arguing that reconsideration 14 was inappropriate because the SEC could have discovered the 15 annuity before the original proceeding to freeze the Trust s 16 assets. 17 Dunn and Wojeski. 18 disclose the agreement to the SEC on the telephone call of July 19 22. 20 that [she] did not make [the statement that there was a private 21 annuity agreement] because [she] did not know of the existence 22 of the private annuity agreement until [she] received it . . . 23 on July 27, 2010, the same day the SEC received it. In support, the Trust submitted affidavits from both Dunn s affidavit asserted that she did not It stated that Dunn could state with absolute certainty 3 It The other SEC attorney did not remember hearing Dunn say anything about an annuity agreement. However, the SEC attorney also testified that he was not paying attention during that part of the conversation. 7 1 further stated that [n]either I nor Mr. Wojeski had any 2 documents in our possession relating to the private annuity 3 other than the courtesy copy of the documents I received . . . 4 on July 27 . . . . 5 learned of the existence of the annuity agreement in late July 6 when Dunn informed him that both she and the SEC had received 7 the agreement from the former trustee. 8 9 Wojeski s affidavit stated that he first A hearing concerning the motion for reconsideration was scheduled for November 16, 2010. The day before that hearing, 10 Dunn submitted a corrective affidavit stating that she had 11 recently discovered the July 21 e-mail from Wojeski containing 12 the documents referencing the annuity and that her prior 13 affidavit was incorrect. 14 the documents when she composed her prior affidavit because, at 15 the time she received the e-mail, she was focusing her 16 attention on the Trust s purchase of the New York vacation 17 home, other client matters, and personal issues. 18 the hearing, Wojeski also submitted a corrective affidavit 19 stating that when he reviewed his first affidavit -- prepared 20 by Dunn -- he did not realize that the documents he had 21 received on July 20 were different from the contract produced 22 on July 27 and that he thought the two events had happened at 23 the same time. 24 incorrect, only imprecise, because he did learn of the annuity 25 in late July. She stated that she did not recall A day after He also implied that the affidavit was not 8 1 The court granted the SEC s motion and reinstated the 2 freeze on the Trust s assets. The court found the SEC s 3 evidence to be more credible. It specifically found that Dunn 4 had mentioned the annuity agreement during the telephone call 5 on July 22. 6 logical consistency and probability of a reference by Dunn to 7 the private annuity agreement being elicited by questions from 8 the SEC concerning the reason Dunn believed no gift tax was 9 owed by Smith. 10 Magistrate Judge Homer noted, inter alia, the The court also granted the SEC leave to move for sanctions, which the Commission did. 11 After considering all parties arguments, the court 12 sanctioned Lynn Smith for her failure to disclose the annuity 13 in her list of accounts and assets and for her statements that 14 she had no present or future interest in the Trust. 15 found Lynn Smith s argument that she had forgotten about the 16 annuity unconvincing in light of the considerable size of the 17 payments that she would receive from the annuity. 18 also found that Lynn s efforts to preserve the assets of the 19 Trust were inconsistent with her alleged forgetfulness, noting 20 that no payments had been disbursed from the Trust to the named 21 trust beneficiaries, the Smith children, prior to 2010 and also 22 that Lynn had personally covered a year s worth of her 23 daughter s expenses even though they were of a type for which 24 the Trust was created. 25 under both Rule 11(c)(3) and the inherent powers of the court. The court The court The court then sanctioned Lynn Smith 9 1 She was ordered to repay the Trust $944,848, which included the 2 $600,000 that the Trust paid to purchase the New York vacation 3 home, and to pay the SEC $51,232 in attorney and expert fees. 4 The court also sanctioned Wojeski and Dunn for their 5 statements that they first learned of the annuity agreement on 6 July 27, rather than on July 20 and 21 respectively. 7 magistrate judge found that it was not credible that Dunn 8 ignored a client s e-mail for six days. 9 that Dunn s explanation that she did not remember reading the The Moreover, he found 10 e-mail to be incredible because the documents were of such 11 importance that Dunn must have immediately known their 12 significance. 13 finding that Dunn had told the SEC attorneys about the annuity 14 on July 22 by finding that the false statements were made 15 deliberately because: 16 ignored a client e-mail for at least six days, (ii) Dunn s 17 first reference to a private annuity trust came the day after 18 Wojeski sent an e-mail disclosing the trust to her, and (iii) 19 the financial stakes for Dunn -- over $100,000 -- provided 20 ample motivation to conceal the Trust s existence. Finally, the court elaborated on its prior (i) it was improbable that Dunn had 10 Dunn was 1 sanctioned under Rule 11(c)(3),4 28 U.S.C. § 1927,5 and the 2 inherent power of the court. 3 the amount she had been paid by the Trust after July 21. 4 was also publicly admonished and reported to the New York State 5 Bar. 6 She was ordered to pay $5,355, She With regard to Wojeski, the court noted that his affidavit 7 had the effect of corroborating Dunn s false affidavit. The 8 court also rejected Wojeski s contention that the original 9 affidavit, in stating that he first learned of the agreement 10 from Dunn in late July, was simply imprecise rather than false. 11 In doing so, the court noted that the original affidavit stated 12 not only that Wojeski had learned about the agreement in late 13 July, which was not necessarily incorrect, but also that he 14 learned that information from Dunn, which was clearly untrue. 15 Therefore, the court found that not only had Wojeski made a 16 false statement in his original affidavit, but that it was 17 disingenuous for him to say that his original affidavit was an 18 imprecise reference to him receiving the fax on July 20. 19 Wojeski was sanctioned under both Rule 11(c)(3) and the 4 By making a representation to the court, whether by pleading, written motion, or other paper, one certifies that the the factual contentions have evidentiary support. Fed. R. Civ. P. Rule 11(b). Rule 11(c)(3) provides, [o]n its own, the court may order an attorney, law firm, or party to show cause why conduct specifically described in [an] order has not violated Rule 11(b). If a court determines that a Rule 11(b) violation has occurred, it may impose an appropriate sanction on any attorney, law firm, or party that violated the rule or is responsible for the violation. Rule 11(c)(1). 5 Section 1927 provides, Any attorney . . . of the United States . . . who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys fees reasonably incurred because of such conduct. 11 1 inherent power of the court. He was ordered to repay $13,384, 2 the amount he had received from the Trust in payment and 3 reimbursements after July 20; was publicly admonished; and was 4 reported to the state licensing authority for accountants. 5 Finally, the court authorized the receiver, who had 6 previously been appointed to oversee the corporations owned by 7 David Smith and his co-defendants, to proceed in whatever 8 manner he deemed best to maximize the return on the vacation 9 property that the Trust had purchased from Lynn Smith if she 10 did not repay the $600,000 by September 1, 2011. 11 stated: 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 [I]f Lynn Smith fails to return to the Receiver by September 1, 2011 the full amount of the $600,000.00 sale price of the property plus closing costs, the Receiver may proceed in whatever manner he deems economically most feasible to maximize the return on this property. This may include the sale or rental of the property, or portions thereof, depending on the receiver s determination of market conditions. Lynn Smith and the Trust shall cooperate reasonably with the Receiver and any designee to facilitate the sale or rental of the property. This appeal followed. 27 28 29 The order DISCUSSION a) Appellate Jurisdiction Our appellate jurisdiction is generally limited to final 30 decisions of district courts, those that end[] the litigation 31 on the merits and leave[] nothing for the court to do but 32 execute the judgment. See Cunningham v. Hamilton Cnty., Ohio, 12 1 527 U.S. 198, 204 (1999) (quoting Van Cauwenberghe v. Biard, 2 486 U.S. 517, 521-22 (1988)). 3 deference to trial judges, prevents piecemeal litigation, and 4 conserves the resources of both the opposing party and the 5 judiciary by preventing numerous successive appeals. 6 Firestone Tire & Rubber Co. v. Risjord, 449 U.S. 368, 374 7 (1981). This limitation accords See 8 An exception to this general rule is the collateral order 9 doctrine, see Cunningham, 527 U.S. at 204, under which federal 10 appellate courts have jurisdiction over decisions that are 11 conclusive, that resolve important questions separate from the 12 merits, and that are effectively unreviewable on appeal from 13 the final judgment in the underlying action. 14 Swint v. Chambers Cnty. Comm n, 514 U.S. 35, 42 (1995)). 15 However, the collateral order doctrine is not one requiring a 16 fact-specific, case-by-case analysis. 17 categorically. 18 satisfies the three conditions, we still lack jurisdiction if 19 the appeal is of a type that does not generally fall within the 20 doctrine. 21 discovery sanction will be inextricably intertwined with the 22 merits, but we have consistently eschewed a case-by-case 23 approach to deciding whether an order is sufficiently 24 collateral. ). Id. (quoting Rather, it is applied Therefore, even if a particular appeal See Cunningham, 527 U.S. at 206 ( Perhaps not every 25 13 1 A statutory exception to the final order requirement is 2 found in 28 U.S.C. § 1292, which provides appellate 3 jurisdiction over appeals of preliminary injunctions. 4 Jurisdiction under this provision extends to issues that are 5 inextricably bound up with those injunctions. 6 of Penn, LLC v. Town of Orchard Park, 356 F.3d 365, 371 (2d 7 Cir. 2004) (citing 28 U.S.C. § 1292(a)(1)). 8 issues is a narrowly tailored exception to the final judgment 9 rule, Amador v. Andrews, 655 F.3d 89, 95 (2d Cir. 2011), and 10 issues will be deemed inextricably intertwined with appellate 11 review of preliminary injunctions only where review of the 12 otherwise unappealable issue is necessary to ensure meaningful 13 review of the appealable one. 14 457 F.3d 264, 273 (2d Cir. 2006)). 15 Lamar Adver. Review of such Id. (quoting Britt v. Garcia, Applying these principles to the present matter, we agree 16 with the SEC that we lack jurisdiction over the appeals of Dunn 17 and Wojeski. 18 Lynn Smith. 19 1. 20 Dunn and Wojeski argue that we have jurisdiction over 21 22 23 However, we have jurisdiction over the appeal of Appeals of Dunn and Wojeski their appeals under the collateral order doctrine. In Cunningham, the Supreme Court, addressing an appeal of sanctions imposed under Fed. R. Civ. P. 37(a),6 held that a 6 Rule 37 provides for sanctions, including costs and reasonable attorney s fees, against parties or persons unjustifiably resisting discovery. See Rule 37 advisory committee s note on 1970 amendments. 14 1 sanctions order imposed on an attorney is not a final 2 decision under § 1291, and is therefore not immediately 3 appealable. 4 conclusion, the Court relied heavily on the fact that review of 5 sanctions orders could not remain entirely separate from the 6 merits of the underlying litigation because the propriety of 7 those orders may require courts to inquire into the importance 8 of information sought, the adequacy of responses, and the 9 truthfulness of those responses. 527 U.S. at 202-03, 210. In reaching this See id. at 205-06. 10 Therefore, review of the sanctions would differ only 11 marginally from an inquiry into the merits. 12 Id. at 206. The Court also pointed out that an attorney s appeal from 13 a sanction order fails to satisfy the third prong of the 14 collateral order doctrine because those orders are not 15 unreviewable on appeal of a final judgment. 16 Despite the fact that attorneys are not parties to the 17 underlying case, the effective congruence of interests between 18 clients and attorneys counsels against treating attorneys like 19 other nonparties for purposes of appeal. 20 Moreover, unlike civil contempt orders for defiance of a 21 district court s enforcement order, which are considered final 22 and therefore appealable, Dynegy Midstream Servs. v. 23 Trammochem, 451 F.3d 89, 92 (2d Cir. 2006), sanctions orders do 24 not seek to compel compliance with existing court orders, but 25 are available as a deterrent to delaying tactics and the 15 See id. at 206-09. Id. at 207. 1 imposition of unnecessary costs on adversaries. 2 Coastal Corp., 503 U.S. 131, 138-39 (1992). 3 appeal of those orders would be counterproductive because it 4 would allow the sanctioned party to cause additional delays and 5 costs. 6 Willy v. Allowing immediate Cunningham, 527 U.S. at 207-09. As noted, Cunningham addressed appellate jurisdiction only 7 with regard to Rule 37 sanctions. 8 jurisdiction turns on whether the holding in Cunningham also 9 applies to sanctions imposed under Rule 11, 28 U.S.C. § 1927, 10 11 Therefore, our appellate and the inherent power of the court. Several other circuits have held that Cunningham precludes 12 interlocutory appeals of sanctions imposed under these other 13 sources of authority. 14 45 at *47 n.1 (2d Cir. Jan. 23, 2012)7 (Slip Op.) (citing 15 Stanley v. Woodford, 449 F.3d 1060, 1063-65 (9th Cir. 2006) (§ 16 1927 and inherent power sanctions); Comuso v. National R.R. 17 Passenger Corp., 267 F.3d 331, 339 (3d Cir. 2001) (abrogating 18 precedent or appealability of Rule 11 and discovery sanctions 19 and holding inherent power sanctions not immediately 20 appealable); Empresas Omajede, Inc. v. Bennazar-Zequeira, 213 See Douglas v. Merck & Co., 456 F. App x 7 However, the panel in Douglas, which was faced with an interlocutory appeal of sanctions imposed under the district court s inherent power, chose not to consider whether Cunningham categorically precluded interlocutory appeals of inherent-power sanctions because the specific facts of that case did not satisfy the collateral order test. See Douglas, 456 F. App x 45 at *47. 16 1 F.3d 6, 9 n.4 (1st Cir. 2000) (inherent power sanctions)).8 2 addition, we have also suggested that in the wake of Cunningham 3 a sanctions order against an attorney does not satisfy the 4 requirements of the collateral order doctrine. 5 Overseas Grp. (U.S.A.) v. Excal Int l Dev. Corp., 252 F.3d 667, 6 670 (2d Cir. 2001). 7 directly addressed sanctions imposed only under Rule 37.9 8 id. In New Pac. However, like Cunningham, that case See 9 We conclude that Cunningham applies to appeals of 10 sanctions imposed under Rule 11 as well as under the district 11 court s inherent powers because, like Rule 37 sanctions, these 12 appeals will often implicate the merits of the underlying 13 action. 14 require courts to evaluate the completeness or truthfulness of 15 responses and whether a party s claims are without merit. Sanctions based on these other authorities often See 8 The reasoning for concluding that Cunningham precludes immediate appeals of sanction orders has differed slightly among the circuits. For example, the Third Circuit has asserted that the Supreme Court created a per se rule that sanctions orders are inextricably intertwined with the merits of the case. Comuso, 267 F.3d at 339. On the other hand, the Ninth Circuit has looked to the rationale used by the Court in Cunningham and concluded that the reasons underlying Cunningham s bar against immediate appeal from Rule 37(a) sanctions orders apply equally to other types of sanctions. Stanley, 449 F.3d at 1064 (quoting Cato v. Fresno City, 220 F.3d 1073, 1074 (9th Cir. 2000)). The latter reasoning leaves open the possibility that some types of sanctions may be immediately appealable if the rationale underlying the Cunningham decision does not apply. We need not address these issues because, as discussed infra, the reasoning applied in Cunningham applies to the types of sanctions present in this matter. 9 We note that, in a recent opinion, two members of a panel stated in separate concurring opinions that we have jurisdiction over the immediate appeal of Rule 11 sanctions. See Kiobel v. Millson, 592 F.3d 78, 87 (2d Cir. 2010) (Cabranes, J., concurring); id. at 107 (Jacobs, C.J., concurring). However, neither opinion discussed Cunningham, both relying entirely on precedent preceding that decision. See id. at 87, 107. 17 1 e.g., Lawrence v. Richman Grp. of CT LLC, 620 F.3d 153, 156 (2d 2 Cir. 2010) (Rule 11); Revson v. Cinque & Cinque, P.C., 221 F.3d 3 71, 78-79 (2d Cir. 2000) (inherent powers and § 1927). 4 The fact that the particular sanctions before us were 5 imposed in the context of an ancillary proceeding, and required 6 evaluation of the accuracy and truthfulness of appellants, does 7 not alter the analysis. 8 rise to the sanctions here -- Lynn Smith s monetary interest in 9 the Trust -- does not necessarily implicate the merits of the 10 underlying securities fraud prosecution, ancillary proceedings 11 often do implicate the underlying claims. 12 Futures Trading Comm n v. Walsh, 618 F.3d 218, 225 (2d Cir. 13 2010) (to freeze the assets of a relief defendant the 14 government must show that they are likely to succeed in 15 disgorging the funds, which requires, in part, that the assets 16 are ill-gotten, which deals directly with the merits of the 17 underlying action). 18 also often will be inextricably intertwined with the merits of 19 the action, Cunningham, 527 U.S. at 205, and, even if that is 20 not necessarily the case here, the requisite categorical 21 analysis is not altered. 22 Although the particular issue giving See, e.g., Commodity Therefore, sanctions in these contexts Finally, the particular sanctions here do not meet the 23 third prong of the collateral order doctrine. 24 in Cunningham, the fact that Dunn and Wojeski are not parties 25 to this action, and are no longer acting as the attorney and 18 As was the case 1 trustee for the Trust does not render the issues unreviewable 2 on appeal. 3 concern with regard to the appeals of attorneys, see id. at 4 206-07, and its reasoning is equally applicable to Wojeski as a 5 trustee. 6 and have a fiduciary duty to that party. 7 Dictionary trustee (9th ed. 2009); Saltzman v. Comm r, 131 8 F.3d 87, 90 (2d Cir. 1997) ( [P]ursuant to the inexorable 9 dictates of trust law, [the trustees] owed the trust The Supreme Court squarely rejected a similar Trustees, like attorneys, act on behalf of a party See Black s Law 10 beneficiaries the absolute duty of undiluted loyalty. ). 11 Therefore, the appeals of Dunn and Wojeski also fail to satisfy 12 the final prong of the collateral order doctrine. 13 therefore, dismiss these appeals.10 We, 14 2. Appeal of Lynn Smith 15 We conclude that we have jurisdiction over Lynn Smith s 16 appeal under 28 U.S.C. § 1292(a)(1) because the sanctions order 17 against her is inextricably intertwined with the order of 18 injunction against the Trust. 19 An appeal is inextricably bound up with an injunction if 20 the court cannot resolve the issue of the injunction without 21 considering the additional appeal. 22 at 372. See Lamar Adver., 356 F.3d Here, the order directing the receiver to sell or 10 Like the Court in Cunningham, we recognize that our conclusion may create hardships for Dunn and Wojeski. However, that fact does not serve to grant jurisdiction. See Cunningham, 527 U.S. at 209-10 ( Should these hardships be deemed to outweigh the desirability of restricting appeals to final decisions, solutions other than an expansive interpretation of § 1291 s final decision requirement remain available. ). 19 1 rent the property owned by the Trust was contingent on whether 2 Lynn Smith satisfied the order of sanctions against her by the 3 specified date. 4 against Lynn Smith is invalid, the court s order regarding the 5 disposal of the Trust s property is moot. 6 is, therefore, inextricably bound up with the Trust s appeal of 7 the injunction,11 and we have jurisdiction over her appeal. 8 b) 9 Therefore, if the order of disgorgement Lynn Smith s appeal Sanctions Against Lynn Smith We review a lower court s imposition of sanctions for 10 abuse of discretion. See Storey v. Cello Holdings, LLC, 347 11 F.3d 370, 387 (2d Cir. 2003). 12 when it bases its ruling on an erroneous view of the law or on 13 a clearly erroneous assessment of the evidence. 14 (internal citations and quotations omitted). 15 the evidence is clearly erroneous where the reviewing court is 16 left with the definite and firm conviction that a mistake has 17 been committed. 18 Scivantage, 564 F.3d 110, 113 (2d Cir. 2009) (quoting Zervos v. 19 Verizon N.Y., Inc., 252 F.3d 163, 168 (2d Cir. 2001)), and the 20 imposition of sanctions was made with[out] restraint and 21 discretion. 22 F.3d 323, 334 (2d Cir. 1999). A court abuses its discretion Id. at 387-88 An assessment of Wolters Kluwer Fin. Servs., Inc. v. Schlaifer Nance & Co. v. Estate of Warhol, 194 11 Wojeski also asserts that his appeal is inextricably bound up with the injunction against the Trust; however, he does not explain how the order of sanctions against him in any way affects the injunction against the Trust. His only argument is that the sanctions order was issued in the context of a preliminary injunction proceeding. However, 28 U.S.C. § 1292(a) provides jurisdiction over orders, not over proceedings, and there is nothing in Wojeski s briefs that would suggest that review of his appeal is vital to deciding the appeal of the Trust. 20 1 Under Rule 11(c)(3) and the inherent power of the court, 2 sanctions are appropriate where an individual has made a false 3 statement to the court and has done so in bad faith. 4 Pennie & Edmonds LLP, 323 F.3d 86, 90 (2d Cir. 2003) (Rule 5 11(c)(3)); DLC Mgmt. Corp. v. Town of Hyde Park, 163 F.3d 124, 6 136 (2d Cir. 1998) (inherent power). 7 she did not make any false statements, that there was 8 insufficient evidence that she acted in bad faith, and that 9 disgorgement is not an appropriate sanction. 10 11 See In re Lynn Smith argues that We address those arguments in turn. Whether Lynn Smith made false statements, and whether she 12 did so in bad faith, are questions of fact that will not be 13 disturbed unless clearly erroneous. 14 Mortg. Corp., 555 F.3d 298, 302 (2d Cir. 2009). 15 of the magistrate judge on these issues were certainly not 16 clearly erroneous. 17 See Agiwal v. Mid Island The findings Lynn Smith was ordered to list her accounts and assets. 18 The annuity in question is clearly an asset. See Black s Law 19 Dictionary, asset (9th ed. 2009) (defined as something that 20 is owned and has value). 21 listed as the sole beneficiaries of the Trust hardly means that 22 the Trust as arranged was for the sole benefit of the children. 23 Viewing the Trust as a whole, it was undoubtedly created, at 24 least in part, to benefit Lynn and David Smith because, as Lynn 25 Smith acknowledges in her brief, it allowed them to defer The fact that her children were 21 1 capital gains taxes. 2 under the annuity contract were contingent on the Trust 3 retaining sufficient assets to make those payments. 4 facts clearly establish that Lynn Smith had an ongoing 5 substantial interest in the Trust whether or not it was 6 technically an ownership interest.12 7 Similarly, the payments to Lynn Smith These The court s finding that Lynn Smith acted in bad faith in 8 not revealing her interest in the Trust is amply supported by 9 the record. First, the size of the annuity payments is easily 10 sufficient to support an inference that Lynn Smith did not 11 simply forget about the annuity, but rather purposely chose to 12 omit it. 13 for approximately a year, despite the fact that the stated 14 purpose of the Trust was to provide financial assistance to the 15 Smiths children when needed. 16 daughter supports a finding that Lynn Smith was seeking to 17 preserve the Trust s assets so as to protect her future 18 payments under the annuity agreement and was fully aware of her 19 interest in the Trust. 20 her vacation home to the Trust soon after the original asset 21 freeze was lifted indicates a motive to falsify the required 22 reports in order to gain access to the Trust s funds. 23 these facts may not compel as a matter of law a finding that Second, Lynn Smith concededly supported her daughter This provision of means to the Finally, the fact that Lynn Smith sold 12 While We have already upheld the freeze on the Trust's assets based on the finding that the Trust was for the benefit of David Smith. See Smith v. SEC, 432 F. App'x 10, 12 (2d Cir. 2011). 22 1 Lynn Smith made false statements to the court in bad faith, we 2 are not left with the definite and firm conviction that a 3 mistake has been committed. 4 (internal quotations omitted). 5 circumstantial stench that only heroic credibility findings in 6 her favor would dissipate. 7 Wolters Kluwer, 564 F.3d at 113 Indeed, the record carries a Finally, with regard to Lynn Smith s claim that 8 disgorgement is not a proper sanction, we note that [d]istrict 9 courts are given broad discretion in tailoring appropriate and 10 reasonable sanctions. O Malley v. N.Y.C. Transit Auth., 896 11 F.2d 704, 709 (2d Cir. 1990); Wright & Miller, Federal Practice 12 & Procedure § 1336.3 ( [F]ederal courts retain broad 13 discretionary power to fashion novel and unique sanctions to 14 fit the particular case. ). 15 proceedings initiated to preserve assets in order to compensate 16 victims of the alleged fraud -- it was entirely appropriate for 17 the court to require Lynn Smith to disgorge herself of funds 18 she obtained after that freeze was lifted in substantial 19 reliance upon her false statements. 20 21 22 c) 23 vacation home was issued as part of the sanction order. 24 Therefore, it is also reviewed under an abuse of discretion 25 standard. 26 Cir. 2000). In the present context -- Order Authorizing the Disposition of Trust Property The order authorizing the receiver to dispose of the See United States v. Seltzer, 227 F.3d 36, 39 (2d 23 1 The Trust argues that the lower court abused its 2 discretion because it did not provide the Trust with notice 3 that the court intended to give the receiver the authority to 4 dispose of Trust assets and an opportunity to be heard prior to 5 issuing the order. 6 substantive arguments that were not addressed in the district 7 court. 8 usurps the role of the trustee and forces the Trust to bear the 9 costs of Lynn Smith s actions even though the Trust was not In addition, the Trust also makes various Those arguments include the contention that this order 10 accused of wrongdoing. 11 Trust will not bear any additional costs because the receiver 12 was instructed to dispose of the property only if doing so 13 would maximize the return on that property. 14 asserts that the Trust s other arguments are unavailing in 15 light of the fact that the veil of the Trust s separate legal 16 existence has been pierced as to David Smith. 17 In response, the SEC asserts that the The SEC also The Trust also raises concerns that the order gives very 18 little direction to the receiver as to how he or she is to 19 determine what course of action to take. 20 argues, gives the receiver nearly complete discretion and 21 precludes effective judicial review. 22 This, the Trust We believe it appropriate to allow the magistrate judge to 23 consider the Trust s arguments in the first instance. 24 way suggest that the district court should determine that its 25 prior order with regard to the Trust is inappropriate. 24 We in no We 1 leave that to its sound discretion. 2 provide additional guidance to the receiver concerning how to 3 determine whether to dispose of the property, if at all. 4 5 However, the court should CONCLUSION For the foregoing reasons, we dismiss the appeals of Dunn 6 and Wojeski, affirm the sanctions against Lynn Smith, and 7 remand for further proceedings in accordance with this opinion. 8 25
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