A recent Law 360 story by Celeste Bott, “5th Circ. Says Judge Botched Divvy of $10M Atty Fee Award,” reports that the Fifth Circuit vacated the allocation of $10 million in attorney fees in a class action against SGE Management over an alleged pyramid scheme to resell electricity, saying the lower court relied on “unconsummated or outdated contracts among the attorneys” and didn’t adequately explain its reasoning.
The panel said the district court must elaborate on its reasoning for allocating a $1.5 million share to attorney Scott Clearman, who brought the appeal because he says he is entitled to half of the award. The order isn’t supported with written reasons, especially “given the disparate positions taken by the vexed attorneys, the size of the award and the complexities in weighing the attorneys’ various contribution," the court said.
The district court “explicitly disclaimed” in its order the use of 12 factors laid out in the Fifth Circuit’s 1974 Johnson v. Ga. Highway Express case for determining the reasonableness of attorney fees, but another Fifth Circuit case, In re: High Sulfur Content Gasoline Products Liability Litigation, mandates the use of the Johnson framework in fee allocations, the court said.
“We have little choice but to find that the district court abused its discretion in explicitly disclaiming use of the Johnson factors,” the panel said. “The sole reasoning of record is the recitation that the court, ‘having examined the various agreements, and the spirit behind the documents determine[d] that the last arrangement, even though Scott Clearman did not join in, is fair and equitable.’” Under the High Sulfur precedent, courts are required to do more, the court said.
“Although sympathetic to the difficult task the lawyers gave to the district court, we must vacate the award allocating attorney’s fees and remand for proceedings consistent with this opinion and with due consideration of the Johnson factors,” the panel said. “While nothing forecloses an agreement among all, its absence leaves no choice but to ‘do it by the book.’”
When Clearman initially joined the case, any fee was to be distributed with 75% to Clearman and 25% to attorney Jeffrey Burnett, the first to be retained by two distributors for Stream Energy LLC when they suspected the company’s multi-level marketing program was a pyramid scheme, according to filings in the case. Clearman later partnered with Matthew Prebeg to form Clearman Prebeg LLP. Burnett and Clearman Prebeg were then joined in the litigation by Andrew Kochanowski and Sommers Schwartz PC. A new fee agreement was signed that allocated 60% to Clearman Prebeg, split among its partners, 20% to Sommers and 20% to Burnett.
But at this point, the other attorneys dispute Clearman’s involvement, saying though he remained in charge of the case he struggled with severe substance abuse issues and eventually entered inpatient treatment. When the district court certified the class in 2014, the remaining Clearman Prebeg partners formed a new firm, Prebeg Faucett & Abbott PLLC, and other attorneys on the case retained Goldstein & Russell. A new fee arrangement was signed off on by everyone except Clearman, giving Goldstein & Russell 16% and Burnett 17%, with the remainder distributed among Sommers, Prebeg Faucett & Abbott and Clearman, who would receive about 17%.
It was that final agreement that the lower court deemed fair and equitable. Clearman argues he is entitled to $5 million, though the other lawyers on the case contend he failed to keep adequate time sheets and was asking for an exorbitant hourly rate.