§ 1927 — Standards for Imposing Liability — Reckless Disregard Sufficient in Fifth Circuit — Prerequisites to Awarding Damages — Not Sanctionable to Pursue Compulsory Counterclaim to Save Parallel State Court Action Where Opponent Refuses Stay

Lawyers Title Insurance Corp. v. Doubletree Partners, LP, 2014 U.S. App. LEXIS 717 (5th Cir. Jan. 14, 2014):

In a consolidated appeal, Doubletree's attorneys, Kalis and Martin, challenge the magistrate judge's award of attorneys' fees to Lawyers Title under 28 U.S.C. § 1927. The magistrate judge granted in part Lawyers Title's motion for attorneys' fees and ordered Kalis and Martin to pay $55,310.00 to Lawyers Title. The magistrate judge imposed the sanctions based on the lawyers' pursuit of Doubletree's extracontractual claims. We hold that the magistrate judge abused his discretion in awarding fees to Lawyers Title.

Lawyers Title argues the award of fees was appropriate because Kalis and Martin persistently pursued meritless extracontractual claims, which were unsupported by the facts or law. Pursuit of these claims, Lawyers Title argues, multiplied the proceedings and distracted it and the court from the breach of contract issue. Lawyers Title further contends that Doubletree's counsels' conduct in pursuit of its claims--including inadequate citations of authority in briefing and persistent assertions of baseless arguments--also supports an award of attorneys' fees.

Kalis and Martin argue that, for several reasons, the fee award was inappropriate here. First, Kalis and Martin note that, when they first entered their appearance in this lawsuit filed by Lawyers Title in the Eastern District of Texas, Doubletree had already filed a separate state court action alleging the extracontractual claims against Lawyers Title. At that time, Doubletree was represented by different counsel in its state court lawsuit. After entering their appearance, Kalis and Martin believed the state court extracontractual claims might be compulsory counterclaims in the federal court lawsuit and would be waived if not asserted under Federal Rule of Civil Procedure 13(a). Kalis and Martin offered to enter into a non-waiver agreement with Lawyers Title to toll the extracontractual claims and thereby avoid having to litigate them until the policy coverage question was decided. Lawyers Title rejected the offer. At that point, fearing they would commit legal malpractice if the extracontractual claims were not pursued in federal litigation, Kalis and Martin filed the extracontractual claims in federal court. Based on this series of events, Kalis and Martin argue that their conduct was not unreasonable or vexatious, but rather a good-faith effort to avoid waiving Doubletree's extracontractual claims.

Kalis and Martin also argue that, even if the court concludes that the extracontractual claims lack merit, Lawyers Title has not shown that their conduct in pursuing the claims rose to the level of bad faith, improper motive, or reckless disregard, as required for a fee award under § 1927. Further, Kalis and Martin contend, their references to Lawyers Title's "time traveling policy" and their allegations that Lawyers Title went back in time to rewrite its insurance policy do not warrant a fee award.

As mentioned, we review an award of sanctions under § 1927 for abuse of discretion.83 Section 1927 provides:

 

   Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct.84

An award of attorneys' fees under § 1927 requires "evidence of bad faith, improper motive, or reckless disregard of the duty owed to the court."85 In awarding fees under this provision, "[t]he district court must make detailed factual findings."86 Specifically, the court is required to "(1) identify sanctionable conduct and distinguish it from the reasons for deciding the case on the merits, (2) link the sanctionable conduct to the size of the sanctions, and (3) differentiate between sanctions awarded under different statutes."87 Further, punishment under § 1927 is "sparingly applied."88 This court has held that sanctions under § 1927 are "punitive in nature and require clear and convincing evidence" that sanctions are justified.89 "An unsuccessful claim is not necessarily actionable."90 Section 1927 sanctions should be employed "only in instances evidencing a serious and standard disregard for the orderly process of justice," lest "the legitimate zeal of an attorney in representing [a] client [be] dampened."91

83   See Cambridge Toxicology Grp., Inc. v. Exnicios, 495 F.3d 169, 180 (5th Cir. 2007) ("A district court abuses its discretion if it awards sanctions based on an erroneous view of the law or on a clearly erroneous assessment of the evidence.") (internal quotation marks and citation omitted).

84   28 U.S.C. § 1927.

85   Cambridge Toxicology, 495 F.3d at 180 (quoting Procter & Gamble Co. v. Amway Corp., 280 F.3d 519, 525 (5th Cir. 2002)).

86   Id.

87   Id. at 180-81  (quoting Procter & Gamble Co., 280 F.3d at 526).

88   Meadowbriar Home for Children, Inc. v. Gunn, 81 F.3d 521, 535 (5th Cir. 1996) (internal quotation marks and citation omitted).

89   Bryant v. Military Dep't of Miss., 597 F.3d 678, 694 (5th Cir. 2010) (internal quotation marks and citation omitted).

90   See Hogue v. Royse City, Tex., 939 F.2d 1249, 1256 (5th Cir. 1991).

91   FDIC v. Conner, 20 F.3d 1376, 1384 (5th Cir. 1994) (internal quotation marks and citations omitted).

Here, the magistrate judge abused his discretion in awarding fees to Lawyers Title. First, there is no clear and convincing evidence that Kalis and Martin's conduct in filing and litigating the extracontractual claims was a result of bad faith, improper motive, or reckless disregard of the duty owed the court. The evidence instead shows that Kalis and Martin acted in good faith in pursuing the extracontractual claims because they sincerely believed that those claims would be waived if not asserted in federal court. Indeed, they even tried to put the extracontractual claims "on hold" pending resolution of the breach of contract issue, but Lawyers Title's attorneys rejected this offer. Lawyers Title has not contradicted this evidence of good faith by showing at least a reckless disregard of the duty owed the court by Kalis and Martin. At most, it has shown that Doubletree's extracontractual claims lack merit, which is not a sufficient basis for awarding sanctions.

Second, the reasons given by the magistrate judge for awarding sanctions do not support his award. The magistrate judge noted that the extracontractual claims had no basis in fact, emphasizing that Doubletree "could not identify a single misrepresentation made by" Lawyers Title. For one thing, whether the claims pursued had a "basis in fact" is not the applicable standard in reviewing a sanctions award: The standard is whether the claims were pursued in bad faith, for improper motive, or in reckless disregard of the duty owed the court. As discussed, that standard has not been satisfied. In addition, although Doubletree originally brought fraud and negligent misrepresentation claims, the majority of Doubletree's claims were not that Lawyers Title made express misrepresentations, but that Lawyers Title had no reasonable basis for denying coverage, failed to settle in good faith, failed to provide an adequate explanation of denial, and other similar claims.  Therefore, even if Doubletree never identified a misrepresentation by Lawyers Title, it still might recover on many of its extracontractual claims.

The magistrate judge also based his award on the fact that Kalis and Martin alleged that Lawyers Title had the ability to "time travel," repeatedly accused Lawyers Title of going back in time to rewrite its insurance policy, and questioned witnesses regarding their ability to "time travel." Although this was inappropriate rhetoric, alone it does not rise to the level of bad faith, improper motive, or reckless disregard for the duty owed the court.

In conclusion, the magistrate judge abused his discretion in awarding fees, and we thus reverse the fee award to Lawyers Title.

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