Saadeh v. Kagan

Background

Rafic Saadeh sued the Estate of Irving Kagan and others after Irving defaulted on a $130,000 loan. Michael Kagan was appointed administrator of the Estate. One of the Estate’s principal assets was a potential recovery from litigation in the United Kingdom involving an attorneys’ fee dispute.

Saadeh became concerned that the United Kingdom litigation proceeds would not be fully recovered for the Estate. He learned that the Estate had offered to settle the litigation for $100,000 and that Joshua Kagan and others claimed priority repayment as funders of the litigation. Saadeh sought emergency court orders to prevent the proceeds from being distributed.

On February 9, 2022, the court ordered Michael to notify Saadeh’s counsel within one business day of activity involving Estate assets. On March 1, the court issued a temporary restraining order barring dissipation of certain Estate assets and defining those assets to include funds passing through the Estate, even if the funds would later be distributed to secured creditors. Michael was ordered to send the restraining order to United Kingdom counsel and copy Saadeh’s counsel.

Before the restraining order could prevent the distribution, the United Kingdom litigation proceeds were paid out. The court then authorized expedited discovery and ordered that approximately $50,000 connected to Joshua’s distribution be placed in escrow. The third-party lenders ultimately agreed to return $89,242.67, including Joshua’s distribution, and the funds were held pending further court action.

Saadeh’s Motion

Saadeh moved for sanctions under the court’s inherent authority, arguing that Michael, Joshua, and John Maggio acted in bad faith and improperly increased the cost of the litigation. He also sought a finding of contempt, attorney’s fees and costs, case-dispositive sanctions, and other sanctions.

Rule 16 Sanctions

Federal Rule of Civil Procedure 16(f) permits sanctions for failing to obey a pretrial order. The court found that Michael waited about 36 hours before notifying Saadeh’s counsel that the United Kingdom litigation had been resolved. The court found that the delay was intended to facilitate rapid distribution of the funds. But the February 9 order required notice within one business day, and the court concluded that Michael’s Friday notice technically met that deadline.

Michael sent the temporary restraining order to United Kingdom counsel within 24 hours but failed to copy Saadeh’s counsel as required. The court found that this technical violation was immaterial and did not prejudice Saadeh. The court also concluded that Michael was otherwise compliant with the order and that the record did not show that Joshua or Maggio violated a clear court directive. The court therefore found that Rule 16 sanctions were not appropriate.

Sanctions Under 28 U.S.C. § 1927

Section 1927 allows a court to require an attorney to pay excess costs caused by unreasonably and vexatiously multiplying the proceedings. The court found that Maggio knowingly helped facilitate the distribution while emergency requests for relief were pending and that this conduct was inconsistent with his duty of candor to the court. The court stated that Maggio should have informed the court that the distribution was imminent.

The court nevertheless could not conclude that Maggio’s conduct was clearly vexatious under the legal standard for Section 1927 sanctions. It therefore declined to impose sanctions under that statute.

The Court’s Inherent Authority

A court may use its inherent authority to sanction a party or attorney who acts in bad faith, vexatiously, wantonly, or for oppressive reasons, but this power is reserved for exceptional circumstances and must be used with restraint.

The court found that Michael acted at the edge of the court’s orders and for the improper purpose of allowing the United Kingdom litigation funds to be distributed before the court could restrain them. The court also expressed serious concern about the conduct of Michael, Joshua, and Maggio in helping move the Estate assets while the emergency applications were pending.

The court concluded, however, that the funds had been recovered and were being held in escrow, so the ultimate harm to Saadeh—the loss of the Estate asset—had been avoided. The court also found that the defendants’ actions were not entirely without a legitimate legal basis, which was required for sanctions under the court’s inherent authority. Fees incurred by Saadeh’s counsel after the funds were recovered could not be treated as harm caused by the defendants’ conduct.

Disposition

Judge Sarah Netburn denied Saadeh’s motion for sanctions against Michael Kagan, Joshua Kagan, and John Maggio. The clerk was directed to terminate the motion.