Opinion ID: 4538956
Heading Depth: 4
Heading Rank: 2

Heading: Cohen Is Entitled to Attorneys’ Fees and

Text: Expenses The Bankruptcy Court erred in awarding Cohen a conditional fee. First, this case presents the unusual situation in which the judge reviewing the fee application did not preside over the settlement, and we will cabin the Bankruptcy Court’s expansive discretion accordingly. Second, Cohen’s objection improved the settlement of the derivative action. Thus, he is entitled to attorneys’ fees and expenses for his efforts related to that objection. To start, this case is unusual because Bankruptcy Judge 18 Sontchi, who granted Cohen’s fees on a contingent basis, did not preside over the EDNY Settlement, to which Cohen objected in 2006, and which Cohen then successfully appealed to the Second Circuit. Indeed, this case presents an even more extreme version of the unusual situation presented in White. By the time Judge Sontchi passed on Cohen’s fee application in late 2015, nearly a decade had elapsed since Cohen lodged his objection with EDNY and approximately five years had passed since the Second Circuit vindicated his objection to that settlement’s release and indemnification. Judge Sontchi considered Cohen’s fee application in the context of the renegotiated 2015 Settlement, which did not include the illegal provisions. Thus, Judge Sontchi was not in the best position to assess Cohen’s contribution to the EDNY Settlement and its progression into the 2015 Settlement because he entered the litigation midstream and in an entirely different context. Such a conclusion is strengthened by our consideration of Judge Sontchi’s statements regarding the Bankruptcy Court’s specific role in 2015. When he approved the 2015 Settlement, he emphasized: “My focus is on the debtor and the debtors’ estates, and its creditors as they’re affected by the estate” and “what I’m tasked with . . . under the code[,] . . . is to figure out whether this settlement makes sense for the debtors’ estates.” J.A. 637–39. Judge Sontchi’s notion of what it meant for Cohen, as an objector, to improve the settlement was heavily, and understandably, influenced by the circumstances of Body Armor’s bankruptcy proceedings. Rather than considering how Cohen’s objection to the EDNY Settlement led to the favorable 2015 Settlement by, for example, eliminating illegal provisions and avoiding a potential indemnification obligation, the Bankruptcy Court was singularly focused on the real-time monetary benefit to Body Armor’s estate. Accordingly, we will narrow the broad 19 deference we traditionally accord to that Court’s determinations. The Bankruptcy Court erred in concluding that Cohen was entitled only to a contingent fee. Although the Court did not state what standard it applied, the order essentially requires Cohen to demonstrate that he created or contributed to a common fund. See J.A. 9 (“[I]f the Debtors do not receive any funds on account of the SOX [§] 304 Claim, no fee shall be payable.”). Rather than viewing the creation of a common fund as one factor to consider, the Bankruptcy Court believed that the creation of, or monetary contribution to, a common fund was a prerequisite to awarding any fee. To be sure, at the hearing on Cohen’s fee application, the Bankruptcy Court asked: “What’s the non-pecuniary benefit?” J.A. 1704. However, it went on to stress that “no funds have been received by the debtor[] in connection” with the SOX § 304 claim. J.A. 1712. And it stated: “[T]he debtor hasn’t seen [one dime][, t]here hasn’t been one benefit to this debtor, not one benefit to this debtor as a result of [Cohen’s] work.” J.A. 1705. 10 10 The District Court held that the Bankruptcy Court’s conditional fee award is appropriate because it does not preclude Cohen from potentially recovering fees under the 2018 Global Settlement. See Cohen v. SS Body Armor I, Inc. (In re SS Body Armor I, Inc.), Nos. 15-633, 15-1154, 18-349, 18-634, 2019 WL 2344038, at  (D. Del. June 3, 2019) (finding that the Bankruptcy Court’s order “does not require that [Cohen] create a common fund solely from the outcome of the SOX § 304 Claim or use any language that would foreclose relief under the circumstances of the Global Settlement”). It is true that the order does not require that Cohen create a common fund standing alone. But it does dictate that Body Armor must receive some funds “on account of” the SOX § 304 claim. As 20 The Bankruptcy Court erred in taking such a narrow view of Cohen’s contribution. Cohen did more than just preserve the possibility of the $186 million recovery for Body Armor under SOX § 304—although that benefit was certainly significant. 11 His objection to and successful appeal of the EDNY Settlement also stripped the agreement of a potential $186 million indemnification obligation to Brooks, which would have negated any SOX § 304 recovery. The indemnification was, according to Brooks’s counsel, an “essential” and “key” term of the EDNY Settlement, which was “negotiated” and “fought over” and “was one of the most important things . . . Brooks got” in exchange for his payment to the settlement. J.A. 1366; see also J.A. 1356–59. In addition, in eliminating the indemnification obligation, Cohen also ensured that the settlement would not be vulnerable to attack for containing an illegal provision as one of its “essential” and “key” terms. Furthermore, those involved in this case uniformly recognize that the latter settlements were better for Body Armor—and other claimants—than the EDNY Settlement. we have explained, this is not the appropriate standard. Also, the District Court’s repeated emphasis on the fact that Cohen may still recover fees under the Global Settlement ignores the issue on appeal—whether the Bankruptcy Court erred in awarding a contingent fee in the first place. 11 Cohen also argues that his preservation of the SOX § 304 claim provided a “backstop,” which would ensure Body Armor and Brooks’s victims would recover if his criminal convictions were overturned or abated. This became even more important after Brooks died in prison and the criminal restitution orders were in fact abated. 21 After Body Armor petitioned for bankruptcy protection and while Cohen’s appeal was pending in the Second Circuit, Body Armor admitted that the EDNY Settlement was not a favorable agreement and moved to reject it “for a list of reasons . . . . [f]irst, and . . . foremost” of which was that “the settlement . . . of the derivative action ha[d] a release of . . . Brooks.” J.A. 1387–88. Body Armor also admitted that the EDNY Settlement did not become effective “[d]ue to the pendency of [Cohen’s] appeal.” Bankr. Ct. Docket No. 589, at 9. The fact that the EDNY Settlement did not become effective due to Cohen’s appeal also meant that the Escrow Funds were not distributed pursuant to that agreement. Thus, Cohen’s objection helped to preserve the money which later funded (in part) the 2015 Settlement and Body Armor’s plan to exit Chapter 11. As explained above, under the 2015 Settlement, Class Plaintiffs agreed to loan $20 million of the funds they received as part of the settlement to Body Armor on an interest-free, non-recourse basis. Body Armor’s Chief Restructuring Officer testified that this loan was “extremely important.” J.A. 335. He stated that if Body Armor had been required to seek outside financing, it would have cost over $15 million and “would [have] eliminate[d] any recovery to [Body Armor’s] equity holders and [would have] significantly impair[ed] the recovery to [Body Armor’s] unsecured creditors.” J.A. 447. While Body Armor recognized in 2010 that the EDNY Settlement was not a favorable agreement, its counsel now describes the ultimate result reached in this case as a “home run.” Oral Arg. at 22:54–23:02. Similarly, the Bankruptcy Court has repeatedly emphasized that the 2015 Settlement was “a good settlement” and “a very good result for the estate.” J.A. 1714; see also J.A. 637–38 (“There is no question at all that this is a good deal for the debtor. . . . I [also] find it highly 22 significant that both committees, class counsel and the debtors, all support the settlement.”). Beyond the understanding that the latter settlements achieved in this case were superior to the EDNY Settlement, there is also widespread recognition that Cohen’s objection contributed to that evolution. For example, Body Armor’s counsel have said that Cohen made “a contribution, and we’ve acknowledged that . . . repeatedly.” J.A. 1682. The Bankruptcy Court has stated: “I think it’s a good settlement. And . . . I think one of the reasons we’re here today are the efforts of Mr. Cohen and his counsel.” J.A. 1714–15. And we have also recognized Cohen’s contribution. See S.S. Body Armor I., Inc. v. Carter Ledyard & Milburn LLP, 927 F.3d 763, 775 (3d Cir. 2019) (affirming denial of emergency stay but noting Cohen “showed tremendous skill and expended substantial time in preserving a highly valuable claim”). Moreover, both Class Counsel and Body Armor’s counsel have acknowledged that Cohen should earn a fee for his efforts. Class Counsel stated: “I don’t have a problem with [Cohen] arguing as to why his fees should be paid in connection with his appeal. I don’t have a problem with that. I don’t think anyone can dispute it.” J.A. 1372–73. And at oral argument, Body Armor’s counsel admitted that Cohen provided a benefit to the bankruptcy estate and conceded Body Armor’s willingness to pay him fees. Oral Arg. at 22:24–22:38. Finally, we note that our holding today accords with our Court’s interest in “[a]ssuring fair and adequate settlements.” Bell Atl. Corp. v. Bolger, 2 F.3d 1304, 1310 (3d Cir. 1993). Meritorious objectors, of course, “play an important role” in advancing that interest “by giving courts access to information on the settlement’s merits” in situations in which “judges no longer have the full benefit of the adversarial process.” Id. In sum, under the unique facts of this case, Cohen is 23 entitled to an award of fees and expenses for his efforts in objecting to the EDNY Settlement. 12 We conclude only that he earns a fee without any contingency. We do not rule on the appropriate amount of the fee or how it should be calculated. 13 Nor do we rule on the method by which it will be paid.