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2nd Circuit Rejects Bid to Erase Trial Judge's Sanctions
Panel rips lawyers for seeking a court order directing companies to 'depublish' judge's opinion from any publication or database in which it appears
New York Law Journal
October 22, 2008
Three lawyers who tried to settle their way out of sanctions and to erase the sanctions decision from legal publications and databases have been rebuffed by the 2nd U.S. Circuit Court of Appeals.
Attorneys Maryann Peronti of New York and Gary M. Jewell and Stephen Smith of Houston, and their firms, were sanctioned $64,656 in March by Southern Districtof New York Judge Lewis A. Kaplan for filing a meritless lawsuit against a stock trader.
But the lawyers and their firms agreed to settle with the trader, Knight Capital Markets, on one condition -- that the 2nd Circuit first vacate the sanctions judgment.
Circuit Judges Robert Sack and Robert Katzmann and, sitting by designation, Southern District Judge Jed Rakoff, refused to go along in ATSI Communications Inc. v. The Shaar Fund, Ltd., 08-1815.
"We would be hard pressed to conclude that the judgment here, sanctioning lawyers appearing before a United States District Court, is insignificant. And it is precisely to avoid the public's scrutiny of the sanctions that ATSI's counsel seeks vacatur," the panel said in an opinion written by Sack.
The panel also ripped the lawyers for seeking a court order directing West Publishing Co., Westlaw, the Bureau of National Affairs (BNA) and LexisNexis that Judge Kaplan's opinion be "depublished" -- removed from any publication or database in which it appears.
"We note the extraordinary nature of a request to require privately owned and operated publishers to discontinue publishing public records, raising as it would serious constitutional questions," the court said.
However, the court said it did not have to reach that issue because it was refusing to vacate the sanctions, despite the possibility that its ruling might scuttle the settlement.
The court said it was bound by U.S. Supreme Court precedent: U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18 (1994), which held that, absent exceptional circumstances, a motion to vacate a judgment must be denied where a party has mooted its appeal through settlement.
The first complaint in the action was filed in 2002 as ATSI, through its counsel -- Jewell and Smith of Christian Smith & Jewell in Houston and Peronti, now a solo practitioner, who was then at Koerner, Silberberg & Weiner (now White & Williams) -- alleged that Samuel Levinson committed securities fraud.
As explained by Judge Kaplan, the fraud was allegedly accomplished by selling convertible preferred shares in ATSI to the Shaar Fund and then having Levinson and others manipulate the price of ATSI shares downward to benefit from the more favorable rates of conversion of the preferred shares.
Judge Kaplan dismissed the case in 2004 with leave to replead and ATSI later filed second and third complaints charging Levinson, Rose Glen and others with manipulating the price of the stock downward after agreeing not to put pressure on the stock price.
They also added as a defendant Knight, which, as the market maker in ATSI shares, the plaintiffs claimed, must have been aware of the manipulation.
Judge Kaplan dismissed the action in February 2005, saying the "complaint failed to allege with particularity any trades or other activities that Rose Glen Capital Management and the Levinson defendants engaged to manipulate downward the price of ATSI common stock."
The judge said the allegations were "farfetched, to say the least," and the claim that Knight must have known about the manipulation was "simply ridiculous."
"Even assuming that Knight was the principal market maker, all that it 'must have known' is that some person or persons was involved in large sales of ATSI common stock," Kaplan said in awarding the $64,656 that Knight spent defending the suit.
At the circuit, both parties moved for vacatur of the judgment.
Under 28 U.S.C. §2106, courts of appeal have the equitable power to vacate "any judgment, decree, or order a court lawfully brought before" them for review. It is customary for the circuit to issue vacatur when a matter becomes moot on appeal.
But the exception to that rule is the U.S. Bancorp holding: Vacatur should not issue where mootness derives from settlement.
Judge Sack explained that part of the reason for the U.S. Bancorp rule was that "denying vacatur after settlement 'advances the public interest' in preserving judicial precedent and the proper course of appellate procedure."
While the precedent rationale is less compelling when deciding to vacate a district court's judgment as opposed to that of a federal court of appeals, Sack said, application of the rule here would help "advance the interest in preserving orders and judgments."
The parties here argued that U.S. Bancorp should not apply because they conditioned settlement on vacatur.
"We disagree," Judge Sack said. "The parties cannot change that result by sleight of the draftsman's hand -- making the settlement contingent upon, rather in contemplation of, vacatur. Unlike a motion made after settlement is complete, the appeal in this case is not yet moot."
The parties tried in vain to persuade the court to apply the "exceptional circumstances" exception to the U.S. Bancorp rule, arguing that the public has no interest in Kaplan's decision and the decision does not purport to make precedent.
"As we have noted, district courts do not, by deciding cases, create law, they apply it," Judge Sack said. "Nor is there anything in U.S. Bancorp to suggest that, at the request of the parties, we are supposed to examine a district court decision and vacate it when we do not think it to be of particular importance."
Peronti declined comment.
Thomas Sheridan of Hanly Conroy Bierstein Sheridan Fisher & Hayes represented all three attorneys. He also declined comment.
Thorn Rosenthal of Cahill Gordon & Reindel represented Knight Capital Markets.
