D. Bruce McMahan v. William A. Toto

[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
___________________________ ELEVENTH CIRCUIT
JULY 10, 2001
No. 00-10323 THOMAS K. KAHN
CLERK
___________________________
D.C. Docket No. 96-08294 CV-DMM
D. BRUCE MCMAHAN,
NEMESIS VERITAS, f.k.a.
Mcmahan & Company,
Plaintiffs-Appellants,
versus
WILLIAM A. TOTO,
Defendant-Appellee.
_____________________
No. 00-14728
_____________________
D. C. Docket No. 96-08294-CV-DMM
D. BRUCE MCMAHAN,
NEMESIS VERITAS, f.k.a.
Mcmahan & Company,
Plaintiffs-Appellants,
Cross-Appellees,
versus
WILLIAM A. TOTO,
Defendant-Appellee,
Cross-Appellant.
____________________________
Appeals from the United States District Court
for the Southern District of Florida
____________________________
(July 10, 2001)
Before CARNES and MARCUS, Circuit Judges, and HAND*, District Judge.
CARNES, Circuit Judge:
Along with several other limited partners in McMahan, Brafman, Morgan &
Company (“MBM”), William A. Toto filed a RICO action in federal court in New
York against that company and D. Bruce McMahan after the Internal Revenue
Service imposed penalties and disallowed deductions related to the company that
he and the other limited partners had claimed. Several of the limited partners in
that suit were dismissed, because their claims were precluded by release and
assignment provisions contained in agreements between them and McMahan,
*
Honorable William B. Hand, U.S. District Judge for the Southern District of Alabama,
sitting by designation.
2
MBM’s principal general partner, in which he bought back their partnership
interests. McMahan and MBM subsequently brought suit in state court against
those limited partners alleging that by participating in the RICO action they had
breached the release and assignment provisions of their agreements with him. The
state court granted summary judgment in favor of the limited partners.
Before summary judgment was granted in the state court action, McMahan
and MBM filed this diversity jurisdiction lawsuit in the Southern District of
Florida against Toto for tortious interference with contractual relations, based on
his actions in instituting the RICO action and encouraging the limited partners who
were later dismissed to participate in that lawsuit. The district court granted
summary judgment to Toto and entered various orders relating to fees, costs, and
sanctions. McMahan and MBM then appealed, and Toto cross-appealed.1
In order to dispose of this appeal, an issue we must decide is whether the
state court’s decision collaterally estops McMahan and MBM from establishing
that the dismissed limited partners breached their agreements, which is an essential
element of the tortious interference claim. If it does, then a second and third issue
are presented. The second issue is whether the district court abused it discretion by
1
Although there are two appeals with two different case numbers before us, we have
consolidated the appeals for decisional purposes.
3
not imposing sanctions against MBM and McMahan or their counsel pursuant to
Fla. Stat. § 57.105 and 28 U.S.C. § 1927. The third issue is whether under
Florida’s offer of judgment statute Toto is entitled to recover the attorney’s fees he
incurred since the making of an offer to settle the tortious interference claim.
As we will soon explain in full, we decide that collateral estoppel does bar
the tortious interference claim, and that the district court did not abuse its
discretion in declining to award sanctions. However, we decide that the district
court erred in awarding attorney’s fees pursuant to the offer of judgment statute.
I. BACKGROUND
A. FACTS
In September of 1980, MBM2 was formed for the purpose, among other
things, of trading government securities and commodities. From 1980 through
1982, between 300 and 400 investors purchased limited partnership interests in
2
MBM changed its name to McMahan & Company on January 16, 1985, and to Nemesis
Veritas, L.P. on July 30, 1996. To avoid confusion we will use the old name throughout this
opinion.
4
MBM, lured by the promise of significant tax benefits. Toto bought in for
$200,000 and received one partnership unit in MBM in return.
However, the promised tax benefits were, like many things in life, too good
to be true, and the IRS subsequently disallowed many of the deductions claimed by
the limited partners relating to MBM and imposed draconian penalties. The IRS
notified Toto in late 1987 of its audit of MBM, and Toto eventually paid
approximately $630,000 to settle his dispute regarding deductions he claimed
relating to his investment in MBM.
Eventually, McMahan offered to buy back the interests of all of the MBM
limited partners. As part of the sale of their interest to McMahan, each tendering
limited partner executed a contract of sale and security agreement providing for the
assignment to McMahan of all rights to any cause of action the limited partner may
have in connection with (1) the original sale of the partnership interest to the
limited partner, and (2) the conduct of MBM’s business prior to the sale of the
limited partner’s interest. Each contract also provided that each tendering limited
partner released MBM and its general partners from all claims arising from
disallowance by the IRS of any tax benefits stemming from MBM.3 Each contract
3
Paragraph 13 of each contract provides, in relevant part:
13. Assignment and Release of Claims. The Seller hereby assigns to the
Purchaser all of his right, title and interest in and to any and all causes of action,
5
provided that it would be governed by New York law. On December 31, 1984,
McMahan bought back the interests of more than 80% of the limited partners of
MBM. Toto, however, did not sell his limited partnership interest to McMahan.
In 1988 or early 1989, Toto contacted the law firm of Biegel & Sandler
(“B&S”) about filing a lawsuit against MBM and McMahan. Not prepared to fund
the litigation himself, however, Toto contacted other MBM limited partners
beginning in 1990 regarding his intention to sue and inquiring as to their interest in
joining him. In June of 1991 B&S also contacted the limited partners, stating that
it required a minimum $25,000 retainer to pursue the action. B&S proposed that
each limited partner contribute an amount equal to 1% of his or her investment in
MBM towards the retainer, to be credited against a 1/3 contingency fee for B&S.
suits, claims and demands whatsoever against any party which the Seller ever
had, now has, or hereafter can, shall or may have, by reason of or in connection
with the sale of the Interest by the Partnership to the Seller and (b) [sic] the
conduct of the Partnership’s business prior to the date of the Seller’s tender of his
Interest, but excluding claims in connection with the solicitation of Interests
pursuant to which this Agreement is being executed.
The Seller hereby releases the Partnership and the general partners
thereof, and, to the fullest extent applicable, their respective heirs, executors,
successors, employees, agents and assigns, from all causes of action, suits, claims
and demands whatsoever which the Seller ever had, now has, or hereafter can,
shall or may have, by reason of any damages arising from any and all claims
which might arise upon disallowance by the Internal Revenue Service of tax
benefits previously taken by the Partnership.
6
Eventually, fifteen limited partners retained B&S and filed suit in June of
1992 against MBM and McMahan (and others), alleging civil violations of the
Racketeer Influenced and Corrupt Organizations Act and various state law theories
of recovery (“the RICO Action”), claiming damages from the loss of their limited
partnership investments, the disallowance of tax deductions, and imposition of
penalties. The suit was filed in the United States District Court for the District of
New Jersey, but that court determined that venue was inappropriate and the case
was transferred to the Southern District of New York in July of 1993.
However, some of the limited partners who had joined in the RICO Action
had, as part of the sale of their interests back to McMahan, signed a contract
whereby they assigned and released certain rights. MBM and McMahan moved for
summary judgment against these limited partners, whom we will call “the
Releasors,” arguing that they were prevented from bringing such an action by the
terms of the contracts. On February 7, 1995, the district court granted the motion,
rejecting the Releasors’ argument that the assignments and releases were invalid
because they were induced by fraud, and holding that the asserted claims were
within the scope of the assignments and/or releases given by the Releasors. See
Toto v. McMahan, Brafman, Morgan & Co., 1995 WL 46691, at *14 (S.D. N.Y.
1995).
7
On January 5, 1996, MBM and McMahan filed a complaint against the
Releasors in the Supreme Court of New York which asserted, among other things,
a cause of action for breach of contract based on the Releasors’ participation in the
RICO Action despite the assignment and release provisions contained in the
contracts.4 MBM and McMahan sought damages in the amount of $30,000,000 as
a result of the breach of their agreements by the Releasors. On May 19, 1998, the
Appellate Division of the Supreme Court of New York held that the Releasors
were entitled to summary judgment on the breach of contract cause of action,
because the assignment and release provisions of the contracts constituted releases,
and not covenants not to sue:
4
The complaint alleges, in relevant part:
AS AND FOR A FIRST CAUSE OF ACTION
(Breach of Contract)
...
21. Notwithstanding their execution of the Contracts of Sale and Sales
Agreement, and the releases contained therein, defendants proceeded to breach
their agreements by suing plaintiffs and others in the United States District Court,
District of New Jersey and the United States District Court, Southern District of
New York, for alleged violations of the Racketeer Influenced and Corrupt
Organizations Act, fraud, breach of fiduciary duty and negligent
misrepresentation in the sale of said limited partnership interests.
...
24. By reason of defendants’ breach of the aforementioned agreements,
plaintiffs have sustained damages in an amount in excess of $30,000,000 for
which defendants are jointly and severally liable.
8
The assignment and release clauses contained in the contracts
constitute releases, not implied covenants not to sue, because they
relate to claims extant at the time the parties entered into the contracts.
A release is a provision that intends a present abandonment of a
known right or claim. By contrast, a covenant not to sue also applies
to future claims and constitutes an agreement to exercise forbearance
from asserting any claim which either exists or which may accrue . . .
The provisions at issue do not speak to the future, but rather are
related to known events that had transpired prior to execution of the
contracts, namely the Internal Revenue Service audit and the
operation of the MBM partnership. Absent a covenant not to sue,
there exists no implicit agreement by defendants to pay the attorneys’
fees, as would result from breach of a covenant not to sue.
McMahan & Co. v. Bass, 673 N.Y.S.2d 19, 21 (N.Y. App. Div. 1998). The parties
filed a Stipulation of Discontinuance with Prejudice on September 2, 1999, thereby
foreclosing any further appeal.
B. PROCEDURAL HISTORY
Not content with merely suing the Releasors, MBM and McMahan filed this
lawsuit against Toto on May 6, 1996. Count I of their Second Amended Complaint
alleged that Toto committed tortious interference with contractual relations by
inducing the Releasors to participate in the RICO Action, even though he knew at
the time that they had by the terms of the contracts released MBM and McMahan
from any and all claims. Count II alleged Toto had engaged in malicious
prosecution by prosecuting the RICO Action with full knowledge that it was barred
9
by the assignments and releases contained in the contracts and without the consent
of one of the Releasors.
On March 29, 1999, the district court granted Toto’s motion for summary
judgment as to Count II, the malicious prosecution claim, and that part of the case
is not at issue in this appeal. But at the same time the court denied Toto’s motion
for summary judgment on Count I, the tortious interference claim. On May 11,
1999, acting pursuant to Fla. Stat. § 45.061 and, in the alternative, Fla. Stat. §
768.79, Toto made an offer to settle for $100 the litigation on Count I. His offer
read as follows:
Defendant, WILLIAM A. TOTO, hereby offers pursuant to Fla. Stat.
§ 45.061 to settle this case for the amount of $100.00 (One Hundred
Dollars) upon a stipulation for dismissal, or, alternatively, pursuant to
Fla. Stat. § 768.79, at Plaintiff’s election, to allow judgment to be
taken against him in the total sum of $100.00 (One Hundred Dollars),
in full and final resolution of all claims made in this action.
MBM and McMahan did not accept the offer.
On October 29, 1999, the district court again denied Toto’s renewed motion
for summary judgment as to Count I, the tortious interference claim. But on
December 21, 1999, although nothing changed, the district court granted summary
judgment to Toto on that claim. The basis of the district court’s decision was that
the New York state court decision in Bass collaterally estopped it from finding that
10
the Releasors had breached their contracts, an essential element of the tortious
interference claim against Toto.
Thereafter, Toto filed a motion (1) under Fla. Stat. § 57.105 for attorney’s
fees, (2) under 28 U.S.C. § 1927 for fees and costs due to the vexatious
multiplication of proceedings, and (3) under Fla. Stat. § 768.79 for fees and costs.5
The district court denied the motion for fees and costs pursuant to Fla. Stat. §
57.105 and 28 U.S.C. § 1927, but granted the one for fees and costs pursuant to
Fla. Stat. § 768.79 and ordered MBM and McMahan to pay Toto a total of
$260,034.29. MBM and McMahan have appealed the judgment against them on
their Count I tortious interference claim and the order awarding fees and costs
against them under Fla. Stat. § 768.79, while Toto has cross-appealed the order
denying him fees and costs under Fla. Stat. § 57.105 and 28 U.S.C. § 1927.
II. DISCUSSION
We begin our discussion with MBM and McMahan’s appeal from the
summary judgment against them on the tortious interference claim, because if they
are entitled to reversal of it the costs issues will be moot.
5
Toto also filed a motion for costs (other than attorney’s fees) under Fed. R. Civ. P. 54(d)
and 28 U.S.C. § 1920, which was granted in the amount of $4,799.33. MBM and McMahan
make no argument that costs were incorrectly taxed against them in that regard, and accordingly
no issue concerning that award is before us in this appeal. Federal Sav. & Loan Ins. Corp. v.
Haralson, 813 F.2d 370, 373 n.3 (11th Cir. 1987) (“[I]ssues that clearly are not designated in the
appellant’s brief normally are deemed abandoned.”).
11
A. COLLATERAL ESTOPPEL
The district court granted summary judgment against MBM and McMahan
on their tortious interference claim because it concluded that they were collaterally
estopped from pursuing that claim by the decision against them in McMahan & Co.
v. Bass, 673 N.Y.S.2d 19, 21 (N.Y. App. Div. 1998). In reaching that conclusion
the district court followed a chain of reasoning with the following five links. First,
Virginia law governs the tortious interference claim in this case. Second, under
Virginia law in order to succeed on such a claim a plaintiff must show that the
defendant engaged in “intentional interference inducing or causing a breach or
termination of the relationship,” Krantz v. Air Line Pilots Ass’n, 427 S.E.2d 326,
328 (Va. 1993), which means that another party must have breached a contract
with the plaintiff or terminated a contractual relationship with the plaintiff. Third,
Virginia law gives a judgment from another jurisdiction the same preclusive effect
it would receive in that jurisdiction. See Coghill v. Boardwalk Regency Corp., 396
S.E.2d 838, 840 (Va. 1990); see generally 28 U.S.C. § 1738 (state court judgments
have the same preclusive effect in federal court they have in the state where the
judgment was rendered). Fourth, under the law of New York, where the Bass
decision was issued, a party is collaterally estopped from relitigating in another
proceeding an issue necessarily decided against that party in a prior proceeding.
12
See Conte v. Justice, 996 F.2d 1398, 1400-03 (2d Cir. 1993). Fifth, in Bass the
New York appellate court necessarily decided against MBM and McMahan the
issue of whether the Releasors had breached a contractual undertaking not to sue
MBM and McMahan. It follows from those five premises that because of the
Bass decision MBM and McMahan are collaterally estopped from asserting that the
Releasors breached a contractual obligation not to sue them, and without any
breach MBM and McMahan’s claim that Toto wrongfully induced a breach must
fail.
MBM and McMahan do not deny that the district court’s conclusion
logically follows if the five premises we have set out for it are correct, nor do they
take issue with the first four of those premises. The only one that MBM and
McMahan dispute is the fifth premise – they contend that the Bass decision did not
necessarily decide that there was no breach by the Releasors of a contractual
obligation not to sue MBM and McMahan. Like the district court, we disagree.
In Bass, the complaint MBM and McMahan filed in New York state court
against the Releasors claimed that by participating in the RICO Action in federal
court the Releasors had breached agreements in the assignment and release
provisions of their contracts with MBM and McMahan resulting in damages in the
amount of $30,000,000. The Appellate Division of the Supreme Court of New
13
York held that the agreements the Releasors had signed constituted releases, and
not covenants not to sue. Bass, 673 N.Y.S.2d at 21. The result of the
Bass litigation was that MBM and McMahan took nothing on their breach of
contract claim. They lost on it. MBM and McMahan concede that they pleaded a
breach of contract claim against the Releasors in Bass and that they did not prevail
on it, but they maintain that somehow their contract claim was not decided; instead,
they insist, in some unexplained way the contract claim was converted to one for
attorney’s fees only. How that could have happened is not entirely clear, and we
conclude that it did not happen. Because the Bass court had a statutory duty to
“dispose of all issues in the proceeding,” N.Y. C.P.L.R. 7804(g), and the breach of
contract claim was clearly raised in the pleadings, we think that claim actually was
decided against MBM and McMahan in Bass. See Grubb v. Public Utilities
Comm’n of Ohio, 281 U.S. 470, 477-78, 50 S. Ct. 374, 377-378 (1930) (“Omitting
to mention that question in the opinion did not eliminate it from the case or make
the judgment of affirmance any the less an adjudication of it.”); Nelson v. Swing-
A-Way Mfg. Co., 266 F.2d 184, 187 (8th Cir. 1959) (“The doctrine of collateral
estoppel applies to matters necessarily decided in the former judgment even if there
is no specific finding or reference thereto.”).
14
Because we agree with the district court that MBM and McMahan are
collaterally estopped from establishing in this lawsuit that the Releasors breached
their contractual agreements, Toto is entitled to summary judgment on the tortious
interference claim that he wrongfully induced them to do so. Our decision in this
respect requires that we decide MBM and McMahan’s appeal of the grant of costs
and attorney’s fees under Fla. Stat. § 768.79, and Toto’s cross-appeal of the denial
of attorney’s fees under Fla. Stat. §57.105 and the denial of sanctions under 28
U.S.C. § 1927. We start with the cross-appeal issues, which are the easiest ones to
decide.
B. 28 U.S.C. § 1927We review the trial court’s ruling on an award of sanctions under 28 U.S.C.
§ 1927 only for abuse of discretion. Peterson v. BMI Refractories, 124 F.3d 1386,
1390 (11th Cir. 1997). As we have observed, the abuse of discretion standard of
review recognizes that for the matter in question there is a range of choice for the
district court and so long as its decision does not amount to a clear error of
judgment we will not reverse even if we would have gone the other way had the
choice been ours to make. See In re Rasbury, 24 F.3d 159, 168 (11th Cir. 1994).
Toto, of course, contends that the district court’s decision not to award him
sanctions against counsel for MBM and McMahan under 28 U.S.C. § 1927 is a
15
clear error of judgment. Section 1927 provides that “[a]ny attorney . . . 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.
The district court refused to award sanctions under section 1927, stating simply
that MBM and McMahan have not “unreasonably extended the proceedings.”6
The plain language of section 1927 sets forth three requirements to justify an
imposition of sanctions:
(1) an attorney must engage in “unreasonable and vexatious” conduct;
(2) such “unreasonable and vexatious” conduct must “multipl[y] the
proceedings;” and
(3) the amount of the sanction cannot exceed the costs occasioned by
the objectionable conduct.
Peterson, 124 F.3d at 1396. The critical question in this case involves the first
Peterson factor – whether the filing of this lawsuit was “unreasonable and
vexatious” conduct.
On this record, we cannot say that the district court abused its discretion in
answering that question in the negative. Counsel for MBM and McMahan argued
6
The statute speaks of sanctions against counsel, see 28 U.S.C. § 1927, while the district
court spoke of the actions of MBM and McMahan, which we take to be a shorthand reference to
their counsel.
16
to the district court that the New York state court decision in Bass never decided
the issue of whether the Releasors had breached their contracts by joining the
RICO action. MBM and McMahan took the position that Bass had merely held
that they were not entitled to attorney’s fees, which did not necessarily mean there
had been no breach of contract by the Releasors. The district court and this Court
have rejected their position since this lawsuit was filed, but that merely means
there is no merit to the position. Something more than a lack of merit is required
for § 1927 sanctions or they would be due in every case. The opinion of the
Appellate Division of the Supreme Court of New York in Bass is not entirely clear,
and actually does offer some support for MBM and McMahan’s interpretation of
that opinion, although not enough to convince us their interpretation is correct. See
generally Bass, 673 N.Y.S.2d at 20-21 (stating that “[MBM] and McMahan seek
payment of attorneys’ fees in connection with the defense of the [RICO Action]”).
Not only that, but the district court twice denied summary judgment to Toto on his
collateral estoppel theory before finally concluding that MBM and McMahan’s
reading of the Bass decision was wrong.
Given these circumstances, we cannot say that it was a clear error in
judgment for the district court not to award §1927 sanctions against counsel for
MBM and McMahan. That does not mean we would have reversed the district
17
court had it awarded sanctions. As we explained in Rasbury, under an abuse of
discretion standard there will be circumstances in which we would affirm the
district court whichever way it went. 24 F.3d at 168 (“Quite frankly, we would
have affirmed the district court had it reached a different result, and if we were
reviewing this matter de novo, we may well have decided it differently.”).
C. FLA. STAT. § 57.105
We turn now to the other part of Toto’s cross-appeal, which is his contention
that the district court erred in failing to award him attorney’s fees against MBM
and McMahan under Fla. Stat. § 57.105, the frivolous litigation statute. Generally,
a district court’s decision about whether to award attorney's fees is reviewed for an
abuse of discretion, see Am. Civil Liberties Union of Georgia v. Barnes, 168 F.3d
423, 427 (11th Cir. 1999), and, more specifically, a trial court’s decision about
whether to award attorney’s fees under Fla. Stat. § 57.105 is reviewed only for an
abuse of discretion. Dep’t of Health v. Curry, 722 So.2d 874, 879 (Fla. 1st DCA
1998).
Section 57.105, as it read in May of 1996 when MBM and McMahan filed
their complaint in this lawsuit, provided, in relevant part:
The court shall award a reasonable attorney’s fee to be paid to the
prevailing party in equal amounts by the losing party and the losing
18
party’s attorney in any civil action in which the court finds that there
was a complete absence of a justiciable issue of either law or fact
raised by the complaint or defense of the losing party; provided,
however, that the losing party’s attorney is not personally responsible
if he or she has acted in good faith, based on the representations of his
or her client.
Section 57.105 was amended, effective October 1, 1999, but that amendment is not
relevant to this case, because it was adopted more than three years after this lawsuit
was filed. Because the complaint in this case was filed in May of 1996, before the
October 1, 1999 effective date of the amendment to § 57.105, the “old” version of
§ 57.105 would apply, which only allows sanctions where there was a “complete
absence of a justiciable issue of either law or fact raised by the complaint.” See
Fla. Dep’t of Revenue v. Lucignani, 775 So.2d 996, 997 n.1 (Fla. 3d DCA 2000)
(holding that 1997 version of § 57.105 applies because the DOR’s motion for
contempt was filed before the effective date of the amendment to that section);
Visoly v. Sec. Pacific Credit Corp., 625 So.2d 1276, 1277 (Fla. 3d DCA 1993)
(holding that amendment to § 57.105 did not apply retroactively to a case that was
commenced before the October 1, 1990 effective date of the amendment).
The question of whether § 57.105 even applies in a case such as this one,
where the substantive law of Virginia governs the underlying claims, is one we
need not answer. Assuming that § 57.105 does apply to this case, the district
court’s refusal to award attorney’s fees under it is not an abuse of discretion.
19
Given the less than pellucid clarity of the opinion in Bass and the fact that the
district court twice decided not to grant summary judgment to Toto on the
collateral estoppel theory of defense before finally doing so, we cannot say that it
was a clear error of judgment for the district court to conclude that there was not a
“complete absence of a justiciable issue of either law or fact raised by the
complaint,” which is the standard under § 57.105.
MBM and McMahan filed their complaint in this case charging Toto with
malicious prosecution and tortious interference in May of 1996. The New York
state court’s decision in Bass, which held that the Releasors were entitled to
summary judgment against MBM and McMahan on their breach of contract cause
of action, was not issued until May of 1998. “The point in time to assess whether
the granting of fees pursuant to section 57.105 is appropriate is at the lawsuit’s
inception, or in other words, at the time of the filing of the complaint.” Haas v.
Roe, 696 So.2d 1254, 1256 (Fla. 2d DCA 1997). Thus, although the decision in
Bass has collateral estoppel effect and precludes MBM and McMahan from
litigating their tortious interference claim here, it did not have that effect until two
years after the complaint in this case was filed. Accordingly, we affirm the district
court’s holding that there was not a “complete absence of a justiciable issue of
either law or fact” at the time the complaint was filed.
20
D. FLA. STAT. § 768.79
We review the district court’s determinations of state law in a diversity case
de novo. See Salve Regina College v. Russell, 499 U.S. 225, 231, 111 S. Ct. 1217,
1221 (1991); Ins. Co. of N. Am. v. Lexow, 937 F.2d 569, 571 (11th Cir. 1991).
The question before us is whether the Supreme Court of Florida would apply
its offer of judgment statute, Fla. Stat. § 768.79, to a case where Virginia
substantive law governs the underlying claim. Section 768.79 provides, in relevant
part:
(1) In any civil action for damages filed in the courts of this state, if a
defendant files an offer of judgment which is not accepted by the
plaintiff within 30 days, the defendant shall be entitled to recover
reasonable costs and attorney’s fees incurred by her or him or on the
defendant’s behalf pursuant to a policy of liability insurance or other
contract from the date of filing of the offer if the judgment is one of
no liability or the judgment obtained by the plaintiff is at least 25
percent less than such offer, and the court shall set off such costs and
attorney’s fees against the award.
...
(2) . . .
An offer must:
(a) Be in writing and state that it is being made pursuant to this
section.
(b) Name the party making it and the party to whom it is being made.
(c) State with particularity the amount offered to settle a claim for
punitive damages, if any.
(d) State its total amount.
The offer shall be construed as including all damages which may be
awarded in a final judgment.
...
21
(7)(a) If a party is entitled to costs and fees pursuant to the provisions
of this section, the court may, in its discretion, determine that an offer
was not made in good faith. In such case, the court may disallow an
award of costs and attorney’s fees.
(b) When determining the reasonableness of an award of attorney’s
fees pursuant to this section, the court shall consider, along with all
other relevant criteria, the following additional factors:
1. The then apparent merit or lack of merit in the claim.
2. The number and nature of offers made by the parties.
3. The closeness of questions of fact and law at issue.
4. Whether the person making the offer had unreasonably refused to
furnish information necessary to evaluate the reasonableness of such
offer.
5. Whether the suit was in the nature of a test case presenting
questions of far-reaching importance affecting nonparties.
6. The amount of the additional delay cost and expense that the
person making the offer reasonably would be expected to incur if the
litigation should be prolonged.
Fla. Stat. § 768.79.
Somewhat complicating matters, Florida Rule of Civil Procedure 1.442
(Proposals for Settlement), adopted by the Florida Supreme Court, also covers the
subject of offers of judgment.7 Rule 1.442 is the procedural vehicle which a
litigant can use to enforce the right to attorney’s fees. The Florida Supreme Court
retains final authority to control judicial procedure and, consequently, the
7
To complicate matters even further, the Florida legislature enacted another statute
governing attorney’s fees and costs related to the acceptance or rejection of offers of settlement
and judgment, Fla. Stat. § 45.061, although it has been repealed for causes of action accruing
after October 1, 1990. See Timmons v. Combs, 608 So.2d 1, 3 (Fla. 1992).
22
provisions of Rule 1.442 supersede any contrary procedures contained in Fla. Stat.
§ 768.79. Fla. R. Civ. P. 1.442(a).
MBM and McMahan argue that under Florida choice-of-law principles,
Virginia law determines whether Toto is entitled to recover the attorney’s fees he
incurred after his offer of judgment, and for that reason the award of attorney’s
fees to Toto pursuant to Fla. Stat. § 768.79 was incorrect. (Virginia has no offer of
judgment rule or statute.)
1. Choice of Law: General Principles
Federal jurisdiction in this case is based on diversity of citizenship, and the
forum state is Florida. As a federal court exercising diversity jurisdiction, we
engage in a two-step inquiry to determine if Fla. Stat. § 768.79 is applicable. See
Boyd Rosene & Assocs., Inc. v. Kansas Mun. Gas Agency, 174 F.3d 1115, 1118
(10th Cir. 1999); Servicios Comerciales Andinos, S.A. v. General Elec. Del Caribe,
Inc., 145 F.3d 463, 479 (1st Cir. 1998). In the first step, we determine whether the
matter at hand is procedural or substantive for Erie R.R. Co. v. Tompkins purposes.
304 U.S. 64, 58 S. Ct. 817 (1938). If the matter is procedural then federal law will
apply; but if the matter is substantive, then we will apply the law of the forum
state. See Erie, 304 U.S. at 78, 58 S. Ct. at 822 (a federal court sitting in diversity
applies state substantive law). If we do determine that the matter is substantive, we
23
examine the substantive law of the forum state, which includes its choice-of-law
rules, to ascertain the applicable substantive law. See Klaxon Co. v. Stentor Elec.
Mfg. Co., 313 U.S. 487, 496, 61 S. Ct. 1020, 1021 (1941); Boyd, 174 F.3d at 1118;
Servicios, 145 F.3d at 479. We note, however, that the two steps are independent
of each other, and thus a finding that a matter is substantive or procedural for Erie
purposes does not compel the same characterization for choice-of-law purposes.
See Sun Oil Co. v. Wortman, 486 U.S. 717, 726, 108 S. Ct. 2117, 2124 (1988);
Boyd, 174 F.3d at 1118; Servicios, 145 F.3d at 479-80.
a. Is Fla. Stat. § 768.79 Substantive or Procedural for Diversity Purposes?
It is clear that statutes allowing for recovery of attorney’s fees are
substantive for Erie purposes. See All Underwriters v. Weisberg, 222 F.3d 1309,
1311-12 (11th Cir. 2000) (holding Florida statute which allowed an insured or
named beneficiary under an insurance policy to recover attorney fees upon
judgment in insured's favor was substantive for Erie purposes); see also MRO
Communications, Inc. v. Am. Tel. & Tel. Co., 197 F.3d 1276, 1282 (9th Cir. 1999)
(“In an action involving state law claims, we apply the law of the forum state to
determine whether a party is entitled to attorneys’ fees, unless it conflicts with a
valid federal statute or procedural rule.”) (citation omitted); In re King Resources
24
Co., 651 F.2d 1349, 1353 (10th Cir. 1981) (“Thus in diversity cases generally, and
certainly in this circuit, attorney fees are determined by state law and are
substantive for diversity purposes.”). As the Supreme Court has stated:
[I]n an ordinary diversity case where the state law does not run
counter to a valid federal statute or rule of court, and usually it will
not, state law denying the right to attorney’s fees or giving a right
thereto, which reflects a substantial policy of the state, should be
followed.
Alyeska Pipeline Serv. Co. v. Wilderness Society, 421 U.S. 240, 259 n.31, 95 S.
Ct. 1612, 1622 n.31 (1975) (citation and quotation omitted). Accordingly, we turn
to Florida’s choice-of-law rules to determine whether Toto was entitled to
attorney’s fees in this tortious interference action.
b. Florida Choice-of-Law Principles
Several decisions from Florida’s intermediate appellate courts have, albeit
without discussion of the choice-of-law issue, held that the availability of
attorney’s fees should be determined under the state law which also governs the
underlying claim. In Montalvo v. Travelers Indem. Co., 643 So.2d 648, 651 (Fla.
5th DCA 1994), Florida’s Fifth District Court of Appeal, in remanding a case
concerning interpretation of two automobile insurance contracts to the trial court,
directed that the amount of attorney’s fees be determined pursuant to North
Carolina law, which controlled the interpretation of the insurance contracts. But
25
cf. Weatherby Assocs., Inc. v. Ballack, 783 So.2d 1138, 1143 (Fla. 4th DCA 2001)
(affirming trial court’s award of attorney’s fees pursuant to § 57.105 where former
employer’s suit became frivolous after filed even though employment contract
between parties stated that Connecticut law would apply to any litigation arising
out of the employment agreement, and holding that “[t]he choice of law provision
in the agreement is irrelevant, because the trial court did not award attorney’s fees
pursuant to the agreement. Rather, the court awarded attorney’s fees pursuant to
section 57.105(1) . . . ”).
In Andrews v. Continental Ins. Co., 444 So.2d 479 (Fla. 5th DCA 1984), the
court held that even though an automobile accident occurred in Florida, Maine had
the most significant relationship with the occurrence, and that required application
of Maine law about whether to confirm an arbitration award. In remanding to the
trial court, the Fifth District Court of Appeal held that whether attorney’s fees were
allowed should also be decided under Maine law. Id. at 483.
Finally, in Hirsch v. Hirsch, 369 So.2d 407 (Fla. 3d DCA 1979), Florida’s
Third District Court of Appeal had previously determined in a related proceeding
involving the same parties that New York law applied to a controversy regarding
the provisions of a separation agreement, because the parties had specified New
York law in that agreement. The appellate court reversed the part of the trial
26
court’s judgment increasing support provisions to the wife, and remanded for
reconsideration of the award of attorney’s fees in light of the reversal on the merits.
In doing so, the appellate court noted that attorney’s fees could be granted to the
wife even though she was unsuccessful in securing a modification, because New
York law so provided. Id. at 409.
In applying Florida’s choice-of-law rules, procedural matters are governed
by Florida law, even where another forum’s substantive law applies. See Aerovias
Nacionales De Columbia, S.A. v. Tellez, 596 So.2d 1193, 1194-95 (Fla. 3d DCA
1992) (although New York law applied to substantive matters in wrongful death
action, Florida procedural law applied). We believe the Supreme Court of Florida
would hold that Fla. Stat. § 768.79 is not a “local law rule[] prescribing how
litigation shall be conducted.” Restatement (Second) of Conflict of Laws § 122.
Instead, it would hold that Fla. Stat. § 768.79 modifies the substantive rights of the
parties. Accordingly, we believe that the Supreme Court of Florida would not
apply Fla. Stat. § 768.79 to a case otherwise governed by the substantive law of
Virginia.
In this regard, we find the Florida Supreme Court’s discussion of the
division of responsibility for enacting substantive and procedural rules informative:
Article V, section 2(a), of the Florida Constitution provides this Court
with exclusive authority to adopt rules for practice and procedure in
27
the courts of this State. The Legislature, on the other hand, is
entrusted with the task of enacting substantive law. . . . The
Legislature has modified the American rule, in which each party pays
its own attorney’s fees, and has created a substantive right to
attorney’s fees in section 768.79 on the occurrence of certain specified
conditions.
TGI Friday’s, Inc. v. Dvorak, 663 So.2d 606, 611 (Fla. 1995). Thus, the task of
enacting procedural rules that apply even where another forum’s substantive law
governs is confined to the Supreme Court of Florida. See In re Amendments to
Florida Rules of Civil Procedure, 682 So.2d 105, 105-06 (Fla. 1996) (Florida
Supreme Court rejected amendments to Fla. R. Civ. P. 1.442 that were at variance
with Fla. Stat. § 768.79 because of legislative prerogative to enact substantive
law); Timmons v. Combs, 608 So.2d 1, 2-3 (Fla. 1992) (“[I]t is clear that the
circumstances under which a party is entitled to costs and attorney’s fees is
substantive and that our rule [Fla. R. Civ. P. 1.442] can only control procedural
matters.”).8 But the Florida legislature is entrusted with the task of enacting
8
See also Boyd Rosene & Assocs., Inc. v. Kansas Mun. Gas Agency, 174 F.3d 1115,
1120 (10th Cir. 1999):
In the choice-of-law context, most matters are treated as substantive. Only in
particular instances should a court consider a matter to be procedural. If a case
“has foreign contacts and . . . many issues in the case will be decided by reference
to the local law of another state,” a state should label an issue “procedural” and
thus apply its own law only when to do so would serve the purpose of efficient
judicial administration. Restatement § 122 cmt. a. The range of issues relating to
efficient judicial administration is narrow and includes such items as “the proper
form of action, service of process, pleading, rules of discovery, mode of trial and
execution and costs.” Id.; see generally id. ch. 6. These are matters in which it
28
substantive laws, for choice-of-law purposes, which it exercised in enacting Fla.
Stat. § 768.79.
Our conclusion that Fla. Stat. § 768.79 is a substantive law, for choice-of-
law purposes, is buttressed by the fact that it is properly viewed as a type of “loser
pays” rule or standard, instead of a sanction for frivolous litigation. In Servicios,
145 F.3d at 480-81 n.9, the First Circuit explained that “loser pays” rules might be
substantive for conflicts purposes:
Peru’s “loser pays” rule, which presumably always provides an award
of attorney’s fees to the prevailing party in a suit, has a much better
claim to being “substantive” [for purposes of Puerto Rico conflict of
laws analysis] than a rule awarding attorney’s fees only as a sanction
for frivolous litigation. After all, a “loser pays” rule could be
conceived of as adding an award of attorney’s fees to the recovery
provided by the underlying cause of action.
Loser pays attorney’s fees are those awarded to a party merely for prevailing in
their suit. Boyd, 174 F.3d at 1125-26. Bad-faith attorney’s fees, by contrast, are
those awarded “against a losing party who acted in bad faith, vexatiously,
wantonly, or for oppressive reasons.” Id. at 1126.
would be especially disruptive or difficult for the forum to apply the local rules of
another state, and in which failure to employ another state’s law will not
undermine interstate comity.
(footnote omitted).
29
Toto notes, as did the district court, that Florida courts have occasionally
described § 768.79 as a penalty designed to encourage litigants to act reasonably
and in good faith in settling lawsuits. See, e.g., Eagleman v. Eagleman, 673 So.2d
946, 947 (Fla. 4th DCA 1996); Goode v. Udhwani, 648 So.2d 247, 248 (Fla. 4th
DCA 1994). That description does not change the fact that § 768.79 provides for a
mandatory award of attorney’s fees where the offer of judgment is rejected, instead
of a discretionary award of attorney’s fees designed to sanction frivolous litigation.
See TGI Friday’s, 663 So.2d at 611 (Fla. Stat. § 768.79 provides for award of
attorney’s fees regardless of reasonableness of offeree’s rejection of offer of
judgment); Jordan v. Food Lion, Inc., 670 So.2d 138, 140 (Fla. 1st DCA 1996)
(Fla. Stat. § 768.79 creates mandatory right to attorney’s fees when statutory
prerequisites are satisfied, i.e., when a party makes an offer for settlement and that
party has recovered a judgment at least 25 percent more or less than the offer).
Thus, § 768.79 is a “loser pays” type of rule or standard.9
9
We also note that the Florida Supreme Court’s discussion in TGI Friday’s, 663 So.2d at
611, of the legislature’s decision in section 768.79 to modify the traditional American rule that
each party pays its own fees strongly suggests that section 768.79 constitutes a “loser-pays”
attorney’s fees statute. See Boyd 174 F.3d at 1126:
Loser-pays attorney’s fees are normally not within a court’s inherent power.
Instead, they reflect a conscious policy choice by a legislature to depart from the
American rule and codify the English rule. . . . The authority to award bad-faith
attorney’s fees, though frequently codified, is usually within a court’s inherent
powers. . . ”)
30
Fla. Stat. § 45.061, which is no longer effective, contained language
indicating that an award of attorney’s fees was discretionary, because it provided
that the court “may” award fees if it determined an offer of judgment had been
“rejected unreasonably.” However, similar language was not included in § 768.79,
which uses the word “shall.” Accordingly, attorney’s fees must be awarded once
the statutory prerequisites are satisfied, regardless of the reasonableness of the
offeree’s rejection. Knealing v. Puleo, 675 So.2d 593, 595 (Fla. 1996) (“the right
to an award [of attorney’s fees and costs] depends only on the amount of the
rejected offer and the amount of the later judgment” and “the reasonableness of the
plaintiff’s rejection is irrelevant to the question of fee entitlement”). As the Florida
Supreme Court has noted:
Under this statute, the legislature did not give judges the discretion to
determine whether it is reasonable to entitle qualifying plaintiffs to
fees. Rather, it determined for itself that it is reasonable to entitle
every offeror who makes a good faith offer (later rejected) . . . to an
award of fees. Under subsection (7)(b), the court’s discretion is
directed by the statutory text solely to determining the reasonability
[sic] of the amount of fees awarded.
TGI Friday’s, 663 So.2d at 613.
For all of these reasons, we conclude that Florida choice-of-law principles
compel the application of Virginia law on attorney’s fees. MBM and McMahan
(citation omitted).
31
allege, and Toto does not disagree, that Virginia law does not allow recovery of
attorney’s fees in this case.
III. CONCLUSION
For the foregoing reasons, (1) we AFFIRM the district court’s grant of
summary judgment in favor of Toto on the tortious interference claim, (2) we
AFFIRM the district court’s decision not to award fees and costs under Fla. Stat. §
57.105 and 28 U.S.C. § 1927, and (3) we REVERSE the district court’s decision to
award attorney’s fees under Fla. Stat. § 768.79.
32