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Adams v. United Services Automobile Association

United States District Court, W.D. Arkansas, Fort Smith Division

August 3, 2016

MARK I. and KATHERINE S. ADAMS, individually and on behalf of all others similarly situated PLAINTIFFS



         Before the Court is the matter of potential sanctions against Respondents 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., and Stephen C. Engstrom (collectively, Plaintiffs’ counsel); and Lyn Peeples Pruitt, Stephen Edward Goldman, and Wystan Michael Ackerman (collectively, “Defense counsel”).[1]

         I. Background[2]

         On January 15, 2014, this case was removed to this Court from the Circuit Court of Polk County, Arkansas. During the course of this putative class action, Respondents engaged in protracted settlement negotiations. After agreeing on the terms of a class settlement, on June 19, 2015, Respondents stipulated to dismissal of the action from this Court and immediately filed a new action in the Circuit Court of Polk County, along with a motion to certify a class and approve their proposed class settlement. Because Arkansas courts have a lenient approach to class certification and require no heightened attention when a class is certified for settlement purposes, the class was certified and over-noticed. Final approval was given in the state court to a claims-made settlement that resulted in a 4% claims rate against the estimated settlement value of $3, 445, 598 and $1, 850, 000 in fees and expenses awarded to Plaintiffs’ counsel through a quick-pay provision, benefitting Plaintiffs’ counsel and Defendants at the expense of the class. On December 21, 2015, the Court entered an order for all Respondents to show cause why sanctions should not be imposed pursuant to Federal Rule of Civil Procedure 11(b)(1). The Court issued an additional notice on February 11, 2016, advising Respondents that sanctions pursuant to the Court’s inherent disciplinary authority were also under consideration. Respondents filed briefs, affidavits, and other supporting documents, and a hearing was set for February 18, 2016. On April 14, 2016, the Court issued an order finding that Rule 11 was violated when Respondents stipulated to dismissal of this action for the improper purpose of seeking a more favorable forum and avoiding an adverse decision. The Court also found that Respondents’ use of properly-attached federal jurisdiction as a mid-litigation bargaining chip was an abuse of the judicial process. The Court further determined that the conduct of at least some Respondents was characterized by bad faith, and that sanctions were warranted. So that Respondents might have the notice that is essential to due process, the Court listed the sanctions it was considering and set a hearing at which Respondents could be heard with respect to those sanctions, which included both traditional sanctions and injunctive sanctions.[3]

         Respondents submitted supplemental briefs and affidavits in response to the Court’s order, and on June 24, 2016, the Court held a hearing on the issue of whether and what sanctions should be issued. At the close of that hearing, the Court took the matter under advisement and now issues this opinion and order.

         II. Sanctions Analysis

         The sanctions process is a fluid one. After the Court determined in this case that a violation of Rule 11 occurred and that the judicial process had been abused, it was obligated to give notice of the sanctions it intended to impose, as well as an opportunity to be heard. Sec. Nat’l Bank of Sioux City, Iowa v. Day, 800 F.3d 936, 945 (8th Cir. 2015). Respondents availed themselves of the opportunity to be heard by presenting factors that were not previously presented to the Court, and addressing specific concerns identified by the Court. One result of the fluidity in this process is that corrections to the Court’s prior opinion and order may be necessary. Therefore, to the extent any findings from this Court’s previous opinion and order are controverted by this opinion and order, this opinion and order controls.

         To that end, at the June 24 hearing the Court was more fully informed about the role of Respondent Stephen C. Engstrom in this matter. Mr. Engstrom’s role was to argue the depreciation of labor issue before the Arkansas Supreme Court, which legal issue was central to the merits of this and other cases. Counsel for Mr. Engstrom clarified that while Mr. Engstrom “continued to follow the case, ” and while he was aware that the parties intended to return to state court for settlement, Mr. Engstrom was not consulted about that decision. (Doc. 77, pp. 17:23-18:7). The Court has previously explained that minimal participation does not absolve a Respondent of responsibility for a Rule 11 violation. (Doc. 61, p. 18). In light of this additional information, however, it is difficult for the Court to distinguish Mr. Engstrom’s role from that of Stephen O. Clancy, insofar as Mr. Engstrom’s substantive participation in the matter following his argument before the Arkansas Supreme Court largely seems to have ended. Though it remains the opinion of the Court that a participating attorney’s silence in the face of improper conduct is not objectively reasonable, the Court is left with the impression that Mr. Engstrom’s continued participation in this matter was much more limited than that of his co-counsel, and even describing that participation at the time of the misconduct as “minimal” may overstate it. On the evidence before the Court, Mr. Engstrom bears no responsibility for the violation in this case.

         Similarly, in its prior opinion and order the Court identified silence before the state court on the “penalty of perjury” issue as evidence that the actions before this Court of Respondents Vowell, Putman, Taylor, Keil, and Ackerman were characterized by some degree of bad faith. (Doc. 61, pp. 22-23, n.15). At the June 24th hearing, Plaintiffs’ counsel called to the Court’s attention the actual objections made before the state court, and later filed those objections for the Court’s review. (Doc. 76). Regardless of the merits of those objections, in light of the lack of clarity in their presentation of the penalty of perjury issue, some confusion before the state court is understandable. Additionally, Respondent Ackerman has pointed out that he was not allowed to participate in the hearing before the state court. (Doc. 75-4, ¶ 20). The conduct of Respondents at the December 16, 2015 state court hearing is not sufficiently weighty evidence of bad faith for the Court to continue to rely on it in finding bad faith characterized Respondents’ misconduct.[4]

         The Court also identified the updated Rule 26(f) report (Doc. 31), which failed to address either the settlement or the parties’ intended dismissal (topics easily addressed in such a report when explaining why, for example, a long discovery period is not desired) as evidence that Respondents deliberately concealed their intent to dismiss and insulate the case from this Court’s review, and therefore as evidence of bad faith on the part of Respondents Mustokoff and Ackerman. (Doc. 61, pp. 22-23, n.15). Though the Court finds the innocent explanations offered by Respondents for the Rule 26(f) report less convincing than the explanations offered regarding the state court hearing, there is now at least a greater question as to whether the filing of the Rule 26(f) report was an act of bad faith. This Court is mindful of the admonition that “judges must be especially careful where they are both prosecutor and judge.” Young v. City of Providence ex rel. Napolitano, 404 F.3d 33, 40 (1st Cir. 2005). Therefore, the Court will give the benefit of the doubt to Respondents on this issue, and will not attribute the filing of the misleading Rule 26(f) report to malice. The Rule 26(f) report is insufficiently weighty evidence of bad faith for the Court to continue to rely on it in finding bad faith characterized Respondents’ misconduct.

         Other issues raised at the hearing and in briefing border on argument as to why the Court should reconsider its finding that Rule 11 was violated and the judicial process abused. Though these arguments do not require the Court to retreat from those findings, the arguments are of sufficient import that they must be addressed before the Court imposes sanctions. As an initial matter, the Court rejects Respondents’ argument that they reasonably believed their conduct was proper because they have not previously been sanctioned for it. It is doubtful that in any cases where Respondents stipulated to dismissal so they could file a new lawsuit in state court to certify and settle a class action on terms negotiated in federal court, the presiding judges had any real awareness of what happened post-dismissal. Stipulations of dismissal are self-effecting. Gardiner v. A.H. Robins Co., Inc., 747 F.2d 1180, 1189 (8th Cir. 1984) (“Caselaw concerning stipulated dismissals under Rule 41(a)(1)(ii) is clear that the entry of such a stipulation of dismissal is effective automatically and does not require judicial approval.”).[5] This means no order is necessary for the case to substantively end on the terms of the stipulation. Any such order could at most have an administrative effect limited to docket recordkeeping. It is not reasonable to read a pro forma or text-only order of dismissal that ultimately has no legal effect as a judicial ruling condoning Respondents’ dismissal tactic. Additionally, courts possess a great amount of discretion in managing their own dockets. In cases of parallel litigation, a federal court’s decision to delay or stay an action pending before it while a parallel state action proceeds toward an outcome that will ultimately resolve the federal action and require its dismissal implicates a different analysis than this case, where the issue is Respondents’ dismissal of a pending federal action in which they have reached agreed class settlement terms so that they could get approval of those desired settlement terms in a state forum.

         Plaintiffs’ counsels have also rehashed the argument that the 2003 amendments to Rule 23 specifically allow the conduct which occurred here, that the Class Action Fairness Act of 2005 (“CAFA”) did not specifically disallow the conduct, and that therefore the conduct cannot have been unreasonable. This argument is made to show that because Respondents relied on a reasonable interpretation of the law, their conduct was not characterized by bad faith, though if the Court were to agree with it, it would necessitate a reexamination of whether a Rule 11 violation occurred at all. In essence, Plaintiffs’ counsel argue that in amending Rule 23, “the purpose of the rule change was to permit parties to divest federal courts of review of putative class actions if they are uncertified, ” and “the rule-makers allowed parties to divest federal courts of jurisdiction over uncertified class actions, ” (Doc. 77, p. 9:10-12; 10:10-11). Plaintiffs’ counsel infer too much from the difference in the Rule as proposed and the Rule as amended. They correctly note that after the comment period, the proposed Rule was changed so that a plaintiff in a putative class action could dismiss his case without prior Court approval. (Doc. 77, pp. 9:25-10:3; 10:5-8). They point out that the proposed version of the Rule, which ultimately was not adopted, required the court’s permission before class claims, issues, or defenses could be resolved by a putative class representative. The advisory committee notes for the 2003 amendments juxtapose the interpretation of the superseded version of the Rule-“requir[ing] court approval of settlements with putative class representatives that resolved only individual claims”-with the amended version-“requir[ing] approval only if the claims, issues, or defenses of a certified class are resolved by a settlement, voluntary dismissal, or compromise.” Fed.R.Civ.P. 23 advisory committee’s note to 2003 amendment. Read in the context of the Rule as proposed, this juxtaposition does not reveal that the advisory committee intended to allow parties to divest federal courts of jurisdiction or review over uncertified class actions so that they could be certified and settled in another court. Rather, it reveals that the amendment was made to allow putative class representatives to settle their individual claims without court approval before any class action was certified. It must be noted that settlement of individual claims without court approval is not what happened in this case, where Respondents negotiated a class settlement in this Court then stipulated to dismissal, effectively remanding the case to state court for class certification and review of the settlement.

         An interpretation of the 2003 amendments that allows parties to divest the Court of jurisdiction in this way is unreasonable. It is well-settled, both as a matter of federal law and of Arkansas law, that once a court’s subject matter jurisdiction attaches, subsequent events do not divest the court of jurisdiction. See Mullen v. Torrance, 22 U.S. 537, 539 (1824) (“It is quite clear, that the jurisdiction of the Court depends upon the state of things at the time of the action brought, and that after vesting, it cannot be ousted by subsequent events.” (emphasis added)); Estes v. Martin, 34 Ark. 410, 419 (1879) (“It is the universal rule, so far as we know, in the courts of the various states, and in the United States courts, that where a court once rightfully acquires jurisdiction of a cause, it has the right to retain and decide.”); accord St. Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283, 293 (1938) (“Thus events occurring subsequent to removal which reduce the amount recoverable, whether beyond the plaintiff’s control or the result of his volition, do not oust the district court’s jurisdiction once it has attached.”). In the face of such well-settled law, for it to be reasonable to believe that the change in Federal Rule of Civil Procedure 23 was intended to abrogate this bedrock jurisdictional principle, some clear indication of this intent is necessary. One possible implication to be drawn from a difference between the Rule as proposed and as adopted does not suffice.

         Nor can it be the case that the 2003 amendments to Rule 23 divest the Court of its authority to review a case in which the parties are stipulating to dismissal in order to ...

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