Opinion ID: 3192719
Heading Depth: 1
Heading Rank: 3

Heading: fraud and sanctions

Text: Before proceeding to the merits of Capt Jay and Zirlott’s appeal regarding fraud, we note that the parties dispute which substantive law the district court should have applied in finding fraud. Capt Jay and Zirlott, without explanation, argue that Alabama substantive law applies to the instant matter and that the district court could not have found fraud under Alabama law. In response, Freeh argues that general maritime law applies to issues arising under the Settlement Program. We hold that general maritime law applies to the instant matter. This is because the Settlement Agreement, by its express terms, states that its interpretation and enforcement is governed by general maritime law and the Oil Pollution Act of 1990 (OPA). 4 See In re 4 Section 36.1 of the Agreement states: Notwithstanding the law applicable to the underlying claims, which the Parties dispute, this Agreement and the Release and Individual Releases hereunder shall be interpreted in accordance with General Maritime Law as well as in a manner intended to comply with OPA. 6 Case: 15-30574 Document: 00513457669 Page: 7 Date Filed: 04/08/2016 No. 15-30574 Deepwater Horizon, 739 F.3d 790, 804 n.53 (5th Cir. 2013) (noting that the Settlement Agreement is governed by the substantive law of the OPA and federal maritime law). Because general maritime law applies, we apply traditional common law fraud rules to determine whether the district court abused its discretion in finding fraud. See Johnson v. GlobalSantaFe Offshore Servs, Inc., 799 F.3d 317, 321 (5th Cir. 2015) (“Drawn from state and federal sources, the general maritime law is an amalgam of traditional common-law rules, modifications of those rules, and newly created rules.” (quoting E. River S.S. Corp. v Transamerica Delaval, Inc., 476 U.S. 858, 864–65 (1986))). We have recognized that common law fraud exists where: (1) a material representation was made; (2) the representation was false; (3) when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the representation was made with the intention that it be acted upon by the other party; (5) the party acted in reliance on upon the representation; and (6) the party suffered injury. In re DEEPWATER HORIZON, 786 F.3d at 363 (quoting O’Hare v. Graham, 455 F. App’x 377, 379–80 (5th Cir. 2011) (per curiam) (unpublished)); see also Black Gold Marine, Inc. v. Jackson Marine Co., Inc., 759 F.2d 466, 470 (5th Cir. 1985). Under common law principles, “[a] transfer induced by fraud or material misrepresentation is subject to rescission and restitution.” Restatement (Third) of Restitution and Unjust Enrichment § 13 (Am. Law Inst. 2011). The district court here did not abuse its discretion in finding fraud and ordering restitution based on the facts before it. Capt Jay and Zirlott defrauded the Settlement Program when they filed sworn statements affirming that the revenue shown on their 2009 tax returns came only from commercial shrimp landings, when in fact 80 percent of the revenue came from marine debris cleanup. As the district court properly concluded, the 7 Case: 15-30574 Document: 00513457669 Page: 8 Date Filed: 04/08/2016 No. 15-30574 Settlement Agreement’s Shrimp Compensation Plan governs the compensation criteria under the Settlement Agreement. 5 And that Compensation Plan specifically provides compensation for loss of revenue from “shrimp landings in the Gulf Coast Areas,” but not for marine debris cleanup. Therefore, Capt Jay and Zirlott made knowingly false representations when seeking compensation from the Settlement Program for their marine debris cleanup work. In turn, the Settlement Program relied on these misrepresentations in dispersing money from the settlement fund to Capt Jay and Zirlott. Capt Jay and Zirlott argue that any misrepresentation was at most a misunderstanding based on the ambiguity of the terms of the Settlement Agreement and on Zirlott’s high-school-level education. However, the district court specifically found that Zirlott knew his claim for compensation to be false when he made it, as Zirlott stated on a claim form “that he had earned $162,364 ‘from the sales of fish’” in 2009. And while Capt Jay and Zirlott asserted that the Compensation Plan was ambiguous, the district court also found that the Compensation Plan’s criteria were “unambiguous” so that Capt Jay and Zirlott could not have been mistaken that marine debris cleanup was not covered by the Settlement Agreement. 5The Shrimp Compensation Plan was attached as an exhibit to the Settlement Agreement and states: The Seafood Compensation Program shall cover and compensate Commercial Fishermen, Seafood Boat Captains, all other Seafood Crew, Oyster Leaseholders, and Seafood Vessel Owners for economic loss claims relating to Seafood. All economic loss claims by Commercial Fishermen, Seafood Boat Captains, all other Seafood Crew, Oyster Leaseholders, and Seafood Vessel Owners relating to Seafood will be part of and must be brought under the Seafood Compensation Program. Capt Jay and Zirlott cite a number of federal regulations and other authorities that they argue make it reasonable to assume that marine debris cleanup revenue was compensable under the Settlement Program. These authorities are inapposite. 8 Case: 15-30574 Document: 00513457669 Page: 9 Date Filed: 04/08/2016 No. 15-30574 Alternatively, Capt Jay and Zirlott argue that the common law requirement of reliance for fraud is not satisfied here because they submitted all of their documentation and an inspection of this documentation would have revealed that 80 percent of Capt Jay’s revenue came from marine debris cleanup. Capt Jay and Zirlott’s alternative arguments on reliance are also without merit. For common law fraud, we look to justifiable reliance as the common law standard for reliance. See Field v. Mans, 516 U.S. 59, 71–75 (1995). Under this standard, unless a fraudulent misrepresentation is patently apparent, “a person is justified in relying on a representation of fact ‘although he might have ascertained the falsity of the representation had he made an investigation.’” Id. at 70 (quoting Restatement (Second) of Torts, § 540 (Am. Law Inst. 1976)). The documents filed by Capt Jay and Zirlott suggested that their 2009 revenue came from shrimping and not marine debris cleanup, and Capt Jay and Zirlott do not suggest how any misrepresentation would have been patently apparent to the administrators of the Settlement Program. Moreover, reliance is not lacking because the administrators failed to investigate the claims more thoroughly, as “[t]he requirement of [justifiable reliance] does not impose a duty of active investigation on a plaintiff, and does not entitle a defendant to exploit a plaintiff's foolishness with impunity.” Restatement (Third) of Torts: Liab. for Econ. Harm § 11 cmt. d (Am. Law Inst. 2014). The district court similarly did not abuse its discretion in imposing sanctions that prohibited Capt Jay and Zirlott from further participating in the Settlement Agreement’s Seafood Compensation Program. 6 Within its 6Capt Jay and Zirlott argue that the district court applied judicial estoppel in barring them from further participation in the Settlement Program and that the elements of judicial estoppel are not present in its case. While the district court did not make clear whether it was exercising its inherent power to sanction or applying judicial estoppel, we interpret its judgment as exercising its inherent power to sanction. See Blanco River, L.L.C. v. Green, 457 9 Case: 15-30574 Document: 00513457669 Page: 10 Date Filed: 04/08/2016 No. 15-30574 “inherent powers,” a district court has “the ability to fashion an appropriate sanction for conduct which abuses the judicial process.” Chambers, 501 U.S. at 44–45. “Because of their very potency, inherent powers must be exercised with restraint and discretion.” Id. at 44. Accordingly, when “invoking its inherent power” to sanction, a district court “must comply with the mandates of due process.” Id. at 50. And we have noted that sanctions under a district court’s inherent powers generally require a finding of “bad faith” by the district court. In re Sealed Appellant, 194 F.3d 666, 671 (5th Cir. 1999). But “specific findings [of bad faith] are unnecessary to understand the misconduct giving rise to [a] sanction,” “[w]hen bad faith is patent from the record” and “may be inferred.” Id. The district court complied with due process when it gave Capt Jay and Zirlott the opportunity to respond in writing to Freeh’s motion that they be barred from receiving further compensation. See Merriman v. Sec. Ins. Co. of Hartford, 100 F.3d 1187, 1192 (5th Cir. 1996) (“[T]he opportunity to respond through written submissions [to motions for sanctions] usually constitutes sufficient opportunity to be heard.”). And, as previously mentioned, the district court made the requisite finding of bad faith when it found that Capt Jay and Zirlott had engaged in fraud by falsely misrepresenting that all of their 2009 revenue came from shrimping. See Chambers, 501 U.S. at 46 (“[I]f a court finds ‘that fraud has been practiced upon it, or that the very temple of justice has been defiled,’ it may assess [sanctions] against the responsible party . . . as it may when a party ‘shows bad faith.’” (citations omitted)); cf. Takeda Chem. Indus., Ltd. v. Mylan Lab., Inc., 549 F.3d 1381, 1391 (Fed Cir. 2008) (noting F. App’x 431, 438–40 (5th Cir. 2012) (per curiam) (unpublished) (determining the basis for sanctions from a district court where the basis was not mentioned by the district court); Hazeur v. Keller Indus., No. 92-3488, 1993 WL 14973, at –6 (5th Cir. Jan. 11, 1993) (per curiam) (unpublished) (noting that a court does not have to expressly state that it is sanctioning under its inherent power to comply with due process). 10 Case: 15-30574 Document: 00513457669 Page: 11 Date Filed: 04/08/2016 No. 15-30574 that conduct that did not amount to fraud could still be considered bad faith and subject a party to sanctions). Based on these facts, the district court did not abuse its discretion by barring Capt Jay and Zirlott from collecting funds from the Settlement Program.