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NJ Panel: Anticipated Legal Fees Constitute an Asset

August 19, 2016

A recent Law 360 story, “Future Attys’ Fees Can Be Security Interest, NJ Panel Says,” reports that the New Jersey Appellate Division for the first time clarified that anticipated legal fees constitute a valid security interest under the Uniform Commercial Code, handing a victory to a bankrupt attorney’s creditor who challenged the distribution priority of the attorney’s assets.

In a published opinion on an issue of first impression in New Jersey courts, a three-judge panel upended a lower court’s ruling that creditor OKS Realty could collect on its $125,000 loan to former attorney Diane Marie Acciavatti only after two other creditors got paid because Acciavatti didn’t yet have a true interest in the fees she pledged to OKS as collateral.

The panel rejected the lower court judge’s reasoning that because Acciavatti secured the loan with anticipated counsel fees from a malpractice lawsuit, they were an asset that didn’t exist at the time it was promised. The lower court judge’s reasoning “clearly ignored” the language of the security agreement between OKS and Acciavatti, which identified the counsel fees as collateral for the loan, the panel said.

The anticipated fees indeed qualified as an account and therefore an asset of Acciavatti’s, under the secured transactions provision of UCC guidelines, the panel ruled. OKS further complied with UCC requirements to “perfect,” or ensure, the security interest by filing a financing statement covering the collateral of Acciavatti's anticipated counsel fees, the opinion said. The December 2010 statement was filed before the other creditors, accounting firm Rotenberg Meril Solomon Bertiger & Guttilla PC and the law firm Gourvitz & Gourvitz LLC, entered their own liens against Acciavatti.

“As such, OKS's security interest was perfected before Gourvitz or Rotenberg obtained their liens and, therefore, OKS enjoyed priority over both,” said the opinion, which remanded the distribution issue back to court for further proceedings. 

While no other New Jersey case has considered whether an attorney's pledge of an anticipated counsel fee can be considered a receivable under UCC Article 9, the panel said, other courts have uniformly held that contracts for legal fees, including pending ones, are considered accounts for Article 9 purposes.

The panel cited as examples the First Circuit’s 2001 decision in Cadle Co. v. Schlichtmann, which held that amounts to be paid under contingent-fee agreements are accounts, and In re: Holstein Mack & Klein, a 2000 decision by the Seventh Circuit that determined fees to be earned from personal injury suits and class actions are considered receivables.

The security agreement between OKS and Acciavatti identified as "collateral" the legal fees owed to Acciavatti in a malpractice matter in which she represented a client, John Giovanni Granata, suing Broderick Newmark & Grather PC over its representation in Granata’s whistleblower lawsuit against Prudential Insurance Co. of America.

While Granata’s case was pending, Acciavatti left her law firm and an attorney-trustee was appointed for her practice. The Granata case settled in January 2014 for $840,000, after which OKS, Gourvitz and Rotenberg Meril claimed liens upon any legal fees owed to her from her work on the case, the opinion said. Acciavati filed for bankruptcy in March 2014.

Acciavatti’s October 2010 loan agreement with OKS included a promissory note indicating that monthly payments would begin on Dec. 1, 2010, and required Acciavatti to pay the full amount on the loan either when she received legal fees from the Granata case or on Nov. 1, 2013, according to the opinion.

The Gourvitz lien stemmed from Acciavatti’s representation of a Gourvitz client in 2009 in the firm’s suit against the client for unpaid counsel fees as well as the client’s own malpractice suit against the firm, the opinion said. “For reasons that are not clear in the record,” Acciavatti agreed to pay Gourvitz $82,500 from fees she expected to receive in the Granata v. Broderick matter.

The Gouvritz client was also ensnared in litigation with Rotenberg Meril, according to the opinion. Rotenberg Meril sued the client for unpaid fees and she in turn filed claims relating to its accounting practices. Rotenberg Meril prevailed, and Acciavatti signed a $75,000 settlement agreement assuming the client’s debt to Rotenberg, the opinion said. A judge later entered a $133,652.42 default judgment against Acciavatti, the opinion said.

OKS intervened in the Granata v. Broderick litigation and claimed that the trial judge erred in placing it last in priority among Acciavatti's creditors, arguing it had a perfected security interest in legal fees owed to Acciavatti before the Gourvitz or Rotenberg liens were filed.

The appeals panel’s opinion also maintained the award of $279,000 in counsel fees in the Granata v. Broderick case, which Granata had appealed because of how the fees would be distributed. Granata, who ended up filing a malpractice case against Acciavatti over her representation in his case against Broderick, argued that any consideration of claims by Acciavatti’s creditors should await the outcome of his malpractice case against Acciavatti, the opinion said.

“Given our narrow scope of review, we are satisfied that the motion judge was presented with abundant, unchallenged evidence to support his quantum meruit findings, and Granata has failed to demonstrate any procedural irregularities that would require reversal of the order granting attorney's fees to Acciavatti,” the panel said.

An attorney for OKS said she was pleased with the ruling. “The next step will be recouping the funds,”  Robyne D. LaGrotta told Law360.
Representatives for the other parties didn’t immediately respond to requests for comment.      

The cases are John Giovanni Granata v. Edward F. Broderick Jr. Esq. et. al., case numbers A-2928-14T2 and A-3036-14T2, in the New Jersey Appellate Division.

California Supreme Court Allows Class Action Fee Awards Based on Settlement Size

August 18, 2016

A recent The Recorder story, “Calif. Justices Rebuff Attack on Class Action Attorney Fees,” reports that the California Supreme Court shot down a bid to upend compensation for class action attorneys in ways that could have significantly reduced the amount of fees they receive.  In a unanimous ruling (pdf) by its seven justices, the court said California law permits the doling out of fees to attorneys based on a percentage of the money they recover for the class, rejecting arguments from a class action critic that fees should be tied directly to the hours put into a case.

"We clarify today that when an attorney fee is awarded out of a common fund preserved or recovered by means of litigation," Justice Kathryn Werdegar wrote for the court, "the award is not per se unreasonable merely because it is calculated as a percentage of the common fund."

The case has been closely watched by class action attorneys in California.  A number of legal advocacy groups, including Impact Fund and the Western Center on Law & Poverty, had weighed in as amicus in support of the view that percentage-based fees fairly compensate attorneys and help incentivize litigation on behalf of consumers and workers who can't otherwise afford representation.  The fight arose out of an employment class action against staffing firm Robert Half International.  Kevin Barnes, a Los Angeles solo practitioner who represented the class, negotiated a settlement of $19 million and was granted a fee award of one-third, or $6.3 million.

But he faced pushback from Lawrence Schonbrun, a frequent objector to class action settlements based in Berkeley, who argued that the award was excessive and not supported by documentation.

In arguments before the Supreme Court in May, Schonbrun maintained that attorney fees should never be based on a simple percentage of the recovery.  Instead, he said, attorneys should only be entitled to compensation for the hours they worked and that there should be limits on the "multiplier" premium they receive for especially difficult or complex cases.

Schonbrun found a legal basis for that position in a 1977 California Supreme Court decision, Serrano III, which he characterized as explicitly barring percentage-based fee awards.  But the court rejected that interpretation, noting that the case involved a much different set of facts.

The judgment in Serrano III related to the allocation of funding for public schools, and the attorneys did not propose to draw money out of that pool.  Instead, they were granted a separate award, and the court in that context noted that the time spent on the case was a key factor in determining the appropriate amount.

"In Serrano III, this court simply did not address the question of what methods of calculating a fee award may or should be used when the fee is to be drawn from a common fund created or preserved by the litigation," Werdegar wrote.  "For this reason, the passages quoted cannot fairly be taken as prohibiting the percentage method's use in a common fund case."

Barnes and Michael Rubin of Altschuler Berzon, who argued on behalf of amici, countered that percentage-based fees help create a market for litigation that benefits consumers and private citizens.  Tying fees to hourly billing would not fairly compensate lawyers for taking on difficult work with no guarantee of future payment, they said.

Barnes applauded the decision. "It's good day for the workers of America and a good day for the plaintiffs bar because it allows for a fair and reasonable recovery," he said.

Schonbrun, meanwhile, expressed disappointment.  "I was just hoping that this court would live up to the reputation that it has in being a national trendsetter and trying to create greater justice," he said.  "But I believe they did not live up to that hope."  In oral arguments, Schonbrun had also advocated for the court to impose new safeguards to prevent excessive fee awards.  For example, he called for the appointment of a class "guardian" for any settlements totaling more than $1 million, and allowing that guardian to call an expert witness to scrutinize class counsel's estimate of how much damages would be if a case was carried through to a win.

Werdegar did not address those proposals in the court's decision.  But Justice Goodwin Liu, in a concurring opinion, seemed to see value in those ideas.  "The class guardian would provide counterpoints to class counsel's arguments concerning the risks and difficulty of litigating the case," he wrote.  "Perhaps most importantly, the class guardian or a fee expert retained by the guardian would provide information on prevailing market rates for similar litigation."

Liu also encouraged counsel and judges to address the issue of fees at the beginning of the litigation.  He argued this would set the fee at a level sufficient to incentivize the lawyer to take on the suit, while avoiding inherent conflicts of interest that typically arise at the end between client and attorney—when "every additional dollar for one means a dollar less for the other."

Nation’s Top Legal Bill Review Programs

August 17, 2016

NALFA members provide a range of services on attorney fee and legal billing matters.  NALFA members include full qualified attorney fee experts, special fee masters, bankruptcy fee examiners, fee dispute mediators and legal bill auditors.  Legal bill auditors are companies that provide quantitative analysis of legal billing entries. 

NALFA members follow Best Practices in Legal Fee Analysis.  These best practice measures are professional standards that ensure integrity and reliability in the legal fee analysis field.  Legal bill review programs that follow these professional standards are inherently more qualified than legal bill review programs that do not.  Here are the nation’s top legal bill review programs:

Legal Fee Solutions LLC

KPC Legal Audit Services, Inc.

Bottomline Technologies

“We’d encourage legal bill review clients to choose a legal bill auditor who follows best practices in legal fee analysis,” said Terry Jesse, NALFA Executive Director.  “Legal bill auditors who follows best practices are not only more qualified, but clients can be assured in the reliability of the process and the credibility of the results,” Jesse concluded.

For more on Best Practices in Legal Fee Analysis, visit http://www.thenalfa.org/Best-Practices/

Lawyers Limit Fee Request to $324M in Massive VW Emission Settlement

August 16, 2016

A recent Law.com story, “VW Lawyers’ Fee Request Won’t Exceed $324M Despite Massive Size of Emission Accord,” reports that lead plaintiffs lawyers who crafted a $14.7 billion settlement with Volkswagen A.G. over its emissions scandal have told a federal judge that they won’t ask for more than $324 million.

In a filing, the lawyers said they hadn’t yet reached a deal on fees with Volkswagen but noted it would be “far below” the U.S. Court of Appeals for the Ninth Circuit’s benchmark of 25 percent, which could give them more than $3.5 billion.

“But this is not an ordinary case, this is not an ordinary settlement, and this will not be an ordinary fee request,” wrote lead counsel Elizabeth Cabraser, a partner at Lieff Cabraser Heimann & Bernstein.

The fee estimate, for 22 law firms appointed to the plaintiffs steering committee, also includes no more than $8.5 million in costs.  Plaintiffs lawyers acknowledged that settlement negotiations were a “team effort” given the role that government regulators played.

But their estimate is much more than the $200 million fees requested—and later awarded—to the 31 firms that led a 2013 settlement of consumers of Toyota Motor Corp. who sued over sudden-acceleration defects.

In an emailed statement, Cabraser called the Volkswagen deal a “landmark settlement.”  “This was achieved with the leadership of attorneys at more than 20 law firms who worked thousands of hours litigating the case and negotiating one of the largest class action settlements in U.S. history,” she wrote.  “Any prospective legal fees—which are subject to the approval of the court—are in addition to the $14.7 billion Volkswagen has already agreed to pay under the terms of its settlement agreements, and will not be deducted from any class member’s recovery amount.”

U.S. District Judge Charles Breyer, who preliminarily approved the Volkswagen settlement last month, has scheduled a final approval hearing for Oct. 18.

Under the settlement, reached on June 28, Volkswagen agreed to provide $10 billion in buybacks, lease terminations, repairs and cash payments to owners and lessees of about 475,000 two-liter diesel vehicles that now have a “defeat device” installed to cheat emissions tests.  Another $2.7 billion will go toward a mitigation trust that would fund environmental remediation projects, while $2 billion would be earmarked for investments in zero-emissions technology.

But the fee request promises to be a challenge ahead.  In settlement papers, plaintiffs lawyers had indicated they wouldn’t even start negotiating fees until Aug. 12 if no deal had been reached for 85,000 owners and lessees of three-liter diesel vehicles.  The fee negotiations also could end up in litigation.  The settlement included the provision: “Volkswagen reserves all rights to object to an award of attorney’s fees and/or costs beyond what it believes to be reasonable.”

Regarding Wednesday’s filing, Volkswagen spokeswoman Jeannine Ginivan said in an emailed statement:  “Volkswagen is prepared to pay attorneys’ fees that reasonably reflect the work the plaintiffs’ steering committee has undertaken in connection with the 2.0L TDI settlement program.  Ultimately, it will be for the court to decide what is reasonable.”

The settlement excludes potentially $18 billion in Clean Water Act penalties, criminal penalties, shareholder cases, lawsuits in foreign countries and claims by owners.

Class members have until Sept. 16 to object to the settlement.  Earlier this month, at least 11 advocacy groups lodged complaints with the U.S. Department of Justice over aspects of the deal pertaining to zero-emissions technology investments and environmental mitigation.

GSK Moves Away From Hourly Billing

August 15, 2016

A recent Law.com story, “At GlaxoSmithKline, Hourly Billing Is All But Dead,” by Jennifer Williams-Alvarez reports on hourly billing at GlaxoSmithKline.  The story reads:

GlaxoSmithKline’s long-running campaign to eradicate the billable hour is paying off.

An impressive 84 percent of the work GSK assigned to law firms in 2015 was done through an alternative fee arrangement, Bob Harchut, associate general counsel at the pharmaceutical company, said in an interview.  In 2011, the number was 68 percent.  In 2008, it was just 3 percent.

Dan Troy, GSK’s general counsel, began a companywide initiative to phase out hourly billing back in 2008, pretty much as soon as he arrived from Sidley Austin.  “Dan joined the company during the recession, so he was tasked with significantly reducing outside counsel spend while continuing to get excellent legal representation,” Harchut said.  “The mission was to dramatically change the paradigm by which GSK paid for legal services,” Harchut recalls.

Troy asked Harchut, who had been the company’s director of litigation, to carry out this mission.  “I was really skeptical,” Harchut said.  “It was pretty radical to say we’re going to move every new engagement around the world, whenever feasible, to an alternative fee arrangement,” he said.

GSK has pulled it off by making the shift worthwhile for the firms.  “Dan was insistent that this be a win-win initiative for the firms.  He was very willing to reward them for the value they provide to GSK,” Harchut said.

The pharmaceutical giant has also kept firms happy by being open to revisiting agreements if necessary, Harchut said.  “We made it clear to the firms that if there’s a material change in the assumptions of the matter, we are very willing to sit down with them in good faith to look at the arrangement,” he says.

The shift has not been without its challenges.  One perennial concern, Harchut said, is ensuring that the flat fees GSK negotiates with firms are reasonable.  “How can we make sure we aren’t over or underpaying for value … that has been our Holy Grail,” he said.

GSK’s law firms have responded positively once they see “that we’re not doing this just to cut costs and that we’re trying to make this a win-win for them as well,” Harchut said.  “They want to keep their clients happy and they’ve been very cooperative.”

GC: Law Firms Are Terrible at Billing

August 8, 2016

A recent Corporate Counsel story, “Law Firms Are ‘Terrible’ at Billing, Says GE’s GC,” reports on one general counsel’s honest take on law firm billing practices.  The story...

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