Claims of fraud, ‘sham’ suit, aren’t an attack on court’s ruling

There’s no getting out of a long-running battle between a South Carolina attorney and the businessmen he likened to TV mobster Tony Soprano. The 4th U.S. Circuit Court of Appeals has reinstated a lawsuit filed by the attorney, Paul Hulsey, who is leveling allegations of fraud against a father and son who had previously sued him for defamation and won multimillion-dollar default verdicts that were later tossed out by the state’s Supreme Court.

The appeals court ruled that the federal judge who dismissed the suit had improperly applied the Rooker-Feldman doctrine, which takes its name from a pair of U.S. Supreme Court cases that established that federal district courts may not exercise appellate jurisdiction over final state-court judgments.

The dispute began in April 2006, when Lawton Limehouse Sr. and his son, Lawton Limehouse Jr., filed separate defamation complaints against Hulsey and Hulsey Law Group in South Carolina state court. The 4th Circuit’s opinion didn’t rehash the details of that case, but Hulsey had previously sued Limehouse Sr. on behalf of day laborers who claimed they had been exploited by Limehouse’s business, and Hulsey told a newspaper that the set-up was a racketeering system worthy of boss Soprano.

Hulsey failed to file a timely answer to either complaint, leading to orders of default against him in both cases. As a result, both cases went to jury trials on damages without discovery and yielded verdicts totaling $11 million in favor of the Limehouses. The state Supreme Court reversed the verdicts, holding that the trial court lacked jurisdiction because of a procedural defect prior to the damages trial.

On remand, the parties engaged in discovery and Hulsey discovered that a large tax levy was in place against the Limehouses’ businesses. During a trial on the merits of Limehouse Sr.’s claim, Hulsey told jurors that the tax levy—and not his allegedly defamatory statements—was the cause of the Limehouses’ monetary losses. The jury sided with Hulsey, although the parties eventually settled.

But the battle recommenced when Hulsey sued the Limehouses, their businesses, and the law firm that represented them as defendants in 2017. He alleged that the defamation lawsuits were a sham and that the defendants concealed crucial evidence to obtain the initial verdicts against him. Senior U.S. District Judge Patrick Michael Duffy dismissed the complaint, reasoning that it sought to “undermine” the state Supreme Court’s ruling and therefore ran afoul of the Rooker-Feldman doctrine.

If you can quote the rules

But Judge Allison Jones Rushing, writing for a unanimous 4th Circuit panel, said there were multiple reasons why the case didn’t fall within the doctrine’s “narrow scope.”

“First and foremost, Hulsey is not complaining of an injury caused by a state-court judgment,” Rushing wrote. “According to the complaint, Hulsey’s injuries were caused by the defendants’ fraud, which was merely enabled by the state court’s discovery ruling. The defendants’ alleged use of the courts as a tool to defraud does not make the state court’s ruling the cause of Hulsey’s injury.”

Hulsey’s federal complaint asserted claims for RICO violations, fraud, and perjury, among other allegations, and sought damages, disgorgement, and injunctive relief. It didn’t seek redress for an injury caused by the state court decision itself, Rushing wrote, “but rather for injuries caused by the defendants’ allegedly fraudulent conduct in prosecuting the defamation suits against him in state court.”

Even if the denial of discovery in the default proceedings may have aided the defendants’ alleged fraudulent concealment of evidence, that didn’t make the state court’s discovery ruling the cause of Hulsey’s injury, Rushing wrote.

“A plaintiff’s injury at the hands of a third party may be ‘ratified, acquiesced in, or left unpunished by’ a state-court decision without being ‘produced by’ the state-court judgment. Such is the case here.”

Additionally, Rushing noted that Hulsey didn’t lose in state court and therefore wasn’t seeking an appeal of an unfavorable state court decision. Although the defendants argued that Hulsey qualified as a state-court loser because he was denied discovery in the default damages trials, those orders were nullified when the Supreme Court ordered new trials in which Hulsey had the opportunity to conduct discovery and fully participate, Rushing said.

“The discovery rulings thus were not ‘final state-court judgments’ against Hulsey over which Hulsey sought the district court to ‘exercis[e] appellate jurisdiction.’”

A Whitman’s Sampler of errors

Finally, Rushing said that Hulsey’s federal court complaint didn’t typify an appeal of the state court judgment, as it did not invite review and rejection by the district court.

“This criterion is not satisfied by mere overlap between state-court litigation and the plaintiff’s claim; the federal action must be filed ‘specifically to review th[e] state court judgment,’” Rushing wrote. “Hulsey’s complaint does not seek, implicitly or explicitly, reversal or modification of the South Carolina court’s judgment in the defamation cases, which he ultimately settled.”

Duffy was concerned that adjudicating Hulsey’s complaint would “undermine” the South Carolina Supreme Court’s ruling that Hulsey was not entitled to discover the tax levy in the state-court default proceedings. But a party that attempts to litigate in federal court a matter previously litigated in state court doesn’t necessarily trigger the Rooker-Feldman doctrine, Rushing noted.

“Here, Hulsey has presented independent claims about the defendants’ alleged misconduct in instituting and pursuing the defamation suits against him,” she wrote. “That Hulsey previously may have presented to the state court some of the arguments in his federal complaint does not strip the district court of jurisdiction. Because the fraud claims in Hulsey’s complaint do not challenge the South Carolina court’s decision regarding the defamation claims litigated in state court, it is ‘not an impediment to the exercise of federal jurisdiction that the ‘same or a related question’ was earlier aired between the parties in state court.’”

Phillip Russel Myles of Mobile, Alabama, who represented Hulsey, did not respond to a request for comment, nor did attorneys for the defendants.

The 11-page decision is Hulsey v. Cisa (Lawyers Weekly No. 001-011-20). The full text of the opinion is available online at nclawyersweekly.com.