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Update: No Action on Lawyer Sanctions; Holmes Rethinking Finding of ‘Bad Faith’

3 min read

U.S. District Judge P.K. Holmes III held a brief hearing Friday morning and then recessed to continue considering the sanctions he has said he intends to impose on 16 attorneys involved in a class-action strategy that he found was an abuse of the judicial process.

Holmes said he had read the extensive briefs filed since he first held a hearing on the legal maneuvering that moved a case out of his court and into a state court, where it was promptly settled under terms that Holmes said “benefited everyone but the class members.”‘

The filings, he said, did call into question his previous finding of “bad faith” on the part of attorneys on both sides of the case of Mark and Katherine Adams v. United Services Automobile Association.

Holmes, the chief federal judge for the Western District of Arkansas, gave no indication of when he would issue his decision, but he did not indicate that he would hold another hearing.

Most of the 16 attorneys were in the court, but the most prominent, Texarkana plaintiffs’ attorney John Goodson, was not. For profiles of the attorneys in the case, click here.

The Adams case, which concerned the method used to calculate homeowners’ insurance claims, was pending in Holmes’ court for 17 months until both sides jointly agreed to dismiss it in June 2015. (Under court rules, the judge did not have to approve the agreed dismissal.) The case was refiled the next day, with a settlement agreement attached, in Polk County Circuit Court.

Although four USAA policyholders hired Little Rock attorney Robert Trammell to object to the terms of the settlement, it was approved without amendment in December by Polk County Circuit Judge Jerry Ryan.

Only by reading an article in Arkansas Business did Holmes learn that the case that was dismissed from his court had been refiled for settlement. This, he concluded after a hearing in February, was “mid-litigation forum shopping” designed to “escape an adverse decision [or] seek a more favorable forum” and the settlement itself “benefited everyone but the class members.”

Gregory Joseph of Joseph Hage Aaronson LLC of New York, who represents most of the plantiffs’ attorneys in their dealings with Holmes, gave a brief argument in which he pointed out that other federal judges in Arkansas had knowingly approved similar movement of cases from federal to state court. If federal judges don’t consider such maneuvers improper, Joseph suggested it was unreasonable to expect attorneys to know that it was.

Holmes asked whether the other judges had followed up to find out how those cases turned out. Joseph said he had no reason to think they had.

In the Adams case, the plaintiffs’ attorneys were paid $1.85 million in fees; the class of as many as 15,000 USAA customers would split up to $3.4 million. But only a tiny fraction — perhaps as little as $150,000 — was claimed under what Trammell said was an onerous and unnecessary claims process designed to discourage the plaintiffs from collecting. And Holmes has said he would not have approved the settlement; indeed, he had required changes in a settlement that had come before him in a similar case involving some of the same attorneys.

Joseph also pointed out that Holmes’ own order in April made clear that the attorneys “now know” that they shouldn’t move cases to state court specifically to get a better settlement, suggesting the possibility that they didn’t know last summer.

Although Holmes has said he will not reconsider his decision to sanction the attorneys, the plaintiffs’ lawyers have asked him not to impose sanctions because they have already been punished by widespread attention to Holmes’ findings. Joseph made the same plea on Friday, saying sanctions were not necessary as a deterrent. “The court has said that. They are not necessary to punish. The media has taken care of that,” he said.

Trammell, the attorney who objected to the settlement in Polk County Circuit Court, last week filed a new lawsuit in Saline County Circuit Court accusing USAA and 15 of the attorneys (Engstrom was not named) of colluding to minimize the damages awarded to the policyholders who had been shortchanged by the claims calculation formula. He is seeking class-action status.

The original story exposing the strategy in the Adams case, written by Arkansas Business Senior Editor Mark Friedman, recently received a national award for excellence in investigative reporting by a local business journal.

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