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Category: Prevailing Party Issues

Judge Tosses Suit Seeking Coverage of Defense Fees

November 23, 2020

A recent Law 360 story by Rachel O’Brien, “Judge Nixes Suit For Crypto Co. Investor’s $728K Atty Fees,” reports that a New York federal judge tossed a lawsuit by an alleged pump-and-dump scheme mastermind asking for his attorney fees to be paid by a cryptocurrency company involved in the alleged scheme, ordering the man to pay the company's fees instead.  While Barry Honig and his business GRQ Consultants Inc. point to indemnification clauses in agreements with Riot Blockchain as proof that his legal fees should be paid, U.S. District Judge Naomi Reice Buchwald said the clauses say the opposite.

Honig, at one time the largest shareholder in Riot Blockchain, spearheaded a $27 million pump-and-dump scheme involving 10 individuals and 10 associated corporate entities, the U.S. Securities and Exchange Commission alleged in September 2018.  Honig and others, including former Teva Pharmaceutical Industries Ltd. chairman Phillip Frost and Riot Blockchain CEO John O'Rourke, manipulated stock prices in three microcap companies and left investors holding "virtually worthless shares," the SEC said.

In July 2019, Honig settled the SEC claims without admitted any wrongdoing, submitting to an injunction barring him from future violations of federal securities laws, a penny stock ban and further restrictions.  Honig was named in several other suits, including in five shareholder derivative actions which alleged Riot, its directors and officers and Honig violated securities laws, and that Honig bought stock from Riot to gain "control" over the company so he could violate the securities laws.

A February 2018 class action from shareholder Creighton Takata in New Jersey federal court alleged that Honig's purchase of securities was part of a "fraudulent scheme consisting of misrepresentations, omissions, and actions that deceived the investing public in violation of securities laws."  He called those allegations "a house of cards" in his October 2019 motion to dismiss, which was granted in April because the shareholders didn't show how the defendants violated anti-fraud provisions of federal securities law, the judge said then.

In the case tossed, Honig had argued that the security purchase agreements he entered into with Riot in 2017 to buy convertible promissory notes and common stock purchase warrants guaranteed that if Honig was a defendant in a lawsuit, Riot would pay his legal fees.  The indemnification clauses in the agreements, Honig argued in the April suit, meant Riot must pay the $728,000 attorney fees he incurred fighting securities fraud allegations by the SEC and in class actions.

Riot argued that Honig's claim fails because Riot isn't obligated to pay when the litigation is connected with actions "based upon ... any violations by [Honig] of securities laws or any conduct by [Honig] which constitutes fraud, gross negligence, willful misconduct or malfeasance by [Honig]."  But Honig said the carveout in the indemnification clause only applies to actual securities violations, and since some of the lawsuits are ongoing, he's entitled to advancement of legal costs.

Judge Reice Buchwald agreed with Riot that "the allegations of the underlying action — not the merits of the action — govern Riot's obligations."  Since it's the nature of the allegations that trigger the obligation to indemnify, the clauses clearly side with Riot, Judge Reice Buchwald said.  "If there were any ambiguity, which there is not, about when the obligation to indemnify is determined (and thus whether allegations or merits control), the next sentence of Section 4.8 confirms the court's conclusion," she said.  She pointed to the section that states if an action is brought wherein the indemnity clause might be implemented, Honig must notify Riot in writing and Riot "shall have the right to assume the defense thereof with counsel of its own choosing reasonably acceptable to [Honig]."

"The logic of Section 4.8's structure is apparent," the judge said.  "The first sentence informs the parties as to whether indemnification is required.  If and when those conditions are satisfied, Honig would notify Riot, which then has the option to assume the defense.  The provision presupposes that the parties can determine, prior to that notice, whether an obligation to indemnify exists."

Judge Reice Buchwald also granted Riot's motion that Honig pay its reasonable attorney fees for this action.  Scott Carlton of Paul Hastings LLP, counsel for Riot Blockchain, told Law360 in a statement, "We are pleased with the court's careful consideration in this matter, including the awarding of attorneys' fees for Riot Blockchain as the prevailing party."

Pre-Suit Demand Can’t Serve as ‘Catalyst’ in Justifying Fee Award

October 6, 2020

A recent Metropolitan News story, “Pre-Suit Demand Can’t Serve As ‘Catalyst’ For Public Benefit, Justifying Fee Award,” reports that an attorney fee award may not be made based on a pre-litigation demand having been the “catalyst” for bringing about alterations to a public accommodation which caused it to be accessible to persons in wheelchairs, Div. One of the First District Court of Appeal held.

Richard Skaff, who is wheelchair bound, sued the Rio Nido Roadhouse in Sonoma County, owned by Lowbrau, LLC, for injunctive relief and damages based on his inability to gain access to the facility on the night of Oct. 18, 2012.  However, that was before he complained to the owner, who was in the process of effecting renovations which provided access to the handicapped when suit was filed in 2013, with the work having been completed by the time of trial in 2017.

Skaff sued under Health and Safety Code §19955 et seq., pertaining to accessibility of public accommodations to the handicapped, and the Unruh Civil Rights Act. Civil Code §55 provides that where a suit is brought under §19955, “[t]he prevailing party in the action shall be entitled to recover reasonable attorney’s fees.  Sonoma Superior Court Judge Allan Hardcastle ruled against Skaff on the Unruh claim, finding there was no access barrier that needed to be remediated.  He held in his favor under §19955, however, awarding Skaff $242,672 in attorney fees and costs.

Hardcastle reasoned that the §19955 claim “would have entitled him to obtain injunctive relief for all non-compliant conditions at the Rio Nido Roadhouse relative to his disability” had they not already been remediated, but since they had been, he “already obtained all the injunctive relief he sought in his pre-litigation correspondences and in his complaint,” rendering him the prevailing party. 

Justice Gabriel P. Sanchez wrote the opinion reversing the judgment on the §19955 cause of action and the fee award. He wrote: “It is axiomatic that plaintiff cannot prevail on a cause of action in which no violation of law was ever demonstrated or found.  Nor is the catalyst theory available when a claim lacks legal merit.  That a pre-litigation demand may have spurred action that resulted in positive societal benefit is not reason alone to award attorney fees under the Civil Code.”

Sanchez said the catalyst theory originated in connection with the private attorney general statute, Code of Civil Procedure §1021.5, but has been applied since 2010 to attorney fee awards under Civil Code §55.  However, he pointed out, the theory “requires a causal connection between the plaintiff’s lawsuit and the relief obtained.”  The jurist said the pre-litigation demand, not the lawsuit, prompted the remediation and, in any event, remediation was not required under §19955 which requires remediation only where certain other repairs or alterations were made—which weren’t.

Sanchez set forth: “Plaintiff cannot be deemed the prevailing party because no evidence was adduced at trial establishing a violation or potential violation of section 19955.  Nor can plaintiff be awarded his attorney fees under a catalyst theory because the claim on which it is based was objectively without legal merit.  While Lowbrau accomplished all the remediation plaintiff sought in his pre-litigation demands, plaintiff concedes that none of that remediation was required by section 19955.  The fee award must therefore be reversed.”

Court Resolves $4M Attorney Fee Dispute with Law Firms

October 1, 2020

A recent Law.com story by Raychel Lean, “Court Chides Morgan & Morgan as Holland & Knight Prevails in $4 Million Attorney Fee Dispute,” reports that a federal breach of contract lawsuit which saw Holland & Knight litigators take on Morgan & Morgan came to a head when U.S. District Judge K. Michael Moore awarded more than $4.1 million in fees and costs to one side and just $550,000 to the other.  Now more than seven years in, the litigation itself has proved more costly for the plaintiffs than the actual judgment it obtained.

The dispute began in 2013, when the plaintiffs — Miami construction companies Architectural Ingenieria Siglo XXI LLC and Sun Land & RGITC LLC — sued over a failed irrigation construction contract worth $51.8 million.  Their lawsuit accused the Dominican Republic and its water resource agency, Instituto Nacional De Recursos Hidraulicos, or INDRHI, of breaching its contract by terminating the deal under force majeure, citing financial hardship.

And though the defendants were initially slapped with a $50 million default judgment for failing to respond, that was reversed when it retained Holland & Knight attorneys, who argued service hadn’t been properly handled.  Then, an eight-day bench trial resulted in a comparatively low $576,000 judgment against the water resource agency, while the Dominican Republic was absolved of liability.

Both sides moved for prevailing party fees and costs.  And after a report from U.S. Magistrate Judge Honorable Chris M. McAliley, Moore found plaintiff AIS was entitled to fees from the water resource agency; the Dominican Republic was entitled to fees from both plaintiffs; and the water resource agency was entitled to fees from plaintiff Sun Land.  In the order, Moore adopted McAliley’s findings on how much each side could recover.  And it was good news for defense attorneys Gregory Baldwin, Eduardo Ramos and Ilene Pabian of Holland & Knight’s Miami office, who’d sought more than $3.6 million in fees, along with $629,450 in non-taxable costs and $33,000 in taxable costs.

Though the plaintiffs argued those numbers were unreasonably high and moved for a 50% to 75% reduction, Moore approved the magistrate’s 15% haircut instead, shaving $144,600 off their fees.  It was a satisfying result for a case that Baldwin said “took a lot of patience, a lot of dedication and a great deal of time.”  “We’re very pleased and satisfied with the result.  We think, overall, it’s a just and fair result,” Baldwin said.  “The Dominican Republic was completely vindicated, and INDRHI received a damages award against it in an amount that we think was reasonable.”

But the ruling was bad news for plaintiff AIS, which sought $2.7 million in fees under a 2.5x contingency fee multiplier, and asked for $438,203 in nontaxable costs.  But Moore only awarded about $248,000 in fees and $302,000 in nontaxable costs — thanks to a bruising 75% reduction in fees recommended by the magistrate.

McAiley’s report levied some criticism at Morgan & Morgan, which “substantially frustrated the court’s task of working through the issues.”  The report said the firm caused extra work and delay by failing to initially disclose certain fee information, demonstrated a “lack of care” in its filings, kept unreliable records and had mixed some non-recoverable appellate costs up with trial costs.

“Obvious examples include the several entries where single timekeepers claim to have worked nearly, or more than, 24 hours in one day,” McAiley’s report said. “For instance, Morgan & Morgan maintains that one of its attorneys worked 32.7 hours in one day.”  McAiley denied Morgan & Morgan’s request for a fee multiplier and reduced its fees by 10% for failure to keep proper time records, 15% for block billing and 50% after factoring in the plaintiffs’ “very limited success” in the underlying case.  But they argued the reduction was “too much given the significant amount of work it took to litigate this case,” according to the ruling.

Moore said he wasn’t swayed by the plaintiff’s objections.  “Here, in objecting to the 75% fee reduction, plaintiffs fail to identify any factual finding in the R&R to which plaintiffs object,” Moore’s ruling said. “Rather, plaintiffs take issue with Magistrate Judge McAliley’s reasoning by arguing not that plaintiffs accurately recorded their hours worked and avoided block billing, but that the hours requested were reasonable and their success was greater in context than Magistrate Judge McAliley found it to be.”

The plaintiffs team also requested $237,400 to cover work performed by GrayRobinson.  But Moore rejected that, accepting McAiley’s finding that the retainer agreement said Morgan & Morgan was obligated to pay GrayRobinson, not that the client was

Second Circuit Rejects Fee Request After Landmark SCOTUS Ruling

September 30, 2020

A recent Connecticut Law Tribune story by Tom McParland, “2nd Circuit Blocks Attorney Fees for Troopers Who Recovered Union Dues After Landmark SCOTUS Ruling,” reports that a Manhattan-based federal appeals court rejected an appeal from a group of Connecticut state troopers who petitioned for attorney fees after securing a refund of collective bargaining dues in the wake of the U.S. Supreme Court’s landmark Janus decision, finding that it lacked jurisdiction to determine if they were “prevailing parties” to the litigation.

The ruling, from a three-judge panel of the U.S. Court of Appeals for the Second Circuit, left in place, for now, a district court’s ruling that the case was moot because the Connecticut State Police Union had refunded the current and former officers the full amount they had paid into collective bargaining, plus interest.  In a six-page summary order, the Second Circuit said the lower court’s ruling, which dismissed the case without prejudice, was not a final judgment that could be appealed, and noted that more litigation was likely in the U.S. District Court for the District of Connecticut.

“Having reviewed the record, we find that there has been no final, appealable judgment entered in the district court.  Therefore, we do not have jurisdiction over this appeal and must remand to the district court for further proceedings,” the panel wrote.

The plaintiffs, who declined to join the union, filed their lawsuit before the Supreme Court held in Janus that the First Amendment bars public employers from withholding agency fees from workers who opt out of a collective bargaining union.  Following the Janus decision, the union stopped collecting fees, and eventually provided a full refund after the officers moved for summary judgment.

U.S. District Judge Victor A. Bolden denied the motion as moot, and later found that the plaintiffs did not qualify as “prevailing parties” to the litigation.  Though the case was “administratively closed,” it did allow the plaintiffs to petition the court for post-judgment attorney fees and costs.

The Second Circuit panel said that its jurisdiction was limited, with few exceptions, to appeals from final judgments by a district court.  The administrative closure, however, did not meet that threshold, and the judges said Bolden would still need to rule on the plaintiffs’ motion for declaratory judgment on remand.  “In short, we see no indication that a final order has been entered in this case,” the court said.

Attorney Fees Under CA Trade Secrets Act Belong to Attorney, Not Client

September 16, 2020

A recent Metropolitan News-Enterprise story, “Attorney Fees Under Trade Secrets Act Belong to Attorney, Not Client—C.A.,” reports that attorney fees awarded to a “prevailing party” under the California Uniform Trade Secrets Act belong to the attorney and not the attorney’s client absent an enforceable agreement providing otherwise, the Third District Court of Appeal held.  The opinion by Acting Presiding Justice Coleman Blease affirms a judgment by Sacramento Superior Court Judge Alan G. Perkins who determined that the law firm of Porter Scott, P.C. was entitled to the attorney fees paid by the opposing party in litigation in which the firm successfully represented defendant Johnson Group Staffing Company.

The amount that was awarded initially, pursuant to Civil Code §3426.4, was $735,781.27; appeals ensued and, when paid, the fees had expanded to $917,811.48; after Perkins deducted sums which the Johnson Group had paid to Porter Scott, the remainder was $827,938.17, to which the judge added 90 percent of the interest that accrued while the money was in a blocked account.  Blease pointed to the California Supreme Court’s 2001 decision in Flannery v. Prentice.  The issue was whether the client or her former lawyers and their firms had entitlement to attorney fees that were awarded under Government Code §12900, a portion of the California Fair Employment and Housing Act.

Then-Justice Kathryn Werdegar (now retired) wrote, over the lone dissent by then-Justice Joyce Kennard (also retired): “[W]e conclude that attorney fees awarded pursuant to section 12965 (exceeding fees already paid) belong, absent an enforceable agreement to the contrary, to the attorneys who labored to earn them.”

Blease declared in yesterday’s opinion: “We thus conclude that attorney fees awarded under section 3426.4 (exceeding fees the client already paid) belong to the attorneys who labored to earn them, absent an enforceable agreement to the contrary.”

He went on to say: “Reading section 3426.4 to vest awarded ‘attorney’s fees’ in counsel would be consistent with the ordinary view that attorney fees compensate attorneys, not litigants… Reading the statute to vest fee awards in litigants, on the other hand, would at times stray from that ordinary understanding of attorney fees.”

The Johnson Group argued that Porter Scott had agreed to forego an award by consenting, in writing, to forfeit its entitlement to the past-due amount of $92,845.86, except for $25,000 of that amount, and to provide pro bono representation.  Blease noted that a footnote in the agreement provides: “Should the Johnson Group or Chris Johnson be awarded fees in the future based on Porter Scott’s underlying representation, all fees shall be reimburseable [sic] at that point and this waiver shall not apply.”

Blease added: “[A]s the Flannery court recognized, even attorneys who perform services pro bono may obtain ‘reasonable’ attorney fees under a fee-shifting statute.”

Five policies discussed by the Flannery court in support of such fees belonging to attorneys and not litigants were: 1) to encourage representation of legitimate FEHA claims and discourage frivolous suits; 2) to avoid unjust enrichment where an attorney had not been paid for services rendered; 3) to ensure fairness that the losing party pays only fees incurred and not a punitive penalty; 4) to avoid attorney fee-splitting; and 5) to avoid wrongly punishing attorneys who fail to secure written fee agreements.