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Strongly urging lower court judges to explain their reasoning when cutting attorneys’ fees in class-actions, a federal appeals court vacated a fee award of $1.7 million to lawyers who asked for more than $3.1 million for their work in winning a $9.5 million settlement. “The district court abused its discretion in this case by not exercising it; and when it did exercise it, by misapplying our jurisprudence,” Chief U.S. Circuit Judge Edward R. Becker wrote in Gunter v. Ridgewood Energy Corp. The ruling is a victory for attorneys Joseph Sternberg of Goodkind Labaton Rudoff & Sucharow in New York and G. Martin Meyers of Denville, N.J., who argued that U.S. District Judge William H. Walls of the District of New Jersey ignored their arguments that the case was an extremely difficult and labor-intensive one that had resulted in a very favorable settlement for the class. The case arose from a series of failed oil and gas investments. The plaintiffs were investors in a series of limited partnerships who claimed that the defendants fraudulently marketed and sold about $150 million worth of interests in the partnerships between 1986 and 1990. When the $9.5 million settlement was struck, the plaintiffs’ lawyers asked for $3.16 million in fees. But Walls allowed fees of only 18 percent of the fund, or $1.71 million. Becker said Walls explained his decision to slash the fees by nearly half with “a conclusory one-sentence statement.” Walls wrote: “The nature of this litigation, its resolution at this stage without the necessity of a trial, the nature of the settlement and its value, convince the court that it would place a reasonable burden on the class to award fees of 18 percent of the settlement fund.” Becker said Walls “expanded slightly upon that statement” when he denied a motion for reconsideration, by saying that he did not credit “the unexplained and undetailed expenditure of 2,500 hours by counsel.” But Becker said Walls declined the lawyers’ invitation to review their billing records and that the judge did not explain why he had refused to credit 2,500 of the 8,500 hours “even though counsel proffered documentation for that work.” The jurisprudence of the 3rd Circuit, Becker said, calls for “thorough judicial review” of fee applications. “Without a reasoned and documented explication of the rationale for approving or denying a particular fee award, it is difficult, if not impossible for an appellate court to review such an award for abuse of discretion,” Becker wrote. Walls’ rulings, Becker said, were “vague and conclusory” and “did not address or apply the relevant criteria . . . that a district court should consider in awarding fees in a class action.”‘ Becker, who was joined by U.S. Circuit Judges Jane R. Roth and Max Rosenn, said it was impossible to review Walls’ rulings because he never discussed how he had applied the seven factors that go into deciding how to award fees in a common-fund case. “The problem in this case is that the district court dealt with the fee-award issue in a cursory and conclusory fashion,” Becker wrote. “Even after reading the district court’s opinions, it remains difficult to discern both how the court arrived at the 18 percent award figure, and why it reached certain other conclusions that it did. The court mentioned the costs awards factors that a court should consider in such circumstances, but did not apply any of the factors, at least insofar as we can ascertain,” Becker wrote. In a final footnote to the opinion, Becker said that lower court judges can “avoid many of the complications associated with fee awards by setting guidelines and ground rules early in the litigation process.” Such ground rules, he said, may include orders pertaining to record-keeping that facilitate judicial review; periodic status reports; establishing reasonable hourly rates; and capping the amount of time that lawyers may spend on a particular matter if they expect to be compensated. Another approach, Becker said, is to determine the fee arrangement in advance through competitive bidding. “This device appears to have worked well, and we commend it to district judges within this circuit for their consideration,” Becker wrote. In listing cases in which bidding processes have been used, Becker cited district court rulings from the Northern District of California, the Northern District of Illinois and one decision by Walls himself, in In Re: Cendant Corp. Litigation. Finally, Becker said, a judge who suspects that the class plaintiffs’ rights are not being adequately vindicated by appointed counsel may appoint a special master “to review or challenge the fee application.”

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