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Lead Plaintiff in State Street Overbilling Case Hires Outside Counsel

June 7, 2018

A recent NLJ story by Amanda Bronstad, “Lead Plaintiff in State Street Overbilling Probe Hires Own Counsel but Stays in Case” reports that the executive director over an Arkansas pension fund has retained outside counsel but insisted he could continue to serve as lead plaintiff in settlements with State Street Corp. despite an overbilling probe that could end up returning a “significant amount of money” to class members, according to a federal judge’s remarks.  In an affidavit, George Hopkins, executive director of the Arkansas Teacher Retirement System, said he had retained Thomas Hoopes of Boston’s LibbyHoopes, who represents professionals in criminal matters and corporate investigations.

Senior Judge Mark Wolf of the U.S. District Court for the District of Massachusetts had ordered the affidavit following a May 30 hearing at which Hopkins testified about his role as lead plaintiff and the relationship between his Arkansas pension fund to Labaton Sucharow, one of three plaintiffs firms whose potential overbilling in a $75 million attorney fee request prompted Wolf to bring in a special master, who filed his report under seal last month.  At last week’s hearing, Wolf raised concerns that Hopkins and Labaton Sucharow, which has defended the fee request, now has a conflict with class members.

“The conduct of Labaton and the other lawyers you selected has been called into question,” he told Hopkins, who testified at the hearing.  “The special master, as you know, recommends that what, by my standards, is a significant amount of money be returned by those lawyers and distributed to the class.”  He said his “paramount responsibility” is to the class and whether the lead plaintiff is “typical and adequate,” in light of the report’s recommendations.

“Do you understand, therefore, that I have a concern that there may be a conflict at this point between the interests of Labaton and the other lawyers, who want to vindicate the propriety of everything they did and keep the money,” he said, “and the class that would benefit if I ordered some of that money paid back?”  In his May 31 order, Wolf asked whether the Arkansas pension fund wanted to continue to be lead plaintiff and, if so, whether it would seek legal advice other than Labaton concerning the case.

In his affidavit, Hopkins acknowledged the judge’s concerns but insisted he could still represent the class.  “I do firmly believe that we all can learn from this case, including a little more ‘trust but verify,’” wrote Hopkins, who has been the system’s executive director since 2008.  “However, trusting those who have not previously given us cause to distrust does not create a failure of duty.  Imperfection may or may not signal more.  Still, hindsight is 20/20 and hindsight will certainly lead to refinements in best practices, at least for class representatives both sophisticated and less sophisticated as there is no instruction manual on how to be a class representative.  But that does not prevent ATRS from continuing to do our best to be both fair and vigorous on behalf of those we serve.”

He wrote that Hoopes’ legal advice consisted of the Arkansas pension fund’s duties to the class and other issues raised in the special master’s report.  But Hopkins said he would continue to consult with Labaton on the settlement’s distribution.  Labaton issued a statement defending the affidavit and saying the Arkansas pension fund had a “critical role in helping formulate and evaluate litigation strategy, overseeing and supporting class counsel and establishing a basis for a strong financial recovery for the class.  George Hopkins personally did an outstanding job as class representative throughout the six-year entirety of the case.”

A year ago, Wolf appointed the special master, Gerald Rosen, a retired federal chief judge from the Eastern District of Michigan, to look into potential overbilling in a $300 million settlement of cases alleging State Street overcharged pension fund clients in connection with foreign currency trades.  Lawyers at New York-based Labaton and two other lead counsel firms, San Francisco’s Lieff Cabraser Heimann & Bernstein and the Thornton Law Firm in Boston, admitted to double-counting hours relating to staff attorneys but continued to defend their fee request.

Rosen filed his report on May 14.  The three plaintiffs firms have challenged Rosen’s findings and insisted on redactions to the 375-page report.  Wolf has set deadlines for those redactions and a possible June 22 hearing.  He also scheduled last week’s hearing and ordered Hopkins to show up in court to address whether, given the findings of the report, the judge should replace class counsel and the lead plaintiff.

At the hearing, arguments by the special master’s lawyer, William Sinnott, and Joan Lukey, who represents Labaton, shed some light on the polarized opinions about the report.  Sinnott, of Barrett & Singal in Boston, pointed to a declaration filed by Hopkins as “very troubling.”

“And not for nefarious reasons, but with respect to what he saw as his role with respect to the class and the members,” he said.  But Lukey, of Boston’s Choate Hall & Stewart, called the report’s conclusions “very vigorously disputed.”  Some items in the report, she said, “are extremely injurious to the reputations of the three firms” and could have an “effect on these firms and perhaps others in the plaintiffs’ class action bar.”

She also said some of the report is based on “errors of law as to what the Massachusetts law is on the subject at issue.”  That issue became clearer when, following a closed sidebar discussion, Lukey stated in court: “We wish to make it clear that the nature of the misconduct which is asserted relates to the existence of a so-called bare referral or origination or forwarding fee, as permitted under Massachusetts Rules of Professional Conduct, which was not disclosed to the court under the premises of Rule 54(d)(2), and which the master feels was inappropriate withheld from the court.”

Given that the hearing was public, she said, “I did not wish anyone publicly present to be left with the impression that there was anything more nefarious than that.”  Sinnott responded: “This was not a referral fee.  This was a finder’s fee.  And, more importantly, this was a finder’s fee that was not disclosed to the client, to the class, to co-counsel, nor to the court.”

Massachusetts Rules of Professional Conduct permits a referral fee—a fee paid from one law firm to another for referring a client —“only if the client is notified before or at the time the client enters into a fee agreement.”  But the Massachusetts rules on referral fees are less stringent than that of the American Bar Association’s, said Tigran Eldred, a professor at New England Law in Boston.

“The ABA rules require that, if there’s going to be a division of fees between two or more lawyers that either the fees are distributed proportionate to the amount of work each lawyer does, or that those lawyers take on ethical responsibility for all the work done,” he said.  Massachusetts rules do not define a finder’s fee, he said, but that presumably could mean any kind of payment for “law-related services,” like title insurance, financial planning, real estate lobbying or legislative lobbying.

Law Firm Loses Fee Dispute at U.S. Supreme Court

June 4, 2018

A recent Daily Report story by R. Robin McDonald, “Atlanta Law Firm Loses Seven-Year Fee Fight at U.S. Supreme Court” reports that Atlanta firm Lamar Archer & Cofrin has lost a seven-year fee fight it took all the way to the U.S. Supreme Court.  The nation’s highest court affirmed a 2017 ruling by the U.S. Court of Appeals for the Eleventh Circuit favoring a law firm client’s effort to discharge unpaid legal bills in U.S. Bankruptcy Court.

The law firm claimed client Scott Appling misled them about promised payments if the firm continued to work on his behalf even though he had fallen behind. But Appling eventually reneged on that promise to pay.

The firm sued in 2011 after five years of non-payment, eventually securing a $104,000 judgment. Appling then filed for Chapter 7 bankruptcy and contended his unpaid legal fees were dischargeable.

The case centers on a section of the federal bankruptcy code addressing dishonest debtors. The bankruptcy code allows debts to be discharged even if a debtor’s statements respecting his overall financial condition are untrue, as long as they are not in writing. But the code also bars the discharge of debts involving money, property, services or credit if they are secured by “false pretenses, a false representation, or actual fraud.”

Writing for the majority, Justice Sonia Sotomayor said, “A creditor opposing discharge must explain why it viewed the debtor’s false representation as relevant to the decision to extend money, property, services, or credit. If a given statement did not actually serve as evidence of ability to pay, the creditor’s explanation will not suffice to bar discharge.”

All of the justices concurred, except Justices Clarence Thomas, Samuel Alito and Neil Gorsuch, who concurred in part and dissented in part.

Sotomayor also rejected Lamar, Archer & Cofrin’s contention that allowing their former client to discharge legal fees he had previously promised to pay leaves “fraudsters” free to “swindle innocent victims for money, property or services by lying about their finances, then discharge the resulting debt in bankruptcy, just so long as they do so orally.”

A stringent standard for barring the discharge of debts even when debtors’ statements about their finances prove false “are not a shield for dishonest debtors,” Sotomayor wrote. “Rather, they reflect Congress’ effort to balance the potential misuse of such statements by both debtors and creditors.”

NJ Court: Fee Dispute Need Not Be Separated from Underlying Matter

June 1, 2018

A recent New Jersey Law Journal story by Michael Booth, “Lawyer Fee Claim Need Not Come in Separate Suit, Court Rules in $99K Fee Dispute,” that ruling in a fee dispute between New Jersey firm Carella, Byrne, Cecchi, Olstein, Brody & Agnello and its client, a state appeals court has streamlined rules for attorneys seeking to recover fees from their clients.

In a published opinion released Tuesday in the $99,000 fee dispute, a three-judge Appellate Division panel said attorneys involved in fee disputes do not have to file separate actions in the Law Division.

Appellate Division Judge Richard Geiger, writing for the panel, said an aggrieved attorney instead should file a petition in the underlying action, to be adjudicated in the Chancery Division as necessary.

“We hold that a petitioning attorney may obtain a judgment against his or her client for the reasonable amount of unpaid legal fees in the underlying action without filing a separate action in the Law Division,” Geiger said, joined by Judges Carmen Alvarez and Heidi Currier.

“The petition should be filed in the underlying action but it is to be tried as a separate and distinct plenary action in the Chancery Division with the right to conduct discovery, and the holding of pre-trial conferences,” Geiger added.

“Petitioner need not file a separate action in the Law Division to obtain a judgment against his or her client for attorney’s fees,” he said.

The ruling comes in a dispute between Roseland’s Carella Byrne and one of its clients, Valerie Giarusso.

Giarusso retained a lawyer at the firm, who was not identified by the court, to represent her in her postdivorce actions against her ex-husband, William Giarusso, according to the decision.

Carella Byrne is seeking $99,356 in unpaid counsel fees.

According to the ruling, Carella Byrne said it expended extensive efforts on obtaining alimony, child support and equitable distribution, and was never fully compensated beyond the initial $5,000 retainer.

After the matrimonial action was ended, Carella Byrne lodged an attorney charges lien against Giarusso for the amount the firm said it was owed. Giarusso disputed the claim, saying the fees sought did not reflect the services rendered, the court said.

A Bergen County trial judge vacated the lien, but awarded Carella Byrne $50,000 in fees. The firm appealed.

In ruling Monday, the appeals court said further hearings must be held to determine what fees Carella Byrne is entitled to.

“A lawyer’s fee must be reasonable,” Geiger said, quoting the Appellate Division’s 1995 ruling in Rosenberg v. Rosenberg. “Attorneys have never had the right to enforce contractual provisions for more than a reasonable and fair fee.

“They are not businessmen entitled to charge what the traffic will bear,” Geiger added.

“Petitioner [Carella Byrne] bears the burden of proving the reasonableness of the fees by a preponderance of the evidence,” he said.

Giarusso’s attorney, Joseph Maceri, welcomed the ruling. There was no reason to place a lien on his client because of a fee dispute, said Maceri, of Snyder, Sarno, D’Aniello, Maceri & DaCosta.

Consider Mandatory Arbitration to Resolve Fee Disputes

May 24, 2018

A recent Daily Report article by Shari Klevens and Alanna Clair, “Consider Mandatory Arbitration to Resolve Fee Disputes,” reports on the most effect manner to resolve attorney fee disputes.  This article was posted with permission.  The article reads:

Although many state bars recognize that attorney-client disputes may be resolved through arbitration, the use of mandatory arbitration clauses in engagement letters may be subject to federal law. The FAA (Federal Arbitration Act) governs requests for arbitration and, on its face, is supreme to state law on the issue.

Recently, the U.S. Court of Appeals for the Third Circuit reviewed the application of the FAA to a mandatory arbitration clause in an attorney engagement letter. Smith v. Lindemann, No. 16-3357 (3d Cir. 2017). In a nonprecedential opinion, the court concluded that, although a mandatory arbitration clause could be set aside on the basis of fraud, duress or unconscionability (which analysis may be governed by state law), federal law generally governs the application of such a provision. Indeed, the U.S. Supreme Court has indicated that state law may not prohibit the arbitration of any specific type of claim. AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 341 (2011).

Though the FAA may govern an arbitration clause absent any restriction by the parties, the state-level rules of professional conduct may still have some impact. Indeed, those rules bearing on a client’s right to be informed about the scope of the representation and the potential waiver of rights may impact whether an arbitration provision violates public policy.

Indeed, separate from the requirements of federal law, attorneys have certain duties to clients that can be reflected in the use of an arbitration provision in an engagement letter.

Consider the Advantages of Mandatory Arbitration

It is helpful for law firms and practitioners to give thought at the outset of a representation as to whether they would like any fee disputes or other claims to be resolved by private arbitration. Some firms adopt a mandatory arbitration clause in every engagement letter they use, while others may limit the use of an arbitration clause to address fee disputes only.

For some, there is an advantage to using arbitration to address fee disputes only. It is well-recognized that often, when an attorney sues a client for unpaid fees, the client will bring a counterclaim for legal malpractice. Some sources indicate that the likelihood of receiving such a counterclaim could be as high as 40 percent; others place it even higher.

Therefore, some firms elect to include in their engagement letters a provision that requires all fee disputes to be resolved by private arbitration. That can help attorneys pursue fee claims, which can be unpleasant in and of themselves and can allow them to carve out malpractice claims for separate resolution.

Other potential advantages of binding arbitration for fee disputes or malpractice claims include that arbitration can be faster than litigation. The procedure can be less formal than litigating in court, which some attorneys view as an advantage. Using arbitration can also help the parties keep the proceedings and the outcome confidential, which may be a great advantage to some law firms.

FAA May Apply Absent Restriction

Courts read the FAA expansively in interpreting arbitration clauses. The default understanding of a general demand for arbitration in an engagement letter or other form is usually that it is a demand being made consistent with the FAA.

Generally, if a law firm and client want a state’s arbitration statute to apply to any future dispute, they will take steps to ensure that the engagement letter specifically says as much. Otherwise, a general reference to arbitration in an engagement letter is understood to invoke the FAA and federal law, rather than state law.

Obtaining Informed Consent

If a law firm or lawyer has determined that they want to use a mandatory arbitration clause in the engagement letter, it is helpful at this point to consider the requirements of the Rules of Professional Conduct. Indeed, most attorneys considering a mandatory arbitration clause will consider additional language to help ensure that the client understands the differences between arbitration and litigation.

The engagement letter can detail many factors relating to the use of mandatory arbitration should a dispute arise between lawyer and client, including that proceeding to arbitration necessarily involves foregoing a jury trial. The engagement letter can also explain that there is typically a limited scope of any appeal of an arbitration. Others will consider the procedural issues, such as the speed of resolution, confidentiality (if applicable) and the potentially relaxed procedure.

Considering these issues is consistent with the guidance provided by the ABA in Formal Opinion 02-425. There, the ABA recognized that it is ethically permissible for attorneys to include mandatory arbitration provisions in their engagement letters. However, Formal Opinion 02-425 recommends ensuring that the client has been “fully apprised of the advantages and disadvantages of arbitration and has given her informed consent to the inclusion of the arbitration provision in the retainer agreement.”

Notably, in Smith v. Lindemann, the Third Circuit approved of a mandatory arbitration clause that did not detail all the risks and advantages of proceeding with an arbitration, but simply confirmed that agreeing to arbitration meant waiver of the right to have disputes heard by a jury.

Therefore, even if federal law governs the application of the arbitration clause generally, attorneys can anticipate the requirements of any applicable ethical rules to help ensure that the clause will not be stricken down as contrary to public policy or the attorney’s ethical duties.

Does the Bar Provide Help?

The State Bar of Georgia has a fee arbitration program that assists in the resolution of fee disputes between attorneys and clients. The hearing is conducted by a panel of three arbitrations: two Georgia attorneys and one nonlawyer. A client can elect to have a fee dispute arbitrated—even over the attorney’s objection—but the parties may seek to reference this program in an engagement letter.

Comment 9 to Rule 1.5 of the Georgia Rules of Professional Conduct recognizes that “[i]f a procedure has been established for resolution of fee disputes, such as an arbitration or mediation procedure established by the Bar, the lawyer should conscientiously consider submitting to it.”

Shari L. Klevens is a partner at Dentons US in Atlanta and Washington and serves on the firm’s U.S. board of directors. She represents and advises lawyers and insurers on complex claims and is co-chair of Dentons’ global insurance sector team.  Alanna Clair is a partner at Dentons US in Washington and focuses on professional liability and insurance defense. Shari and Alanna are co-authors of “The Lawyer’s Handbook: Ethics Compliance and Claim Avoidance” and the upcoming 2019 edition of “Georgia Legal Malpractice Law.”

Lawmakers Question $125M Fee Request in 3M Case

March 7, 2018

A recent Bloomberg Law story by Stephen Joyce, “Covington’s $125M Fee for 3M Case ‘A Little Steep’: Lawmaker,” reports that Covington & Burling LLP came under fire for a $125 million fee it received to represent the state of Minnesota in its $5 billion environmental lawsuit against 3M Co., which settled Feb. 20 for $850 million.  At a March 5 Minnesota House Ways and Means Committee hearing, state Rep. Sarah Anderson (R) questioned the Big Law firm’s contingency arrangement with the state, reached in 2010.

“I’m just curious as to why we are paying a law firm $125 million for seven years of work,” she said.  Referring to her own math, she said the sum works out to about $48,000 per day.  “That seems a little steep.”  She also said all the legal fees are being shipped outside the state because Covington doesn’t have an office in Minnesota.  Jim Knoblach (R), Minnesota Ways and Means Committee chairman, said additional legislation may be needed to ensure the money could be received and spent appropriately.

The underlying case stems from a lawsuit in 2010, when Minnesota sued 3M, alleging it acted with deliberate disregard by dumping perfluorinated chemicals at four Minnesota sites beginning in the 1950s, largely in unlined pits and trenches, contaminating groundwater.  The complaint alleged the company knew about the risks the chemicals posed but concealed those risks from government regulators for decades.  The March 5 hearing was called to review the settlement deal, particularly its impact on the state’s finances.

Lawyer and state Rep. Debra Hilstrom (D), who said she has followed the case for years, told the hearing the litigation involved more than 27 million pages of documents, more than 200 witness depositions, more than 100 judicial hearings and conferences, and about $10 million in environmental tests, fees, and associated costs.

The agreement the state put in place with Covington was a contingency contract, and such deals can result in legal teams reaping up to 40 percent of any eventual settlement, Ben Wogsland, a spokesman for state Attorney General Lori Swanson (D), told Big Law Business.  Covington’s fee was about 14 percent of the total settlement amount.

A Dec. 22, 2010, agreement between Minnesota and Covington said the state was not liable to pay Covington compensation other than amounts recovered from 3M.  If the final recovery turned out to be less than sufficient to fully reimburse Covington for its costs and expenses, Minnesota would not be responsible to make the law firm whole, the agreement said.  The Minnesota Attorney General’s office didn’t provide Big Law Business with a breakdown of the billable hour fees of Covington lawyers working on the case, which was included in the retainer agreement.

“Covington has represented the State of Minnesota in environmental matters for more than 20 years, including the NRD [3M] litigation that was recently resolved.  Our work on the NRD case involved a contingency fee arrangement, the attendant risk that we might receive no fee whatsoever, and dedicated efforts by our team in hard-fought, complex litigation lasting over seven years,” a Covington spokesman told Big Law Business in an email.  Anderson also questioned why the state didn’t rely on state Attorney General Lori Swanson (D) and her office to litigate the case.

Wogsland said Covington is “a long-time counsel to the state on environmental matters and has represented Minnesota on environmental matters for over 20 years.”  Minnesota state agencies also likely didn’t have the wherewithal to litigate the case, he said.  “To litigate this case you needed the best experts in the world, from geologists to chemists to engineers, and this firm [Covington] put up that money to pay for all of that,” he said.