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Civil Practice – $150,000 sanction on counsel, firms upheld

Rebecca Lightle//June 14, 2018

Civil Practice – $150,000 sanction on counsel, firms upheld

Rebecca Lightle//June 14, 2018

Attorneys’ “egregious” conduct was designed to, and did, mislead the district court, the 4th Circuit affirmed. They challenged the authenticity of a loan agreement for two years before revealing that they possessed an identical copy, obtained from their client, before filing the complaint. Their firms ratified their conduct and were thus jointly liable, though an associate’s liability was capped at $100,000 for his lesser role.


James Dillon borrowed money from online lenders in 2012 and 2013 at interest rates that he alleged were usurious. To take out the loan, Dillon clicked through an online loan agreement, incurring a finance charge of approximately 139 percent of the principal amount. Neither Dillon nor the lender signed a hard copy of the loan agreement.

In October 2013, Dillon filed a putative RICO class action against several non-lender banks whose only roles were processing loan-related transactions through the Automatic Clearing House network. Attorneys Stephen Six, J. Austin Moore, and Darren T. Kaplan, among others, represented Dillon in his suit. Six and Moore are a partner and associate attorney, respectively, at the Steuve Siegel Hanson LLP law firm. Kaplan is the principal shareholder of Darren Kaplan Law Firm, PC.

Generations Community Federal Credit Union promptly moved to dismiss Dillon’s complaint, arguing that the loan agreement’s arbitration, forum-selection, and choice-of-law clauses each justified dismissal. Generations attached a copy of the loan agreement as an exhibit to its motion.

Dillon opposed Generations’s motion to dismiss on grounds that can most charitably be described as ambiguous. He argued that it originated online and “does not bear Plaintiff’s signature (or any signature) and Defendant fails to offer any explanation as to how it came into possession of the Loan Agreement or whether it is authentic.”

At a hearing to consider several pre-trial motions, the district court framed the “main question” for the parties as whether or not Dillon actually challenged the authenticity of the loan agreements. The district court said it understood Dillon’s briefing to challenge the document’s authenticity. Six explained that “the claims that we make don’t rely on the loan agreement.” But Six nevertheless repeatedly challenged the authenticity of the loan agreements. At one point, the district court pushed Six to explain whether or not he at least “agree[d] that there is some sort of written agreement somewhere.” When Six evaded the question, the court pressed harder: “I’m not saying you should produce it. I am just saying, based on your allegations in the complaint, you are the one who refers to the loan documents all the time.” Six still avoided answering the court’s question directly. The district court interpreted Six’s statements as agreeing that Dillon sought to challenge the authenticity of the loan agreements. Under the impression that a good-faith basis existed to challenge the authenticity of the copy of the loan agreement that Generations produced, the district court denied the defendants’ various motions to dismiss or to compel arbitration: “Mr. Dillon disputes the authenticity of the documents and objects to their consideration.”

The court’s opinion and order clearly articulated what it perceived as Dillon’s good-faith challenge to the loan agreements on authenticity – not authentication – grounds. Any misunderstanding on this point was both created and reinforced by Dillon’s attorneys.

On the banks’ appeal of the denied motions to dismiss, Six demonstrated on appeal the same determination that he had shown before the district court to avoid both answering questions and clarifying misimpressions. In response to a question from the panel about how he could simultaneously rely on and reference the loan agreements and challenge their authenticity, Six responded:

“Well, here’s the answer to that: Mr. Dillon took out a number of loans, like a lot of these folks who get trapped in a cycle of debt. It’s happened in cyberspace somewhere. And the example I used with Judge Eagles was there’s one lender called Vin Capital. We have no idea where they exist. They’re off in cyberspace. Mr. Dillon doesn’t have the loan agreement. He doesn’t know if that loan agreement the bank has brought on behalf of Vin Capital is the loan agreement…. So the claim that Mr. Dillon is one of the signatories [and] is in the best position to say, ‘Yeah, this unauthenticated writing is the one that applies to my loan,’ who knows. Maybe it is, maybe it isn’t.” The panel member then asked Six directly whether there had ever been a challenge to the authenticity of the arbitration agreements within the loan agreements and requested that he “start off with yes or no.” Six finally answered “yes.”

In discovery following remand, information quickly emerged that led the district court to question the good-faith basis for Dillon’s attorneys’ authenticity challenges. At Dillon’s deposition, he revealed for the first time that he had printed a copy of the loan agreement, possibly close to the time he took out the loan, and had provided the copy to his attorneys. Dillon’s counsel provided Generations with a partially redacted version of Dillon’s copy of the Western Sky loan agreement several weeks after the deposition. The terms in Dillon’s copy were identical to those in the copy that Generations had provided in support of its earlier motions to dismiss. Dillon’s attorneys had, however, redacted markings around the contractual text under a claim of attorney-client privilege. Dillon’s attorneys explained that he “concedes the authenticity of the [loan agreement] because he was able to locate a copy of the agreement in his own files that is identical to the agreement produced by Generations.”

A forensic investigation of Dillon’s laptop computer revealed that Dillon had provided his copy of the loan agreement to his attorneys one week before the original complaint in the suit was filed. The portions of Dillon’s copy of the loan agreement that had been redacted by his attorneys included markings indicating that Dillon had submitted the document to his attorneys in 2013.

In other words, Six stood before the district court and this court challenging the authenticity of the loan agreement, describing at length how he “drafted the complaint without the loan agreement,” how the loan agreements were somewhere “in cyberspace,” and how “they haven’t established these are the agreements,” all while his law firm had a copy identical to the one that Generations claimed was genuine.

In 2016, Generations moved for sanctions on grounds that the existence of the Dillon copy rendered his attorneys’ authenticity arguments disingenuous and in bad faith, misleading to the court, and calculated to obstruct and multiply the proceedings.

During the sanctions hearing process, Dillon’s attorneys’ attempts to explain their prior conduct were marked by behavior the district court would later characterize as manifesting the same level of bad faith. Remarkably, Kaplan’s affidavit in opposition to the motion for sanctions argued that there had never been a challenge to authenticity: “At no time did Plaintiff’s counsel ever suggest that any of the copies of the loan agreements proffered by Defendants were not the actual agreements.” Kaplan made this assertion under penalty of perjury, despite Dillon’s attorneys’ numerous assertions that they sought to challenge the authenticity of the loan agreement, orally and in writing, before the district court and this court.

Six, on the other hand, argued that he still doubted the authenticity of the loan agreement. This assertion was particularly astonishing because he was one of the attorneys who submitted Dillon’s request-for-admission responses admitting that the loan agreement was “a true and correct copy of the agreement [Dillon] electronically clicked-through over the Internet.”

Moore’s affidavit asserted that he did “not believe that Mr. Dillon printed a copy of the [loan] agreement at the time he took out the loan on May 30, 2013.” This directly contradicts Moore’s proffered explanation of why Dillon had the agreement (but not others) during Dillon’s deposition. When it became more favorable to deny that Dillon printed the loan at that time, Moore asserted to the contrary that he believed Dillon must have printed the document much later. Such behavior supported the district court’s conclusion that the attorneys would say whatever produced the necessary result at the moment regardless of its veracity.

The district court granted Generations’s motion for sanctions. Their conduct “multiplied the proceedings, wasted court resources, misled the [c]ourt, and caused Generations to incur unnecessary attorney’s fees.” The district court concluded that the three attorneys’ bad faith conduct had generated attorney’s fees and expenses of $70,148 in connection with Generations’s renewed motion to dismiss and the first appeal. This conduct, the district court found, increased Generations’s attorney’s fees by $118,417, but it awarded only $79,853. The district court also found that the law firms fully participated in the violation of the duty of candor and ratified the conduct of the three attorneys. Thus, the firms were held jointly liable for the sanctions.

In total, the court held Six, Kaplan, and their law firms jointly liable for $150,000 in attorney’s fees. The court held Moore jointly liable for only $100,000 of that amount because it reasoned that as an associate attorney Moore performed a lesser role in the bad-faith conduct. The sanctioned attorneys appealed.


The district court did not abuse its discretion in awarding compensatory sanctions totaling $150,000 pursuant to its inherent authority and 28 U.S.C. § 1927. The district court invoked its inherent authority to create a remedy to address bad-faith behavior that abused the judicial process. Under its inherent authority, the district court found that the attorneys acted in bad faith and that, through this conduct, the attorneys “intended to hide and did hide relevant facts from the [district court] and opposing counsel for almost two years” and “intentionally misled the [district court] about the relevant facts to gain a tactical advantage and prevail on pending arbitration motions.”

The district court also imposed sanctions under 28 U.S.C. § 1927, explaining: “Instead of disclosing the Dillon Copy and consenting to reconsideration, Counsel opposed the renewed motion and continued to keep the existence of the Dillon Copy a secret. They created the need to litigate an unnecessary side issue: whether the [c]ourt could consider the renewed arbitration motion on its merits.” The attorneys’ continuing conduct also generated additional, unnecessary costs of appeal.

The district court listed several examples of this continuing bad-faith conduct through the sanctions proceedings, awarding a portion of Generations’s attorney’s fees incurred through the sanctions proceedings to account for the increase in costs directly caused by this behavior.

The district court correctly articulated the applicable legal standards, made appropriate factual findings, and supported its conclusions with ample evidence from the record:

“It is unreasonable and vexatious and a violation of the duty of candor for lawyers to bring a lawsuit referring to a written contract, to then challenge the [c]ourt’s consideration of a document that appears to be that contract proffered by the defendant without disclosing that their client possesses an identical copy, to then imply in argument to the [c]ourt that their client does not possess any copy of the contract, and to then cause an unnecessary side dispute over whether the [c]ourt should treat a renewed motion to dismiss as a motion for reconsideration, when it was obvious that a motion to reconsider would be granted if the [c]ourt knew of the client’s hidden copy.”

Duty to disclose irrelevant

The sanctioned attorneys miss the point by arguing that there was no affirmative duty to disclose the Dillon copy before discovery commenced. Counsel are not being sanctioned for their failure to disclose but rather for raising objections in bad faith –simultaneously questioning (and encouraging the district court to question) the authenticity of a loan agreement without disclosing that the plaintiff provided them a copy of that loan agreement before the complaint was filed. The district court reasonably described sanctioned counsel’s conduct as evincing a multi-year crusade to suppress the truth to gain a tactical litigation advantage.


Six v. Generations Fed. Credit Union (Lawyers Weekly No. 001-097-18, 25 pp.) (Duncan, J.) No. 17-1548; May 31, 2018; from MDNC at Greensboro (Eagles, J.) Kannon K. Shanmugam for Appellants; Leslie Sara Hyman for Appellee. 4th Cir.


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