A panel of the 7th Circuit Court of Appeals has vacated U.S. District Judge David Herndon's judgments in a case over attorneys' fees.
Herndon, the chief judge for the Southern District of Illinois, in March 2010 enjoined Alton attorney Lanny Darr from pursuing a state court claim against the Carpenters' Health and Welfare Trust Fund of St. Louis that sought fees.
He also ordered Darr, an attorney at Schrempf, Kelly, Napp & Darr, to pay fees and costs of the fund's trustees.
On Tuesday, the federal appeals panel vacated Herndon's judgments, granted the trustees' cross appeal for reinstatement of their alternative counts and remanded the matter back to the district court for further consideration.
The dispute over attorneys' fees stems from a lawsuit Darr handled for James Miller, a beneficiary of the fund.
After Miller fell from a ladder and injured his back, he and his wife retained Darr to represent them in a suit seeking recovery from the person who was supposed to hold the ladder steady.
The Millers' agreement with Darr provided a contingent fee of one-third of any recovery before deductions for medical expenses.
According to the opinion of the federal appeals court, the fund advanced the Millers $86,709.73 in medical and disability benefits on the condition that they pay back its advance from whatever they recover before deducting attorneys' fees.
The opinion further states that James Miller and Darr signed a subrogation agreement to let the fund pay Miller's medical expenses in exchange for the assignment of any third-party recovery up to the advanced amount.
The Millers' suit eventually settled for $500,000, but as the appeals' panel noted, "this case isn't about James Miller's injury; this case is about attorneys' fees."
Following the settlement, the Millers and Darr distributed the proceeds by deducting Darr's fees based on $413,290.27, the settlement amount left after the Millers paid back the fund's advance.
Darr submitted $57,806.48 of the Millers' settlement to the fund and said he was withholding the remaining one-third ($28,903.25) as his attorneys' fees.
The opinion states that Darr later paid the remainder in an attempt to avoid jeopardizing his clients' benefits, but maintained that the payment would not resolve the dispute between his firm and fund.
The fund responded to Darr, saying that if he pursued his claim for the $28,903.25, it would consider him and the Millers in breach of the plan's term, as well as their subrogation agreement, and could terminate the Millers' coverage and seek relief under the Employee Retirement Income Security Act (ERISA).
Darr's law firm went ahead and sued the fund in state court to recover the $28,903.25 under the common fund doctrine, which allows a party which creates a fund to obtain reimbursement for litigation expenses.
The fund's trustees then sued Darr and the Millers in federal court to enjoin Darr from pursuing his state claim.
In their alternative counts, the trustees sought construction and declaration that Darr and the Millers owed the fund an amount equal to any judgment they obtained in state court, as well as attorneys' fees incurred by the trustees.
Herndon issued a temporary restraining order against Darr's suit and after a hearing, entered a permanent injunction against the lawsuit and dismissed the trustees' alternative counts in March 2010.
The opinion of the federal appeals panel states that Herndon later awarded the trustees their fees and costs in the federal case, but not in the state court case.
On appeal, Darr challenged the federal court's jurisdiction on several grounds.
Writing for the federal appeals panel, U.S. Judge John Daniel Tinder of the 7th Circuit wrote that Darr's "only real jurisdictional argument is that federal courts lack jurisdiction when a state court defendant raises ERISA preemption as a basis for federal jurisdiction under the well pleaded complaint rule."
Tinder wrote that Darr "misses the jurisdictional basis of the trustees' claim," explaining that it didn't arise as a defense to his state claim, but rather under a provision of ERISA that "created a federal remedy the trustees seek to employ in a federal court."
Under section 502(a)(3)(A) of ERISA, Tinder wrote, ERISA fiduciaries can bring claims "to enjoin any act of practice which violates any provision of this subchapter or the terms of the plan."
Because the trustees in this case sought to enjoin Darr's claim in state court, which it contends violated the plan's term, Tinder said the district court had jurisdiction over the matter.
In its analysis, the federal appeals panel also addressed "the next barrier Darr raises to the district court's judgment, the Anti-Injunction Act."
This law, Tinder wrote, states that courts cannot grant injunctions to stay proceedings in state courts except when "expressly authorized" by Congress or in cases in which it's necessary in aid of its jurisdiction or to protect its judgments.
Citing a decision from the 4th Circuit Court of Appeals, Tinder wrote that section 502(a)(3)(A) of ERISA does not expressly authorize injunctions against state courts unless the state court suit "will have the effect of making it impossible for a fiduciary of a pension plan to carry out its responsibilities under ERISA."
While Herndon determined that Darr's state court suit would force the trustees to pay his fees in violation of plan terms, Tinder wrote that "this hardly makes it impossible for the trustees to carry out their ERISA responsibilities."
The appeals panel noted that Congress provided ERISA trustees with multiple tools to assist them in carrying out their duties.
And although an injunction against plan violations is one of those tools, Tinder wrote that "not every violation of plan documents is sufficient to override the basic rule, embodied in the Anti-Injunction Act and the cases interpreting it, that it is seldom appropriate for federal courts to enjoin state court proceedings."
"Darr's state court common fund claim for attorneys' fees is too removed from the core federal interests represented by ERISA," Tinder wrote in the opinion. "Darr's common fund suit, although certainly involving the Fund's finances, does not directly involve the recovery of benefits."
Although the nation's high court has not yet addressed whether and when section 502(a)(3)(A) ERISA expressly authorizes injunctions against state court proceedings, Tinder pointed to two U.S. Supreme Court cases dealing with the law's "expressly authorized" exception to bolster the panel's ruling.
Those cases, Tinder wrote, are Mitchum v. Foster and Vendo Co. v. Lektro-Vend Corp.
Tinder wrote that "Mitchum's test -whether the federal law 'could be given its intended scope only by the stay of a state court proceeding'—supports our holding here" and that the Vendo case held that antitrust laws expressly authorize injunctions against state court suits only if the suit violates the antitrust law.
"Given the Anti-Injunction Act's requirement that a federal law "expressly" authorize an injunction against a state court suit and its foundation in the "fundamental constitutional independence of the States ... we find an injunction against Darr's state court common fund claim outside the expressly authorized exception," Tinder wrote.
Judges Michael Kanne and Ann Claire Williams joined Tinder in the 7th Circuit opinion.
The case is Trustees of the Carpenters' Health and Welfare Trust Fund of St. Louis v. Darr, Nos. 10-1682, 10-1793 and 10-2579.