The financial condition of Continental became so precarious that the FDIC entered into an "Assistance Agreement" whereby, in return for a substantial investment of funds, the FDIC acquired controlling interest in the bank and essentially took over its affairs. Pursuant to the agreement, Continental assigned to the FDIC its right to pursue the shareholder derivative claims against the bank officers and Ernst & Whinney. The FDIC was thereafter substituted as plaintiff in the derivative action and hired as its counsel the Chicago firm of Sachnoff Weaver, one of the firms that had been representing Bleier in the derivative action.
Extensive settlement negotiations took place between the plaintiffs (the class and the FDIC) and Continental, the bank officer defendants and their insurance carriers. A settlement was reached and given preliminary approval by me in April 1986. In return for dismissal of the securities fraud claim of the class plaintiffs, Continental paid $ 25 million into a settlement fund for the class. The bank officers had attempted to persuade their insurance carriers to settle plaintiffs' claims, but no agreement could be reached with the carriers. The total amount of director and officer insurance ("D&O") was $ 100 million. The combined claims of the class and the FDIC against the individual defendants greatly exceeded that amount. The individual defendants settled with plaintiffs for the full policy limits and assigned to plaintiffs, in full satisfaction of the settlement, their claims against the D&O carriers for bad faith or negligent refusal to settle within policy limits. Eighty percent of the assignment went to the FDIC and 20 percent to the class. I gave final approval to these settlements on July 25, 1986.
Some of the D&O carriers then a filed declaratory judgment suit against Continental and the bank officers and directors, seeking to avoid liability on their policies. They claimed that the reckless conduct alleged by the class was not within the coverage of their policies and that the settlements with the class and the FDIC were collusive. That case was assigned to Judge Milton I. Shadur of this court. Steinlauf, as class representative, attempted to intervene as a defendant on the ground that the interests of the class would not be adequately represented by the FDIC and the individual defendants. Judge Shadur denied leave to intervene, holding that the FDIC and the officer and director defendants "have the incentive and the obligation to make all the relevant legal arguments that Steinlauf would make if he were a defendant. His interest in establishing insurance coverage for the class claims will be adequately represented." Nat. U. Fire Ins. Co. v. Continental Illinois Corp., 113 F.R.D. 532, 538 (N.D. Ill. 1986).
The claims against the D&O carriers were settled at various times during 1987 and 1988, with the class plaintiffs receiving a total of $ 13 million on their $ 20 million assignment. The class has therefore received a total of $ 38 million in settlement payments, and that amount earned another $ 7 million in interest by the end of 1989.
The remaining defendant was Ernst & Whinney. The parties were unable to settle, and I presided over an 18-week jury trial in 1987. The class endeavored to persuade the jury that Ernst & Whinney had been reckless in its audits and its certifications of Continental financial statements, resulting in an artificial inflation of the purchase prices of Continental stock during the class period. The FDIC contended that Ernst & Whinney had been negligent in its audits of Continental and in failing to advise Continental's officers and directors of the dangers lurking in the energy loan portfolio. The jury returned verdicts in favor of Ernst & Whinney on both claims. No appeal was taken.
FEE PETITION OF CLASS COUNSEL
The court's basis for awarding fees in this case is the familiar "common fund" theory. The services of counsel have contributed to the creation of the settlement fund which will be distributed to the class, and it is equitable that counsel be compensated from the fund for those services. The problem is how to value those services. From the outset of this case, the court and counsel have proceeded on the premise that the Lindy "lodestar" method would be used. No other method was suggested by counsel, nor did the case law at the time suggest that an alternative would be permissible. Under the lodestar method, the first step is to determine "the amount to which attorneys would be entitled on the basis of an hourly rate of compensation applied to the hours worked." Lindy Bros. Bldrs., Inc. of Phila. v. American R. & S. San. Corp., 487 F.2d 161, 167 (3rd Cir. 1973). The premise of this approach is that "the value of an attorney's time generally is reflected in his normal billing rate." Id.
Petitioners have grouped their services into 284 categories. Category No. 1, for instance, is "Pre-Complaint Investigation." Category No. 2 is "Preparation of Complaint." Each category is documented by chronological time entries indicating services performed in that category by each attorney and paralegal over the life of the case. These time sheets are in a 23-volume appendix entitled "Statement of Services." Appendix I contains categories No. 1 through No. 16; Appendix II contains No. 17 through No. 26; and so on.
The Statement of Services has also been separated into three stages. Stage One covers the period through May 31, 1986, when the first interim fee award was made. Stage Two covers June 1986 through July 1988, when the second interim fee award was made. Stage Three covers services rendered subsequent to July 31, 1988. These interim payments were 50 percent of the hourly charges claimed by counsel for each stage. I made no determination as to whether the full amounts claimed were justified and expressly reserved that question until the conclusion of the case.
Petitioners argue they should be paid for their work on the Ernst & Whinney claim, even though the trial resulted in a loss. They urge that what they learned in the Ernst & Whinney trial was useful in their pursuit of the D&O carriers and was instrumental in bringing about the D&O settlements. The argument is strained,
but, more than that, it is unnecessary. There is no question that petitioners should be paid for their work on the Ernst & Whinney claim. The class was advised that the case against Ernst & Whinney would be pursued following the settlement with the bank and the individual defendants, and no class member objected. Had the claim been successful, the class would have recovered an amount from Ernst & Whinney perhaps in excess of that obtained in the settlements with the other defendants. (I do not recall what amount class counsel requested of the jury in final argument, but at the time of the settlement with Continental and the individual defendants in July 1982, counsel estimated that the class damages were between $ 101 million and $ 116 million. Statement in Support of the Estimate of Class Damages at 1.) The claim against Ernst & Whinney was a plausible one, and it was clearly worth pursuing. Although the class did not recover, it had the benefit of a full scale effort. It would be unjust to deny class counsel reasonable compensation for making that effort.
In the final petition, counsel claim compensation for 23,930 hours of attorney and paralegal time in Stage One, 17,450 hours in Stage Two, and 575 hours for Stage Three. They ask for compensation based on their "lodestars" (hours x billing rates) and, in addition, for "multipliers" of the lodestars for all Stage One work and for the D&O work in Stages Two and Three.
It will be useful to analyze the petition in terms of the number of hours, the hourly rates, and finally, the question of multipliers.
A. The Number of Hours
In the Revised Memorandum of Class Plaintiffs' Counsel in Support of a Final Award of Attorneys' Fees and Reimbursement of Expenses ("Memorandum"), counsel acknowledge the troublesome nature of hourly charges:
The primary defect of the lodestar approach is its emphasis on the quantity of hours expended as a basis for arriving at a reasonable attorneys' fee. Because of this emphasis on hours worked, the lodestar methodology penalizes efficiency and creates a disincentive to resolve cases at the earliest appropriate opportunity. See Third Circuit Report, 108 F.R.D. at 248; Kirchoff v. Flynn, 786 F.2d 320, 324 (7th Cir. 1986) ("An hourly fee creates an incentive to run up hours, to do too much work in relation to the stakes in the case."). (footnote omitted).
Memorandum at 23 (footnote omitted). Petitioners repeatedly invite me to deemphasize the matter of hours and consider the fee request in light of the percentage it represents of the total amount recovered by the class. They point out that the $ 9 million they are requesting in fees and interest would represent "only" 22 percent of the settlement fund.
There are two problems with the percentage approach. First, this is not the basis on which the representation in this case was undertaken. Counsel, the court, and the members of the class have all understood from the outset that compensation in this case would be on an hourly basis. It is too late to change the rules. Secondly, the percentage approach has its own problems. Lindy itself was a rejection of what the reviewing court believed was an excessive percentage fee; the case was remanded for a determination of the appropriate fee under the "lodestar" method, which the court thought was "the only reasonably objective basis for valuing an attorney's services." 487 F.2d at 167. There is nothing about 22 percent that strikes me as more reasonable than an amount properly computed on a time basis with appropriate adjustments.
The settling defendants have made their payments into the settlement fund and have no further interest in how the money is disbursed. No member of the class has filed an objection to the fee petition. The situation before the court is well described by the Third Circuit Task Force on Court Awarded Attorney Fees:
Another difference between fund-in-court and statutory fee cases is that in the former category there is a greater need for the judge to act as a fiduciary for the beneficiaries (who are paying the fee), particularly in the class action situation, because few, if any, of the action's beneficiaries actually are before the court at the time the fees are set. Judicial scrutiny is necessary inasmuch as the fee will be paid out of the fund established by the litigation, in which the defendant no longer has any interest, and the plaintiff's attorney's financial interests conflict with those of the fund beneficiaries. As a result, there is no adversary process that can be relied upon in the setting of a reasonable fee.