Prominent Indiana Firm Ordered to Reimburse Defendant’s Legal Fees after Pursuing a Frivolous Lawsuit

According to Forbes, a federal judge in Indiana ordered attorneys from the prestigious firm Motley Rice, among others, to reimburse almost $400,000 in legal defense fees to ITT Educational Services, following what the court deemed to be a frivolous lawsuit “based on a completely false story.”

The litigation stemmed from a whistleblower case brought by ex-employee Debra Leveski, in which the “whistleblowing” information and legal arguments under the False Claims Act were apparently provided by attorneys Timothy Matusheski and the law firm of Plews Shadley Racher and Braun after the fact. Matusheski, who runs a website with the domain, reportedly trolls for litigants against large, private educational companies, in direct violation of the Model Rules of Professional Conduct prohibiting soliciting professional employment from a prospective client. Leveski was not the only target; Matusheski had two cases pending against similar educational institutions that were ultimately dismissed in other states during the course of this litigation. “From what the court can gather, Matusheski’s view is that virtually any ex-employee will do for the purposes of manufacturing an FCA lawsuit.”

The case in Indiana pressed on even after the other suits had been dismissed, causing ITT to spend another $4.7 M in fees. It was during this time that Motley Rice had “unfortunately” joined the Plaintiff’s team. When ITT filed a motion to dismiss in March 2011, the attorneys continued to “litigate aggressively”, racking up another $2.6 M in costs before the motion was granted in August.

Leveski admitted in court that she got the idea of suing ITT from talking to the lawyers, and that most of the information provided backing her claim she acquired after leaving ITT. As Forbes reports, “[a]ll along there was a crucial flaw in the case: A whistleblower can’t claim to be one if the whistle has already been blown.”

Judge Tanya Pratt issued a 31 page order on Monday, stating that the court easily found that the case was brought for an improper purpose, namely, to extract a large settlement from ITT which would otherwise be forced to pay massive legal fees defending the action. The Judge even noted that this case was “far worse than ambulance chasing, since at least a lawyer chasing an ambulance is likely to find an accident victim inside.”

Struggling with whether to award Rule 11 sanctions, Judge Pratt’s ruling reasoned that although sanctions are to be imposed sparingly due to the significant impact they can have on the reputation and creativity of counsel, in this case “a negative effect on Matusheski’s reputation … is a problem of his own making.” Although $2.7 M in legal fees were eligible for repayment, the Judge found that lowering the award amount was appropriate in this case because ITT delayed the case for 3 years before deposing Plaintiff Leveski and should have suspected early on that she had no information.

Ultimately, 15% of the legal fees, amounting to $394,998.33, were ordered to be paid by Matusheski, Plews Shadley Racher & Braun, and Motley Rice, jointly and severally. The Judge admonished the Plaintiff’s behavior as well, calling her agreement to be part of the case “highly irresponsible” and threatened to order her to pay some of the litigation costs in a later order.

UPDATE: On July 8, 2013, the United States Court of Appeals for the Second Circuit reversed both the district court’s dismissal of Leveski’s case for lack of subject-matter jurisdiction and the district court’s award of sanctions in the amount of $394,998.33 against Leveski’s legal counsel. The case has been remanded back to district court for further proceedings.

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