     14-1626
     Chong v. Chang

                          UNITED STATES COURT OF APPEALS
                              FOR THE SECOND CIRCUIT

                                     SUMMARY ORDER
     RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED
     ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE
     PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A
     DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN
     ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST
     SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

 1            At a stated term of the United States Court of Appeals
 2       for the Second Circuit, held at the Thurgood Marshall United
 3       States Courthouse, 40 Foley Square, in the City of New York,
 4       on the 3rd day of April, two thousand fifteen.
 5
 6       PRESENT: DENNIS JACOBS,
 7                DENNY CHIN,
 8                              Circuit Judges,
 9                ELIZABETH A. WOLFORD,
10                              District Judge.*
11
12       - - - - - - - - - - - - - - - - - - - -X
13       MICHAEL K. CHONG,
14                     Appellant,
15
16                    -v.-                                               14-1626
17
18       KWO SHIN CHANG, STEVEN WONG,
19                     Appellees.**
20       - - - - - - - - - - - - - - - - - - - -X
21



                *
               The Honorable Elizabeth A. Wolford, United States
         District Judge for the Western District of New York, sitting
         by designation.
                **
                The Clerk of Court is directed to amend the official
         caption as set forth above.
 1   FOR APPELLANT:             MICHAEL K. CHONG, Fort Lee, New
 2                              Jersey.
 3
 4   FOR APPELLEES:             MORTON S. MINSLEY, New York, New
 5                              York.
 6
 7        Appeal from a judgment of the United States District
 8   Court for the Southern District of New York (Forrest, J.).
 9
10        UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED
11   AND DECREED that the judgment of the district court be
12   VACATED AND REMANDED.
13
14        Michael K. Chong appeals from the judgment of the
15   United States District Court for the Southern District of
16   New York (Forrest, J.), granting appellees’ motion for
17   attorney’s fees and costs as a sanction for pursuing a
18   baseless third-party complaint against appellees, Kwo Shin
19   Chang and Steven Wong. We assume the parties’ familiarity
20   with the underlying facts, the procedural history, and the
21   issues presented for review.
22
23        Chang, Wong, and others filed an action against Chong’s
24   client, Vihn Ly, asserting claims under the Fair Labor
25   Standards Act (“FLSA”) and New York Labor Law (“NYLL”) in
26   connection with the operation of a restaurant, Neo Sushi.
27   Ly’s answer asserted counterclaims against Chang and Wong
28   for fraud and breach of an alleged partnership agreement
29   among Ly, Chang and Wong to purchase and own Neo Sushi. An
30   amended complaint was filed in which Chang and Wong were no
31   longer plaintiffs; Ly asserted the same claims against Chang
32   and Wong, brought in the form of a third-party complaint.
33
34        After a trial, the district court entered judgment in
35   favor of Chang and Wong, concluding “that there was a
36   failure of proof as to essential elements of both claims.”
37   Special App. at 5. Chang and Wong sought sanctions in the
38   form of fees and costs pursuant to Federal Rule of Civil
39   Procedure 11, 28 U.S.C. § 1927, and the inherent power of
40   the court. The court determined sanctions were “warranted
41   under all three asserted grounds.” Id. at 7.
42
43        We review a district court’s award of sanctions,
44   whether under Rule 11, § 1927, or its inherent power for
45   abuse of discretion. See StreetEasy, Inc. v. Chertok, 752
46   F.3d 298, 306-07 (2d Cir. 2014) (discussing Rule 11
47   sanctions); Enmon v. Prospect Capital Corp., 675 F.3d 138,

                                  2
 1   143 (2d Cir. 2012) (discussing § 1927 and the court’s
 2   inherent power).
 3
 4        Chong argues that the district court erred in imposing
 5   sanctions pursuant to Rule 11 because Chang and Wong failed
 6   to comply with the procedural requirements of the Rule’s
 7   safe harbor provision. The district court found that
 8   “sufficient notice” was provided because opposing counsel
 9   warned Chong by e-mail “about the possibility of attorneys’
10   fees if he had to sit through trial.” Special App. at 8.
11   But the “safe-harbor provision is a strict procedural
12   requirement” and “[a]n informal warning . . . without
13   service of a separate Rule 11 motion is not sufficient.”
14   Star Mark Mgmt., Inc. v. Koon Chun Hing Kee Soy & Sauce
15   Factory, Ltd., 682 F.3d 170, 175 (2d Cir. 2012) (per
16   curiam). The e-mail sent to Chong in this case does not
17   satisfy the requirements under the Rule.
18
19        Although the court set out the applicable standards for
20   sanctions under Rule 11, § 1927, and the court’s inherent
21   authority, it did not engage in “separate consideration of
22   the available sanctions machinery[, which] is not only
23   warranted, but necessary for meaningful review.” United
24   States v. Int’l Bhd. of Teamsters, Chauffeurs, Warehousemen
25   & Helpers of Am., 948 F.2d 1338, 1346 (2d Cir. 1991). A
26   district court should “treat[] and determine[ each
27   authority] separately” and the court’s “resulting findings
28   must appear with reasonable specificity in terms of the
29   perceived misconduct and the sanctioning authority.”
30   MacDraw, Inc. v. CIT Grp. Equip. Fin., Inc., 73 F.3d 1253,
31   1262 (2d Cir. 1996) (internal quotation marks omitted).
32
33        The court’s opinion lacks the specific findings
34   required to support the imposition of sanctions under either
35   its inherent authority or § 1927, and remand is therefore
36   warranted. Schlaifer Nance & Co. v. Estate of Warhol, 194
37   F.3d 323, 338 (2d Cir. 1999). While it is true that “[b]ad
38   faith can be inferred when the actions taken are so
39   completely without merit as to require the conclusion that
40   they must have been undertaken for some improper purpose,”
41   id. (internal quotation marks omitted), the court’s
42   determination that “there was absolutely no merit to the
43   claims asserted” is not sufficient. Special App. 3 n.3.
44
45        The standard requires “clear evidence that (1) the
46   offending party’s claims were entirely meritless and (2) the
47   party acted for improper purposes.” Revson v. Cinque &

                                  3
 1   Cinque, PC, 221 F.3d 71, 79 (2d Cir. 2000) (internal
 2   quotation marks omitted). The court’s only findings are
 3   that: “third-party plaintiffs failed to introduce evidence
 4   sufficient to support even a prima facie” claim; the
 5   “failure[] of proof [was] . . . powerful evidence of the
 6   fact that the complaint was meritless from the start;” and
 7   “[t]his obvious lack of merit gives rise to precisely the
 8   inference that . . . the third-party complaint was filed
 9   solely to pressure plaintiffs into withdrawing meritorious
10   FLSA and NYLL claims.” Special App. at 7-8. These findings
11   collapse the relevant standard into a single requirement
12   that the court find the claims baseless. But, as the
13   district court recognized, “one of the ways this could
14   [have] play[ed] out is with a wage and labor claim that
15   there was a period of time during which the partnership
16   operated where there were monies due and owing to the
17   employees and that [the] debt, if any, [was] owed by the
18   partnership” as opposed to by Ly alone. Appellant App. at
19   71-72.
20
21        For the foregoing reasons, and finding no merit in
22   Chang and Wong’s other arguments, we hereby VACATE and
23   REMAND the judgment of the district court.
24
25                              FOR THE COURT:
26                              CATHERINE O’HAGAN WOLFE, CLERK
27




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