Law Funder, L. L.C. v. Munoz

• Decision Date: 16 May 2019
• Docket Number: No. 18-40320,18-40320
• Citation: 924 F.3d 753
• Parties: The LAW FUNDER, L.L.C., Plaintiff - Appellee v. Sergio MUNOZ, Jr. ; Law Offices of Sergio Munoz, Jr. P.C., doing business as Munoz Law Firm, Defendants - Appellants
• Court: U.S. Court of Appeals — Fifth Circuit

924 F.3d 753

The LAW FUNDER, L.L.C., Plaintiff - Appellee

v.Sergio MUNOZ, Jr. ; Law Offices of Sergio Munoz, Jr. P.C., doing business as Munoz Law Firm, Defendants - Appellants

No. 18-40320

United States Court of Appeals, Fifth Circuit.

FILED May 16, 2019

REVISED June 6, 2019

Michael Jonathan Smikun, Law Office of Sean R. Callagy, Esq., Paramus, NJ, Juan Francisco Tinoco, Law Office of J. Francisco Tinoco, P.C., McAllen, TX, for Plaintiff-Appellee.

John F. Carroll, Attorney, San Antonio, TX, Francisco Javier Rodriguez, Rodriguez, Tovar, Calvillo & Garcia, McAllen, TX, for Defendants-Appellants.

Before KING, SMITH, and WILLETT, Circuit Judges.

PER CURIAM:

The Law Funder, L.L.C., sued Sergio Munoz, Jr., and his law firm for legal malpractice. Finding a series of discovery violations and related malfeasance, the district court struck Munoz’s answer. Munoz did not move to replead, and the district court entered default judgment against him. The district court then held a bench trial on damages and awarded Law Funder nearly $ 3 million. Munoz appeals, challenging both the default judgment and the district court’s award. We AFFIRM the district court’s entry of default judgment against Munoz. But because we conclude the district court improperly calculated damages under Texas law, we VACATE the district court’s final judgment and REMAND for a new trial on damages.

I.

A.

The Law Funder, L.L.C., ("Law Funder") is a litigation-financing firm. It grants nonrecourse loans to plaintiffs and attorneys to cover the expenses of lawsuits in exchange for the rights to portions of the lawsuits’ eventual winnings. As relevant here, Law Funder held rights to portions of the proceeds of 21 lawsuits litigated by Servicios Legales de Mesoamerica S. de R.L. ("SLM"), a Mexican law firm. Seeking to protect its investments into SLM’s litigation, Law Funder intervened in a Texas state-court divorce proceeding involving Wilfrido Garcia, who had an ownership interest in SLM that became part of the marital estate.

The state court ordered a number of law firms and attorneys to pay litigation debts owed to SLM. Only one attorney complied, so the state court appointed receivers to locate and collect the remainder of the debts owed to SLM. Several of SLM’s creditors intervened in the Garcia divorce and claimed entitlement to the funds the receivers collected, although testimony below established that Law Funder’s claim was the most substantial. Law Funder retained several attorneys, including defendants Sergio Munoz, Jr., and his law firm, Law Offices of Sergio Munoz, Jr., P.C., (collectively, "Munoz") to help locate these funds and secure their ultimate disbursement to Law Funder.

Unbeknownst to Law Funder, Munoz had a close professional relationship with Judge Jesus Contreras, who was presiding over the Garcia divorce: Munoz and Judge Contreras were coprincipals in a professional corporation, Contreras & Munoz, P.C. About a year after Law Funder retained Munoz, an intervenor in the Garcia divorce with a competing claim to the SLM receiver funds discovered this conflict and moved to disqualify Judge Contreras. A different state-court judge heard the motion and ordered Judge Contreras disqualified. The state court subsequently voided all orders Judge Contreras had entered in the case, including the order appointing the receivers. At this point, Law Funder had expended almost $ 2 million in attorney fees and expenses trying to collect SLM’s debt. Left without enough funding to start over, Law Funder ceased pursuing its claims in the Garcia divorce.

B.

Invoking the district court’s diversity jurisdiction, Law Funder brought the present suit against Munoz for negligence, breach of fiduciary duty, and legal malpractice under Texas law. Munoz filed an answer, and the case proceeded to discovery. The district court later found Munoz committed a litany of discovery violations and other procedural transgressions. Because the district court had a front-row seat to the saga below, we quote its description of events at length:

Plaintiff served Defendants with its first request for production on May 29, 2015. Due to Defendants’ failure to produce any documents, Plaintiff subsequently filed a motion to compel production. Thereafter, Defendants promised to act in good faith and turn over appropriate documentation. In light of this promise, Judge Randy Crane ordered Defendants "to produce any relevant, unprivileged documents in their possession as indicated in their objections and responses to Plaintiff’s first request for production within fourteen days of this order ...."

Two months later, Plaintiff moved for sanctions on the ground that Defendants had not complied with this order. The Court subsequently permitted David Calvillo, then counsel of record, to withdraw but abated the case for 30 days to allow Defendants to obtain new counsel. Despite the fact that the abatement ended on May 12, 2016, no appearance was made by counsel at that time. The Court held a hearing on June 6, 2016 to discuss the pending motion for sanctions, but Defendants did not appear. Nevertheless, the Court ordered Defendants to produce certain documents requested by Plaintiff in its first request for production, most notably certain electronic documents. Defendants, through their new counsel, subsequently requested an extension of time to comply with the production order, claiming that Counsel had just been retained. No other explanation was given for the request, thus the Court denied the request. The Court thereafter held a hearing on September 13, 2016 to discuss the status of the case but Defendants again failed to appear. The Court reset the hearing to October 18, 2016 at which time the Court was made aware that Defendants had never produced the electronic documents which the Court had ordered Defendants to produce. The Court ordered Defendants to tender the electronic documents to Plaintiff within three days of the October 1, 2016 status conference, or else it would consider sanctions upon Plaintiff’s motion.

Plaintiff also served Defendants with its second request for production on September 8, 2016. Defendants never responded, and Plaintiff’s counsel raised this issue with the Court during the October 18, 2016 status conference. The Court ordered Defendants to respond to Plaintiff’s second request for production within three days of that hearing, and warned Defendants that failure to timely respond could result in sanctions. Exactly three days later, at 12:40 P.M., Plaintiff filed its second motion for sanctions, stating that "Defendants have still not fully complied with the Court’s original order compelling the production of documents and had not responded to Plaintiff’s second request for production." It is not entirely clear from the face of Plaintiff’s motion whether Defendants have yet tendered the electronic documents identified in Plaintiff’s first production request.

The Court observes more generally that Defendants have materially impeded the discovery process and therefore resolution of this case. Defendants asserted perfunctory objections to many of Plaintiff’s requests for production and were uncooperative in scheduling depositions. The Court thus had to order Defendants to appear for their depositions. Also, Defendants failed to adequately respond to Plaintiff’s request for admissions, because they copied and pasted the same "vagueness" objection to twenty-nine of the thirty-six admissions requests. Defendants and Defendants’ counsel have also failed to appear or have arrived late at three hearings held specifically for the purpose of resolving discovery disputes. Plaintiff’s counsel also informs the Court that Defendants failed to "produce a single document" in response to Plaintiff’s subpoena duces tecum. In sum, this case was filed in federal court in December of 2014, and after almost two years, discovery has not been completed.

(omission in original) (footnotes omitted).

As alluded to in the above-quoted passage, Law Funder filed a second motion to sanction when Munoz failed to meet the district court’s deadline to comply with Law Funder’s second request for production. Law Funder represented in its motion that Munoz objected to sanctions, but Munoz failed to file an opposition. After noting Munoz’s litany of litigatory misbehavior and failure to oppose Law Funder’s motion, the district court determined a sanction was warranted under Federal Rule of Civil Procedure 37(b)(2)(A). The district court applied the four-factor test for weighing a sanction for failing to make a required evidentiary disclosure that we articulated in United States v. Garza , 448 F.3d 294 (5th Cir. 2006) : "(1) the reasons why the disclosure was not made; (2) the amount of prejudice to the opposing party; (3) the feasibility of curing such prejudice with a continuance of the trial; and (4) any other relevant circumstances." Id. at 299-300. It concluded that the reason for Munoz’s disobedience was unclear, that the delay and expense caused by his violations prejudiced Law Funder, and that continuing the case would only exacerbate that prejudice. The district court further found all other relevant circumstances "weigh[ed] heavily in favor of sanctions." Specifically, it noted that Munoz "is an attorney who should fully understand the need to comply with the Federal Rules of Civil Procedure and the need to cooperate in discovery" and that he had "unreasonably and systematically prolonged this case almost from inception."

The district court then concluded that the most appropriate sanction was to strike Munoz’s pleadings. In reaching this conclusion, the district court cited the extent of Munoz’s violations and his attempts to systemically undermine discovery. It also observed that striking Munoz’s pleadings was particularly warranted because Munoz thwarted Law Funder’s attempts to gather evidence about his relationship with Judge Contreras, jeopardizing Law Funder’s ability to prove its claims.

In...