Federal Bad-Faith Fee Awards in Diversity: Knowing Violation of a Release Plus Concealment Can Satisfy the “Without Color” and “Improper Purpose” Test

1. Introduction

Banner Bank v. Smith (10th Cir. June 1, 2026) is the Tenth Circuit’s second review of an attorneys’ fee award arising from a long-running, diversity-based foreclosure dispute. The parties were Banner Bank (plaintiff/appellant) and Loree C. Smith and James M. Smith (defendants/appellees). The dispute traces to a 2009 loan secured by Oregon real property and a 2010 Release Agreement that broadly “release[d] and forever discharge[d]” Loree Smith from any claim “of any and every nature whatsoever relating to the Loan.”

The key issues on this appeal were whether the district court (on remand after the first appeal) permissibly awarded fees under the federal bad-faith exception to the American Rule; and whether the amount awarded was reasonable given challenges to counsel’s fee affidavit. The panel affirmed, holding the district court adequately supported bad-faith findings and did not abuse its discretion in determining the fee amount.

Although designated a non-precedential “Order and Judgment,” the decision provides a detailed application of the Tenth Circuit’s strict, conjunctive federal bad-faith standard in a diversity case and illustrates how litigation conduct—especially pursuing claims in knowing violation of a release and withholding material information—can justify fee-shifting.

2. Summary of the Opinion

The Tenth Circuit affirmed the district court’s award of $105,550 in attorneys’ fees to Loree Smith under the federal bad-faith exception to the American Rule. The court concluded:

  • The district court’s bad-faith findings were not clearly erroneous.
  • The evidence supported the conjunctive test: Banner Bank’s conduct was without color and pursued for an improper purpose.
  • The district court did not abuse its discretion in its lodestar-based assessment of reasonableness, including a reduction for travel-time billing imprecision.

Because the fee award was affirmed on federal bad-faith grounds, the court declined to reach the district court’s alternative basis—fees as direct damages for breach of the Release Agreement.

3. Analysis

A. Precedents Cited

1) Choice of law in diversity and attorneys’ fees

  • Banner Bank v. Smith, 30 F.4th 1232 (10th Cir. 2022) (“Banner Bank I”): The first appeal vacated the fee award because the district court incorrectly relied on a Utah fee statute in a diversity case. The remand required evaluation under preserved federal bad-faith and contract-damages theories. This decision (“Banner Bank II”) is the direct continuation and operationalizes the remand instruction.
  • Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938): The foundational rule separating state substantive law from federal procedural law in diversity. The 2026 panel’s analysis proceeds from Erie’s premise (as applied in Banner Bank I) that a fee award premised on litigation bad faith is governed by federal law in this circuit’s framework.
  • Scottsdale Ins. Co. v. Tolliver, 636 F.3d 1273 (10th Cir. 2011) and Chieftain Royalty Co. v. Enervest Energy Institutional Fund XIII-A, L.P., 888 F.3d 455 (10th Cir. 2017): These cases supply the controlling proposition that in diversity, federal law governs attorneys’ fees awarded as a sanction for bad-faith conduct in litigation. The panel explicitly grounds its framework in Chieftain and quotes it (via Scottsdale).

2) The federal bad-faith exception: standards and elements

  • FTC v. Kuykendall, 466 F.3d 1149 (10th Cir. 2006): Central authority for the “subjective bad faith” requirement and the strict conjunctive test—clear evidence that the claim is “entirely without color” and asserted “wantonly” for harassment, delay, or other improper reasons. The panel repeatedly measures the district court’s findings against Kuykendall’s two-prong test.
  • FTC v. Freecom Commc'ns, Inc., 401 F.3d 1192 (10th Cir. 2005): Defines when a claim lacks color (“utterly devoid of a legal or factual basis”) and when it is colorable (“some legal and factual support” based on the party’s reasonable beliefs). The panel uses Freecom to reject the notion that mere weakness or ultimate failure suffices.
  • Schlaifer Nance & Co. v. Est. of Warhol, 194 F.3d 323 (2d Cir. 1999): Cited (through Freecom) for the “utterly devoid” articulation. Its influence is indirect but reinforces the high bar for “without color.”
  • United States v. 2,116 Boxes of Boned Beef, 726 F.2d 1481 (10th Cir. 1984): Quoted in Kuykendall for the principle that bad-faith fee awards are reserved for “exceptional cases” and “dominating reasons of justice.” The panel’s affirmance signals that the conduct found here cleared that exceptional-case threshold.

3) Standards of review: deference to the district court

  • FTC v. Kuykendall: Also supplies clear-error review for bad-faith factual findings.
  • Chieftain Royalty Co. v. Enervest Energy Institutional Fund XIII-A, L.P.: Provides abuse-of-discretion review for fee awards.
  • Jensen v. W. Jordan City, 968 F.3d 1187 (10th Cir. 2020) and Somerlott v. Cherokee Nation Distribs, Inc., 686 F.3d 1144 (10th Cir. 2012): Provide the “definite and firm conviction” / “bounds of permissible choice” formulation of abuse-of-discretion review, reinforcing the uphill climb for appellants challenging fee determinations.

4) Fee calculation and documentation

  • Robinson v. City of Edmond, 160 F.3d 1275 (10th Cir. 1998) and Hensley v. Eckerhart, 461 U.S. 424 (1983): Supply the lodestar framework and the presumption of reasonableness.
  • Ramos v. Lamm, 713 F.2d 546 (10th Cir. 1983): Supplies factors for reasonable hours and the requirement of “meticulous, contemporaneous time records,” and it also supports limits on billing for travel time.
  • Case v. Unified Sch. Dist. No. 233, 157 F.3d 1243 (10th Cir. 1998) and Jane L. v. Bangerter, 61 F.3d 1505 (10th Cir. 1995): Support reductions where time records are “sloppy and imprecise,” validating the district court’s half-reduction of billed travel hours.

5) Preservation/waiver and related procedural citations

  • United States v. Leffler, 942 F.3d 1192 (10th Cir. 2019): Used to characterize failure to preserve an issue below (absent plain error) as waiver.
  • Perry v. Woodward, 199 F.3d 1126 (10th Cir. 1999): Cited for the principle that appellate courts will not craft undeveloped arguments.

6) Contract damages and counterclaim principles (addressed in passing)

  • TruGreen Companies, L.L.C. v. Mower Bros., Inc., 199 P.3d 929 (Utah 2008): Cited by the bank for Utah’s disfavor of punitive contract damages. The panel distinguishes this by emphasizing that the fee award was grounded in a combination of conduct amounting to bad faith, not “intentional breach alone.”
  • Baker v. Gold Seal Liquors, Inc., 417 U.S. 467 (1974): Cited to note that compulsory counterclaims not brought are later barred. The panel signals that even if allocation arguments had been properly preserved, fees tied to compulsory counterclaims may remain recoverable because the counterclaims were procedurally necessary.

B. Legal Reasoning

1) The governing rule applied

The panel applies the Tenth Circuit’s narrow federal bad-faith exception. The party seeking fees must show, by clear evidence, both: (i) the challenged position was “entirely without color,” and (ii) it was asserted “wantonly” for harassment, delay, or another improper reason. The conjunctive nature is critical: bad motive alone or legal weakness alone is insufficient.

2) “Without color”: why the declaratory claim crossed the line

The district court found Banner Bank pursued declaratory relief against Loree Smith despite knowing the Release barred “any and all” claims relating to the loan, and despite lacking a factual basis to believe she had an interest in the 11 parcels or would interfere with foreclosure. On appeal, the bank argued that joinder complied with the Declaratory Judgment Act and the Federal Rules of Civil Procedure.

The panel’s key move is conceptual separation: even if a litigant has a procedural right to sue or join a party, exercising that right can still be sanctionable if done without a factual predicate and in knowing derogation of contractual commitments. Thus, technical compliance with joinder rules did not negate the district court’s finding that the claim lacked a factual basis and was pursued in subjective bad faith.

3) “Improper purpose”: concealment and tactical advantage

The district court found Banner Bank concealed certain alterations to the original Deed of Trust until the second day of trial—alterations not visible on copies attached to the complaint, produced in discovery, used in depositions, disclosed pretrial, or recorded with the county. The panel emphasizes that the bank alone had access to the original showing the late-discovered changes. The relevance was not whether the alterations ultimately changed substantive terms, but that nondisclosure foreclosed discovery and constrained Smith’s litigation choices.

This conduct supported the improper-purpose prong because it suggested an intent “to take unconscionable advantage” of Smith in litigation, particularly while the bank pursued dismissal of claims and continued to press foreclosure-related positions.

4) The Unit 7 foreclosure conduct as part of the bad-faith mosaic

The bank argued it never sought to foreclose Loree Smith’s interest in Unit 7, later released its interest before trial, and no sale order issued. The panel treats these points as nonresponsive to the district court’s concern: the harm was the bank’s prolonged pursuit of foreclosure of Mr. Smith’s interest while withholding deed-alteration information that could have enabled Smith to respond (including by attempting to cancel the deed), and the years-long cloud and partition risk created by that posture.

5) Reasonableness of the amount: affidavit challenges and the travel-time reduction

Applying lodestar principles, the district court reduced billed travel time by half because counsel’s records grouped travel and work time and did not sufficiently itemize productive work during inter-city travel—an approach supported by Ramos v. Lamm and reduction cases such as Case v. Unified Sch. Dist. No. 233. The panel affirms that this response was within discretion and that additional admissibility attacks were underdeveloped or meritless (e.g., the affidavit was sworn).

C. Impact

  • Reinforces the strict two-prong test: The decision underscores that federal bad-faith fee awards in the Tenth Circuit remain exceptional and require clear evidence of both “without color” and “improper purpose,” but also shows what kinds of record facts can satisfy that high threshold.
  • Procedural entitlement is not a safe harbor: The opinion highlights that compliance with joinder rules or the Declaratory Judgment Act does not immunize a litigant from bad-faith fee shifting when the claim lacks a factual predicate and violates known contractual releases.
  • Discovery transparency and document integrity: The court’s treatment of late-disclosed document alterations signals that withholding unique-access information (even where copies circulated) can be powerful evidence of improper purpose, supporting fee sanctions.
  • Fee documentation discipline: The affirmance of a partial travel-time reduction illustrates how district courts can salvage imperfect records through targeted reductions rather than wholesale denial—while still policing imprecision.
  • Diversity litigation guidance post-Erie: In tandem with Banner Bank v. Smith, 30 F.4th 1232 (10th Cir. 2022), the case provides a practical roadmap: state fee-shifting statutes may be off-limits where deemed procedural, but federal bad-faith authority remains available for litigation misconduct.

4. Complex Concepts Simplified

  • American Rule: Each side ordinarily pays its own attorneys’ fees, even if it wins, unless a statute, contract, or narrow exception applies.
  • Federal bad-faith exception: A narrow judge-made exception allowing fee shifting when a party litigates in subjective bad faith—proved by clear evidence that the claim is both (i) wholly baseless (“without color”) and (ii) pursued for an improper purpose.
  • “Without color”: More than a weak claim; it must be essentially devoid of legal or factual support.
  • “Improper purpose”: Using litigation to harass, delay, gain unfair advantage, or otherwise abuse the process rather than genuinely resolve a dispute.
  • Erie doctrine (diversity cases): Federal courts apply state substantive law and federal procedural law. Fee awards tied to litigation misconduct are often treated as procedural/sanction-like and thus governed by federal standards in this circuit.
  • Lodestar: The standard method for fee calculation: reasonable hours × reasonable hourly rate, subject to adjustments.
  • Clear error vs. abuse of discretion: Factual findings (like bad faith) are reversed only if clearly mistaken; fee amounts are reversed only if the court’s judgment exceeds permissible bounds.
  • Compulsory counterclaim: A claim that must be brought in the current lawsuit or it is lost forever; this matters when arguing whether time spent on certain counterclaims should be excluded from a fee request.

5. Conclusion

Banner Bank v. Smith affirms that, in a diversity case, federal courts in the Tenth Circuit may award attorneys’ fees under the federal bad-faith exception where the record clearly shows a party pursued claims lacking factual color and did so for improper purposes—here, by knowingly suing in the face of a broad release and by withholding uniquely available evidence of document alterations until trial. The decision also validates pragmatic district-court management of imperfect billing records through targeted reductions (notably for travel time), reinforcing both accountability for litigation abuse and disciplined lodestar review.