Court Opinion

ID: 3192719
Source: CourtListenerOpinion
Date Created: 2016-04-09 00:00:51.071407+00
Date Added: 2024-06-11T12:25:11.129301
License: Public Domain

Case: 15-30574   Document: 00513457669   Page: 1   Date Filed: 04/08/2016

        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT
                                                               United States Court of Appeals
                                                                        Fifth Circuit
                               No. 15-30574                           FILED
                                                                   April 8, 2016
                                                                 Lyle W. Cayce
IN RE: DEEPWATER HORIZON                                              Clerk
____________________________________________

LAKE EUGENIE LAND & DEVELOPMENT, INCORPORATED, ET AL.,

             Plaintiffs

v.

BP EXPLORATION & PRODUCTION, INCORPORATED, ET AL.,

              Defendants

JASON ZIRLOTT; CAPTAIN JAY, L.L.C.,

             Movants - Appellants

v.

LOUIS J. FREEH,

             Appellee

                Appeal from the United States District Court
                   for the Eastern District of Louisiana
                           USDC No. 2:12-CV-970
                          USDC No. 2:10-MD-2179

Before KING, SOUTHWICK, and HAYNES, Circuit Judges.
     Case: 15-30574      Document: 00513457669         Page: 2    Date Filed: 04/08/2016

                                      No. 15-30574
PER CURIAM:*
       In 2014, Special Master Louis J. Freeh filed a motion with the district
court overseeing the Deepwater Horizon settlement fund to have Capt Jay,
LLC, and Jason Zirlott remit monetary amounts that they collected from the
fund. Freeh argued that Capt Jay and Zirlott had submitted fraudulent claims
for compensation and separately moved for the district court to bar Capt Jay
and Zirlott from further collecting from the settlement fund. Exercising its
continuing supervision over the settlement fund, the district court granted
both motions. Capt Jay and Zirlott timely appealed. We hold that the district
court did not abuse its discretion when it granted both motions and AFFRIM
the district court’s judgment.
             I. FACTUAL AND PROCEDURAL BACKGROUND
       This case arises from the multidistrict litigation (MDL), In Re: Oil Spill
by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico, on April 20, 2010, 10-
MD-2179, that resulted after a number of private plaintiffs brought civil claims
against BP plc in the wake of the 2010 Deepwater Horizon oil spill. The claims
were consolidated into the Deepwater Horizon MDL, and the matter was
transferred by the United States Judicial Panel on Multidistrict Litigation to
Judge Carl Barbier in the United States District Court for the Eastern District
of Louisiana on August 10, 2010. In 2012, counsel for BP and the Plaintiffs
Steering Committee (PSC) in the MDL reached an agreement to settle claims
for economic damages arising from the oil spill. And on December 21, 2012,
the district court approved the Deepwater Horizon Economic and Property
Damages Settlement Agreement (Settlement Agreement). Included under the

       * Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.

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Settlement Agreement was a Seafood Compensation Plan that covered
commercial fishermen, seafood crews, or seafood vessel owners that operated
vessels in Gulf Coast areas around the time of the Deepwater Horizon oil spill.
To implement and administer the Settlement Agreement, the court established
the Deepwater Horizon Court Supervised Settlement Program (Settlement
Program) whereby entities and individuals, who fell within the settlement
class, could submit claims for compensation for economic losses. Under the
terms of the Settlement Agreement, the court retained continuing and
exclusive jurisdiction over the administration of claims under the Settlement
Program and was tasked with resolving disputes concerning the enforcement
of the Settlement Agreement.
      On July 2, 2013, the district court appointed Louis J. Freeh as Special
Master, pursuant to Federal Rule of Civil Procedure 53, on suspicion that
ethical violations and other misconduct were taking place in the Settlement
Program. Freeh was tasked with performing an external investigation of the
Settlement Program, conducting fact finding as to possible ethical violations or
misconduct in the Settlement Program, and examining internal compliance
programs and anti-corruption controls. On September 6, 2013, the district
court directed Freeh to investigate any past or pending claims submitted to the
Settlement Program and to initiate legal action in order to recover any funds
paid out on fraudulent claims by the Settlement Program.                 Freeh’s
investigation turned to claims submitted by Capt Jay, LLC, and Jason Zirlott
for lost commercial fishing income, for which they had received payment from
the Settlement Program.
      Capt Jay, an Alabama company engaged in commercial fishing and
water debris cleanup, had filed a shrimp vessel owner claim with the
Settlement Program on November 19, 2012, seeking compensation from the
Seafood Compensation Program. Zirlott, an employee of Capt Jay, filed his
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own shrimp vessel captain claim thereafter. In support of their claims, Capt
Jay and Zirlott submitted supporting documentation that included accounting
statements, official licenses, and tax forms that Capt Jay filed with the
Internal Revenue Service (IRS) from 2007 to 2009. In submitting their claims,
Capt Jay and Zirlott both filed sworn, written statements on November 29,
2012, that Capt Jay’s 2009 gross receipts from shrimping in Gulf Coast areas
totaled $162,364—a figure that matched Capt Jay’s gross receipts in the Form
1065 it submitted to the IRS in 2009. Based on the documentation provided,
the Settlement Program determined that Capt Jay was entitled to $248,371.29
on its claim but awarded the company $85,357.82, based on deductions for
prior payments from the Settlement Program.              The Settlement Program
determined that Zirlott was entitled to $196,906.96 on his shrimp vessel
captain claim but, after adding reimbursement for accounting expenses,
increased the award to $197,384.31. Capt Jay’s and Zirlott’s attorneys at the
time received $43,222.81 in attorneys’ fees for handling the claims. 1
      On October 7, 2014, Freeh, pursuant to his duties as Special Master,
moved to have Capt Jay and Zirlott remit the payments they received from the
Settlement Program and moved for an order prohibiting both from receiving
any more compensation from the Settlement Program. According to Freeh,
subsequent investigation revealed that Capt Jay and Zirlott had submitted
fraudulent claims for compensation. In particular, Freeh alleged that Capt
Jay and Zirlott knowingly presented false information and concealed
information when they claimed that their 2009 revenue came from shrimping
activities alone when, in fact, over 80 percent of this revenue came from marine
debris cleanup work.       And in a separate motion, Freeh argued that this

      1  The attorneys later withdrew from further representation of both claimants and
repaid their fees to the Settlement Program on October 3, 2014.
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deceptive conduct precluded Capt Jay and Zirlott from collecting further
amounts from the Settlement Program. Capt Jay and Zirlott opposed both of
Freeh’s motions. They argued that they reasonably believed marine debris
cleanup could be compensable under the Settlement Program, provided all
materials disclosing their income, and innocently made any alleged
misrepresentations.
       The district court granted both of Freeh’s motions on June 24, 2015.
Interpreting the terms of the Seafood Compensation Plan, the district court
rejected any argument that Capt Jay and Zirlott’s marine debris cleanup was
covered by the Settlement Agreement. According to the district court, Capt
Jay and Zirlott had not merely filed tax returns with the Settlement Program
but had personally averred, in sworn statements, that all of their revenue came
“from ‘shrimp’ landed in 2009.” The district court therefore concluded, as a
matter of law, that Capt Jay and Zirlott had committed fraud. 2 In light of this
finding, the court entered final judgment under Rule 54(b), ordering restitution
of the amounts Capt Jay and Zirlott had received and barring both parties from
further participation in the Settlement Program. Capt Jay and Zirlott timely
appealed on July 1, 2015. 3
                           II. STANDARD OF REVIEW
       We have acknowledged that “a district court has inherent power to
recognize, encourage, and when necessary enforce settlement agreements
reached by the parties.” Bell v. Schexnayder, 36 F.3d 447, 449 (5th Cir. 1994);
see also Chambers v. NASCO, Inc., 501 U.S. 32, 44 (1991) (“[A] court has the
power to conduct an independent investigation in order to determine whether

       2  The court rejected ancillary arguments from Capt Jay and Zirlott that they had not
signed the sworn statements, only their lawyers had, and that entities responsible for
administering the Settlement Program were at fault for not discovering the misinformation
in the claims.
        3 On appeal, Special Master Louis J. Freeh defends the district court’s judgment.

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                                       No. 15-30574
it has been the victim of fraud.”). We review a district court’s exercise of this
inherent power, absent any challenge to the underlying settlement, “for abuse
of discretion.” In re DEEPWATER HORIZON, 786 F.3d 344, 354 (5th Cir.
2015). Similarly, “[w]e review the imposition of sanctions [under a court’s
inherent power] for an abuse of discretion.” Chaves v. M/V Medina Star,
47 F.3d 153, 156 (5th Cir. 1995). “A district court abuses its discretion if it:
(1) relies on clearly erroneous factual findings; (2) relies on erroneous
conclusions of law; or (3) misapplies the law to the facts.” Harmon v. Journal
Pub. Co., 476 F. App’x 756, 757 (5th Cir. 2012) (per curiam) (unpublished)
(citation omitted).         We review de novo any questions regarding the
interpretation of a settlement agreement as questions of law. Waterfowl Ltd.
Liab. Co. v. United States, 473 F.3d 135, 141 (5th Cir. 2006).
                           III. FRAUD AND SANCTIONS
      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.
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                                 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
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                                    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.
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       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
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“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 *5–6 (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).
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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.
                             IV. CONCLUSION
      For the reasons herein, we AFFIRM the district court’s judgment.

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