Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-13-56903/USCOURTS-ca9-13-56903-0/pdf.json

Parties Involved:
China Electric Motor, Inc.
Appellee
Phillip Kempisty
Appellee
Kempsity & Company, CPAs, P.C.
Appellee
MaloneBailey LLP
Appellee
Mike McGee
Appellant
Richard Rappaport
Appellee
Roth Capital Partners, LLC
Appellee
Robert Stanger

WestPark Capital, Inc.
Appellee

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

ROBERT STANGER, Individually and

on behalf of all others similarly

situated,

Plaintiff,

and

MIKE MCGEE, Individually and on

behalf of all others similarly

situated,

Plaintiff-Appellant,

v.

CHINA ELECTRIC MOTOR, INC.;

WESTPARK CAPITAL, INC.; ROTH

CAPITAL PARTNERS, LLC; RICHARD

RAPPAPORT; PHILLIP KEMPISTY;

KEMPSITY & COMPANY, CPAS, P.C.;

MALONEBAILEY LLP,

Defendants-Appellees.

No. 13-56903

D.C. No.

2:11-cv-02794-

R-AGR

OPINION

Appeal from the United States District Court

for the Central District of California

Manuel L. Real, District Judge, Presiding

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2 MCGEE V. CHINA ELECTRIC MOTOR

Submitted December 11, 2015*

Pasadena, California

Filed January 15, 2016

Before: Harry Pregerson, A. Wallace Tashima,

and Consuelo M. Callahan, Circuit Judges.

Per Curiam Opinion

SUMMARY**

Securities / Attorneys’ Fees

The panel vacated an award of attorneys’ fees to class

counsel following the settlement of an action under the

Securities Act of 1933.

The panel held that the district court’s choice to apply the

lodestar method, rather than the percentage-of-fund method,

was well within the district court’s discretion in this common

fund case. The district court abused its discretion, however,

by failing adequately to explain its reasons for reducing the

lodestar.

* The panel unanimously finds this case suitable for decision without

oral argument. See Fed. R. App. P. 34(a)(2)(C).

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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MCGEE V. CHINA ELECTRIC MOTOR 3

The panel vacated the fee award and remanded with

instructions to recalculate the award and provide a more

detailed explanation.

COUNSEL

Laurence M. Rosen, The Rosen Law Firm, P.A., New York,

New York, for Plaintiff-Appellant.

No appearance for Defendants-Appellees.

OPINION

PER CURIAM:

This is an appeal of an attorneys’ fees award in a

securities class action. The parties reached a settlement and

the district court approved the settlement and awarded

attorneys’ fees. Named-plaintiff, Mike McGee, appeals on

behalf of class counsel (“Class Counsel”) contending that the

fee award was arbitrary. We conclude that the district court’s

near total failure to explain the basis of its award was an

abuse of discretion. Thus, we vacate the award and remand

with instructions to recalculate the fee award and provide a

more detailed explanation of the fee award.

I.

Class Counsel represented a class of investors in an action

under the Securities Act of 1933 against China Electric

Motor, Inc., and its officers, directors, auditors, and

underwriters. After two years of litigation – during which

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4 MCGEE V. CHINA ELECTRIC MOTOR

Plaintiffs survived motions to dismiss, conducted discovery,

and filed for class certification – the parties reached a $3.78

million global settlement. The settlement notice to the class

included notice that Class Counsel would seek a fee award of

25% of the class fund. No one objected to the size of

proposed attorneys’ fees award.1

Soon thereafter, together with their motion for final

approval of the settlement, Plaintiffs filed a motion for

attorneys’ fees and expenses. Class Counsel requested 25%

of the $3.78 million award, or $944,583. They submitted

billing records and argument justifying the sought

percentage-of-fund fee award.

At the hearing on final approval of the settlement, the

district court also discussed the fee request. It declined to use

Class Counsel’s proposed percentage-of-fund method for

calculating the fee award; instead, it applied the lodestar

method. It multiplied a blended hourly rate of $475 by the

1,402 hours Class Counsel had collectively spent working on

the case, for a lodestar value of $666,488. The court then

found that a downward adjustment from the lodestar was

appropriate. It stated that a review of the billing records

disclosed “numerous examples of legal tasks being

inappropriately [lumped] together.” The court did not,

however, point to any specific tasks by way of example,

much less explain why grouping those tasks was

inappropriate, or how any of this affected the ultimate fee

award. Instead, the court merely asserted that the case was “a

very simple case” and commented that “a lot of high-cost

lawyers were not doing work . . . that would . . . take their

1 One putative class member requested exclusion from the settlement

class and one objected to the settlement.

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MCGEE V. CHINA ELECTRIC MOTOR 5

expertise to do.” Ultimately, the court reduced the lodestar

by 422 hours.2 This resulted in a final fee award of $466,038 

– a 30% reduction from the original lodestar value, and a 50%

reduction from Class Counsel’s requested fee.

In its subsequent written Order Awarding Lead Plaintiff’s

Counsel Attorneys’ Fees and Reimbursing Expenses (the

“Order”), the district court did not offer any additional

explanation for its decision to cut Class Counsel’s hours by

30%. Indeed, some language in the Order directly

contradicted the court’s statements at the final approval

hearing and may have even supported applying a positive

multiplier to the original $666,488 lodestar. For example, the

Order stated that “the litigation of this Action involved

complex factual and legal issues and was actively prosecuted

since its filing, and in the absence of the Settlement, the

Action would have continued to involve complex factual and

legal questions,” and that “if Lead Plaintiff’s Counsel had not

achieved the Settlement, there was a risk of either a smaller

or no recovery.” Nevertheless, in keeping with its statements

at the final approval hearing, the court awarded Class Counsel

the significantly reduced fee.

II.

We review an award of attorneys’ fees for abuse of

discretion. Childress v. Darby Lumber, Inc., 357 F.3d 1000,

1011 (9th Cir. 2004). “A district court abuses its discretion

2 Presumably, the inappropriate “high-cost lawyers” work was

discounted by the court in arriving at its “blended” hourly rate of $475 per

hour. Ifso, then discounting the number of hours was double-counting the

same discount. But the district court did not explain how it arrived at the

blended hourly rate.

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6 MCGEE V. CHINA ELECTRIC MOTOR

if its decision is based on an erroneous conclusion of law or

if the record contains no evidence on which it rationally could

have based its decision.” In re Mercury Interactive Corp.

Sec. Litig., 618 F.3d 988, 992 (9th Cir. 2010) (quoting Fischel

v. Equitable Life Assurance Soc’y, 307 F.3d 997, 1005 (9th

Cir. 2002)). We review underlying factual determinations for

clear error. Native Vill. of Quinhagak v. United States,

307 F.3d 1075, 1079 (9th Cir. 2002). We review whether the

district court applied the correct legal standard de novo. Sea

Coast Foods, Inc. v. Lu-Mar Lobster & Shrimp, Inc.,

260 F.3d 1054, 1058 (9th Cir. 2001).

A.

In a common fund case, such as this, the district court has

the discretion to choose between either the lodestar or the

percentage-of-fund methods when calculating fees. E.g.,

Fischel, 307 F.3d at 1006. “Under the lodestar method, the

court multiplies a reasonable number of hours by a reasonable

hourly rate.” Id. Because there is a strong presumption that

the lodestar amount represents a reasonable fee, adjustments

to the lodestar “are the exception rather than the rule.” Id. at

1007 (quoting D’Emanuele v. Montgomery Ward & Co.,

904 F.2d 1379, 1383–84 (9th Cir. 1990)).

Under the percentage-of-fund method, the district court

may award plaintiffs’ attorneys a percentage of the common

fund, so long as that percentage represents a reasonable fee. 

E.g., In re Wash. Pub. Power Supply Sys. Sec. Litig., 19 F.3d

1291,1294 n.2 (9th Cir. 1994) (“WPPSS”). The Ninth Circuit

has set 25% of the fund as a “benchmark” award under the

percentage-of-fund method. Powers v. Eichen, 229 F.3d

1249, 1256 (9th Cir. 2000) (citing Torrisi v. Tucson Elec.

Power Co., 8 F.3d 1370, 1376 (9th Cir. 1993); Paul, Johnson,

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MCGEE V. CHINA ELECTRIC MOTOR 7

Alston &Hunt v. Graulty, 886 F.2d 268, 272 (9th Cir. 1989)). 

“Reasonableness is the goal, and mechanical or formulaic

application of either method, where it yields an unreasonable

result, can be an abuse of discretion.” Fischel, 307 F.3d at

1007 (quoting In re Coordinated Pretrial Proceedings in

Petroleum Prods. Antitrust Litig., 109 F.3d 602, 607 (9th Cir.

1997) (“Petroleum Prods.”)). In this case, the choice to apply

the lodestar method, rather than the percentage-of-fund

method, was well within the district court’s discretion.

In order for this Court to conduct a meaningful review of

the fee award’s reasonableness, however, the district court

must “provide a concise but clear explanation of its reasons

for the fee award.” Hensley v. Eckerhart, 461 U.S. 424, 437

(1983). The district court must state not only the grounds on

which it relied, but also how it weighed the various

competing considerations. Powers, 229 F.3d at 1257–58. 

“Without some indication or explanation of how the district

court arrived at the amount of fees awarded, it is simply not

possible for [the appellate court] to review such an award in

a meaningful manner.” Chalmers v. City of L.A., 796 F.2d

1205, 1213 (9th Cir. 1986); see also Ferland v. Conrad

Credit Corp., 244 F.3d 1145, 1151–52 (9th Cir. 2001). 

Especially “where the disparity [between the requested fee

and the final award] is larger, a more specific articulation of

the court’s reasoning is expected.” Moreno v. City of

Sacramento, 534 F.3d 1106, 1111 (9th Cir. 2008).

Here, the district court did not adequately explain its

reasons for reducing the lodestar. While the court noted one

or two considerations that might have supported its decision,

it failed to explain how it weighed those considerations when

calculating the final award. Specifically, the record lacks any

explanation as to why the lodestar was reduced by 422 hours,

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8 MCGEE V. CHINA ELECTRIC MOTOR

as opposed to any other number of hours. What’s more, those

422 hours represent a 30% reduction of the hours

compensable under the presumptively correct lodestar. A

30% reduction is large enough that the parties were entitled

to a more detailed explanation of the court’s reasoning. See

Costa v. Comm’r of Soc. Sec. Admin., 690 F.3d 1132, 1136

(9th Cir. 2012) (requiring “relatively specific reasons” where

compensable hours were reduced by nearly one-third). 

Based on the evidence (or lack of evidence) before us, we can

only conclude that the 422-hour cut was arbitrary. We

therefore vacate the fee award, and remand for further

consideration.3

B.

In addition to arguing that the reduction to the lodestar

was arbitrary, Class Counsel challenge the district court’s

failure to consider three additional grounds for increasing the

award. Class Counsel first contend that the Kerr

“reasonableness” factors entitled them to an upward

adjustment of the lodestar. See Kerr v. Screen Extras Guild,

Inc., 526 F.2d 67, 70 (9th Cir. 1975).4 Class Counsel further

3 Class Counsel ask us to exercise our discretion to determine the

appropriate fee award on appeal, rather than remand to the district court. 

Because the record is insufficiently developed, we decline Class Counsel’s

invitation.

4

In Kerr, the Ninth Circuit adopted a twelve-factor matrix to guide the

district court’s consideration ofthe reasonableness ofthe fee award. Kerr,

526 F.2d at 70. The continued relevance of two of the original factors has

since been called into question by the Supreme Court. See Resurrection

Bay Conservation All. v. City of Seward, Alaska, 640 F.3d 1087, 1095 n.5

(9th Cir. 2011) (citing Davis v. City & Cnty. of S.F., 976 F.2d 1536, 1546

n. 4 (9th Cir.1992)).

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MCGEE V. CHINA ELECTRIC MOTOR 9

contend that the court’s failure to apply two modifiers to the

adjusted lodestar – namely, compensation for delay in

payment and the risk of litigation – was an abuse of

discretion. Whether these factors require an increase of the

lodestar amount is for the district court to decide in the first

instance on remand. We agree, however, that the court’s

failure explicitly to consider the Kerr “reasonableness”

factors, as well as the delay and risk factors, was an abuse of

discretion. We therefore include the following discussion of

the applicable legal standards to aid the district court in

awarding an appropriate fee on remand.

1. The “reasonableness” factors

Class Counsel first argue that several of the Kerr

“reasonableness” factors entitle them to an upward

adjustment of the lodestar. Once the lodestar has been

calculated, “the court may adjust it upward or downward by

an appropriate positive or negative multiplier reflecting a host

of ‘reasonableness’ factors, including the quality of

representation, the benefit obtained for the class, the

complexity and novelty of the issues presented, and the risk

of nonpayment.” In re Bluetooth Headset Prods. Liab. Litig.,

654 F.3d 935, 941–42 (9th Cir. 2011) (internal quotation

marks omitted). Class Counsel emphasize the excellent result

they believe they obtained; the difficulty and risks inherent in

litigating against defendants in China; the complexity and

difficulty of prosecuting the specific claims raised in the

complaint; and the high quality of representation Class

Counsel provided the class.5

5 Contrary to the district court’s approach, Class Counsel include

detailed citations to the record supporting their arguments.

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10 MCGEE V. CHINA ELECTRIC MOTOR

While the decision to enhance or reduce the lodestar

under the Kerrfactors is within the district court’s discretion,

the court still must explain how it arrived at its final decision. 

Here, the district court never mentioned the Kerr factors, nor

did it discuss in any detail the substance of Class Counsel’s

tendered grounds for applying a positive multiplier to the

final lodestar amount. Without more, “we have no choice but

to remand the case to the district court to permit it to make

the necessary calculations and provide the necessary

explanations.” McCown v. City of Fontana, 565 F.3d 1097,

1102 (9th Cir. 2009) (as amended). On remand, the district

court must explicitly discuss why the Kerr reasonableness

factors do or do not favor applying a multiplier (positive or

negative) in this case.

2. The delay factor

As for the delay factor, “[a]ttorneys in common fund

cases must be compensated for any delay in payment” and

failure to do so is an abuse of discretion. Fischel, 307 F.3d at

1010. The district court may choose one of two methods to

compensate attorneys for a delay in payment: (1) the court

may apply “the attorneys’ current rates to all hours billed

during the course of the litigation”; or (2) the court may use

the attorneys’ historical rates and add a prime rate

enhancement. Id. (quoting Petroleum Prods., 109 F.3d at

609). Here, the district court gives us no clue on whether it

relied on Class Counsel’s current or historic rates to calculate

the blended hourly rate.6 On remand, the district court must

apply one of the two delay-compensation methods outlined

above to compensate for the delay in payment and clearly

6 Neither did the district court otherwise explain how it arrived at the

blended hourly rate of $475. See also note 2, supra.

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MCGEE V. CHINA ELECTRIC MOTOR 11

explain how it utilized that method to arrive at its calculated

delay compensation.

3. The risk factor

Finally, Class Counsel contend that the district court’s

failure to apply a risk multiplier was an abuse of discretion. 

Risk multipliers incentivize attorneys to represent class

clients, who might otherwise be denied access to counsel, on

a contingency basis. WPPSS, 19 F.3d at 1300. This incentive

is especially important in securities cases. Id. Thus, the

district court must apply a risk multiplier to the lodestar

“when (1) attorneys take a case with the expectation they will

receive a risk enhancement if they prevail, (2) their hourly

rate does not reflect that risk, and (3) there is evidence the

case was risky.” Fischel, 307 F.3d at 1008. Failure to apply

a risk multiplier in cases that meet these criteria is an abuse

of discretion. Id.

The record is insufficiently developed to allow us to

determine whether this case warrants the application of a risk

multiplier. On remand, the district court may take steps to

develop the record more fully. See WPPSS, 19 F.3d at 1302. 

We emphasize that regardless of whether or not the district

court ultimately finds that this case requires application of a

risk multiplier, it must fully and adequately explain the basis

for its decision.

III.

We recognize that the district court had a difficult task in

balancing the interests of the class against the need to award

a fee that adequately compensates Class Counsel for their

representation in this case. Yet, this difficulty does not

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12 MCGEE V. CHINA ELECTRIC MOTOR

relieve the district court of its responsibility, not only to

consider carefullyClass Counsel’s fee application, but also to

explain fully its reasoning in arriving at its award. The

entirelyimpressionistic reasoning offered by the district court

is inadequate, and thus arbitrary; it prevents us from properly

reviewing the award on appeal.

The district court’s award of attorneys’ fees is vacated

and the matter is remanded for further proceedings consistent

with this opinion.

VACATED and REMANDED.

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