Winston & Strawn LLP v. Federal Deposit Insurance Corporation

Citations: 894 F. Supp. 2d 115; 2012 WL 4505394; 2012 U.S. Dist. LEXIS 142085Docket: Civil Action No. 2006-1120

Court: District Court, District of Columbia; October 2, 2012; Federal District Court

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The case involves a dispute over attorney's fees between plaintiffs, including Ernest M. Fleischer, and the Federal Deposit Insurance Corporation (FDIC), acting as receiver for the Benj. Franklin Federal Savings and Loan Association. Fleischer, who served as a consultant in litigation concerning a tax claim against the FDIC, has been compensated $89,465.34, which includes $1,408.34 for expenses and $88,057 for approximately 250 hours of work at hourly rates between $340 and $390.

Fleischer seeks additional compensation through two proposals: first, he claims entitlement to 2% of a $43.4 million surplus, amounting to $778,535, or ten times his hourly fee; second, he requests a success fee of twice his hourly rate plus "fees on fees," totaling $223,075 beyond what he has received. 

The court, after reviewing evidence and applicable law, determined that Fleischer has already been reasonably compensated and is not entitled to further fees. The case is atypical due to the involvement of attorneys who sought compensation for their role in settlement discussions in a tax case where they were not direct representatives of the shareholders. Fleischer's compensation claims arise from surplus funds held in receivership, which are unusual, especially since fees for other attorneys involved in the case have already been settled through arbitration and mediation.

The background highlights the context of the dispute, referencing the FIRREA of 1989, which led to the seizure of Benj. Franklin by federal regulators due to capitalization issues, with the FDIC succeeding the Resolution Trust Corporation as receiver. The FDIC's powers include assuming the rights and assets of the institution, which is relevant to the compensation claims in this case.

The FDIC is empowered to collect debts owed to a financial institution and manage its assets, ultimately liquidating them to pay depositors, creditors, and administrative expenses before distributing any surplus to shareholders. In the case of Benj. Franklin, the assets in receivership exceeded its liabilities, creating a surplus of over $90 million, which is atypical for FDIC-managed receiverships. Shareholders are entitled to pro rata distributions of the surplus. A significant $1.2 billion tax claim from the IRS for unpaid taxes, penalties, and interest was lodged against the receivership in 1992, but the surplus allows for potential payment of part of this claim, which is usually irrelevant in deficit situations. The IRS and the FDIC did not scrutinize early tax returns closely, affecting the tax liability's clarity.

Additionally, shareholders filed a derivative suit against the U.S. in 1990, claiming the seizure of Benj. Franklin was a breach of contract, which remained pending until August 2012 when the appeal was voluntarily dismissed. The shareholders anticipated that a favorable damages award could enhance their surplus. However, the potential depletion of the surplus due to the IRS claim prompted the shareholders to seek involvement in related discussions and litigation. The IRS submitted its initial claim for $862 million in unpaid federal income taxes in 1992, which included significant interest and penalties. Although an action was filed in 1998 for an independent trustee, it was dismissed after the FDIC agreed to minimize the tax claim and keep shareholders informed. Progress on the tax claim was minimal from 1992 to 2002, during which the surplus remained over $90 million. Following a $34.7 million judgment for shareholders in 2002, assurances were sought from the FDIC to minimize the IRS claim and involve shareholders in any payment decisions.

On May 20, 2002, Don Willner wrote to Bruce Taylor of the FDIC Legal Division, expressing concern over the FDIC's lack of agreement to consult shareholders before addressing an IRS claim, which could lead to the depletion of surplus funds. Following this, Willner hired tax attorney Ernest Fleischer on a contingency basis in early to mid-June 2002, explaining he could not pay upfront and that fees would be determined by a federal judge based on Fleischer's contributions. On June 17, 2002, influenced by Fleischer's advice, Willner filed a lawsuit in the U.S. District Court for the District of Oregon to prevent the FDIC from paying the IRS. Although he initially secured a temporary restraining order (TRO), it was rescinded two weeks later for jurisdictional reasons. However, during a subsequent hearing, the FDIC agreed to notify Willner before making any payments to the IRS.

On July 17, 2002, the IRS initiated litigation against the FDIC-Receiver in the U.S. District Court for the District of Columbia, claiming approximately $1.2 billion in taxes, interest, and penalties. Willner's motion to intervene on behalf of shareholders was denied without prejudice after the case was stayed, although the FDIC and IRS later allowed shareholder attorneys to negotiate with the IRS, despite the IRS's position that the FDIC was the sole interested party. 

Settlement discussions involved attorneys from multiple law firms, with Willner acting as lead counsel for the shareholders. Shareholders paid reduced fees with the expectation of a success fee, while Fleischer did not receive any compensation during these negotiations. In November 2005, a proposed settlement of $50 million was reached, which would leave about $44 million available for shareholders, although the reasons for the IRS's agreement to this settlement remained unclear.

The FDIC and shareholders’ attorneys established a mechanism for attorneys to collect fees via the FDIC claims process. The tax case, while not a class action or derivative suit, involved unique circumstances related to the receivership that raised issues similar to those in such cases, prompting the FDIC to consider its obligations to distribute surplus funds to shareholders. On February 3, 2006, the FDIC-Receiver sought court approval for a Notice to Shareholders about the settlement, which was ultimately approved by the court. The Notice indicated that the attorneys would receive "reasonable fees and expenses" for reducing a $1.2 billion tax liability to a $50 million settlement, with anticipated fees between $1 million and $2 million, based on calculations made by the attorneys themselves. Rosemary Stewart, one of the attorneys involved, testified that the fee agreement was negotiated 1.5 to 2 years before the settlement's approval, and other attorneys were aware of this agreement as early as November 2004. The attorneys were to file claims for fees through the FDIC's receivership process, and the specifics of the fee range and multiplier sought were determined by the attorney team involved. Following the settlement, shareholder attorneys submitted fee petitions through the FDIC process.

Ms. Stewart indicated that the FDIC approved payments for most hours claimed by Spriggs, Hollingsworth, and Winston Strawn, but denied a requested twofold multiplier. Mr. Willner sought compensation for about 1,000 hours at standard complex litigation rates in Washington, D.C., as well as a significant contingent fee similar to that awarded to other attorneys. He also sought reimbursement for his consultants, specifically $93,600 for 240 hours worked by Mr. Fleischer and $2,200 for his expenses, without requesting a multiplier for Fleischer's fees. Fleischer later provided billing records showing 253.6 hours and $1,408.34 in expenses. Although he did not formally request a multiplier, he expressed an agreement with Willner for "fair" compensation, expecting a fee determined by a Federal judge. The FDIC disallowed 188.75 of Willner's hours and rejected his $525 per hour request, instead awarding him $250 per hour, below Laffey rates. It also disallowed 4.5 hours of Fleischer's time, resulting in a total payment of $89,465.34 to him. Following the denial of the multiplier, Ms. Stewart opted not to pursue the issue further. Willner, Fleischer, and attorneys from Winston Strawn subsequently filed consolidated lawsuits in October 2006, seeking amounts similar to their FDIC claims based on 12 U.S.C. 1821(d)(6) or quantum meruit. Willner claimed $880,000 for his hours plus a 63% success enhancement, while Fleischer requested 5% of the remaining surplus after FDIC payments. Their claims represented approximately 2.6% and 2% of a $44 million surplus, respectively, but were based on hours worked multiplied. In early 2007, the plaintiffs moved for summary judgment, modifying their arguments to invoke the common fund doctrine for fee requests, though they maintained similar dollar amounts. Judge Sullivan denied the summary judgment motions, rejecting the argument for compensation under the common fund doctrine. He noted the record was insufficient to assess the FDIC's fee awards and indicated that a multiplier could be appropriate for contingent factors, ultimately referring the dispute to mediation.

Plaintiffs from Winston & Strawn received a judgment from arbitration, which included their fees multiplied by two, while the court ordered Winston & Strawn to bear its own litigation costs regarding those fees. Mr. Willner was awarded fees based on Magistrate Judge Facciola's recommendation of Laffey rates for attorneys with over twenty years of experience, resulting in hourly rates between $350 and $425, but without a multiplier. Mr. Fleischer and the Blackwell firm did not settle with the FDIC during mediation, leading to the dismissal of Fleischer’s firm without prejudice, leaving Fleischer as the sole remaining plaintiff.

The court holds jurisdiction to review FDIC claims under 12 U.S.C. 1821(d)(5, d)(6) and has discretion in fee determinations, which are only reviewable for abuse of discretion. Typically, each party bears its own attorney fees; however, exceptions exist through fee-shifting statutes and equitable doctrines, notably the "common fund" doctrine applicable in class actions. This doctrine allows parties who enhance a fund's value to recover litigation expenses from that fund. The D.C. Circuit supports the percentage-of-the-fund method for calculating attorney fees in common fund cases, addressing concerns of unjust enrichment for beneficiaries who do not contribute to the incurred fees. This approach incentivizes lawyers to take on cases with inadequate compensation potential for claimants.

The D.C. Circuit recognizes that when a subset of potential beneficiaries has significant stakes, litigation efforts increase, reducing free-rider concerns. This impacts fee calculations, asserting that fees should come from the entire fund rather than a few litigants, yet it does not clarify why a percentage of the fund is the proper fee measure. The court outlines several reasons for using a percentage-based approach: it enhances efficiency by linking attorney awards to amounts won, mirrors contingent fee practices, conserves judicial resources by minimizing detailed billing reviews, and reduces subjectivity compared to a lodestar analysis.

Regarding attorney's fees for Mr. Fleischer, both parties agree he is owed compensation for his services during tax settlement discussions. The FDIC contends he has received reasonable fees based on his billed hours and rate, while Mr. Fleischer claims entitlement to a percentage of the surplus or a success fee. The court notes that Judge Sullivan previously dismissed the common fund theory now proposed by the plaintiff, and it finds that the law of the case doctrine does not apply here. The court supports Judge Sullivan's reasoning, emphasizing that this case involves reviewing the FDIC’s administrative decision on reasonable fees as stipulated in the Notice to Shareholders rather than typical attorney fee awards.

Judge Sullivan noted that plaintiffs sought payment from the FDIC via an administrative claims process, not from the opposing party in the tax case. The agreement indicated that the FDIC would compensate for "reasonable fees," yet did not define "reasonable." Judge Sullivan determined that this term should be interpreted according to prevailing legal standards for reasonable attorneys’ fees. He concluded that the percentage-of-the-fund method was inappropriate, as the agreement anticipated a total of $1 to $2 million for attorney fees, which would not align with the typical 20-30% allocation that would suggest fees of $8 to $12 million. Therefore, the court agrees that the reasonable fees should be assessed using the lodestar method rather than the percentage-of-the-fund approach.

The common fund doctrine is deemed inapplicable in this context due to the absence of representation of parties in the litigation by Mr. Fleischer or the other shareholder attorneys. Mr. Fleischer was a consultant, not a direct representative of any shareholder. The Tax Case involved only the FDIC and the IRS, and common fund cases typically pertain to parties who contribute to the creation or preservation of a fund. No legal precedent was cited to extend the doctrine to non-record attorneys or consultants. Although one non-binding case suggested that such attorneys might qualify for fees under the common fund doctrine, it emphasized that non-lead counsel must demonstrate their work provided benefits beyond those of lead counsel.

In this situation, the concerns typically associated with the common fund doctrine are mitigated. The shareholders involved funded a significant portion of the litigation, reducing free rider issues. The D.C. Circuit has noted that when a subset of beneficiaries has substantial stakes, the free rider concern diminishes. Additionally, over $3 million has already been distributed by the FDIC to reimburse shareholders for litigation contributions, further reducing the likelihood of free riding. Any attorney payments from the FDIC would impact all shareholders' distributions, making the concerns raised in prior cases less relevant. Furthermore, the notion of using the percentage-of-the-fund method is less applicable for consultants paid hourly rather than on a contingent basis, which is typically associated with market practices.

The fund theory is deemed more challenging to apply than a lodestar approach due to the complexities involving multiple parties and the difficulty in attributing specific contributions of shareholder lawyers to the settlement fund. The settlement amount was influenced by pre-settlement surpluses, successes from FDIC attorneys, and the unexamined rationale behind the IRS's $50 million settlement. The Supreme Court's view emphasizes that equitable jurisdiction requires individualized discretionary power to avoid stagnation in equity law. The case’s unique circumstances do not align well with standard percentage-of-the-fund methodologies, and the court rejects applying a broad doctrine that would not yield equitable outcomes.

Even if the Common Fund Doctrine were applicable, Mr. Fleischer has not demonstrated that he meets the necessary criteria. A claimant must show some success on the merits, and their litigation must have causally contributed to the benefits sought. Payment should reflect a reasonable share of the actual amount collected attributable to the attorneys’ efforts. While Mr. Fleischer may have aided in achieving a favorable outcome for shareholders, it remains uncertain if his actions were a substantial or necessary cause of that success. He claims to have contributed a legal theory that initially supported a TRO against FDIC payments to the IRS; however, this TRO was short-lived and rescinded due to jurisdictional issues. Testimonies suggest Mr. Willner played a more critical role in securing the shareholders' attorneys' involvement in negotiations. Additionally, Mr. Fleischer’s tax-related advice during discussions was reportedly disregarded by the IRS, indicating limited impact on the settlement outcome.

Mr. Fleischer acknowledges the contributions of other attorneys, including those from the FDIC, in reaching a settlement that preserved a surplus. The FDIC prepared a key memorandum on the tax treatment of $258 million in post-insolvency interest, which was crucial for IRS acceptance. Fleischer noted that without the IRS's acceptance of the FDIC's position, the surplus would have been lost. The IRS also developed the scenario that underpinned the FDIC's final settlement offer. Consequently, Fleischer has not demonstrated any unique benefit he provided compared to other attorneys or the FDIC. 

In the context of a similar case (In re Prudential Ins. Co.), the court criticized a lack of distinction between contributions from state attorneys and class counsel, highlighting the need for clarity in attributing benefits. Witnesses in this case could not definitively explain why the IRS settled for $50 million, with varying theories presented regarding the motivations behind the settlement. Ms. Stewart argued that the IRS was influenced by the equities involved, particularly the unique situation of a receivership with a surplus and the impact on elderly shareholders. Mr. Buchanan suggested the IRS aimed to reach a compromise that would maintain some surplus, describing the settlement as a "black box" arrangement with an unclear legal basis.

Fleischer admitted to uncertainty about the IRS's legal theories and the rationale for the reduction of its claim from $1.2 billion to $50 million. Even if he could demonstrate some contribution to the settlement, courts can limit fee calculations to the portion of the fund attributable to the attorney's efforts. Fleischer has not established responsibility for preserving the full $44 million surplus, making it impossible to determine his share. Furthermore, the common fund doctrine, which allows for equitable attorney fees, does not favor Fleischer's request since no other attorneys in the case have been compensated under this doctrine. Given that he appears to have done the least work among the four shareholder firms, awarding him fees based on this theory would be inequitable.

Other attorneys, unlike Mr. Fleischer, made fee decisions partly based on Judge Sullivan’s prior rejection of the common fund theory at the summary judgment stage. Mr. Fleischer contends that his attorney's fees, if not based on a percentage of the fund, should be double his hourly rate. This argument depends on defining "reasonable" fees as outlined in the Notice to Shareholders, which the court has previously established cannot be based on a percentage of the fund. 

Courts typically assess "reasonable" fees using various methods, including the lodestar approach and a twelve-factor test. The lodestar method calculates fees by multiplying reasonable hours worked by a reasonable hourly rate, allowing for adjustments based on risk and quality of work. The twelve factors include time and labor required, the novelty and difficulty of the case, the attorney's skill, and the customary fee, among others. 

Mr. Fleischer submitted billing records for approximately 250 hours, less than other attorneys involved, but he did not maintain contemporaneous records, suggesting he may have worked more than 250 but less than 500 hours. The lodestar method has become the dominant approach for calculating attorney fees, with multipliers generally disfavored. The "Laffey rates" are considered the highest reasonable rates for statutory fees. Fee enhancements are rare and permitted only in extraordinary circumstances, as affirmed by the Supreme Court, which states there is a strong presumption that the lodestar amount is adequate.

The burden of proof for justifying an enhanced fee lies with the party seeking the fees, who must identify factors not accounted for in the lodestar calculation. Mr. Fleischer has been compensated at rates comparable to those in the Laffey matrix and has not demonstrated, with specificity, any factors that would warrant an enhanced fee. Although he testified to his unique qualifications and experience that allowed him to provide sophisticated legal advice quickly, he failed to show that his efforts were extraordinary or solely responsible for the settlement. The quality of an attorney’s performance should not influence the lodestar, according to Supreme Court precedent, and the IRS's reluctance to accept his legal theories indicates that other factors may have been more influential in the settlement's outcome. Additionally, no other attorney has received a success fee from this Court, and while another firm, Winston & Strawn, received double their fees through arbitration, the Court does not find this precedent applicable. Mr. Fleischer's arguments against the relevance of the Perdue case are unconvincing, as the discussions on lodestar calculations are pertinent. Consequently, he has not proven entitlement to a fee enhancement or to reimbursement for fees incurred in the current litigation. In conclusion, Mr. Fleischer has been adequately compensated for approximately 250 hours of work, with only 4.5 hours unpaid, and is not entitled to a percentage-of-the-fund award.

The FDIC agreement stipulates that "reasonable" attorney's fees for Mr. Fleischer should not be based on a percentage of the fund, which could amount to $8 to $13 million, but rather align with the $1 to $2 million requested by the parties. Other shareholder attorneys indicated they would seek a success modifier based on hourly rates, not a percentage of surplus funds, indicating that the percentage-of-the-fund approach is inapplicable. Even if that method were applied, Mr. Fleischer would fail to demonstrate that his efforts directly contributed to the preservation of the surplus, thus he is not entitled to a success fee. The lodestar method for calculating fees is deemed sufficient, and Mr. Fleischer must provide specific evidence for any fee enhancement, which he has not done. Additionally, he is not entitled to fees on fees, as he did not successfully argue for a fee enhancement and such fees would be improper. An Order and Judgment will follow this Memorandum Opinion, signed by Chief Judge Royce C. Lamberth on October 2, 2012.