Law Funder, L.L.C. v. Sergio Munoz, Jr., 924 F.3d 753

Background

Law Funder, a litigation financier, paid litigation expenses and held rights to proceeds from 21 lawsuits handled by a Mexican firm (SLM); it intervened in a Texas divorce proceeding to collect receivership funds owed to SLM.
Law Funder retained attorney Sergio Munoz Jr.; Munoz had an undisclosed close professional relationship with the state judge (Judge Contreras) who issued receivership orders in the divorce.
A competing intervenor moved to disqualify Judge Contreras; when a different judge granted disqualification, the state court voided the prior receivership orders, and Law Funder ceased prosecuting claims after spending nearly $2 million.
In federal suit for negligence, breach of fiduciary duty, and legal malpractice, Munoz repeatedly violated discovery orders; the district court struck his pleadings under Rule 37 and, after Munoz did not replead or oppose, entered default judgment.
At a bench trial on damages, Law Funder’s expert testified to $2,988,660.61 in damages (combining litigation fees/costs incurred, $1.2 million of expected receivership recovery, and $21,230.61 paid to Munoz); the district court awarded that amount without independent findings.
The Fifth Circuit affirmed entry of default but vacated the damages award because the district court misapplied Texas causation law and awarded a double recovery; remanded for a new damages trial allowing Munoz to present evidence on proximate cause.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether striking defendant’s pleadings was an abuse of discretion under Rule 37	Law Funder argued sanctions were warranted given repeated discovery noncompliance and prejudice	Munoz argued the district court failed to apply the heightened Conner factors required for litigation-ending sanctions	Affirmed: Munoz forfeited the Conner challenge by failing to oppose below; no plain error shown and district court’s findings support sanction
Whether default establishes both liability and quantity of damages	Law Funder argued default established proximate cause such that claimed damages could be awarded	Munoz argued default does not establish the amount of damages and proximate-cause analysis under Texas law is required	Held: Default establishes liability but not amount of damages; court must apply Texas law to determine causation and proper damages
Whether attorney fees and costs incurred in the Garcia divorce were proximately caused by Munoz’s malpractice	Law Funder contended its litigation fees/costs were caused by Munoz’s failure to disclose conflict	Munoz contended fees were incurred regardless (would have been spent with substitute counsel) and thus not proximately caused	Held: Vacated damages award—district court erred by awarding both fees/costs incurred and expected recovery (double recovery); proximate-cause must be shown for each component
Whether fee forfeiture to recover amounts paid to Munoz is available	Law Funder sought forfeiture of fees paid to Munoz as separate damages for breach of fiduciary duty	Munoz did not contest availability on appeal	Held: Fee forfeiture remains available under Texas law and was not foreclosed by the panel; district court may award this separately on remand

Key Cases Cited

United States v. Garza, 448 F.3d 294 (5th Cir. 2006) (articulating four-factor test for discovery-disclosure sanctions)
FDIC v. Conner, 20 F.3d 1376 (5th Cir. 1994) (identifying additional findings required before imposing litigation-ending sanctions)
Ins. Corp. of Ir. v. Compagnie des Bauxites de Guinee, 456 U.S. 694 (U.S. 1982) (sanctions must be just and related to the claim at issue)
Smith & Fuller, P.A. v. Cooper Tire & Rubber Co., 685 F.3d 486 (5th Cir. 2012) (district court has broad discretion in fashioning Rule 37 sanctions)
United States v. $49,000 Currency, 330 F.3d 371 (5th Cir. 2003) (standard of review for Rule 37 sanctions)
Akin, Gump, Strauss, Hauer & Feld, L.L.P. v. Nat’l Dev. & Research Corp., 299 S.W.3d 106 (Tex. 2009) (Texas legal-malpractice damages require proximate cause; recoverable fees must be caused by malpractice)
United States ex rel. M-CO. Constr., Inc. v. Shipco Gen., Inc., 814 F.2d 1011 (5th Cir. 1987) (default establishes liability but not the amount of damages)
Burrow v. Arce, 997 S.W.2d 229 (Tex. 1999) (Texas recognizes fee forfeiture as remedy for breach of fiduciary duty)