A federal appeals court has vacated $24,400 in sanctions against two law firms because a district judge ordered the sanctions without a finding of bad faith and gave the firms no chance to respond.

Southern District Judge Deborah Batts (See Profile) in 2011 had ordered Vermont’s Langrock Sperry & Wool and Virginia’s Lankford & Reed to pay attorney fees and costs to Cleary Gottlieb Steen & Hamilton because the firms were four days late in filing paperwork on motions to dismiss in the case.

The U.S. Court of Appeals for the Second Circuit, however, held that Batts abused her discretion by “imposing a sanction of attorneys’ fees without explicitly finding that Langrock acted in bad faith, and by sanctioning Langrock without affording the attorneys prior notice and an opportunity to be heard.”

Judges Robert Katzmann (See Profile), Barrington Parker (See Profile) and Richard Wesley (See Profile) heard oral argument in Langrock Sperry & Wool v. Citigroup, 11-5085 on Dec. 11. The panel issued a bench ruling the following day vacating the sanctions and ordering the return of the funds. The judges explained their reasoning in a written unsigned opinion issued December 26.

The 25-lawyer Langrock Sperry & Wool and the three-lawyer firm of Lankford & Reed represented Robert Wilson III on his claim that Citigroup and the Cayman Islands-based investment firm Opportunity Equity Partners Ltd. denied him tens of millions of dollars in compensation for the work he claimed to have performed managing some $1.5 billion in investments in Brazilian companies.

Citigroup, through Cleary, moved to dismiss the complaint on June 24, 2011.

Wilson’s lawyers then contacted Cleary attorneys and obtained their assent to an extension of the July 11, 2011, deadline for filing opposition papers to the motion to dismiss.

On July 7, Langrock filed electronically a stipulation and order signed by counsel for both parties that purported to extend the deadline to July 28 and give Cleary an extension on its own deadline for reply papers.

However, because local rules bar filing stipulations on the district’s electronic filing system, the clerk’s office rejected the stipulation. Langrock followed the next day by emailing the document to the court but its request was denied by the district judge.

On July 11, Lankford & Reed’s Terrence Reed faxed a letter to the judge explaining the reasons the lawyers needed the extension—including that he was preparing for trial in another Southern District matter.

The district court did not immediately respond and Langrock ended up filing its response on July 15—four days late. It was not until Sept. 13 that the judge granted the motion to file an untimely response to Langrock and said the scheduling conflicts provided “good cause for the grant of an extension.”

Nonetheless, Batts said that, to cure any prejudice to Citigroup, the firms had to pay Cleary “reasonable fees and costs incurred in preparing their Reply to Plaintiff’s Opposition”—an amount Citigroup said was $24,398.83.

Langrock paid that amount to Cleary on Oct. 21, 2011, and then appealed to the circuit.

In its per curiam opinion, the panel said, “As an initial matter, we conclude that Langrock did nothing to warrant a sanction,” and had stated good cause for the requested extensions.

“Langrock then filed its opposition brief before the deadline to which Cleary had consented,” the panel said. “Langrock disobeyed no order of the district court and caused no prejudice to opposing counsel.”

And even if there was a valid reason for sanctioning Langrock, the panel said, it would reverse for procedural reasons.

“Our case law is clear that a district court may not impose attorney’s fees as a sanction without first making an explicit finding that the sanctioned party, whether a party or a party’s counsel, acted in bad faith in engaging in sanctionable conduct,” the panel said, and here, the judge had actually found there was good faith, albeit “nearly two months later.”

“Under this sequence of events, we do not think it reasonable to infer that Langrock’s submission of opposition papers four days late was ‘for reasons of harassment or delay or for other improper purposes,’” the circuit said. “Indeed, had the district court promptly acted upon Langrock’s second extension request, Langrock’s papers would not have been untimely.”

Finally, Langrock had a right to receive fair notice and an opportunity to be heard, the panel said, but “the district court afforded Langrock’s none of these due process protections.”

Peter Langrock and Devin McLaughlin of Langrock and Terrence Reed represented the two law firms.

“We’re very pleased with the opinion,” Langrock said. “Obviously, we didn’t feel there was any justification for sanctions. I’ve never been sanctioned in over 50 years of practice and I’m glad to have this cleared up.”

Carmine Boccuzzi and David Livshiz of Cleary represented the firm.

@|Mark Hamblett can be reached at mhamblett@alm.com.