Allstate Insurance v. Mader , 201 F. App'x 261 ( 2006 )

United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
October 2, 2006
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk
No. 05-21061
Summary Calendar
ALLSTATE INSURANCE COMPANY,
Plaintiff-Appellee,
v.
YVONNE MADER, ET AL,
Defendants,
YVONNE MADER, Individually; WILLIAM V MADER, Individually;
doing business as Mader’s Meat Market & Smokehouse,
Defendants-Appellants,
MICHAEL R WADLER,
Appellant.
Appeals from the United States District Court
for the Southern District of Texas
(04-CV-2173)
Before DAVIS, BARKSDALE, and BENAVIDES, Circuit Judges.
PER CURIAM:*
William Mader and Yvonne Mader appeal the district court’s
*
Pursuant to 5th Cir. R. 47.5, the Court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5th Cir. R. 47.5.4.
granting of summary judgment. Michael Wadler appeals the district
court’s final judgment that held him — as the Maders’ attorney —
jointly and severally liable for Allstate’s $17,000 in attorney’s
fees. The Maders, appearing pro se, do not present any issue to
this Court that has been preserved for appellate review, and we
affirm. Mr. Wadler challenges the award of attorney’s fees against
him, and we vacate and remand the judgment against Mr. Wadler.
I. BACKGROUND
This litigation stems from the fiery destruction — under
suspicious but ultimately inconclusive circumstances — of Mader’s
Meat Market and Smokehouse a mere two months after its owners
obtained property insurance from Allstate. The insurance policy
was predicated on false information. When Yvonne Mader applied
for the insurance policy in December, 2003, she told the
insurance agent that her husband had been in the meat market
business for ten years; in reality, he had traded fish, oysters,
and sausage for other goods, but had never actually sold meat or
owned a store. Yvonne Mader also told the agent that she and her
husband had been in business at that location for forty years;
the store was actually a new business that happened to be in the
same location as a previous business that had closed its doors
months before.
Shortly after the fire reduced the store to rubble, the
Maders filed a proof of loss for $566,077. Because of the false
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statements on their application, however, Allstate determined
that the Mader’s insurance policy was void and sought a
declaratory judgment. The Maders then hired Mr. Wadler, who
filed their counterclaims. They argued that Allstate had
breached its contract and engaged in unfair or deceptive
practices under the Texas Insurance Code. The Maders
subsequently failed to comply with court orders to supply
objective evidence of their claims. They also failed to disclose
to the court that they had divorced and filed for bankruptcy.
The district court struck the Maders’ counterclaims and entered
judgment for Allstate, awarding attorney’s fees of $17,000. The
court, sua sponte, held Mr. Wadler jointly and severally liable
for those fees.
Mr. Wadler moved to amend the summary judgment to reflect
that he is not liable for the attorney’s fees. In the subsequent
hearing, the court declined to amend its previous judgment.
Instead of couching Mr. Wadler’s liability for attorney’s fees as
a sanction, however, the court stated to the contrary that “this
is not a case of punitive sanctions. I don’t think it should
be.” The court explained that because Mr. Wadler had “an
interest in the Maders’ claim,” presumably a standard contingency
arrangement, and because the Maders could not have brought their
counterclaim without his assistance, it was appropriate that Mr.
Wadler also be held accountable for Allstate’s attorney’s fees.
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The Maders now appeal the district court’s judgment, pro se.
Mr. Wadler also appeals his liability for attorney’s fees.
II. STANDARD OF REVIEW
This is an appeal from a final judgment in the United States
District Court for the Southern District of Texas, and this Court
has jurisdiction pursuant to Section 1291, Title 28, United
States Code. The Maders’ claims — concerning what constitutes
ethical practices on the part of insurance companies — are not
reviewable on appeal. This Court’s standard of review as to the
court’s award of attorney’s fees is abuse of discretion. See
Chambers v. NASCO, Inc., 501 U.S. 32 (1991).
III. Discussion
The Maders present two issues on appeal, both of which
concern their original application for an insurance policy
wherein they supplied false information that ultimately
invalidated the policy. Specifically, they argue that the
insurance agent’s practice of submitting their policy application
to multiple companies online without furnishing the Maders a hard
copy was unethical, and that an insurance applicant should be
“entitled to a copy of the document that he/she had been required
to sign.” Appellants’ Br. (Maders) at 2. Neither issue bears any
relation to the proceedings below nor to the district court’s
striking of the Maders’ pleadings, dismissal of their
counterclaims, or grant of summary judgment in favor of Allstate.
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A party must press an argument in the court below in order to
preserve it for appeal. See Kelly v. Foti, 77 F.3d 819, 823 (5th
Cir. 1996). Because the Maders fail to present any issue that
has been preserved for appellate review, the judgment against
them is affirmed.
Mr. Wadler’s claims merit more substantial discussion. “It
is well settled that the district court has broad discretion in
determining the appropriateness of an award of attorney’s fees,
and we review its award or denial thereof for an abuse of
discretion.” Gibbs v. Gibbs, 210 F.3d 491, 500 (5th Cir. 2000).
“A district court abuses its discretion if it bases its decision
on an erroneous view of the law or on a clearly erroneous
assessment of the evidence.” Esmark Apparel, Inc. v. James, 10
F.3d 1156, 1163 (5th Cir. 1994). Other courts have held that
sanctions issued sua sponte, as these were, are reviewed with
“particular stringency.” See In re Pennie & Edmonds LLP, 323
F.3d 86, 90 (2d Cir. 2003); Hunter v. Earthgrains Co. Bakery, 281
F.3d 144, 153 (4th Cir. 2002).
The court did not cite any particular code or rule in
awarding attorney’s fees. The only guidance the court gave came
in the hearing on Mr. Wadler’s motion to amend the judgment, when
the court stated that the award of attorney’s fees — and Mr.
Wadler’s joint and several liability — “is not a case of punitive
sanctions.” Rather, the court referred to the award as “a cost
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adjustment.” Id. Given the court’s lack of explanation, we must
first determine the basis for the award of attorney’s fees and
Mr. Wadler’s liability. This Court may affirm a district court’s
imposition of sanctions on any basis supported by the record.
See Johnson Int’l Co. v. Jackson Nat’l Life Ins. Co., 19 F.3d 431
(8th Cir. 1994).
Allstate requested attorney’s fees from the Maders under
section 37.001 et. seq. of the Texas DJA. However, while “the
Texas DJA expressly provides for attorney’s fees, it functions
solely as a procedural mechanism for resolving substantive
‘controversies which are already within the jurisdiction of the
courts.’” Utica Lloyd’s of Texas v. Mitchell, 138 F.3d 208, 210
(5th Cir. 1998)(emphasis added)(quoting Housing Authority v.
Valdez, 841 S.W.2d 860, 864 (Tex. App.-Corpus Christi 1992, writ
denied). Texas procedural law does not govern this diversity
action. Id. See also Gasperini v. Center for Humanities, Inc.,
518 U.S. 415, 427(1996)(observing that “[u]nder the Erie
doctrine, federal courts sitting in diversity apply state
substantive law and federal procedural law”).
Turning to the relevant federal law, the federal DJA, 28
U.S.C. § 2202, provides that “further necessary or proper relief
based on a declaratory judgment . . . may be granted.”
Attorney’s fees are appropriate under § 2202 in “cases of bad
faith, vexation, wantonness, or oppression relating to the filing
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or maintenance of the action.” Mercantile Nat’l Bank v. Bradford
Trust Co., 850 F.2d 215, 218 (5th Cir. 1988). The Maders’
actions were sufficiently vexatious and in bad faith to make the
award of attorney’s fees proper: the entire litigation stems from
their fraudulent insurance application and subsequent deceit,
rendering their entire role in the litigation in bad faith. Less
certain, however, is the appropriateness of extending liability
for those fees to Mr. Wadler.
The court’s reasoning — that because Mr. Wadler owns an
interest in the case (his potential contingency fee), he is also
liable for the attorney’s fees even in the absence of any actual
punitive sanction — is flawed. Various mechanisms, such as Rules
11, 16(f), 26(g), 37(b), and 56(b) of the Federal Rules of Civil
Procedure, 28 U.S.C. § 1927, and the court’s inherent powers,
permit the court to hold an attorney liable for fees; all of
those mechanisms, however, constitute sanctions. The district
court explicitly declared that this is “not a case of punitive
sanctions,” instead holding Mr. Wadler liable as a party based
solely on the interest he acquired in the outcome of the case.
There is no precedent allowing such a judgment. Indeed, such a
practice in the absence of sanctions would likely have a dramatic
impact on plaintiffs’ lawyers across the country. Finally,
contrary to the district court’s opinion, in the case of awarding
fees based on bad faith, “the underlying rationale of ‘fee
shifting’ is, of course, punitive.” Chambers v. NASCO, Inc., 501
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U.S. 32, 53 (1991).
To be sure, the court possessed the authority to sanction
Mr. Wadler and hold him liable for attorney’s fees. In
determining the appropriate basis for the sanction, however, the
fact that he is jointly liable for all $17,000 of Allstate’s
attorney’s fees — including fees that accrued before Mr. Wadler
had been retained as counsel by the Maders — must guide our
analysis. The Federal Rules of Civil Procedure limit the
attorney’s liability to the fees that can actually be attributed
to his involvement in the case. By holding Mr. Wadler liable for
all the fees, rather than just the fees arising from his filing
of a counterclaim and subsequent actions on behalf of the Maders,
the court precluded applying Rules 11 (allowing fees “incurred as
a direct result of the violation”), 16(f)(requiring attorney “to
pay the reasonable expenses incurred because of any noncompliance
with this rule . . .), 26(g)(“sanction . . . may include an order
to pay the amount of the reasonable expenses incurred because of
the violation”), 37(b)(requiring attorney “to pay the expenses .
. . caused by the failure . . .”), and 56(g)(allowing fees caused
by filing of bad faith affidavit).1 Similarly, 28 U.S.C. § 1927
potentially affords the court the discretion to impose attorney’s
1
Several of these rules also succumb to other procedural
requirements that the court failed to satisfy and, therefore, could
not have been the basis for the award of attorney’s fees,
independent of the amount awarded. In the interest of brevity, it
is unnecessary to elaborate further given that the full award of
all attorney’s fees sufficiently precludes application.
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fees against Mr. Wadler, but also characterizes the applicable
fees as those “reasonably incurred because of [the attorney’s]
conduct.”
Given that none of these standard mechanisms for awarding
attorney’s fees are applicable, it appears, by process of
elimination, that the court awarded attorney’s fees under its
inherent powers to do so. The Supreme Court has stated that “an
assessment of attorney’s fees is undoubtedly within a court’s
inherent power.” Chambers, 501 U.S. at 45. The Court also
noted, however, that “[b]ecause of their very potency, inherent
powers must be exercised with restraint and discretion.” Id. at
44.
“[A] court may assess attorney’s fees when a party has acted
in bad faith, vexatiously, wantonly, or for oppressive reasons.”
Id. at 45–46 (internal quotations omitted). Moreover, statutes
and rules that provide for sanctions do not displace this
inherent power. Id. at 46. However, while the presence of §
1927 and the various procedural rules as a means of assessing
attorney’s fees against Mr. Wadler does not prevent the court
from resorting to its inherent power, the Supreme Court has also
cautioned that where bad-faith conduct could be sanctioned under
the Rules, “the court ordinarily should rely on the Rules rather
than the inherent power.” Id. at 50. A court should, therefore,
resort to its inherent powers only when “in the informed
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discretion of the court, neither the statute nor the Rules are up
to the task . . .”
The court, of course, enjoys considerable latitude under the
abuse of discretion standard. Nevertheless, it appears from the
record that the existing statutes and Rules were adequate to
sanction Mr. Wadler. The Maders committed most of the fraud and
bad faith in this case before they retained Mr. Wadler as
counsel; he was neither a participant when the Maders provided
false information to the insurance agent, nor when they filed
their inflated claim. Retained after Allstate filed for
declaratory judgment, Mr. Wadler did file an answer and
counterclaims. Whether those counterclaims were in bad faith or
otherwise vexatious is safely within the discretion of the court,
and if so, various mechanisms are in place to adequately sanction
Mr. Wadler. The court did not need to resort to its inherent
powers in this case and abused its discretion when it did. “A
court should invoke its inherent power to award attorney’s fees
only when it finds that ‘fraud has been practiced upon it, or
that the very temple of justice has been defiled.’” Boland Marine
& Mfg. Co. v. Rihner, 41 F.3d 997, 1005 (5th Cir. 1995) (quoting
Chambers, 501 U.S. at 46). While Mr. Wadler arguably should have
done a better job investigating his clients’ claims and been less
accepting of what they told him, it is a significant leap to find
that he defiled the “temple of justice.”
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For the reasons above, we affirm the district court’s grant
of summary judgment as to the Maders. We vacate the district
court’s award of attorney’s fees against Mr. Wadler and remand
for further proceedings.
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