Limitations on Sanctions for Frivolous RICO Claims Post-Removal: Clarifying Rule 11, § 1927, and Inherent Power in Jobar Holding Corp. v. Halio

Introduction

This commentary examines the United States Court of Appeals for the Second Circuit’s decision in Jobar Holding Corp. v. Halio, No. 24-2879-cv (2d Cir. May 28, 2025), and the principles it affirms concerning sanctions under Federal Rule of Civil Procedure 11, 28 U.S.C. § 1927, and a district court’s inherent power. Plaintiffs-appellees Robert Buck and Jobar Holding Corporation (“Jobar”) sued defendant-appellant David Halio (“David”) for civil RICO, fraud, unjust enrichment, and related claims stemming from the alleged misappropriation of $1.5 million in “Holdback Funds.” After the district court granted David’s motion to dismiss the RICO claims and remanded the remaining state-law claims, it denied David’s request for sanctions. On appeal, the Second Circuit affirmed, clarifying when and how Rule 11 applies to removed cases and reaffirming the high threshold for imposing sanctions under § 1927 and a court’s inherent authority.

Summary of the Judgment

The Second Circuit unanimously held:

• The district court did not abuse its discretion in denying Rule 11 sanctions because Rule 11 does not apply to pleadings originally filed in state court and later removed, and because Plaintiffs conducted a “reasonable inquiry” before advancing their RICO claims.
• Sanctions under 28 U.S.C. § 1927 and the court’s inherent power likewise require a showing of bad faith—i.e., that the claims were both without colorable basis and brought for an improper purpose. No such showing was made.
• The judgment of the district court denying all three forms of sanctions was therefore affirmed.

Analysis

1. Precedents Cited

• Perez v. Posse Comitatus, 373 F.3d 321 (2d Cir. 2004) – Standard of review for Rule 11 sanctions: abuse of discretion.
• In re Sims, 534 F.3d 117 (2d Cir. 2008) – Clarified that an abuse of discretion occurs where a court bases its ruling on an erroneous view of law or clearly erroneous findings.
• Universitas Educ., LLC v. Nova Grp., Inc., 784 F.3d 99 (2d Cir. 2015) – Emphasized the district court’s superior familiarity with the case when reviewing Rule 11 sanctions.
• Mareno v. Jet Aviation of Am., Inc., 970 F.2d 1126 (2d Cir. 1992) – Held Rule 11 does not apply retroactively to complaints filed in state court and removed.
• Fishoff v. Coty Inc., 634 F.3d 647 (2d Cir. 2011) – Frivolous claims test: a “long-shot” theory is not necessarily sanctionable.
• Rossbach v. Montefiore Med. Ctr., 81 F.4th 124 (2d Cir. 2023) – Bad faith requirement for sanctions pursuant to a court’s inherent power.
• Oliveri v. Thompson, 803 F.2d 1265 (2d Cir. 1986) – § 1927 requires a clear showing of bad faith akin to inherent power sanctions.

2. Legal Reasoning

The court’s reasoning unfolded in three steps:

1. Rule 11 Does Not Cover Removed State-Court Complaints.
   Citing Mareno and Stiefvater, the panel held that Rule 11’s safe-harbor and certification requirements apply only to documents filed originally in federal court. Because Plaintiffs filed in state court and then removed the action, the district court properly declined to impose Rule 11 sanctions for the initial complaint.
2. Reasonableness of Plaintiffs’ Inquiry.
   Even if Rule 11 could reach the removed pleading, the court found no abuse of discretion in the district court’s conclusion that Plaintiffs’ state–court discovery (mandamus proceeding, affidavits, deposition) constituted a “reasonable inquiry” into their RICO claims, including timeliness issues and tolling theories.
3. High Threshold for § 1927 and Inherent-Power Sanctions.
   Both § 1927 and inherent power sanctions demand proof that the claims were “completely without merit” and motivated by bad faith (e.g., harassment, delay, forum-shopping). Because David offered no evidence of improper motive and the RICO claims were not egregiously frivolous, sanctions under either authority were unwarranted.