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No sanctions for conduct prelitigation

What the court held

Case: Bender v. Freed, No. 04-4169.

Issue: Can sanctions be imposed pursuant to 28 U.S.C. 1927 for conduct occurring prior to the commencement of litigation?

Holding: No. Without a case pending, there are no "proceedings" to "multiply," and therefore, sanctions are not authorized by the statute.

An attorney cannot be sanctioned under 28 U.S.C. 1927 for conduct that occurs before litigation commences, the Seventh Circuit held on Feb. 2.

Gary Bender’s health insurance was provided through the Bergquist Company Health Plan, an employee welfare benefit plan for purposes of ERISA.

In December 2002, he was injured in an automobile accident with Gretchen Freed, and the Plan paid some $23,000 for Bender’s medical expenses; under the terms of the plan, it retained a subrogated interest in any damages Bender might later recover.

Nevertheless, after Bender and his attorney, Phillip Todryk, settled with Freed’s insurer for her policy limit of $50,000, they did not inform the Plan of the settlement and paid no money to the Plan.

In November 2003, Bender, represented by Todryk, filed suit against Freed and the Plan in Wisconsin state court, seeking additional damages against Freed and a declaration that the Plan was not entitled to reimbursement.

The Plan removed the case to federal court, and counterclaimed for reimbursement, adding Todryk to the case as a third-party defendant on the theory that he was in possession of a portion of the $50,000 already received in the settlement with Freed’s insurer.

U.S. District Judge John C. Shabaz granted summary judgment to the Plan, but declined to award attorney fees pursuant to 29 U.S.C. 1132(g).

Bender later settled with Freed for $65,000. The Plan then sought attorney fees pursuant to 28 U.S.C. 1927, based on Todryk’s settlement with Freed’s insurer, and failure to honor the Plan’s subrogation interest.

Judge Shabaz denied the Plan’s motion for fees. With respect to the 29 U.S.C. 1132(g) claim, the court held that the motion was untimely under FRCP 54(d)(2)(B), which requires such motions to be filed within 14 days after entry of judgment. The court also held that sec. 1927 did not apply because the Plan’s allegations against Todryk related solely to his prelitigation conduct in failing to inform the Plan of the original $50,000 insurance settlement, not a vexatious “multiplication” of federal court proceedings that would be sanctionable under the statute.

The Plan appealed, but the Seventh Circuit affirmed in a decision by Judge Diane S. Sykes.

The court first held that the Plan’s motion for fees under sec. 1132 was properly denied as untimely.

ERISA allows prevailing parties to recover reasonable attorney fees and costs in the court’s discretion.

However, FRCP 54(d)(2) provides that, unless otherwise provided by statute or order of the court, a motion for attorney fees and non-taxable expenses must be filed within 14 days after judgment, “unless the substantive law governing the action provides for the recovery of such fees as an element of damages to be proved at trial.”

The Plan argued that the Rule does not apply because the fee provision in sec. 1132 is part of the “substantive law governing the action,” but the court rejected the argument, citing Bittner v. Sadoff & Rudoy Indus., 728 F.2d 280 (7th Cir. 1984).

The court also rejected the Plan’s alternative argument that the untimeliness should be excused because “all parties were well aware of the Plan’s intention to file a motion for attorneys’ fees long before the entry of judgment.”

The court wrote, “This is not a legal argument; it is an appeal to fairness based upon an asserted absence of prejudice, but without a corresponding claim that compliance with the deadline imposed by Rule 54(d)(2) was impossible or impracticable or that the Plan’s noncompliance was for some reason excusable. … The fact that the parties were ‘well aware’ that the Plan intended to file a fees motion at some indeterminate date in the future does not excuse noncompliance with the applicable procedural rules.”

Turning to the sanctions issue, the court also affirmed the district court, because the allegedly vexatious conduct occurred prior to the commencement of litigation.

Related Links

7th Circuit Court of Appeals

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Case Analysis

The statute provides, “Any 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 a
ttorney’s fees reasonably incurred because of such conduct.”

The court concluded, “It applies, therefore, to misconduct by an attorney in the course of ‘proceedings’ in a ‘case’ before the court, not misconduct that occurs before the case appears on the federal court’s docket. That is, the statute provides a discretionary sanction against attorneys who abuse the judicial process, not those who engage in improper conduct in the runup to litigation.”

Finally, the court also rejected the Plan’s argument that, because Trodyk’s conduct is a violation of the Rules of professional conduct in Wisconsin, it is therefore sanctionable. The court held, “But sec. 1927 does not provide a generalized substantive remedy for attorney misconduct wherever and in whatever context it may occur. It provides a remedy for bad faith misconduct by an attorney in the pursuit of a case in court (cite omitted).”

Because the Plan’s claim was premised entirely on his failure to notify it of the prelitigation insurance settlement — conduct occurring before litigation — the court affirmed the denial of sanctions.

Click here for Case Analysis.

David Ziemer can be reached by email.

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