Court Opinion

ID: 2737414
Source: CourtListenerOpinion
Date Created: 2014-09-26 16:01:04.595497+00
Date Added: 2024-06-11T12:31:23.347997
License: Public Domain

FILED
                                                 United States Court of Appeals
                                 PUBLISH                 Tenth Circuit

                  UNITED STATES COURT OF APPEALS     September 26, 2014

                                                    Elisabeth A. Shumaker
                        FOR THE TENTH CIRCUIT           Clerk of Court

UNITED STATES OF AMERICA,

          Plaintiff-Appellee,

v.                                          No. 13-2201

KATHERINE L. MELOT,

          Defendant-Appellant,

and

BILLY R. MELOT; C.D. EXPRESS,
INC.; MIRROR FARMS, INC.; LEIGH
CORPORATION; KLM TRUST;
SUZANNE CORPORATION; MELM
TRUST,

          Defendants.

________________________________

UNITED STATES OF AMERICA,

          Plaintiff-Appellee,

v.                                          No. 13-2202

BILLY R. MELOT,

          Defendant-Appellant,

and

KATHERINE L. MELOT; C.D.
EXPRESS, INC.; MIRROR FARMS,
INC.; LEIGH CORPORATION; KLM
TRUST; SUZANNE CORPORATION;
MELM TRUST; C.D. PROPERTIES,
INC.; Q.F. MARKETING, INC.,

             Defendants.

          APPEAL FROM THE UNITED STATES DISTRICT COURT
                 FOR THE DISTRICT OF NEW MEXICO
                   (D.C. No. 2:09-CV-00752-JCH-WPL)

Katherine L. Melot and Billy R. Melot, Pro Se, Defendants-Appellants.

Kathryn Keneally, Assistant Attorney General, Thomas J. Clark and Anthony T.
Sheehan, Attorneys, Tax Division, Steven Yarbrough, Acting United States Attorney,
Department of Justice, Washington, D.C. for Plaintiff-Appellee.

Before HARTZ, BALDOCK, and BACHARACH, Circuit Judges.

BACHARACH, Circuit Judge.

      The district court sanctioned Mrs. Katherine L. Melot and Mr. Billy R. Melot

based on the court’s inherent authority. The Melots appeal and seek leave to proceed

in forma pauperis. We grant leave to proceed in forma pauperis and address the

merits of the appeal.

      This appeal requires examination of the Fifth Amendment’s Due Process

Clause, which requires notice and an opportunity to be heard. In light of these

requirements, a court considering sanctions must give the sanctioned party notice and

an opportunity to be heard. Here, the court supplied notice that it was considering

                                         -2-
contempt, but not sanctions. Thus, the Melots never had notice of sanctions or an

opportunity to argue against the district court’s use of its inherent authority to order

sanctions. The lack of notice and an opportunity to be heard led to a denial of due

process. Thus, we reverse the sanctions order.1

I.    Suspicion of Fraud and the Imposition of Sanctions

      Mr. and Mrs. Melot owe millions of dollars in federal taxes, and Mr. Billy

Melot is serving time in federal prison for tax crimes. The debt led the United States

to foreclose on the Melots’ real properties, and the Melots tried to stop the

foreclosure. The sanctions were imposed because of the methods used by the Melots.

The district court regarded them as fraudulent.

      The disagreement began when the district court reduced the tax assessments to

judgments and ordered the sale of the Melots’ real properties. That order prompted a

motion to intervene by Mr. Steven M. Byers, who filed documents asserting liens on

the property. These documents supplied an address in New Mexico and were mailed

from the city where the Melots’ properties were located (Hobbs, New Mexico).

      The government suspected fraud and collaboration with the Melots, pointing

out to the court that: (1) Mr. Byers lived in prison―not Hobbs, New Mexico, (2) he

could not own any liens because he was destitute, (3) the Melots had never disclosed

any liens, (4) Mrs. Melot had signed Mr. Byers’ name on the lien and motion to
1
      We conclude that oral argument will not provide material assistance in
deciding the appeal. Thus, we have decided the appeal based on the briefs. See
Fed. R. App. P. 34(a)(2).

                                          -3-
intervene, and (5) the New Mexico address listed for Mr. Byers was actually the

home of Mrs. Melot’s friends.

      The magistrate judge held a hearing on the motion to intervene. Mrs. Melot

attended with counsel, and Mr. Byers participated by telephone. Mr. Melot declined

the opportunity to participate by telephone.

      At the hearing, Mr. Byers moved to withdraw his motion for lack of proof.

Nevertheless, the government asked to continue with the hearing because of the

potential fraud on the court. The court denied the motion to withdraw, and the

government presented evidence tending to show that the Melots and Mr. Byers had

created a scheme to derail the foreclosure. Mrs. Melot refused to answer questions,

invoking the Fifth Amendment privilege against self-incrimination.

      At the end of the hearing, government counsel proposed filing restrictions and

an order for reimbursement of the government’s costs related to the hearing.

Mrs. Melot’s counsel stated: “[I]f sanctions are on the table, I believe a Rule 11

sanction, I would just like notice and opportunity to be heard on those.” ECF No.

256 at 85.2 Before the court adjourned, counsel again stated: “I assume that if the

Court is going to consider sanctions, that we’ll just get notice of that?” Id. at 87.

The magistrate judge responded: “Well, we’ll see how it works. I mean, I could

2
        We will identify the district court filings by referring to the court’s numbering
in its electronic case filing system.

                                          -4-
make a recommendation to the district judge, which, of course, would be noticed to

you, and then the hearing would be before the district judge.” Id.

      The magistrate judge certified criminal contempt by the Melots. In certifying

the contempt, the magistrate judge noted that the district court would hold a hearing

and decide whether to hold the Melots in contempt. The certifications then set forth

the facts constituting contempt: Mrs. Melot “assisted Steven M. Byers in an effort to

mislead the Court about Mr. Byers’ identity and incarcerated status in an effort to

delay the administration of justice” and “actively and intentionally participated in a

scheme to fraudulently create a third party interest in her properties with the intention

of defrauding the Court, sabotaging the orderly administration of justice and delaying

the United States’ lawful efforts to recover the judgment as issued by the Court.”

ECF No. 245 at 5-6. And according to the magistrate judge, Mr. Melot participated

in the scheme. ECF No. 246 at 4.

      More than a year later, the district court issued an order addressing the

contempt certifications. Recognizing the costs of prosecuting a criminal contempt

matter and the shortfalls in the court’s budget, the district court declined to order

contempt. Instead, the court imposed sanctions consisting of: (1) removal of

Mrs. Melot and her children from the property, (2) reimbursement of the

government’s costs for the hearing, (3) striking of the Melots’ pending motions,

responses to motions, and requests for stays, and (4) imposition of filing restrictions.

                                          -5-
II.   The Lack of Notice and an Opportunity to be Heard

      The Melots argue that the district court violated the Fifth Amendment’s Due

Process Clause by imposing sanctions without notice and an opportunity to be heard.

We agree.

      Sanctions cannot be assessed without the “basic requirements of due process,”

which are “notice that such sanctions are being considered by the court and a

subsequent opportunity to respond.” Braley v. Campbell, 832 F.2d 1504, 1514

(10th Cir. 1987) (en banc); see also United States ex rel. Jimenez v. Health Net, Inc.,

400 F.3d 853, 857 (10th Cir. 2005) (“Due process requires us to give Appellants

notice that we are contemplating imposing sanctions and an opportunity to

respond.”). The notice must include not only the “conduct alleged to be

sanctionable,” but also “the standard by which that conduct [would] be assessed.”

Ted Lapidus, S.A. v. Vann, 112 F.3d 91, 97 (2d Cir. 1997). The Melots had no notice

of possible sanctions until they had already been imposed.

      The magistrate judge provided notice that: (1) he would consider a motion to

intervene by Mr. Byers, and (2) the district judge would consider whether to find

criminal contempt. In supplying notice of these matters, the magistrate judge

expressed serious concerns about possible fraud on the court. But the magistrate

judge never said that the district court would consider sanctions under the court’s

inherent authority. And when the subject of sanctions arose, the discussion lacked

any specifics. With little to go on, Mrs. Melot’s counsel surmised that the court

                                         -6-
might have intended to invoke Federal Rule of Civil Procedure 11 rather than the

court’s inherent power.

      The magistrate judge certified criminal contempt for Mr. and Mrs. Melot, so

the Melots knew that contempt was a possibility. Ultimately, however, the district

court did not follow the contempt procedure. Instead, the court used its inherent

authority to impose sanctions.

      Until then, there had been no notice of any potential for sanctions under the

court’s inherent authority. Though the Melots knew they could be cited for

contempt, they weren’t. And “the pursuit of sanctions under one . . . provision[] does

not constitute notice for purposes of the other” where, as here, the provisions differ

“in standards, procedure, and punitive scope.” Hutchinson v. Pfeil, 208 F.3d 1180,

1185 (10th Cir. 2000); see also Mackler Prods., Inc. v. Cohen, 146 F.3d 126, 129

(2nd Cir. 1998) (“[T]here are significant differences between the imposition of

sanctions and the punishment of criminal contempt.”).

      The Melots not only lacked notice regarding sanctions, but also lacked an

opportunity to be heard. The hearing did not supply this opportunity because the

issue of sanctions did not arise until the hearing on a motion to intervene, and no one

discussed the possibility of sanctions under the court’s inherent authority. See Sakon

v. Andreo, 119 F.3d 109, 114 (2nd Cir. 1997) (no notice of sanctions when the only

pending matters involved motions to dismiss and to set aside an order striking the

complaint). After issuing the contempt certifications, the magistrate judge never set

                                          -7-
a briefing schedule or mentioned the possibility of sanctions. That subject was not

broached until the district judge imposed sanctions in a written order.

       Accordingly, we reverse, vacating the sanctions and remanding for further

proceedings.3 The district court is free to consider re-imposing sanctions. But if the

court re-imposes sanctions, it must provide the Melots with notice and an opportunity

to be heard (under whatever source of authority the court invokes).

III.   In Forma Pauperis

       Mr. and Mrs. Melot have filed motions for leave to proceed in forma pauperis.

These motions are granted.

3
       One sanction was an order for Mrs. Melot to remove herself and her family
from the real property that was subject to sale. In related appeals (Nos. 13-2225 &
13-2226), the United States has informed the court that the sale has closed. Given
that the Melots no longer have an ownership interest in the property, the vacatur of
the sanctions order should not be construed as authorizing Mrs. Melot or her family
to return to the property.

                                         -8-