_________

No. 95-2768

_________

THOMAS J. JOHNSTON; THERESE * A. JOHNSTON, and all others * similarly situated, * * Appellants, * * v. * * COMERICA MORTGAGE CORPORATION, * * Appellee. *

_________ Appeals from the United States No. 95-2776 District Court for the District

_________ of Minnesota.

BETH WILLS, and all others * similarly situated, * * Appellant, * * v. * * CENLAR FEDERAL SAVINGS BANK, * * Appellee. *

___________ Submitted: March 11, 1996 Filed: May 9, 1996

___________ Before FAGG, BRIGHT, and WOLLMAN, Circuit Judges.

___________ BRIGHT, Circuit Judge.
Residential mortgagors, through counsel, brought class action s against Comerica Mortgage Corporation (Comerica) and Cenlar Federal

### A magistrate judge initially recommended denial of the fee 1 

### request in each case, and the district court approved the recommendation and filed an opinion.
-2- Saving s Bank (Cenlar) for alleged improprieties in the maintenance o f resi dential mortgage escrow accounts. After settlement, class counse l sought fees in the total sum of $157,500 ($57,500 in the Comerica action and $100,000 in the Cenlar suit) pursuant to "cl ear sailing" provisions in the settlement agreements. The district court determined that any fe e award should be analyzed under the lodestar method, and concluded tha t class coun sel had failed to establish an adequate basis to support a n award. 1
Two questions surface in this appeal: (1) whether the district court abused i ts discretion by applying the lodestar approach to the fe e analysi s; and (2) whether the district court abused its discretion b y refusing t o allow counsel to present time records after the court ha d declined t o allow fees based on benefit to the class. We vacate th e judgment of the district court disallowing any fee to class counsel, and remand for further proceedings and direct the allowance of reasonabl e attorney fees under the circumstances.

I. BACKGROUND

In the fall of 1991, appellants brought separate class action s alleg ing that Cenlar and Comerica each improperly maintained escro w
accoun ts for taxes and insurance on residential mortgages that the y serviced. The classe s claimed that the defendants had failed to properly refund or credit surplus funds and were violating federal law and the term s of the mortgage agreements by their ongoing

### Escrow accounts typically are maintained to enable the 2 

### servicer to pay taxes, insurance, and other expenses as they come due. When the loan servicer maintains excess cushion in anescrow account, the servicer essentially receives an interestfree loan from the customer on the excess amount. Maintaining some cushion, however, enables the servicer to pay off expenses as they accrue without dipping into corporate funds if the customer is delinquent in paying. The extent of the allowable cushion is governed by the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. § 2609, and the mortgage contract itself. See DeBoer v. Mellon Mortgage Co. , 64 F.3d 1171, 1173 (8th Cir. 1995). In the Cenlar action, Cenlar agreed to establish a 3 

### "Settlement Fund" of $100,000, which would be prorated equally among eligible class members who had maintained escrowed mortgage loans as of January 1, 1994. Cenlar agreed to pay each eligible class member a one-time payment of $0.68, as a "Paid-Off Loan Rebate," for escrowed mortgage loans which were not on its books and records on or after January 1, 1994. Additionally, the class representatives received a one-time payment of $2,000. In the Comerica action, each class member who, as of June 4 

### 1, 1994, had maintained an escrowed mortgage loan would receive a one-time $.60 payment. As to loans which had been paid off, transferred or otherwise removed from Comerica's books and
-3- servici ng practices. The law firm Zimmerman Reed represented the clas s 2 in both actions.

The cases were assigned to then Chief Judge Diana Murphy of th e District of Minnesota. Over the next three years the parties engaged in intensive settlement negotiations supervised to some extent by Magistrate Judge Jonathan Lebedoff. In July of 1994, the parties came to an agreemen t
on the se ttlement of each case and submitted the matters to Chief Judg e Murphy for approval. Subsequently, when Chief J udge Murphy became a judge on this court, the ca ses were reassigned to Judge David Doty. On October 27, 1994, Judge Doty approved both settlements.
The terms of the settlement agreemen ts provided members of the class cash " rebates" representing damages for lost interest on past retaine d overages t otalling at least $123,000 in the Cenlar action and $29,000 in 3 the Comerica action. The settlements also provide 4

### records,

a one-time loan rebate of no more than $.75, based on the number of years the loan had been previously serviced by Comerica, wouldapply. Additionally, the class representatives received a onetime payment of $2,000.
-4- injunctive relief changing defendants' future mortgage servicing practices

. Althou gh the value of the injunctive relief remained speculative, clas s counsel maintained th at it constituted the real heart of the settlements.

In each case the settlement agreement provided that the defendan t would establish a fun d for attorney fees. The settlements also contained
a "clear sailing" provision whereby the defendants agreed not to oppose th e request for attorney fees. In the Comerica case the settlement agreement provided:

If the settlement is finally approved, then Defendan t will pay, as set forth below, fees and costs of Class counsel awarded or approved by the Court. Counsel for Plaintiffs and the Class will request compensation for their services

. Defendant agrees to esta blish a fund for attorney fees, costs, and expenses not to exceed fifty seven thousand five hundre d ($57,500) dollars (the "fund"). Defendant also agrees not to oppose, or cause to be opposed, a request for attorney fees , cost s and expenses not exceeding fifty seven thousand fiv e hund red ($57,500) dollars. Defendant shall not, under an y cir cumstances, be liable for any fees, expenses, or costs i n excess of the fund, nor shall counsel for the Plaintiffs an d the Class be entitled to request any fees, costs or expenses in an amount in excess of t he fund, or to invade or seek recovery from any payments being made to members of the Class.

(Appellants' App. at A-39). The Cenlar case specified the attorney fe e issue on the same ter ms except that the fund for attorney fees, costs and expenses was capped at $100,000 rather than the $57,500. The di strict court referred the matter of attorney fees to a ne w magistrate judge. Fo r reasons of convenience, the court consolidated the review of the applications. In the proceedings

### The magistrate judge stated, 5 

### Indeed, a most thorough review of the record before us fails to disclose the number of members in any certified class, the costs or expenses that would warrant taxation, the substantiality of any benefit that the class members would receive by the compromise of their claim, or the quantum of attorneys' time, skill or effort that was expended in processing these cases toward trial or in securing the settlement that was obtained. Johnston v. Comerica Mortgage Corp. , Civil Nos. 4-91-675/4-92-202 (D. Minn. Dec. 14, 1994) (Report and Recommendation) at 17 (footnote omitted).
-5- before the magistrate judge, class counsel sought to receive the ful l amount which each def endant had set aside for fees and expenses. Counsel base d its request for fees solely upon a "percentage of the benefit " appr oach. The magistrate judge held a telephonic hearing on the fe e request and during the course of that hearing, as his opinion notes,

[T] he Court took pains to stress that the obligation o f documenting a request for fees was not to be borne by th e Court, that a number of factors generally have been thought to apply to the propriety of a fee request, and that t he Court was not in a position to specify the documentation that would b e appropriate for submission. . . . [T]he Court was assured by counsel for the Plaintif fs that "copious computerized" records had been maintained with respect to each of these cases, an d that "hard numbers" would be forthcoming.

Johnston v. Comerica Mortgage Corp. , Civil Nos. 4-91-675/4-92-202 (D. Minn

. Dec. 14, 1994) (Report and Recommendation) at 5. Class counsel provided no further documentation.

After the deadline for submitting information had passed, th e magistrate judge rend ered his report recommending that the fee request be disallo wed. The magistrate judge stated that class counsel failed t o produce any informati on which would shed light upon the reasonableness of the fee applications and determined 5

### -6-

that the total amount of benefit to the classes could not be accuratel y calculated and amounted to speculation. The magistrate judge considered this p aucity of information particularly troubling given that the clea r sailing agreement created a non-adversarial climate. Subsequently, th e magistrate judge denied plaintiffs' motion for rehearing an d reconsideration, noting that counsel submitted n o further documentation in support of the motion.
Plaintiffs objected to the Report an d Recommendation, asserting that the classes had received substantial benefit andthat their claim for fees should rest on benefit to the class. In an extensive opinion, the distric t court disallowed the request for attorney fees. Plaintiffs then asked the court to reconsider its ruling and requested permission to submit tim e
rec ords in support of the fee request. The district court denied th e mot ion for reconsideration and also denied counsel leave to submit tim e record s, stating, "Counsel simply failed to meet its burden unde r circumsta nces where the law was clear. This failure does not warrant a submission at this late date." Johnston v. Come rica Mortgage Corp. , Civil Nos
. 4-91-675/4-92-202 (D. Minn. June 16, 1995) at 3. This appea l followed.

II. DISCUSSION

A. Basis for Awarding Fee

Courts utilize two main approaches to analyzing a request fo r attorney fees. Under the "lodestar" methodology , the hours expended by an attorney are multipli ed by a reasonable hourly rate of compensation so as to produce a fee amou nt which can be adjusted, up or down, to reflect the individualized characteristics of a given action

. See Swedish Hosp. Corp. v. Shalala , 1 F.3d 12 61, 1266 (D.C. Cir. 1993); H.J. Inc. v. Flygt Corp. , 925 F .2d 257, 259-60 (8th Cir. 1991); In re Workers' Compensation Ins

. Antitrust Litig. , 771 F. Supp. 284, 286 (D. Minn. 1991). Another

### This approach is also referred to as the "percentage of the 6 

### recovery" or the "percentage of the fund" method. The Task Force consisted of a distinguished panel of judges 7 

### and attorneys within and outside the Third Circuit.
-7- method, the "percentage of the benefit" approach , permits an award of fees that is equal to some fraction of the common fund that the attorneys were
succe ssful in gathering during the course of the litigation. See In r e 6 Washington Pub. Power Supply Sys. Sec. Litig. , 1 9 F.3d 1291, 1294 n.2 (9th Cir. 1994); Walitalo v. Iacocca , 968 F.2d 741, 747-48 (8th Cir. 1992); In re Workers' Compensation Ins. Antitrust Litig. , 771 F. Supp. at 286.

The lodes tar and percentage of the benefit methods were extensively discussed in a Third Circuit Task Force Report d ated October 8, 1985. See Court Awarded Attorney Fees , Report of the Third Circuit Task Force (Arthu r R. Miller, Reporter), 108 F.D.R. 237. The Task Force noted that th e 7 lodestar and the percentage of the benefit methods have distinct attribute s which mak e them suitable for particular types of cases. Id . at 250-51

. The Task Force recommended the lodestar approach for statutory fee-shiftin g
cas es because it is reasonably objective, neutral, and does not requir e making monetary assessments of intangible rights

. Id . at 255; see also In re General Motors Cor p. Pick-Up Truck Fuel Tank Products Liab. Litig. , 55 F.3d 768, 821 (3d Cir.) ("Because the lodestar a ward is decoupled from the class recovery, the lodestar assures counsel undertaking sociall y beneficial litigation (as legislatively identified by the statutory fe e shifting provision) a n adequate fee irrespective of the monetary value of the final relief achieved for the class."), cert. denied , 116 S. Ct. 8 8 (1995). However, the Task Force recommended that the percentage of

### The Task Force discussed some of the deficiencies of the 8 

### lodestar process particularly as it applies to a fund case. First, calculation of the lodestar increases the workload of an already over-taxed judicial system. Second, the elements of the lodestar process are insufficiently objective and produce results that are far from homogenous. Third, the lodestar process creates a sense of mathematical precision that is unwarranted in terms of the realities of the practice of law. Fourth, the lodestar is subject to manipulation by judges who prefer to calibrate fees in terms of percentages of the settlement fund or the amounts recovered by the plaintiffs or of an overall dollar amount. Fifth, although designed to curb certain abuses, the lodestar approach has led to others. Sixth, the lodestar creates a disincentive for the early settlement of cases. The report in this area added ". . . there appears to be a conscious, or perhaps, unconscious, desire to keep the litigation alive despite a reasonable prospect of settlement, to maximize the number of hours to be included in computing the lodestar." Seventh, the lodestar does not provide the district court with enough flexibility to reward or deter lawyers so that desirable objectives, such as early settlement, will be fostered. Eighth, the lodestar process works to the particular disadvantage of the public interest bar. Ninth, despite the apparent simplicity of the lodestar formulation, considerable confusion and lack of predictability remain in its administration. Court Awarded Attorney Fees , 108 F.R.D. at 246-49.
In In re General Motors , Judge Becker presents a detailed 9 

### and scholarly analysis of class action settlements and attorney fee awards in which he notes the inadequacies of both the lodestar and the percentage of the recovery mechanisms. See In Re General Motors , 55 F.3d at 801-03.
-8- the benefi t method be employed in common fund situations. Id .; see also 8 In re General Motors , 55 F.3d at 821. 9
In approving the magistrate judge's recommendation not to award fees in th is case, the district court stated that counsel could not recove r under the "percentage of the benefit" approach because the attorney fees
were not recovered from common funds and because the value of th e settlements was too speculative to allow proper calculation. The district court determined that the lodestar, or time plus hourly charge, should be applied to these cases. The district court further stated that counsel ha d

### -9-

failed to develop a sufficient factual basis to support the recovery under the lodestar method and denied any fee award. Finally, the

### The district court relied on Weinberger v. Great Northern 10 

### Nekoosa Corp. , 925 F.2d 518 (1st Cir. 1991) as illustrative of its reasoning. In Weinberger , plaintiffs appealed the district court's denial of attorney fees in connection with a class action suit which was voluntarily discontinued. Id . at 521. Weinberger is inapposite to the "common fund" discussion in this case where the settlement did provide a tangible and substantial benefit to the members of the class. The court exhibited some concern that the separate 11 

### negotiation of attorney fees presents the opportunity for the attorneys to trade relief benefiting the class for a higher fee for themselves. See Weinberger , 925 F.2d at 524-25; Court Awarded Attorney Fees , 108 F.R.D. at 266. The district court appropriately noted that the potential for abuse is heightened by the defendants' agreement not to contest fees up to a certain point. See Weinberger , 925 F.2d at 525. Under such
-10- district court denied counsel's motion for reconsideration and for leave to submit time records in support of the fee request.

The distr ict court concluded that because the attorney fees were to be paid by the defendants separate and apart from the settlement funds, th e fees did not come from a "common fund" belonging to the plaintiffs, an d thus t he percentage of the benefit approach was inappropriate. W e 10 disagree. Although under the terms of each sett lement agreement, attorney fees technically derive from the defendant rather than out of the class'
recover y, in essence the entire settlement amount comes from the sam e
source. The award to the class and the agreement on attorney fee s represent a package deal. Even if the fees are paid directly to th e attorneys, those fees are still best viewed as an aspect of the class ' recovery. See In re General Motors , 55 F.3d at 821 ("The rationale behind the pe rcentage of recovery method also applies in situations where , alt hough the parties claim that the fee and settlement are independent , they actually come from the same source.")
Accordingly, the direct payment of attorney fees by defendants should not be a barrier to the use of the percentage of the benefit analysis in the cases. The distr ict court, however, also concluded that the value of th e settlements remained too speculative to calculate an appropriat e percentage of the benefit. Although 11

### circumstances, the district court believed that it could better

scrutinize the fairness of the fee award by using the lodestar approach.
-11- class counsel contends that the total benefits to the classes are surely in excess of one million dollars and may extend to fifteen million dollars , the defendants dispute those figures.

It is within the discretion of the district court to choose whic h method to apply. See Court Awarded Attorney Fees , 108 F.R.D. at 258; In
re General Motors , 55 F.3d at 821 (court may select lodestar method in non

statutory fee cases where it can be determined more easily than th e suitable percentage); Florin v. Nationsbank of G eorgia, N.A. , 34 F.3d 560, 566 (7th Cir. 1994) (decision whether to use per centage method or lodestar method remains in discretion of district court); In re Washington Pub

. Power Supply Sys. Sec. Litig. , 19 F.3d at 1296 ( no presumption in favor of either percentage or lodestar method encumbers d istrict court's discretion to choose one or the other); In re Workers' Compensation Ins. Antitrus t Litig. , 771 F. Supp. at 286. But see Swedish Hosp. Corp. , 1 F.3d at 1271 (requiring use of percentage method in common fund cases). Given th e relativel y small cash rebate and the dispute as to the value of th e injunc tive relief, the district court's decision to apply the lodesta r approach was not an abuse of discretion.

The district court properly noted that it bears the responsibilit y of scrutinizing attorney fee requests, see In re General Motors , 55 F.3d at 820; Court Awarded Attorney Fees , 108 F.R.D. at 251, and that the burde n rests with counsel to establish a factual basis to support the award. See , H.J. Inc. v. Flygt Corp. , 925 F.2d at 260 (citing Hensley v. Eckerhart , 64 1 U.S. 424, 437 (1983)). In its fee application materials, class counsel

### -12-

failed to disclose its hourly rates or its time records, making calculatio n of a lodestar impossible. Accordingly, the district court disallowed a fe e award.

As we have observed, once the district court issued its fina l determination that any award would be analyzed only under the lodesta r approach, class couns el moved the court for reconsideration and for leave to submit its time records. The district court denied the motions.

Although the district court need not tolerate stonewalling by class counsel, special circumstances exist here such that the district court's den ial of fees in its entirety must be set aside. First, counse l successfully obtainedcash rebates and injunctive relief on behalf of the classe s and should be rewarded for its efforts. Second, we think i t significant to note t hat the magistrate judge did not demand that counsel provide an hourly basis for a fee award and did not state that the lodesta r app roach would be the sole basis for its award. Moreover, in th e precedents in similar cases in the District of Minnesota, a percentage of the benefit approach has been applied. Of particular note is the similar
case Meserow v. Sears Mortgage Corp. , Civil No. 4-91-477 (D. Minn. Oct. 5, 1994). The order in that case recited:

The Cou rt has reviewed the Petition for Attorneys' Fee s and Expenses submitted by Zimmerman Reed and has determine d that the amounts petitio ned for are reasonable, and therefore, directs that counsel for the class shall receive, as and fo r compensation for their l egal services and as reimbursement for rea sonable out-of-pocket costs and expenses Three Hundre d Thirty Thousand Dollars ($330,000) (to be paid by Defendant). Said su m shall be paid in accordance with the terms of th e Settlement Agreement.
(Appellants' App. at A-159). In addition, the a ppellants have referred to several other cases in the District of Minnesota in which class counse l participated and were awarded substantial fees

### See, e.g. , Jacobson v. Midland Mortgage Co. , Civil No. 4- 12 

### 91-443 (D. Minn. June 9, 1994) (App. at A-160); and Danforth v. First Union Mortgage Corp. , Civil No. 4-91-457 (D. Minn. May 16, 1994) (App. at A-177). -13- based on the settlement arrangements and not on a lodestar approach. 12

Additiona lly, it is worthy of note that, in an opinion in a similar
case i ssued subsequent to the district court's determination here, thi s court approved an award of $240,000 in attorney fees as provided for under a settlement agreemen t. DeBoer v. Mellon Mortgage Co. , 64 F.3d 1171 (8th Cir. 1995). We stated,

The award of attorneys' fees likewise d oes not constitute an abuse of discretion. The vast majority of the fee will be pa id by Mellon and will not come out of any class recovery

. The c ontinuing nature of a permanent refunding procedur e constitutes a benefit to the class adequate to justify the fee award.

Id . at 1178. Class counsel in this case also re presented the class in the DeBoer action.

Given the successful recovery of the classes and class counsel' s prior experience with attorney fee awards in sim ilar situations within the District of Minnesota, counsel's belief that it could rely on the terms of the settlement agreements and the percentage of the benefit approach was unders tandable. Although the district court could properly decide t o proceed with the lodestar approach, the court abused its discretion i n faili ng to allow counsel to submit time records once that decision wa s final.

III. CONCLUSION
Accordingly, we reverse and vacate the order denying attorney fee s in these cases and remand to the district court for further

### -14-

proceedings consistent with this opinion. The district court is free to utilize either the lodestar or the percentage of the benefit method. In the for mer event, class counsel should be afforded the opportunity t o justify its fee request with submission of verified time records. No cost s are awarded on this appeal.

A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.