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Costs can’t ‘travel’ from fed to state court

A district court may not transfer the determination of costs allowed under FRCP 54(d) to a prevailing defendant to a state court, when the plaintiff voluntarily dismissed his federal suit, pursuant to Rule 41, in order to proceed in state court instead, the Seventh Circuit held on July 30.

In 1998, 11-year-old Ryan Harris was murdered in Chicago. Suspicion fell upon two young boys — R.G. and E.H. A month after charges were brought against the boys, it became clear that an adult had committed the crime, and the charges were dropped.

In 1999, the parents of R.G. (identified only as “Mother and Father”) brought suit in federal court on behalf of their son against the City and several police officers, raising both federal and state claims. The parents of E.H. brought similar proceedings in state court.

Mother and Father’s federal lawsuit generated more than 70 depositions and 30,000 documents, at a cost of more than $100,000. In 2001, nearly two years after the original complaints were filed, Mother and Father moved for voluntary withdrawal of their federal claims pursuant to FRCP 41. In their motion, they stated their intention to re-file their state-law claims in state court and to seek consolidation with the related E.H. litigation.

The district court agreed to dismiss the federal-law claims without prejudice for the time being, but it indicated that the dismissal would be converted to one with prejudice upon the state court filing. In addition, the district court ruled, over the City’s objection, that the costs of the federal case would not be assessed at all in federal court. Instead, the court ordered that the costs would “travel to the state court,” and whichever party prevailed in state court would be entitled to an award of costs from that court.

The City appealed after the order was converted to a dismissal with prejudice, and the Seventh Circuit reversed in a decision by Judge Diane P. Wood.

The Rules

Rule 54(d)(1) reads as follows: “Except when express provision therefor is made either in a statute of the United States or in these rules, costs other than attorneys’ fees shall be allowed as of course to the prevailing party unless the court otherwise directs; but costs against the United States, its officers, and agencies shall be imposed only to the extent permitted by law. Such costs may be taxed by the clerk on one day’s notice. On motion served within 5 days thereafter, the action of the clerk may be reviewed by the court.”

What the court held

Case: Mother & Father, et al. v. James Cassidy, et al., No. 01-2832.

Issue: Can a district court transfer the determination of costs allowed under FRCP 54(d) to a prevailing defendant to a state court, when the plaintiff voluntarily dismissed his federal suit, pursuant to Rule 41, in order to proceed in state court instead?

Holding: No. The federal district court is required to award costs to the defendant, unless a recognized exception for not doing so is present.

Counsel: Janis. M. Susler, Chicago, for Plaintiffs-Appellees; Benna R. Solomon, Chicago, for Defendants-Appellants.

Rule 41(a)(2) provides: “Except as provided in paragraph (1) of this subdivision of this rule, an action shall not be dismissed at the plaintiff’s instance save upon order of the court and upon such terms and conditions as the court deems proper. If a counterclaim has been pleaded by a defendant prior to the service upon the defendant of the plaintiff’s motion to dismiss, the action shall not be dismissed against the defendant’s objection unless the counterclaim can remain pending for independent adjudication by the court. Unless otherwise specified in the order, a dismissal under this paragraph is without prejudice.”

Subpart (d) of Rule 41 provides, “If a plaintiff who has once dismissed an action in any court commences an action based upon or including the same claim against the same defendant, the court may make such order for the payment of costs of the action previously dismissed as it may deem proper and may stay the proceedings in the action until the plaintiff has complied with the order.”

The court noted that, under Rule 54, costs are to be awarded to the prevailing party “as of course.” The only two exceptions are when the party seeking costs has engaged in misconduct, or when the losing party is indigent.

However, the court noted that Rule 41(a)(2) grants district courts broad discretion to impose conditions upon voluntar
y dismissal of a claim. The only recognized exception to this is when the party opposing dismissal would be prejudiced by the proposed condition.

From the rules and the previously recognized exceptions, the court discerned the following: “We learn from these rules first that Rule 54(d)(1) acknowledges that the court may have power otherwise to direct something about costs, even though the prevailing party is entitled to them ‘as a matter of course.’ We also learn that while Rule 41(a) has no language suggesting limits on the possible terms and conditions the court may impose, Rule 41(d) addresses the specific situation of the approach a federal court should take when prior litigation has occurred. It says nothing about what the federal court should do when it is the first court to dispose of a case in a situation where several courts are likely to be involved.”

Noting that there is no hierarchy between the two rules, under which one would take precedence over the other, the court stated, “we think it best to adhere to the general rule that governs entitlements to Rule 54 costs: that is, costs must be awarded to a prevailing party unless one of the recognized situations warranting a denial of costs is present.”

The court added, “it is perhaps worth noting that Rule 41 dismissals are normally to be done without prejudice, … and thus costs will generally not be an issue. Where the dismissal is with prejudice, however, as it was here, nothing in the language of Rule 41 suggests that the prevailing defendant should not enjoy the normal benefits of a final judgment in its favor. … The district court therefore acted beyond its authority when it attempted to deny the City its right to costs as a condition of the Rule 41 dismissal.”

The court noted, however, that it was not ruling that the City is entitled to an award of costs. Due to the procedural history, Mother and Father never had an opportunity to show that they might be able to avoid costs, either because of misconduct by the City or indigency. The court stated that, on remand, the district court will be free to explore those possibilities.

The court then added, “Even if it were possible to read Rule 41 as in some instances authorizing a refusal to award costs for reasons that go beyond those contemplated by Rule 54, we would still reverse the particular order the district court entered.”

The court listed numerous reasons why shifting the decision over costs to state court is improper. First, the court noted that no federal statute authorizes such an action. Second, the court found it would raise serious constitutional issues vis-à-vis the relationship between the federal government and the states. Third, there may be no way for the district court to ensure compliance, because the Rooker-Feldman doctrine would foreclose it from reviewing any costs determination by the state court.

Even if the court interpreted the district court’s order as merely a “request,” the court found it would still be problematic. The court noted, “The state court is under no obligation to honor any such request, which means that the City’s rights as a prevailing party in the federal litigation may never be vindicated.” The court also questioned whether the state court would have authority to award costs incurred in a federal court action.


Seventh Circuit Court of Appeals

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Case Analysis

Finally, the court determined that policy considerations dictate leaving the responsibility for awarding its own costs to each respective court. The court found that, if Mother and Father prevail, they can ask the state court to award costs that include whatever sums they have to pay to the City in the federal litigation. The court found, “The state court will be in a far better position then to see how much duplication of effort was involved and how much adjustment is appropriate.”

Conversely, if the City prevails, it can obtain additional costs under state law, and the state court can consider any argument Mother and Father may raise about potential double recovery.


Finally, the court rejected a request by Mother and Father that, if the court does not affirm, they b
e permitted to re-open the district court’s dismissal order, arguing that they would not have dismissed the case had they known that the Rule 54 costs would not travel to the state court.

The court acknowledged that, “the ‘terms and conditions’ clause of Rule 41(a)(2) grants plaintiff the option of withdrawing his motion if the district court’s conditions are too onerous, and proceeding instead to trial on the merits,” quoting Marlow v. Winston & Strawn, 19 F.3d 300, 304 (7th Cir.1994). However, Mother and Father did not file a cross-appeal seeking such an alteration. The court concluded that permitting withdrawal of the dismissal and full reinstatement of the case would go “far beyond an alternate ground for affirmance of a refusal to award costs.”

Accordingly, the court vacated the order, and limited remand to the question of costs.

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David Ziemer can be reached by email.

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