Hammervold v. Blank

3 F.4th 803

Mark HAMMERVOLD, Plaintiff—Appellant,

v.David BLANK; Diamond Consortium, Incorporated, doing business as The Diamond Doctor; Jewelers Mutual Insurance Company, Defendants—Appellees.

No. 20-40578

United States Court of Appeals, Fifth Circuit.

FILED July 9, 2021

Mark Hammervold, Hammervold Law, L.L.C., Elmhurst, IL, for Plaintiff-Appellant.

Katherine Elrich, Carrie Johnson Phaneuf, Cobb Martinez Woodward, P.L.L.C., Dallas, TX, for Defendants-Appellees David Blank, Diamond Consortium, Incorporated, doing business as Diamond Doctor.

Elizabeth Lee Thompson, Shawn W. Phelan, Thompson, Coe, Cousins & Irons, L.L.P., Dallas, TX, for Defendant-Appellee Jewelers Mutual Insurance Company.

Before Owen, Chief Judge, Smith and Graves, Circuit Judges.

Jerry E. Smith, Circuit Judge:

Mark Hammervold sued the defendants for malicious prosecution, abuse of process, and civil conspiracy. But, after the defendants’ voluntary dismissal of the allegedly malicious and abusive suit, he moved for attorney's fees based on 28 U.S.C. § 1927 and the common law bad-faith exception to the American rule. He lost that motion. The court held that the denial of that motion precludes his current suit based on res judicata and collateral estoppel. We reverse and remand.

I.

Because this case involves res judicata and collateral estoppel, background on both the previous and current lawsuits is needed.

A.

In the first lawsuit, Diamond Consortium, Incorporated, and Blank, its owner—hereinafter jointly referred to in the singular as "Diamond Doctor"—sued Hammervold for violations of the Racketeer Influenced Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c), and for civil conspiracy. The details underlying that lawsuit are not critical to this opinion.¹ In short, Hammervold was an attorney filing consumer-fraud claims against Diamond Doctor on behalf of clients. Diamond Doctor alleged that Hammervold brought those suits in bad faith to extort it into retaining him and his associates as attorneys, which would conflict Hammervold out of the consumer-fraud suits. Hammervold denied that characterization, contending that the consumer-fraud suits were legitimate and that it was Diamond Doctor that suggested retaining Hammervold to conflict him out, an offer that Hammervold repeatedly declined.

Following protracted litigation, Diamond Doctor moved voluntarily to drop the lawsuit under Federal Rule of Civil Procedure 41. Diamond Doctor asserts that it dropped the suit because it became concerned that Hammervold was judgment-proof. Hammervold avers that Diamond Doctor dropped the suit because of the motions in limine he had filed, which he asserts were effectively dispositive. The court granted the motion and dismissed the suit without prejudice.

Hammervold filed a post-judgment motion for "attorney[’]s fees and costs pursuant to 28 U.S.C. § 1927 and [the] common law ‘bad faith’ exception to the American rule."² He contended that Diamond Doctor brought the RICO and civil conspiracy claims in bad faith and that the true aim of the suit was to force him to spend money on legal fees in order to pressure him into accepting a settlement that would unethically require him to agree not to file additional clients’ claims against them.

The court denied Hammervold's motion. It analyzed § 1927 and the common law bad-faith exception together and found that (1) because Diamond Doctor's suit survived motions to dismiss, Hammervold's arguments that the suit was baseless were "not sufficient to support a claim of bad faith," and (2) Diamond Doctor's "conduct throughout the course of litigation [was] appropriate," so Hammervold's objections to its conduct "[did] not rise to the level of proof required to obtain a bad faith finding."

B.

In the present lawsuit, Hammervold sued Diamond Doctor and Jewelers Mutual, Diamond Doctor's insurer,³ for malicious prosecution, abuse of process, and civil conspiracy. He again alleged that Diamond Doctor brought the initial lawsuit to make Hammervold and his alleged co-conspirators "start spending money" in order to pressure them to accept an unethical settlement agreement that would prevent them from bringing additional clients’ consumer-fraud claims against Diamond Doctor, constituting both malicious prosecution and abuse of process. He further alleged that Diamond Doctor "intentionally conducted the litigation against Hammervold in a way that" forced him to spend more money, again to pressure him to accept the settlement. He also alleged abuse of process in a related lawsuit that resulted in the silencing of a witness important for his defense.

The district court granted the defendants’ motion to dismiss those claims. The court reasoned that, because the motion for attorney's fees in the previous suit, and Hammervold's claims in the present lawsuit, arose from the same nucleus of operative fact, res judicata barred the claims. The court also reasoned that the court's statements in the order denying the motion for attorney's fees—specifically that the first lawsuit was "brought ... in good faith" and that Diamond Doctor "acted appropriately" throughout the first lawsuit—would prevent Hammervold from proving required elements of malicious prosecution and abuse of process respectively.

II.

Applying res judicata, which "bars the litigation of claims that either have been litigated or should have been raised in an earlier suit," In re Southmark Corp. , 163 F.3d 925, 934 (5th Cir. 1999), the district dismissed Hammervold's claims. Our review is de novo . Test Masters Educ. Servs., Inc. v. Singh , 428 F.3d 559, 571 (5th Cir. 2005).

Under Texas law,⁴ "a judgment in an earlier suit precludes a second action by the parties and their privies not only on matters actually litigated, but also on causes of action or defenses which arise out of the same subject matter and which might have been litigated in the first suit." Getty Oil Co. v. Ins. Co. of N. Am. , 845 S.W.2d 794, 798 (Tex. 1992) (quotation omitted). Succeeding on a res judicata defense "requires proof of the following elements: (1) a prior final judgment on the merits by a court of competent jurisdiction; (2) identity of parties or those in privity with them; and (3) a second action based on the same claims as were raised or could have been raised in the first action." Amstadt v. U.S. Brass Corp. , 919 S.W.2d 644, 652 (Tex. 1996). All parties agree that the first two elements are met⁵ ; the disagreement surrounds only the third.

The third element is met if Hammervold's claims—malicious prosecution and abuse of process—were actually raised or could have been raised in his post-judgment motion for attorney's fees. Those claims were not actually raised. Though Hammervold's claims for attorney's fees involve similar elements and factual bases as do his current claims, they are not literally the same claim, such that we could say the claims were actually raised.⁶

Nor could Hammervold have raised those claims in his post-judgment motion. "If the court rendering judgment lacked subject-matter jurisdiction over a claim or if the procedural rules of the court made it impossible to raise a claim," then that claim could not have been raised.⁷ That is precisely the case here. Hammervold raised his claims for attorney's fees after the court had dismissed the case. Because judgment had been entered, the court's jurisdiction was limited to actions ancillary to its judgment. That includes motions for attorney's fees⁸ but does not extend to "action[s] separate and independent from the action giving rise to the judgment."⁹ Therefore, the court lacked jurisdiction to hear Hammervold's claims for malicious prosecution and abuse of process when he filed the post-judgment motion, so he could not have brought those claims.

The district court found otherwise, because it applied the "transactional test," which determines the res judicata effect of a prior judgment based on whether the new claim arises from the same nucleus of operative fact as did the original claim. See Test Masters , 428 F.3d at 571. And the appellees here press that same argument. But the transactional test is used only to determine which claims that could have been brought in the first suit are precluded by judgment in that suit. Therefore, though Hammervold's post-judgment motion and current claims make essentially identical factual assertions, that is beside the point. Res judicata bars "causes of action or defenses which arise out of the same subject matter" as the initial suit, but only where they "might have been litigated in the first suit." Getty Oil , 845 S.W.2d at 798 (cleaned up).¹⁰

As a final note, the district court's granting Diamond Doctor's motion for voluntary dismissal in the first suit also does not preclude Hammervold's claims. Because that dismissal was without prejudice, it is without res judicata effect. See In re USAA Gen. Indem. Co ., No. 20-0075, ––– S.W.3d ––––, ––––, 2021 WL 1822944, at *3 (Tex. May 7, 2021). And, even if it were not, because Hammervold was the defendant in that action, res judicata would bar those claims only if they were compulsory counterclaims to Diamond Doctor's RICO claim. Ingersoll-Rand Co. v. Valero Energy Corp. , 997 S.W.2d 203, 206–07 (Tex. 1999). Under both federal and Texas law, counterclaims are compulsory only if they arise from the same facts as the plaintiff's suit.¹¹ Given that the claims for malicious prosecution and abuse of process arise out of the fact of the first lawsuit—and not the facts underlying that lawsuit—they do not arise from the same transaction and are thus not compulsory counterclaims.

III.

The district court also held that collateral estoppel precludes Hammervold from succeeding on his claims for malicious prosecution and abuse of process. Our review is de novo . See Test Masters , 428 F.3d at 571. "The elements of collateral estoppel under Texas law are: (1) the facts sought to be litigated in the second action were fully and fairly litigated in the prior...