No. 05-20808 _______________________________________________

IN THE

UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

_______________________________________________

FEDERAL DEPOSIT INSURANCE CORPORATION, As manager of the FSLIC Resolution Fund,

Appellant, v.

CHARLES E. HURWITZ, et al., Appellees.

________________________________________________

On Appeal From The United States District Court For The Southern District of Texas

________________________________________________

ORIGINAL BRIEF OF PLAINTIFF-APPELLANT FEDERAL DEPOSIT INSURANCE CORPORATION

________________________________________________ GENE W. LAFITTE JAMES A. BROWN Liskow & Lewis, PLC 701 Poydras Street, Suite 5000 New Orleans, LA 70139 (504) 556-4116 F. THOMAS HECHT KATHLEEN HOLPER CHAMPAGNE Ungaretti & Harris LLP 3500 Three First National Plaza Chicago, IL 60602 RANDOLPH D. MOSS PAUL R.Q. WOLFSON JONATHAN G. CEDARBAUM KELLEY BROOKE SNYDER Wilmer Cutler Pickering Hale and Dorr LLP 1899 Pennsylvania Ave., N.W. Washington, DC 20006

DOUGLAS H. JONES Acting General Counsel RICHARD J. OSTERMAN, JR. Assistant General Counsel COLLEEN J. BOLES Senior Counsel LAWRENCE H. RICHMOND Counsel FEDERAL DEPOSIT INSURANCE CORPORATION 3501 Fairfax Drive, D-7014 Arlington, VA 22226 703-562-2376

ATTORNEYS FOR PLAINTIFF-APPELLANT FEDERAL DEPOSIT INSURANCE CORPORATION,

As Manager of the FSLIC Resolution Fund

i

CERTIFICATE OF INTERESTED PERSONS

The undersigned counsel of record certifies that the following listed persons

and entities as described in Rule 28.2.1 have an interest in the outcome of this case.

These representations are made in order that the Judges of this Court may evaluate

possible disqualification or recusal.

1. Appellant Federal Deposit Insurance Corporation, as manager of the FSLIC

Resolution Fund (“FDIC”), is the plaintiff in this case. FDIC is an agency of

the United States. It is represented by Richard J. Osterman, Jr., Colleen J.

Boles, Lawrence H. Richmond, Robert J. DeHenzel, Jr., and Douglas H.

Jones (Acting General Counsel) (the Acting General Counsel of the FDIC

and his staff affiliated with this case); James A. Brown and Gene W. LaFitte

of Liskow & Lewis, PLC; F. Thomas Hecht and Kathleen Holper

Champagne of Ungaretti & Harris LLP; and Randolph D. Moss, Paul R.Q.

Wolfson, Jonathan G. Cedarbaum, and Kelley Brooke Snyder of Wilmer

Cutler Pickering Hale and Dorr, LLP.

2. The defendants-appellees are Charles E. Hurwitz, Maxxam, Inc., and

Federated Development Company. They are represented by Stephen D.

Susman of Susman Godfrey; David J. Beck and Russell S. Post of Beck,

Redden & Secrest; David P. Griffith of Andrews Kurth LLP; and Jacks C.

ii

Nickens of Nickens, Keeton, Lawless, Farrell & Flack.

3. Maxxam, Inc. has the following subsidiaries:

Pacific Lumber Company (PALCO).

Scotia Pacific Company LLC and Britt Lumber are PALCO

subsidiaries.

Scotia Development LLC

Palmas del Mar Properties, Inc.

MCO Properties Inc.

Mirada Estates is a subsidiary of MCO Properties

Sam Houston Race Park, Ltd.

Valley Race Park is a SHRP subsidiary

By: ___________________________ James A. Brown

Attorney of Record for Plaintiff-Appellant Federal Deposit Insurance Corporation

REQUEST FOR ORAL ARGUMENT

Appellant Federal Deposit Insurance Corporation, as Manager of the FSLIC

Resolution Fund (“FDIC”) respectfully requests oral argument. The District Court

ordered the FDIC to pay more than $72 million as a sanction for bringing what the

District Court found was a frivolous lawsuit solely for the improper purpose of

advancing a government-wide conspiracy to coerce Charles Hurwitz into

surrendering to the government an environmentally sensitive old-growth redwood

forest. The District Court harshly condemned the FDIC’s integrity and expressly

found that numerous high government officials had committed perjury. The

District Court laid out its reasoning in a 40,512-word, 131-page Opinion. FDIC

respectfully submits that oral argument will assist the Court in understanding the

many complex factual and legal issues raised by the District Court.

iii

TABLE OF CONTENTS

Page

CERTIFICATE OF INTERESTED PERSONS ................................................................. i

REQUEST FOR ORAL ARGUMENT............................................................................... iii

TABLE OF CONTENTS........................................................................................................ iv

TABLE OF AUTHORITIES ................................................................................................ vii

INTRODUCTION ......................................................................................................................1

JURISDICTION..........................................................................................................................4

ISSUES PRESENTED ..............................................................................................................4

STATEMENT OF THE CASE ...............................................................................................6

STATEMENT OF FACTS.......................................................................................................8

A. EVENTS PRECEDING FDIC’S SUIT ................................................8

1. Hurwitz Acquires Control Of USAT ..........................................9

2. Hurwitz Effectively Dominates USAT’s Operations, Including Its Investment Strategy .........................11

3. USAT Undertakes A High-Risk Investment Strategy .....................................................................................12

4. USAT Fails To Maintain Its Net Worth ...................................14

5. FDIC Coordinates With OTS In Investigating USAT’s Failure .........................................................................17

6. FDIC’s Board Decides To Sue Hurwitz ...................................19

B. MERITS PROCEEDINGS..................................................................24

-iv-

1. FDIC Files Suit And Seeks a Stay Pending Disposition Of The OTS Case ..................................................24

2. The OTS Proceedings And Settlements....................................27

C. SANCTIONS PROCEEDINGS..........................................................29

SUMMARY OF ARGUMENT ...............................................................................34

STANDARD OF REVIEW .....................................................................................36

ARGUMENT ...........................................................................................................36

I. THERE IS NO BASIS FOR RULE 11 SANCTIONS AGAINST FDIC............................................................................................36

A. FDIC Investigated Extensively Before Filing Its Claims ...................37

B. FDIC’s Claims Had Reasonable Bases in Fact and Law....................39

1. Hurwitz’s Effective Control Of USAT.....................................40

2. Mortgage-Backed Securities Claims ........................................43

3. Net Worth Maintenance Claim .................................................47

C. The Environmental Controversy Surrounding Hurwitz Provided No Basis For Sanctions........................................................53

1. A Factually Well-Grounded And Legally Warranted Complaint Is Not Sanctionable Under Rule 11 ......................................................................................54

2. The Objective Evidence Confirms That FDIC Had No Improper Purpose In Suing Hurwitz ...................................55

(a) The FDIC’s Purpose In Suing Was To Obtain Compensation For Losses...................................58

(b) FDIC Was Willing To Consider A Settlement Including Trees, But That Was Not Improper ..................................................................69

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II. THE DISTRICT COURT IMPROPERLY BASED ITS SANCTIONS AWARD ON EXTRANEOUS PROCEEDINGS AND ISSUES ................................................................................................71

A. The District Court Improperly Sanctioned FDIC For Other Proceedings, Including The OTS Administrative Proceeding ...........................................................................................72

B. FDIC’s Coordination With OTS Provided No Basis For Sanctions .............................................................................................73

C. The Constitution Of FDIC's Board Was Irrelevant.............................76

D. The FDIC's Response To Congressional And Inspector General Inquiries About This Lawsuit Was Irrelevant ......................77

E. The District Court Improperly Relied On Sanctions Awards in Other Cases ........................................................................78

III. THE SANCTION AMOUNT WAS UNSUPPORTED AND EXCESSIVE..................................................................................................78

IV. THE SANCTIONS ORDER CANNOT BE SUSTAINED UNDER RULE 37, 28 U.S.C. § 1927, OR THE COURT’S INHERENT POWER ....................................................................................80

A. Rule 37.................................................................................................80

B. 28 U.S.C. § 1927 .................................................................................82

C. Inherent Authority ...............................................................................83

V. FDIC IS NOT LIABLE FOR INTEREST ON THE SANCTIONS AWARD.................................................................................84

CONCLUSION........................................................................................................87

CERTIFICATE OF SERVICE ................................................................................89

CERTIFICATE REGARDING TYPE-VOLUME LIMITATION, TYPEFACE REQUIREMENTS, AND TYPE STYLE REQUIREMENTS...................................................................................................90

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TABLE OF AUTHORITIES

Page Cases

Am-Pro Protective Agency, Inc. v. United States, 281 F.3d 1234, 1239-40 (Fed. Cir. 2002)......................................................................................66

Banco De Desarrollo Agropecuario, S.A. v. Gibbs, 709 F. Supp. 1302, 1306 (S.D.N.Y. 1989) ................................................................................42

Batson v. Neal Spelce Associates, 765 F.2d 511, 516 (5th Cir. 1985) ............. 80, 81

Battista v. FDIC, 195 F.3d 1113, 1120-21 (9th Cir. 1999) .....................................86

Boland Marine & Mfg. Co. v. Rihner, 41 F.3d 997, 1005 (5th Cir. 1995).............................................................................................................. 83, 84

Burkhart v. Kinsley Bank, 852 F.2d 512, 515 (10th Cir. 1988)...............................54

California Federal Bank v. United States, 395 F.3d 1263, 1273-74 (Fed. Cir. 2005) ....................................................................................................86

Chambers v. NASCO, Inc., 501 U.S. 32, 57 (1991).......................................... 73, 84

City of El Paso v. City of Socorro, 917 F.2d 7, 9 (5th Cir. 1990) ...........................37

CJC Holdings, Inc. v. Wright & Lato, Inc., 989 F.2d 791, 794 (5th Cir. 1993) .............................................................................................................37

Coleman v. Espy, 986 F.2d 1184, 1191-92 (8th Cir. 1993).....................................84

Conner v. Travis County, 209 F.3d 794, 800 (5th Cir. 2000)........................... 72, 73

Cooter & Gell v. Hartmax Corp., 496 U.S. 384, 405 (1990) ..................................36

Demoulas v. Demoulas Super Markets, Inc., Civ. A. No. 90-2827(B), 1995 WL 476772, at *80 (Mass. Dist. Ct. Aug. 2, 1995) ....................42

Doolin Security Savings Bk. v. OTS, 156 F.3d 190, 192 (D.C. Cir. 1998).....................................................................................................................76

Edwards v. General Motors Corp., 153 F.3d 242, 245 (5th Cir. 1998).....................................................................................................................72

vii

Far West Federal Bank v. OTS, 119 F.3d 1358, 1366-67 (9th Cir. 1997).....................................................................................................................86

FDIC v. Calhoun, 34 F.3d 1291, 1298-1299 (5th Cir. 1994) ............................ 37, 78

FDIC v. Henderson, 61 F.3d 421, 423-24 (5th Cir. 1995) ............................... 19, 87

FDIC v. Schuchmann, 319 F.3d 1247 (10th Cir. 2003)...........................................78

Foval v. First Nat’l Bank of Commerce, 841 F.2d 126, 130 (5th Cir. 1988).....................................................................................................................72

Fry v. Trump, 681 F. Supp. 252, 256 (D.N.J. 1988)................................................42

FSLIC v. Molinaro, 889 F.2d 899, 902 (9th Cir. 1989)...........................................74

Garner v. Pierson, 545 F. Supp. 549, 557 (M.D. Fla. 1983), aff’d, 732 F.2d 850 (11th Cir. 1984) .............................................................................42

Goldin v. Bartholow, 166 F.3d 710, 722 (5th Cir. 1999) ........................................83

Hartman v. Moore, 126 S. Ct. 1695, 1703-1706 (2006) .........................................56

Hudson v. United States, 522 U.S. 93 (1997) ..........................................................75

Interfirst Bank Dallas v. Risser, 739 S.W.2d 882, 899 (Tex. Ct. App. 1987)............................................................................................................52

In re DaimlerChrysler Corp., 294 F.3d 697, 701 (5th Cir. 2002) ...........................87

In re FDIC, 58 F.3d 1055, 1061 (5th Cir. 1995) .............................................. 63, 82

In re Flutie New York Corp., 310 B.R. 31, 57 (S.D.N.Y. 2004) .............................42

Insurance Co. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 707 (1982) .......................................................................81

Jennings v. Joshua Indep. Sch. Dist., 877 F.2d 313, 320 (5th Cir. 1989).....................................................................................................................54

Johnson v. Sawyer, 120 F.3d 1307, 1333-36 (5th Cir. 1997) ..................................87

Kaneb Services, Inc. v. FSLIC, 650 F.2d 78, 82-83 (5th Cir. 1981) .......................50

-viii- Keating v. OTS, 45 F.3d 322, 324 (9th Cir. 1995)...................................................74

Kunstler v. Britt, 914 F.2d 505, 518 (4th Cir. 1990) ...............................................54

Lewis v. Knutson, 699 F.2d 230, 235 (5th Cir. 1983)..............................................42

Library of Congress v. Shaw, 478 U.S. 310, 314 (1986).................................. 84, 85

Matta v. May, 118 F.3d 410, 415 (5th Cir. 1997)....................................................36

Matter of Case, 937 F.2d 1014, 1023-24 (5th Cir. 1991)........................................73

Murray v. City of Austin, 947 F.2d 147, 153 (5th Cir. 1991) ..................................36

Nat’l Ass’n of Gov’t Employees v. Nat’l Ass’n of Fed. Employees, 844 F.2d 216, 223-24 (5th Cir. 1988)..................................................................54

Nguyen v. Excel Corp., 197 F.3d 200, 209 (5th Cir. 1999) .....................................82

O’Brien v. Alexander, 101 F.3d 1479, 1489 (2d Cir. 1996) ....................................36

O'Melveny & Myers v. FDIC, 512 U.S. 79, 86-87 (1994).......................................42

OTS v. Paul, 985 F. Supp. 1465, 1474-75 (S.D. Fla. 1997) ....................................76

Proctor & Gamble Distributing Co. v. Amway Corp., 280 F.3d 519, 526 (5th Cir. 2002)...............................................................................................79

Robinson v. Nat’l Cash Register Co., 808 F.2d 1119, 1130 n.20 (5th Cir. 1987) .............................................................................................................54

RTC v. Acton, 49 F.3d 1086 (5th Cir. 1995)............................................... 45, 46, 47

RTC v. Firstcorp., Inc., 973 F.2d 243, 249-50 (4th Cir. 1992) ...............................50

RTC v. FSLIC, 25 F.3d 1493, 1506 (10th Cir. 1994) ..............................................86

San Luis Obispo Mothers for Peace v. United States NRC, 789 F.2d 26, 44 (D.C. 1985) ...............................................................................................81

SEC v. Dresser Indus., Inc., 628 F.2d 1368, 1374 (D.C. Cir. 1980) ................ 74, 75

SEC v. First Financial Group of Tex., 659 F.2d 660, 666-67 (5th Cir. 1981) ...................................................................................................... 74, 75

-ix-

Smith v. Our Lady of the Lake Hospital, Inc., 960 F.2d 439, 446, 447 (5th Cir. 1992)...............................................................................................38

Spawn v. Western Bank-Westheimer, 989 F.2d 830, 833 (5th Cir. 1993).............................................................................................................. 85, 86

Sussman v. Bank of Israel, 56 F.3d 450, 458-59 (2d Cir. 1995) .............................54

Szabo Food Service Co. v. Canteen Corp., 823 F.2d 1073, 1083 (7th Cir. 1987)......................................................................................................54

Thomas v. Capital Sec. Servs., Inc., 836 F.2d 866, 872 (5th Cir. 1988)........................................................................................................ 36, 37, 54

Topalian v. Ehrman, 3 F.3d 931, 936 (5th Cir. 1993) .............................................78

Transp. Ins. Co. v. Moriel, 879 S.W.2d 10, 23 (Tex. 1994)....................................46

United States v. Alexander, 981 F.2d 250, 253 (5th Cir. 1993) ....................... 36, 37

United States v. Chemical Foundation, 272 U.S. 1, 14-15 (1926)..........................66

United States v. Frowein, 727 F.2d 227, 232 (2d Cir. 1984) ..................................75

United States v. Horn, 29 F.3d 754, 763-66 (1st Cir. 1994)....................................84

United States v. Kordel, 397 U.S. 1 (1970) .............................................................75

United States v. Ursery, 518 U.S. 267, 274 (1996) .................................................75

United States v. Welborn, 849 F.2d 980, 983 (5th Cir. 1988) .................................66

Upjohn Co. v. United States, 449 U.S. 383, 399 (1981)..........................................81

Whitehead v. Food Max of Mississippi, Inc., 332 F.3d 796 (5th Cir. 2003).............................................................................................................. 55, 56

Zaldivar v. City of Los Angeles, 780 F.2d 823, 832 (9th Cir. 1986) .......................54

Statutes

12 U.S.C. § 1818(b)(6)(A).......................................................................................18

12 U.S.C. § 1819(a) .................................................................................................85

12 U.S.C. § 1823(d)(3)(D)................................................................................ 39, 87

12 U.S.C. §§1730a(a)(1)(D) ............................................................................. 15, 50 -x-

28 U.S.C. § 1291........................................................................................................4

28 U.S.C. § 1345........................................................................................................4

28 U.S.C. § 1927............................................................................... 6, 35, 79, 80, 82

28 U.S.C. § 2106......................................................................................................87

5 U.S.C. § 552b(c) ...................................................................................................60

Tex. Civ. Stat. Art. 342-102 (1994) .........................................................................41

Tex. Civ. Stat. Art. 852a § 8.04 ...............................................................................41

Rules

Fed. R. Civ. P. 26(b)(4)............................................................................................81

Fed. R. Civ. P. 37 .......................................................................................... 6, 35, 79

FRCP 37(a)(4)..........................................................................................................80

Rule 11 ............................................................ 2, 3, 4, 5, 6, 36, 37, 38, 53, 55, 72, 79

Rule 26 ................................................................................................................ 2, 38

Rule 28.2.1 ................................................................................................................. i

Regulations

12 C.F.R. § 574 ................................................................................................. 15, 50

12 C.F.R. § 583.26(a), (b) ........................................................................................15

12 C.F.R. § 561.31 (1987) ................................................................................ 41, 42

Other Authorities

Jerold S. Solovy et al., Sanctions Under Rule 11: A Cross-Circuit Comparison, 37 LOY. L.A. L. REV. 727, 736-45 (2004)......................................54

The Vacancies Act, 22 Op. OLC 44 (1998) ............................................................76

Villa, Bank Directors, Officers and Lawyers Civil Liabilities § 1.02[D][2]..........................................................................................................52

-xi-

William W. Schwarzer, Sanctions Under the New Federal Rule 11--A Closer Look, 104 F.R.D. 181, 196 (1985) ........................................................55

-xii-

INTRODUCTION

This case surely presents one of the most extraordinary sanctions awards

ever to come before this Court. The District Court ordered the Federal Deposit

Insurance Corporation to pay more than $72 million as a sanction for bringing suit

against Charles Hurwitz based on his involvement in the collapse of United

Savings Association of Texas (USAT)—$58 million of this amount for fees

allegedly incurred in proceedings not before the District Court. The principal basis

for the Court’s opinion was its conclusion that FDIC’s suit was politically

motivated—part of a supposed government-wide conspiracy to coerce Hurwitz into

surrendering an environmentally sensitive old-growth redwood forest that the

“green lobby” pressured the government to acquire.

The District Court fundamentally erred in reaching this conclusion. FDIC

brought suit against Hurwitz to seek compensation for massive losses at USAT—

the fifth costliest failure in the 1980’s thrift crisis—only after an extensive

investigation produced evidence that those losses were in significant part

attributable to Hurwitz’s gross mismanagement and dereliction of fiduciary duty.

The Court brushed aside this lengthy investigation, disregarded 55 pages of Rule

1

26 disclosures that FDIC submitted in support of its claims,1 and ignored reports

and deposition testimony of three eminent ethics experts concluding that FDIC’s

claims readily satisfied Rule 11 standards.2 Perhaps most troubling, the Court

dismissed the consistent deposition testimony of every FDIC witness who was

asked about the basis for the suit, each of whom stated that the suit was not brought

to pressure Hurwitz into giving up his company’s trees.3 The Court sweepingly

stigmatized all of them as liars,4 though it heard the live testimony of only one

witness. And the Court vilified FDIC, a federal agency established to maintain the

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1 R.V. 39 at 25888-R.V. 40 at 25787. Citations to the record are to the

volume of the record (abbreviated as “R.V.”) followed by the record page number. Citations to the Record Excerpts (abbreviated as “R.E.”) correspond to the tab numbers assigned in the table of contents followed by the record page number.

2 R.E. 9 (reports and resumes of Burns, Hazard and Schuwerk); 2nd Supp. Rec., Vol. 2 at Tabs A (depositions) and Tabs B (reports). Citations to the First and Second Supplemental Records on Appeal filed in this Court on July 13 and August 30, 2006, respectively, are to volume (abbreviated as “1st or 2nd Supp. R. Vol. __”) and page. Because the pages of these supplemental records were not consecutively bates numbered, pages are referenced to the original document or by other appropriate identifying information.

3 R.V. 31 at 27737, R.V. 32 at 27542, R.V. 34 at 27080, R.V. 45 at 24237, R.V. 46 at 23901-23901(a). All references to pages with “(a)” represent a two sided document, the second page of which was not bates numbered by the district court clerk.

4 R.E. 4 at 34115, 34097, 34041, 34028, 34025, 34022, 33992.

public’s confidence in the nation’s banking system, as a “corrupt” agency, likening

it to the “cosa nostra” and “a secret society of extortionists.”5

The District Court’s opinion fails to meet basic standards of accuracy and

fairness. The opinion is also clearly wrong on the merits. FDIC had a reasonable

basis for its case, far more than sufficient to satisfy Rule 11. The staff and Board

of Directors of FDIC understood that the case faced significant obstacles.

Nonetheless, the Board reasonably concluded that the enormous losses and

evidence of misconduct warranted bringing the case.6 Dismissing the ample

objective evidence that FDIC did not sue to obtain trees, the District Court instead

pursued speculation about FDIC’s participation in a government conspiracy against

Hurwitz. That excursion, however, deeply entangled the District Court in a web of

material errors—perfectly illustrating why this Court has disapproved inquiry into

a litigant’s subjective state of mind in bringing suit. The District Court overrode

-3-

5 R.E. 4 at 33992. 6 R.V. 46 at 23830(a) (deposition testimony of FDIC chairman Helfer that

“not only . . . was [this] a case that was meritorious but . . . it was a case that balancing all the issues and the nature of the . . . bad conduct. . . FDIC had an obligation . . . to bring”); see R.E. 6 at 24549 (final Authority to Sue “ATS” Memo) (the “litigation risks are worth taking because of the egregious character of the underlying behavior … which caused enormous losses, and to further [FDIC’s] ongoing efforts to shape the law evolving in this area.”); R.E. 5 at 29314 (statement of FDIC Board member that “the one thing that is certain is that we have people who, in our opinion and the historical opinion of the regulatory agencies, have done things that are unsafe and unsound and have performed acts that we don’t think are appropriate and they’ve cost the FDIC $1.6 billion with these acts”).

FDIC’s privileges and subjected its high officials and lawyers to depositions. Yet

at the end of the day, the Court was able to reach its finding of a conspiracy only

by selectively quoting pieces of evidence in ways that changed their meaning,

mischaracterizing documents, and misstating verifiable facts.

The District Court’s opinion demonstrates neither the fairness nor the rigor

demanded when so much is at stake. This flawed judgment should not be allowed

to stand.

JURISDICTION

The District Court had jurisdiction under 28 U.S.C. §§ 1345 and 1819.

This Court has jurisdiction under 28 U.S.C. § 1291.

This appeal is timely. The District Court’s Final Judgment and Order

Awarding Sanctions, which disposed of all parties’ claims, were entered on August

25 and 26, 2005. FDIC filed its Amended Notice of Appeal on September 16,

2005.

ISSUES PRESENTED

1. Did the District Court abuse its discretion by:

a. concluding that FDIC’s complaint violated Rule 11, where

FDIC’s extensive pre-filing investigation uncovered substantial

evidence that Hurwitz acted as an officer and director of United

Savings Association of Texas (“USAT”) in all but name,

-4-

contributed to the gross mismanagement of USAT’s investment

portfolio, and failed to take steps to ensure that USAT’s

regulatory capital requirements were met;

b. concluding that FDIC sued Hurwitz with the improper purpose

of coercing him into surrendering a forest, where as a matter of

law, a complaint reasonably grounded in fact and law is not

sanctionable under Rule 11’s “improper purpose” provision,

and where the objective evidence contradicts the Court’s

conclusion;

c. including in the sanction roughly $58 million allegedly incurred

in separate proceedings not before the District Court;

d. relying on irrelevant matters to support its sanctions award,

such as FDIC’s cost-reimbursement agreement with the Office

of Thrift Supervision (“OTS”), the allegedly invalid

appointment of a member of FDIC’s Board, and sanctions

orders against FDIC in unrelated cases; and

e. awarding Hurwitz all the sums he claimed without any evidence

supporting the details of those expenses, analysis of whether the

expenses were unreasonable or caused by Hurwitz’s own -5-

actions, or explanation of how those costs were related to

specific conduct by FDIC in the litigation?

2. Is the $72 million sanction unsustainable under sources other than

Rule 11 seemingly invoked by the District Court, such as Fed. Civ. P. 37, 28

U.S.C. 1927, and the District Court’s “inherent power”?

3. Did sovereign immunity preclude adding prejudgment interest to the

sanctions award?

STATEMENT OF THE CASE

On August 2, 1995, FDIC, as manager of the FSLIC Resolution Fund, filed

a complaint against Charles Hurwitz in the Southern District of Texas, alleging that

Hurwitz breached his fiduciary duties as a de facto officer, director and controlling

person of USAT by grossly mismanaging USAT’s investment portfolio in

mortgage-backed securities (MBS) and by failing to take steps to maintain USAT’s

net worth.7 On November 29, 1996, the District Court granted MAXXAM, Inc.,

leave to intervene;8 it granted Federated Development Company leave to intervene

on January 10, 1997.9 FDIC filed an amended complaint on January 15, 1997,

which withdrew the MBS claims in light of pending administrative proceedings

7 R.V. 152 at 0022-0001. 8 R.V. 141 at 2597. 9 R.V. 140 at 2646.

-6-

brought against Hurwitz by the OTS, a bureau within the Department of Treasury

with responsibility for supervision of savings and loan associations.10

In September 1997, Hurwitz moved for sanctions against FDIC.11 Over the

next seven years, he filed numerous “renewed” and/or supplemental sanctions

motions.12 FDIC opposed these motions.13

On October 18, 2002, Hurwitz settled the claims against him in the OTS

proceedings by paying (along with MAXXAM and Federated) $206,000.14 He

also agreed not to be a controlling shareholder of an insured financial institution

for three years and not to participate in the investment decisions of an insured

financial institution for the same period.15 Hurwitz also agreed that, for the same

period of time, he would not participate in review or approval of certain

transactions if he served as a director, officer, or employee of a financial

-7-

10 R.V. 140 at 2657-2647. 11 R.V. 126 at 5840-5833, 5889-5841, R.V. 123-125 at 6455-5890. 12 R.V. 120 at 6978-6974, 7018-6979, R.V. 103-104 at 10857-10684, R.V. 102

at 11100-10896, R.V. 101 at 11122-11109, R.V. 99 at 11605-11555, R.V. 98 at 11877-11853, R.V. 95-98 at 12544-11848, R.V. 93 at 13097-12957, R.V. 81 at 15546-15494, R.V. 78 at 16225-15962, R.V. 73 at 17154-17153, R.V. 51 at 22795-22593, R.V. 50 at 23131-22796.

13 R.V. 120-121 at 6964-6589, R.V. 120 at 7055-7050, R.V. 99 at 11618-11606, R.V. 94 at 12565-12549, 13081-12566, R.V. 53-56 at 22237-21411, R.V. 52 at 22426-22293, R.V. 48 at 23489-23299.

14 R.V. 43 at 24850-24844. 15 R.V. 43 at 24849-48, 24844.

institution.16 FDIC dismissed its complaint with prejudice on November 12,

2002.17

On November 8, 2002, Hurwitz, Federated, and MAXXAM renewed their

motions for sanctions in the District Court.18 The District Court held a hearing on

June 29 and 30, 2004, at which one FDIC witness testified and the court heard oral

argument.19 On August 23, 2005, the District Court issued an Opinion sanctioning

FDIC over $72 million, including more than $35 million in interest. The sanction

included an award of costs, fees, and interest of $58 million attributable to other

proceedings, including the OTS case, to which FDIC was not a party.20

This appeal followed.

STATEMENT OF FACTS

A. EVENTS PRECEDING FDIC’S SUIT

On December 30, 1988, the Federal Home Loan Bank Board (“FHLBB”)

closed USAT21 and appointed the Federal Savings and Loan Insurance Corporation

16 Id. at 24849. 17 R.V. 57 at 21119-21118. 18 R.V. 73 at 17154-17153. 19 R.V. 6 at 33233; 1st Supp. R.Vols. 7-8. 20 R.E. 4 at 34120-33990. 21 R.E. 4 at 34103.

-8-

(“FSLIC”) as receiver. USAT’s $1.6 billion failure was the fifth costliest of nearly

1300 thrift failures between 1980 and 1994.22

Following standard procedures, FDIC (as FSLIC’s successor), investigated

to determine whether there was any wrongdoing that should be pursued to lessen

the failure’s cost to taxpayers.23 FDIC retained three law firms to examine the

causes of USAT’s collapse.24 Over six years, those lawyers reviewed USAT’s

records, auditors’ reports and work records, supervisory files, and regulatory

examination reports. They also interviewed numerous officers, directors,

employees, supervisory agents, examiners and auditors. Based on this extensive

investigation, the law firms concluded that there was a reasonable basis for claims

against Hurwitz and others for gross mismanagement of USAT.25

1. Hurwitz Acquires Control Of USAT

In 1982, Hurwitz, a Houston investor active in leveraged corporate

acquisitions, gained effective control of USAT in connection with the merger of

two troubled Houston savings and loan holding companies, United Financial

Group (“UFG”) and First American Financial of Texas.26 After the merger, UFG

-9-

22 Id. 23 R.V. 29 at 28131-28130, R.V. 42 at 24916-24904; R.V. 44 at 24549-24548. 24 R.E. 7 at 25984; R.V. 46 at 24039 (a). 25 R.E. 7 at 25989-25982, 25975-25971, 25957-25952, R.V. 45 at 24072(a),

24070(a), R.V. 46 at 24034; R.V. 21 at 30035-30021. 26 R.E. 7 at 25989-25987.

emerged as the holding company for USAT.27 UFG owned 100% of the stock of

USAT and had no other substantial operations.28

Hurwitz was CEO or Chair of UFG for much of the pertinent time.29 He

also exercised effective control of UFG—and, through it, USAT—by means of a

set of interlocking corporations. Two of UFG’s major shareholders were MCO

Holdings, Inc. (later MAXXAM, Inc.) and Federated Development Company.30

Hurwitz was Chairman and CEO of both MAXXAM and Federated. Federated

was a Hurwitz family business trust, and it controlled approximately 67% of the

voting power of MAXXAM’s stock.31 These close relationships led USAT’s

President to believe that Federated and MAXXAM may have functioned together,

in effect, as a holding company for USAT.32

-10-

27 R.E. 4 at 34113; R.V. 65 at 19186. 28 R.E. 4 at 34119. 29 R.V. 20 at 30258; R.V. 40 at 25745, ¶¶13-14. 30 R.E. 7 at 25989-25988. Three months after the UFG/First American

Financial of Texas merger, MAXXAM and Federated owned 22.3% of UFG’s stock. Dr. George Kozmetsky, a director of MAXXAM and UFG and a trustee of Federated, owned a further 1.1%. For federal reporting purposes, Kozmetsky’s shares were required to be aggregated with MAXXAM’s and Federated’s holdings. See R.V. 33 at 27377 (¶¶ 86-89).

31 R.E. 7 at 25988; R.V. 151 at 0448, 0446; R.V. 20 at 30190. 32 R.V. 42 at 24955.

2. Hurwitz Effectively Dominates USAT’s Operations, Including Its Investment Strategy

Although Hurwitz held no official title at USAT, FDIC’s investigation

showed that Hurwitz in fact assumed a major role in directing its operations, and

that Hurwitz deliberately avoided any formal position in order to insulate himself,

and perhaps MAXXAM and Federated, from liability.33 According to USAT’s

General Counsel, Hurwitz was part of USAT’s senior management: “[H]e was

certainly considered part of the people that make policy, for sure.”34 A USAT

Board member agreed that “[Hurwitz] was in control of the institution,” “took a

very active role in running the institution,” and was “essentially calling the

shots.”35

Hurwitz was a member of the UFG/USAT Strategic Planning Committee.36

He also regularly attended and participated in USAT or joint UFG/USAT Board

meetings.37 USAT’s Executive Vice President responsible for investments

-11-

33 R.V. 147 at 1152, 1149. 34 R.V. 47 at 23681. 35 R.V. 47 at 23678-23677. 36 R.V. 121 at 6768-6766. 37 R.V. 148 at 1120, 1119 at ¶¶2-6 and attached meeting minutes; R.V. 40 at

25747-25746 at ¶¶2-6; R.V. 40 at 25707-25696; R.V. 41 at 25488, 25470-25248.

reported his trading activities to Hurwitz.38 Hurwitz personally approved major

investments for USAT.39 Indeed, USAT’s investment team was housed at

Federated, along with Hurwitz.40 FDIC would later contend that Hurwitz directed

and controlled USAT’s investment strategy.41

3. USAT Undertakes A High-Risk Investment Strategy

In 1984, responding to interest-rate pressures and the decline of its

traditional home-loan business, USAT sold several of its branches and used the

proceeds to invest (through a subsidiary) in high-risk mortgage backed securities

and junk bonds.42 USAT’s liabilities grew rapidly and its financial health

deteriorated.43 FDIC’s investigation uncovered evidence that USAT’s senior

management had little or no appreciation of the complexities of the financial

instruments in which they invested.44 In fact, the Senior Vice President

-12-

38 R.V. 41 at 25485, R.V. 42 at 25007-25006 (Huebsch interview); see also id.

(Munitz interview, at 24994; Williams interview, at 24986). 39 R.V. 121 at 6812-6811(handwritten note from former USAT CFO); R.V.

121 at 6827-6825 (deposition of former UFG Chairman and USAT President and CEO), R.V. 121 at 6823-6822 (Hurwitz deposition in a separate proceeding).

40 R.E. 7 at 25974. 41 R.V. 152 at 0018 ¶ 11. 42 R.E. 7 at 25987-25984; R.V. 42 at 25108. 43 R.V. 42 at 25106-25105. 44 R.V. 24 at 29152-51; R.V. 121 at 6740-6737.

responsible for USAT’s MBS portfolios characterized her job as “rolling the

dice.”45

Hedging strategies promised to federal regulators never materialized.46

Indeed, an internal USAT memorandum warned that its MBS subsidiary was

“basically $1.6 billion of unhedged MBS” and proposed options for USAT—

including to “[d]o nothing and continue to use mirrors to disguise our GAP.”47

FDIC’s investigation also uncovered evidence that USAT falsely reported its

financial condition in order to hide losses from its MBS portfolio.48 A USAT

outside consultant proposed options to alleviate the portfolios’ damaging effects,

but USAT considered these “obviously unworkable” because they would have

required booking losses up front.49

Hurwitz’s effective control of USAT enabled him to cement a relationship

with Drexel Burnham Lambert (“Drexel”), under which USAT invested in Drexel

junk bonds and Drexel provided Hurwitz with the financing needed to undertake

-13-

45 R.V. 42 at 24958-24957 (Laurenson interview notes). 46 R.E. 7 at 25984; R.V. 121 at 6741, 6738-6735, 6645-6643. 47 R.V. 121 at 6673-6672 (6-17-87 Williams Memorandum, p. 1). GAP is the

difference between the maturity structure of interest rate-sensitive assets and rate-sensitive liabilities. See R.V. 33 at 27394 (¶ 15).

48 R.V. 24 at 29174-72, 29170-69. 49 R.V. 121 at 6670-6666; R.V. 24 at 29158.

corporate acquisitions.50 From 1984 to 1988, companies controlled by Hurwitz

obtained at least $1.5 billion in junk bond financing through Drexel for his

takeover activities; during the same time, USAT purchased approximately the

same amount of junk bonds, much of it directly underwritten by Drexel.51

4. USAT Fails To Maintain Its Net Worth

In December 1987, USAT failed to meet its minimum regulatory capital

requirement by $46 million.52 By November 1988, this shortfall had increased to

$466 million.53 FDIC’s investigation showed that by at least October 1987

Hurwitz knew of USAT’s anticipated failure to meet its regulatory capital

requirement.54

UFG had a written obligation to infuse enough capital into USAT so that

USAT could meet its regulatory capital requirements. The FHLBB twice directed

UFG to comply with that written obligation.55 Hurwitz did nothing to urge such an

infusion. UFG did not comply with FHLBB’s demands.56

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50 R.E. 7 at 25982-25980; R.V. 40 at 25744 ¶¶22-23; R.V. 41 at 25487-25482,

RV. 42 at 25125-25110, 25010-24950; R.V. 24 at 29176-74. 51 R.V. 41 at 25489, 25482, R.V. 42 at 25125-25110; R.V. 24 at 29176-74. 52 R.V. 40 at 25743 ¶25. 53 R.V. 40 at 25743 ¶ 26. 54 R.V. 42 at 25130-25127. 55 R.V. 19 at 30305; R.V. 18 at 30767. 56 R.E. 7 at 25989.

Nor did Maxxam or Federated infuse capital into USAT. FDIC’s

investigation showed that Hurwitz had made an unusual arrangement with Drexel,

under which, it appeared, Drexel held stock in UFG (USAT’s corporate parent)

effectively as the nominee of MAXXAM and Federated.57 By statute and

regulation, any company seeking to gain control of more than 25% of the shares of

a savings and loan association, and thereby a controlling interest, had to apply to

the FHLBB to become a savings and loan holding company and accept obligations

required by FHLBB.58 Thus, in 1983, when UFG acquired 100% of USAT, UFG

agreed to maintain USAT’s net worth at a level consistent with that required by

regulation.59

In June 1983, MAXXAM and Federated sought regulatory approval from

the FHLBB to acquire up to 35% of UFG’s shares, which would have exceeded the

25% threshold for control of UFG and, by extension, USAT.60 The FHLBB

-15-

57 2nd Supp. Rec. Vol. 1, Ex. 359, at 10-28. 58 See 12 U.S.C. §§1730a(a)(1)(D) (defining “savings and loan holding

company” as “any company that directly or indirectly controls an insured institution or controls any other company which is a savings and loan holding company by virtue of this subsection”), (e)(1)(A), (B) (requiring Board approval before any company can acquire or retain control of an insured institution) (1988); 12 C.F.R. § 574, esp. §§ 574.3-574.4; id. § 583.26(a), (b) (1987) (25% ownership control threshold); see also R.V. 65 at 19181-19178.

59 R.V. 41 at 25488, 25216. 60 R.V. 39 at 25996-25993.

approved the application subject to the condition that if MAXXAM or Federated

were to directly or indirectly control USAT, they were required to contribute a pro

rata share based on their UFG holdings, of any additional infusion of capital that

may become necessary for the insured institution to maintain its net worth.61

MAXXAM and Federated, however, did not want to assume this net worth

maintenance obligation, and so they refrained from acquiring a controlling interest

in USAT by direct purchase of UFG shares.

Instead, FDIC’s investigation found, MAXXAM and Federated managed to

acquire a controlling interest in USAT by indirect means. In 1985, MAXXAM

entered into an option agreement with Drexel that gave MAXXAM the right to

“call” and Drexel the right to “put” 9.7% of the outstanding shares of UFG’s stock,

which were held by Drexel, at a prearranged purchase price.62 MAXXAM

indemnified Drexel for the risk of any loss arising out of the option agreement and

gave Drexel a letter of credit for the agreed-upon purchase price.63 FDIC would

later conclude that, because MAXXAM alone bore the risk of economic loss in this

arrangement, Drexel was merely a nominee for MAXXAM.64 Thus, FDIC would

-16-

61 R.V. 39 at 25995 ¶4. 62 R.V. 41 at 25195 - R.V. 42 at 25175 (Stock Option Agreement); see R.V. 65

at 19172-19171. 63 R.V. 41 at 25194, R.V. 42 at 25183. 64 R.V. 152 at 0014-0013.

later contend that MAXXAM and Federated—related Hurwitz-controlled

entities—had together effectively gained control of USAT, and as such had also

assumed a responsibility for maintaining USAT’s net worth, notwithstanding their

efforts to avoid such responsibility.65

USAT’s General Counsel suggested to Hurwitz and others that having

MAXXAM or Federated infuse capital into USAT would be one way to meet the

minimum regulatory requirement.66 Hurwitz did nothing to compel or even

encourage them to do so.

5. FDIC Coordinates With OTS In Investigating USAT’s Failure

In 1992, FDIC’s Deputy General Counsel briefed OTS’s Director and Chief

Counsel about possible claims arising from the USAT failure.67 FDIC’s legal staff

later concluded that FDIC could not directly sue UFG, MAXXAM, and Federated

for their failure to maintain USAT’s net worth, but that OTS had potential claims

against those entities because FHLBB, OTS’s predecessor, had imposed the

companies’ net worth maintenance obligation.68 In 1994, FDIC’s Deputy General

-17-

65 R.V. 152 at 0014-0010. 66 R.V. 42 at 25128. 67 R.V. 43 at 24675. 68 R.V. 44 at 24561-24553.

Counsel corresponded with OTS regarding the possibility of OTS’s prosecution of

such claims.69

OTS undertook an independent investigation to determine whether

enforcement claims should be brought against those entities and/or USAT’s

managers.70 FDIC and OTS agreed that OTS would control any such proceedings,

and that the final decision whether to commence OTS enforcement proceedings

would be solely OTS’s.71 FDIC also agreed, however, to reimburse OTS for its

fees and expenses because of OTS’s budgetary constraints and because, under

federal law, FDIC would be the ultimate beneficiary of any restitution or net worth

enforcement recovery.72 In 1994 and 1995, OTS and FDIC researched the

statutory authority for the referral and reimbursement arrangement and concluded

that the cooperative relationship was lawful.73

OTS’s investigation was extensive, involving 42 depositions.74 In

December 1995, OTS initiated multiple claims against MAXXAM, Federated,

Hurwitz, and other USAT officers and directors, including claims based on failures

-18-

69 R.V. 43 at 24675-24662 and R.V. 21 at 29906-29897. 70 R.V. 43 at 24667-24662. 71 R.V. 43 at 24663-24662. 72 R.V. 43 at 24663-24662; 12 U.S.C. § 1818(b)(6)(A); R.V. 43 at 24628-

24627. 73 R.V. 43 at 24660-24655; R.V. 44 at 24610-24600. 74 R.V. 14 at 31492 at ¶9.

to maintain USAT’s net worth and claims based on the reckless and misreported

investments in USAT’s MBS portfolios.75 OTS’s decision to initiate those claims

was made independently of FDIC,76 although FDIC provided comments on OTS’s

draft notice of charges.77

6. FDIC’s Board Decides To Sue Hurwitz

As FDIC’s investigation progressed, FDIC attorneys drafted memoranda

analyzing the merits of possible claims against Hurwitz; those drafted in 1992,

1993, and 1994 recommended suing Hurwitz.78 During those years, Hurwitz

signed agreements waiving potential statute-of-limitations defenses against

FDIC.79 But on July 21, 1995, 12 days before the expiration of the statute of

limitations, Hurwitz refused to sign another tolling agreement.80

Hurwitz’s refusal to accept further tolling created a need for FDIC to decide

quickly whether to bring suit against Hurwitz. As of that time, OTS had not

completed its investigation and had not decided whether to institute its own

-19-

75 R.V. 65 at 19202-R.V. 66 at 19051. 76 R.V. 43 at 24663; 2nd Supp. Rec. Vol. 1, Ex. 360 at 58-59, 63-64. 77 R.V. 22 at 29617. 78 R.V. 44 at 24598-24563, R.V. 110 at 9503-9432, R.V. 15 at 31481-31418. 79 R.V. 44 at 24598; R.V. 110 at 9493; 2nd Supp. Rec. Vol. 1 Ex. 358 at 1.

FIRREA extended any unexpired statute of limitations for tort claims by three years, running from the commencement of the receivership. See, e.g., FDIC v. Henderson, 61 F.3d 421, 423-24 (5th Cir. 1995). It was the FIRREA statute of limitations period that Hurwitz agreed to toll.

80 R.V. 97 at 12165.

proceedings.81 Thus, FDIC was faced with the choice of going forward against

Hurwitz immediately or abandoning its claims against him—which, if OTS also

decided not to pursue charges, would mean that the loss caused by Hurwitz’s

mismanagement of USAT would go unredressed.

The staff then prepared another draft memorandum, this time recommending

against suing Hurwitz, principally because of a potential statute-of-limitations

defense to FDIC’s claims arising out of mismanagement of the MBS portfolio.82

At this point, the staff believed the better course was to avoid the risks of litigation

and defer to the ongoing OTS investigation.83 John Thomas, the head of FDIC’s

Professional Liability Section, briefed FDIC’s Chairman, Ricki Helfer, on the

case.84 Helfer believed that Hurwitz’s conduct was egregious and should not go

unredressed.85 Consequently, Helfer directed another review of the matter by

FDIC staff.86

The final Authority To Sue (“ATS”) Memorandum recommended suit. In

80 pages, the ATS Memorandum recounted evidence that indicated (a) a reckless

-20-

81 R.E. 5 at 29348-29347. 82 R.V. 97 at 12165, 12163 – nonbates page – ES0493. 83 R.V. 97 at 12164-12162. 84 R.V. 46 at 23879(a)-23878. 85 Id. at 23875(a), 23873, 23873(a); see also R.V. 32 at 27549-27548 (Kroener

deposition). 86 R.V. 46 at 23873(a); R.V. 32 at 27550-27548.

failure by USAT’s management, including Hurwitz, to close out the MBS

portfolios and their continued investment in those portfolios after they had shown

dramatic and escalating losses;87 (b) a cover-up of USAT’s financial status by

active gains trading, i.e., the taking of profits in the portfolios and holding

unrealized losses at cost;88 and (c) Hurwitz’s failure to take any steps as a de facto

fiduciary of USAT to cause UFG to abide by its written net worth maintenance

obligation or to make any request to MAXXAM and Federated to infuse capital

into USAT.89 The ATS Memorandum also discussed evidence of other

wrongdoing, including USAT’s unlawful payment of a $32.6 million dividend to

UFG and imprudent real estate lending, as to which it recommended against suit.90

The ATS Memorandum thoroughly discussed the problems that the statute of

limitations would pose for some of the MBS and real estate related claims, the

difficulties in overcoming the business judgment rule, and the complexities in

establishing a breach of fiduciary duty claim against Hurwitz.91

-21-

87 R.E. 6 at 24532, 24530, 24520, 24515, 24511-24498. 88 Id. at 24519-24513, 24506-24498. 89 R.E. 6 at 24530, 24498-24492. 90 Id. at 24522-24521, 24492-24478. 91 R.E. 6 at 24476-24471.

Since 1992, FDIC policy had required ATS memoranda to include

information about any expected media or congressional attention.92 Accordingly,

the ATS Memorandum contained three paragraphs noting that the lawsuit would

attract attention because of Hurwitz’s high visibility in corporate takeovers and his

control of Pacific Lumber Company, which was then enmeshed in controversy and

litigation regarding the harvesting of old-growth redwoods.93 The Memorandum

informed the Board that the Interior Department had told FDIC that Interior was

“negotiating with Hurwitz about the possibility of swapping various properties,

plus possibly the FDIC/OTS claim, for the redwood forest.”94

John Thomas presented the ATS Memorandum to FDIC’s Board of

Directors for approval on August 1, 1995, one day before the FIRREA statute of

limitations would expire.95 Thomas summarized the matters laid out in the ATS

memo, including the status of OTS’s investigation, the merits of the case, and the

statute of limitations issue.96 He also commented briefly upon the redwoods

-22-

92 R.V. 44 at 24440. 93 R.E. 6 at 24544-43, 24541. 94 Id. at 24544. 95 R.E. 5 at 29350, 29346. 96 Id. at 29354-29349, 29347-29346.

controversy, noting Interior Department interest in a possible global settlement of

all the government’s controversies with Hurwitz, including FDIC’s claims.97

The Board discussed at length the case’s strengths and weaknesses,98

including whether unfavorable caselaw relating to the statute of limitations

precedents on some claims might be modified.99 Board members expressed

concern about the difficulties of the case, the cost, and the possibility of a

duplicative OTS proceeding.100 During a discussion of the suit that lasted more

than an hour, the redwood forest was mentioned only in passing—briefly in

Thomas’s opening remarks and in his responses to two open-ended questions from

Board members.101

After the Board’s first vote resulted in a tie,102 one of the directors who had

voted “no” moved for reconsideration.103 The Board continued to discuss the

merits of the case and the options available to FDIC if OTS decided to proceed.104

The Chairman urged approving the suit, noting the $1.6 billion loss, the evidence

-23-

97 R.E. 5 at 29349. 98 Id. at 29348-29308. 99 R.E. 5 at 29311-09. 100 Id. at 29339-333. 101 R.E. 5 at 29350-29349, 29345, 29319. 102 Id. at 29330. 103 R.E. 5 at 29330-29329. 104 Id. at 29329-309.

of grossly negligent behavior by Hurwitz, and the opportunity to alter unfavorable

caselaw on the statute of limitations.105 On reconsideration, the Board authorized

suing Hurwitz.106

B. MERITS PROCEEDINGS

1. FDIC Files Suit And Seeks a Stay Pending Disposition Of The OTS Case

On August 2, 1995, FDIC filed a three-count complaint against Hurwitz.

The first count alleged that Hurwitz had breached his fiduciary duty as a de facto

officer or director or control person of USAT by failing to cause UFG, MAXXAM,

and Federated to maintain USAT’s net worth.107 The second and third counts

alleged breach of fiduciary duty and gross negligence by Hurwitz in mismanaging

USAT’s high-risk MBS investments.108

On October 24, 1995, Hurwitz moved to dismiss the complaint, urging that

(a) because he had not been a formal officer or director of USAT, he owed it no

fiduciary duties; (b) the business judgment rule protected his conduct; (c) FDIC

lacked standing to pursue a net worth maintenance claim; and (d) the statute of

-24-

105 Id. at 29311-309. 106 R.E. 5 at 29310-308. An audio recording of the meeting is available for this

Court’s review at 1st Supp. Record Exhibit Folder 439, Ex. 123A, CD #1-2. 107 R.V. 152 at 0014-0010, ¶¶ 19-29. 108 Id., at 0010-0002, ¶¶ 30-54.

limitations barred two of the counts.109 FDIC opposed the motion to dismiss.110

The District Court never ruled on the motion.

In November 1995, OTS decided to initiate proceedings against Hurwitz,

MAXXAM, Federated, and several other individuals.111 Having been advised that

OTS intended to bring its own case, FDIC moved to stay this matter “so that

duplicative concurrent litigation with respect to Mr. Hurwitz could be avoided.”112

Hurwitz opposed the motion to stay,113 and the Court denied it.114

OTS instituted administrative proceedings against Hurwitz and others on

December 26, 1995. The 13 charges asserted, inter alia, operating USAT in an

unsafe and unsound manner, failing to honor net worth maintenance obligations,

making false and misleading statements to regulators, and failure by Hurwitz to

“see that” MAXXAM and Federated complied with their net worth maintenance

obligations.115 FDIC then renewed its stay motion.116 Hurwitz again opposed a

-25-

109 R.V. 151 at 0371, 0391. 110 R.V. 147 at 1377-1148. 111 R.V. 147 at 1137. 112 R.V. 147 at 1131, 1137-1138; R.V. 40 at 25739. 113 R.V. 147 at 1147. 114 R.V. 146 at 1378. 115 R.V. 65 at 19202 – R.V. 66 at 19051. 116 R.V. 144 at 1907-1757.

stay, stating he wanted the District Court to make rulings that he could use to his

advantage in the OTS proceeding.117 The District Court again denied a stay.118

FDIC never sued MAXXAM or Federated. Both voluntarily intervened in

the District Court and explicitly conditioned their interventions on the involuntary

joinder of OTS, which the District Court ordered.119 The District Court

subsequently dismissed OTS from the case;120 nonetheless, MAXXAM and

Federated remained.121

In November 1996, following OTS’s involuntary joinder, the Court

permitted FDIC to file an amended complaint,122 which it did on January 15, 1997,

including only a claim that Hurwitz breached his fiduciary duty to USAT by failing

to cause MAXXAM and Federated to infuse the capital that USAT required.123

The amendment, which dropped the claims of mismanaging the MBS portfolio,

reflected FDIC’s willingness to defer to the OTS proceeding on MBS-related

-26-

117 R.V. 144 at 1927-1926, R.V. 120 at 6921-6920. 118 R.V. 141 at 2591. 119 R.V. 40 at 25660-25659, R.V. 141 at 2597, 2604-2598, R.V. 140 at 2644,

2646. 120 R.V. 120 at 6970. 121 R.V. 120 at 6969-6965. 122 R.V. 141 at 2597. 123 R.V. 140 at 2657-2647.

claims.124 Hurwitz answered the amended complaint125 and then, on September

30, 1997, filed a motion that (a) sought sanctions from FDIC and (b) briefly urged

dismissal on the ground that the claim asserted in the amended complaint was

unripe.126 The motion to dismiss remained pending for five years, when the

District Court denied it as moot following the parties’ stipulation of dismissal.127

2. The OTS Proceedings And Settlements

Meanwhile, on June 17, 1997, the respondents in the OTS proceeding

moved for summary disposition of many of OTS’s claims, including the claim that

Hurwitz breached his fiduciary duty to USAT by failing to cause MAXXAM and

Federated to infuse capital into USAT.128 The OTS ALJ denied those motions,

concluding that the claims could “be fairly and responsibly resolved only upon a

full evidentiary record of factual and expert testimony.”129

The OTS claims were tried between September 1997 and March 1999.130

Just before the trial’s conclusion, five individual respondents settled with OTS,

agreeing to pay $1.03 million in restitution to the receivership estate and to accept

-27-

124 Id. 125 R.V. 134 at 4131-4107. 126 R.V. 126 at 5840-5833, 5852-5851, 5846-5845. 127 R.V. 57 at 21366. 128 R.V. 42 at 24937-24931; R.V. 65 at 19165-R.V. 66 at 19153-19152. 129 R.E. 10 at 24937-24931. 130 R.V. 14 at 31493, ¶3.

significant restrictions on their participation in the banking industry.131 Those

respondents also released OTS and FDIC from any claim for fees.132 That

settlement did not resolve OTS’s claims against Hurwitz or his entities.

On September 12, 2001, the OTS ALJ issued a sharply worded

Recommended Decision to the Director of OTS. The ALJ recommended that all

remaining claims be denied on the merits.133 OTS submitted 211 pages of

exceptions to the Recommended Decision.134 On October 18, 2002, before the

OTS Director ruled on the exceptions, Hurwitz, MAXXAM, and Federated settled

with OTS.135 They agreed to pay $206,000 and agreed that for three years none

would serve as a controlling shareholder of an insured financial institution.136

Hurwitz also agreed that for the same period he would not participate in investment

decisions if he served as a director, officer, or employee of a financial

institution.137

This brought FDIC’s total recovery from net worth maintenance and

professional liability claims related to USAT to nearly $19 million: roughly $10

-28-

131 R.V. 14 at 31492, ¶6; R.V. 42 at 24916-24857, R.V. 43 at 24855-24844. 132 Id. 133 R.V. 14 at 31492, ¶7; R.V. 32 at 27490-R.V. 34 at 27233. 134 R.V. 14 at 31492, ¶7; 2nd Supp. Rec. Vol. 1 at Exh. 359. 135 R.V. 43 at 24850-24844. 136 Id. at 24848. 137 Id. at 24849.

million from UFG for net worth maintenance claims; $7.5 million from auditors;

and $1.2 million from the individual respondents to the OTS proceeding.138

Hurwitz, MAXXAM, and Federated released OTS from any costs or fees arising

out of the OTS proceeding.139

On November 12, 2002, in light of the OTS resolution, FDIC and Hurwitz

stipulated to dismissal of FDIC’s complaint in this case with prejudice.140

C. SANCTIONS PROCEEDINGS

From 1997 through 2005, the District Court proceedings were devoted

almost exclusively to Hurwitz’s multiple sanctions motions, in which he charged

that FDIC’s suit was frivolous and had in fact been brought to force him to

surrender a redwood forest to the government.141

Throughout the 1990’s, Hurwitz was enmeshed in a bitter environmental

controversy over a stand of ancient California redwoods, known as the Headwaters

Forest, that he controlled and threatened to log for timber.142 The Headwaters

-29-

138 R.V. 47 at 23510-23490; R.V. 29 at 28078. 139 R.V. 14 at 31492 at ¶8; R.V. 42-43 at 24863-24852; R.V. 43 at 24850-

24844. 140 R.V. 57 at 21119-21118. 141 R.V. 126-13, R.V. 120 at 6978-6974, 7018-6979, R.V. 103-104 at 1087-

10684, R.V. 102 at 11100-10896, R.V. 101 at 11122-11109, R.V. 99 at 11505-11555, R.V. 95-98, R.V. 93 at 13097-12957, R.V. 81 at 15546-15494, R.V. 78 at 16225-15692, R.V. 73 at 17154-17153, R.V. 51 at 22795-22593, and R.V. 50 at 23131-22796.

142 R.V. 38 at 26295-26294.

Forest was owned by Pacific Lumber Company, which in turn was owned by

MAXXAM.143 Public pressure and litigation by environmentalists had hindered

Pacific Lumber’s ability to log the forest.144

Environmentalists and California officials pressed the Clinton

Administration to place the Headwaters Forest under government protection,

perhaps by purchasing the forest or exchanging it for other property.145 Hurwitz,

who was prevented by litigation from fully using the forest for timber

operations,146 was amenable to a global resolution of the redwoods issue.147 On

several occasions he proposed a “swap” of the redwoods for settlement of FDIC’s

and OTS’s claims.148 Negotiations with the government over the redwoods

continued until the government purchased the Headwaters Forest in March 1999

for $480 million as part of an agreement that did not include FDIC’s claims.

Even though Hurwitz had urged the government to enter into a settlement

encompassing FDIC’s claims, he moved for sanctions in this case on the asserted

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143 Id. at 26295, R.V. 25 at 29071. 144 R.V. 25 at 29072-29071; R.V. 38 at 26292. 145 See, e.g., R.V. 46 at 24012a-24011(a), 24008. 146 R.V. 38 at 26292. 147 R.V. 39 at 25946-25942. 148 R.V. 43 at 24735-24734, R.V. 40 at 25636-25635. See R.V. 38 at 26372-

26371, 26369-26368, 26345-26343; R.V. 46 at 23945-23945(a), 23939(a)-23938, R.V. 46 at 23981-23981(a), 23968(a)-23967, 23966-23966(a); R.V. 45 at 24238, R.V. 25 at 29074.

ground that FDIC brought suit to coerce him into ceding the Headwaters Forest to

the government.149 FDIC opposed Hurwitz’ continuing sanctions motions on the

ground that it had filed suit based on the merits of the claims against him and not

for the purpose of extorting trees.150

Throughout the sanctions phase of this case, the District Court freely granted

Hurwitz discovery of FDIC’s privileged documents and information over FDIC’s

objections. For example, the court compelled production of the ATS

Memorandum—and although this Court twice, on mandamus writs, reversed the

District Court’s orders on that point,151 somehow the ATS Memorandum was

released and published in the Houston Chronicle.152 The Court also granted

Hurwitz access to a portion of the transcript of the Board deliberations on FDIC’s

prospective claims, and allowed depositions of a former FDIC Chairman, General

Counsel, Deputy General Counsel, and the former head of its Professional Liability

Section.153 Hurwitz was allowed to depose FDIC Board Members, a former

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149 R.V. 126 at 5889, R.V. 120 at 7018-6979, R.V. 102 at 11100-10896, R.V.

99 at 11605-11555, R.V. 95, R.V. 93 at 13097-12957, R.V. 81 at 155546-15494, R.V. 78 at 16225-15692, R.V. 73 at 17262-17155, R.V. 51 at 22795-22593, R.V. 50 at 23131-22796.

150 R.V. 120 at 6964-6932, 7055-7050; R.V. 99 at 11618-11606, R.V. 53-56 at 22237-21411, R.V. 52 at 22426-22293, R.V. 48 at 23489-23299.

151 R.V. 110 at 9301-9300, R.V. 107 at 9966. 152 See, e.g., R.V. 32 at 27557-27556, R.V. 45 at 24331a-24330(a). 153 R.V. 81 at 15492, R.V. 73 at 17130, 17147.

Special Assistant to the Secretary for the Interior, and the former Chair of the

Council on Environmental Quality.154

In June 2004, the District Court held a hearing on Hurwitz’s sanctions

motions.155 The hearing consisted of two days of argument and an examination of

only one witness, FDIC Deputy General Counsel Jack Smith, who never suggested

in any way that FDIC’s purpose for bringing suit was acquiring the redwoods.156

At the hearing, the District Court lifted the confidentiality seal that it had placed on

various documents as to which FDIC claimed privilege.157 The District Court also

reviewed documents for which FDIC claimed privilege in front of the press and

counsel for Hurwitz, MAXXAM, and Federated.158 The District Court ordered

most of those documents produced over FDIC’s objection and ultimately released

them into the record.159

Fourteen months later, the District Court issued a sanctions opinion ordering

FDIC to pay $72,255,147.51, including $37,011,181.27 in interest at 11%.160 The

court ordered the sanctions paid to MAXXAM on the ground that it had paid

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154 R.V. 37 at 26557-26556. 155 1st Supp. Rec. at Vols. 7 - 8. 156 R.V. 7 at 33066, 1st Supp. Rec., Vol. 8 at 213-276. 157 R.V. 6 at 33235, 1st Supp. Rec., Vol. 8 at 285. 158 1st Supp. Rec., Vol. 7 at 127-151. 159 1st Supp. Rec., Vol. 7 at 124-151, R.V. 5 at 33427-33236. 160 R.E. 4.

Hurwitz’s attorney fees and expenses as well as those of the respondents in the

OTS proceeding.161 The sanctions award includes $58,113,080.35 for fees,

expenses, and interest incurred in proceedings other than those pending before the

District Court, including the OTS proceedings, FOIA litigation, and an OTS

subpoena enforcement proceeding.162 The Court apparently also awarded fees for

Hurwitz’s expenses incurred during the two mandamus proceedings in which

FDIC secured reversal of the District Court’s discovery orders.163 The District

Court also offered this Court a reversal option, namely, an alternative sanctions

figure of $15,334,905.98 should this Court find that MAXXAM was not entitled to

recover fees and expenses incurred in the OTS proceeding.164

The Court concluded that FDIC’s “only reason” for suing Hurwitz was to

coerce Hurwitz into surrendering the Headwaters Forest.165 In particular, the Court

found that FDIC’s top officials and staff had corruptly conspired with other

government agencies to extort the redwoods.166 The Court also found that all of

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161 R.E. 4 at 34008, 33996-994. 162 Id. at 33996. 163 Id. 164 R.E. 4 at 33995-994. 165 R.E. 4 at 34015. 166 R.E. 4 at 34063 (“The purpose of the suit was exactly what Helfer publicly

disclaimed: to bring the forces of the national government to bear on a citizen in order to achieve a result that the agency had no authority to accomplish: extorting the redwoods.”).

FDIC’s relevant witnesses had lied about the agency’s reason for suing Hurwitz.167

The final sentence of the District Court’s opinion encapsulates its attitude towards

the FDIC’s effort to secure recompense to the taxpayer for Hurwitz’s

mismanagement of USAT: “the agency became more of a cosa nostra than res

publica.”168

SUMMARY OF ARGUMENT

The District Court’s sanctions order cannot stand under Rule 11 or any other

source of authority. FDIC filed suit against Hurwitz only after undertaking an

extensive investigation into the collapse of USAT, in which it obtained substantial

evidence that Hurwitz bore responsibility for the massive financial injury to

taxpayers caused by that thrift failure. While FDIC was aware that its lawsuit

against Hurwitz faced substantial legal obstacles, the Board reasonably concluded,

in light of the enormity of the loss and the considerable evidence of gross

mismanagement, that an attempt at surmounting those obstacles was justified. The

District Court’s conclusion that the lawsuit resulted, instead, from FDIC’s

participation in a grand conspiracy to coerce Hurwitz into surrendering a redwood

forest to the government was an abuse of discretion. A complaint that is

167 R.E. 4 at 34025, 34022, 34011, 33992. 168 R.E. 4 at 33992; see also R.V. 120 at 6965 (Oct. 23, 1997 opinion on the

dismissal of OTS, stating that “Hired governments and systematic falsehood are the tools of cosa nostra not res publica.”).

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reasonably grounded in fact and law cannot be sanctioned under Rule 11 as a

matter of law. And there is no basis in fact for the conclusion that the complaint

was the product of a corrupt conspiracy.

The sanctions order suffers from multiple other flaws. The award

improperly includes massive amounts attributable to proceedings not before the

District Court. Much of the opinion reflects the District Court’s (misplaced)

displeasure at matters completely irrelevant to whether this lawsuit was reasonably

grounded in fact and law—e.g., whether FDIC properly reimbursed OTS for

OTS’s administrative proceedings; whether a member of the FDIC Board was

properly appointed; and whether FDIC had been sanctioned in other cases. The

order also fails to satisfy basic requirements for sanctions awards that this Court

has imposed: an explanation of how the award is connected to the conduct being

sanctioned; evidentiary support for the fees and costs claimed; and reasonableness

of the fees and costs.

There is also no basis in the record to justify the sanctions under any other

authority, such as Rule 37, 28 U.S.C. § 1927, or the District Court’s inherent

power. Finally, more than half of the award is for interest, from which FDIC is

immune. Accordingly, the order should be reversed, and judgment rendered

dismissing Hurwitz’s sanctions motion.

-35-

STANDARD OF REVIEW

Sanctions orders are reviewed for abuse of discretion. Legal error or a

clearly erroneous assessment of the evidence constitutes an abuse of discretion. 169

ARGUMENT

I. THERE IS NO BASIS FOR RULE 11 SANCTIONS AGAINST FDIC

As this Court has repeatedly emphasized, Rule 11 is not intended to sanction

parties and attorneys merely because their claims ultimately prove unsuccessful.

“[T]he court is expected to avoid using the wisdom of hindsight and should test the

signer’s conduct by inquiring what was reasonable to believe at the time the

pleading, motion, or other paper was submitted.”170 Thus, a pleading will not give

rise to Rule 11 sanctions unless the claims or defenses raised had “no basis in law”

and were “utterly without merit.”171 It is an abuse of discretion to sanction a

plaintiff who made a “good faith argument.”172 This Court has repeatedly reversed

169 Cooter & Gell v. Hartmax Corp., 496 U.S. 384, 405 (1990); Thomas v.

Capital Sec. Servs., Inc., 836 F.2d 866, 872 (5th Cir. 1988) (en banc). 170 Thomas, 836 F.2d at 875 (quoting FRCP 11 advisory committee note

(1983)). 171 United States v. Alexander, 981 F.2d 250, 253 (5th Cir. 1993); O’Brien v.

Alexander, 101 F.3d 1479, 1489 (2d Cir. 1996). 172 Murray v. City of Austin, 947 F.2d 147, 153 (5th Cir. 1991); Matta v. May,

118 F.3d 410, 415 (5th Cir. 1997). -36-

sanctions awards when a legal position was “plausible” or “arguable,” although

ultimately unsuccessful.173

FDIC’s suit against Hurwitz easily surpassed these standards. Indeed, if

FDIC’s claims had been frivolous, they should have been readily dismissed. In

fact, the claims remained pending for more than seven years, when they were

dismissed by stipulation. This sort of “Monday morning quarterbacking” is an

abuse of discretion.174

A. FDIC Investigated Extensively Before Filing Its Claims

Rule 11 requires “a reasonable inquiry into the facts which support the

document.”175 FDIC’s investigation into the facts was more than reasonable; it

was extensive. FDIC, with the assistance of three outside law firms, spent years

reviewing documents and interviewing numerous individuals about the collapse of

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173 See, e.g., FDIC v. Calhoun, 34 F.3d 1291, 1298-1299 (5th Cir. 1994); CJC

Holdings, Inc. v. Wright & Lato, Inc., 989 F.2d 791, 794 (5th Cir. 1993); Alexander, 981 F.2d at 253; City of El Paso v. City of Socorro, 917 F.2d 7, 9 (5th Cir. 1990).

174 Calhoun, 34 F.3d at 1300; see also Thomas, 836 F.2d at 881 (“Parties should not be allowed to ‘run up’ exorbitant fees and expenses when responding to papers filed in violation of Rule 11; nor should litigants or courts remain idle in the face of possible violations.”).

175 Thomas, 836 F.2d at 874.

USAT.176 That inquiry was far more extensive than those this Court has found

sufficient in other cases.177

The District Court’s opinion, though lengthy, largely ignored this extensive

pre-filing investigation by FDIC. What little the District Court said about the

investigation contained clear errors. For example, the Court stated that one law

firm’s investigation found “no viable claims” to be made.178 In fact, the law firm’s

report found “evidence of acts and omissions which could form the basis of

negligence [and] breach of fiduciary duty . . . claims.”179

The District Court ignored the opinions of three eminent legal ethics experts

who concluded that FDIC’s pre-filing investigation surpassed Rule 11 and all other

professional standards.180 Nor did the Court explain why the evidence summarized

in FDIC’s initial Rule 26 disclosures and extensive supplemental disclosures,

provided at the Court’s request, did not set forth an adequate factual basis for

FDIC’s claims.181 All of this evidence shows that FDIC filed suit only after

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176 See supra pp. 9-10. 177 See, e.g., Smith v. Our Lady of the Lake Hospital, Inc., 960 F.2d 439, 446,

447 (5th Cir. 1992) (200-hour investigation “sufficient for the attorneys to draw a reasonable inference that some wrongdoing was afoot”).

178 R.E. 4 at 34116, 34103-02. 179 R.E. 7 at 25975, 25954-53. 180 R.E. 9 (reports of Burns, Hazard and Schuwerk). 181 See R.V. 39-40 at 25888-25787, R.V. 41-42 at 25489-24950.

carefully sifting through the enormous investigative record and concluding that it

had a reasonable basis to go forward against Hurwitz.

B. FDIC’s Claims Had Reasonable Bases in Fact and Law

The Board decided that instituting suit was warranted in light of the massive

injury caused by USAT’s collapse and by the evidence, uncovered in the pre-filing

investigation, that Hurwitz was in large part responsible.182 USAT’s failure cost

the deposit insurance fund, and thus taxpayers, $1.6 billion.183 FDIC had an

obligation to seek to recoup as much of that resulting loss as possible.184

FDIC’s decision to file suit had a reasonable basis in fact and law. FDIC’s

investigation disclosed evidentiary support for the assertions that (a) Hurwitz

effectively controlled USAT to such a degree that he was properly considered a de

facto officer or director; (b) under Hurwitz’s de facto direction, USAT grossly

mismanaged its investment portfolio; and (c) despite having a duty to protect

USAT’s interest and being in a position of influence with the other companies,

Hurwitz did nothing to cause UFG, MAXXAM, or Federated to comply with what

FDIC asserted were their obligations to maintain USAT’s net worth.185

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182 R.E. 5 at 29314, 29311-29308. 183 R.E. 4 at 34103. 184 12 U.S.C. § 1823(d)(3)(D); see R.V. 46 at 23838-23838a, 23830(a) (Helfer

deposition). 185 See record cites, notes 28-66, supra.

Nor was FDIC alone in finding a reasonable basis to proceed against

Hurwitz. After an extensive independent investigation, OTS also brought a

proceeding against Hurwitz based on many of the same facts.186 While the OTS

ALJ ultimately rejected the claims, he did so only after denying motions for

summary adjudication, which amply demonstrates the nonfrivolous nature of the

claims.187 Moreover, after OTS filed exceptions to the ALJ’s decision, Hurwitz

settled the case by agreeing not to serve as a controlling shareholder of a financial

institution for three years, not to participate in investment decisions if he served as

a director, officer, or employee of a financial institution over the same period, and

not to seek costs or fees from OTS.188

Notwithstanding this support for FDIC’s claims, the District Court found

them wanting in three respects. On each point, however, FDIC’s position was

clearly reasonable.

1. Hurwitz’s Effective Control Of USAT

Each count in FDIC’s complaint rested on the premise that, although

Hurwitz avoided a formal position at USAT, he was in fact USAT’s controlling

force and had effectively assumed senior officer and director responsibilities.189

-40-

186 R.V. 65-66 at 19202-19051. 187 R.E. 10 at 24937-24931. 188 R.V. 43 at 24849-24848, 24845-24844. 189 R.V. 152 at 22, 18; see also R.V. 140 at 2657-2647 (amended complaint).

Thus, FDIC contended that Hurwitz was a de facto director and officer of USAT

and, as such, owed the same fiduciary duties to USAT as a formally denominated

official and would be liable on the same basis if he breached those duties. FDIC’s

pre-filing investigation revealed strong evidence that Hurwitz effectively ran

USAT. Numerous USAT officers, directors, and employees confirmed that

Hurwitz formulated key investment and lending policies for USAT and was

considered part of the bank’s senior management.190

FDIC’s claim was amply grounded in existing law. Under Texas banking

law, an officer or director is someone holding that title “or an individual acting in a

comparable capacity.”191 Texas savings and loan statutes also permit regulatory

intervention for operating an association in an unsafe and unsound manner against

directors, officers, and agents “or other persons participating in the conduct of the

affairs of the association.”192 Similarly, federal regulations applicable to USAT

imposed fiduciary duties on anyone performing functions similar to those of a

director or officer.193 These statutes and regulations reflect the sensible policy that

-41-

190 R.V. 47 at 23681, 23678-23677; R.E. 7 at 25975-974, 25987-25986; R.V. 39

at 25875-25868; R.V. 148 at 1120-1119, ¶¶ 2-6 and R.V 148-150 at 1113-548 (attached meeting minutes); R.V. 40 at 25747-25746 at ¶¶2-6; R.V. 41 at 25488, 25479-25248.

191 Tex. Civ. Stat. Art. 342-102 (1994). 192 Tex. Civ. Stat. Art. 852a § 8.04. 193 See 12 C.F.R. §§ 561.31-32 (1987) (defining officers and directors to

include not only those holding those titles but also “other person[s]

an individual should not be able to shield himself from accountability simply by

shunning a formal title.

The principle that someone exercising effective control over an institution

may be held liable for breach of fiduciary duty, even if that person has avoided the

formal title of officer or director, is also firmly rooted in the common law.194

Many courts have held that when a shareholder exercises actual control and

direction over corporate management, a fiduciary duty will be imposed.195

Applying Delaware law, this Court has recognized the same principle.196

The District Court found FDIC’s premise frivolous solely on the ground that

“the de facto officer doctrine” applies only “to third parties who dealt with the

thrift and were unaware of an official’s true role there.”197 But the doctrine

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performing similar functions”); id. § 571.9 (“Directors and officers of an institution, and other persons having the power to direct the management of the institution, stand in a fiduciary relationship to the institution and its accountholders or shareholders”); see also O'Melveny & Myers v. FDIC, 512 U.S. 79, 86-87 (1994) (federal law governs matters that are the subject of explicit federal statute or regulation).

194 See, e.g., In re Flutie New York Corp., 310 B.R. 31, 57 (S.D.N.Y. 2004); Garner v. Pierson, 545 F. Supp. 549, 557 (M.D. Fla. 1983), aff’d, 732 F.2d 850 (11th Cir. 1984); Demoulas v. Demoulas Super Markets, Inc., Civ. A. No. 90-2827(B), 1995 WL 476772, at *80 (Mass. Dist. Ct. Aug. 2, 1995).

195 See, e.g., Banco De Desarrollo Agropecuario, S.A. v. Gibbs, 709 F. Supp. 1302, 1306 (S.D.N.Y. 1989); Fry v. Trump, 681 F. Supp. 252, 256 (D.N.J. 1988); Garner, 545 F. Supp. at 557.

196 Lewis v. Knutson, 699 F.2d 230, 235 (5th Cir. 1983). 197 R.E. 4 at 34069.

described by the District Court was not the one relied upon by FDIC. FDIC’s

claims had nothing to do with the agency law doctrine of apparent authority that

the District Court addressed. Rather, they rested on the well-settled principle that

someone who avoids the formal position of officer or director, but who in fact

directs and controls a corporation, owes fiduciary duties to the corporation. Given

Hurwitz’s degree of domination of USAT, FDIC was on solid ground in alleging

that Hurwitz had assumed such fiduciary duties.

2. Mortgage-Backed Securities Claims

The District Court found FDIC’s MBS claims frivolous on three grounds:

the MBS investments were routine, and indeed likely to be profitable; Hurwitz did

not personally direct the investment decisions; and a two-year statute of limitations

barred the claims.198 The District Court’s criticisms were not well taken, and in

any event, hardly demonstrate that FDIC’s claims were frivolous.

First, FDIC’s pre-filing investigation reported that USAT’s managers lacked

the necessary knowledge and expertise to manage the MBS portfolio, used it to

hide losses, and kept pouring money into it well after regulators had cautioned

them about the dangers involved.199 Moreover, Professor Darrell Duffie of

Stanford University’s Graduate School of Business, whom OTS subsequently hired

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198 Id. at 34066-64. 199 R.V. 42 at 24958-57; R.V. 24 at 29158-51; R.V. 121 at 6673-66; R.V. 42 at

25108-25021, 25019-24950; R.V. 41 at 25246-25220; notes 42-49, supra.

to review USAT’s portfolio, concluded that USAT’s management so little

understood MBS financial instruments that “[i]n essence, the MBS investments

made by USAT amounted to little more than a wager, that resulted in significant

losses.”200 Internal UFG memoranda lamented the “almost black box lack of

understanding” about these kinds of investments.201 Indeed, USAT’s MBS

investments were so recklessly and incompetently handled that the portfolio would

lose money whether interest rates rose or fell.202 Yet, rather than liquidate the

portfolio, USAT management intensified efforts to earn short-term returns in high-

risk transactions.203

Second, the District Court’s conclusion that Hurwitz had nothing to do with

the portfolio was contradicted by testimony of a USAT outside director showing it

was Hurwitz who “took a very active role in running the institution” and “call[ed]

the shots.”204 Further, he approved major investments for USAT and was an active

member of the Strategic Planning Committee.205 USAT’s Executive Vice

President of investments reported his trading activity to Hurwitz.206 Hurwitz

-44-

200 R.V. 121 at 6751. 201 R.V. 42 at 25046. 202 R.V. 24 at 29162-29160; R.V. 121 at 6736, ¶77. 203 R.V. 121 at 6737-6730; R.V. 24 at 29162-29160; R.V. 46 at 24035a-24034. 204 R.V. 47 at 23678-23677. 205 See supra nn. 36-39. 206 See supra n. 38.

regularly attended and participated in USAT or joint USAT/UFG Board

meetings.207 Even if that evidence did not persuade the District Court, it was

certainly solid enough to form the basis of a claim against Hurwitz.

Finally, regarding the statute of limitations, the District Court correctly

noted that this Court’s then-recent Acton decision had interpreted Texas law as

requiring proof of pre-receivership fraud or self-dealing to toll Texas’s two-year

statute of limitations on such claims.208 FDIC was well aware of Acton; the staff

and the Board discussed it at length and identified several plausible reasons why

Acton did not preclude FDIC from bringing its claims.209

First, while most of the MBS portfolio expansion occurred in 1985 and

1986, USAT continued to pour money into one of the two improperly managed

funds during 1987 and 1988—years for which the statute of limitations had not run

under any theory.210 Moreover, the failure to wind down the portfolios as losses

mounted dramatically in 1987 to 1988 was also reasonably characterized as a new

and continuing violation for which USAT’s fiduciaries could be held liable.211

Indeed, it was during those years that the extreme riskiness of the MBS portfolio

-45-

207 See supra n. 37. 208 R.E. 4 at 34065; RTC v. Acton, 49 F.3d 1086 (5th Cir. 1995). 209 R.E. 5 at 29348-29308. 210 Id. at 29353; see R.V. 32 at 27546 (Kroener deposition). 211 R.E. 5 at 29342, 29311; R.V. 32 at 27547-27546.

should have been most apparent.212 FDIC thus had a substantial argument that its

MBS claims based on Hurwitz’s grossly negligent acts and omissions were not

subject to the two-year statute of limitations.213

Second, FDIC also had substantial grounds for concluding that Acton might

be limited or modified.214 That decision itself acknowledged that it was not

supported by clear state-court precedents and was in conflict with decisions of

other federal courts.215 This Court might have distinguished Acton from this case,

where there were continuing violations through failure to reduce losses. This

Court might also have reconsidered Acton en banc or certified pertinent questions

to the Texas Supreme Court.216 Indeed, when the head of the Professional

Liability Section presented the case to the Board, he noted that the Resolution

Trust Corporation had recently gained a favorable ruling on the issue from

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212 R.V. 39 at 25861-25860, 25854; R.V. 41 at 25247-25220; R.V. 46 at 24035-

24035(a), 24034. 213 Under Texas law, omissions as well as acts may constitute gross negligence.

See Transp. Ins. Co. v. Moriel, 879 S.W.2d 10, 23 (Tex. 1994). Both the FDIC Chairman and General Counsel were of the view that a continuing violation theory, based on failure to reduce the size of MBS portfolio once its disastrous effects were clear, was plausible. See R.E. 5 at 29334, 29311-29310; R.V. 32 at 27547-27546.

214 R.E. 5 at 29311-29309. 215 Id. at 29310-29309; see Acton, 49 F.3d at 1090-1091. 216 Id.

Maryland’s highest court.217 Thus, while the FDIC Board was aware of the

obstacle posed by Acton, it reasonably concluded that that problem was not

insuperable.218

3. Net Worth Maintenance Claim

FDIC alleged that Hurwitz breached his fiduciary duty to USAT when he

did nothing to cause UFG, MAXXAM, or Federated—all of which, FDIC

reasonably believed, had controlling positions in USAT—to infuse capital into

USAT as the thrift was failing to meet regulatory net worth requirements.219 The

District Court first disparaged this claim on the ground that net worth maintenance

obligations may only be enforced by OTS.220 That criticism was misdirected.

Although OTS alone may enforce regulatory obligations against obligors such as

UFG, MAXXAM, and Federated, FDIC’s claim was not directed against those

companies. Rather, FDIC’s claim was for breach of fiduciary duty by Hurwitz as a

de facto officer and director of USAT for not taking reasonable steps to cause or

encourage UFG, MAXXAM, or Federated to infuse capital into USAT.

-47-

217 R.E. 5 at 29309. 218 Id. at 29311-29308. 219 R.V. 152 at 14-10. 220 R.E. 4 at 34068.

As even the District Court acknowledged,221 UFG clearly had an obligation

to maintain the net worth of USAT. In October 1983, UFG filed a stipulation with

the FHLBB acknowledging its obligation as USAT’s parent, and thus as a savings

and loan holding company, to infuse sufficient capital to ensure that USAT met its

capital requirements.222 FDIC had sufficient basis to allege that Hurwitz was

effectively in control of UFG during relevant periods and was therefore in a

position to cause or at least call upon UFG to meet that obligation. Hurwitz

resigned from the UFG Board on February 11, 1988, but FDIC possessed

considerable evidence that he remained in effective control of the company

thereafter.223

The District Court emphasized that in earlier years Hurwitz twice voted as a

Board member of UFG to authorize infusions of capital to USAT if they became

necessary.224 That hardly rendered FDIC’s claim frivolous. Those authorizations

were empty gestures; the votes never led to any actual infusions.225 More

-48-

221 Id. at 34066. 222 R.V. 20 at 30199. 223 R.V. 41 at 25292-248; R.V. 40 at 25699-25698; R.V. 121 at 6773-6772. 224 R.E. 4 at 34066. 225 R.V. 66 at 19160-59; R.E. 7 at 25989. The District Court also suggested in

passing that UFG lacked the resources to contribute anything to USAT at that point. R.E. 4 at 34066. But after UFG went into bankruptcy, FDIC recovered nearly $9.5 million from it on its net worth maintenance obligation. See R.V. 47 at 23505.

important, they came before USAT’s greatest financial crisis, in 1988,226 when

FHLBB requested the UFG Board to make infusions. In response to those

requests, Hurwitz did nothing to encourage UFG to satisfy its net worth

maintenance obligations notwithstanding his continued de facto control of that

company.227 It was those later delinquencies that formed the basis for FDIC’s

fiduciary duty claim against Hurwitz.228

The District Court also concluded that FDIC had no claim against Hurwitz

based on his failure to encourage MAXXAM and Federated to remedy USAT’s net

worth deficiency. The District Court took the view that neither company owed an

obligation to maintain the net worth of USAT because, unlike UFG, they had not

signed net worth maintenance stipulations.229

FDIC had a good-faith basis to argue that (a) MAXXAM and Federated had

assumed an obligation to maintain USAT’s capital and (b) Hurwitz was in a

position to protect USAT’s net worth by calling upon both entities to meet that

obligation. Like OTS,230 the agency with responsibility for administering the

pertinent statute and regulations, FDIC reasonably took the position that no written

-49-

226 R.V. 19 at 30278, 30275; R.E. 7 at 25989. 227 R.E. 7 at 25989. 228 R.V. 152 at 12-10. 229 R.E. 4 at 34068-067. 230 See 2nd Supp. Rec. Vol. 1, Exh. 359 at 8-55.

agreement was necessary to establish MAXXAM’s and Federated’s obligations.

By statute and regulation, any company that directly or indirectly acquired control

of 25% or more of the shares of a savings and loan became a savings and loan

holding company required to register with FHLBB as such.231 When MAXXAM

and Federated sought to acquire more than 25% of the shares of UFG in 1984, they

applied to FHLBB, and FHLBB had approved their application to be savings and

loan holding companies conditional on their guaranteeing a portion of USAT’s net

worth.232 FHLBB sometimes required stipulations for capital maintenance (like

that signed by UFG) and sometimes imposed the obligation directly.233 The

condition that FHLBB imposed on MAXXAM and Federated was of the latter

sort.234

In an apparent attempt to avoid assuming a net worth maintenance obligation

for USAT, MAXXAM entered into a put-call arrangement with Drexel instead of

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231 12 U.S.C. § 1730a(a) (1988); 12 C.F.R. §§ 574, esp. §§ 574.3-573.4;

583.26(a) (1987). 232 See R.V. 33 at 27374 (¶ 96). 233 Compare id. at 27376 (¶ 91: stipulation requirement) with id. (¶ 92: direct

condition) and id. at 27374 (¶ 96: direct condition). Courts, including this one, have long recognized FHLBB’s (and OTS’s) statutory authority to impose conditions on approval of savings and loan holding company acquisitions. See, e.g., Kaneb Services, Inc. v. FSLIC, 650 F.2d 78, 82-83 (5th Cir. 1981); RTC v. Firstcorp., Inc., 973 F.2d 243, 249-50 (4th Cir. 1992).

234 R.V. 33 at 27374, ¶96.

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directly acquiring a 35% position in UFG.235 FDIC had a good-faith basis to

contend that this arrangement made Drexel a mere nominee for MAXXAM and

Federated.236 It was reasonable for FDIC to contend that MAXXAM and, by

extension, Federated were truly in control of more than 25% of UFG’s shares and,

as such, were subject to the net worth maintenance obligation imposed on savings

and loan holding companies.237

Although the District Court also questioned whether MAXXAM’s

arrangement with Drexel actually gave the companies control of more than 25% of

UFG’s shares,238 FDIC’s theory was certainly plausible. The OTS endorsed the

same theory, which survived a motion for summary disposition before the ALJ.239

As OTS argued, because the stock option arrangement with Drexel gave

MAXXAM and, by extension, Federated, and no one else, access to vote over 25%

of the UFG shares upon demand, there was a clear argument that they had legal

control over the bank.240 And even if Drexel were considered to own the shares,

they could be attributed to MAXXAM and, by extension, Federated for purposes

of the net worth obligation because the companies had acted in concert with Drexel

235 R.V. 41 at 25195 - R.V. 42 at 25175. 236 R.V. 152 at 0014-0013. 237 R.V. 152 at 0014-0010. 238 R.E. 4 at 34067. 239 R.E. 10 at 24937-24931. 240 2nd Supp. Rec. Vol. 1, Exh. 359 at 2-3, 29-43.

in making their purchases.241 The District Court offered no basis for concluding

that the issue was so clearly settled against FDIC that any claim based on that

theory warranted sanctions.

The District Court also declared FDIC’s claim “confused” because

encouraging MAXXAM to infuse capital into USAT would have violated

Hurwitz’s duty to MAXXAM.242 But FDIC’s position could not have been

clearer: as USAT’s fiduciary Hurwitz had to protect USAT’s interests even if

contrary to his duties to MAXXAM. Hurwitz’s self-created dilemma perfectly

articulated the essence of FDIC’s claim—Hurwitz breached his fiduciary duty to

USAT by dividing his loyalties.243

* * * * *

None of the above is intended to suggest that FDIC failed to appreciate,

when it filed suit against Hurwitz, that its theories of liability faced significant

obstacles. Nonetheless, the Board responsibly concluded that the enormous losses

and evidence of Hurwitz’s involvement warranted accepting those challenges. The

Board understood that the decision to institute suit was a difficult and weighty one,

-52-

241 Id. at 8-28. 242 R.E. 4 at 34067. 243 See, e.g., Villa, Bank Directors, Officers and Lawyers Civil Liabilities

§ 1.02[D][2](financial institution officers and directors must place interests of institution ahead of other personal or corporate interests, citing numerous authorities); cf. Interfirst Bank Dallas v. Risser, 739 S.W.2d 882, 899 (Tex. Ct. App. 1987).

especially in light of the imminent expiration of the statute of limitations, and it

carefully balanced the pertinent considerations and ultimately decided to go

forward with the litigation.244 Its decision to do so was not, as the District Court

believed, an irresponsible and malicious act. It was, quite to the contrary, a

reasonable decision made in good faith under difficult circumstances. As such, it

provides no basis for sanctions under Rule 11.

C. The Environmental Controversy Surrounding Hurwitz Provided No Basis For Sanctions

The District Court not only erred in concluding that FDIC’s claims were

unfounded in law or fact, but it also erroneously found that FDIC had sued Hurwitz

for an improper purpose—to coerce Hurwitz into surrendering an old-growth

redwood forest to the government as part of the settlement of the case. Indeed, the

District Court concluded that this “swap” of FDIC’s claim for the trees was “the

only reason for this suit.”245 The District Court seriously misapprehended the

record in finding that FDIC attorneys, Board Chairmen, and senior Executive

Branch officials conspired to extort Hurwitz’s redwoods in order to placate the

“green lobby” and then lied to cover up their conspiracy. The District Court

abused its discretion in ordering any sanction based on this nonexistent conspiracy.

-53-

244 R.E. 5 at 29348-29308. 245 R.E. 4 at 34015.

1. A Factually Well-Grounded And Legally Warranted Complaint Is Not Sanctionable Under Rule 11

The District Court erred as a matter of law in sanctioning FDIC for filing its

complaint with a purported improper purpose. This Court has held that a party

may not be sanctioned under Rule 11 for filing a factually well-grounded and

legally warranted complaint on the ground that the complaint was filed with the

purpose to harass.246 Other circuits follow the same rule.247 Commentators favor

this approach, stressing the uniquely important role of complaints in vindicating

rights in litigation.248 As those commentators explain, “[t]he policy consequences

of chilling novel claims are simply too great to warrant sanctioning otherwise

nonfrivolous claims for an improper purpose.”249

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246 Jennings v. Joshua Indep. Sch. Dist., 877 F.2d 313, 320 (5th Cir. 1989);

Nat’l Ass’n of Gov’t Employees v. Nat’l Ass’n of Fed. Employees, 844 F.2d 216, 223-24 (5th Cir. 1988); Robinson v. Nat’l Cash Register Co., 808 F.2d 1119, 1130 n.20 (5th Cir. 1987), overruled on other grounds by Thomas v. Capital Security Servs., Inc., 836 F.2d 866, 871-72 (5th Cir. 1988) (en banc).

247 See Sussman v. Bank of Israel, 56 F.3d 450, 458-59 (2d Cir. 1995); Burkhart v. Kinsley Bank, 852 F.2d 512, 515 (10th Cir. 1988); Zaldivar v. City of Los Angeles, 780 F.2d 823, 832 (9th Cir. 1986). But see Kunstler v. Britt, 914 F.2d 505, 518 (4th Cir. 1990) (dicta); Szabo Food Service Co. v. Canteen Corp., 823 F.2d 1073, 1083 (7th Cir. 1987).

248 See Jerold S. Solovy et al., Sanctions Under Rule 11: A Cross-Circuit Comparison, 37 LOY. L.A. L. REV. 727, 736-45 (2004).

249 Id. at 745.

Whitehead v. Food Max of Mississippi, Inc.250 is not to the contrary. There,

this Court ruled that a request for a writ of execution was sanctionable under Rule

11 because of the party’s improper purpose in seeking the writ, whether or not the

writ had a reasonable basis in law and fact.251 Whitehead, however, did not

involve a complaint, and did not purport to overrule earlier decisions of this Court

holding that well-grounded complaints are not sanctionable. This Court, therefore,

need not decide whether FDIC filed its complaint for an improper purpose. As a

matter of law, because the complaint was reasonably grounded in law and fact,

FDIC may not be sanctioned under Rule 11.

2. The Objective Evidence Confirms That FDIC Had No Improper Purpose In Suing Hurwitz

Even if a well-grounded complaint could be sanctionable if filed with an

improper purpose, sanctions would not be appropriate here. In determining

whether a pleading was filed with an improper purpose, courts may look only at

objective circumstances and may not license a wide-ranging exploration of the

litigant’s subjective intent.252 Here the objective circumstances show no improper

purpose.

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250 Whitehead v. Food Max of Mississippi, Inc., 332 F.3d 796 (5th Cir. 2003)

(en banc). 251 Id. at 805. 252 See William W. Schwarzer, Sanctions Under the New Federal Rule 11--A

Closer Look, 104 F.R.D. 181, 196 (1985) (“Were a court to entertain

The best objective evidence of FDIC’s purpose in filing the lawsuit is the

fact that the complaint was well grounded in fact and law. As the Supreme Court

has made clear in an analogous context, if a legal proceeding has a reasonable basis

in fact and law, that is strong evidence that it was not instituted with an improper

purpose.253 This objective evidence contradicts the District Court’s conclusion that

FDIC acted to “placate environmentalists and politicians, not redress the failure of

the thrift.”254

Moreover, the District Court’s efforts to speculate on the subjective

motivations of FDIC decisionmakers illustrate why this Court has limited courts to

reviewing objective evidence. The District Court’s efforts led it to delve into

privileged material and to permit depositions of FDIC lawyers and senior

decisionmakers, even allowing Hurwitz to take discovery into legal advice they

offered and received. This kind of inquiry, if countenanced, would allow litigants

to invade the opposing party’s attorney-client privilege and engage in extensive

discovery in hopes of finding subjective evidence of an improper purpose.

-56-

inquiries into subjective bad faith, it would invite a number of potentially harmful consequences, such as generating satellite litigation, inhibiting speech and chilling advocacy.”); see also Whitehead, 332 F.3d at 805 (noting that an improper purpose must be “objectively ascertainable”).

253 See Hartman v. Moore, 126 S. Ct. 1695, 1703-1706 (2006) (explaining that the existence of probable cause is persuasive objective evidence that prosecution was not undertaken with an improper purpose).

254 R.E. 4 at 34009.

Every FDIC official and attorney who addressed the issue in a deposition

stated that the trees were not the reason for the suit.255 Nevertheless, the Court

concluded that they all lied.256 To find support for its position, the Court turned

instead to boilerplate correspondence to members of Congress and the public,257

correspondence from others to FDIC,258 snippets from notes and emails from staff

members taken out of context,259 and events that took place long after suit was

initiated.260 Despite the millions of dollars and countless hours spent on this

pursuit, this evidence too failed to support the District Court’s conclusion.

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To the contrary, the materials selectively quoted by the District Court, read

fairly, show that FDIC sued Hurwitz based on the merits of the claims against him

and not for an improper purpose. As shown below, the court’s pursuit of the

subjective intent of a government agency led it into clear factual error,

demonstrating the wisdom of this Court’s proscription against such speculative

inquiry.

255 R.V. 30 at 27737; R.V. 32 at 27542; R.V. 34 at 27080; R.V. 45 at 24239(a)-24238, 24237; R.V. 48 at 23901-23901(a).

256 R.E. 4 at 34028 (“When depositions were taken, witnesses lied, rambled evasively, or testified with the party line, in contradiction of the record as it turned out.”).

257 See, e.g., R.E. 4, nn. 88, 116, 156, 269, 282. 258 E.g., R.E. 4, nn. 81-83, 117, 142, 146, 152, 280. 259 E.g., R.E. 4, nn. 95-97, 108-10, 114, 119, 137, 145, 155, 168, 170-71, 197,

227, 274, 276, 279. 260 See, e.g., R.E. 4, nn. 269-74, 276-82, 287-92.

(a) The FDIC’s Purpose In Suing Was To Obtain Compensation For Losses

Even if inquiry into subjective intent were proper (which it is not), the best

indicia of the “state of mind” of the FDIC decisionmakers who authorized this

lawsuit—the Board—are the ATS Memo presented to the Board and the audio

recording and transcript of the Board meeting.261 As shown below, those materials

do not support the district court’s factual conclusions but instead show that FDIC

sued to obtain compensation for USAT’s losses.

The preliminary drafts of the ATS memo, which neither Helfer nor the other

Board members saw,262 noted briefly the possibility that FDIC might be criticized

by environmentalists and Congress for not suing Hurwitz, but in no sense

recommended that suit should be brought to avoid such criticism.263 After being

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261 Much of the evidence the District court cited to support its conclusion as to

FDIC’s intent concerned communications to, from, and among FDIC staff. See, e.g., R.E. 4, nn. 95-97, 108-10, 114, 119, 137, 145, 155, 168, 170-71, 197, 227, 274, 276, 279. The District Court erred by substituting the give and take of staff deliberations for the actions of those with authority to speak for the agency.

262 The District Court unjustifiably concluded that Helfer lied when she stated that “no drafts of the authority-to-sue memorandum had existed” (emphasis added). R.E. 4 at 34022. But Helfer never stated that no prior drafts existed; nor was she asked that question. What Helfer actually said—truthfully—in answer to questions about whether she had seen prior drafts was that the final memo was the only memo she ever saw—because previously she was briefed orally on the case. R.V. 46 at 23894, 23872, 23860(a); R.V. 32 at 27553-27552.

263 See R.V. 23 at 29557, 29543-29542, 29550.

briefed about the case and the staff’s initial recommendation, Helfer asked General

Counsel Kroener to have the staff reexamine its recommendation because she

believed Hurwitz’s conduct was “egregious.”264 No documentary or deposition

evidence suggests that Helfer requested that reexamination because she was

motivated, as the District Court speculated, “to get some trees.”265 To the contrary,

Helfer testified that the debt-for-nature controversy was “legally irrelevant.”266

The final ATS Memo also makes no suggestion that the redwoods

influenced FDIC’s decisionmaking. The 80-page Memo and three-page executive

summary discuss the suit’s basis in detail, but contain only three paragraphs

addressing the Headwaters controversy.267 Both the content and the context of

those paragraphs—which simply alerted the Board to publicly expressed interest in

the contemplated litigation and Interior Department negotiations with Hurwitz—

show that they were not the basis for the staff recommendation to sue. FDIC

procedures required staff to include such information about a case.268 FDIC

procedures also require that ATS memos provide settlement values, and FDIC staff

-59-

264 R.E. 4 at 34082; R.V. 32 at 27549-27548 (Kroener deposition): R.V. 48 at

23875(a), 23873(a) (Helfer deposition). 265 See R.E. 4 at 34083. 266 R.V. 46 at 23901(a). 267 R.E. 6 at 24544-24543, 24541. 268 See R.V. 44 at 24440.

estimated the settlement value in dollars, with no consideration of nonmonetary

benefits of settlement, such as trees.269

The Board’s conversation about the suit was candid, and included frank

debate about the merits of the suit; no member had reason to believe the discussion

would be made public. Indeed, the Board specifically adopted a sunshine motion,

meaning that the meeting was closed to the public.270

FDIC urges the Court to listen to the audio recording of the meeting. The

recording confirms that trees were not even a minor, much less the sole, basis for

deciding to sue.271 During his extensive briefing to the Board about the case’s

merits and risks, the head of FDIC’s professional liability section reiterated the

ATS memo’s brief description of the controversy about the Headwaters Forest,

including the likelihood that legislation would be required if a decision were

eventually made to include the Headwaters forest in a settlement.272 When Helfer

asked whether authorizing suit would affect the prospects for settlement generally,

Thomas responded that it would not “make a large difference,” in part because any

solution involving the redwoods “would be extremely difficult” to arrange, given

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269 R.E. 6 at 24541-40. 270 R.E. 5 at 29357; see also 5 U.S.C. § 552b(c). 271 1st Supp. Rec. Exhibit Folder 439, Ex. 123A, CD #1-2. 272 R.E. 5 at 29349.

the likely need for congressional authorization.273 No Board member asked any

questions about trees—e.g., what kind of legislation would be required to authorize

FDIC to accept trees instead of money, what FDIC would do with the trees in such

circumstances, the likelihood that such legislation would pass, or whether Hurwitz

could lawfully discharge his individual liability by engineering a transfer of

corporate property.

Board members focused instead on whether incurring the costs of litigating

claims against Hurwitz made sense if OTS decided to pursue related claims.274

Board members were concerned that, if OTS ultimately decided not to proceed

against Hurwitz, he would not be held accountable to anyone.275 Chairman Helfer,

for example, stated her concern was that “we have principals that have caused a

$1.6 billion loss.… We have a judgment that as to the claims that we would bring,

these individuals were not simply negligent, but grossly negligent ….”276 These

high stakes and the pressure on the Board to decide immediately, because the

statute of limitations would expire the next day, rather than anything related to the

trees, explain what the Court called “nervous laughter” at the meeting.277

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273 Id. at 29345, 29319. 274 R.E. 5 at 29318-29311. 275 Id. at 29346-29345, 29327. 276 Id. at 29311-29310. 277 R.E. 4 at 34079.

Ultimately, the Board’s concern to preserve the public fisc and hold wrongdoers

accountable, not a desire to extort redwoods, drove the decision to authorize suit.

The record contains still more evidence contradicting the District Court’s

conclusions. Having let Hurwitz question FDIC officials and attorneys about their

actions, the Court then had to deal with their consistent testimony that FDIC did

not sue to coerce Hurwitz into surrendering the forest.278 The Court simply said

that they all lied.279

That conclusion was unjustified and unfair. For example, the District Court

decided that FDIC Chairman Helfer (who never appeared before the Court) lied

when she denied that political considerations influenced the decision to bring suit,

because Helfer “repeated[ly] communicated” with Members of Congress and

environmentalist groups about the Headwaters controversy.280 In fact, although

Helfer received communications from Congress and others supporting legal action

-62-

278 R.V. 30 at 27737, R.V. 32 at 27542, R.V. 34 at 27080, R.V. 45 at 24239(a)-

24238, 24237, R.V. 48 at 23901-23901(a). 279 See R.E. 4 at 34115 (concluding that “FDIC has lied to Charles Hurwitz,

the public, and this court”), 34028 (“When depositions were taken, witnesses lied, rambled evasively, or testified with the party line, in contradiction of the record as it turned out.”), 33992 (“They set about using their agency's authority to compel an illegal result wholly unconnected with their legitimate responsibilities and they lied about it all under oath.”).

280 R.E. 4 at 34022-21.

against Hurwitz,281 she never responded by suggesting that FDIC would sue

Hurwitz to obtain his trees. To the contrary, her responses emphasized that there

was no connection between FDIC’s claims against Hurwitz and the Headwaters

forest.282 Helfer did nothing different than any careful agency head would do in a

case attracting congressional and public attention: ensure that her staff was aware

of the controversy, and assure interested parties that the agency was following the

matter.283 As this Court has made clear, agencies do not act improperly merely

because they proceed with awareness of the political sensitivity of a matter.284

Similarly, the District Court improperly concluded that Helfer’s predecessor

as Acting Board Chairman (and Vice Chair when suit was authorized), Andrew

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281 See, e.g., R.V. 23 at 29589-29588, 29563-29561; R.V. 24 at 29298-29297,

29284. 282 R.V. 24 at 29293-29292 (“There is no direct relationship between Mr.

Hurwitz’s action involving the insolvency of USAT and the Headwaters Forest current owned by Pacific Lumber Company.”), R.V. 40 at 25780-25774 (same) R.V. 24 at 29282 (similar), R.V. 24 at 29276-29273 (similar).

283 R.V. 24 at 29293-29292, 29276-29273; R.V. 25 at 29099; R.V. 40 at 25780-25774.

284 See In re FDIC, 58 F.3d 1055, 1061 (5th Cir. 1995) (holding that high-level agency officials should not be subject to discovery to “probe their decision-making processes and the reasons for their decisions” absent convincing evidence of bad faith, and noting that “[a]gency leaders often send and receive correspondence relative to their official actions”); id. at 1062 (stressing that “the fact that agency heads considered the preferences (even political ones) of other government officials concerning how this discretion should be exercised does not establish the required degree of bad faith or improper behavior”).

“Skip” Hove, assured Congressman Dellums that FDIC “would pursue the

redwoods.”285 The entirety of the evidence supporting this conclusion is a brief

letter from Hove assuring Dellums that FDIC was “following this issue closely.”286

The District Court also found that staff attorney Williams lied because he

allegedly stated that FDIC did not give “serious consideration” to the views of

environmental groups.287 The Court, however, misconstrued a long and often

unclear argument between Williams and opposing counsel over the nature of the

interaction between FDIC and environmental groups.288 Williams did not suggest

that FDIC was oblivious to overtures made by these groups; indeed, he made clear

that FDIC would “review…, consider…” and weigh any “evidence, analysis” or

advice provided by outsiders289—an entirely appropriate stance for officials of a

government agency that is ultimately accountable to the citizenry. Williams also

testified that FDIC was open to exploring a settlement involving the trees.290 What

he categorically rejected—as did all other deponents aware of the decisionmaking

process that led to the suit—was that the trees were the reason for the suit.291

-64-

285 R.E. 4 at 34099. 286 R.V. 21 at 29915 287 R.E. 4 at 34025. 288 R.V. 31 at 27740-27736. 289 Id. at 27739. 290 Id. at 27737. 291 Id. at 27737.

The District Court, however, found perjury and conspiracy. The Court

found that all these (and other) officials perjured themselves without hearing live

testimony (save from one witness) that would have provided insight into their

credibility. And it accused the officials of lying based on demonstrably erroneous

findings. The Court, for example, branded Helfer a liar because she “swore that

she did not know [Jeffrey] Williams, who was the head of her professional liability

section and who had drafted the complaint for her agency's most high-profile

suit.”292 Not only is this a small detail on which to base an assessment of Helfer’s

credibility—it is also simply untrue. Helfer truthfully swore that she did not

remember Williams—but Williams was not the head of FDIC’s professional

liability section; he was one of hundreds of staff attorneys with whom Helfer had

very little direct contact.293 The Court confused Williams with John Thomas, who

was the head of the Professional Liability Section, and whom Helfer knew well.294

As extraordinary as it is for the Court to make such credibility

determinations without the benefit of live testimony, it is particularly objectionable

when a court concludes that high government officials have performed their duties

in bad faith. “In the absence of clear evidence to the contrary,” courts presume that

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292 R.E. 4 at 34022. 293 See 1st Supp. Rec. Vol. 8 at 214; R.V. 46 at 23842; R.V. 30 at 27847; R.V.

34 at 27100. 294 See R.E. 4 at 34021; R.V. 46 at 23905a-23904, 23900-23900a; R.V. 34 at

27100.

government officials “have properly discharged their official duties.”295 To rebut

the presumption of regularity, a party must present “well-nigh irrefragable” proof

or “clear and convincing” evidence of specific intent to injure the plaintiff.296 But

there is no objective evidence, much less irrefragable proof, that FDIC’s Board

voted to sue Hurwitz to extort the redwoods.

Moreover, government officials consistently testified that Hurwitz pursued a

settlement of his controversies with the government that would have included the

redwoods, whereas FDIC consistently preferred a monetary resolution. In 1993,

when Hurwitz urged FDIC to make a settlement offer, FDIC proposed a cash

settlement of $293 million, with no mention of trees.297 In 1994, Hurwitz “put …

on the table” an exchange of the redwoods for FDIC’s claims as part of a broader

effort to convince the government to acquire the trees.298 In July 1995, Hurwitz’s

attorney asked a Department of Interior official to raise the prospect of a settlement

involving the redwoods with FDIC.299 After FDIC filed suit, Hurwitz continued to

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295 United States v. Chemical Foundation, 272 U.S. 1, 14-15 (1926); see United

States v. Welborn, 849 F.2d 980, 983 (5th Cir. 1988). 296 See Am-Pro Protective Agency, Inc. v. United States, 281 F.3d 1234, 1239-

40 (Fed. Cir. 2002). 297 R.V. 39 at 25950-25948. 298 R.V. 46 at 23939(a)-23938, 23945-23945(a). Hurwitz himself expressly

declined to contradict McGinty’s deposition testimony on this point. R.V. 38 at 26347.

299 R.V. 38 at 26273, 26272, 26269-68; R.V. 45 at 24238.

pursue a global resolution including the trees.300 Hurwitz threatened to walk out of

negotiations with the Department of the Interior if FDIC and OTS were not

compelled to participate.301 In September 1996, Hurwitz sent FDIC an unsolicited

proposal for a debt-for-nature swap.302 In February 1998, Hurwitz and MAXXAM

(again unsolicited) wrote to FDIC urging a debt-for-nature exchange, calling it “an

historical opportunity.”303 FDIC responded that it preferred cash—not trees—

because “numerous complications” would arise from an asset transfer like that

involved in a debt-for-nature deal.304

Although this evidence bore directly on the coercion issue at the center of

the Court’s analysis, the Court dismissed it all as “irrelevant.”305 The Court

instead relied on communications to FDIC by elected representatives, other

government agencies, and environmental groups.306 These communications

provide no insight into the view of the recipient. At most, they establish that

members of the public were pressing FDIC to participate in a settlement with

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300 R.V. 38 at 26345-26342; R.V. 25 at 29074 (Smith memo to McGinty). 301 See R.V. 43 at 24735-24734; R.V. 38 at 26344-26343. 302 R.V. 40 at 25636-25635. 303 R.V. 42 at 24929-24924 304 R.V. 42 at 24922. 305 R.E. 4 at 34018. 306 See, e.g., R.E. 4 at nn. 81-83, 117, 133-34. 139-42, 146-47, 149-52, 173,

280.

Hurwitz including the trees (which is undisputed) and that FDIC listened to the

views of members of the concerned public (which cannot be improper). When the

Court did focus on statements by FDIC, it misconstrued or misstated them. For

example, the Court stated that Helfer “was open to the idea of forcing Hurwitz to

influence” Pacific Lumber to relinquish the trees.307 But the Helfer letter cited by

the Court in fact said: “FDIC is open to any appropriate settlement of its claim,

including a debt-for-nature swap”308—not that FDIC had any notion of forcing

Hurwitz to do anything.

The Court also materially misread other documentary evidence. For

example, the Court concluded that General Counsel Kroener met with Vice

President Gore and briefed him on a possible debt-for-nature swap.309 For that

conclusion, the District Court relied on draft discussion points prepared by an

FDIC staff attorney—not Kroener.310 In fact, as Kroener’s unrebutted testimony

showed, Kroener did not write the notes and the Vice President did not attend the

meeting.311 The Court nevertheless transformed talking points of an FDIC staffer

into a discussion between FDIC’s General Counsel and the Vice President which

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307 R.E. 4 at 34063 (emphasis added). 308 R.V. 24 at 29293. 309 R.E. 4 at 34062-61. 310 R.V. 24 at 29214-29211; R.V. 32 at 27526, 27524; R.V. 34 at 27123. 311 R.V. 32 at 27526.

never occurred, and then relied upon the supposed discussion as proof of a

conspiracy.312

Perhaps most egregiously, the Court erred in finding that excerpts of an

FDIC attorney’s handwritten notes showed that FDIC was after trees.313 Those

notes supposedly stated that “we [FDIC] have no claim against Kozmetsky [a

former USAT director] that can survive stat[ute] of limitations.”314 The Court read

these notes as a “concession” that FDIC was motivated by “Hurwitz’s connections

to the redwoods.”315 This “concession” was illusory. As the Court should have

known—because it redacted those notes in light of a privilege claim—those notes

reflected the assertions of opposing counsel to the FDIC attorney that the FDIC

had no claim against Kozmetsky—not the FDIC attorney’s evaluation of the

case.316

(b) FDIC Was Willing To Consider A Settlement Including Trees, But That Was Not Improper

Although FDIC did not sue to obtain Hurwitz’s forest, FDIC was willing to

consider accepting the trees as compensation for the losses inflicted on the public

-69-

312 R.E. 4 at 34062-61. 313 R.E. 4 at 34088-87. 314 Id. at 34088. 315 Id. at 34087. 316 R.V. 5 at 33252.

fisc—as FDIC told legislators and environmentalists.317 The government never

reached consensus, however, on how, or even whether, it could trade the lawsuit

for redwoods.318 And in any event, FDIC’s openness to a settlement on such terms

cannot support sanctions under Rule 11, for it was not improper.

An interagency meeting to explore the possibility of a global settlement was

held in October 1995.319 A follow-up meeting was then scheduled to address the

“complex legal issues” raised at the first meeting.320 As late as March 1996, FDIC

Deputy General Counsel Smith noted that FDIC still lacked an “exit strategy,”321

i.e., assurance that FDIC would not be left with redwoods instead of liquid

assets.322 Hurwitz used the term “exit strategy” to mean the same thing.323 And in

September 1996, the government was still attempting to outline a potential global

settlement.324 And tellingly, although the government did eventually resolve the

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317 R.V. 21 at 29915, 29865; R.V. 23 at 29584; R.V. 24 at 29293-29292. 318 R.V. 25 at 29085-29056; R.V. 34 at 27125; R.V. 42 at 24920-24918; R.V.

38 at 26344; R.V. 32 at 27531 (Kroener deposition). 319 R.V. 24 at 29290-29289, 29209-29206. 320 R.V. 25 at 29121, 29103-29101. 321 R.V. 26 at 28798. 322 R.V. 34 at 27125; R.V. 38 at 26344. 323 R.V. 38 at 26344. 324 R.V. 34 at 27125 (Smith testimony that the Department of Treasury was

unwilling to accept the trees from FDIC, which prevented FDIC from accepting them from Hurwitz).

Headwaters controversy with Hurwitz, the FDIC claim played no role in that

transaction.

FDIC’s participation in these discussions was entirely proper. FDIC had

valid claims against Hurwitz, and the forest would be just one potential form of

compensation for the damage done by Hurwitz’s operation of USAT. Unless

FDIC brought a patently frivolous suit to harass Hurwitz into surrendering his

forest—which it did not—the agency’s openness to participating in a creative

resolution of that lawsuit that would promote a broader public interest can hardly

be considered improper.

II. THE DISTRICT COURT IMPROPERLY BASED ITS SANCTIONS AWARD ON EXTRANEOUS PROCEEDINGS AND ISSUES

Departing from the recognized bases for sanctions, the District Court took it

upon itself to identify what it viewed as abuses on extraneous issues ranging from

FDIC’s dealings with other federal agencies to the process by which its Board was

constituted—and indeed, went so far as to accuse the Inspector General of FDIC of

misfeasance.325 The District Court's inquiry into these extraneous areas was an

abuse of discretion.

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325 R.E. 4 at 34052-51.

A. The District Court Improperly Sanctioned FDIC For Other Proceedings, Including The OTS Administrative Proceeding

More than $58 million of the District Court’s sanctions award is attributable

not to the conduct of the litigation before that Court, but to costs supposedly

incurred by Hurwitz, MAXXAM, and Federated in litigating separate proceedings,

including the administrative proceedings instituted by OTS.326 The Court cited no

authority for the proposition that it could sanction FDIC for OTS’s actions in a

different forum. Indeed, the District Court implicitly acknowledged the lack of

precedent for it to sanction FDIC for OTS’s actions by making a “contingent

finding” that FDIC would be liable for $15 million in sanctions if the part of the

award based on the OTS proceedings were stricken.327

This Court has made clear that Rule 11 applies only to filings made in

federal district court and provides no basis to sanction a litigant for a pleading filed

in another tribunal.328 Similarly, a district court’s inherent authority is limited to

“ensur[ing] its own proper functioning.”329 The court may, for example, exercise

inherent authority to sanction parties for conduct that interferes with the court’s

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326 R.E. 4 at 33996. 327 Id. at 33995. 328 Edwards v. General Motors Corp., 153 F.3d 242, 245 (5th Cir. 1998); Foval

v. First Nat’l Bank of Commerce, 841 F.2d 126, 130 (5th Cir. 1988). 329 Conner v. Travis County, 209 F.3d 794, 800 (5th Cir. 2000).

proceedings and orders.330 But that authority does not extend to punishing

conduct that does not “affect the exercise of … judicial authority or limit the ...

court’s power to control the behavior of parties and attorneys in the litigation

before it.”331 Thus, this Court has made clear that “inherent authority” does not

include the power to sanction parties for pleadings filed in another court, unless

those pleadings threaten the authority of the District Court.332

To the extent that Hurwitz, MAXXAM, and Federated might have believed

that OTS’s administrative claim was meritless, they were free to seek

compensation from OTS in that forum. Notably, however, not only did they settle

the administrative charges brought by OTS by paying a financial penalty and

acceding to restrictions on participating in the banking industry, but they also

waived any claim for fees against OTS based on that proceeding.333 Having

abandoned any claim for fees from OTS based on OTS’s litigation, they can hardly

claim that FDIC should compensate them for the same conduct.

B. FDIC’s Coordination With OTS Provided No Basis For Sanctions

The District Court further concluded that sanctions were appropriate because

FDIC acted improperly by coordinating with OTS in bringing charges against

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330 See Chambers v. NASCO, Inc., 501 U.S. 32, 57 (1991). 331 See Matter of Case, 937 F.2d 1014, 1023-24 (5th Cir. 1991). 332 Conner, 209 F.3d at 800-01. 333 R.V. 43 at 24845-24844.

Hurwitz for the USAT failure and reimbursing OTS for its expenses in that

administrative action.334 This too was an abuse of discretion. The legal staffs of

FDIC and OTS each researched FDIC’s authority to enter into a cooperation and

reimbursement arrangement, and concluded that it was lawful.335 Yet, even if, as

the District Court (incorrectly) believed, FDIC was not legally authorized to

shoulder the costs of OTS’s administrative proceeding, that might have been

subject to correction within the Executive Branch, or oversight by Congress, but

would have no relevance to whether FDIC’s institution of its lawsuit violated Rule

11.

In any event, there was nothing improper in this interagency cooperation. It

is commonplace for the government to pursue a variety of remedies for violation of

law in different fora, depending on the severity of the violation and the

governmental interests being served.336 Parallel enforcement proceedings to

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334 R.E. 4 at 34046-37. 335 See R.V. 43 at 24660-24655, R.V. 44 at 24610-24600. 12 U.S.C. §§

1818(t), 1820(a); H.R Rep. No. 101-54(I), 1989 U.S. Code Cong. and Admin News at 395.

336 See SEC v. First Financial Group of Tex., 659 F.2d 660, 666-67 (5th Cir. 1981); SEC v. Dresser Indus., Inc., 628 F.2d 1368, 1374 (D.C. Cir. 1980) (en banc); Keating v. OTS, 45 F.3d 322, 324 (9th Cir. 1995); FSLIC v. Molinaro, 889 F.2d 899, 902 (9th Cir. 1989).

redress violations of federal law are as old as the Constitution.337 Given that the

courts have rejected the proposition that concurrent or successive civil and criminal

proceedings violate the Constitution,338 it is hardly surprising that there is no

support for the proposition that concurrent civil and administrative proceedings

violate any fundamental legal principle. To the contrary, even “once civil

proceedings are under way,” there is “no policy consideration ... that suggests any

need for curtailment of interagency cooperation.”339

The courts have authority to mitigate the harshness of parallel proceedings

by staying proceedings until one of the proceedings is completed.340 That is

exactly what FDIC sought to do here, when it requested two stays of this case

pending the outcome of the OTS administrative proceeding. It was Hurwitz, not

FDIC, that sought to keep this case on an active litigation track.341 Having

successfully urged the District Court to deny a stay of this case pending the

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337 See United States v. Ursery, 518 U.S. 267, 274 (1996) (noting that First

Congress authorized parallel criminal prosecutions and civil forfeiture proceedings based on same underlying events).

338 Hudson v. United States, 522 U.S. 93 (1997); United States v. Kordel, 397 U.S. 1 (1970).

339 United States v. Frowein, 727 F.2d 227, 232 (2d Cir. 1984) (rejecting challenge to Customs Service administrative subpoena even after Customs had referred civil penalty claim to Department of Justice for litigation).

340 See First Financial Group, 659 F.2d at 667; Dresser Industries, 628 F.2d at 1375.

341 See pp. 25-26, supra.

outcome of the OTS matter, Hurwitz can scarcely complain that he was compelled

to defend both proceedings.

C. The Constitution Of FDIC's Board Was Irrelevant

The District Court also sanctioned FDIC based on its conclusion that

Jonathan Fiechter, who served on the FDIC Board ex officio as Acting Director of

OTS, was appointed to his OTS position in violation of the Vacancies Act.342 The

District Court’s conclusion regarding the Fiechter appointment was wrong.343 But,

even more fundamentally, the Court’s digression was improper. Whether or not

Fiechter was properly appointed at OTS had no relevance to whether FDIC’s

complaint met the standards of Rule 11—just as one would not test the

reasonableness of a corporation’s complaint by examining whether its directors

were elected in conformity with state corporation law.

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342 R.E. 4 at 34076-70. 343 Because Fiechter assumed the position of acting OTS Director pursuant to orders issued by an outgoing Director and not pursuant to the automatic delegation provision of the Vacancies Act for “first assistants,” see Doolin Security Savings Bk. v. OTS, 156 F.3d 190, 192 (D.C. Cir. 1998) (noting “considerable uncertainty” about whether Fiechter was a first assistant for purposes of the Vacancies Act), the Vacancies Act’s limitations on time of service did not apply to him. See OTS v. Paul, 985 F. Supp. 1465, 1474-75 (S.D. Fla. 1997); The Vacancies Act, 22 Op. OLC 44 (1998); Application of Vacancies Act Limitations to Presidential Designation of an Acting Special Counsel, 13 Op. OLC 144 (1989) (collecting earlier decisions).

D. The FDIC's Response To Congressional And Inspector General Inquiries About This Lawsuit Was Irrelevant

The District Court criticized FDIC for resisting a congressional inquiry

about this lawsuit, and for allegedly suspending an investigation by FDIC’s

Inspector General into the case—which the Court inappropriately called “a new

layer of corruption.”344 Even if there were any impropriety in the FDIC's

responses to Congressman DeLay’s queries or the Inspector General inquiry—

which there was not345—there is no support for the Court’s conclusion that FDIC

resisted the congressional inquiry in a way that “directly affected this case.”346

Neither the congressional query nor any action taken by the Inspector General had

any effect on the FDIC’s decision to bring suit, which long predated both inquiries.

Moreover, the proper remedy for any such impropriety would have been further

action by Congress or the Inspector General, not the District Court.

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344 R.E. 4 at 34051. 345 Indeed, FDIC suspected that Hurwitz had engineered congressional

interference in the litigation. Those concerns proved prescient when privileged documents provided by FDIC to Congress (including the draft ATS memos) with an explicit request that the documents would remain confidential ended up in the hands of Hurwitz and were introduced into the record in this case by Hurwitz. R.V. 81 at 15546-15494, R.V. 79 at 15858-15852, 15863-15861, R.V. 66 at 16239-16234, R.V. 74-77 at 17127-16341. Moreover, FDIC’s response to the IG focused on concerns about possible interference in an ongoing lawsuit and noted the IG’s past practice of delaying reviews until the completion of litigation. R.V. 29 at 28055-28049. As it told Congressman DeLay, FDIC’s IG suspended its investigation to avoid any interference in the litigation. R.V. 29 at 28047.

346 R.E. 4 at 34051.

E. The District Court Improperly Relied On Sanctions Awards in Other Cases

Finally, the District Court justified its sanctions award in part because FDIC

had been sanctioned in other cases.347 Those cases had nothing to do with this

case. Moreover, those cases—two of which were completely reversed on

appeal348—represent a tiny fraction of the thousands of cases that FDIC has

litigated. FDIC should have been judged by the claims it filed in this case, not

extraneous cases involving different facts and issues.

III. THE SANCTION AMOUNT WAS UNSUPPORTED AND EXCESSIVE

Even if sanctions were appropriate here, the District Court’s order cannot

stand, for the amount awarded was unsupported and excessive. When district

courts award “substantial” sanctions, they must provide “very specific factual

bases” for the sanctions, which will allow “‘rigorous’ review for abuses of the

district court’s discretion.”349 In particular, the district court must “(1) identify

sanctionable conduct…, (2) link the sanctionable conduct to the size of the

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347 R.E. 4 at 33999-97. 348 FDIC v. Schuchmann, 319 F.3d 1247 (10th Cir. 2003); FDIC v. Calhoun, 34

F.3d 1291 (5th Cir. 1994). 349 Topalian v. Ehrman, 3 F.3d 931, 936 (5th Cir. 1993).

sanctions, and (3) differentiate between sanctions awarded under different

statutes.”350 The District Court made no effort to follow this clear mandate.

In fact, based on the record, the District Court could not have made the

necessary allocation. One of Hurwitz’s attorneys—who also served as his own

“expert” on the sanctions request—stated, for example, that he was unaware of any

effort by Hurwitz and MAXXAM to allocate expenses related to different alleged

rule violations.351 Hurwitz also failed to provide supporting documents that would

have enabled the Court to make such a determination on its own. His sole

submission was a “fee summary” that lacked basic information, such as the names

of individual attorneys who worked on the case, their respective hourly rates, or the

number of hours billed for particular tasks.352 The summary failed to identify what

tasks each attorney, law firm, or expert performed, and gave no information from

which the District Court could determine whether the fees charged were

reasonable, as FDIC’s damages expert, former judge Joseph Morris, confirmed.353

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350 Proctor & Gamble Distributing Co. v. Amway Corp., 280 F.3d 519, 526 (5th

Cir. 2002) (footnotes omitted). 351 Nickens deposition, 2nd Supp. Rec., Vol. 3 at 143 (“Q: To what extent are

the sums that you seek … attributable to Rule 11? … A: I have not made that kind of allocation.”); id. at 143-44 (same for Rule 37 and 28 U.S.C. § 1927); id. at 145 (stating that he was unaware of anyone else undertaking such an allocation).

352 R.V. 51 at 22780-22777, 22753-22711; R.V. 35 at 27023-26886; R.V. 3 at 33772-33729.

353 2nd Supp. Rec. Vol. 2, Morris expert report, at 11-16.

Nevertheless, the Court awarded:

• $31,500,496.31 in attorney fees to twenty law firms, most of which never appeared in the FDIC lawsuit and included work done for individuals who settled with and released all claims against FDIC.

• $2,726,867.72 in costs to fifteen expert consultants, who never provided or otherwise presented testimony or reports in this lawsuit.

• $271,073.18 for six Freedom of Information Act (“FOIA”) challenges initiated by Hurwitz or third parties.

• $866,212.50 in assorted costs including hotels, furniture, supplies, temporary help and the like.354

These amounts are excessive on their face. Yet the District Court ignored all of

these failings and approved all of the amounts requested by Hurwitz, adding

interest. Such an award, reflecting no independent judicial scrutiny of the fee

application, cannot be sustained.

IV. THE SANCTIONS ORDER CANNOT BE SUSTAINED UNDER RULE 37, 28 U.S.C. § 1927, OR THE COURT’S INHERENT POWER

A. Rule 37

Under FRCP 37(a)(4), a party may be required to pay the “reasonable

expenses including attorney’s fees” caused by its discovery misconduct.355 Any

sanction under Rule 37 must be “specifically related to the particular ‘claim’” at

354 These figures are taken from MAXXAM’s request (R.V. 3 at 33772-33729)

and do not include the interest award. The District Court stated that its totals differ from those requested by MAXXAM. R.E. 4, n. 630. The Court’s award is in fact higher than that requested. Compare R.V. 3 at 33772-33729 with R.E. 4 at 33996.

355 Batson v. Neal Spelce Associates, 765 F.2d 511, 516 (5th Cir. 1985). -80-

issue in the discovery dispute.356 “[A]n extraordinarily large assessment of

expenses” based on Rule 37 may be “unreasonable on its face.”357

The $72 million award cannot be a reasonable discovery sanction. The fact

that parties had numerous discovery controversies is hardly surprising given that

Hurwitz sought numerous documents of the sort that are routinely protected from

discovery358—including the final ATS Memo,359 draft ATS memos,360 the

transcript of the Board meeting during which the Board received legal advice,361

and witness interview notes of FDIC’s in-house and outside counsel362—and

sought to depose persons routinely shielded from that process363—including a non-

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356 Insurance Co. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456

U.S. 694, 707 (1982). 357 Batson, 765 F.2d at 516 (finding an award of $30,000 to be facially

unreasonable). 358 See, e.g., R.V. 110 at 9301-9300, R.V. 107 at 9966 (Fifth Circuit orders

granting writs of mandamus to prevent the release of the ATS memo); San Luis Obispo Mothers for Peace v. United States NRC, 789 F.2d 26, 44 (D.C. 1985) (en banc) (noting that judicial review of the transcript of a closed agency meeting would be an “extraordinary intrusion” on the agency); Upjohn Co. v. United States, 449 U.S. 383, 399 (1981) (“Forcing an attorney to disclose notes and memoranda of witnesses’ oral statements is particularly disfavored because it tends to reveal the attorney's mental processes….”).

359 R.V. 139 at 2901. 360 R.V. 128 at 5384-5173, R.V. 110 at 9509-9432. 361 R.V. 109 at 9567-9561. 362 R.V. 21 at 30047-30037, 29978-29971. 363 Fed. R. Civ. P. 26(b)(4) (allowing deposition of nontestifying expert only in

“exceptional circumstances”); Nguyen v. Excel Corp., 197 F.3d 200, 209

testifying expert,364 FDIC’s attorneys,365 its General Counsel and his deputy,366

and its Board members.367

Given that FDIC reasonably resisted Hurwitz’s discovery requests—indeed,

this Court twice issued writs of mandamus overruling District Court orders to

produce the ATS memo368—it is unsurprising that the District Court did not grant

Hurwitz’s first fifteen motions and supplements to motions for sanctions. What is

surprising is the lack of any attempt by the lower court to connect the $72 million

award to costs arising from any particular discovery disputes. An award of this

size, with no connection to specific discovery issues, is facially defective.

B. 28 U.S.C. § 1927

Section 1927 provides for the imposition of sanctions against “[a]ny

attorney … who so multiplies the proceedings in any case unreasonably and

vexatiously.”369 The statute provides only for sanctions against attorneys, not

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(5th Cir. 1999) (“[D]epositions of opposing counsel are disfavored generally and should be permitted in only limited circumstances...”); In re FDIC, 58 F.3d 1055, 1060 (5th Cir. 1995) (granting a writ of mandamus where a magistrate judge refused to quash deposition notices for FDIC directors).

364 R.V. 127 at 5510-5506, 5530-5511. 365 R.V. 152 at 54-44, 56-55. 366 R.V. 93 at 13126-13116, R.V. 79 at 15828-15803. 367 R.V. 142 at 2112-2111, 2115-2113, 2134-2116, R.V. 109 at 9631-9628,

9646-9632, 9651-9649, 9670-9652, and R.V. 80 at 15774-15567. 368 R.V. 110 at 9301-9300, R.V. 107 at 9966. 369 28 U.S.C. § 1927 (emphasis added).

parties. It therefore cannot support the sanctions award imposed by the District

Court against FDIC.

C. Inherent Authority

The District Court’s inherent authority also provides no basis for the

sanctions award. Fee shifting under Rule 11 is unusual, but monetary sanctions

under the court’s inherent powers are reserved for the rarest of cases. “[T]he

standard for the imposition of sanctions using the court's inherent powers is

extremely high.”370 To impose sanctions on this basis, the court must find that “the

very temple of justice has been defiled.”371

FDIC’s conduct in this litigation cannot be said to have “defiled” the

“temple of justice.” To the contrary, FDIC made every effort to avoid unnecessary

District Court proceedings, by twice seeking stays once OTS instituted its own

case. Hurwitz, not FDIC, multiplied the proceedings in the District Court by

opposing a stay and then, after FDIC dismissed its complaint, massively expanding

the litigation by embarking on wide-ranging discovery of FDIC’s top officials and

legal staff solely to support sanctions claims.372

The Supreme Court and this Court have also cautioned that trial courts

should award sanctions under the Federal Rules and statutes, and resort to their

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370 Goldin v. Bartholow, 166 F.3d 710, 722 (5th Cir. 1999). 371 Boland Marine & Mfg. Co. v. Rihner, 41 F.3d 997, 1005 (5th Cir. 1995). 372 See pp. 29-34, supra.

inherent powers only when the Rules and statutes are not “up to the task.”373 The

need for such caution is particularly pronounced where, as here, the sanctions

award is imposed against the sovereign. Courts have been consistently wary of

invoking their inherent authority to impose a monetary award of attorney’s fees

against the government. 374

If, as the District Court believed, the case was brought without an adequate

basis in fact or law, then Rule 11 provided the District Court with an ample source

of authority on which to sanction FDIC. But FDIC’s complaint met and surpassed

Rule 11 standards. There was no ground for resort to inherent authority.

V. FDIC IS NOT LIABLE FOR INTEREST ON THE SANCTIONS AWARD

$37 million of the sanctions award—more than half—is attributable to

prejudgment interest.375 This part of the award must be stricken because no waiver

of sovereign immunity makes FDIC liable for prejudgment interest in this case.

“In the absence of express congressional consent to the award of interest

separate from a general waiver of immunity to suit, the United States is immune

from an interest award.”376 That rule unambiguously precludes any award of

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373 Boland, 41 F.3d at 1005; see Chambers v. NASCO, Inc., 501 U.S. at 50. 374 See United States v. Horn, 29 F.3d 754, 763-66 (1st Cir. 1994); Coleman v.

Espy, 986 F.2d 1184, 1191-92 (8th Cir. 1993). 375 R.E. 4 at 33996. 376 Library of Congress v. Shaw, 478 U.S. 310, 314 (1986).

interest here. Although the District Court characterized its interest award as “the

cost of the delay” and “current pricing of an award to compensate for harm

inflicted through the suit itself,”377 Hurwitz himself called it interest in his fee

summary.378 Moreover, the prohibition on pre-judgment interest bars government

liability for “claims grounded on the belated receipt of funds, even when

characterized as compensation for delay.”379

Nor is there any exception to sovereign immunity that would be applicable

here. Congress may expressly consent to an interest award, or may “shed the cloak

of sovereignty” and give an agency the status of a commercial operation.380

Neither condition is met in this case.

First, Congress has not expressly made FDIC liable for prejudgment interest

on attorney’s fees awards. Although FDIC’s organic statute has a “sue and be

sued” clause,381 that clause does not render FDIC liable for interest. This Court

has recognized that a general waiver of sovereign immunity is not sufficient to

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377 R.E. 4 at 33996-95. 378 R.V. 35 at 27023-26886. 379 Shaw, 478 U.S. at 322. 380 Spawn v. Western Bank-Westheimer, 989 F.2d 830, 833 (5th Cir. 1993)

(internal quotations omitted). 381 12 U.S.C. § 1819(a).

waive an agency’s sovereign immunity for interest, and that a separate, specific

waiver for interest is required.382

Second, FDIC acted in a governmental capacity in bringing suit against

Hurwitz. This Court has concluded that, when FDIC acts as a deposit insurer, it

retains its sovereign immunity from interest because it acts as “a protector of the

banking system and the general welfare” rather than as a commercial entity.383

Here too, FDIC acted as a regulator in investigating USAT’s failure and bringing

suit to replenish public funds available for deposit insurance depleted by

expenditures in the wake of USAT’s failure. In this governmental capacity, FDIC

retains its immunity from the imposition of prejudgment interest. 384

The District Court stated that FDIC was liable for prejudgment interest

because it sued as the receiver of USAT.385 This conclusion was legal error. The

Federal Savings and Loan Insurance Corporation (“FSLIC”) initially acted as

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382 See Spawn, 989 F.2d at 835-38 (concluding that FDIC was not liable for

prejudgment interest for deposit-insurance functions). 383 Id. at 838. 384 Other courts have concluded that FDIC generally performs governmental

regulatory functions rather than commercial ones, and therefore retains its immunity from claims for prejudgment interest. See California Federal Bank v. United States, 395 F.3d 1263, 1273-74 (Fed. Cir. 2005); Battista v. FDIC, 195 F.3d 1113, 1120-21 (9th Cir. 1999); Far West Federal Bank v. OTS, 119 F.3d 1358, 1366-67 (9th Cir. 1997); RTC v. FSLIC, 25 F.3d 1493, 1506 (10th Cir. 1994).

385 R.E. 4 at 33994.

receiver for USAT.386 FSLIC transferred all of its claims as receiver against

Hurwitz to FSLIC in its corporate capacity.387 When FSLIC was abolished, FDIC

acquired the assets of FSLIC in its corporate capacity.388 When FDIC acts as

successor to FSLIC in its corporate capacity, FDIC also acts in its corporate

capacity, not as receiver.389 Accordingly, FDIC was immune from the interest

award.

CONCLUSION

The District Court’s sanctions order should be reversed and judgment

rendered dismissing Hurwitz’s sanction motion. Should this Court have occasion

to remand this proceeding to the District Court, FDIC respectfully requests that the

Court direct that this case be reassigned to a different district judge.390

386 R.V. 152 at 21. 387 Id. At 19. 388 Id. 389 12 U.S.C. § 1823(d)(1); cf. FDIC v. Henderson, 61 F.3d 421, 423 n.1 (5th

Cir. 1995). 390 This Court has authority under 28 U.S.C. § 2106 to order reassignment to

ensure the appearance of justice. See Johnson v. Sawyer, 120 F.3d 1307, 1333-36 (5th Cir. 1997); see also In re DaimlerChrysler Corp., 294 F.3d 697, 701 (5th Cir. 2002).

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Respectfully submitted,

__________________________________ GENE W. LAFITTE (#8091) JAMES A. BROWN (#14101) Liskow & Lewis, PLC 701 Poydras Street, Suite 5000 New Orleans, LA 70139 Ph: (504) 556-4116 Fax: (504) 556-4108

DOUGLAS H. JONES Acting General Counsel RICHARD J. OSTERMAN, JR. Assistant General Counsel COLLEEN J. BOLES Senior Counsel LAWRENCE H. RICHMOND Counsel Federal Deposit Insurance Corporation 3501 Fairfax Drive, D-7014 Arlington, VA 22226

RANDOLPH D. MOSS PAUL R.Q. WOLFSON JONATHAN G. CEDARBAUM KELLEY BROOKE SNYDER Wilmer Cutler Pickering Hale and Dorr LLP 1899 Pennsylvania Ave., N.W. Washington, DC 20006

F. THOMAS HECHT KATHLEEN HOLPER CHAMPAGNE Ungaretti & Harris LLP 3500 Three First National Plaza Chicago, IL 60602

Counsel for Plaintiff-Appellant, Federal Deposit Insurance Corporation, as Manager of the FSLIC Resolution Fund

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CERTIFICATE OF SERVICE

I HEREBY CERTIFY that a paper and computer readable disk copy of the

foregoing brief of Plaintiff-Appellant, Federal Deposit Insurance Corporation, has

been served on the following counsel of record:

David J. Beck Beck, Redden & Secrest, L.L.P 1221 McKinney, Suite 4500 Houston, Texas 77010 Ph: (713) 951-3700 Fax: (713) 951-3720 Jacks C. Nickens Richard P. Keeton Nickens, Keeton, Lawless, Farrell & Flack, L.L.P. 600 Travis, Suite 7500 Houston, Texas 77002 Ph: (713) 571-9191 Fax: (713) 571-9652

David P. Griffith Andrews & Kurth LLP 600 Travis, Suite 4200 Houston, Texas 77002 Ph: (713) 220-4285 Fax: (713) 220-4725

Attorneys for Appellees, Charles E. Hurwitz, MAXXAM, Inc., and Federated Development Corporation

by Federal Express mail this 29th day of September, 2006

__________________________________ James A. Brown

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CERTIFICATE REGARDING TYPE-VOLUME LIMITATION, TYPEFACE REQUIREMENTS, AND TYPE STYLE REQUIREMENTS

1. The undersigned certifies that he has this date filed with the Court a Motion to Exceed Word-Volume Limitation requesting leave to file a brief containing 19,368 words, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii). This brief contains 19,368 words, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii), as requested in the Motion. 2. This brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because this brief has been prepared in proportionally spaced typeface using Microsoft Word 2000 Version 9.0.6926 3 in Times New Roman type, size 14 font. ________________________ James A. Brown

Attorney of Record for Plaintiff-Appellant, Federal Deposit Insurance Corporation

638445_1.DOC

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