Fee Dispute Hotline
(312) 907-7275

Assisting with High-Stakes Attorney Fee Disputes

The NALFA

News Blog

Category: Fee Doctrine / Theory

Bankruptcy Court Denies Fee Enhancement Under Common Fund Doctrine

January 17, 2020

A recent Legal Intelligencer article by Rudolph J. DiMassa, Jr. and Geoffrey A. Heaton, “Bankruptcy Court Denies Motion for Fee Enhancement Under ‘Common Fund Doctrine’,” reports on a bankruptcy court that recently denied creditors’ counsel’s motion for a fee enhancement under the common fund doctrine.  This article was posted with permission.  The article reads:

In a bankruptcy case filed 91 years ago (and reopened 85 years later), the U.S. Bankruptcy Court for the Western District of Virginia recently denied creditors’ counsel’s motion for a fee enhancement under the “common fund doctrine,” finding it could not award the requested fees absent statutory authority.  In particular, the court determined it would be an abuse of its equitable powers to award fees beyond the scope of applicable bankruptcy law in In re Yellow Poplar Lumber, Case No. 605 B.R. 416 (Bankr. W.D. Va. 2019).

Background

In July 1928, White Oak Lumber Co. filed an involuntary Chapter 7 petition in the U.S. District Court for the Western District of South Carolina, seeking to have Yellow Poplar Lumber Co., Inc. “adjudged a bankrupt” under the Bankruptcy Act of 1898.  n 1931, the district court adjudged Yellow Poplar as bankrupt and closed the case.

In 2013, the case was reopened in connection with a dispute over ownership rights in certain gas estates on parcels of land in Virginia, and it ultimately found its way to the U.S. Bankruptcy Court for the Western District of Virginia.  The dispute resulted in a settlement whereby Yellow Poplar’s bankruptcy estate stood to receive approximately $2 million in gas royalties.  The Chapter 7 trustee appointed in the reopened case, with the assistance of a genealogist, identified several of the original creditors’ existing heirs or successors-in-interest.  The bankruptcy court, in turn, directed the trustee to file a brief addressing the appropriate interest rate on the anticipated distribution to creditors, and invited any other party-in-interest to do the same.  While the trustee contended that the interest rate should be 2.4%, counsel for the heirs of two creditors advocated a 7% rate, which reflected the legal rate in effect in South Carolina when Yellow Poplar’s bankruptcy case was filed.  The court ultimately ordered the application of a rate of 3.6%.

Creditors’ counsel, however, successfully appealed the court’s ruling, which resulted in general unsecured creditors receiving 7% interest on their distributions, and increasing the asset pool to be distributed to general unsecured creditors by approximately $740,000.  Notably, the efforts of creditors’ counsel did not increase the amount of funds in the bankruptcy estate, but rather increased just the proportion of estate funds going to the class of general unsecured creditors, effectively diverting funds from one class of constituents to another.  Creditors’ counsel then filed a motion with the bankruptcy court seeking a fee enhancement of $164,164.90 under the “common fund doctrine.”  The trustee opposed the motion, arguing, among other things, that the common fund doctrine does not apply in bankruptcy cases.

Common Fund Doctrine

The common fund doctrine is an exception to the American Rule, i.e., the general rule prevailing in the United States that each litigant is responsible to pay its own attorney fees.  The doctrine generally applies where a litigant, acting to recover on its own claim, recovers property from which others may satisfy their claims as well, entitling the litigant to payment of attorney fees and costs from the “common fund” used for payment of all claims.

Based upon principles of equity, the common fund doctrine recognizes that one who benefits from a lawsuit without contributing to its cost is unjustly enriched at the expense of the successful litigant who bore the costs.  In addition to payment of a litigant’s attorney fees and costs, the doctrine also allows the litigant’s attorney to collect an extra award of fees from the common fund, even if the attorney is merely performing services for his client per the terms of his engagement.

Court Analysis

The court determined that the operative question was not whether the common fund doctrine applies, but rather whether the court had authority to grant the requested fee enhancement from estate assets.  To that end, the court considered precedent under both the Bankruptcy Act of 1898 and the Bankruptcy Code currently in effect: although the Bankruptcy Act governed Yellow Poplar’s case, the court considered cases applying the Bankruptcy Code for additional guidance.

Quoting at length from In re Fesco Plastics, 996 F.2d 152 (7th Cir. 1993), a case filed under the Bankruptcy Code that denied a fee request under the common fund doctrine, the court highlighted the central problem with counsel’s requested fee enhancement: a bankruptcy court cannot award attorney fees without statutory authority, such as that found in Bankruptcy Code Sections 327-330, 1103 and 503(b)(4).  The court concluded that an award of fees outside the context of applicable statutory provisions is beyond a bankruptcy court’s mandate.  In the words of the Fesco Plastics court, “a bankruptcy court is simply not authorized to do whatever is necessary to reach an equitable result; it may only do whatever is necessary to enforce the Code.”

The court noted that prevailing case authority decided under the Bankruptcy Act was in accord with Fesco Plastics.  In particular, the court highlighted Cox v. Elliott (In re Calhoun Beach Club Holding), 122 F.2d 851 (8th Cir. 1941), which rejected the argument that a bankruptcy court “has inherent equitable power” to authorize payment of a creditor’s attorney fees from estate assets.  As the U.S. Court of Appeals for the Eighth Circuit explained in Cox, the Bankruptcy Act “carefully regulates the compensation and expenses that may be allowed in bankruptcy,” and contains an implied exclusion of other fee allowances not expressly set out in the Bankruptcy Act.

After considering Fesco Plastics, Cox and several other cases under both the Bankruptcy Act and the Bankruptcy Code, the court concluded it could not “abuse the equitable power Congress bestowed upon it to award fees for services outside the scope of applicable bankruptcy law.”  The bankruptcy court noted that, even were it to conclude that it had the authority to award fees under the common fund doctrine, counsel might nonetheless remain ineligible for the additional fees: as noted above, counsel’s efforts did not increase funds flowing into the bankruptcy estate, but rather reallocated estate funds among classes of creditors.

Although acknowledging that the common fund doctrine might apply in exceptional circumstances, the court confirmed that a fee award or enhancement would still have to be made pursuant to statutory authority, such as section 64(b)(3) of the Bankruptcy Act, allowing a “reasonable attorney fee” to petitioning creditors in an involuntary case, or section 64(b)(2), allowing for payment of “reasonable expenses” of creditors who recover property transferred by a bankrupt.

Here, however, no provision of the Bankruptcy Act or the Bankruptcy Code existed to authorize “fees for creditor’s attorneys whose actions incidentally benefited some creditors, to the detriment of others, while pursuing their clients’ best interests.”  The court noted, moreover, that counsel had not identified any provision of the Bankruptcy Act or the Bankruptcy Code that authorized the fee award, and the authorities it did cite were either distinguishable, were not on point, or supported the court’s analysis.  Accordingly, the court denied counsel’s motion for a fee enhancement.

Conclusion

Viewed through the equities of the case, it is arguably unfair that all members of the general unsecured creditor class benefited without having to contribute to the legal fees and expenses incurred by just a few creditors in the class.  Indeed, the court confessed that it was “not unsympathetic” to counsel’s fee request.  Nevertheless, Yellow Poplar provides valuable guidance to creditors seeking payment of attorney fees from estate funds: asserting equitable theories such as the “common fund doctrine” may engender judicial sympathy, but they are no substitute for statutory authority.  Consequently, creditors’ counsel seeking any fee enhancement should make their request pursuant to a Bankruptcy Code section that explicitly authorizes such an enhancement.

Rudolph J. Di Massa, Jr. is a partner at Duane Morris in Philadelphia.  Geoffrey A. Heaton, is a special counsel at Duane Morris in San Francisco.

FTC Ordered to Pay Attorney Fees and Costs Under EAJA

December 27, 2019

A recent NLJ story by Mike Scarcella, “FTC Ordered to Pay $843K in Legal Fees, Costs After Losing Privacy Case,” reports that the Federal Trade Commission must pay more than $843,000 in attorney fees and costs to the law firms that represented a now-defunct medical diagnostic testing company that had long argued the agency was misguided in an enforcement action alleging inadequate data-privacy protections.

Atlanta-based LabMD, which has claimed the FTC’s enforcement action put it out of business, was represented by such firms as Ropes & Gray, Dinsmore & Shohl, and Wilson Elser Moskowitz Edelman & Dicker.  A team from Ropes & Gray served pro bono as lead counsel for LabMD in the U.S. Court of Appeals for the Eleventh Circuit, which last year ruled against the FTC.

The appeals court this week upheld a special master’s report that said the law firms were entitled to fees and costs for their successful advocacy on behalf of LabMD.  The report said the FTC’s litigation position was not “substantially justified,” a threshold test for disputes involving whether a federal agency is on the hook for legal fees.  Ropes & Gray was awarded nearly $300,000 in fees.  Dinsmore was granted about $346,000, and Wilson Elser was awarded $83,200.

LabMD’s lawyers sought to recoup attorney fees under the Equal Access to Justice Act, which can provide some relief to parties who prevail against federal agencies.  FTC lawyers had urged the federal appeals panel to reject any legal-fee award at all.  “LabMD is not entitled to recover any of its fees or costs because the commission’s position at every stage—when it opened the investigation, prosecuted an enforcement complaint, and defended its cease-and-desist order on appeal—had ‘a reasonable basis in both law and fact’ and therefore was ‘substantially justified,’” FTC attorney Theodore Metzler said in a court filing last month.

The special master, Walter Johnson, a U.S. magistrate judge in Rome, Georgia, concluded the FTC was not “substantially justified” in its investigation and prosecution of LabMD.  Johnson, like others before him, examined the FTC’s relationship with, and reliance on, a company that allegedly tried to get LabMD to buy its data-protection services after informing the company of an alleged information-security breach.  “Tragically, as this case was proceeding through the enforcement action stage, LabMD was forced to cease operations,” Johnson wrote in his report.

LabMD’s fee petition in the Eleventh Circuit revealed various rates for leading Ropes & Gray partners and associates as of October 2018.  The firm said it would reinvest any awarded compensation into further pro bono work.  Douglas Meal, the primary lawyer for LabMD in the Eleventh Circuit and formerly co-leader of the firm’s privacy and cybersecurity practice, reported an hourly rate of $1,500.  Appellate partner Douglas Hallward-Driemeier was charging $1,200, and then-partner Michelle Visser was billing at $1,060 hourly.  The firm’s fee application presented both current hourly rates and discounted figures that were used as the basis for the petition.

SCOTUS Strikes Down USPTO Attorney Fee Rule

December 16, 2019

A recent Law 360 story by Bill Donahue, “Supreme Court Strikes Down USPTO Atty Fee Rule,” reports that the U.S. Supreme Court struck down an unusual U.S. Patent and Trademark Office policy that saw the agency automatically demand repayment of its legal bills, ruling that it ran afoul of the centuries-old rule that U.S. litigants must usually pay their own lawyers.  Ruling unanimously in favor of a drugmaker called NantKwest Inc., the justices rejected the agency's recent reinterpretation of a decades-old provision in the federal Patent Act that says companies must pay "all expenses" incurred by USPTO in certain types of appeals — regardless of who wins the case.

Affirming a lower court's ruling last year, the high court said that term should not be read to cover the salaries paid to USPTO attorneys who worked on a particular case.  Writing for the court, Justice Sonia Sotomayor said that the agency's approach would violate the so-called American Rule, a doctrine that says litigants must pay for their own attorneys unless Congress expressly says otherwise.

"The [American Rule] presumption against fee shifting not only applies, but is particularly important because [the Patent Act] permits an unsuccessful government agency to recover its expenses from a prevailing party," Justice Sotomayor wrote.  "Reading [the statute] to award attorney's fees in that circumstance would be a radical departure from longstanding fee-shifting principles adhered to in a wide range of contexts."  The ruling had stakes for trademark lawyers, too.  The Lanham Act contains an identical provision and the USPTO has also asked for such attorney fees in trademark cases.

First rolled out in 2013, USPTO's policy was rooted in a novel interpretation of decades-old statutory language.  When the USPTO refuses to grant a patent, the Patent Act allows the applicant to file a streamlined appeal on the existing record directly to the Federal Circuit, or it can file a "de novo" appeal in a district court — a more robust process that allows the applicant to enter new evidence into the record.

The law says that applicants who choose the de novo route must pay "all expenses" of the proceeding, regardless of who wins the appeal.  The provision makes no mention of winning or losing; the applicant pays no matter what.  For decades, the USPTO had only interpreted "expenses" to mean relatively small things, like travel expenses, expert fees and copying.  But that changed in 2013, when the agency started arguing that the expenses provision also covers attorney fees, which are typically far larger.

In the years since, courts have split over the policy.  While the Fourth Circuit ruled that the policy was a fair rereading of the statute, the Federal Circuit ruled that it violated the American Rule.  On appeal to the high court, USPTO had argued that the American Rule didn't apply at all to the unusual Patent Act provision in question.  The rule only covers awards of fees to prevailing parties, the agency argued, and the “expenses” provision applies regardless of who wins a case.

The high court flatly rejected that argument.  “That view is incorrect.  This Court has never suggested that any statute is exempt from the presumption against fee shifting,” Justice Sotomayor wrote.  “Nor has it limited its American Rule inquiries to prevailing-party statutes.  Indeed, the Court has developed a line of precedents addressing statutory deviations from the American Rule that do not limit attorney’s fees awards to the prevailing party.”

Analyzing the provision under the American Rule — which requires clear authorization from Congress — the high court said Patent Act was not explicit enough to cover attorney fees.  "The reference to 'expenses' in [the Patent Act] does not invoke attorney's fees with the kind of clarity we have required to deviate from the American Rule," Justice Sotomayor wrote.  "Simply put, in common statutory usage, the term 'expenses' alone has never been considered to authorize an award of attorney's fees with sufficient clarity to overcome the American Rule presumption," the justice wrote.

In California, Attorney Fees May Be Awarded in ‘Reverse-CPRA’

November 18, 2019

A recent Metropolitan News story, “Attorney Fees May Be Awarded in ‘Reverse-CPRA’ Case,” reports that a newspaper that intervened in an action brought by a department of the City of Los Angeles seeking a declaration that certain of its records are non-disclosable, and succeeded in effecting the release of those records, is entitled to its attorney fees under the private attorney general doctrine, the Court of Appeal for this district has held.

Justice Maria Stratton of Div. Eight wrote the opinion.  It affirms a $136,645.82 award of attorney fees under the private attorney general statute, Code of Civil Procedure §1021.5, to the San Diego Union and tacks on $12,350.33, bringing the total to $148,996.15.

The records relate to pay-outs by the Department of Water & Power (DWP) to customers in the 2014-2015 fiscal year—rebates totaling nearly $18 million—for tearing up their lawns and replacing them with fake grass.

The San Diego Union on May 19, 2015, made a request under the California Public Records Act (CPRA) for records relating to the rebates.  That request was directed to the Metropolitan Water District (MWD), a cooperative water wholesaler with 26 utilities, including DWP, as its members.

MWD failed to adhere to the statutory time limits for responding, but on June 29, 2015, did release information to the Union—but with the names and addresses of DWP customers redacted.  The newspaper pressed for particularized information.  DWP on July 31, 2015, brought an action in mandate to block MWD from releasing records pertaining to rebates to approximately 7,800 of its customers. Three other water districts intervened, seeking non-disclosure.

The Union, too, intervened, urging denial of the DWP’s petition. It also filed a cross petition under the CPRA.  Meanwhile, the significance of release of the records intensified.  The Office of City Controller on Nov. 20, 2015 released an audit showing that the program cost more and was less effective than cheaper measures to deal with the drought.

City Controller Ron Galperin, in a letter on that date to the mayor, city attorney, members of the City Council, and “All Angelenos,” reported on an “Audit of DWP Customer-Based Water Conservation Programs,” saying:  “Auditors found that DWP does not adequately prioritize water conservation projects based on which are the most cost effective.  The key component of DWP’s conservation program last year-turf replacement-targeted outdoor water use, which constitutes about half of residential water use.  But evidence suggests that the turf replacement program, called ‘Cash in Your Lawn,’ was largely a gimmick—a device intended to attract attention and publicity.

“It in some ways worked as intended.  By paying more to provide customers an initial opportunity to get involved in water conservation-in hopes that participation and behavior might continue—it had value as an advertising campaign that helped stimulate major public interest in the drought.  But this came at a rather high cost and, arguably at the cost of some fairness.  Aid was distributed Citywide but was most concentrated in the western San Fernando Valley.  As well as ordinary ratepayers, beneficiaries included some affluent households and some private golf courses. One particular contractor benefited handsomely.”

Los Angeles Superior Court Judge James C. Chalfant on Jan. 15, 2016, denied the DWP’s petition and granted that of the Union. Those decisions were not appealed.  The DWP and the three water districts did appeal the attorney fee award against them.  Chalfant’s award of $25,319 against the MWD in connection with the cross-petition, pursuant to a provision in the CPRA, was not in issue in the appeal.

Stratton said that DWP’s action to block release by MWD of records “is not specifically authorized by CPRA, but this District Court of Appeal has permitted non-statutory actions to prevent disclosure of records requested under CPRA, that is reverse-CPRA actions.”

She cited Div. Seven’s 2012 decision in Marken v. Santa Monica-Malibu Unified School District, and explained:  “Such reverse actions have been viewed as necessary to protect the privacy rights of individuals whose personal information may be contained in government records, because CPRA provides no mechanism for notifying such individuals of the requested disclosure and does not specifically authorize actions to prevent disclosure.”

The jurist observed:  “This case highlights many of the issues that have emerged from permitting reverse-CPRA actions, like DWP’s, to prevent disclosure of public records.  The issue most directly implicated in this case, and the only issue we consider on appeal, is the availability of attorney fees in reverse-CPRA actions.”

She declared: “We conclude Union was eligible for attorney fees under CPRA for work on the CPRA cross-petition and for attorney fees under Code of Civil Procedure section 1021.5 for its work opposing the petition for writ of mandate….The trial court did not abuse its discretion in finding Union met the requirements of Code of Civil Procedure section 1021.5 for attorney fees.  Union was the prevailing party and its action resulted in the enforcement of an important right affecting the public interest, conferring a significant benefit on the general public.”

Stratton elaborated: “DWP’s action, if successful, would have established or expanded the ability of utilities to withhold information from the public and curtailed the public’s ability to obtain information on how the DWP, and potentially all public utilities, spends public funds. The expenditure of public funds is a matter of clear public interest….If, as DWP argued, its customers’ privacy rights outweighed the public’s clear and well-established interest in monitoring the expenditure of public funds, it is difficult to imagine when disclosure of customer information could ever be warranted.”

She went on to say: “DWP sought to block the public’s access to records necessary to monitor and assess the use and alleged misuse of public funds, and potentially to shield its customer information from disclosure in all circumstances.  That is sufficient for purposes of Code of Civil Procedure section 1021.5.”

DWP relied on the decision in Marken, which established the recognition of reverse-CPRA actions.  That case, it contended, supports its position that attorney fees may never be awarded in such cases.  There, Presiding Justice Dennis Perluss said that “a requesting party who participates in a reverse-CPRA lawsuit would not be entitled to the recovery of attorney fees, as would be the case if the party had successfully litigated his or her right to access to documents against a public agency.”

Stratton pointed to factual differences between that case and the one at hand, adding: “Further, Marken’s statement about attorney fees was part of the court’s general discussion of the viability of reverse-CPRA actions and so was dicta; no attorney fees were sought in that appeal.”

She did ascribe significance to an April 12, 2018 opinion by this district’s Div. One in Pasadena Police Officers Assn. v. City of Pasadena.  The underlying facts were that a police union sought an order in the trial court barring the public release of a report relating to a police shooting; the Los Angeles Times intervened, seeking the release of the entire report; the Los Angeles Superior Court found the report partially disclosable; the union sought a writ in the Court of Appeal; Div.  One on Sept. 10, 2015, denied the petition and directed that, on remand, disclosure of additional portions be considered; the trial court ordered further disclosures.

The Times then sought $350,422 in attorney fees under the CPRA and the private attorney general statute. It received an award of $45,472, only under the CPRA.  In the 2018 opinion, Div. One, in an opinion by Justice Jeffrey Johnson, reversed the denial of fees under §1021.5, and remanded the case.

DWP maintained that the Pasadena Police Officers Assn. case (“PPOA”) is distinguishable. Stratton responded: “We disagree.  PPOA is quite similar factually to this case. Both PPOA and this appeal involve records related to a matter of public interest; the PPOA reverse-CPRA action was brought by a union representing the interests of its large number of members, and this reverse-CPRA action to prevent disclosure was brought by a public agency, DWP, representing a large number of its customers.”

An Exception to the American Rule: Attorney Fees Under ERISA §502(G)(1)

November 7, 2019

A recent New York Law Journal article by Michael C. Rakower and Melissa Yang of Rakower PLLC in New York, “Attorney Fees Under ERISA §502(G)(1): An Exception to the American Rule,” report on ERISA §502(g)(1).  This federal statute vests courts with discretion to award attorney fees and costs in an action brought by a plan participant, beneficiary or fiduciary.  This article examines the standards courts apply when assessing motions for these discretionary awards.  This article was posted with permission.  The article reads:

The Employee Retirement Income Security Act (ERISA) marks one of those rare instances where Congress chose to depart from the American Rule to grant litigants an opportunity to seek attorney fees. ERISA §502(g)(1) vests courts with discretion to award attorney fees and costs in an action brought by a plan participant, beneficiary or fiduciary.  This article examines the standards courts apply when assessing motions for these discretionary awards.

‘Some Degree of Success on the Merits’

In 2010, the U.S. Supreme Court issued an opinion in Hardt v. Reliance Standard Life Ins. Co., clarifying the standard under ERISA §502(g)(1). 560 U.S. 242 (2010).  A litigant need not be a “prevailing party” to be eligible for a fee award; rather, the litigant must establish “some degree of success on the merits.” Id. at 254-55.  According to the Second Circuit, this is “the sole factor that a court must consider in exercising its discretion.” Donachie v. Liberty Life Assurance Co. of Boston, 745 F.3d 41, 46 (2d Cir. 2014) (emphasis in original).

The “some degree of success on the merits” standard is met when a claimant obtains a “favorable judicial action on the merits.” Scarangella v. Grp. Health, 731 F.3d 146, 152 (2d Cir. 2013).  A summary judgment or trial verdict can, of course, meet this standard, see, e.g., Buckley v. Slocum Dickson Med. Grp., PLLC, 585 Fed. App’x 789, 794 (2d Cir. 2014) (stating employee entitled to seek attorney fees under ERISA §502(g)(1) after prevailing on summary judgment); Toussaint v. JJ Weiser, 648 F.3d 108, 110 (2d Cir. 2011) (acknowledging some degree of success requirement was met when summary judgment was affirmed in favor of the directors of ERISA plan sponsor), as can a favorable out-of-court settlement if it is triggered by court action, see, e.g., Scarangella, 731 F.3d at 154 (citing to Perez v. Westchester Cnty. Dep’t of Corr., 587 F.3d 143, 150-51 (2d Cir. 2009)).  Even a remand to the plan administrator can qualify where it is premised upon a determination that the administrator’s prior assessment of a claim was deficient or rendered in an arbitrary or capricious manner.  See, e.g., Gross v. Sun Life Assurance Co. of Canada, 763 F.3d 73, 79 (1st Cir. 2014); McKay v. Reliance Standard Life Ins. Co., 428 F. App’x 537, 546-47 (6th Cir. 2011); Valentine v. Aetna Life Ins. Co., 2016 WL 4544036, at *4 (E.D.N.Y. Aug. 31, 2016); Delprado v. Sedgwick Claims Mgmt. Servs., No. 1:12-CV-00673 BKS, 2015 WL 1780883, at *41 (N.D.N.Y. April 20, 2015) (concluding plaintiff obtained “some degree of success on the merits” when plaintiff’s claim was remanded back to plan administrator because prior denial of disability benefits was arbitrary and capricious).

In contrast, “trivial success on the merits” or a “purely procedural victory” is insufficient to merit an award of attorney fees. Hardt, 560 U.S. at 255.  Accordingly, obtaining “relief due to the voluntary conduct of another party after minimal litigation” will not warrant a discretionary award. Scarangella, 731 F.3d at 155.

Favorable Slant Toward Plaintiffs

Case law shows that a court’s discretion is guided by Congress’ intent to encourage participants and beneficiaries to enforce their statutory rights under ERISA. Salovaara v. Eckert, 222 F.3d 19, 28 (2d Cir. 2000).  As a result, even though ERISA §502(g)(1) contemplates that an award may be imposed against “either party,” courts have construed attorney fee motions with a “favorable slant towards ERISA plaintiffs … to prevent the chilling of suits brought in good faith … .” Id. (internal citation omitted); see, e.g., Critelli v. Fidelity Nat’l Title Ins. Co. of New York, 554 F. Supp. 2d. 360 (E.D.N.Y. 2008) (declining to award attorney fees to employer because plaintiff did not act in bad faith and a fee award to employer could act as a disincentive to potentially meritorious ERISA actions).  Rarely does a court award attorney fees against a participant or beneficiary; such instances tend to arise when a court not only rules against the claimant, but also deems the action to be frivolous.  See, e.g., Garlock v. Nelson, No. 96-CV-1096(FJS), 1998 WL 315089, at *1 (N.D.N.Y. June 9, 1998) (considering defendant’s application for fees after concluding defendant is entitled to a fee award because participant’s claims under ERISA are frivolous).

(Discretionary) ‘Chambless’ Factors

Upon a finding of “some degree of success on the merits,” a court in New York may (but is not required to) consider five additional factors to determine whether to grant a fee award.  Hardt, 560 U.S. at 255 n.8 (“[A] court may consider the five factors adopted by the Court of Appeals … in deciding whether to award attorney fees.”); Donachie, 745 F.3d at 46 (“Although a court may, without further inquiry, award attorney fees to a plaintiff who has had ‘some degree of success on the merits,’ Hardt also made clear that courts retain discretion to ‘consider [] five [additional] factors … in deciding whether to award attorney’s [sic] fees.”).  These factors, known as the “Chambless Factors,” are set forth in Chambless v. Masters, Mates & Pilots Pension Plan, 815 F.2d 869, 871 (2d Cir. 1987) as follows:

(1) the degree of the offending party’s culpability or bad faith, (2) the ability of the offending party to satisfy an award of attorney’s fees, (3) whether an award of fees would deter other persons from acting similarly under like circumstances, (4) the relative merits of the parties’ positions, and (5) whether the action conferred a common benefit on a group of pension plan participants.

If the court looks to the Chambless Factors, then it must consider all of the factors; it cannot selectively weigh certain factors and disregard others. Donachie, 745 F.3d at 47.  However, a court may grant a fee award after considering all of the Chambless Factors even if all factors do not weigh in favor of the award. Locher v. Unum Life Ins. Co. of Am., 389 F.3d 288, 299 (2d Cir. 2004) (concluding that failure to satisfy fifth Chambless factor does not preclude an award of fees).

Interim Awards

While the majority of litigants seek attorney fees and costs at the conclusion of a litigation, parties who face financial adversity during the course of the litigation may seek an interim award so long as they can satisfy the “some success on the merits” standard.  See, e.g., Pagovich v. Moskowitz, 865 F. Supp. 130, 139 (S.D.N.Y. 1994) (granting interim attorney fees to plaintiff after defendant admitted to liability for some benefits owed to plaintiff under the plan); Aronoff v. Serv. Employees Local 32-BJ AFL-CIO, No. 02-CIV-5386, 2003 WL 1900832, at *2 (S.D.N.Y. April 16, 2003) (acknowledging court’s authority under ERISA to award interim attorney fees but declining to do so under the facts of the case).  However, practically speaking, any litigant contemplating a motion for interim relief should recognize that establishing sufficient success to warrant discretionary relief will likely be more difficult in the middle of the case than at the end.

Recoverable Costs

Under ERISA §502(g)(1), litigants can recover attorney fees and other reasonable out-of-pocket expenses incurred by their attorneys, such as filing fees, service of process fees, courier charges and printing costs.  Algie v. RCA Glob. Commc’ns, 891 F. Supp. 875, 898 n.13 (S.D.N.Y. 1994) (“Section 502(g)(1) of ERISA refers to an award of ‘costs’, but that term apparently covers not only taxable costs under 28 U.S.C. §1920, but also other disbursements that are customarily charged to the client.”); Severstal Wheeling v. WPN, No. 10CIV954LTSGWG, 2016 WL 1611501, at *4 (S.D.N.Y. April 21, 2016); Cohen v. Metro. Life Ins. Co., No. 00 CIV 6112 LTS FM, 2007 WL 4208979, at *2 (S.D.N.Y. Nov. 21, 2007), aff’d in part, 334 F. App’x 375 (2d Cir. 2009); Taaffe v. Life Ins. Co. of N. Am., 769 F. Supp. 2d 530, 544-45 (S.D.N.Y. 2011).  These costs must have been incurred in connection with the prosecution or defense of a lawsuit in court.  Peterson v. Cont’l Cas. Co., 282 F.3d 112, 119 (2d Cir. 2002).  Thus, pre-litigation costs incurred by litigants to exhaust their administrative remedies or to attempt a negotiated settlement are not recoverable.  See Aminoff v. Ally & Gargano, No. 95 CIV. 10535 (MGC), 1996 WL 675789, at *4 (S.D.N.Y. Nov. 21, 1996) (disallowing fee award to plaintiffs who expended resources to settle retirement plan dispute because no litigation was commenced).  However, “fees incurred during an administrative remand ordered by the district court and over which the court retains jurisdiction are authorized by the statute.” Id. at 122.  (“The fact that a court orders additional fact finding or proceedings to occur at the administrative level does not alter the fact that those proceedings are part of the ‘action’ as defined by ERISA.”)

Factors Affecting the Size of the Award

Any fee award under ERISA §502(g)(1) must be reasonable.  In New York, courts generally apply the lodestar method, which multiplies the number of hours reasonably expended in the action by attorneys and paralegals against a reasonable hourly rate for each such timekeeper.  Conners v. Connecticut General Life Ins. Co., No. 98-CV-8522(JSM), 2003 WL 1888726, at *1 (S.D.N.Y. April 15, 2003).  After determining the lodestar, the court may in its discretion deduct from that amount the cost of legal services rendered in connection with unsuccessful aspects of the case. Id. at *2.  In this way, hours expended on failed claims wholly unrelated to the successful ones may be excluded from the fee award. Grant v. Martinez, 973 F.2d 96, (2d Cir. 1992). See also Conners, 2003 WL 1888726, at *2 (defining claims as unrelated if they are based on “‘different claims for relief that are based on different facts and legal theories’”) (quoting Hensley v. Eckerhart, 461 U.S. 424, 434 (1983)).  But if all of the claims are interrelated (i.e., the claims involve a “common core of facts” or are “based on related legal theories”), then the court should “focus on the significance of the overall relief obtained” to determine whether any reduction to the lodestar is warranted.  Conners, 2003 WL 1888726, at *2 (internal quotation marks and citation omitted).  Of course, courts are always free to adjust a lodestar award by comparing it to the size of the plaintiff’s recovery, even if no reduction for unsuccessful claims is warranted.  In doing so, courts discharge their obligation to consider whether “[t]he amount of fees awarded [are] reasonable in relation to the results obtained.” Id.

Aside from the lodestar, courts may use their discretion to award an appropriate sum to further the goals of ERISA.  This seems most apt in the case of fee award to a defendant who successfully defends against a frivolous action. Weighing the deterrent value of a fee award against a plaintiff for filing frivolous claims with the chilling effect that award would have on potential plaintiffs, courts have discretion to grant a defendant an award lower than the lodestar would support.  See, e.g., Christian v. Honeywell Retirement Ben. Plan, No. 13-CV-4144, 2014 WL 1652222, *8 (E.D. Penn. April 24, 2014) (concluding that an award of $10,000 to defendant serves the purpose of protecting pension benefits and deterring conduct at odds with ERISA’s purpose even though defendant incurred approximately $76,779.18 in succeeding on its motion to dismiss).  Courts are also free to adjust the lodestar upward if, for example, a party’s counsel exhibits superior work product and exceeds the expectation of the party and normal levels of competence.  Feinstein v. Saint Luke’s Hosp., No. 10-CV-4050, 2012 WL 4364641, at *6 (E.D. Penn. Sept. 25, 2012) (citing Rode v. Dellarciprete, 892 F.2d 1177, 1184 (3d Cir. 1990).)

Conclusion

ERISA §502(g)(1) offers an exception to the American Rule to encourage participants, beneficiaries and fiduciaries of ERISA-governed plans to vindicate their rights in court.  A court’s discretionary right to grant a fee award under this provision arises when a party achieves “some degree of success on the merits.”  Courts apply a plaintiff-friendly slant to motions for attorney fees in recognition of ERISA’s fundamental purpose, which is to protect employees’ rights.  This approach generally insulates plaintiffs unsuccessful in litigation from the pain of an adverse fee award, but offers a valuable incentive to a party who may have been wrongly denied an applicable benefit.

Reprinted with permission from the October 10, 2019 edition of the New York Law Journal © 2019 ALM Media Properties, LLC. All rights reserved.  Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

Michael C. Rakower and Melissa Yang are partners at Rakower Law PLLC, a boutique commercial litigation firm located in New York City.  www.rakowerlaw.com.