Enmon v. Prospect Capital Corp.
| Decision Date | 06 April 2012 |
| Docket Number | Docket No. 10–2811–cv. |
| Parties | Michael ENMON, Respondent–Appellant,Arnold & Itkin LLP, Miscellaneous–Appellant, v. PROSPECT CAPITAL CORPORATION, Prospect Capital Management LLC, John F. Barry, M. Grier Eliasek, Walter Parker, and Bart De Bie, Petitioners–Appellees. |
| Court | U.S. Court of Appeals — Second Circuit |
OPINION TEXT STARTS HERE
Alexandra A.E. Shapiro, Elizabeth C. Kennedy, James Darrow (on the brief), Macht, Shapiro, Arato & Isserles LLP, New York, NY, for Miscellaneous–Appellant.
Maura Barry Grinalds, Jonathan J. Lerner, Timothy G. Nelson, Daniel M. Sussner (on the brief), Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Petitioners–Appellees.
Before: POOLER, B.D. PARKER and LOHIER, Circuit Judges.
Arnold & Itkin LLP, a Texas-based law firm, appeals from a judgment of the United District Court for the Southern District of New York (Sand, J.) sanctioning Arnold & Itkin for its conduct in opposing the arbitration of a dispute between its client, Michael Enmon, and appellee Prospect Capital Corporation (“Prospect”).1 Arnold & Itkin challenges the determination that its conduct was sanctionable and the amount and form of the sanctions imposed. For the reasons that follow, we largely affirm the judgment of the District Court, except that we remand in part to permit the District Court to consider whether it should impose certain limits on its requirement that Arnold & Itkin's attorneys attach the sanctions order to all future applications for admission pro hac vice in the Southern District of New York.
The sanctions imposed on Arnold & Itkin arose out of Michael Enmon's attempts to obtain a subordinated loan from Prospect to complete his acquisition of Caprock Pipe & Supply LP (“Caprock LP”), a company in the business of purchasing, refurbishing and selling pipes for use in connection with oil and natural gas wells. In April 2006, Enmon formed a company called Caprock Pipe & Supply, Inc. (“Caprock Inc.”), solely as a vehicle for borrowing the funds to purchase Caprock LP. That same month, Enmon, with the help of his then-attorney Robert Fiser, Esq., signed a letter agreement and term sheet (collectively, the “Letter Agreement”) with Prospect to obtain financing for the acquisition in the form of a subordinated loan for $10 million. The Letter Agreement contained an arbitration provision that committed the parties to resolving all disputes arising thereunder through “binding arbitration in New York City.” The Letter Agreement also provided that Prospect's financing proposal was subject to actual delivery of the final deal documents.
In anticipation of the deal closing in May 2006, Prospect prepared several draft documents and went so far as to forward to its corporate counsel on the deal, Vinson & Elkins LLP, “provisionally signed” signature pages of a credit agreement (the “Credit Agreement”) identifying Enmon's company, Caprock Inc., as the counterparty. The signature pages were undated and unattached to a draft of the Credit Agreement. They were forwarded by email to place Vinson & Elkins in a position to circulate an executed Credit Agreement as soon as one was finalized. Indeed, the accompanying email message to Vinson & Elkins stated:
In May 2006, based on the results of its due diligence and Enmon's belated request for an additional $2 million in financing, Prospect decided not to finance Enmon's purchase of Caprock LP.
In September 2006, Fiser sued Enmon in Texas state court for unpaid legal fees in connection with Fiser's work on the failed Prospect financing transaction. In contesting the lawsuit, Enmon, at this point represented by Jason Itkin, Esq., a named partner of Arnold & Itkin, filed third-party claims against Prospect, alleging common law fraud, statutory fraud under Texas state law, and tortious interference with a contract between Enmon and Caprock LP. The third-party claims were based on Prospect's decision not to consummate the financing proposed in the Letter Agreement and contemplated by the draft Credit Agreement.
Relying on the arbitration clause contained in the Letter Agreement, Prospect responded by initiating an arbitration proceeding in New York and filing a petition to compel arbitration in the United States District Court for the Southern District of New York (the “SDNY Action”). On January 10, 2007, Jason Itkin told Prospect that he intended to ask the Texas state court for a temporary restraining order (the “Texas TRO”) staying the New York arbitration proceeding. In an email response the following day, Prospect's counsel advised Itkin that she would seek a temporary restraining order in the Southern District of New York (the “SDNY TRO”) that same day to enjoin the Texas state court action. Itkin ignored the email and applied for the Texas TRO.
Arnold & Itkin's application for the Texas TRO was signed by Itkin under the name “Arnold & Itkin LLP.” It requested not only that the Texas state court stay the arbitration proceeding, but that it issue “a temporary restraining order and temporary injunction prohibiting Prospect ... from taking any further action in New York state or federal courts” until the Texas court had ruled on the applicability of the arbitration provision. Although the proposed order attached to the application disclosed that the “Prospect Defendants are seeking a temporary restraining order in New York,” the application failed to disclose that Prospect had already filed a complaint in New York federal court.
Both the District Court and the Texas state court granted their respective TROs on January 11, 2007.2 The following day, instead of offering to withdraw the Texas action, Arnold & Itkin wrote a letter to both courts advising them of the dueling TROs and suggesting that the courts “dissolve both TROs and allow the proceedings in both courts to continue.” At a hearing several days later, Prospect advised the Texas state court that the competing New York case was in federal court and that the Texas TRO was unconstitutional under General Atomic Co. v. Felter, 434 U.S. 12, 12–13, 98 S.Ct. 76, 54 L.Ed.2d 199 (1977), because it sought to enjoin a federal court action. So informed, the Texas state court promptly adjourned the hearing, effectively suspending its TRO.
In February 2007, the District Court granted Prospect's petition to compel arbitration after concluding that Enmon's objections to arbitrability “either strain[ed] the language of the [Letter Agreement] or [were] precluded by clear and controlling precedent in the Second Circuit.” Enmon timely appealed the District Court's judgment, but, in the meantime, arbitration was scheduled to start on July 23, 2007.3
Less than two weeks before the arbitration, Arnold & Itkin filed a motion in the District Court under Rule 60(b) of the Federal Rules of Civil Procedure, on behalf of Enmon and Caprock Inc. (as an intervenor), for relief from the order granting Prospect's motion to compel arbitration. The firm sought an order permitting Caprock Inc. to pursue litigation in New York state court for breach of the draft Credit Agreement. It argued that the signature pages for that agreement constituted “new[ly]” uncovered evidence establishing that the draft Credit Agreement had been executed and that the arbitration provision in the Letter Agreement had been superseded. Without revealing that Caprock Inc. had recently changed its corporate name to “Enmon Capital Inc.,” Arnold & Itkin insisted that, regardless of Enmon's obligations to arbitrate the dispute under the Letter Agreement, Caprock Inc. was not similarly bound under the Credit Agreement, which contained no arbitration provision.4
The District Court concluded that Enmon's pending appeal divested it of jurisdiction to resolve the Rule 60(b) motion, which it dismissed by order dated July 24, 2007, with the warning that “it would not be inclined to grant the motion if the Second Circuit were to remand the case.” In August 2007, Arnold & Itkin filed an appeal of the District Court's order denying Enmon's Rule 60(b) motion, but it voluntarily withdrew the appeal in October 2007.
In April 2008, the arbitrator designated to preside over the arbitration between Prospect and Enmon issued a preliminary decision in favor of Prospect. Among other things, the arbitrator found that the draft Credit Agreement was never consummated and that the Letter Agreement permitted Prospect to refuse to finance Enmon's project. Prospect immediately filed a petition to confirm arbitration with the District Court. Arnold & Itkin opposed the petition, urging that confirmation was premature because the arbitrability of the dispute was “ripe for decision in the Second Circuit Court of Appeals.” It also claimed that the arbitration had gone “forward in a disjointed manner that prevented a fair presentation of the evidence,” and that this “disjointed manner included[ ] calling witness[es] out of order, not cross-examining witnesses immediately after their direct testimony, and not allowing depositions.” Arnold & Itkin also rehashed several other arguments it had previously advanced to challenge arbitrability.
In a final award on August 23, 2008, the arbitrator directed Enmon to pay Prospect $2,287,687.32 in attorneys' fees, costs, and expenses. Prospect then filed a renewed petition to confirm the arbitration award, which the District Court granted in October 2008. In November 2008, Arnold & Itkin appealed the confirmation of the award. Because the appeal was defective, Arnold & Itkin refiled a notice of appeal in January 2009, but voluntarily withdrew that appeal in April 2009.
In May 2009, Prospect moved pursuant to 28 U.S.C. § 1927 and the District Court's inherent...
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