Court Opinion

ID: 46028
Source: CourtListenerOpinion
Date Created: 2010-04-25 22:50:50+00
Date Added: 2024-06-11T17:17:32.721967
License: Public Domain

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this opinion should not be published and is not precedent except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

                                     9
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.”

                                 10
     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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