Opinion
Civil Action Nos. 16639 and 16931.
Date Submitted: July 1, 1999.
Date Decided: August 5, 1999. Date Revised: August 10, 1999. CORRECTED OPINION
Joseph A. Rosenthal and Carmella P. Keener, Esquires, of ROSENTHAL, MONHAIT, GROSS GODDESS, P.A., and Sidney B. Silverman, Esquire, of SILVERMAN, HARNES, HARNES, PRUSSIN KELLER, Attorneys for Plaintiff.
Edward P. Welch, Andrew J. Turezyn and Stephen D. Dargitz, Esquires, of SKADDEN, ARPS, SLATE, MEAGHER FLOM, LLP, Attorneys for Defendant Plum Creek Timber Co., L.P.
Jesse A. Finkelstein and Srinivas M. Ragu, Esquire, of RICHARDS, LAYTON FINGER, and Robert A. Sacks and Steven W. Thomas, Esquires, of SULLIVAN CROMWELL, Attorneys for Defendants Plum Creek Management Company, L.P. and P.C. Advisory Corp. I.
MEMORANDUM OPINION
This pending application for attorneys' fees arises out of a settlement of two related actions: Sonet v. Plum Creek Management Co., L.P., ___ Del. Ch. ___, C.A. No. 16639 (" Sonet I") and Sonet v. Plum Creek Management Co., L.P., ___ Del. Ch. ___, C.A. 16931 (" Sonet II"). The settlement of these two actions, described more fully below, was approved at a hearing held on June 21, 1999 at which the Court reserved decision on plaintiffs attorneys' fee application. This is the decision of the Court on that fee application.
I. RELEVANT FACTS
A. Events Leading to the Settlement
The facts that pertain to the fee application are largely procedural. Sonet I was an action challenging a proposed conversion of a limited partnership, Plum Creek Timber Company, L.P. ("Plum Creek") into a real estate investment trust ("the REIT conversion"). In that transaction the general partner's interest in the partnership — which consisted of 2% of all partnership distributions plus an ascending percentage interest in all distributions in excess of $0.21 2/3 per Unit (the latter percentage interest being referred to as the "promote") — would be converted into a 27% equity interest in the REIT. In Sonet I, the plaintiff Unitholder claimed that the terms of the REIT conversion were substantively unfair to the Unitholders, in that the promote and the 2% interest were worth significantly less than a 27% interest in the REIT. The plaintiff also argued that in negotiating and approving that transaction, the general partner had breached its fiduciary and contractual duties to both the partnership and the other limited partners.
The Court granted the plaintiffs motion to expedite the proceedings, and set the case down for trial in January 1999. Expedited discovery took place thereafter. The Court also scheduled a hearing for the defendants' motion to dismiss the complaint on November 17, 1999. Expedited discovery continued after that dismissal motion was heard, but shortly after the last deposition was taken Chancellor Chandler granted the motion to dismiss. The Chancellor ruled that in the partnership agreement, the Unitholders had contracted away their right to seek judicial review of the REIT conversion based upon substantive fiduciary principles, and that in place of judicial review, the parties had substituted a requirement of a two-thirds supermajority vote of the Unitholders to approve the transaction. The plaintiffs appealed the order dismissing Sonet I to the Supreme Court.
Sonet I, Del. Ch. , C.A. No. 16639, Chandler, C. (December 16, 1998).
During the pendency of that appeal, the general partner noticed a special meeting of Unitholders to vote on the proposed REIT conversion for March 22, 1999. In connection with that meeting, they disseminated on January 29, 1999 a proxy statement soliciting approval of the transaction. Shortly thereafter, the plaintiff in Sonet I filed Sonet II, an action challenging the disclosures made in that proxy statement. The plaintiff in Sonet II moved for a preliminary injunction, which, after expedited briefing, was heard and granted in an Opinion handed down on March 18, 1999. In that Opinion this Court ruled that the proxy disclosures were materially misleading in several respects, and that the Unitholder vote would be preliminarily enjoined until corrective disclosures were made. Thereafter, corrective disclosures were made, the Unitholder meeting took place, and the REIT conversion was approved.
Sonet II, Del. Ch. , C.A. No. 16931, Jacobs, V.C. (March 18, 1999)
After the REIT conversion was approved, and while the plaintiffs appeal from the adverse ruling in Sonet I was still pending, the parties negotiated a global settlement of both cases. In that settlement, which this Court ultimately approved on June 21, 1999, the defendants received general releases, and the two actions (including the appeal) were dismissed. In consideration therefor (and specifically in connection with Sonet I) the defendants promised to pay the Unitholder class up to $30 million — which amount would be held separate and secure — if over the next five years the REIT failed to meet the target projections that were the basis of the general partner's claim of entitlement to a 27% equity interest in the REIT. That settlement of Sonet I was found to be fair, because if the target earnings projections were met or exceeded, the general partner would have in fact earned the 27% interest; but if those projections were not met, the Unitholders would receive $30 million as compensation for having conferred upon the general partner a 27% equity interest. As for Sonet II, because the plaintiffs had litigated and won that case and the settlement had finalized that victory, all that remained was for the plaintiffs to apply for a counsel fee award.
B. The Counsel Fee Application
The fee application submitted by plaintiffs counsel at the settlement hearing was broken down into two parts, each part corresponding to one of the two settled actions. For their efforts in Sonet I the plaintiffs sought a counsel fee of up to 25% of the, up to $30 million distributable to the Unitholders, over the next five years, if and as when those monies were actually distributed. Under this arrangement, the plaintiffs attorneys' fee — which could range from $0 to $7.5 million — was entirely contingent upon the success — or failure — of the REIT management to achieve their performance projections. Because the plaintiff did not quantify the benefit achieved by the Sonet I settlement, either by demonstrating the probability that management would (or would not) fail to achieve the projections, or by discounting the number resulting from that process by the time value of money, it was impossible to quantify the precise fee that plaintiffs counsel would be receiving in Sonet I. That would be knowable only five years down the road.
That uncertainty was not a problem in the case of the Sonet II fee application. The plaintiffs took the position that the benefit achieved by the settlement of that case — corrective disclosure — was not quantifiable, and that their fee should be determined on a quantum meruit basis; that is, it should be measured by the hours counsel expended multiplied by a reasonable hourly rate. The amount of the requested fee, which was separate from the Sonet I contingent fee described above, was $1.5 million.
The problem, however, was that the hours for which counsel claimed credit in Sonet II included some 715 hours of time that had been devoted to taking discovery in Sonet I. The result was to increase the "lodestar" (the dollar value of counsels' time in Sonet II) from $453,820 to $707,445. The lodestar itself was based upon claimed hourly rates ranging from $490 per hour to $175 per hour for attorneys, and $125 per hour for a paralegal. Thus, the $1.5 million fee request represented slightly more than twice the lodestar.
That fee structure was problematic for the Court. To the extent that structure was premised upon the two actions being considered separately for fee purposes, it was inconsistent to import into Sonet II the 715 hours devoted to discovery in Sonet I. Supposedly plaintiff's counsel was being compensated for that 715 hours of time in the form of the 25% contingent fee settlement. The Court's concern was that by seeking to reallocate that time to Sonet II, counsel was not only "double counting" but also was changing the terms of the contingency, in effect by rendering approximately 715 hours of that time (at counsels' claimed hourly rates) noncontingent, and then by seeking to double that augmented amount by applying a multiple of 2. That approach might be justified (at least theoretically) if counsel were treating both cases together as a unitary effort, but that was not the basis upon which the fee application was presented.
Even if premised upon treating both cases as a unitary effort the fee application was problematic, because no effort was made to reduce the fee request to a single number to enable the Court to assess its reasonableness. The $1.5 million fee request for Sonet II was, of course, a discrete number, but at the settlement hearing plaintiffs counsel conceded that he had not attempted to "present value" the 25% contingent fee sought in Sonet I, and that it would be highly difficult, if not impossible, to do so.
Because of this dilemma, the Court advised counsel at the settlement hearing that they would have to choose one approach or the other, because as presented the reasonableness of the fee application could not be assessed. The Court advised that if counsel elected to have both actions considered as a unitary effort, then the 25% contingent fee component would have to be discounted for both the probability that it might never be received, and also for the time value of money. If, on the other hand, counsel elected to treat the two cases separately, then the time allocable to discovery in Sonet I should be "backed out" of the hours for which a quantum meruit fee was being sought in Sonet II. The Court asked counsel to submit a supplemental memorandum in support of their fee application, however structured.
Counsel submitted their supplemental memorandum on July 1, 1999. In that submission they elected to treat the two cases separately, and identified the hours (and value attributable thereto) devoted to discovery in Sonet I. Counsel continued to advocate, however, for reasons next discussed, that those 715 hours should be credited to Sonet II for fee awarding purposes.
II. ANALYSIS
Two issues are presented. The first is whether the 715 hours devoted to discovery in Sonet I should be reallocated to Sonet II for fee awarding purposes. The second is what fee amount is reasonable in these circumstances assuming that allocation has been made.
A. Reallocation of the 715 Hours
Plaintiffs counsel contends that their requested reallocation is reasonable, because in these particular circumstances the appropriate test should not be whether the work was performed before or after the complaint in Sonet II, but "the nature of the work done by counsel and the context in which it was performed." Supplemental Memorandum, at 3. In this case, counsel explains, on November 7, 1998 the Court in Sonet I scheduled trial to commence on January 11, 1999, and scheduled oral argument on the motion to dismiss for November 17, 1998. Thereafter, discovery ensued at a precipitate pace and within a five week period, plaintiffs counsel took six depositions and examined and analyzed multiple boxes of documents.
During this discovery period the plaintiff had also received the defendants' preliminary proxy materials and was already focusing on disclosure issues with an eye to asserting disclosure claims in addition to the other fiduciary claims already asserted in Sonet I. But, five days after the last deposition was taken, the Chancellor dismissed the amended complaint in Sonet I on legal grounds. Although the plaintiff appealed that dismissal, at the same time he prosecuted disclosure claims by filing the Sonet II complaint and moving for a disclosure-based preliminary injunction, without the need to take any additional discovery in that case.
Counsel further explains that although the 715 hours of discovery time was expended in Sonet I, but for the dismissal of that action in these unique procedural circumstances and the unusual time constraints in which counsel was required to operate, that discovery would have occurred in Sonet II after the dismissal of Sonet I. In any event, that discovery was used exclusively in Sonet II, and not in Sonet I, not only as the basis for drafting the Sonet II complaint but also as the basis for the ultimately successful motion to enjoin the Unitholder vote on the REIT conversion. Accordingly, plaintiff submits, it would be unfair to deprive counsel of compensation for taking the discovery that led to the grant of injunctive relief solely because of the litigation timetable in Sonet I. Counsel further submits that because the discovery to which the 715 hours was devoted was not used in the prosecution of Sonet I, the allocation of those hours to Sonet II would not constitute double counting.
Having considered counsels' explanation, I am persuaded that under the unique circumstances of this case, their position is well taken and that it is reasonable to reallocate, for fee awarding purposes, the hours devoted to taking discovery used exclusively (and successfully) to prosecute Sonet II. To do otherwise in these circumstances would be unfair and unreasonably formalistic. Although the problem could have been avoided had plaintiffs counsel filed Sonet II in mid-November 1998 and then taken the depositions in that case, the time-related litigation pressures were such that plaintiffs counsel should not be faulted for proceeding as they did. Accordingly, for purposes of this application, the 715 hours devoted to discovery taken in Sonet I but used exclusively to prosecute Sonet II, valued by counsel at $453,820 on an hourly basis, will be treated as if they were expended in Sonet II.
B. Determination of A Reasonable Fee
The second issue is what constitutes a reasonable fee for the services rendered in both of these cases. The fee arrangement negotiated in connection with the settlement of Sonet I is, in my view, unproblematic, as it is wholly contingent upon the Unitholders receiving all or some part of the $30 million distribution for "nonperformance" over the next five years. Counsel's 25% share of those distributions (if any) would be payable only if and as when they are made to the Unitholders. That arrangement represents reasonable compensation in these particular circumstances, even if it is assumed that the reallocated 715 hours had been expended in Sonet II.
Counsel incurred litigation expenses in the agreed upon amount of $125,000. Counsels' entitlement to reimbursement of that amount is not disputed.
The issue concerns counsels' chosen method of calculating a reasonable fee in Sonet II, which the Court is being asked to determine on a quantum meruit basis. In this respect the fee application is problematic, because counsel are asking the Court to do more than simply award a fee on the basis of hours expended multiplied by their hourly rates. On that basis the fee award would be $707,445. Rather, plaintiffs counsel are asking the Court to double that amount, i.e., apply a multiple of slightly more than 2, and award them $1.5 million, on the basis that it represents a "success bonus" that firms "routinely charge[d]" on an hourly, noncontingent basis.
That amount includes $692,325 of time (including the reallocated 715 hours) expended by Silverman, Harnes, Harnes, Prussin Keller; and $15,120 of time expended by Rosenthal, Monhait, Gross Goddess, P.A.
The $707,445 amount that represents counsels' total time was arrived at by applying hourly rates ranging from $175 to $470 per hour, depending upon the seniority of the attorneys involved. Those rates represent the range of hourly rates customarily charged by premier defense firms in litigation of this kind. Those rates are eminently reasonable from a quantum meruit perspective, because they capture the elements of benefit achieved, quality of counsels' effort, and contingency risk that the Court must consider. Indeed, in this case such rates appear fully adequate, if not generous.
Counsel did an excellent job in Sonet II, and they deserve to be compensated accordingly. In my opinion a reasonable fee from aquantum meruit standpoint that fairly compensates counsel for the quality of their efforts, the benefit they achieved, and the risks they took, is measured by the hourly rates that they claim here. To double those rates would not be reasonable or in keeping with the quantum meruit method of fee determination. Accordingly, counsel are awarded a fee of $708,000 for their services rendered in Sonet II, and may submit a supplemental form of order implementing the rulings made herein.
The approach of determining a "lodestar" fee (attorney time multiplied by actual hourly rates) and then increasing that lodestar amount by a multiple, closely resembles the "Lindy Bros." method of fee determination used by some federal courts. That is not the approach followed by our courts, either in "fund" cases or in nonpecuniary benefit cases where the fee is determined on a quantum meruit basis. Sugarland v. Thomas, Del. Supr., 420 A.2d 142 (1980). Nor is that approach consistent with the quantum meruit method of determining a reasonable fee, at least as that method has been applied by this Court. In applying that approach, this Court has customarily utilized counsels' customary hourly rates, not "multiplied" rates, to arrive at a reasonable fee.