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Category: Ethics & Professional Responsibility

Article: Since When Do Attorneys Have to Pay the Opposing Counsel Fees?!

February 20, 2021

A recent article by Deena Duffy, “Since When Do Attorneys Have to Pay the Opposing Counsel Fees?! reports on how attorneys can be held responsible for opposing counsel fees in Ohio.  This article was posted with permission.  The article reads:

Attorneys can be Held Responsible for Opposing Legal Fees if Discovery Rules are Neglected

This may be a question that has never crossed your mind.  If so, then good for you. It means you’ve likely never been faced with sanctions.  However, just because you haven’t, doesn’t mean you shouldn’t be aware of the possibility.

What happens when your client is served discovery requests that require review of a large number of documents prior to production to the other side, yet, your client refuses to be involved in the review?  What if not only does your client refuse to engage in the review, but also refuses to engage in any negotiations aimed at making the review more manageable?  Quite clearly, these actions likely won’t bode well for your client.  Even more unfortunately for you, as this client’s attorney, you yourself could land in hot water with the court, even resulting in you being personally responsible for a portion of opposing counsel’s fees.

As we all know, some jurisdictions are more lenient when it comes to discovery rules while others – not so much.  To that extent, it is crucial to be familiar with not only the discovery rules for the jurisdiction you’re in.  Moreover, the growing importance of becoming aware of the potential ramifications of not complying with those discovery rules cannot be understated.

In a recent case out of Second District Court of Appeals of Ohio, an attorney learned the hard way what happens when you let the client run the show.  As attorneys, our duty is obviously to be zealous advocates for our clients and to provide them with advice and guidance related to their case.  However, we need to recognize that during the course of our representation, it becomes our responsibility to ensure that the client is doing what the court has ordered.

This particular discovery and sanctions issue arose out of a civil action where Plaintiff alleged that Defendant engaged in tortious interference with business relationships, defamation, invasion of privacy, intentional infliction of emotional distress, and civil conspiracy.  During the discovery phase, which began in December 2017, the Defense served Plaintiff with several requests for document production.  In Plaintiff’s interrogatory responses, Plaintiff identified 68 witnesses as having information related to his claims.  Defense counsel proposed that Plaintiff provide his multiple email accounts and their passwords to the Defense’s expert, who would then run searches for the 68 witness names.  The Court approved of the plan; however, the Plaintiff did not, arguing that this approach did not account for the protection of privileged information.

On appeal, the case was remanded and the parties came to an agreement regarding production wherein the first search the expert would conduct would be the names of privileged individuals.  The results of that search would go to Plaintiff counsel to review and produce a privilege log related to those documents.  The remainder of the non-privileged emails that hit on the 68 witness names would then be produced.  Defense counsel provided a list of potential search terms to Plaintiff counsel, who had no objections or modifications to the list.  Herein appears to be the end of Plaintiff’s cooperation in the discovery process.

The search for privileged names returned roughly 3,200 emails.  Plaintiff’s counsel identified roughly 2,700 of them as actually being privileged and produced a privilege log, though woefully insufficient.  The second search, for the 68 witness names, returned roughly 50,000 emails.  Following the second search, Defense counsel requested that Plaintiff modify their discovery responses.  This would assist in modifying the search term list in an attempt to cull out potentially non-responsive results to make the potentially responsive population easier to manage.  Defense counsel didn’t hear anything from Plaintiff counsel for two weeks, at which point the Plaintiff refused to modify the discovery responses.  Plaintiff did suggest that Defense counsel somehow modify the search term list to be able to discern between “material” and “relevant” discoverable information, yet provided no suggestion on how this might be accomplished.  Plaintiff counsel also informed Defense counsel that Plaintiff blatantly refused to review any emails prior to 2013, arguing that there is no way they could be relevant.  Defense counsel continued attempting to negotiate with Plaintiff to methodically deal with the large population of emails; however, Plaintiff counsel never responded to Defense counsel’s suggestions.

After roughly 15 months, the Defense filed a motion for sanctions, arguing that Plaintiff (1) refused to provide a sufficient privilege log, (2) refused to review or provide any emails from pre-2013, (3) refused to review or provide any emails related to the second search, and (4) failed to respond or negotiate regarding any suggestions made by the Defendant to move forward in the discovery phase.  At the sanctions hearing, Plaintiff counsel wasn’t in any position to help himself or his client.  Plaintiff admitted that he didn’t review a single email out of the 50,000 that resulted from the search, saying that he glanced at the list but found it overwhelming, repeatedly stating that the expert never actually ran the search terms.  In response to being asked about the pre-2013 emails, Plaintiff said, “I did not even [expletive] know the defendant during that time and it wasn’t relevant to this particular action.”  The Defense claimed they were relevant for two reasons – first to prove that Plaintiff routinely engaged in vexatious litigation, and second to prove that Plaintiff had been engaging with the witnesses as early as 2010 due to his involvement with the Defendant’s church business.

Eventually, Judge Hall granted the sanctions motion, finding Plaintiff in contempt for failing to comply with the December 2018 agreed discovery order.  A few months later, a hearing was held on the matter of attorneys’ fees, of which the court ordered Plaintiff and Plaintiff counsel, jointly and severally, to pay Defense counsel’s attorney fees, totaling $11,835.00.

In its analysis, the Court routinely returned to the fact that Plaintiff not only failed to review any of the documents, but that he blatantly refused to do so.  The Court noted that the discovery order to which the parties had agreed did not give Plaintiff the option to choose to review the emails but rather the duty to do so.  Plaintiff alleged more than once that the list of documents to review was overwhelming; however, Plaintiff refused to engage in any negotiations with the Defense regarding potential modifications to make the population more manageable.

In Ohio, the civil rules allow for an attorney to be sanctioned for failing to comply with discovery orders per Civ. R. 37(B)(3).  The Court, in granting sanctions against Plaintiff counsel, argued that Plaintiff counsel continued to repeat baseless allegations about Defense counsel’s motives and that it was “especially egregious” for Plaintiff counsel to continually blame the Defendant for Plaintiff’s negligent conduct regarding discovery.

This case, while unfortunate for Plaintiff and Plaintiff counsel, should serve as a reminder to attorneys of the need to be genuine in their efforts regarding discovery.  It should go without saying that, due to attorney ethics and candor requirements, attorneys are responsible for following orders issued by the court and that failure to do so could result in the misbehaving attorney being found personally responsible for a portion of opposing counsel’s fees.

Moral of the Story

Not only is it important to understand what is required with regard to jurisdictional discovery rules, but also to understand what could happen the rules aren’t followed.

Deena Duffy is staff attorney at Spencer Fane LLP in Minneapolis.

NJ Case Has Lessons on Arbitration Clauses in Attorney Retainers

February 14, 2021

A recent Law 360 article by Hilary Gerzhoy, Deepika Ravi, and Amy Richardson, “NJ Case Has Lessons On Arbitration Clauses in Atty Retainers”, reports on arbitration clauses in attorney retainers in New Jersey.  This article was posted with permission.  The article reads:

On Dec. 21, 2020, the New Jersey Supreme Court issued Delaney v. Dickey, an opinion that severely limits the enforceability of arbitration provisions in law firm retainer agreements.  The court held that an arbitration provision in a retainer agreement is only enforceable if an attorney provides "an explanation of the advantages or disadvantages of arbitration" to a client before the client signs the retainer agreement.

The decision, which applies prospectively, tracks and builds on other jurisdictions' limitations on the enforceability of arbitration provisions in retainer agreements.  Attorneys wishing to resolve client disputes via arbitration should take close note of these heightened disclosure obligations.

Delaney v. Dickey

Delaney v. Dickey addressed whether an arbitration provision contained within Sills Cummis & Gross PC's four-page retainer agreement was enforceable.  A Sills attorney provided the retainer agreement to client Brian Delaney during an in-person meeting.  The retainer agreement contained a provision stating that any disputes about the law firm's fees or legal services would be resolved by arbitration.

The arbitration provision stated that the result of any arbitration would not be subject to appeal, and that Delaney's agreement to arbitration waived his right to a trial by jury:

The decision of the Arbitrator will be final and binding and neither the Firm nor you will have the right to appeal such decision, whether in a court or in another arbitration proceeding.  You understand that, by agreeing to arbitrate disputes as provided in this retainer letter, you are waiving any and all statutory and other rights that you may have to a trial by jury in connection with any such dispute, claim, or controversy.

The retainer agreement included a one-page attachment that contained a hyperlink to the JAMS rules.  However, the Sills attorney did not provide Delaney with a hard copy of the JAMS rules at the meeting.  The attachment also stated that the arbitration would be conducted by one impartial arbitrator; that the parties waived any claim for punitive damages; that the arbitration would be binding, nonappealable and confidential; and that the parties would share the arbitrator's fees and expenses, except that the arbitrator could award costs, expenses, and reasonable attorney fees and expert witness costs.

The New Jersey Supreme Court held that the arbitration provision was unenforceable "[b]ecause Delaney was not given an explanation of the advantages or disadvantages of arbitration."

The court recognized that the Sills attorney had disclosed, in the retainer agreement and attachment, several of the differences between an arbitral and judicial forum — but it found that disclosure insufficient.  Instead, the court required that the attorney provide an "explanation" of these differences — but it did not provide clear guidance on what is required for a sufficient explanation.  Importantly, the court held that an attorney must explain the differences between an arbitral and judicial forum, even when the client is "a sophisticated businessman."

The mere recitation of these differences in the retainer agreement, and the Sills attorney's "[offer] to answer any questions" Delaney had about the retainer agreement was insufficient to meet the attorney's fiduciary obligations.  Instead, the court imposed an obligation to explain the advantages and disadvantages of an arbitration provision either orally or in writing.

Although the court did not explicitly so state, its opinion suggests that an attorney cannot merely list the differences between an arbitral and judicial forum, but rather must explain how those differences might affect the client's interests in the event of a future dispute.

What Happens Outside of New Jersey?

The New Jersey Supreme Court pointed to a string of ethics opinions and case law from other states that support heightened disclosure obligations on an attorney where an arbitration provision is included in a retainer agreement.  The court also pointed to jurisdictions that require a lawyer to go even further and advise a client to seek independent counsel before agreeing to arbitrate future disputes.  Delaney closely tracks the American Bar Association's Formal Opinion 02-425, Retainer Agreement Requiring the Arbitration of Fee Disputes and Malpractice Claims, issued in 2002.

The opinion concluded that a binding arbitration provision requiring all "disputes concerning fees and malpractice claims" to be resolved via arbitration does not violate ABA Model Rule of Professional Conduct 1.4(b), "provided 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" and the arbitration provision does not "insulate ... or limit the liability to which she would otherwise be exposed under common and/or statutory law."

Because a lawyer has a fiduciary "duty to explain matters to a client," she must "advise clients of the possible adverse consequences as well as the benefits that may arise from the execution of an agreement" that includes an arbitration provision.  Accordingly, compliance with Rule 1.4(b) requires that the lawyer "'explain' the implications of the proposed binding arbitration provision 'to the extent reasonably necessary to permit the client to make [an] informed decision' about whether to agree to the [provision's] inclusion" in the retainer agreement.

Unlike the New Jersey opinion, the ABA concluded that just how extensie that disclosure must be will depend on "the sophistication of the client."  However, consistent with Delaney, the lawyer "should make clear that arbitration typically results in the client's waiver of significant rights, such as the waiver of the right to a jury trial, the possible waiver of broad discovery, and the loss of the right to appeal."

For these reasons, the Sills attorney's failure to explain these differences to Delaney would similarly fail under the ABA standard.  While ABA opinions are persuasive, not binding, authority on the states, they are an important road map for attorneys seeking to understand their ethical and practical obligations.

The District of Columbia takes a similar approach.  D.C. Ethics Opinion 376, published in November 2018, concludes that an agreement to arbitrate fee disputes and legal malpractice claims is otherwise permitted by the rules, provided that the lawyer has adequately informed the client about "material risks of and reasonably available alternatives to" the proposed arbitration clause such that the client is "fully informed."

That requires, at minimum, that the attorney inform the client about differences between a judicial and arbitral forum as to (1) the fees to be charged; (2) the scope of discovery; (3) a right to a jury; and (4) a right to an appeal.  Like ABA Formal Opinion 02-425, the D.C. opinion also advises that the scope of the discussion depends on the level of sophistication of the client.

What Should an Attorney Explain to a Client, and How?

While the Delaney case is only controlling in New Jersey, it provides useful guidance for attorneys hoping to create binding arbitration provisions in retainer agreements.  As the Delaney court noted, the differences between resolving an attorney-client dispute in arbitration or before a judicial forum can be communicated orally, in writing, or both.

The New Jersey Superior Court's Appellate Division stated in Delaney that it did not hold that the "reasonable explanation" required of an attorney cannot be contained in the written retainer agreement.  However, the New Jersey Supreme Court's opinion did not directly address that question, suggesting that an attorney can sufficiently explain the advantages and disadvantages of the arbitral forum within the retainer agreement.

Rather, the court held that the disclosure in the case before it — which merely recited several of the differences between a judicial and arbitral forum, with no additional explanation provided orally or in writing about these or other differences — was insufficient.  Recognizing that not all arbitration provisions are alike, the court enumerated several differences between an arbitral and judicial forum about which a client might need to be advised including the following:

1.  An arbitration resolves a dispute before a single arbitrator and not a jury of one's peers.

2.  The arbitrator's decision is final and binding with no right of appeal.

3.  Unlike court proceedings, arbitration proceedings are conducted privately and the outcome will remain confidential.

4.  Unlike court proceedings, the arbitration process offers a more limited right to discovery.

5.  The client may be responsible, in part, for the costs of the arbitration proceedings, including payments to the arbitrator.

6.  A plaintiff prevailing in a judicial forum may be entitled to punitive damages, but that right may be waived in an arbitral forum.

7.  A judicial forum generally does not permit reasonable attorney fees to be imposed against a nonprevailing client in a nonfrivolous malpractice action, whereas an arbitral forum may permit an award that imposes costs, expenses and reasonable attorney fees against the nonprevailing party.

However, the court was silent as to how an attorney is to translate that list into a compliant explanation to a client.  Practically then, attorneys should, at a minimum, explain — not merely recite — these differences to a client prior to the client agreeing to a mandatory arbitration provision.

The attorney's explanation should include, for example, that applicable arbitration procedures offer limited discovery — for instance, the JAMS procedures "limit each party to 'one deposition of an opposing [p]arty or of one individual under the control of the opposing [p]arty'" whereas judicial rules do not have a set limitation on the number of depositions available.

The attorney should also explain that, unlike a court proceeding where neither party pays for a judge's time, parties in arbitration often split the cost of the arbitrator's hourly rate, which can be costly.  And, at least in New Jersey, an attorney must provide a hard copy of the rules governing the arbitration — but note that neither D.C. Ethics Opinion 376 nor ABA Formal Opinion 02-425 imposes that requirement.  And, perhaps most importantly, an attorney must understand the relative benefits and disadvantages of arbitration so as to answer any client questions.

Conclusion

While agreements to arbitrate attorney-client disputes are routinely permitted, attorneys' ability to enforce such agreements will turn on the client's ultimate understanding of the implications of agreeing to arbitration.  Attorneys should, as always, consult the ABA Model Rules of Professional Conduct and related guidance in their jurisdiction — and when in doubt, should err on the side of explaining, both orally and in writing, the benefits and disadvantages of an arbitral forum.

Hilary Gerzhoy is an associate, and Deepika Ravi and Amy Richardson are partners, at Harris Wiltshire & Grannis LLP.

Article: The Right Retainer: Classic, Security or Advance-Payment?

February 7, 2021

A recent New York Law Journal article by Milton Williams and Christopher Dioguardi, “Retaining the ‘Right’ Retainer: Classic, Security or Advance-Payment?,” reports on different retainer types in New York.  This article was posted with permission.  The article reads:

This article evaluates which type of retainer agreement gives attorneys the best chance to preemptively shield their retainer fees before a client ends up in bankruptcy or the Department of Justice seizes and forfeits the client’s assets.

The scenario is this: A struggling business on the precipice of bankruptcy, or a criminal defendant whose property is subject to forfeiture, would like to hire you.  The prospective client has funds available to pay its legal fees, but what if you and/or the client expect that bankruptcy trustees or the Department of Justice will soon claim those funds for themselves?

At the outset of an engagement, an attorney can structure his or her retainer agreement to protect the retainer to the greatest extent possible in the event the client’s creditor comes knocking.  New York law recognizes three types of retainers: “classic,” “security,” and “advance payment.”  And under New York law, a retainer fee is shielded from attachment so long as the client does not retain an interest in the funds. See Gala Enterprises v. Hewlett Packard Co., 970 F. Supp. 212, 219 (S.D.N.Y. 1997).  For this reason, described in more detail below, it is the “advance payment” retainer agreement that will likely provide the most protection.

The ‘Classic’ Retainer

This type of retainer is typically a single, up-front payment to the lawyer simply for being available to the client—the attorney commits to future legal work for a specific period of time, regardless of inconvenience or workload constraints.  The classic retainer is not for legal services, and is therefore earned upon receipt, whether or not the attorney performs any services for the client (i.e., it is nonrefundable). See Agusta & Ross v. Trancamp Contr., 193 Misc.2d 781, 785-86 (N.Y. Civ. Ct. 2002) (general retainer compensates a lawyer for “agree[ing] implicitly to turn down other work opportunities that might interfere with his ability to perform the retainer-client’s needs” and “giv[ing] up the right to be retained by a host of clients whose interests might conflict with those of the retainer-client”).

Because the classic retainer is earned upon receipt and is nonrefundable, it without a doubt provides the most protection against would-be creditors.  However, the classic retainer is really only “classic” in the sense that it relates to antiquity.  Indeed, it is difficult to imagine a situation in the modern practice of law where a client would want to pay a classic retainer.  And attorneys would be remiss to draw up a nonrefundable classic retainer agreement unless certain specific conditions are met.

In general, under New York Rule of Professional Conduct 1.5(d)(4), “[a] lawyer shall not enter into an arrangement for, charge or collect … a nonrefundable retainer fee.” Further, under Rule 1.16(e), fees paid to a lawyer in advance for legal services are nonrefundable only to the extent they have been earned by the lawyer: “upon termination of representation, a lawyer shall promptly refund any part of a fee paid in advance that has not been earned.” See also Matter of Cooperman, 83 N.Y.2d 465, 471 (1994) (holding that nonrefundable retainer fee agreements clash with public policy and transgress the rules of professional conduct; affirming lower court decision that the use of nonrefundable fee arrangements warranted two-year suspension.); Gala Enterprises, 970 F. Supp. at 219 (narrowly construing the holding in Cooperman, and holding that only retainers with express non-refundability language are invalid per se).

The Security Retainer

While the classic retainer might offer the attorney the most security, the security retainer offers little defense against a client’s future creditors.  Typically, payments pursuant to a security retainer are placed in an escrow or trust account to be drawn upon only as the fee is earned.  In other words, the security retainer remains the property of the client until the attorney applies it to charges for services rendered.

So long as the client retains an interest in escrowed funds, the escrow account is attachable.  Under New York law, a security retainer may be attached so long as it is subject to the client’s “present or future control,” or is required to be returned to the client if not used to pay for services rendered. See, e.g., Lang v. State of New York, 258 A.D.2d 165, 171 (1st Dept. 1999); Potter v. MacLean, 75 A.D.3d 686, 687 (3d Dept. 2010) (defendant owed more than $20,000 in arrears on child support obligations and subsequently paid law firm a $15,000 retainer fee; the court found that the retainer fee, which was held in escrow, was subject to restraining order); M.M. v. T.M., 17 N.Y.S.3d 588, 599 (N.Y. Sup. Ct. 2015) (wife’s restraining notice against husband’s attorney’s security retainer was valid and enforceable); see also Pahlavi v. Laidlaw Holdings, 180 A.D.2d 595, 595-96 (1st Dept. 1992) (judgment debtor deposited $50,000 with his attorney after receipt of a restraining order and the court ordered his law firm to return them).

The Advance-Payment Retainer

Similar to the security retainer, the advance-payment retainer is a fee paid in advance for all or some of the services to be performed on a specific matter.  However, unlike a security retainer, ownership of the advance-payment retainer passes to the attorney immediately upon payment in exchange for the attorney’s promise to provide the legal services.  This type of retainer is likely the best way to ensure that the client has sufficient funds to pay for expected legal services.

Under an advance-payment retainer agreement, the law firm places the money into its operating account and may use the money as it chooses, subject only to the requirement that any unearned fee paid in advance be promptly refunded to the client upon termination of the relationship (recall Rule 1.16(e)).

A client’s contingent future interest in an advance-payment retainer, if any, that would be refunded if the firm’s services were prematurely terminated is not a sufficient basis for attachment. See Gala Enterprises, 970 F. Supp. at 219.  Therefore, the most secure option will likely be to require an advance payment for all services to be rendered, commonly referred to as a flat or fixed fee.  In other words, a creditor would not be able to seize such a retainer, even if part of the retainer may yet be refundable.  In Gala Enterprises, the court held that because a $150,000 flat fee as well as a $500,000 flat fee were subject to refund only if the legal services were prematurely terminated, the fees were therefore not attachable.

However, just because a client has paid an advance-payment retainer, does not mean that the retainer is untouchable.  Two specific possibilities come to mind.  First, Gala Enterprises illustrates that law firms might need to defend against fraudulent conveyance claims.  That being said, if the retainer is not excessive or unreasonable, the attorney is in a good position to defend against any such claims.  It goes without saying, when establishing a flat fee—or any fee for that matter—the fee must not be excessive. See Rule 1.5(a) (“[a] lawyer shall not make an agreement for, charge, or collect an excessive [] fee …”).

Second, attorneys of course must not accept funds that may have been obtained by fraud. See, e.g., S.E.C. v. Princeton Economic Intern. Ltd., 84 F. Supp. 2d 443 (S.D.N.Y. 2000) (lawyer who blindly accepts fees from client under circumstances that would cause reasonable lawyer to question client’s intent in paying fees accepts fees at his peril.).

Conclusion

In sum, we offer this advice:

  1. Review the Rules of Professional Conduct and case law cited herein, as well as the relevant New York State Bar Association ethics opinions, specifically: Ethics Opinion 570, June 7, 1985; Ethics Opinion 816, Oct. 25, 2007; Ethics Opinion 983, Oct. 8, 2013; and Ethics Opinion 1202, Dec. 2, 2020.
  1. Be transparent and direct with prospective clients regarding retainer agreements.
  2. A reasonable advance-payment retainer for all services to be rendered will give attorneys the most protection against future unknown creditors.
  3. Make clear in the retainer agreement that the client acknowledges and agrees that the advance-payment will become the law firm’s property upon receipt and will be deposited into the law firm’s operating account, not into an escrow account or a segregated bank account.
  4. Acknowledge in the retainer agreement that the client may be entitled to a refund of all or part of advance payment based on the value of the legal services performed prior to termination.

Milton Williams is a partner and Christopher Dioguardi is an associate at Walden Macht & Haran LLP in New York.

Lieff Cabraser to Appeal Attorney Fee Reduction Before Paying It

January 27, 2021

A recent Law 360 story by Chris Villani, “Lieff Wants To Appeal $1M State St. Fee Cut Before Paying It,” reports that Lieff Cabraser Heimann & Bernstein LLP asked a federal judge to hold off on ordering the firm to pay out a $1.1 million chunk of its fee for work on a years-old $300 million settlement with State Street Corp. so it can ask the First Circuit whether the repayment is justified.  In the latest salvo stemming from revelations of overbilling and other improprieties largely laid on its co-class counsel, Labaton Sucharow LLP and Thornton Law Firm LLP, Lieff Cabraser told U.S. District Judge Mark L. Wolf that once the money goes out, the firm is not likely to get it back.

Lieff Cabraser is appealing its part of the overall fee reduction order by Judge Wolf that slashed the tab owed to it, Labaton Sucharow and Thornton Law from $75 million to $60 million.  "Under the fee order, absent a stay, Lieff Cabraser's escrowed funds will be distributed to the class before the First Circuit can rule on the firm's appeal from the court's decision to penalize Lieff Cabraser," the firm said.  "Recovering those funds from the class, once distributed, will be impossible — effectively mooting the appeal."

But the vast majority of the money ordered repaid can go out right away, Lieff Cabraser argued, so the class of consumers who alleged they were swindled by State Street and Employee Retirement Income Security Act lawyers who worked on the case can get the rest of the money without any delay.  Putting a pause on the $1,139,4572 of Lieff Cabraser's money would not inconvenience anyone in line for a payout since it would take some time to distribute the funds even if the firm was not appealing, it said.

"Complete settlement distributions — especially those involving settlement funds in the hundreds of millions of dollars — commonly take years, not months," the firm said.  The case has wound through the court system since the suit, led by the Arkansas Teacher Retirement System, was first filed against State Street in 2011.  The parties reached a $300 million settlement and Judge Wolf approved a $75 million fee in 2016.  The order was vacated after allegations of double-billing surfaced in a Boston Globe report.

Judge Wolf appointed retired U.S. District Judge Gerald Rosen as a special master to investigate, and the probe ran up a seven-figure tab paid by the firms under investigation.  In a February order, Judge Wolf took Labaton Sucharow and Thornton Law to task, saying they repeatedly violated the rules of professional conduct by overbilling and failing to disclose a $4.1 million finder's fee paid to a lawyer who did not work on the case.  Lieff Cabraser's appeal is the only one to come from Judge Wolf's order and challenges a narrow set of issues pertaining only to findings related to the firm and alleged violations of Rule 11, which concerns representations made to the court in civil cases.

Judge Wolf indicated he would retain counsel to represent himself and his order before the First Circuit, but no attorney appearance has been entered on the First Circuit docket and no one filed an opposition to Lieff Cabraser's appeal.  It was also unclear, both to Lieff Cabraser and to the First Circuit, whether Judge Wolf's order last February was "final."  The firm told the appellate court it felt it had to treat the February order as "final" lest it lose the chance to appeal altogether, but Judge Wolf entered a "final judgment" on Jan. 19 of this year and Lieff Cabraser acknowledged to the First Circuit that the question of whether an actual appealable order existed last summer was murky.

In September, the First Circuit said it would dismiss the appeal without prejudice, writing that "the district court appears to have simultaneously treated its order as both final and non-final; that is, the court sought to retain counsel to file a brief in this court in support of its order and at the same time has issued several post-fee orders, the cumulative effect of which may well be to alter the fee ruling."  With the final judgment entered, Lieff Cabraser plans to revive its appeal, which has centered on due process issues and is a matter of first impression in the circuit.

A strict adherence to notice requirements in Rule 11 matters is necessary, Lieff Cabraser argued, because "sanctions imposed on the court's own motion circumvent the adversarial process, putting the district court in the position of being the 'accuser, fact-finder and sentencing judge all in one.'"  Five circuits, the firm has argued, have found that sanctions like the ones imposed by Judge Wolf are problematic "when a court fails to set out the precise issues to be considered."

"This issue has not directly been addressed by the First Circuit," the firm said, "although the circuit has noted that 'judges must be especially careful where they are both prosecutor and judge.'"  The underlying suit alleged Boston-based State Street swindled millions of dollars a year from its clients on their indirect foreign exchange trades over the course of a decade.  The law firms admitted to overstating their billing but contended the $75 million fee award initially approved by Judge Wolf was still proper.  The special master, Rosen, recommended in 2018 that the firms disgorge just over $10 million, but Judge Wolf's 160-page order in late February ruled that the cuts should be even deeper.

Insurer Seeks to Dodge Attorneys Fees in Overbilling Matter

January 14, 2021

A recent Law 360 story by Kevin Penton, “Insurer Seeks to Dodge Mass. Firm’s Overbilling Probe Fees” reports that an insurance company asked a Massachusetts federal court to declare that it is not responsible for paying attorney fees incurred by Thornton Law Firm LLP when the firm faced an investigation over alleged overbilling in a $300 million State Street Corp. settlement.  Continental Casualty Co. should not be obligated to pay Thornton Law the unspecified amount of fees the firm paid to its legal counsel for representation throughout the investigation, along with the unspecified amount the court ordered to be deducted from the firm's fee award to help cover the investigation's costs, according to the complaint in the District of Massachusetts.

Continental argues that Thornton Law did not take out insurance that would require the insurer to defend or indemnify the firm in the investigation.  The company noted that the investigation was not a claim triggered by an "act or omission in the performance of legal services" by Thornton Law, nor does it leave open the possibility of covered damages, according to the complaint.  The investigation's findings — that Thornton Law and Labaton Sucharow LLP repeatedly violated the rules of professional conduct in part by overbilling — meant that the insurance policy's "intentional acts exclusion" is also triggered, according to the complaint.

"The acts or omissions at issue in the special master fee investigation are not services performed by Thornton as a lawyer," the complaint reads.  "To the contrary, the special master fee investigation arose from the insured's false and misleading submission regarding its billing rates and business practices in a declaration to the court."

The underlying suit, filed in 2011, alleged that State Street swindled millions of dollars a year from its clients on their indirect foreign exchange trades over the course of a decade.  The class action resulted in a $300 million settlement between State Street and investors, and U.S. District Judge Mark L. Wolf approved $75 million in attorney fees for Thornton Law, Labaton Sucharow and Lieff Cabraser Heimann & Bernstein LLP in 2016.

The billing issues first came to light later that year in a Boston Globe report. The firms later acknowledged they overstated their billing, but claimed the $75 million fee was still proper.  Following the investigation by a special master, Judge Wolf in February reduced the firms' fees to $60 million.  Judge Wolf noted at the time that Thornton Law managing partner Garrett Bradley also signed a false fee declaration, which Bradley lamented as a "stupid mistake" when testifying in one of the case's hearings.

"The United States has a proud history of honorable, trustworthy lawyers," Judge Wolf wrote.  "However, this case demonstrates that not all lawyers can be trusted when they are seeking millions of dollars in attorneys' fees and face no real risk that the usual adversary process will expose misrepresentations that they make."