Federal judge finds foul play, collusion in Arkansas insurance class action

April 15, 2016

(Reuters) – In January 2014, the insurer United Services Automobile Association removed a property insurance class action to federal court in Fort Smith, Arkansas. About 14 months later, plaintiffs’ and defense lawyers informed the presiding judge, U.S. District Judge P.K. Holmes, that they had reached a settlement. Judge Holmes entered a scheduling order in May 2105.

Then something unusual happened. Instead of proceeding with a preliminary hearing for approval of the settlement before Judge Holmes, lawyers on both sides jointly dismissed the federal court action. The plaintiffs refiled the case in Polk County court, along with a joint motion to certify the class and approve the class settlement the two sides reached while the case was being litigated in federal court.

As it happens, the standard of review for class action settlements is much less stringent in Arkansas state court than in federal court, as defense lawyers representing USAA have themselves pointed out in briefing to the 8th U.S. Circuit Court of Appeals and the U.S. Supreme Court in previous cases. It is also difficult for class members to object to class action settlements in Arkansas state court.

Not surprisingly, given those circumstances, the $3.4 million USAA settlement received final approval last December. The deal released potential claims by about 15,000 USAA policyholders and granted plaintiffs’ counsel $1.85 million in fees and expenses. As of February, only 651 policyholders had completed the onerous paperwork to receive compensation from USAA; whatever is left over from the $3.4 million fund after the claim period runs out will revert to the insurer.

Last December, Judge Holmes smelled a rat. The federal-court judge, as I told you at the time, issued a show cause order demanding that lawyers on both sides explain why they ditched his court in favor of state court. The “clear inference,” he said, was that plaintiffs’ lawyers and USAA were eager to avoid his scrutiny of a questionable deal that contained advantageous terms for them, at the expense of class members.

On Thursday, Judge Holmes said that rat he smelled was real, and a whopper. In a 32-page opinion, the judge concluded that plaintiffs’ and defense lawyers colluded in improper mid-litigation forum shopping, violating Rule 11 of the Federal Rules of Civil Procedure and abusing the federal judicial process. They lawyers “filed a stipulation of dismissal in this case for the purposes of seeking a more favorable forum and escaping an adverse decision,” Judge Holmes wrote. “This mid-litigation forum shopping was objectively unreasonable.”

The order covers plaintiffs’ lawyers Matt Keil, Jason Roselius, John Goodson, Richard Norman, Stevan Vowell, Timothy Myers, W. H. Taylor, William Putman, Tom Thompson, Casey Castleberry, Matthew Mustokoff, Martin Weber and Stephen Engstrom. It also puts defense lawyers Stephen Goldman and Wystan Ackerman of Robinson & Cole and Lyn Pruitt of Mitchell Williams on the hook for sanctions. Judge Holmes said that most of the lawyers showed at least some degree of bad faith. He proposed requiring them to notify Arkansas federal judges of their sanction when they enter appearances in class actions but has ordered a hearing in June to allow each lawyer to address the proposed penalty. The judge said he is still weighing whether to refer the matter to relevant bar associations for disciplinary investigations.

Judge Holmes’ investigation of the USAA settlement reveals what he considered to be a pattern of evading federal court review of insurance class action settlements by refiling in state court, where, he said, precedent insulates settlements from rigorous review. Both sides, he said, were “complicit” in these arrangements.

“Plaintiffs’ counsel have embraced the practice of negotiating lucrative attorneys’ fees from various defendants using the threat of class action as leverage (and  ) used the lesser scrutiny of Arkansas state courts to entice defendants to stipulate to dismissal for refiling in a forum where it is possible to certify a potentially over-inclusive and indeterminate class and settle on terms that will take less money from the defendants,” the judge wrote. “Defense counsel removed this action to federal court and then took advantage of the more difficult certification and settlement process in this forum to negotiate a settlement designed to result in a lower payout to an over-inclusive class in exchange for a high attorney’s fee.”

Judge Holmes rejected arguments that he did not have authority to issue sanctions because there is no active case before him. He also said that while switching forums in the middle of litigation can be a legitimate tactic, the 8th Circuit has said, most recently in the 2011 decision Thatcher v. Hanover Insurance Group that lawyers may not dismiss cases just to avoid an adverse decision or find a more favorable jurisdiction. Judge Holmes pointed out that all of the defense lawyers in the USAA case, as well as three of the plaintiffs’ lawyers, were counsel of record in the Thatcher case at the 8th Circuit. If anyone ought to know about improper forum-shopping, he suggested, it is these lawyers.

And if any lawyers practicing in federal court in the Western District of Arkansas weren’t previously on notice about misusing federal courts, Judge Holmes said, they ought to be now: “Because the court can and will institute changes to the way it manages putative class actions, and because this order should make clear to the bar that invoking federal jurisdiction under CAFA does not allow federal jurisdiction to be treated as a bargaining chip, other attorneys in this district  will also be unlikely to repeat this violation,” he warned.

I emailed John Elrod of Conner & Winters, who represented all but one of the plaintiffs’ lawyers in the Rule 11 proceeding before Judge Holmes, as well as James Moody of Wright Lindsey Jennings, who represented plaintiffs’ lawyer Engstrom. Neither responded to my request for comment. David Matthews of Matthews Campbell Rhoads McClure Thompson, who represents the USAA defense lawyers in the sanctions case, sent an email statement: “While we respect Judge Holmes and the office he holds, we do not agree with his analysis or conclusions and we believe we have fully complied with our obligations to the court and to our client.”

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