In Adams et al. v. United Services Automobile Ass’n et al., W.D. Ark. No. 2:14-cv-02013, Chief District Judge P.K. Holmes III of the Western District of Arkansas will soon decide whether to sanction attorneys who negotiated a class settlement in federal court and then dismissed and refiled in state court, where the case originated, for approval of the settlement.

Like a number of similar cases filed in recent years, Adams v. USAA was a putative class action filed in Arkansas state court by insureds claiming their insurer improperly deducted labor depreciation from their “actual cash value” payments for structural damage losses covered under their homeowners’ insurance policies. The insurer removed the case to federal court in January 2014, and then moved for partial judgment on the pleadings in April 2014. Shortly thereafter, the parties jointly moved to stay the case pending mediation. 

After the stay was lifted, the parties filed a stipulation of dismissal, and the federal court dismissed the case on June 22, 2015. The next day, the plaintiffs filed a motion for preliminary approval of class settlement in the Arkansas state court where the case was originally filed. Attached to the preliminary approval motion was the parties’ stipulation of settlement, which defined “Court” as “the Circuit Court of Polk County, Arkansas” and was dated June 16, 2015 - even though the case was still pending in federal court on that date.

While the parties were in settlement negotiations, the plaintiffs in another labor depreciation case before Judge Holmes - “presumably the same Plaintiffs” as in Adams v. USAA, according to the court - reached a class settlement with another insurer. Adams v. Cameron Mut. Ins. Co., W.D. Ark. No. 2:12-cv-02173. In Adams v. Cameron, Judge Holmes expressed concerns about the settlement’s claims-made structure and attorneys’ fee award. That settlement was ultimately approved in federal court, but only after the parties made court-ordered revisions to address those and other concerns.

Given this history, Judge Holmes viewed the Adams v. USAA state-court settlement as an attempt to avoid the criticisms of the Adams v. Cameron settlement. On December 21, 2015, just one week after an Arkansas business journal ran a story on the state-court settlement, Judge Holmes ordered counsel for all parties to show cause “as to why a non-monetary sanction should not be imposed for violations of Federal Rule of Civil Procedure 11(b)(1).”

In his show-cause order, Judge Holmes denounced what he perceived to be “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.” And he mandated a hearing at which the parties are expected to do as follows:

[S]how how their actions in making filings in this Court (to include the original removal, requests for stay, and/or stipulation of dismissal, etc.) were not made “for any improper purpose,” including: (1) forum-shopping to seek a forum that counsel believed would best suit their own interests at any given time (to the detriment of class members); (2) wasting Government resources expended in adjudicating and monitoring this matter over 17 months only so counsel could gain leverage in settlement negotiations while ultimately evading federal review of the negotiated settlement; and/or (3) generally inappropriate procedural gamesmanship with no intent to actually litigate claims in good faith before this Court.

Counsel for both parties recently filed briefs in response to the show-cause order. Among other arguments, the plaintiffs’ counsel argued in their brief that “Plaintiffs initially filed their case in Arkansas state court and always believed that it was the appropriate forum.” And the insurer’s counsel, disclaiming any “knowledge of the concerns this Court expressed in May of 2015 concerning a proposed class action settlement in Adams v. Cameron Mutual Ins. Co.,” argued that the insurer “always intended to litigate the case in [federal court] to finality if settlement discussions were unsuccessful.” Counsel for both parties noted that in two other recent putative class actions involving labor depreciation, Arkansas federal courts did not take issue with the cases being removed from state court before returning there for settlement approval. Vinson v. Metro. Prop. & Cas. Ins. Co., E.D. Ark. No. 4:14-cv-00029; Simpson v. Certain Underwriters at Lloyd’s, London, W.D. Ark. No. 4:14-cv-04042.

The Adams v. USAA show-cause hearing is scheduled for February 18, 2016. Judge Holmes’ decision will provide valuable guidance in practitioners’ settlement strategy in class actions.