When is an attorney personally liable for the attorney fees and costs an opponent incurs?

attorney fees

Watson Rounds v. Eighth Jud. Dist. Ct. (Nev. Supreme Ct. – Sep. 24, 2015)

NRS 7.085 allows a district court to make an attorney personally liable for the attorney fees and costs an opponent incurs when the attorney files, maintains, or defends a civil action that is not well-grounded in fact or is not warranted by existing law or by a good-faith argument for changing the existing law. The issues are whether (1) Nevada Rule of Civil Procedure NRCP 11 supersedes NRS 7.085, and (2) the district court abused its discretion in sanctioning the law firm under NRS 7.085.

FortuNet, Inc., is a gaming company that leases bingo equipment to casinos. In 2011, FortuNet filed the initial version of its complaint in an action against former FortuNet employees and an entity they created; the claims centered on allegations that the employees breached various duties to FortuNet and improperly used FortuNet’s intellectual property. FortuNet later retained Watson Rounds, P.C. (Watson), as its new counsel, and Watson prepared a second amended complaint adding Bruce Himelfarbl and Himelfarb & Associates, LLC (collectively Himelfarb), as defendants. All claims against Himelfarb derived from an alleged kickback scheme and the alleged theft of FortuNet’s intellectual property.

Each of FortuNet’s claims against Himelfarb survived summary judgment. The parties proceeded to trial, but before the jury entered a verdict, the district court dismissed several of FortuNet’s claims against Himelfarb for lack of evidence under NRCP 50(a). FortuNet also voluntarily dismissed several other claims against Himelfarb. The remaining claims against Himelfarb made it to the jury, which had the option of finding that Himelfarb was involved in the kickback scheme, the theft of FortuNet’s intellectual property, both, or neither. The jury rejected FortuNet’s claims against Himelfarb, found for Himelfarb on its counterclaims, and specifically asked the district court if it could include Himelfarb’s attorney fees when calculating the damages Himelfarb suffered from FortuNet’s breach of the implied covenant of good faith and fair dealing. The district court instructed the jury that it could not add attorney fees because such fees, if any, would be assessed posttrial.

The district court eventually determined that FortuNet would be liable for Himelfarb’s attorney fees and costs in the amount of $551,216.83. Additionally, the district court determined Watson was jointly and severally liable with FortuNet for those fees and costs pursuant to NRS 7.085. The district court explained that Watson’s liability was proper because, “despite not being well-grounded in fact and not warranted by existing law or a good faith argument for a change in existing law, [Watson] filed and maintained FortuNet’s claims against [Himelfarb] and defended FortuNet against [Himelfarb’s] counterclaims as contemplated by NRS 7.085.”

The district court sanctioned Watson under NRS 7.085 based on (1) its review of the various pre-trial motions, (2) the evidence presented at trial, (3) NRCP 50(a) rulings, (4) FortuNet’s voluntary dismissal with prejudice of certain claims, (5) the jury’s unanimous verdict in favor of Himelfarb, and (6) the jury’s expressed desire to award Himelfarb its entire attorney’s fees incurred relating to this case. The district court also cited the fact that the deposition and trial testimony of FortuNet’s CEO]and principal witness stated that counsel was responsible for 99.99% of the factual and legal content of FortuNet’s pleadings. Finally, the district court found that Watson could not have made the required inquiries prior to filing the second amended complaint against Himelfarb, could not have reassessed the evidentiary support for FortuNet’s claims against Himelfarb before filing, and could not have had a reasonable belief that the claims against Himelfarb were well-grounded in either fact or law.

Watson sought a writ of mandamus vacating the portion of the district court’s order making Watson jointly and severally liable for Himelfarb’s attorney fees.  Watson contended that NRCP 11 superseded NRS 7.085  such that the award against Watson was improper and that the district court abusd its discretion in making Watson liable for Himelfarb’s attorney fees under NRS 7.085 without making adequate findings.

Does NRCP 11 supersede NRS 7.085?

Watson argued that NRCP 11 superseded NRS 7.085 because NRS 7.085 is a procedural statute last amended in 2003 and NRCP 11 is a procedural rule that was materially amended in 2004. According to Watson, NRCP 11’s 2004 amendment added safe harbor rules that superseded NRS 7.085, such that the statute (1) was now totally superseded by NRCP 11, or (2) at least incorporates NRCP 11’s safe harbor provisions. NRCP 11’s safe harbor provisions prevent attorneys from being sanctioned until they have the opportunity to cure the sanctionable conduct or appear at an order to show cause hearing.

Watson relied on State v. Connery, 99 Nev. 342, 661 P.2d 1298 (1983), to support its position that procedural rules supersede conflicting procedural statutes when the rule is enacted after the statute. In Connery, the issue was whether the time for appeal was governed by (1) a statute requiring appeal within 30 days of a district court’s oral pronouncement of an order, or (2) a later-enacted appellate rule requiring appeal within 30 days of the district court’s entry of a written order. The Watson court held that the subsequently enacted procedural rule superseded the statute.

The Supreme Court of Nevada explained that Connery did not compel the result Watson sought because it is materially distinguishable from the present matter. In Connery, the rule and statute plainly and irreconcilably conflicted because they provided different dates from which to calculate a strict 30-day appeal window. The Court noted that Watson had not articulated any reason why it cannot give effect to both NRCP 11 and NRS 7.085, and there was nothing to suggest that the rule and statute cannot be read in harmony. Moreover, persuasive authority and Nevada’s rules for statutory interpretation strongly support treating NRCP 11 and NRS 7.085 as independent sanctioning mechanisms.

The Court explained that Nevada adopted the 1993 version of Federal Rule of Civil Procedure (FRCP) 11 in its entirety. As the Advisory Committee Notes on the 1993 amendments to FRCP 11 make clear, FRCP 11 does not supersede or supplant 28 U.S.C. § 1927, which makes attorneys personally liable for the unreasonable and vexatious multiplication of proceedings. While federal courts have declined, as a matter of discretion, to allow § 1927 to be used as a means of sidestepping FRCP 11’s safe harbor provisions where the misconduct involved is clearly covered by FRCP 11, they recognize that FRCP 11 and § 1927 apply to different types of misconduct and provide independent mechanisms for sanctioning attorney misconduct. The Court noted the relationship between the Nevada statute and rule is analogous to that between § 1927 and FRCP 11. Thus, federal authority strongly indicates that NRCP 11 does not supersede NRS 7.085.

The Court explained that Nevada’s statutory interpretation rules also supported treating NRCP 11 and NRS 7.085 as separate sanctioning mechanisms. The court has previously indicated that the rules of statutory interpretation apply to Nevada’s Rules of Civil Procedure. The Court noted that whenever possible, a court will interpret a rule or statute in harmony with other rules or statutes. The simplest way to reconcile NRCP 11 and NRS 7.085 was to do what federal courts have done with FRCP 11 and § 1927; treat the rule and statute as independent methods for district courts to award attorney fees for misconduct. Therefore, the Court concluded NRCP 11 does not supersede NRS 7.085.

Did the district court fail to make adequate findings supporting sanctions against Watson?

Watson contended the district court abused its discretion in concluding that it violated NRS 7.085 because the court’s findings were insufficient to support that conclusion.

NRS 7.085 allows the district court to make an attorney personally liable for the attorney fees and costs an opponent incurs when the attorney files, maintains or defends a civil action that is not well-grounded in fact or is not warranted by existing law or by a good faith argument for changing the existing law. The court has previously held, in the context of an attorney fees award, that a district court abuses its discretion by making such an award without including in its order sufficient reasoning and findings in support of its ultimate determination.

According to the district court’s order, its award against Watson was based on (1) the jury’s express desire to award Himelfarb attorney fees; (2) a review of pretrial motions; (3) the evidence presented at trial; (4) the court’s NRCP 50(a) rulings; (5) FortuNet’s voluntary dismissal of certain claims; (6) the jury’s unanimous verdict in Himelfarb’s favor; (7) a statement by FortuNet’s CEO that Watson was 99.99% responsible for the contents of pleadings; and (8) its determination that Watson could not have (a) made the required inquiries before filing the second amended complaint, (b) reassessed the evidence underlying FortuNet’s claims, and (c) reasonably believed FortuNet’s claims were well-grounded in fact or law. The Court believed this reasoning did not support the imposition of sanctions against Watson.

The Court explained that the district court’s order improperly relied on the jury’s question to the district court about awarding Himelfarb attorney fees for FortuNet’s breach of the implied covenant of good faith and fair dealing. NRS 7.085 does not empower juries to sanction attorneys. Even though juries can award attorney fees as a consequential damage for the breach of an obligation, such an award is only permissible if a request for attorney fees was pleaded in accord with NRCP 9(g). The record did not demonstrate that Himelfarb pleaded such a request in accord with NRCP 9(g). More importantly, there was no authority indicating that Watson could be liable for consequential damages caused by its client’s breach. As such, The Court believed the jury’s impulse to award Himelfarb some attorney fees had no logical bearing on whether Watson can be sanctioned under NRS 7.085.

Moreover, the Court noted it was not clear the NRCP 50(a) rulings and FortuNet’s voluntary dismissal of some claims supported an award for attorney fees. There are many cases in which attorneys are not made personally liable for fees even though some claims are dismissed before trial. The Court noted that the district court did not explain how the pre-verdict dismissals here indicated that Watson brought or maintained groundless claims. Further, despite several claims being eliminated by NRCP 50(a) and voluntary dismissal, all those claims survived summary judgment, demonstrating the district court believed there might have been sufficient evidence to support them. Additionally, the core factual issues— whether Himelfarb was involved in the kickback scheme or the theft of FortuNet’s intellectual property—still went to a jury.

Finally, the Court noted the only piece of evidence the district court identified did not explain why the award against Watson was justified. FortuNet’s CEO stated that Watson was 99.99% responsible for the decision to add Himelfarb to the second amended complaint. The district court cited this statement as evidence that Watson filed or maintained claims not well-grounded in fact or law. However, the Court believed this evidence said nothing about whether the claims were well-grounded. Instead, it assigned blame to Watson for any groundlessness that may have existed, without supporting an actual finding of groundlessness. Therefore, the Court concluded that the district court abused its discretion in sanctioning Watson because its findings were insufficient to justify making Watson liable for attorney fees and costs under NRS 7.085.

Accordingly, the Court granted the petition and directed the clerk to issue a writ of mandamus instructing the district court to vacate the portion of its September 2013, order holding Watson Roundsj ointly and severally liable for Himelfarb’s attorney fees and costs.

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