Opinion ID: 4538956
Heading Depth: 2
Heading Rank: 1

Heading: Award of Fees to Cohen

Text: Cohen primarily challenges the Bankruptcy Court’s 2015 order regarding his fee application. As outlined above, after the Bankruptcy Court approved the 2015 Settlement, it granted Cohen’s application for attorneys’ fees and expenses in part and denied it in part. First, the Court “awarded [Cohen] a fee for [his] efforts in preserving the SOX [§] 304 Claim,” but it stated that the amount would “be determined” later and would be “paid solely from funds received by [Body Armor] 11 or [its] successors-in-interest on account of the SOX [§] 304 Claim, if any.” J.A. 8–9. “For avoidance of doubt,” the Court emphasized, “if [Body Armor does] not receive any funds on account of the SOX [§] 304 Claim, no fee shall be payable.” J.A. 9. Second, the Court also denied Cohen’s separate claim of substantial contribution under the Bankruptcy Code. J.A. 9. The District Court affirmed. Cohen argues that the Bankruptcy Court erred in granting his request for fees and expenses on a contingent basis and in denying his substantial-contribution claim. We address each challenge in turn.
We review a bankruptcy court’s fee award “for an abuse of discretion.” Zolfo, Cooper & Co. v. Sunbeam-Oster Co., 50 F.3d 253, 257 (3d Cir. 1995). An abuse of discretion occurs “if the judge fails to apply the proper legal standard or to follow proper procedures[,] . . . or bases an award upon findings of fact that are clearly erroneous.” Id. (citation omitted).
Although “the general American rule is that attorneys’ fees are not ordinarily recoverable as costs, both the courts and Congress have developed exceptions to this rule for situations in which overriding considerations indicate the need for such a recovery.” Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 391–92 (1970). For example, courts have recognized that lead counsel in both class-action and derivative suits may recover fees and expenses for their efforts. Lead class-action counsel are typically compensated pursuant to the “common fund doctrine,” which provides that “a private plaintiff, or plaintiff’s attorney, whose efforts create, discover, increase, or preserve a fund to which others also have a claim, is entitled to recover 12 from the fund the costs of his litigation, including attorneys’ fees.” In re Cendant Corp. Sec. Litig., 404 F.3d 173, 187 (3d Cir. 2005) (emphasis added) (quoting In re Gen. Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 820 n.39 (3d Cir. 1995)). On the other hand, “plaintiffs in a shareholders’ derivative action may . . . recover their expenses, including attorneys’ fees, from the corporation on whose behalf their action is taken if the corporation derives a benefit, which may be monetary or nonmonetary, from their successful prosecution or settlement of the case.” Shlensky v. Dorsey, 574 F.2d 131, 149 (3d Cir. 1978) (emphasis added). In addition, courts, including our own, have said that objectors to settlements of class-action and derivative lawsuits may be entitled to attorneys’ fees and expenses when they improve the settlement. See Welch & Forbes, Inc. v. Cendant Corp. (In re Cendant Corp. PRIDES Litig.), 243 F.3d 722, 743 (3d Cir. 2001) (citing White v. Auerbach, 500 F.2d 822, 828 (2d Cir. 1974)). Federal procedural rules dictate that such settlements must be approved by a judge and notice of the agreement must be provided to certain persons and entities. See Fed. R. Civ. P. 23(e), 23.1(c); Fed. R. Bankr. P. 9019(a). “One of the purposes of the dual [approval and notice] requirement . . . is to prevent the unrighteous compromise of just . . . actions.” White, 500 F.2d at 828 (internal quotation marks and citations omitted). Objectors, like these procedural safeguards provided for in the rules, “have a valuable and important role to perform in preventing collusive or otherwise unfavorable settlements.” Id. Therefore, they “are entitled to . . . attorneys’ fees and expenses where a proper showing has been made that the settlement was improved as a result of their efforts.” Id. 9 9 A judge decides two inquiries: “whether, and in what amount,” fees should be awarded. White, 500 F.2d at 828. We 13 Although courts agree on the general contours of the standard set out in White, it is often unclear how judges are to determine whether “the settlement was improved as a result of [an objector’s] efforts.” Id. Some courts meld this objector standard with a version of the common fund doctrine, requiring that the objector create, preserve, or somehow contribute to a monetary recovery to be entitled to a fee. See, e.g., Levitt v. Sw. Airlines Co. (In re Sw. Airlines Voucher Litig.), 898 F.3d 740, 744–46 (7th Cir. 2018) (awarding fees to objector to classaction settlement under common fund doctrine); Vizcaino v. Microsoft Corp., 290 F.3d 1043, 1051–52 (9th Cir. 2002) (denying fees for objectors to class-action settlement because they “did not increase the fund or otherwise substantially benefit the class members”). Other courts award fees when the objector merely transformed the litigation into a more balanced proceeding or otherwise influenced the court’s decision to approve or deny a settlement. See, e.g., In re Metlife Demutualization Litig., 689 F. Supp. 2d 297, 367–68 (E.D.N.Y. 2010) (objections “served to clarify the proposed Settlement and [the corporation’s] positions regarding implementation of the Settlement”); Great Neck Capital Appreciation Inv. P’ship, L.P. v. PricewaterhouseCoopers, L.L.P., 212 F.R.D. 400, 412–13 (E.D. Wis. 2002) (objector preserved class members’ claims, convinced parties to modify settlement term, and “aided the court and enhanced the adversarial process”); Howes v. Atkins, 668 F. Supp. 1021, 1027 (E.D. Ky. 1987) (objector “ably performed the role of devil’s advocate . . . even though the settlement [terms were] are at the first step—that is, we are tasked with reviewing whether Cohen is entitled to a fee. See Appellants’ Reply Br. 10 n.6 (“The amount of [Cohen’s] fee award has not been yet litigated and is not presently before this Court.”). 14 not improved”); Frankenstein v. McCrory Corp., 425 F. Supp. 762, 767 (S.D.N.Y. 1977) (objections, although ultimately overruled, “transformed the settlement hearing into a truly adversary proceeding” and “cast in sharp focus the question of the fairness and adequacy of the settlement”). We have not had much occasion to consider fee awards to settlement objectors. When we have, our statements have suggested that, at least in the class-action context, an objector may need to improve a settlement monetarily. In Cendant PRIDES, we remanded for the district court to reconsider its denial of an objector’s fee application. We first quoted White and stated that objectors are entitled to compensation when “the settlement was improved as a result of their efforts.” In re Cendant Corp. PRIDES Litig., 243 F.3d at 743 (quoting White, 500 F.2d at 828). We then noted that the objector “called our attention to the many [problematic] aspects of [class counsel’s] fee award . . . which we . . . found require[d] reconsideration,” and we remanded for the district court to “evaluate the value of the benefit of the [objector’s] contribution to the ultimate fee . . . and to compensate the [objector] to that extent.” Id. at 744. We later elaborated on this holding in a related case, stating that: [A] court can usually determine whether an objector has improved the class’s recovery, and can often measure the amount of that improvement. If the objection is meritorious, it will usually lead to an increase in the settlement, a reallocation of the award among different plaintiffs, or a decrease in the fees paid to lead counsel. The court will thus be able to measure the dollar value of the objector’s contribution to the class’s net recovery. 15 In re Cendant Corp., 404 F.3d at 201 n.17. Nevertheless, in neither of these opinions, nor in any other case, have we held that a trial court is required to consider only an objector’s monetary improvement to a settlement in deciding whether to award fees. In addition, we have never held that a settlement objector will only improve a settlement if he creates, preserves, or contributes to a common fund. Indeed, we used equivocal language in In re Cendant Corp., saying: “a court can usually determine” if the objection enhances the class’s recovery; the court “can often measure the amount of that improvement”; and a successful objection “will usually” augment the settlement. Id. (emphases added). Furthermore, certain district courts within our Circuit have noted that objectors’ fees may be awarded for non-pecuniary contributions. See, e.g., Dewey v. Volkswagen of Am., 909 F. Supp. 2d 373, 395 (D.N.J. 2012) (“[O]bjectors must have economically benefitted the class or, at the very least, shown that a court adopted their objection.”). We now clarify that, in both class and derivative actions, trial courts may, in their discretion, consider non-monetary factors in determining whether an objector’s participation improved a settlement. Most of the cases addressing objectors’ fees, including the Cendant litigation, have involved objectors to class-action settlements. As a logical matter, however, non-pecuniary improvements to settlements are even more relevant in the derivative-action context than in the class-action context. The purpose of a class action is to vindicate direct harm to the class—typically financial. So, whether the objector created or enhanced a monetary recovery for class members will often be an adequate measurement of whether the objector improved the settlement. When shareholders bring claims on behalf of a corporation, however, such improvements may be less susceptible to straightforward financial evaluation. Thus, the 16 clarification we announce today will likely apply with particular force when it comes to evaluating settlements of derivative actions. Our conclusion—that courts may consider non- monetary improvements to settlements when assessing whether to award attorneys’ fees and expenses to settlement objectors—leads us to another observation: despite the uncertainty surrounding what it means to improve a settlement, courts universally acknowledge that a trial court exercises “broad discretion” in determining “whether” to award fees. White, 500 F.2d at 828. As noted above, settlements must be approved by a judge. See Fed. R. Civ. P. 23(e), 23.1(c); Fed. R. Bankr. P. 9019(a). The value an objector provides is assisting the court in determining whether to approve the settlement, and, therefore, the court can easily assess whether the objector improved the settlement or otherwise enhanced its review. Accordingly, a bankruptcy or district court has broad discretion in evaluating whether a settlement objector improved the settlement because that court, in the ordinary case, presides over both the settlement and the corresponding fee applications. The court can therefore “easily evaluate not only the quality of the objector’s work but also the impact it had on the court’s ultimate decision.” In re Cendant Corp., 404 F.3d at 201 n.17. The trial court, in short, “is in the best position to determine whether the participation of objectors assisted the court and enhanced the recovery.” White, 500 F.2d at 828; see also Goldberger v. Integrated Res., 209 F.3d 43, 47 (2d Cir. 2000) (noting that the deferential abuse of discretion standard “takes on special significance when reviewing fee decisions”). Nevertheless, unusual situations may arise in which such significant discretion should be cabined. In White, for example, the Second Circuit reversed the district court’s denial 17 of fees to settlement objectors and remanded for the court to determine “to what extent, if any, [the judge who presided over the settlement but died before considering fee applications] may have been influenced by [the] objectors’ contentions.” 500 F.2d at 823 n.1, 828–29; see also Dubbin v. Union Bank of Switz. (In re Holocaust Victim Assets Litig.), 424 F.3d 150, 158 (2d Cir. 2005) (finding White inapposite because same judge “presided over both the settlement and the fee application, and his assessments of [the objector’s] contributions should therefore be accorded deference”). In sum, a settlement objector is entitled to attorneys’ fees and expenses when he improves the settlement. The objector is not invariably required to create, preserve, or contribute to a common fund, and the court may consider both (or either) pecuniary and non-pecuniary factors in determining whether the objector is entitled to fees. We typically accord significant deference to the trial court’s determination because it is usually in the best position to determine whether the settlement was improved as a result of the objector’s efforts. Such discretion may be narrowed, however, in the unusual case in which the judge reviewing fee applications was not in the best position to assess the objector’s contribution.
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.
Cohen also challenges the Bankruptcy Court’s denial of his substantial-contribution claim. In reviewing the determination of whether there has been a substantial contribution under the Bankruptcy Code, “[w]e exercise plenary review over the district court’s decision, as well as over the legal determinations of the bankruptcy court.” Lebron v. 12 Cohen notes that he has “emphatically raised” whether “vindication of the public interest” alone is a sufficient basis to support an award of attorneys’ fees to an objector. Appellants’ Reply Br. 6. Because we hold that Cohen improved the settlement in other, more direct ways, we need not reach this question. We note, however, that the standard for awarding fees to objectors—whether the objector improved the settlement—is tied to the settlement reached in the respective case. 13 Our Court recognizes two methods for making such calculation—the lodestar and the percentage-of-recovery. See S.S. Body Armor I., 927 F.3d at 773. The lodestar approach is often used in statutory fee-shifting cases but may be used in other circumstances, “where ‘the nature of the settlement evades the precise evaluation needed for the percentage[-]of[- ]recovery method.’” Id. at 774 (alteration in original) (quoting In re Gen. Motors Corp., 55 F.3d at 821). The percentage-ofrecovery method is “[g]enerally used in common fund cases.” Id. at 773. 24 Mechem Fin. Inc., 27 F.3d 937, 942 (3d Cir. 1994). “[W]e review the bankruptcy court’s factual findings for clear error.” Id. The Bankruptcy Code permits the payment of “administrative expenses,” including the “reasonable compensation for professional services rendered by an attorney” of “an equity security holder . . . in making a substantial contribution in a case under chapter . . . 11.” 11 U.S.C. § 503(b)(3)(D), (b)(4) (emphasis added). There has been a substantial contribution when “the efforts of the applicant resulted in an actual and demonstrable benefit to the debtor’s estate and the creditors.” Lebron, 27 F.3d at 944 (quoting Haskins v. United States (In re Lister), 846 F.2d 55, 57 (10th Cir. 1988)). Cohen argues that he provided a substantial contribution to Body Armor’s estate.14 However, even if he did make a substantial contribution, he did not do so “in a case under chapter . . . 11.” 11 U.S.C. § 503(b)(3)(D). Rather, the expenses he incurred in making a substantial contribution accrued months and years before Body Armor petitioned for bankruptcy. To be sure, there is “no across-the-board bar” to recovery of pre-bankruptcy-petition expenses that benefit the estate. Lebron, 27 F.3d at 945. But here, even if Cohen would not have undertaken his efforts “absent an expectation of reimbursement,” he certainly did not undertake those efforts under Chapter 11 or with “an expectation of reimbursement from [Body Armor’s Bankruptcy E]state.” Id. at 944; see also 14 Cohen’s substantial-contribution claim “admittedly is a backup argument.” J.A. 1667–68. He emphasizes that any substantial-contribution award would “reduce, and not replace, the legal fee to which [he is] entitled” as a settlement objector. Appellants’ Br. 36 n.12. 25 In re Lister, 846 F.2d at 57 (denying substantial-contribution claim for pre-petition efforts because creditor was “unaware of the pendency of bankruptcy proceedings until after the petition had been filed [so a]ny benefit accruing to the bankruptcy estate as a result of these efforts was only incidental”).