Saadeh v. Kagan

Background

Rafic Saadeh sued the Estate of Irving Kagan and Irving Kagan’s sons, Michael Kagan and Joshua Kagan. Saadeh sought to collect on a $130,000 loan to Irving Kagan and asserted fraudulent-conveyance claims against the Estate and the sons. The court had entered a default judgment for Saadeh against the Estate in the amount of $178,265.02, with interest, making Saadeh a judgment creditor of the Estate.

One potential Estate asset was a claim in litigation in the United Kingdom for unpaid legal-consulting fees allegedly owed to Irving Kagan. After learning that the Estate planned to settle that litigation, Saadeh sought an order preventing the defendants from distributing or encumbering Estate assets. On March 1, 2022, Magistrate Judge Sarah Netburn recommended an order restraining Estate assets and imposed a temporary restraining order while the recommendation was being reviewed. The order required Michael, the Estate’s administrator, to deliver it to the Estate’s United Kingdom counsel.

Before the order was delivered, settlement funds were temporarily distributed to third-party litigation funders, including Joshua. The funds were later returned and placed in escrow. Judge Netburn authorized expedited discovery about the events, including communications, funding agreements, and bank statements.

Sanctions motion

Saadeh moved for sanctions against Michael, Joshua, and Joshua’s attorney, John Maggio. He relied on Federal Rule of Civil Procedure 16, which permits sanctions for violating certain pretrial orders; 28 U.S.C. § 1927, which can authorize sanctions for an attorney’s unreasonable and vexatious conduct; and the court’s inherent power to sanction bad-faith litigation conduct. Saadeh also sought civil-contempt relief based on alleged violations of three court orders.

Saadeh argued that Michael had failed to give timely notice about Estate activity, had provided misleading information about the timing and destination of the settlement funds, and had failed to copy Saadeh’s attorney when transmitting the temporary restraining order. He also argued that Michael, Joshua, and Maggio had acted to move the funds while Saadeh’s request for emergency relief was pending and had delayed notifying the court after the funds were distributed.

Joshua and Maggio argued that the temporary restraining order’s purpose had been achieved because all distributed funds had been returned and were being held in escrow. Michael argued that his conduct before the order complied with the court’s requirements and that, after he understood the order’s scope, he acted to stop the transfers and recover the funds.

Magistrate judge’s recommendations

Judge Netburn recommended denying the sanctions motion. Under Rule 16, she found that Michael had technically complied with the order requiring notice of the impending settlement, although he had complied with its letter rather than its spirit. She found that Michael’s failure to copy Saadeh’s attorney when transmitting the temporary restraining order was immaterial because the funds had already been distributed by then.

Under Section 1927, Judge Netburn found that Maggio’s conduct was not clearly vexatious, even though she indicated that it was worthy of criticism and that he likely breached his duty of candor to the court. Under the court’s inherent power, she found that Michael’s conduct was near the edge of an improper purpose but was not entirely without a reasonable legal basis and had not ultimately harmed Saadeh because the funds were recovered.

Saadeh later moved for reconsideration, arguing that he should receive the attorney’s fees he incurred in the discovery concerning the settlement. Judge Netburn recommended denying reconsideration because the circumstances did not create a manifest injustice. She noted that Saadeh chose to continue with several depositions after the funds had been placed in escrow.

District court’s analysis

Judge Engelmayer reviewed the recommendations under the standard for nondispositive matters. Under that standard, the district court may set aside a magistrate judge’s decision if it is clearly erroneous or contrary to law. A decision is contrary to law if it fails to apply, or misapplies, relevant statutes, precedent, or procedural rules.

The court held that Saadeh had not met that demanding standard. It rejected his arguments that Judge Netburn should have found Michael’s statements knowingly false, drawn a broader negative inference from the defendants’ communications, or sanctioned Maggio for violating his duty of candor. The court also upheld the finding that Michael had complied with the February 25 notice order and that his failure to copy Saadeh’s attorney when transmitting the temporary restraining order did not justify sanctions.

The court further held that Judge Netburn did not clearly err in finding Maggio’s conduct less than clearly vexatious. The record showed that Maggio ultimately made Joshua aware of the temporary restraining order and advised him to safeguard the funds he had received.

Finally, the court rejected Saadeh’s argument that Judge Netburn had improperly focused on the fact that the funds were recovered instead of focusing on the defendants’ intent. The court explained that sanctions under the court’s inherent power require bad-faith conduct that is entirely without a reasonable legal basis. Although the defendants’ conduct was “well short of noble,” the court agreed that it was not entirely without such a basis. The court also stated that the absence of harm was not the sole reason for denying sanctions.

Disposition

The court adopted Judge Netburn’s recommendations in full and denied Saadeh’s motions for sanctions and for reconsideration. The opinion states that the trial remained scheduled for November 13, 2023, with a final pretrial conference scheduled for November 3, 2023.