A sanctions order against an attorney and his client was revised by the U.S. Court of Appeals for the Second Circuit Monday, which found that the district court's sanctioning of a novel legal theory could have unintended chilling effects.

Private attorney Stephen A. Katz and his former client, Nance Hutter, were sanctioned by U.S. District Judge Nelson Román of the Southern District of New York, who granted the motion by attorneys representing former mortgage provider Countrywide Bank and other defendants involved in a $1.785 million refinancing of Hutter's Bedford home in December 2006. Hutter alleged she was deceived into taking on a risky subprime loan.

As the appellate court notes in its summary order in Hutter v. Countrywide Bank, 17-372, over the five years of litigation, Hutter and her attorney amended her complaint three times. In January 2014, after discovery was concluded, Hutter proposed a fourth amended complaint. In it, as the appellate panel notes, core factual allegations were changed and a new claim, under New York Banking Law Section 598, was added over allegations one of the brokers involved was not properly licensed to practice in New York.

In August 2014, Román denied the leave to file, granting Rule 11 sanctions against Hutter and Katz for making allegations without evidentiary support, as well as for bringing a frivolous claim under state banking law and other provisions. Summary judgment in favor of Countrywide was granted. Hutter was ordered to pay a $100 fee. Her attorney was ordered to pay the cost of Countrywide's opposition to the motion for leave to amend, totaling $25,000.

The appellate panel dispatched quickly with Hutter's appeal of Countrywide's summary judgment. The panel likewise backed up the district court's sanctions against both Hutter and Katz, with the exception of the sanctions over bringing new claims under New York's banking law. The panel said the lower court was right when it found no implied private right of action to sue over doing business with an unlicensed broker, yet Katz's attempts to do so weren't onerous enough to merit sanctions. To do so would “risk deterring others from advancing novel theories” for fear of facing sanctions.

The panel of Judges Pierre Leval and José Cabranes of the U.S. Court of Appeals for the Second Circuit remanded the case to the district court to recalculate Katz's sanctions, to eliminate Countrywide's costs specifically related to its opposition of the banking law claim. Circuit Judge Guido Calabresi, who was assigned to the panel, recused himself.

Katz, who represented himself pro se, could not be reached for comment.

Bergstein & Ullrich name attorney Stephen Bergstein represented Hutter. ZeichnerEllman & Krause partner Kenneth Rudd represented the Countrywide defendants. Neither responded to a request for comment.