Court Opinion

ID: 8931255
Source: CourtListenerOpinion
Date Created: 2022-11-27 07:05:23.033277+00
Date Added: 2024-06-11T17:09:31.181360
License: Public Domain

MANSFIELD, Circuit Judge
(dissenting);
I respectfully dissent. In my view the proposed settlement is tainted by the simultaneously-negotiated agreement by the defendants not to oppose their paying $2,325,-000 to class counsel. This amounts to an average of at least $203 per hour for every lawyer, no matter how junior, who worked on the case, plus costs and disbursements. 1 find it difficult to believe that this huge sum could not have improperly tempted class counsel to give up class claims potentially worth many millions of dollars rather than carry on the fight to enforce those claims or negotiate a more advantageous settlement for the class members. Certainly class counsel should bear the heavy burden of proving that they were not so improperly influenced. I do not believe that this burden has thus far been sustained. As the guardian of 11.2 million absent class members unable to protect their own interests, see National Super Spuds, Inc. v. New York Mercantile Exchange, 660 F.2d 9, 20 (2d Cir.1981), we should not approve the settlement or the fees until they have done so.
What may be good for class counsel may not necessarily be in the best interests of the class. Although an agreement by defendants “not to oppose” a $2,325,000 fee to plaintiffs’ counsel does not technically bind the court, it is naive not to recognize that as a practical matter it constitutes a joint invitation by the parties to the court to award the specified upper limit since the defendants, not the members of the class, would pay the agreed-upon fee and the payment would be in addition to the defendants’ commitments under the main settlement. The defendants’ interest in learn*909ing of their total potential exposure could be satisfied by their obtaining from the class counsel, before joining in a submission of the proposed agreement on the merits to the court for approval, a statement of the fee that the class would seek to have approved and fixed by the court. If that proposed fee figure appeared to the defendants to be excessive they would remain free to withdraw completely from the settlement or to oppose the class counsel’s fee application. Advance fee agreements, however, such as the one presently before us, should be abolished since they promote a potential abuse of trust and conflict of interest on the part of class counsel.
For these reasons the amount of the fee should in my view be left to the court for determination after its independent review and approval of a settlement, governed by the factors outlined in Hensley v. Ecker-hart, 461 U.S. 424, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983); Blum v. Stenson, — U.S. -, 104 S.Ct. 1541, 79 L.Ed.2d 891 (1984); City of Detroit v. Grinnell Corp., 495 F.2d 448 (2d Cir.1974); Lindy Bros. v. American Radiator, 487 F.2d 161 (3d Cir. 1973). Included among the factors to be considered, of course, are the degree of risk incurred by class counsel and whether it justifies a risk premium.1 The objective should be to compensate class counsel adequately and at the same time not unreasonably reduce the recovery and relief to be gained for the class. However, as Judge Oakes recognized in asking the district court in his earlier opinion, Malchman v. Davis, 706 F.2d 426, 436 (2d Cir.1983), to explain whether “the fees [were] agreed upon before the settlement was reached or only after substantive issues were worked out,” simultaneous negotiation of attorney’s fees and settlement terms poses the serious danger of collusion, i.e., that plaintiffs’ counsel will give up potentially valuable client’s rights in return for non-opposition to fees higher than those that might otherwise be awarded. See Barnett v. Pritzker, 73 F.R.D. 430 (S.D.N.Y.1977); City of Philadelphia v. Chas. Pfizer & Co., 345 F.Supp. 454, 471 (S.D.N.Y.1972). That danger is great in the present case for the reason that we are dealing with the release of claims for very large amounts of money.
The district court, after characterizing as “realistic” and unchallenged an estimate that “individual damage recoveries would likely be less than $100” (which could result in a recovery of up to $250,000,000) estimated that if the plaintiffs could prove that they would have been able to purchase insurance from another company at 10% less than the premiums charged by Colonial Penn Group (CPG), the savings, after trebling, would be $32.40 per year per person for the 2.5 million members of the class who purchased insurance. This would amount to a potential recovery of $80,000,-000 per year. Even if, allowing for the risks and difficulties in proof described by the court, the recovery were cut by 50% it would be $40,000,000 per year for a period of up to seven years. To prepare and try damage claims to completion would be costly and involve substantial risk for plaintiffs’ counsel. On the other hand, the settlement, under which the defendants agreed not to oppose $2,325,000 for class counsel’s legal fees, assures the latter a virtually riskless award of a very substantial amount for their services. This tantalizing prospect can tempt class counsel, consciously or not, to agree to settlement terms that are less favorable to their clients than would otherwise be the case.
The majority and Judge Griesa, relying on conelusory statements made in counsels’ affidavits, have proceeded on the erroneous assumption that class counsel’s attorney’s fees were not negotiated until after the substantive terms of the main settlement *910were agreed upon and that the settlement was therefore not tainted by the agreement on class counsel’s attorney’s fees. The record before the state court Referee (which Judge Griesa apparently did not examine) strongly supports an inference that only after plaintiffs’ counsel were assured of nonopposition by the defendants to their $2,325,000 fee application (originally class counsel demanded $4,500,000) did they surrender their clients’ potential recovery of $40-$80 million per year.
In a hearing on January 9,1981, only two months after the settlement was reduced to writing and signed by the parties, Mr. Rosdeitcher, CPG’s counsel, was asked by Referee Johnson, “[h]ow did the number of $2.325 million [maximum legal fees] come about?” Rosdeitcher replied that it was a “negotiated figure” arrived at during the “settlement discussions ... as part of the settlement.”2 He stated that in February 1979 (when settlement of the case was initiated and long before terms were agreed upon) counsel for the parties, including himself, discussed “both the form of a settlement” and “whether we [defendants] would be agreeable not to oppose a certain fee application.” (Suppl.App. 4).3 At this early stage plaintiffs’ counsel, Mr. Lesch, asked the defendants whether they would agree not to oppose an application by the plaintiffs for an attorney’s fee of approxi*911mately $4.5 million,4 but the CPG and Association defendants were unwilling to agree to such a large amount. Settlement negotiations were then suspended, according to Messrs. Kalmus and Rosdeitcher, who proposed “in early 1980” that the fee be limited to $1 million.5 Out of these negotiations, which began in 1979 with class counsel initially asking $4,500,000 and defendants starting with $1,000,000, came the figure of $2,325,000 which, according to defense counsel, constituted part of a “framework of settlement” agreed to orally in june ^ -^gg
Defendants now contend that their early discussions, in which class counsel asked for a $4,500,000 fee and the defense re*912sponded with an offer not to oppose a $1,000,000 fee, should not be considered by us since the parties failed to reach a settlement agreement with respect to the class’ claims and discussions then ended, not to be resumed until some time in 1980. If, as defense counsel now concede, it would be improper to discuss class counsel’s legal fees until the framework of a settlement of the class claims had been agreed upon and if, as they now aver, there was no discussion of the $2,325,000 legal fee until such an agreement was reached in the latter part of 1980, how do they justify the earlier fee discussions which admittedly took place before any settlement with respect to the substantive issues was reached? The answer is that the parties were discussing the amount of class counsel’s legal fee (i.e., $4,500,000 versus $1,000,000 maximum) before any agreement on the class’ claims was arrived at and, to use Mr. Rosdeitcher’s words, the $2,325,000 figure “was a negotiated figure,” arrived at “[djuring the course of the settlement discussions ... as part of the settlement.” See footnote 2, supra.
Thus, according to the January 9, 1981, record before Referee Johnson, which was much closer to the events in question than today, the parties acknowledged that they had agreed, long before the terms of the settlement had firmly been reached, that the $4.5 million attorney’s fee limit originally sought by plaintiffs’ counsel would be reduced to $2,325,000 and that this figure would not be opposed by the defendants. Against this background it is beyond dispute that the parties did not agree upon the terms of the settlement itself (as distinguished from the amount of counsel fees) until September 1980 and that no written agreement was signed until November 3, 1980. Until the latter date plaintiffs were as a practical matter not legally bound to surrender their damage claims potentially worth many millions of dollars.
From the foregoing record of the hearing before Referee Johnson, in which lead counsel for all major parties participated, it is difficult not to conclude that plaintiffs’ counsel were unwilling to give the class’ damage claims of some $40-$80 million per year until they were firmly assured that there would be no opposition to their proposed $2,325,000 in legal fees. But, regardless whether one accepts this inference, the record certainly dictates a more searching inquiry than that made by Judge Griesa.
In my view such an inquiry is mandated by other surrounding circumstances as well. The lead plaintiff, Nathan Malchman (whose deposition was never taken), is the brother of Irving Malchman, legal counsel for the class. One of the original named plaintiffs, Frieda Lederer, was Irving Malchman's mother-in-law. Greta Conway is the sister of the chauffeur for class counsel. Louis Stone is a personal friend of class counsel. All of this raises the question of whether, absent these close relationships, the named plaintiffs would not, because of their desire to see their relative or friend receive a generous share of the $2,325,000 legal fee, be much more willing to give up their potential recoveries than would the other eleven million plus members of the class who have no such relationships with class counsel.
For these reasons I would remand the case to the district court for a more searching inquiry into the reasonableness of the settlement. I would also make clear that the agreement of the defendants to pay class counsel fees up to $2,325,000 should not influence the court in any way not to disallow that amount and fix a substantially lower figure if such a figure appears to be reasonable. Indeed, the district court might test the reasonableness of the attorney’s fees agreement by obtaining the benefit of the views of an independent expert or of an adversarial presentation as to the fairness of the $2,325,000 figure.

. In the present case, for instance, the court would also take into consideration the defendants’ adoption in February 1979 of some salutary provisions beneficial to the class, which possibly had the effect of assuring class counsel that they were likely in any event to receive some award from the court. As the district court noted, "the vigorous prosecution of these lawsuits was the principal cause, if not the sole cause, of the revisions in practice carried out by the Associations commencing in February 1979.”

. "THE REFEREE: Mr. Rosditcher [sic throughout transcript], how did this number come about, is what I would like to know? How did the number of 2.325 million come about? Where did that come from?
"MR. ROSDITCHER: This was a negotiated figure. During the course of the settlement discussions, we were asked whether, among other things, as part of the settlement, we would agree not to oppose a fee of a certain size. And various numbers, I can’t remember the progression of the numbers, but various numbers were discussed.
"THE REFEREE: Who discussed them, if I may ask?
"MR. ROSDITCHER: I discussed them with Mr. Lesch. Mr. Kalmus discussed them with Mr. Lesch. Mr. Malchman and Mr. Kaufman, I believe, were also involved in discussions. Mr. Belnick was involved in discussions. And a partner of mine, Arthur Kalish, and at one point, one of my senior partners, Morris Abram, had been in one early discussion.” (Suppl.App. 2-3). (Emphasis supplied).

. "THE REFEREE: How long did these negotiations or discussions ensue? Over what period of time?
“MR. ROSDITCHER: I would say there were two periods, and correct me if my memory is inaccurate, there were two periods of settlement discussion.
There was a period which went back, I suppose, to, was it late 1978?
"MR. BELNICK: Yes.
"MR. LESCH: In about February, 1979.
"MR. KALMUS: Which came to nothing.
"MR. ROSDITCHER: Which was the first discussion of settlement. It was at that time—
"THE REFEREE: Settlement with reference to the counsel fees, I'm talking about specifically now.
"MR. ROSDITCHER: Both, the entire settlement and entire counsel fees.
The Associations at that time had begun the process of effecting changes in the relationship and the structure of the Association, and so forth, that Mr. Lesch has been describing and described in his affidavit, at that time.
And it was about that time that settlement discussions were first raised with any seriousness.
My recollection is that at times, people have said, 'Is there any basis for settlement?’ But it was nothing worth describing here.

And at that time [early 1979] we discussed both the form of a settlement and the question of fee was raised, as to whether we would be agreeable not to oppose a certain fee application.

Now, I don’t recall what amount was proposed. I believe that it was certainly in excess of the 2.3 million.
"MR. LESCH: So the record is clear,—
"THE REFEREE: Let Mr. Rosditcher state it, and then you may have the opportunity.
"MR. LESCH: Excuse me.
"THE REFEREE: After Mr. Rosditcher, Mr. Kalmus will state it, and you will state it and anyone else.
Go ahead.
"MR. ROSDITCHER: My recollection is there was an initial figure which was substantially in excess of 2.325 million dollars mentioned.
"THE REFEREE: Which was it, approximately?
“MR. ROSDITCHER: Which was approximately $4 million.
"THE REFEREE: When you say mentioned, mentioned by whom?
“MR. ROSDITCHER: Mentioned by plaintiffs’ counsel.
"MR. LESCH: So the record is clear, you are talking about 1980?
"MR. ROSDITCHER: No, talking about 1979." (SuppkApp. 3-5). (Emphasis supplied).

. "MR. LESCH: ....
First, on the question of fee negotiations, I do not believe that Mr. Fischman ever mentioned the figure of $4 million.
What I believe happened was that benefits were discussed. And that in the context of the quantification of benefits, the inference was drawn that Mr. Fischman was talking about a fee of $4 million.
My understanding is that the first time that that figure was mentioned occurred in negotiations between, and I don’t believe it was 4 million, I believe that the number I mentioned was somewhat in excess of 4 million.
"MR. KALMUS: I believe it was. 41/2.
"MR. ROSDITCHER: I think Mr. Lesch is correct in the way I first got the 4 million.
"MR. KALMUS: I would concur with Mr. Lesch.
"MR. ROSDITCHER: I derived the inference from the benefits they were describing.
"MR. LESCH: And that then we got into the negotiations and we started with the figure in excess of 4 million, and they started with a figure substantially below 2.325 million dollars." (Rev. Suppl.App. 17-18). (Emphasis supplied).

. "MR. ROSDITCHER: And we indicated, that is, the CPG and the Association defendants as well, we would not be agreeable to an agreement which said we would not oppose such a fee.
“THE REFEREE: Such a fee of $4 million?
"MR. ROSDITCHER: Yes.
"THE REFEREE: Very well. But did you come back with a counter-proposal with reference to the—
"MR. ROSDITCHER: Not at that time, I think our feeling was it was too high, and didn't come back with any approval.
I think at some point, shortly after those talks began, that is, within a month or two, they ended, and we then proceeded to full activity.
I think things got wound up and we went through a lot of discovery after that.
The next period that I recall, the time is collapsing here.
"THE REFEREE: I realize that.
“MR. ROSDITCHER: Was it early in 1980 we began again?
"MR. KALMUS: In the latter part of 1979.
"MR. ROSDITCHER: The latter part of 1979, yes.
"MR. KALMUS: I first had some discussions then. I and Mr. Oberman, my partner, had discussions with Mr. Lesch and his partner, Mr. Fischman. And at times, with Mr. Malchman and Mr. Kaufman as well.
"THE REFEREE: With reference to counsel’s fees?
“MR. KALMUS: No, not specifically; with reference to the possibility of settling the litigation either with the AARP defendants alone or the entire litigation as to everyone.
Those discussions began in late 1979, continued into 1980, on and off, with adversary discovery going on concurrently.
In due course, in the early spring, I would say, of 1980, or perhaps late winter of 1980, that is to say, a little less than a year ago, those discussions led to discussions in which Colonial Penn counsel, Mr. Rosditcher and his partner, Mr. Kalish, were also involved, that went on back and forth over an extended period of time into June of 1980.

At that time, a framework of a settlement was agreed upon orally. That framework included an understanding that the defendants would not oppose an application for counsel fees up to $2.325 million, inclusive of disbursements.

And from June through into the autumn of last year [1980], we worked on the details of a settlement agreement which resulted in the settlement agreement that you have before you dated November 3, 1980.
“THE REFEREE: Is that substantially what occurred, Mr. Rosditcher?
"MR. ROSDITCHER: That is substantially what occurred.
Just to add to something that I said earlier, I do not recall that you asked how we got to this number.
“THE REFEREE: Yes.
"MR. ROSDITCHER: And I do recall that Mr. Lesch, I believe it was, told us precisely what he believed the total hours spent by his firm and the Kaufman firm were worth. And I believe the number mentioned at that time, this was probably in early 1980, was a million dollars.
He also felt that the benefits he conferred justified a substantial multiple of that number.
And I think that we then started — said 4 million, and we said, ‘No, that is too high.’
And somehow, through the period in early 1980, we came to an agreement as to the number we would not oppose." (Suppl.App. 6-9). (Emphasis supplied).