Commercial Litigation and Arbitration

§ 1927 Sanctions — Recklessness May Suffice to Show Bad Faith — Multiplicity Essential: “Section 1927 Only Authorizes Shifting Fees That Are Associated with the Persistent Prosecution of a Meritless Claim.” (Good Quotes)

Hamaker v. Enerco Grp., Inc., 2014 U.S. App. LEXIS 9868 (5th Cir. May 28, 2014):

Patricia Ayala brought suit in Louisiana state court  [*2] against a manufacturer, its insurers, and a retail store alleging that defects in a propane heater caused the death of her husband. The case was removed to federal court by the manufacturer and insurers who argued the non-diverse retailer, Gabriel Building Supply, was improperly joined. The district court, finding improper joinder, dismissed Gabriel, and retained jurisdiction over the remaining defendants. The court later granted summary judgment for the defendants on Ayala's products liability claim. The district court also sanctioned Ayala's counsel for filing a second, nearly identical action in state court after the district court denied Ayala's motion to remand the case. Ayala argues the court erred in dismissing Gabriel from the suit and denying her motion to remand. She also appeals the grant of summary judgment for the remaining defendants on her products liability claim. Ayala's counsel challenges the imposition of sanctions. We AFFIRM the district court's dismissal of Gabriel from the suit and the court's grant of summary judgment for the remaining defendants on Ayala's products liability claim. The imposition of sanctions is REVERSED.


III. Sanctions

The district court imposed sanctions on Ayala's counsel under 28 U.S.C. § 1927. It 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.

28 U.S.C. § 1927. "An award of attorney's fees under § 1927 requires evidence of bad faith, improper motive, or reckless disregard of the duty owed to the court." Lawyers Title Ins. Corp. v. Doubletree Partners, L.P., 739 F.3d 848, 871 (5th Cir. 2014). We review a district court's award of sanctions under Section 1927 for abuse of discretion. Gonzalez v. Fresenius Med. Care N. Am., 689 F.3d 470, 479 (5th Cir. 2012). "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." Lawyers Title Ins. Corp., 739 F.3d at 856.

The district court imposed sanctions after finding that counsel had subverted the court's jurisdiction by filing claims against Mr. Heater in a second state court action virtually identical to the ones pending before the district court. At a  hearing on the matter, Ayala's counsel argued that it was necessary to assert the claims against Mr. Heater in the state court action to protect the plaintiff's rights and not lose claims to prescription. The district court found those justifications specious at best. It concluded that Ayala's rights against Mr. Heater were adequately protected in its court and the actions evinced a reckless disregard of the duty owed to the court. The court enjoined the state court proceedings and assessed Ayala's counsel the costs and fees incurred by Mr. Heater in bringing the motion to enjoin the state court proceedings.

The validity of the district court's decision to enjoin the second state court action is not before us. We only determine if the court abused its discretion by imposing sanctions under Section 1927 on the basis that Ayala's counsel acted with a reckless disregard for the duty owed to the court. Ayala's counsel argues that Gabriel remained a viable defendant after the district court refused to remand the case and that he was "forced" to re-file in state court. He further argues that alleging claims against Mr. Heater was necessary to "avoid possible malpractice charges and running of delays applicable to third-party actions under Louisiana law."

Counsel's decision to make a second filing in state court against the same defendants who were still in federal court was inconsistent with the federal district court's assumption of jurisdiction over the claims against those parties. We accept that counsel did not advance legally sound arguments for his filing these nearly identical claims against Mr. Heater in the second state court action. It is not enough, however, that counsel made legal error. When, as here, there is no evidence of counsel's bad faith or improper motive, recklessness by counsel may be enough to conclude an attorney vexatiously multiplied the proceedings. Still, "Section 1927 only authorizes shifting fees that are associated with the persistent prosecution of a meritless claim." Procter & Gamble Co. v. Amway Corp., 280 F.3d 519, 525 (5th Cir. 2002) (quotation marks omitted; emphasis added). "The courts often use repeated filings despite warnings from the court, or other proof of excessive litigiousness, to support imposing sanctions." Id.; see also, e.g., Cambridge Toxicology Grp., Inc. v. Exnicios, 495 F.3d 169, 181 (5th Cir. 2007).

We conclude there is no evidence that counsel's conduct in filing the second state court action was a result of bad faith, improper motive, or reckless disregard of the duty owed the court. Counsel for Ayala did not persistently prosecute a meritless claim despite warnings from the court; rather, the evidence reflects that counsel at worst errantly believed that unless the second action was filed, his client would lose certain claims. Lawyers Title Ins. Corp., 739 F.3d at 871-72. While counsel's justifications for filing the second state court action may lack merit, that "is not a sufficient basis for awarding sanctions." Id. at 872. "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." Id. (quotation marks omitted) (alteration in original). The district court abused its discretion in imposing sanctions against Ayala's counsel.

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