A divided Fifth Circuit Court of Appeals panel has affirmed a judgment against two lawyers on claims of fraud and breach of the duty of good faith and fair dealing; their alleged misrepresentations purportedly induced the plaintiff to settle asbestos exposure claims filed by its former employees. Ill. Cent. R.R. Co. v. Guy, Nos. 10-61006 and 11-60122 (5th Cir., decided May 29, 2012).
The attorneys contended that the district court lacked subject matter jurisdiction under the Rooker-Feldman doctrine and, alternatively, that the court should have abstained from considering the case under Burford v. Sun Oil Co. They also argued that they had established their statute-of-limitations and waiver defenses as a matter of law.
The attorneys allegedly provided information about asbestos claimants to Illinois Central Railroad as part of an agreement to settle the claims without trial. The agreement established a process to ensure that the claims had merit, that is, the claimants had worked for the company, had been diagnosed with an asbestos-related disease and had filed suit within the three-year limitations period. Disagreements arose over the time the company was taking to process unsettled claims and concerns that the attorneys were not meeting their good-faith obligation to ensure that information collected from their clients was accurate. Illinois Central prevailed in its fraud and bad faith claims against the attorneys and was awarded $210,000 in compensatory damages and $210,000 in punitive damages.
While the underlying asbestos litigation had occurred in state court and the Mississippi Supreme Court was called on to decide whether the trial court should have relieved Illinois Central from its obligations under the settlement agreements, the court held that the Rooker-Feldman doctrine, which bars federal courts from exercising appellate jurisdiction over final state-court judgments, did not apply. According to the court, “adjudicating Illinois Central’s [fraud] claims did not require the district court to review any final judgment rendered by a state court.”
According to the court, “adjudicating Illinois Central’s [fraud] claims did not require the district court to review any final judgment rendered by a state court.”
As for Burford abstention, which protects “complex state administrative processes from undue federal interference,” the court determined that limits on that doctrine applied here because it was an action for damages. The U.S. Supreme Court has ruled that abstention does not allow district courts to dismiss or remand actions that seek damages only. The court also found that just two out of five Burford factors would possibly apply to the case to favor abstention.
The court further determined that Illinois Central had introduced sufficient evidence of affirmative acts of concealment to toll the applicable statute of limitations. Finally, the court rejected the attorneys’ contention that Illinois Central waived its fraud claims by failing to rescind the settlement agreements that were purportedly based on inaccurate or incomplete information. While the company did not repudiate the settlement agreements, “there is no evidence it did anything to ratify them after February 13, 2004.” The company sought relief in a separate action, “but that does not show that Illinois Central was somehow able to speculate on the value of the releases” of the claims.
A dissenting judge would have reversed, finding that the company failed to exercise due diligence in investigating the fraud, despite obtaining evidence of the attorneys’ potentially fraudulent conduct.