Affholder, Inc. v. Southern Rock, Inc.

• Decision Date: 16 November 1984
• Docket Number: No. 83-4420,83-4420
• Citation: 746 F.2d 305
• Parties: , 40 Fed.R.Serv.2d 461 AFFHOLDER, INC., a Missouri Corporation, Plaintiff-Appellee, v. SOUTHERN ROCK, INC., a Mississippi Corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 305

746 F.2d 305

53 USLW 2284, 40 Fed.R.Serv.2d 461

AFFHOLDER, INC., a Missouri Corporation, Plaintiff-Appellee, v. SOUTHERN ROCK, INC., a Mississippi Corporation, Defendant-Appellant.

No. 83-4420.

United States Court of Appeals Fifth Circuit.

Nov. 16, 1984.

Butler, Snow, O'Mara, Stevens & Cannada, Thomas W. Prewitt, Luther T. Munford, Jackson, Miss., for defendant-appellant.

Campbell & DeLong, Fred C. DeLong, Jr., Greenville, Miss., Alan E. Popkin, St. Louis, Mo., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Mississippi.

Before CLARK, Chief Judge, RUBIN and POLITZ, Circuit Judges.

On Motion to Assess Damages for Appeal

ALVIN B. RUBIN, Circuit Judge:

The appellee, Affholder, having prevailed in this diversity case, seeks to recover 15% of its judgment, in addition to the judgment amount, under a Mississippi statute that assesses such a fixed penalty against a litigant who unsuccessfully appeals. We conclude that Fed.R.App.P. 38 precludes such an automatic deterrent to the right to appeal and allows a federal appellate court to chasten an unsuccessful appellant only when it finds an appeal to be frivolous. In doing so, we decline to follow a prior decision by a panel of this circuit holding the Mississippi statute applicable in federal diversity cases because that decision was rendered without consideration of Rule 38. Finding this appeal not to have been frivolous, we deny the motion to levy a penalty.

I.

Section 11-3-23 Miss.Code Ann. (Supp.1982), assesses a penalty of fifteen percent of the judgment against an unsuccessful appellant. In Walters v. Inexco Oil Co., ¹ a panel of this circuit held that the state statute applies in federal diversity jurisdiction cases. Another panel had earlier applied a similar Alabama penalty statute in a diversity case. ² Both of these cases were decided on the authority of Erie R. Co. v. Tompkins, ³ which mandates the application of the forum-state substantive law in federal diversity cases. In neither case did counsel direct the court's attention to, nor did either panel consider, the possible application of the Federal Rules Enabling Act, ⁴ or the effect of the Supreme Court's decision in Hanna v. Plumer, ⁵ which held that, under the Enabling Act, even in a diversity action, the Federal Rules of Civil Procedure govern in federal district courts whenever they plainly conflict with a state statute and the possible application of like reasoning to finding dominance of the Federal Rules of Appellate Procedure in matters of appeal. In opposing Affholder's motion to assess damages under the Mississippi statute, Southern Rock argues that both the Enabling Act and Hanna are applicable, and in fact, are controlling on this issue.

The first issue to be resolved is which "rule of decision" applies in this case. Affholder contends that this is "a pure Erie question," in that the Mississippi statute creates a substantive right that must be applied in diversity actions. Southern Rock, on the other hand, argues that, because Rule 38 is a valid rule of appellate procedure, Hanna requires that the federal rule control the outcome despite the existence of contrary state law. Analysis of Hanna and its sequelae persuades us that it provides the relevant mode of analysis.

II.

For purposes of determining their validity and effect with regard to contrary state law, there is no difference between the Federal Rules of Appellate Procedure and the Federal Rules of Civil Procedure. The authority and effect of both sets of rules are identical. ⁶

In the absence of jurisprudence dealing with the collision of state laws and federal laws or rules in federal appellate procedure, we turn to Hanna 's method of analysis when such a clash emerges in the trial court. Although both Hanna and Erie address the issue of the applicability of state law in federal diversity cases, each case focuses on a different aspect of the question. In Erie, the Supreme Court's concern lay primarily with determining what substantive law a federal court should apply to decisions on the merits when sitting in diversity actions. The Court's resolution of that question is now hornbook law: "Except in matters governed by the Federal Constitution or by Acts of Congress, the law to be applied in any case is the law of the state." ⁷ In Hanna, the Court again discussed the applicability of state law in diversity cases, but this time it focused its analytical lens on which body of procedural law a federal court should apply. It unequivocally stated that Erie did not supply the appropriate test for determining the applicability of a Federal Rule of Civil Procedure, and went on to develop a separate method of analysis for resolving the procedural law issue. In doing so it distinguished Erie:

When a situation is covered by one of the Federal Rules, the question facing the court is a far cry from the typical, relatively unguided Erie choice: the court has been instructed to apply the Federal Rule, and can refuse to do so only if the Advisory Committee, this Court and Congress erred in their prima facie judgment that the Rule in question transgresses neither the terms of the Enabling Act nor constitutional restrictions. ⁸

If the federal rule in question is clearly applicable, therefore, the court need not consider whether Erie commands the enforcement of an allegedly substantive state rule seemingly in conflict with the federal procedural rule. Erie simply no longer provides the relevant inquiry. ⁹

The Supreme Court has not departed from this command. Its most recent pronouncement on the applicability of Hanna and Erie in federal diversity actions is Walker v. Armco Steel Corp. ¹⁰ The issue presented was whether, in a diversity action, a federal court should follow state law or Rule 3 of the Federal Rules of Civil Procedure in determining when an action is commenced for purposes of tolling the state statute of limitations. The Court traced the development and evolution of both Hanna and Erie, but focused on the Hanna analysis as the starting place for determining the validity and applicability of a federal rule when there is a different state law provision. "The first question must, therefore, be whether the scope of the Federal Rule in fact is sufficiently broad to control the issue before the court. It is only if that question is answered affirmatively that the Hanna analysis applies," the Court said. ¹¹ It then added in a footnote:

This is not to suggest that the Federal Rules of Civil Procedure are to be narrowly construed in order to avoid a "direct collision" with state law. The Federal Rules should be given their plain meaning. If a direct collision with state law arises from that plain meaning, then the analysis developed from Hanna v. Plumer applies. ¹²

The Walker Court then compared the scope of Fed.R.Civ.P. 3, providing that a civil action is commenced by filing a complaint, with an Oklahoma statute that provided that an action was not deemed to be "commenced" for purposes of the statute of limitations until a summons was served on the defendant. The state statute further provided that, if the complaint was filed within the limitations period, the action was deemed to have commenced on the date of filing if the plaintiff served the defendant within 60 days, even though service occurred after the limitations period had run. The Court found that Rule 3 did not affect the tolling of the statute of limitation, but, in contrast, the Oklahoma statute "[was] an integral part of the several policies served by the statute of limitations." ¹³ The Court then held that, because the scope of Rule 3 was not broad enough to control the issue before the district court, and because there was no direct conflict between the Federal Rule and the state law, the Hanna analysis did not apply and Erie required the application of the Oklahoma statute in a federal diversity action.

In contrast to the situation in Walker, there is a direct conflict between Rule 38 and the Mississippi statute. Fed.R.App.P. 38 penalizes only the appellant whose appeal is found to be frivolous. The rule is not designed otherwise to deter litigants from exercising their right to appeal. Damages may be imposed only when the appellate court finds "the appeal to be utterly without merit, the appellant's arguments totally unsound, the judges' time and energies wasted, and the appellee put to the inconvenience and expense of employing counsel to resist such a frivolous appeal," as a leading treatise notes it. ¹⁴

The Mississippi statute is also designed to avoid frivolous appeals, ¹⁵ but at the same time, it also penalizes those that are merely unsuccessful, even those whose appeal has such merit as to evoke a dissenting opinion. Unlike Rule 38, the Mississippi statute makes the penalty mandatory. The mechanical application of this rule allows for no discretion, and the penalty "must be assessed even though the justness of doing so is not apparent." ¹⁶ Regardless of the merits of an appeal, therefore, "the ordeal of defending an appeal is viewed by Mississippi as an injury to the appellee" and its statute, "provides 'a measure of compensation for the successful appellee, compensation for his having endured the slings and arrows of successful appellate litigation.' " ¹⁷

These two rules cannot be reconciled. The federal rule allows the appellate courts to make the determination of when the penalty should apply. It is designed not to discourage appeals that have any reasonable support, but only those without foundation. The Mississippi statute rejects this case-by-case and on-the-merits analysis, and ordains a mandatory penalty rule. In reaching the decision to appeal, an appellant must take into account the penalty that will be exacted if he does not succeed. It thus acts as a deterrent to exercise of the right to appeal. The "plain meaning" of Rule 38, therefore, brings it into "direct collision" with...