Sanctions award of attorneys’ fees upheld

Even though a party didn’t have to pay her own attorneys’ fees, she had incurred reasonable expenses that could be awarded as sanctions, the Virginia Supreme Court has held in a matter of first impression.

“We conclude that regardless of whether the attorney’s fees were incurred personally by [the defendant], the fees were incurred on her behalf because of the filing of the sanctionable pleadings,” Justice Stephen R. McCullough wrote.

While the court upheld sanctions against the plaintiffs for misrepresentations and delayed depositions, it reversed penalties related to the delayed designation of an in-house accountant as an expert.

McCullough’s Sept. 15 opinion, AV Automotive, LLC, et al., v. Gebreyessus (VLW 022-6-044), was joined by Chief Justice S. Bernard Goodwyn, Justices Cleo E. Powell and Wesley G. Russell Jr., and Senior Justice LeRoy F. Millette Jr.

Sanctionable conduct

Betelehem Gebreyessus was employed as a salesperson at an Audi dealership owned by AV Automotive and managed by Geneva Enterprises, Inc.

Under an agreement with AV Automotive, Audi USA paid $700,000 in bonuses after the dealership met certain benchmarks for vehicle sales and customer survey ratings.

In early 2018, the dealership fired Gebreyessus after discovering she was involved in a fraudulent scheme to earn the bonuses by manipulating customer reviews.

AV Automotive and Geneva sued Gebreyessus in February 2019, claiming that they had been penalized by Audi USA and would have to repay the bonuses. In April 2019, Audi USA advised the plaintiffs it had no intention of financially penalizing them.

Within days, the plaintiffs sent a letter to Gebreyessus’ attorney saying they would withdraw their allegations regarding the Audi penalty; however, they waited four months before filing notice of the withdrawal.

Meanwhile, the plaintiffs designated an in-house accountant as an expert for “expert in nature” testimony. He testified about being made aware of the designation only three or four weeks in advance, and he offered no opinion about damages.

Gebreyessus moved for sanctions against the plaintiffs under Virginia Code § 8.01-271.1, alleging the complaint was filed and prosecuted in bad faith.

Although the court allowed the plaintiffs to nonsuit the complaint, it retained jurisdiction to address the sanctions motion.

The court awarded Gebreyessus total attorneys’ fees in the amount of $213,196.95 as sanctions for the plaintiffs’ misrepresentations about damages, as well as the delayed expert designation and deposition scheduling.

The plaintiffs’ arguments that Gebreyessus wasn’t entitled to sanctions because she wasn’t paying her own attorneys’ fees or, alternatively, that she should only be awarded fees related to defending against sanctionable conduct were rejected.

The plaintiffs appealed.

Fees ‘incurred’

The court found the plaintiffs couldn’t have had an objectively reasonable belief that the Audi damages claim was grounded in fact and that the trial court didn’t abuse its discretion in awarding sanctions for the repeated misrepresentations.

The plaintiffs contended the trial court abused its discretion in awarding attorneys’ fees as a sanction when Gebreyessus didn’t “incur” any attorney’s fees because they were paid by another defendant in the lawsuit.

“Here, the lawyers were not working for free. Their fees were incurred. Even if their fees are ultimately paid for by [another defendant] rather than by Gebreyessus, that does not make them any less ‘incurred.’”

– Justice Stephen R. McCullough

After acknowledging that the Virginia Supreme Court hadn’t addressed this question, McCullough pointed out that § 8.01-271.1 doesn’t require that reasonable expenses be incurred directly by the other party because of a sanctionable filing.

“Here, the lawyers were not working for free. Their fees were incurred,” he pointed out. “Even if their fees are ultimately paid for by [another defendant] rather than by Gebreyessus, that does not make them any less ‘incurred.’ It is not unusual for counsel fees to be covered by a non-party, such as a corporation, an insurance company, a parent, legal aid, or a civil rights group.”

Further, McCullough said sanctions are intended to be for punishment and deterrence, rather than compensation, and the chance of a windfall doesn’t preclude the imposition of a sanction to cover the cost of attorneys’ fees not paid by a party.

The court also rebuffed the plaintiffs’ argument that the sanctions against them should have been apportioned with their attorneys.

“To the contrary, the circuit court stated in a footnote that it had ‘exercised discretion in not sanctioning plaintiff’s counsel in addition to the plaintiff’ and gave counsel ‘the benefit of the doubt given the counsel’s actions were based on information received from the Appellants,’” McCullough wrote.

Not sanctionable

The plaintiffs claimed there was nothing egregious or sanctionable about designating an employee or in-house expert to testify about information learned or acquired during their employment.

The court agreed, finding that the plaintiff’s accountant was not a hired expert, that he had time to prepare documents detailing Gebreyessus’ compensation before the deposition, and that he only provided information to which he had access by virtue of his employment.

“Because [the accountant] was an employee of the Appellants, and thus not a true ‘expert witness,’ we agree with the Appellants that … delayed notification of his expert designation is not sanctionable conduct under Code § 8.01-271.1,” McCullough wrote.

Finally, the plaintiffs argued the trial court erred in refusing to segregate attorneys’ fees incurred due to sanctionable conduct from fees incurred for non-sanctionable conduct.

The court agreed and remanded the matter with instructions to the trial court to recalculate the attorneys’ fees sanction.

“Here, the circuit court failed to make any attempt to segregate the amounts incurred because of the Appellants’ sanctionable conduct, namely, the costs incurred defending the Audi Penalty claim,” McCullough wrote.

The court concluded that segregating the fees wouldn’t impose additional burden on the trial court because Gebreyessus’ attorneys provided detailed billing statements and invoices.

Dissent

Justice Teresa M. Chafin, joined by Justice D. Arthur Kelsey, issued a partial concurrence and partial dissent, saying the majority shouldn’t have allowed the awarding of attorneys’ fees to a party who didn’t have to pay them.

“As evidenced by the clear language of the statute, the General Assembly’s definition of the term in other contexts, and our prior interpretations of ‘incurred’ …, it is evident that the term ‘incurred’ as used in Code § 8.01-271.1 refers to attorney’s fees that were personally paid by Gebreyessus, or attorney’s fees that Gebreyessus was legally obligated to pay,” Chafin explained. “I am of the opinion that the majority opinion will result in the same outcome we avoided in [State Farm Mut. Auto. Ins. Co. v.] Bowers. Gebreyessus will receive a windfall, as she failed to assert on appeal that she personally incurred any expenses for attorney’s fees.”