Judge Slaps Motley Rice With Fees Over "Frivolous" Lawsuit

Business

3/28/2012 @ 11:24AM
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Judge Slaps Motley Rice With Fees Over "Frivolous" Lawsuit

A federal judge in Indiana ordered lawyers including the prominent firm of Motley Rice to pay ITT Educational Services almost $400,000 in legal fees for pursuing a “frivolous” lawsuit the judge said was “based on a completely false story.”

The unusually harsh ruling — for a U.S. court, anyway — was designed to punish the lawyers for imposing millions of dollars in costs on ITT to defend a whistle-blower case where the plaintiff was a low-level employee who didn’t even think of filing suit until a lawyer contacted her. That sequence of events suggested the case was “both frivolous and brought for an improper purpose,” wrote U.S. District Judge Tanya Walton Pratt in a 31-page order issued Monday. It was first reported by Law.com.

Pratt’s order should be required reading for law students as it states precisely how not to bring a lawsuit. In this case Mississippi lawyer Timothy Matusheski dispatched a private investigator to interview Debra Leveski after learning she’d settled an employment lawsuit with ITT in 2006.

“For Matusheski, this was not an isolated incident. To the contrary, Matusheski (whose website domain is www.mississippiwhistleblower.com) advertises for clients who “work or worked in the financial aid or recruitment department for an institution of higher education” and has a history of seeking out ex-employees of for-profit educational institutions in hopes of finding an appropriate qui tam plaintiff.

Matusheski had two similar cases pending against for-profit educational companies, all claiming they violated federal law by paying employees improper incentives for recruiting students. While Leveski had worked for 10 years as a student recruiter and financial-aid administrator at ITT’s Troy, Mich. campus, she’d never worked at headquarters and testified in a deposition she had never complained about federal False Claims Act violations before she left ITT. “It is unclear if Matusheski cares whether the prospective plaintiff is appropriate in the sense that he or she has valuable information,” the judge said. “From what the Court can gather, Matusheski’s view is that virtually any ex-employee will do for purposes of manufacturing an FCA lawsuit.”

Matusheski should have gotten an inkling his case was in trouble after courts in two other states dismissed his claims. More than an inkling: In a Virginia case, Matusheski apologized to ITT, perhaps to spare his client the “potentially devastating financial impact” of being ordered to pay attorney fees and costs.

He pressed on with the Indiana case, however, seeking discovery on 130 campuses, not just the Troy, Michigan one where Leveski worked. In a deposition, Leveski admitted she got the idea of suing ITT from the lawyers, and got the legal theory for the suit from talking to the lawyers and researching the HEA on public websites. Her main evidence of fraud was a supervisor who told her compensation was a “numbers game.”

ITT said it spent another $4.7 million in fees, then delivered an ultimatum March 2011: Either drop the suit or face a demand for fees. The company filed a motion to dismiss, which was ultimately granted in August, but in the meantime the lawyers “continued to litigate aggressively,” running up $2.6 million more in costs. By then, Motley Rice had “unfortunately joined” the plaintiff team, the judge said.

All along there was a crucial flaw in the case: A whistleblower can’t claim to be one if the whistle has already been blown. Leveski got most of the information backing her claim after she left ITT, much of it from the lawyers who recruited her to sue. That led the judge to say of the case:

“The Court easily finds that it was brought for an improper purpose—presumably, to extract a large settlement from ITT, which would otherwise be forced to incur massive legal fees. On this point, the Court simply cannot ignore the genesis of this lawsuit. Matusheski brought this lawsuit after trolling public dockets and using a private investigator to cold-call ex-employees of for-profit educational institutions who had sued their former employer. This is as unethical as it is unseemly. Specifically, Model Rule of Professional Conduct 7.3 prohibits lawyers from soliciting “professional employment from a prospective client when a significant motive for the lawyer’s doing so is the lawyer’s pecuniary gain.” At its core, this was an opportunistic and attorney-driven lawsuit.

The judge said this case was far worse that ambulance-chasing, since at least a lawyer chasing an ambulance is likely to find an accident victim inside. “Here, by contrast, Matusheski plucked a prospective plaintiff out of thin air and tried to manufacture a lucrative case.”

“It is true, of course, that Rule 11 sanctions are “to be imposed sparingly, as they can have significant impact beyond the merits of the individual case and can affect the reputation and creativity of counsel.” However, if this order has a negative effect on Matusheski’s reputation, then that is a problem his own making. And, in the Court’s view, something needs to be done to curtail—not encourage—Mr. Matusheski’s “creativity.”

Of course, this is America and courts are extremely reluctant to fine any attorney out of fear it might discourage others from bringing suit. The judge found $2.7 million in fees eligible for repayment but lowered the amount because ITT should have suspected Leveski didn’t know anything and shouldn’t have waited three years to depose her. So he awarded 15% or $394,998.33, to be paid by Matusheski, Indiana lawyers Plews Shadley Racher & Braun and Motley Rice. They can work it out among themselves, the judge said. (For reference, the entire penalty represents about seven hours’ worth of the $500 million a year in fees Motley Rice and other plaintiff firms continue to draw from the 1998 tobacco settlement.)

The judge had harsh words for the would-be whistleblower as well.

“Agreeing to be part of this case was a highly irresponsible move on Leveski’s part; she knew that her lawsuit-related knowledge was paltry at best. Her common sense simply had to tell her that “if something is too good to be true, it probably is.

He threatened to order her to pay some of the costs of the litigation in a later order, despite the fact she described herself as indigent.


http://www.forbes.com/sites/danielfisher/2012/03/28/judge-slaps-motley-rice-with-fees-over-frivolous-lawsuit/