_________

 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 actions

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. 

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Savings Bank (Cenlar) for alleged improprieties in the maintenance of

residential mortgage escrow accounts. After settlement, class counsel

sought fees in the total sum of $157,500 ($57,500 in the Comerica action

and $100,000 in the Cenlar suit) pursuant to "clear sailing" provisions in

the settlement agreements. The district court determined that any fee

award should be analyzed under the lodestar method, and concluded that

class counsel had failed to establish an adequate basis to support an

award. 

1

Two questions surface in this appeal: (1) whether the district court

abused its discretion by applying the lodestar approach to the fee

analysis; and (2) whether the district court abused its discretion by

refusing to allow counsel to present time records after the court had

declined to allow fees based on benefit to the class. We vacate the

judgment of the district court disallowing any fee to class counsel, and

remand for further proceedings and direct the allowance of reasonable

attorney fees under the circumstances.

I. BACKGROUND

In the fall of 1991, appellants brought separate class actions

alleging that Cenlar and Comerica each improperly maintained escrow

accounts for taxes and insurance on residential mortgages that they

serviced. The classes claimed that the defendants had failed to properly

refund or credit surplus funds and were violating federal law and the terms

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 an

escrow 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

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servicing practices. The law firm Zimmerman Reed represented the class

2

in both actions. 

The cases were assigned to then Chief Judge Diana Murphy of the

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 agreement

on the settlement of each case and submitted the matters to Chief Judge

Murphy for approval. Subsequently, when Chief Judge Murphy became a judge

on this court, the cases were reassigned to Judge David Doty. On October

27, 1994, Judge Doty approved both settlements. 

The terms of the settlement agreements provided members of the class

cash "rebates" representing damages for lost interest on past retained

overages totalling 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, would

apply. Additionally, the class representatives received a onetime payment of $2,000. 

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injunctive relief changing defendants' future mortgage servicing practices.

Although the value of the injunctive relief remained speculative, class

counsel maintained that it constituted the real heart of the settlements.

In each case the settlement agreement provided that the defendant

would establish a fund for attorney fees. The settlements also contained

a "clear sailing" provision whereby the defendants agreed not to oppose the

request for attorney fees. In the Comerica case the settlement agreement

provided:

If the settlement is finally approved, then Defendant

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 establish a fund for attorney fees, costs,

and expenses not to exceed fifty seven thousand five hundred

($57,500) dollars (the "fund"). Defendant also agrees not to

oppose, or cause to be opposed, a request for attorney fees,

costs and expenses not exceeding fifty seven thousand five

hundred ($57,500) dollars. Defendant shall not, under any

circumstances, be liable for any fees, expenses, or costs in

excess of the fund, nor shall counsel for the Plaintiffs and

the Class be entitled to request any fees, costs or expenses in

an amount in excess of the 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 fee

issue on the same terms except that the fund for attorney fees, costs and

expenses was capped at $100,000 rather than the $57,500. 

The district court referred the matter of attorney fees to a new

magistrate judge. For 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).

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before the magistrate judge, class counsel sought to receive the full

amount which each defendant had set aside for fees and expenses. Counsel

based its request for fees solely upon a "percentage of the benefit"

approach. The magistrate judge held a telephonic hearing on the fee

request and during the course of that hearing, as his opinion notes,

[T]he Court took pains to stress that the obligation of

documenting a request for fees was not to be borne by the

Court, that a number of factors generally have been thought to

apply to the propriety of a fee request, and that the Court was

not in a position to specify the documentation that would be

appropriate for submission. . . . [T]he Court was assured by

counsel for the Plaintiffs that "copious computerized" records

had been maintained with respect to each of these cases, and

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, the

magistrate judge rendered his report recommending that the fee request be

disallowed. The magistrate judge stated that class counsel failed to

produce any information which would shed light upon the reasonableness of

the fee applications and determined 5
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that the total amount of benefit to the classes could not be accurately

calculated and amounted to speculation. The magistrate judge considered

this paucity of information particularly troubling given that the clear

sailing agreement created a non-adversarial climate. Subsequently, the

magistrate judge denied plaintiffs' motion for rehearing and

reconsideration, noting that counsel submitted no further documentation in

support of the motion. 

Plaintiffs objected to the Report and Recommendation, asserting that

the classes had received substantial benefit and that their claim for fees

should rest on benefit to the class. In an extensive opinion, the district

court disallowed the request for attorney fees. Plaintiffs then asked the

court to reconsider its ruling and requested permission to submit time

records in support of the fee request. The district court denied the

motion for reconsideration and also denied counsel leave to submit time

records, stating, "Counsel simply failed to meet its burden under

circumstances where the law was clear. This failure does not warrant a

submission at this late date." Johnston v. Comerica Mortgage Corp., Civil

Nos. 4-91-675/4-92-202 (D. Minn. June 16, 1995) at 3. This appeal

followed.

II. DISCUSSION

A. Basis for Awarding Fee

Courts utilize two main approaches to analyzing a request for

attorney fees. Under the "lodestar" methodology, the hours expended by an

attorney are multiplied by a reasonable hourly rate of compensation so as

to produce a fee amount 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 1261, 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.

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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

successful in gathering during the course of the litigation. See In re

6

Washington Pub. Power Supply Sys. Sec. Litig., 19 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 lodestar and percentage of the benefit methods were extensively

discussed in a Third Circuit Task Force Report dated October 8, 1985. See

Court Awarded Attorney Fees, Report of the Third Circuit Task Force (Arthur

R. Miller, Reporter), 108 F.D.R. 237. The Task Force noted that the

7

lodestar and the percentage of the benefit methods have distinct attributes

which make them suitable for particular types of cases. Id. at 250-51.

The Task Force recommended the lodestar approach for statutory fee-shifting

cases because it is reasonably objective, neutral, and does not require

making monetary assessments of intangible rights. Id. at 255; see also In

re General Motors Corp. Pick-Up Truck Fuel Tank Products Liab. Litig., 55

F.3d 768, 821 (3d Cir.) ("Because the lodestar award is decoupled from the

class recovery, the lodestar assures counsel undertaking socially

beneficial litigation (as legislatively identified by the statutory fee

shifting provision) an adequate fee irrespective of the monetary value of

the final relief achieved for the class."), cert. denied, 116 S. Ct. 88

(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.

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the benefit 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 this case, the district court stated that counsel could not recover

under the "percentage of the benefit" approach because the attorney fees

were not recovered from common funds and because the value of the

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 had
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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

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district court denied counsel's motion for reconsideration and for leave

to submit time records in support of the fee request. 

The district court concluded that because the attorney fees were to

be paid by the defendants separate and apart from the settlement funds, the

fees did not come from a "common fund" belonging to the plaintiffs, and

thus the percentage of the benefit approach was inappropriate. We

10

disagree. Although under the terms of each settlement agreement, attorney

fees technically derive from the defendant rather than out of the class'

recovery, in essence the entire settlement amount comes from the same

source. The award to the class and the agreement on attorney fees

represent a package deal. Even if the fees are paid directly to the

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 percentage of recovery method also applies in situations where,

although 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 district court, however, also concluded that the value of

the settlements remained too speculative to calculate an appropriate

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. 

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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 which

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 nonstatutory fee cases where it can be determined more easily than the

suitable percentage); Florin v. Nationsbank of Georgia, N.A., 34 F.3d 560,

566 (7th Cir. 1994) (decision whether to use percentage 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 district court's discretion

to choose one or the other); In re Workers' Compensation Ins. Antitrust

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 the

relatively small cash rebate and the dispute as to the value of the

injunctive relief, the district court's decision to apply the lodestar

approach was not an abuse of discretion. 

The district court properly noted that it bears the responsibility

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 burden

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, 641

U.S. 424, 437 (1983)). In its fee application materials, class counsel
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failed to disclose its hourly rates or its time records, making calculation

of a lodestar impossible. Accordingly, the district court disallowed a fee

award. 

As we have observed, once the district court issued its final

determination that any award would be analyzed only under the lodestar

approach, class counsel 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

denial of fees in its entirety must be set aside. First, counsel

successfully obtained cash rebates and injunctive relief on behalf of the

classes and should be rewarded for its efforts. Second, we think it

significant to note that the magistrate judge did not demand that counsel

provide an hourly basis for a fee award and did not state that the lodestar

approach would be the sole basis for its award. Moreover, in the

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 Court has reviewed the Petition for Attorneys' Fees

and Expenses submitted by Zimmerman Reed and has determined

that the amounts petitioned for are reasonable, and therefore,

directs that counsel for the class shall receive, as and for

compensation for their legal services and as reimbursement for

reasonable out-of-pocket costs and expenses Three Hundred

Thirty Thousand Dollars ($330,000) (to be paid by Defendant).

Said sum shall be paid in accordance with the terms of the

Settlement Agreement. 

(Appellants' App. at A-159). In addition, the appellants have referred to

several other cases in the District of Minnesota in which class counsel

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). 

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based on the settlement arrangements and not on a lodestar approach. 

12

Additionally, it is worthy of note that, in an opinion in a similar

case issued subsequent to the district court's determination here, this

court approved an award of $240,000 in attorney fees as provided for under

a settlement agreement. DeBoer v. Mellon Mortgage Co., 64 F.3d 1171 (8th

Cir. 1995). We stated,

The award of attorneys' fees likewise does not constitute

an abuse of discretion. The vast majority of the fee will be

paid by Mellon and will not come out of any class recovery.

The continuing nature of a permanent refunding procedure

constitutes a benefit to the class adequate to justify the fee

award. 

Id. at 1178. Class counsel in this case also represented the class in the

DeBoer action. 

Given the successful recovery of the classes and class counsel's

prior experience with attorney fee awards in similar 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

understandable. Although the district court could properly decide to

proceed with the lodestar approach, the court abused its discretion in

failing to allow counsel to submit time records once that decision was

final. 

III. CONCLUSION

Accordingly, we reverse and vacate the order denying attorney fees

in these cases and remand to the district court for further
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proceedings consistent with this opinion. The district court is free to

utilize either the lodestar or the percentage of the benefit method. In

the former event, class counsel should be afforded the opportunity to

justify its fee request with submission of verified time records. No costs

are awarded on this appeal. 

A true copy.

Attest:

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