Navigating the Difficult Waters of Offers of Judgment in Bankruptcy

Offers of Judgment can be a handy device for shifting the risk of paying court costs in litigation. However, as a pair of recent opinions from Judge Leif Clark demonstrate, they can be tricky to pull off successfully. Eastman v. Baker Recovery Services, Adv. No. 08-5055-C (Bankr. W.D. Tex. 12/28/10 and 1/31/11). You can find the opinions here and here.

The Offer of Judgment Rule

Federal Rule of Bankruptcy Procedure 7068 incorporates Federal Rule of Civil Procedure 68, which states:

Rule 68. Offer of Judgment

(a) Making an Offer; Judgment on an Accepted Offer.

More than 14 days before the trial begins, a party defending against a claim may serve on an opposing party an offer to allow judgment on specified terms, with the costs then accrued. If, within 14 days after being served, the opposing party serves written notice accepting the offer, either party may then file the offer and notice of acceptance, plus proof of service. The clerk must then enter judgment.

(b) Unaccepted Offer.

An unaccepted offer is considered withdrawn, but it does not preclude a later offer. Evidence of an unaccepted offer is not admissible except in a proceeding to determine costs.

(c) Offer After Liability Is Determined.

When one party's liability to another has been determined but the extent of liability remains to be determined by further proceedings, the party held liable may make an offer of judgment. It must be served within a reasonable time — but at least 14 days — before a hearing to determine the extent of liability.

(d) Paying Costs After an Unaccepted Offer.

If the judgment that the offeree finally obtains is not more favorable than the unaccepted offer, the offeree must pay the costs incurred after the offer was made.

The rule is designed to encourage parties to make serious settlement offers early in the proceedings to avoid running up costs. If a defendant makes a reasonable offer and it is accepted, the case is over. On the other hand, if the defendant makes an offer which is not accepted and the ultimate judgment is “not more favorable than the unaccepted offer” the plaintiff must pay the defendant’s costs incurred after the offer was made.

The Eastman Case

Eastman was a particularly ugly discharge violation case. I have written about the underlying case before here. The defendants made an offer of judgment for $5,000.00 on February 27, 2009. After trial, the Court awarded $1,000.00 in statutory damages under the FDCPA plus attorney’s fees. The defendants objected to the plaintiff’s request for attorney’s fees based on the offer of judgment.

The Court rejected the defendant’s argument, finding that the offer of judgment was not “not more favorable than the unaccepted offer.”

The rule thus provides that the plaintiff must pay a defendantʼs fees if the judgment rendered fails to exceed the amount of the offer in compromise. In this case, the judgment consists of (a) the actual damages suffered, consisting of attorneysʼ fees incurred by the Plaintiff in order to enforce the discharge injunction and (b) the reasonable expenses incurred by the Plaintiff in recovering those actual damages, consisting of attorneysʼ fees incurred in prosecuting the litigation in order to obtain that recovery. (citation omitted). Thus, “costs” in the context of the rule includes the reasonable attorneysʼ fees incurred by the plaintiff in enforcing a civil contempt action, per settled case law. “[T]he judgment finally obtained must include not only the verdict of the jury but also the costs actually awarded by the court for the period that preceded the offer.” (citation omitted).

The offer in this case was made well after the Plaintiff had incurred reasonable fees for the preparation of the complaint, preparing a response to a motion to dismiss, and preparing a response to a motion for summary judgment. In addition, discovery had already taken place. The offer made was for $5,000, and was filed of record on February 27, 2009. By that point, the Plaintiff had already incurred $3,900 in fees by Alex Katzman (litigation counsel), and $4,150 in fees by Rob Eichelbaum (bankruptcy counsel) by February 27, 2009. Over $9,000 in fees were incurred by Mr. Eichelbaum from late 2007 through the end of 2008. $3,000 in fees was incurred just to convince the Defendants to withdraw the offending judgment -- and that only after the Defendants tried to use that judgment to extract a payment from the Plaintiff. Thus, the judgment, including the costs incurred to that point in time exceeded the offer in compromise. The Defendants are not entitled to recover their costs from Plaintiff under Rule 68(d).

Opinion on 12/28/10, pp. 8-9. Thus, in order to have been successful, the Offer of Judgment should have offered $5,000 plus costs incurred to date. Because the offer was for a flat $5,000.00 and the attorney’s fees incurred exceeded that amount, the offer did not meet the requirements of the rule.

Undeterred, the defendants moved for reconsideration on the basis that they had previously made an offer to settle in March 2008. The Court noted that this offer was made prior to the commencement of the litigation. The Court cited the Wright & Miller treatise for the proposition that an offer of judgment can only be made by a party defending against a claim. If litigation has not been brought, then the offer to settle is not an offer of judgment.

A Successful Offer of Judgment Case

While Eastman shows how not to make an offer of judgment, Judge Letitia Paul’s opinion in Smith v. Radoff, 2006 Bankr. LEXIS 2412 (Bankr. S.D. Tex. 2006), is an illustration of a successful use of Rule 7068. In that case, a judgment creditor obtained appointment of a receiver for the debtor’s assets some sixteen years after entry of the discharge. The receiver withdrew $44,475.79 from the debtor’s bank account.

Upon being sued, the quick-thinking defendants made separate offers of judgment to return the funds and to pay interest, costs and attorney’s fees. The plaintiff refused the offer and proceeded to trial.

At trial, the Court found that the defendants testified credibly that they were not aware of the bankruptcy discharge and had difficulty verifying it due to the age of the case (it was filed in 1987) and the debtor’s common surname.

The Court awarded interest on the seized funds at the federal judgment rate. Although the plaintiff requested attorney’s fees of $71,357.50, the court only awarded fees of $12,000.00, finding that the plaintiff had failed to mitigate damages. The Court denied all other relief to the plaintiff.

The Court then found that because the judgment was not more favorable than the offer of judgment, that the defendants were entitled to recover their costs. In subsequent proceedings, the Court awarded attorney’s fees to each of the defendants in an amount exceeding the plaintiff’s recovery. As a result, when the final judgment was entered, the plaintiff owed a small amount to the defendants. The case settled after an appeal was filed.

More on Attorney’s Fees

While both the Eastman and Smith cases found that attorney’s fees were included within the definition of costs, this is not always the case. In Marek v. Chesny, 473 U.S. 1 (1985), the Supreme Court held that attorney’s fees constitute costs whenever the underlying substantive ground for relief defines them as costs. The Advisory Committee notes to Federal Rule 54(d) listed 35 statutes which allow recovery of costs, of which at least eleven included attorney’s fees within the definition of costs. The Civil Rights Attorney’s Fees Awards Act of 1976, which was the governing statute in the Marek case, allowed attorney’s fees “as part of the costs.” As a result, the Supreme Court found that attorney’s fees could be awarded under Rule 68.

The Supreme Court’s ruling means that awards of attorney’s fees as costs under Rule 68 may be dependent upon small variations in language. For example, 28 U.S.C. §1927 allows a court to award “excess costs, expenses, and attorney’s fees.” Since costs and attorney’s fees are listed as separate items in the statute, attorney’s fees would likely not constitute costs in that context.

In Eastman, Judge Clark found that “’costs’ in the context of the rules, includes the reasonable attorney’s fees incurred by the plaintiff in enforcing a civil contempt action, per settled case law.” Opinion 12/28/10, p. 9. Unfortunately, Judge Clark did not cite to the settled case law. However, in Chambers v. NASCO, Inc., 501 U.S. 32 (1991), the Supreme Court stated that “a court's discretion to determine ‘the degree of punishment for contempt’ permits the court to impose as part of the fine attorney's fees representing the entire cost of the litigation.” While the Supreme Court was not using the term “cost” in the narrow sense of costs of court under Rule 68, this may provide some support for the proposition.

A Final Quirk

As if the law on Offers of Judgment were not difficult enough, there is a line of cases which hold that an Offer of Judgment will not result in cost shifting in a case where the defendant is the prevailing party. In re LMP Shoal Creek, LLC, 2007 Bankr. LEXIS 4659 (Bankr. W.D. Tex. 2007); In re Security Funding, Inc., 234 B.R. 398 (Bankr. E.D. Tenn. 1999). Rule 68(d) refers to “the judgment that the offeree finally obtains.” These cases hold that if the plaintiff does not recover a judgment, that Rule 68 would not apply. This appears to be a strange result, since a damage award of $1 would allow cost shifting, but a take nothing judgment would not.