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Federal judge plans to sanction 16 lawyers for 'gamesmanship' and 'forum shopping'

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After issuing a show-cause order earlier this year, a federal judge has now lowered the boom.

In a Thursday decision, Chief U.S. District Judge P.K. Holmes III announced that he intends to impose nonmonetary sanctions on all but one of the counsel of record for both sides in a class-action insurance coverage case, for using settlement tactics intended to benefit the attorneys at the expense of the plaintiffs. However, he scheduled a June 10 hearing to give the lawyers an opportunity to be heard before he issues a final order specifying the sanctions.

The San Antonio Express-News provides a link to the written opinion (PDF).

Holmes found that the 16 lawyers violated Rule 11 of the Federal Rules of Civil Procedure by agreeing to dismiss their Fort Smith, Arkansas, federal case and then immediately refiling it in state court with a stipulated settlement. Doing so, he says, was intended to avoid the greater scrutiny that a federal court would have given the purported $3.4 million settlement—which potentially could have provided monetary relief to nearly 15,000 homeowners with a USAA insurance policy but, due to onerous requirements, had actually seen claims filed by about 650 as of February. Meanwhile, the lawyers involved got an immediate payout of more than $1.8 million in attorney’s fees.

“Having considered the matter, the Court finds that Respondents filed a stipulation of dismissal in this case for the purposes of seeking a more favorable forum and escaping an adverse decision, and that this mid-litigation forum shopping was objectively unreasonable under the circumstances,” Holmes wrote.

But that wasn’t the only way in which the lawyers transgressed, the judge said. Invoking the court’s “inherent authority to sanction parties for abuse of the judicial process,” he said that a number of filings prior to the dismissal of the federal court case had misrepresented the lawyers’ intentions.

Initially filed in state court in December 2013 and properly removed to federal court in January 2014 under the Class Action Fairness Act (CAFA), the USAA case fell afoul of good-faith requirements when lawyers let it sit in federal court for over a year and submitted misleading filings implying that progress was being made, according to Holmes. These included, the judge said, a final status report and continuance request claiming “that they had ‘made substantial progress toward resolving this action,’ ” rather than an expected state-court settlement.

“This conduct—knowingly aimed at evading properly-invoked federal judicial scrutiny and gaming the system established by the Federal Rules of Civil Procedure to dismiss for a purpose Respondents knew or should have known to be improper under those Rules—reveals some degree of bad faith on the part of Respondents,” Holmes wrote. “An appropriate sanction is necessary to vindicate judicial authority.”

Additionally, however, the overall handling of the case in federal court by the 16 lawyers abused the judicial process and is punishable under the court’s inherent authority, the judge said.

“Defense counsel removed this action to federal court and then took advantage of the more difficult certification and settlement process in this forum to negotiate a settlement designed to result in a lower payout to an overinclusive class in exchange for a high attorney’s fee,” the opinion states.

“The result of Defense counsel invoking federal jurisdiction and then all Respondents treating that jurisdiction as a bargaining chip during pending litigation is that the Court was not treated as a forum in which to resolve a dispute but as leverage in negotiations that benefited everyone but the class members. This gamesmanship is improper in any case.”

The 16 counsel of record facing sanctions are: D. Matt Keil, Jason Earnest Roselius, John C. Goodson, Richard E. Norman, Stevan Earl Vowell, Timothy J. Myers, W. H. Taylor, William B. Putman, A. F. “Tom” Thompson, III, Kenneth (Casey) Castleberry, Matthew L. Mustokoff, R. Martin Weber, Jr., Stephen C. Engstrom, Lyn Peeples Pruitt, Stephen Edward Goldman, and Wystan Michael Ackerman.

Their lawyers either could not be reached for comment Thursday or declined to comment, reports the Northwest Arkansas Democrat Gazette.

A 17th lawyer escaped sanctions because he stopped working on the case before the issues arose.

At best, the planned sanctions would be a reprimand, for those Holmes determines not to have acted in bad faith. At worst, for those who did act in bad faith—because they were listed as counsel on filings in at least one of two earlier federal appeals court cases that banned such forum-shopping, the judge said—they would be required to disclose the Rule 11 sanction in future federal class-actions in Arkansas. (The earlier 8th U.S. Circuit Court of Appeals cases are Hamm v. Rhone-Poulenc Rorer Pharm., Inc., 187 F.3d 941, 950, which was decided in 1999, and Thatcher v. Hanover Insurance Group, Inc., 659 F.3d 1212, which was decided in 2011.)

More is not needed to correct the problem, although he regards the lawyers’ handling of the case as a “serious violation,” Holmes said:

“Because the Court can and will institute changes to the way it manages putative class actions, and because this order should make clear to the bar that invoking federal jurisdiction under CAFA does not allow federal jurisdiction to be treated as a bargaining chip, other attorneys in this district—even those who remain unfamiliar with the holdings in Hamm and Thatcher—will also be unlikely to repeat this violation.”

Related coverage:

ABAJournal.com: “Did lawyers use federal court as a ‘bargaining chip’? Irked judge schedules sanctions hearing”