APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW MEXICO. (D.C. No. 2:09-CV-00752-JCH-WPL).
Katherine L. Melot and Billy R. Melot, Pro se, Defendants-Appellants.
Kathryn Keneally, Assistant Attorney General, Thomas J. Clark and Anthony T. Sheehan, Attorneys, Tax Division, Steven Yarbrough, Acting United States Attorney, Department of Justice, Washington, D.C. for Plaintiff-Appellee.
Before HARTZ, BALDOCK, and BACHARACH, Circuit Judges.
BACHARACH, Circuit Judge.
The district court sanctioned Mrs. Katherine L. Melot and Mr. Billy R. Melot based on the court's inherent authority. The Melots appeal and seek leave to proceed in forma pauperis. We grant leave to proceed in forma pauperis and address the merits of the appeal.
This appeal requires examination of the Fifth Amendment's Due Process Clause, which requires notice and an opportunity to be heard. In light of these requirements, a court considering sanctions must give the sanctioned party notice and an opportunity to be heard. Here, the court supplied notice that it was considering contempt, but not sanctions. Thus, the Melots never had notice of sanctions or an opportunity to argue against the district court's use of its inherent authority to order sanctions. The lack of notice and an opportunity to be heard led to a denial of due process. Thus, we reverse the sanctions order.
I. Suspicion of Fraud and the Imposition of Sanctions
Mr. and Mrs. Melot owe millions of dollars in federal taxes, and Mr. Billy Melot is serving time in federal prison for tax crimes. The debt led the United States to foreclose on the Melots' real properties, and the Melots tried to stop the foreclosure. The sanctions were imposed because of the methods used by the Melots.
The district court regarded them as fraudulent.
The disagreement began when the district court reduced the tax assessments to judgments and ordered the sale of the Melots' real properties. That order prompted a motion to intervene by Mr. Steven M. Byers, who filed documents asserting liens on the property. These documents supplied an address in New Mexico and were mailed from the city where the Melots' properties were located (Hobbs, New Mexico).
The government suspected fraud and collaboration with the Melots, pointing out to the court that: (1) Mr. Byers lived in prison--not Hobbs, New Mexico, (2) he could not own any liens because he was destitute, (3) the Melots had never disclosed any liens, (4) Mrs. Melot had signed Mr. Byers' name on the lien and motion to intervene, and (5) ...