Hanshaw v. Emerald River Dev.

• Decision Date: 05 April 2001
• Docket Number: No. 99-55395,99-55395
• Citation: 244 F.3d 1128
• Parties: (9th Cir. 2001) F.J. HANSHAW ENTERPRISES, INC., a California corporation, Plaintiff-counterdefendant-Appellant, FREDERICK J. HANSHAW, Counter-defendantAppellant, v. EMERALD RIVER DEVELOPMENT, INC., an Arizona corporation,Defendant-Appellee, GORDON HANSHAW,Defendant-counter-claimant-Appellee, RICHARD A. MARSHACK, Receiver-Appellee
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1128

244 F.3d 1128 (9th Cir. 2001)

F.J. HANSHAW ENTERPRISES, INC., a California corporation, Plaintiff-counterdefendant-Appellant, FREDERICK J. HANSHAW, Counter-defendantAppellant, v. EMERALD RIVER DEVELOPMENT, INC., an Arizona corporation,Defendant-Appellee, GORDON HANSHAW,Defendant-counter-claimant-Appellee, RICHARD A. MARSHACK, Receiver-Appellee.

No. 99-55395

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted August 8, 2000

Filed April 5, 2001

[Copyrighted Material Omitted]

[Copyrighted Material Omitted]

Jennifer L. Keller, Irvine, California, Cheryl L. Thomas, Santa Ana, California, for the plaintiff, counter-defendants, appellants.

Timothy L. McCandless, Los Angeles, California, for the defendant, counter-claimant, appellee.

Appeal from the United States District Court for the Central District of California Gary L. Taylor, District Judge, Presiding. D.C. No.CV-94-01023-GLT-1

Before: Alex Kozinski, Susan P. Graber and Raymond C. Fisher, Circuit Judges.

FISHER, Circuit Judge:

This appeal arises from a bitter sibling rivalry between two wealthy brothers, Frederick and Gordon Hanshaw, whose dispute wound up in a partnership dissolution proceeding in the federal district court. As the court-appointed receiver neared completion of his lengthy, often contentious accounting process and was preparing his report recommending the ultimate allocation of millions of dollars in assets between the brothers, Frederick Hanshaw allegedly offered the receiver a bribe during a private lunch meeting. Once alerted to this alleged bribe, the district court was confronted with the tricky task of determining what actually happened and whether Frederick had attempted to defraud the court. After conducting two evidentiary hearings, the district court found that Frederick had attempted to bribe the receiver, and sanctioned Frederick $500,000 payable to the United States and imposed a $200,000 surcharge against him in favor of Gordon. The principal questions we must address on this appeal relate to the scope and limits of the district court's authority to deal with allegations of attempted corruption of the judicial process and the procedural protections the accused party is entitled to before sanctions may be imposed.

FACTUAL AND PROCEDURAL BACKGROUND

Frederick Hanshaw is the sole shareholder of F. J. Hanshaw Enterprises, Inc. ("Enterprises"), a California corporation. Gordon Hanshaw is the president of Emerald River Development, Inc. ("Emerald River"), an Arizona real estate development corporation. This acrimonious litigation began in 1994 when Enterprises sued Emerald River and Gordon for a portion of Emerald River's profits. Emerald River and Gordon counter-sued both Enterprises and Frederick, claiming a de facto partnership existed and seeking a dissolution of the partnership.¹ After lengthy delays, bitter accusations, contempt sanctions, a failed settlement (the abrogation of which we upheld on appeal, F.J. Hanshaw Enterprises, Inc. v. Emerald River Development, Inc., No. 97-55751, 1998 WL 416505 (9th Cir. June 15, 1998) (unpublished)), and a trial, the district court ordered the dissolution of the partnership and appointed a receiver to oversee allocation of partnership assets. In its order appointing the receiver, the court enjoined the parties from interfering in any manner with the discharge of the receiver's duties.

Near the end of the receivership process, Frederick met with the receiver for lunch and offered him $100,000 and future business "to get this case resolved." After two evidentiary hearings -including hearing testimony from the three individuals present at the lunch meeting, Frederick, the receiver and his assistant -the district court found Frederick's offer to be an attempted bribe made "corruptly and in bad faith" and an attempted fraud on the court. Relying on its inherent and equitable powers, the court sanctioned Frederick and Enterprises $500,000 and imposed a $200,000 surcharge in favor of Gordon. The ultimate property distribution deducted Frederick's sanction and surcharge from Enterprises' share of the partnership assets, the district court finding that Enterprises was Frederick's alter ego and that he was its agent.

On appeal, Frederick and Enterprises argue that the district court's sanction and surcharge were tantamount to a finding of criminal contempt and, therefore, Frederick should have been afforded various procedural protections applicable to criminal trials. Appellants also contend that (a) the evidence was insufficient to support the district court's sanction and surcharge; (b) the sanction imposed against Frederick should not have been paid out of Enterprises' funds -a challenge to the district court's alter ego finding; (c) the district court should have been recused from presiding over the sanctions hearing; and (d) the ultimate distribution of the partnership assets was inequitable. We have jurisdiction pursuant to 28 U.S.C. S 1291. We hold that the $500,000 sanction was criminal in nature and thus required commensurate due process protections, some of which Appellants did not receive -including the right to an independent prosecutor, a jury trial and a reasonable-doubt standard of proof. Accordingly, we vacate the $500,000 sanction and the distribution of assets reflecting the imposition of that sanction and remand for further proceedings related thereto. On all other issues we affirm.

* * *

On June 22, 1998, Frederick telephoned the courtappointed receiver, Richard Marshack, and asked to meet with him. At that time, Marshack's final report allocating assets between Frederick and Gordon was nearing completion, including the receiver's resolution of several key items involving over one million dollars in value. That afternoon, Frederick, Marshack and his assistant, Debby Slack, met for lunch at a restaurant. What transpired at this lunch meeting is the basis for the district court's finding that Frederick attempted to bribe Marshack.

The first notice the district court received of a possible attempted bribe was a copy of a file memorandum Marshack wrote on July 2, 1998 (some 10 days after the lunch meeting) and faxed to the district court that day. In the memorandum, Marshack recounted that, when Slack went to the restroom shortly after they arrived, Frederick "leaned forward and low over the table and said `while she is gone, I want you to know that I will pay you $100,000 to get this case resolved.' " According to the memorandum, Marshack immediately told Frederick a receiver could not accept payment from either party, whereupon Frederick offered to retain Marshack as counsel to work on the case. As soon as Slack returned to the table, Marshack "reiterated" to Slack his discussion with Frederick, who did not deny Marshack's reiteration. Marshack and Slack then explained the role of a receiver to Frederick, including the limitation that any compensation must be approved by the district court. Marshack concluded his memo by saying, "after I told [Frederick] I could not accept the money without full disclosure, he indicated he would recommend it to the Court as additional compensation."

Confronted with this serious allegation of a party's misconduct, Judge Taylor took two actions: First, he referred the matter to the local office of the Federal Bureau of Investigation for investigation of possible criminal violations.² Second, he issued a minute order on July 13, 1998, ordering the parties, their respective counsel, and Marshack and Slack to appear for an evidentiary hearing on July 16. The district court did not specify the exact nature of the events giving rise to the order, but stated that "[t]he Court will inquire about recent events involving Receiver Richard A. Marshack."

At the July 16 evidentiary hearing, the district court questioned Marshack and Slack about the June 22 lunch meeting. Frederick, however, on the advice of his specially retained criminal counsel, invoked his Fifth Amendment right not to testify.

Slack testified that Marshack had informed her, upon her return to the table, that Frederick "really want[ed] to get the case settled [and] that he was willing to compensate [the receiver] separately for, uh, assisting in getting the case settled. Um, he also told me that [Frederick] had indicated that he wanted to hire [the receiver's firm] for that purpose." Slack did not believe Marshack had informed her during lunch of the exact amount of money Frederick had offered (although she testified that Marshack later told her that the amount was$100,000). Finally, Slack recounted Marshack's subsequent confusion regarding the events in question and his initial uncertainty regarding whether an attempted bribe had occurred.

Marshack's testimony was consistent with his July 2 file memorandum. In addition, he explained that he had not contacted the district court immediately after the lunch because he had difficulty interpreting the import of Frederick's offer. Pressed to specify whether Frederick's offer was a bribe, Marshack stated, "I am 100-percent certain as to what he said. I am, uh -the uncertainty comes as to what he meant." But Marshack did say he was 85 to 90 percent certain that Frederick had attempted to bribe him in his capacity as receiver.

Given the information gathered during the July 16 hearing, the district court on August 3 scheduled a second evidentiary hearing. The order stated: "Notice is hereby given that, arising out of the events of June 22, 1998, the Court will consider imposing sanctions and/or surcharges against Frederick J. Hanshaw up to the amount of one million dollars, and/or other appropriate evidentiary or property division sanctions and/or surcharges." The district court invited both parties to file "any briefing they consider appropriate on the topic of potential sanctions and/or surcharges." The court stated that, "[a]t the hearing, the Court [would] consider testimony presented at the ...