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KENNEDY v. NICASTRO

United States District Court, Northern District of Illinois, E. D


August 19, 1982

EILEEN KENNEDY, ET AL., ETC., PLAINTIFFS,
v.
LOUIS J. NICASTRO, ET AL., DEFENDANTS.

The opinion of the court was delivered by: Shadur, District Judge.

MEMORANDUM OPINION AND ORDER

This action, like the world in T.S. Eliot's The Hollow Man, has ended "not with a bang but a whimper." Plaintiffs have never generated a complaint that has survived a motion to dismiss. Under the agreed-upon settlement, which this Court approved at the scheduled hearing August 9, 1982, plaintiffs' counsel have the right to seek an attorneys' fee award for services rendered not only in this action but in a group of related actions*fn1 —not one of which has been successful on the merits.

Nonetheless plaintiffs' counsel argue plaintiffs are "prevailing parties" in the sense necessary for an allowance of fees. In that respect they have pointed to three things (P1. Mem. 14):*fn2

      1. Settlement has produced a $150,000 cash fund to
    "satisfy all of petitioners' fee requests which
    might otherwise be taxable to Xcor."

      2. Louis Nicastro ("Nicastro"), James Hughes
    ("Hughes") and William O'Brien ("O'Brien"), who were
    respectively Xcor's Chief Executive Officer, Chief
    Operating Officer and Chief Financial Officer when
    this action was filed, have been "removed and
    replaced as Xcor's chief officers."

      3. Xcor has created an independent Special
    Committee that "can now review the entire situation
    and take any action it finds appropriate, including
    continuation of these actions by Xcor itself."

Xcor and the Cash Fund

It is true that the $150,000 cash fund, available for payment of fees if and to the extent this Court awards them, is being put up by officer-director defendants and not by Xcor. That does not however make plaintiffs "prevailing parties" except through an impermissible kind of bootstrapping.

Lawsuits can hardly be viewed as successful from the plaintiffs' perspective if their principal result is to generate not any recovery for plaintiffs, but rather funds out of which plaintiffs' lawyers get paid. Xcor itself laid no claim to the fund under the settlement agreement. It was only in response to this Court's direct inquiry that the parties acknowledged that if the Court so determined, the unawarded portion of the $150,000 fund could (as in this Court's view it most logically should) go into the corporate coffers. And even on that score we are confronted with the anomaly that the more that factor is viewed as making plaintiffs "prevailing parties," the more could presumably be awarded as attorneys' fees, and the less would remain for Xcor's shareholders—thus making plaintiffs less viewable as "prevailing parties."

In the determination of "prevailing parties," then, generation of the cash fund is not really a factor unless other significant factors are also present that independently make plaintiffs prevailing parties. At most the fund provides a sort of self-fulfilling self-justification that, unless plaintiffs' counsel are successful on their other arguments, cannot be given real weight.*fn3

                        "Removal" of the Challenged
                               Xcor Officers

Defendants' response to plaintiffs' fee application is very brief, addressing not all what defendants term "at best [plaintiffs'] exercise in revisionist history" (Def. Mem. 1)*fn4 They do however challenge the contention that Messrs. Nicastro, Hughes and O'Brien were "removed" from their offices. Instead defendants say (id. at 2-3):

    None of these executives was "removed" from their
    Xcor positions. None of these executives was
    "removed" or terminated by Xcor as a result of this
    litigation or otherwise. Messrs. Hughes and O'Brien
    voluntarily resigned as Xcor's President and Chief
    Operating Officer and Executive Vice
    President-Finance respectively, and thereafter
    accepted other positions with Xcor; both continue as
    directors of Xcor. Mr. Nicastro voluntarily resigned
    as an officer and director of Xcor, to enable him to
    undertake the position as President, Chief Executive
    Officer and Chairman of the Board of another public
    company. None of these executive resignations was
    stimulated or caused by the instant litigation.

At the Court's request during the hearing on the settlement, defendants agreed to elaborate on that assertion. Appendix 1 to this opinion is the letter counsel then filed for that purpose. Plaintiffs' counsel responded at the hearing that rather than committing time and expense to further hearings, they desired the Court to make its own determination from the opposing contentions before it and such inferences as it deemed reasonable.

Nonetheless plaintiffs' counsel has since dealt with that subject in the final submission referred to in n. 2. Separating fact from argument in that submission, it appears that Appendix 1 is entirely accurate, subject only to the following possible additions:

      1. Mr. Hughes was 46 and Mr. O'Brien 45 in
    September 1980.

      2. Since September 1980 no Xcor mergers or
    acquisitions have taken place.

Without the factual hearing none of the parties wants to have, there is no predicate here for determining whether or not the departure of Mr. Nicastro, and the internal shifting of responsibilities of Messrs. Hughes and O'Brien, were tantamount to removal. In its practice of law this Court has represented major corporations and is of course familiar with the phenomenon of easing an executive out (or kicking an executive upstairs) while the corporation provides a sanitized cover story. But that may or may not have occurred here. Plaintiffs' counsel asks the Court to indulge in speculation not fact.

Unless corporate benefit can be found from this litigation, no fees are properly allowable to plaintiffs' counsel. Given the lack of facts submitted to it, at most this Court can view plaintiffs as having been minimally successful so as to permit some fee allowance. Based on the history of the litigation known to this Court, it would be a gross exaggeration to call them "prevailing parties" in any meaningful sense.

Xcor's Special Committee

In its report to the Court regarding the proposed settlement, the Special Committee advised that based on its review:

      1. It had concluded "that the transactions
    challenged in this action were the consequence of
    the exercise of sound business judgment by members
    of [Xcor's] management and its Board of Directors
    based upon circumstances existing at the time of
    said transactions."

      2. In light of all the facts, including its
    "analysis of the serious financial impact and burden
    of continued litigation on [Xcor] its business
    judgment was that the settlement was in the best
    interests of Xcor and its shareholders."

      3. If however the settlement were disapproved by
    this Court, it had concluded that Xcor "should
    continue to defend the plaintiffs' action and is
    obligated to continue paying the costs of defense of
    the action on behalf of the individual
    officer-director defendants as well as its own
    costs."

Although the effect of the settlement was that this Court was not ultimately called to rule on the merits of this litigation, the Special Committee's expression of views is consistent with the Court's sense of the litigation from its series of rulings on the pleadings. In any case the litigation is now terminated, and mere creation of the Special Committee so that it could consider the merits—a consideration that led to a conclusion adverse to the plaintiffs—must also be regarded as at best a limited "benefit" to Xcor.

Allowance of Fees

In sum then plaintiffs can be viewed as "prevailing parties" in only a very narrow sense. In that respect this case is strikingly and unfortunately parallel to Zilker v. Klein, 540 F. Supp. 1196 (N.D. III. 1982), except that (1) the degree of plaintiffs' "success" here is well down the scale from that in Zilker and (2) the waste motion here, in terms of expenditure of lawyers' time to no constructive end, has been enormous. No objective criteria are of real assistance in establishing the proper fee award in this case, 5 but in the Court's best judgment the allowable amount can be no more than 15% of the claimed "lodestar" figure of $223,951.25, or the sum of $33,592.69.*fn6 In addition, counsel are allowed reimbursement of the out-of-pocket expenses of $11,082.91 set forth in the original application, plus $476.50 expended by Abraham Goldman to meet with the Special Committee (as reflected in the most recent supplemental-submission).

Conclusion

Of the $150,000 fund:

      1. $45,152.10 shall be paid to plaintiffs' counsel
    (who may divide that award as they deem
    appropriate).

2. $104,847.90 shall be paid to Xcor.

If and to the extent the escrowed amount has produced any income, such income shall be divided ratably between the two payments.

APPENDIX

MARTEN C. BARELL               GOLENBOCK AND BARELL               EDWARD H. DIETRICH
JUSTIN M. GOLENBOCK              645 FIFTH AVENUE                 GERALD W. MCFARREN
SEYMOUR KLEINMAN               NEW YORK, N.Y. 10022               RONALD G. TODD
DONALD D. SHACK                                                   MANUEL W. GOTTLIEB
LEONARD W. WAGMAN                                                 PAUL A. BATISTA
ARTHUR M. HANDLER                   212-935-9800                  HARRIET N. COHEN
STEVEN ft. FRANKEL                 CABLE "GOLEGAL"                MICHAEL M. MEADVIN
ARTHUR C. SILVERMAN               TWX 710-581-3956                ALAN D. SCHEINKMAN
CHARLES ZALAZNICK                                                 WILLIAM NATBONY
PETER ROTHENBERG                                                  RODNEY A. BROWN
JEFFREY N. SIEGEL                                                 SUSAN L. ROBBINS
MICHAEL A. LEVIN                                                  GERI S. KRAUSS
MICHAEL C. SILBERBERG                                             LILLIAN S. WEIGERT
H. JOSEPH MELLO                                                   GARY N. HOROWITZ
STEPHEN M. RATHKOPF                                               HAROLD M. HOFFMAN
CHARLES F. CRAMES                                                 ADAM KIMMELL
RONALD S. KATZ                                                    DEAN ROISTON
RICHARD J. KANE                                                   PAMELA F. ANSARY
ROBERTS. GOODMAN                                                  JERRY GONTOWNIK
DAVID J. ADLER                                                    BRUCE P. MEVERSON
                                                                  DANIEL C. VENET
NORMAN J. MENELL                            August 10, 1982       BARBARA A. SHAPIRO
JORGE L. BATISTA                                                  TERRI A. SHERMAN
  COUNSEL                                                         ROBERT M. KAPLAN
            EXPRESS MAIL                                JASON I. BITSKY
                                                                  TIMOTHY P. DILLON
            Hon. Milton I. Shadur                                 AMY E. LORBER
            United States District Judge
            United States Courthouse
            219 South Dearborn Street
            Chicago, Illinois 60604

      Re: Kennedy, et al. v. Nicastro, et al.
          (Civil Action No. 2820)

Dear Judge Shadur:

At your request, I am writing to provide you with the following information:

        1. James J. Hughes was the President of Xcor
      International, Inc. (the "Corporation") from July
      1979 until he resigned in September 1980 and Chief
      Operating Officer from April 1977 until his
      resignation in September 1980. Mr. Hughes was
      elected Vice Chairman of the Board of Directors in
      September 1980, and continues in that position to
      date.

        2. William P. O'Brien served as Executive Vice
      President—Finance from October 1975 until he
      resigned in September 1980 and as Chief Financial
      Officer from April 1977 until his resignation in
      September 1980, when he was elected Executive Vice
      President—Mergers and Acquisitions. He
      continues to serve in that position to date and
      also continues to serve as a director of the
      Corporation.

        3. Louis J. Nicastro served as Chairman of the
      Board and Chief Executive Officer of the
      Corporation from January 1972 to March 1981. On
      March 5, 1981 Mr. Nicastro resigned as an officer
      of the Corporation and, on July 27, 1981, resigned
      as a director of the Corporation and Chairman of
      the Finance Committee. Mr. Nicastro resigned in

APPENDIX—Continued

GOLENBOCK AND BARELL

Hon. Milton I. Shadur                            August 10, 1982

order to devote his full time to service as Chairman of the Board of Directors and Chief Executive Officer of Williams Electronics, Inc., a public company, the securities of which are listed on the New York Stock Exchange.

In accordance with your directions at the hearing on August 9, 1982, a proposed form of Final Judgment and Order will be filed with the Court shortly.

Respectfully yours,

Arthur M. Handler

AMH/ls

cc: Abraham N. Goldman, Esq. Reuben L. Hedlund, Esq. Norman E. Goldman, Esq.


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