Thomas J. Johnston v. Comerica Mortgage , 83 F.3d 241 ( 1996 )

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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
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
1
A magistrate judge initially recommended denial of the fee
request in each case, and the district court approved the
recommendation and filed an opinion.
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servicing practices.2 The law firm Zimmerman Reed represented the class
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 action3 and $29,000 in
the Comerica action.4 The settlements also provide
2
Escrow accounts typically are maintained to enable the
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 interest-
free 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).
3
In the Cenlar action, Cenlar agreed to establish a
"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.
4
In the Comerica action, each class member who, as of June
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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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
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 one-
time payment of $2,000.
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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 applications5 and determined
5
The magistrate judge stated,
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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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
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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.6 See In re
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. 237.7 The Task Force noted that the
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
6
This approach is also referred to as the "percentage of the
recovery" or the "percentage of the fund" method.
7
The Task Force consisted of a distinguished panel of judges
and attorneys within and outside the Third Circuit.
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the benefit method be employed in common fund situations.8 Id.; see also
9
In re General Motors, 55 F.3d at 821.
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
8
The Task Force discussed some of the deficiencies of the
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.
9
In In re General Motors, Judge Becker presents a detailed
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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failed to develop a sufficient factual basis to support the recovery under
the lodestar method and denied any fee award. Finally, the
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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.10 We
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.11 Although
10
The district court relied on Weinberger v. Great Northern
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.
11
The court exhibited some concern that the separate
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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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 non-
statutory 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
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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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
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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
12
See, e.g., Jacobson v. Midland Mortgage Co., Civil No. 4-
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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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.
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