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Category: Ethics & Professional Responsibility

Labaton Sucharow to Return $4.8M in Attorney Fees in Securities Class Action

October 11, 2018

A recent ABA story by Debra Cassens Weiss, “Labaton Sucharow Agrees to Return $4.8M in Attorney Fees After Attorney Finder Fee is Revealed,” reports that Labaton Sucharow has agreed to return $4.8 million in attorney fees to plaintiffs and other law firms in a securities class action against State Street Corp.  The payment resolves allegations of double billing and a failure to disclose a $4.1 million finder fee to a lawyer who helped introduce Labaton to the lead plaintiff, the Arkansas Teacher Retirement System, report Law.com and the New York Times.  The lawyer who received the fee is Damon Chargois of Texas.

According to a supplemental report filed with a Boston federal court, Labaton should have disclosed the payment to Chargois, who “did not commit to work on, nor accept responsibility for, the representation of ATRS in the prosecution of the State Street case.”  But the report said the payment itself “did not violate the rules of professional misconduct or constitute intentional misconduct.”

Columbia Law School professor John Coffee Jr. told the New York Times that the agreement shines a light on the “rather sordid market of buying and selling plaintiffs” in securities class actions.  “I think the whole arrangement was under the table and dubious,” he said.

The lawsuit against State Street Corp. had alleged the bank overcharged its customers in connection with certain foreign exchange transactions.  State Street agreed to a $300 million settlement, and U.S. District Judge Mark L. Wolf of Boston awarded $75 million in attorney fees to several law firms.

After a Boston Globe report alleged double billing by Labaton and two other law firms, Wolf appointed retired U.S. District Judge Gerald Rosen as a special master to investigate.  Rosen learned of the finder fee payment.

Labaton’s agreement to return the $4.8 million is part of an agreement with Rosen.  Labaton and two other law firms also agreed to pay $3.8 million to cover the cost of the special master probe.  Labaton also agreed to internal reforms, including the appointment of a new general counsel and a chief compliance officer.  The law firm also agreed to hire former U.S. District Chief Judge James Holderman of Chicago for a year to ensure that fee agreements comply with “emerging best practices.”

Labaton also said it had adopted a policy banning “bare referral” arrangements with other lawyers.  Bare referral refers to a fee paid for no work, according to this law review article.  Labaton said in a statement that the payment to Chargois “was outside the norms of a traditional case-specific referral fee” and its disclosure “fell short of emerging best practices.”  But the firm said the special master concurs “that the payment made to referring counsel did not violate any rules of professional misconduct.”

“The master’s recommendation that we maintain our role as lead counsel and that our client Arkansas Teacher Retirement System continue to serve as class representative are important elements of the agreement and hopefully reflect our collective achievement in the substantial recovery secured for the class,” the statement said.

Bankruptcy Attorney Sanctioned for Improper Billing Practices

September 25, 2018

A recent BNA story by Daniel Gill, “Bankruptcy Attorney Sanctioned for Sloppy, Improper Billing,” reports that a consumer bankruptcy attorney has to return client payments in 17 Chapter 7 cases where he improperly billed for services and failed to provide appropriate required disclosures, an Oklahoma bankruptcy judge ruled.

Attorney J. Ken Gallon failed to properly disclose his compensation to the court or the source of such payments; he charged unreasonable fees; and he allowed legal fees to be paid before case filing fees were paid in full, Chief Judge Terrence L. Michael of the U.S. Bankruptcy Court for the Northern District of Oklahoma wrote in his Sept. 4 opinion.

At the center of the court’s problems with Gallon’s practices was his use of what the court called the “BK Billing Model.”  BK Billing is a Utah company that factors receivables for consumer bankruptcy attorneys.  It essentially buys the attorneys’ receivables for about 75 percent of their face value.  BK Billing was created to benefit debtors who lacked the resources to pay all their attorneys fees for filing a Chapter 7 prior to filing the case, the company’s president, Sean Mawhinney, previously told Bloomberg Law.

Many, including the American Bankruptcy Institute’s Commission on Consumer Bankruptcy, have highlighted the problem of access to Chapter 7 for consumers unable to pay fees up front, because an attorney can’t collect on a pre-petition debt after the case is filed.  Currently many of these debtors are compelled to file Chapter 13, which allows for paying attorneys fees over time, but which is also significantly more expensive, time consuming (up to five years for Chapter 13 compared to less than one for Chapter 7), and far less successful in discharging, or wiping out, debts.

BK Billing proposes a system where the debtor enters into two separate agreements with his bankruptcy attorney—one for services rendered prior to the filing and another for post-filing, or post-petition, services.  The first contract would be for no or little money, with the bulk of the attorneys’ fees loaded into the post-petition agreement.  As a post-petition debt, the Chapter 7 attorney wouldn’t be barred from collecting.

“If debtors had the money upfront to afford a bankruptcy attorney they would pay upfront,” Mawhinney said in a Sept. 5 email to Bloomberg Law.  "[B]ifurcation of services allows desperately-needed Chapter 7 cases to be filed quickly without debtors resorting to filing an unnecessary Chapter 13 case, or facing a continued wage garnishment, with no relief in sight,” he said.  But it remains unclear whether courts will ultimately approve of the bifurcating of a Chapter 7 case to pre- and post-petition services.

Gallon had sloppy record keeping, the court said. The required disclosures he filed were often inaccurate and failed to indicate when he was paid from advances by BK Billing, which would subsequently collect monthly payments from the client.  Worse, the court was “troubled by Gallon’s practice of charging a higher fee to his clients that use the BK Billing Model than to his conventional clients.”  BK Billing cautions lawyers not to charge clients a premium when they use the company’s services, Mawhinney said.

Attorneys’ fees must always be reasonable and properly disclosed, Mawhinney told Bloomberg Law.  He suggests that attorneys can avoid problems by filing a motion for approval of the fee agreement, or by stipulating with the U.S. Trustee’s office in advance or at the beginning of the case, he said.

While expressing reservations regarding the validity of bifurcating fees in Chapter 7, Judge Michael declined to make a ruling on the issue, instead finding that Gallon failed in his duties to properly disclose the details of his fee arrangement with his clients, as required by the Bankruptcy Code and applicable rules.  The court voided Gallon’s post-petition contracts and ordered him to return whatever the debtors wound up paying to BK Billing. He could keep the funds that were paid by the clients directly to him, it said.

The case is In re Wright, 2018 BL 318559, Bankr. N.D. Okla., 17-11936, 9/4/18.

Third Circuit: No Attorney Fees After ‘Outrageously Excessive’ Fee Request

September 12, 2018

A recent Legal Intelligencer story by PJ D’Annunzio, “3rd Circ.: Judge Was Right to Award Nothing After ‘Outrageously Excessive’ $1M Fee Request, reports that a federal appeals court has upheld the denial of a $1 million fee request by a Scranton attorney in an auto insurance case that produced a verdict almost a tenth of the requested legal compensation.  In its denial, the U.S. Court of Appeals for the Third Circuit, joining other circuit courts, also held that it is within a judge’s discretion to award no attorney fees at all, especially if the fee request is deemed “outrageously excessive.”

The ruling stems from plaintiff Bernie Clemens’ bad-faith case against New York Central Mutual Fire Insurance over its handling of his auto accident case.  The claims went before a jury and ended with a $100,000 punitive damages award.  The defendants had settled Clemens’ uninsured motorist claim for $25,000.

The case was handled by Mike Pisanchyn of the Pisanchyn Law Firm in Scranton.  After the case was resolved, Pisanchyn asked the court to award the seven-figure fee amount.  However, U.S. District Judge Malachy Mannion of the Middle District of Pennsylvania was taken aback by the sheer size of the number—so much so that he awarded Pisanchyn and his firm nothing and referred Pisanchyn for disciplinary review.

Reached for comment, Pisanchyn disagreed that his firm’s fee request was excessive.  “In essence, despite us obtaining a $100,000 award on a zero written offer case while we represented the plaintiff over eight to nine years of litigation, the court has determined the plaintiff’s attorney should be awarded nothing,” he said in an email.  “However, we do take comfort in the fact that our clients have been compensated and are extremely happy with our representation of them through this almost decade of litigation.”

James Haggerty of Haggerty, Goldberg, Schleifer & Kupersmith in Philadelphia represented Clemens on appeal.  “The decision is important in that it addresses an issue regarding the award of counsel fees which had not heretofore been considered by the Third Circuit,” Haggerty said, “The court issued a well-reasoned and well written opinion, finding that the district court did not abuse its discretion in refusing to award counsel fees to trial counsel following his successful recovery of bad faith damages from the defendant insurer.”

Mannion’s 100-page opinion went line-by-line through the request, slashing billed fees he deemed vague, duplicative and excessive.  Mannion also took issue with how the firm recreated its timesheets, saying that, while recreating timesheets is allowable if the attorneys did not make them contemporaneously, a number of the entries appeared to be based on guesswork.

The Third Circuit agreed with Mannion’s handling of the request, which found that Pisanchyn and his firm were entitled to recover only 13 percent of the fees they asked for.  “In light of that substantial reduction, the district court deemed Clemens’s request ‘outrageously excessive’ and exercised its discretion to award no fee whatsoever,” Third Circuit Judge Joseph Greenaway wrote for the panel, which also included Judges Luis Felipe Restrepo and Stephanos Bibas.

“Although it was unusual, we cannot say that this decision was an abuse of discretion,” Greenaway added.  ”Review of the record and the district court’s comprehensive opinion makes clear that denial of a fee award was entirely appropriate under the circumstances of this case.  Counsel’s success at trial notwithstanding, the fee petition was severely deficient in numerous ways.”  Mannion had said one of the most “egregious” requests included billing 562 hours for trial preparation, with the plaintiffs attorneys entering between 20 and 22 hours per day on some days.  The Third Circuit examined that figure in detail.

“All the more troubling is the fact that counsel’s (supposedly) hard work did not appear to pay off at trial.  As the district court explained, counsel had ‘to be repeatedly admonished for not being prepared because he was obviously unfamiliar with the Federal Rules of Evidence, the Federal Rules of Civil Procedure and the rulings of th[e] court,” Greenaway said.  “Given counsel’s subpar performance and the vagueness and excessiveness of the time entries, the district court did not abuse its discretion in disallowing all 562 hours.”

Greenaway continued, “Aside from the problems with the hours billed for individual tasks, counsel also neglected their burden of showing that their requested hourly rates were reasonable in light of the prevailing rates ‘in the community for similar services by lawyers of reasonably comparable skill, experience, and reputation.’”

Wachtell Billing Practices Come Under New Scrutiny in CVR Case

September 5, 2018

A recent New York Law Journal story by Christine Simmons, “Wachtell Billing Practices Come Under New Scrutiny in CVR Case,” reports that on raising the stakes in its long-running legal malpractice suit against Wachtell, Lipton, Rosen & Katz, CVR Energy is now alleging the elite law firm engaged in unethical billing practices by basing its legal fees on the amount charged by investment banks.  “This Kafkaesque method of billing was never disclosed to CVR and Wachtell has gone to great lengths to avoid scrutiny, by clients, the bar and the public of its billing practice,” CVR alleged in a proposed amended complaint that would seek punitive damages against the law firm.

CVR, a refining and fertilizer business controlled by Carl Icahn, is suing Wachtell for legal malpractice in the Southern District of New York.  In the 2013 suit, which Wachtell has strongly contested, CVR alleges the firm failed to advise that CVR would face claims by Deutsche Bank AG and The Goldman Sachs Group Inc. for $36 million under the terms of engagement letters with the banks.  CVR hired the banks as financial advisers in an unsuccessful attempt to fend off a 2012 acquisition by Icahn.  CVR’s counsel, Herbert Beigel, wrote to U.S. District Judge Richard Sullivan, seeking permission to add claims for breach of contract and breach of the covenant of good faith and fair dealing and to seek punitive damages.  He said the additions stem from information “we learned late in discovery.”

As American Lawyer previously reported, Wachtell has a unique billing structure.  Instead of charging by the hour, the firm charges fees for deals that range from 1 percent to 0.1 percent of the transaction amount, according to the 2012 fee agreement at issue in the malpractice case brought by CVR against Wachtell.  A “Billing and Retention Policies” document sent to CVR—and cited in CVR’s proposed new complaint—states that Wachtell provides a “distinctive service,” marked by extraordinary expertise and sophistication that doesn’t lend itself to hourly fees.

“We must base our fees not on time but on the intensity of the firm’s efforts, the responsibility assumed, the complexity of the matter and the result achieved,” the firm asserts.  The document adds: “While our fees are not based on the amount involved in a matter, experience indicates that merger and acquisition and takeover fees have typically ranged [from] 1 percent or more on matters under $250 million and 0.1 of 1 percent or less on matters over $25 billion.”

But CVR, in its new court papers, said contrary to the terms of its engagement letter, Wachtell billed CVR $6 million based on the amount of the success fees invoiced by Goldman and Deutsche in connection with the company’s response to Icahn’s 2012 tender offer, “resulting in a much larger fee than the law firm promised to charge or it was otherwise entitled to—and the firm did so without informing CVR.”  Under CVR’s argument, a $6 million fee would represent 16 percent of the banks’ $36 million fees to CVR.  However, this formula does not appear in CVR’s publicly filed court papers.  CVR’s amended complaint and Beigel’s letter to the court are redacted.

CVR’s court papers do say that Wachtell’s fees, like the fees of Goldman and Deutsche, were higher for failing than succeeding.  “Even though Wachtell is hired by its client to, among other things, get the best deal for its client when engaging investment bankers … for takeover ‘defense’ assignments, Wachtell is perversely incentivized to negotiate engagement letters that benefit the investment bankers, not its client, which is exactly what happened with CVR,” Beigel alleges.

CVR argues that the basis for Wachtell’s fee was unethical and in violation of the attorney ethics rules in that it was excessive and not aligned with CVR’s interests.  The more fees Goldman and Deutsche would receive, the higher Wachtell would bill for its services, “thus creating a material conflict of interest on the part of Wachtell,” the company claims.  CVR also claims Wachtell’s fee was not based on “the amount involved” in the Icahn tender offer, and contrary to the terms of its engagement letter, the fee was not based on “the result achieved” or the “responsibility assumed.”

The company said it’s entitled to the return of fees paid to Wachtell and to recover from Wachtell punitive damages, as its conduct “constituted gross, wanton or willful fraud.”

Wachtell has fought the malpractice allegations since the 2013 suit was first filed and even brought a state court suit against CVR and Icahn for abuse of process and breach of protective order.  In federal court last month, Wachtell’s counsel, Shuster, said the firm believes Icahn brought the case out of animosity.  “He does not like Wachtell.  It was brought as payback.”

NJ Court: Attorneys Must Advise Clients of Billing Options in Fee-Shifting Litigation

August 30, 2018

A recent New Jersey Law Journal story by Michael Booth, “Lawyers Must Advise Clients of Other Options Before Billing Hourly on Fee-Shifting Case, Court Says,” reports that a New Jersey appeals court voided a retainer agreement between a lawyer and his longtime friend, saying he did not properly disclose hourly fees he would be charging for representing her in a discrimination case.  The three-judge Appellate Division panel, in a published ruling, said Somerville solo Brian Cige did not adequately explain the arrangement, which provided for an hourly billing rate and litigation costs, to his client, Lisa Balducci.

The panel said lawyers who wish to charge hourly fees for work on discrimination or other fee-shifting cases must explain to their clients that there are other competent counsel who will accept those cases on a contingency basis, and who also will advance any litigation costs.

“Ethically then, must an attorney whose fee for undertaking an LAD case that includes an hourly rate component explain both the consequences on a recovery and the ability of other competent counsel likely willing to undertake the same representation based on a fee without an hourly component?  We conclude the answer is yes,” Appellate Division Judge William Nugent said.

The lawsuit filed by Balducci claimed she never fully reviewed the retainer agreement offered by Cige but was shocked when she began receiving bills for hourly services and costs, which included a $1 fee for reviewing incoming emails and sending responses, the court said.  Balducci eventually fired Cige and hired another attorney to represent her and her son in a Law Against Discrimination claim.  The decision didn’t reveal the details of that matter,

Nugent, writing for the court, said a Somerset County Assignment Judge Yolanda Ciccone properly found that Cige violated his professional responsibility to explain the agreement’s material terms to Balducci so that she could reach an informed decision as to whether to retain him.  Thus the retainer agreement was void.  “The hearing recording in this case includes adequate, substantial, credible evidence support the court’s decision,” said Nugent.  Judges Carmen Alvarez and Richard Geiger joined in the ruling.  “There is no dearth of competent counsel attorneys willing to litigate LAD and other fee-shifting cases that do not include an hourly component.

Balducci retained Cige in September 2012 to represent her and her child in the LAD case.  Cige presented her with what he said was a standard retainer agreement stating he could charge up to $7,500 up front, plus $450 an hour.  Balducci signed the agreement despite having “concerns,” according to the decision.  Balducci began complaining when she began receiving bills from Cige for hourly services plus expenses.  He told Balducci to not worry about the bills, because he was using them for purposes of a future fee petition he would demand at the conclusion of what he believed was a successful case.

“We are friends,” Balducci, in depositions, quoted Cige as saying, according to the decision.  “I was at your wedding.  I would never do this to you.  Ignore that.  Don’t worry about.  It is standard info.”  Balducci also complained that she was devoting her time to preparing for depositions while Cige was away attending chess tournaments, the ruling said.  Balducci fired Cige after she complained that it would be impossible for her to advance tens of thousands of dollar for expert witnesses.  Balducci filed a lawsuit against Cige, and he filed a counterclaim seeking more than $286,000 in fees for work he already had done.

“The trial court properly found the agreement was unenforceable and void,” Nugent said.  “There is no dearth of competent, civic-minded attorneys willing to litigate LAD and other statutory fee-shifting cases under fee agreements that do not include an hourly component.  The number of such cases litigated in our trial courts and reported in the case law evidence this, as does—at least as to numbers—advertising on television and radio, in telephone books and newspapers, and on billboards and other media,” Nugent wrote, noting that Balducci’s current counsel in the LAD case is not charging hourly fees.