Jessica Karmasek Feb. 16, 2016, 10:30am


FORT SMITH, Ark. (Legal Newsline) - An Arkansas federal judge soon will decide whether to sanction attorneys for their dismissal of a class action settlement in his court and subsequent refiling in a state court.

Chief Judge Paul K. Holmes III for the U.S. District Court for the Western District of Arkansas said in a December show-cause order that the counsel appeared to have dismissed the action “for the purpose of evading this Court’s review of their negotiated settlement.”

“This forum shopping is inimical to our system of justice and violates the spirit of the laws governing the jurisdictions of the state and federal sovereigns,” Holmes wrote in the seven-page order, which the judge filed a week after an Arkansas business journal ran an article on the state court settlement.

Holmes, in a notice filed last week, has set a show-cause hearing for Thursday, allowing all counsel of record to show cause as to why he should not sanction them.

“Counsel will be given the opportunity to respond through argument of their own attorneys, presentation of testimony, and/or the admission of other evidence, as counsel and their attorneys deem appropriate and advisable, and at the discretion of the Court,” the chief judge wrote.

“If the Court ultimately determines that sanctions should be imposed, the Court will give notice of the nature of sanctions it intends to impose and will give counsel an opportunity to respond, at a second hearing, to the propriety of the specific sanctions before any final order imposing sanctions is entered.”

The plaintiffs in Adams et al. v. United Services Automobile Association et al. originally filed their class action in state court, claiming their insurer improperly applied depreciation when adjusting claims for structural losses under their homeowners insurance policies.

Allegedly, the defendant -- United Services Automobile Association, USAA Casualty Insurance Company and USAA General Indemnity Co. -- applied depreciation to labor and other non-material items, such as taxes and general contractor overhead and profit.

USAA removed the case to the federal court in January 2014, and then moved for partial judgment on the pleadings in April 2014. Soon after, the parties jointly moved to stay the case pending mediation.

Later, the stay was lifted and the parties filed a stipulation of dismissal on June 19, 2015. An order of dismissal was entered on June 22.

According to Holmes’ show-cause order, the matter was re-filed in Polk County Circuit Court, together with a motion for preliminary approval of class settlement one day later.

The chief judge noted in his December order that “although this matter was pending in this Court until June 22, the stipulation of settlement was signed by counsel on June 16, 2015, and specifically defines ‘Court’ as ‘the Circuit Court of Polk County, Arkansas.’”

“The clear inference to be drawn from the fact that counsel filed a stipulation of settlement in Polk County the day after dismissing the case that had been pending with this Court for over 17 months is that counsel wished to evade the federally-mandated review of the class and the proposed settlement by this Court in particular,” Holmes wrote. “This inference is supported by the fact that on May 13, 2015, this Court held a hearing in a separate case brought by ‘Mark and Kathy Adams’ (also of Mena, Arkansas, and presumably the same Plaintiffs in this matter) on preliminary approval of a class-action settlement of claims identical to those raised in the instant matter and brought by many of the same plaintiffs’ counsel.”

According to the chief judge’s show-cause order, he had expressed concerns about that settlement’s structure and attorneys’ fee award. The settlement was ultimately approved in federal court, but only after both parties had to make revisions to address Holmes’ concerns.

“Having experienced or otherwise been made aware of the Court’s scrutiny of the settlement in Adams 1, counsel had the benefit of knowing the Court’s views on the issues that would be raised by the stipulation of settlement filed with the Circuit Court of Polk County upon dismissal of this case. Counsel likely believed that, given the almost identical nature of Adams 1 and this case, the Court would not approve a settlement so strikingly different from that entered into in Adams 1,” Holmes wrote. “The Court can only conclude that counsel anticipated that this Court would be diligent in its duty to protect the interests of absent class members and would be unlikely to approve a settlement that advanced the interests of class counsel (a large fee award with a clear sailing provision) and defense counsel (a claims made settlement with onerous claims requirements and a reversionary fund) while largely failing to protect the interests of the class, whose members would otherwise be entitled to collect potentially substantial sums of money from Defendants. Plaintiffs’ counsel likely also anticipated that the Court would look with skepticism at a request for a large sum of attorneys’ fees for negotiation of a claims-made settlement, and that recovery of fees would likely have to bear some relationship to the amount ultimately recovered on behalf of the class.

“Counsel therefore chose to dismiss the action from this Court to evade this review. The ethical problem presented by this case is compounded by counsel’s abuse of process in using this Court and its exercise of jurisdiction as a bargaining chip in the negotiation of the ultimately questionable settlement.”

Plaintiffs’ counsel argued in their Jan. 14 response that they “have acted in good faith and pursued a legitimate course of action.”

“Given that Plaintiffs initially filed their case in Arkansas state court and always believed that it was the appropriate forum, Counsel ultimately negotiated a settlement that appropriately took the matter back to its forum of inception,” lawyers for the plaintiffs’ counsel wrote. “Such actions were in no way detrimental to the class nor were they in any other manner improper.”

W.H. Taylor, Stevan E. Vowell, William B. Putman and Timothy J. Myers of Fayetteville law firm Taylor Law Partners LLP and Matt Keil and John C. Goodson of Keil & Goodson PA in Texarkana represented the plaintiffs.

Mitchell Williams Selig Gates & Woodyard PLLC in Little Rock represented the defendant.

The defendant’s counsel said in its Jan. 19 response to Holmes’ show-cause order that it “always intended to litigate the case in this Court to finality if settlement discussions were unsuccessful.”

“After lengthy settlement negotiations assisted by a prominent national mediator who is a former federal judge, spanning more than six months, USAA agreed to settle in state court because it could not reach an acceptable settlement agreement with Plaintiffs otherwise,” they explained.

“Prior to receiving this Court’s recent order, USAA’s counsel had no knowledge of the concerns this Court expressed in May of 2015 concerning a proposed class action settlement in Adams v. Cameron Mutual Ins. Co.

Counsel for both parties noted in their responses that in two recent, similar class actions, Arkansas federal courts didn’t take issue with the cases being removed from state court before returning there for settlement approval.

“If this Court were to reach a conclusion that a decision to dismiss a federal case and enter into a state court settlement is improper, it appears this Court would be the first court ever to do so,” lawyers for the defendant’s counsel wrote.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

Organizations in this Story

Taylor Law Partners LLP
303 Millsap Road
Fayetteville, AR 72703

Keil & Goodson PA
406 Walnut Street
Texarkana, AR 71854

Mitchell Williams Selig Gates & Woodyard PLLC
425 West Capitol Avenue
Little Rock, AR 72201

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