Plaintiffs lawyers in the 9/11 respiratory cases cannot pass on to clients some $6.1 million in interest costs associated with financing the massive litigation, Southern District Judge Alvin K. Hellerstein ruled Friday.
Even though lead lawyer Paul Napoli marshaled opinions by bar associations, court cases and experts to show that borrowing to finance litigation and passing the cost to clients is both legal and ethical, Hellerstein said he would not allow it.
"Mr. Napoli, I can tell you now, I'm not going to allow this charge," the judge said. "I'm not saying it was unethical. I'm not saying you didn't try to stay attuned to the rules of professional responsibility. What you're getting is too much."
The judge's decision came as all sides in the litigation are pressing to convince some 10,000 plaintiffs who suffered respiratory and other illnesses in the response to and cleanup after the Sept. 11, 2001, terror attacks to accept a settlement that could run as high as $712.5 million.
Those parties include New York City, its contractors who worked the site, and the World Trade Center Captive Insurance Company, which was established with a $1 billion Federal Emergency Management Agency grant and is bankrolling the defense and would make payments under the settlement.
Plaintiffs now have until Nov. 8 to opt into the settlement, which requires 95 percent participation in order to become effective. More than 50 percent have opted into the agreement so far. Settlement talks are proceeding with non-settling defendants led by the Port Authority of New York and New Jersey and hundreds of contractors that are not ensured through Captive.
Hellerstein had already forced Napoli earlier this year to lower his firm's contingency fee in the case to 25 percent from 33 percent.
On Friday, the judge said that, even at the low end of the proposed settlement, or $625 million, plaintiffs lawyers, led by Worby Groner Edelman & Napoli Bern, would earn $150 million in fees.
"You can surely absorb this," Hellerstein said Friday. "This disbursement is unreasonable."
Napoli said there has yet to be a single case where a judge has rejected passing on litigation financing costs by clients, as attorneys do with other litigation expenses such as filing fees and the retention of experts.
Napoli insisted that his clients, some 9,700 of the over 10,000 in World Trade Center Disaster Site Litigation, 21 MC 100, were informed that interest costs would come off the top of any settlement both up-front and more recently in mailings that have been vetted by ethics experts.
"Not one client who has signed off on the settlement has objected to this disbursement," Napoli told the court.
He said that, without the borrowed money, the litigation never would have gotten off the ground, and financing "helped level the playing field."
"We do what we can with what we have," Napoli said, adding that "our resources are dwarfed" by the big firms or "behemoths" that are defending New York City, meaning McDermott Will & Emery for Captive and Patton Boggs for the city.
Napoli also challenged the court's jurisdiction to change the terms of the firm's privately negotiated fee contracts, just as he and James Tyrrell Jr. of Patton Boggs had claimed that Hellerstein had no right to reject an initial settlement in the case earlier this year or hold a fairness hearing on the settlement that is now on the table.
But Hellerstein said his exercise of jurisdiction was "reasonable" here.
He asked Napoli, rhetorically, whether it might not have been "advisable to have this conversation with the judge before this got to crisis mode."
Napoli said he did not anticipate that the firm's financing arrangements or retainer agreements would be subject to court "scrutiny or vetting." He added, "I don't think it [would have been] beneficial to come to the court with the defendants by my side and discuss how this case was financed."
Napoli argued in his papers that the judge, in a June 25 order, had delegated the issue of costs to the allocation neutral hired to determine and manage disbursements under the settlement.
Hellerstein began the hearing by saying he asked for answers from Napoli because he was unfamiliar with the practice of borrowing to finance litigation and passing on interest costs.
"I'm not saying borrowing is inappropriate -- the question is the appropriateness of passing it onto clients," he said. "I'd never seen that before."
To answer these concerns, Napoli presented Anthony Sebok of Benjamin N. Cardozo School of Law, who said the practice of financing and then assessing interest costs "is something that is permissible and done."
It was unusual, Sebok suggested to the court, but only because this was an unusual case and not a class action.
"The reason it's not done in class actions is there is no client signing a retainer agreement in class actions," Sebok told the judge. "The root [of this issue] is in your structuring this as an aggregation of individual cases."
Sebok said he was of the opinion that Napoli had "no choice" but to finance the litigation through borrowing.
He was followed by W. Bradley Wendel of Cornell Law School, who offered that there were "numerous ethics opinions that say borrowing costs" can legitimately be passed on to a client, including opinions from both the city and state bar.
Next up before the judge is a hearing Wednesday on a fight between Napoli and Andrew Carboy of Sullivan Papain Block McGrath & Cannavo over the reimbursement of common benefit costs in the litigation.
Carboy, who represents over 600 plaintiffs in the litigation, is co-liaison counsel for the plaintiffs in the case, along with Napoli, and both sides have filed papers challenging the other's claim on common benefit costs.