Opinion
No. CV 01 0388156
February 24, 2004
MEMORANDUM OF DECISION
On November 29, 2001, the plaintiff James Stutz (Stutz) commenced this suit by his application for temporary injunction against the defendants Horace Shepard (Shepard), Southport Athletic Club, Inc. (SACI) and eight others (the Individual Defendants). Stutz alleged that the action was brought by him individually and derivatively on behalf of the shareholders of Southport Athletic Club, Inc.
The alleged purpose of the suit was to enjoin the payment of annual employee bonuses pursuant to a bonus plan which Stutz believed was "flawed" and which would have had a negative effect on the finances and per share value of SACI.
The defendants appeared and opposed the relief sought by Stutz. Subsequently, the parties entered into an Arbitration Agreement, dated April 26,2002, which provided, inter alia, that SACI's Board of Directors would yield their authority to set bonuses and dividends for the next ten years to independent arbitrator David Chapman, who would hear the parties and then set the plan for the next ten years. On May 20, 2002, the Arbitration Agreement was then made an order of the court in this case.
The arbitrator filed his report in two phases: Phase I and Phase II.
Phase I is a lengthy, detailed recitation by the arbitrator of his findings and his orders. It addresses the concerns raised by the plaintiff in his derivative action and sets forth in clear language a Compensation Plan, designed to correct "structural anomalies" in the existing plan, and a Dividend plan, designed to help SACI provide a better current return to shareholders which, in turn, might encourage shareholders to retain their shares.
The parties have agreed on the record, that they do not take issue with Phase I of the arbitrator's decision. It is not part of the motions before this court.
Phase II deals with the award of fees and expenses incurred in this matter. It begins with the sentence: " Plaintiff is awarded $125,000.00 for fees and expenses of his counsel incurred in this matter, allocated first to expenses and then to attorneys fees."
The parties have agreed, on the record, that the "expenses" portion is not in dispute.
"Expenses" being understood by both parties to constitute $75,000.00 of the $125,000.00 amount which the arbitrator allocated "for fees and expenses."
The plaintiff's motion has been specifically limited to the "fees of his counsel" portion of that award. He seeks to have that part of the award vacated and referred to a successor arbitrator. The defendant's motion is to have the court affirm Phase II in its entirety.
Section 52-417, Connecticut General Statutes, provides, in relevant part, "At any time within one year after an award has been rendered and the parties to the arbitration notified thereof any party to the arbitration may make application to the superior court for the judicial district in which one of the parties resides for an order confirming the award. The court or judge shall grant such an order confirming the award unless the award is vacated, modified or corrected as prescribed in sections 52-418 and 52-419."
Section 52-418, Connecticut General Statutes, provides, in relevant part, "(a) Upon the application of any party to an arbitration, the superior court for the judicial district in which one of the parties resides . . . any judge thereof, shall make an order vacating the award if it finds any of the following defects: (1) If the award has been procured by corruption, fraud or undue means; (2) if there has been evident partiality or corruption on the part of any arbitrator; (3) if the arbitrators have been guilty of misconduct in refusing to postpone the hearing upon sufficient cause shown or in refusing to hear evidence pertinent and material to the controversy or of any other action by which the rights of any party have been prejudiced; or (4) if the arbitrators have exceeded their powers or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made."
The court is bound by the arbitrator's determination unless that determination falls within the proscriptions of this section or procedurally violates the parties' agreement. Costello Construction Corporation v. Teamsters Local 559, 167 Conn. 315, 318 (1974) (emphasis added).
The parties' Arbitration Agreement of April 26, 2002, at Paragraph 10, expressly provides that, "the parties may seek pursuant to General Statutes Sections 52-417, 52-418 and/or 52-419 judicial orders confirming, vacating and/or modifying any arbitration award entered pursuant to paragraphs 6 and/or 7 (but not for [plaintiff's] liability for fees under paragraph 7(ii) above). The parties further agree that any arbitration award regarding expenses (including attorneys fees) that enters pursuant to paragraph 6 may be vacated upon a determination by the court that the fee was clearly erroneous as to entitlement and/or amount." (Emphasis added.)
The plaintiff argues that the arbitrator's award as to counsel fees is inherently "clearly erroneous" because it was not arrived at by either one of the only two appropriate methods for determining shareholder's derivative fees: "percentage" and "lodestar." The defendant maintains that the decision is not "clearly erroneous" because the arbitrator could have, and in fact did, adopt a third method: "reasonableness."
As the "clearly erroneous" basis for seeking to vacate the award is the vehicle upon which this case was brought, the court is not limited to statutory considerations, including the four statutory bases to vacate enumerated in Sec. 52-419, C.G.S., in deciding the motions before it.
PERCENTAGE METHOD
A threshold prerequisite to any award of counsel fees to the plaintiff is a determination by the arbitrator that the action commenced by the plaintiff ultimately resulted in "a substantial benefit" to the corporation, as that term is utilized in Sec. 33-726(1) of the General Statutes.
The arbitrator made that determination in the second paragraph of Phase II. What the arbitrator went on to add, however, was that while there was a "substantial benefit" inuring to SACI as a result of the plaintiff's action, ". . . awarding fees on a percentage of benefits test is impossible because the dollar value of the benefits cannot be reliably quantified." Citing CT Page 2593 Seinfeld v. Robinson, 246 App.Div.2d 291, 297, 767 N.Y.S.2d 579 (1998). The primary reason he gave for that finding was the unknown future monetary impact of the new compensation plan which made such quantification too speculative.
It is obvious from his statements that he was well aware of the percentage approach to awarding counsel fees, and was equally aware that, under the facts existing, that the percentage method was not appropriate in this case.
According to the plaintiff, that would leave on the "lodestar" method of determining shareholder derivative fees, in accordance with prevailing shareholder derivative law.
LODESTAR METHOD
"[L]odestar" is "the product of reasonable hours times a reasonable rate." Pennsylvania v. Delaware Valley Citizens' Council for Clean Air, 478 U.S. 546, 559-60 (1986) ( Delaware Valley I).)
Commonly accepted in many shareholder derivative suit is the lodestar method of assessing attorneys fees. The figure is reached by multiplication of the hours expended by the hourly rate of the attorney. It is often increased by a multiple of two or three in those cases where the court or arbitrator determines that the risk factor in prevailing in a suit was so great that the fee should be enhanced to reward counsel for its involvement in bringing and prevailing in a case where the benefits to the corporation (or the community) are significant. It is universally recognized as incentive for plaintiffs to take on rich or powerful or established wrongdoers.
The plaintiff in this case is proceeding under the adamant belief that when, in a shareholder derivative suit, legal fees are awarded to the plaintiff, the lodestar figure submitted plaintiff's attorney (in this case $150,725.00) is binding on the arbitrator as a mandated "bottom-line" fee. Additionally, the plaintiff takes the position that once the lodestar amount is "established," it cannot be appreciably reduced (or increased, for that matter) without specific findings by the arbitrator. The plaintiff cited numerous federal shareholder derivative suits as authority for his position.
"The `lodestar' figure has, as its name suggests, become the guiding light of our fee-shifting jurisprudence. We have established a `strong presumption' that the lodestar represents the `reasonable' fee, Delaware Valley I, supra, at 565, and have placed upon the fee applicant who seeks more than that the burden of showing that `such an adjustment is necessary to the determination of a reasonable fee.'" Blum v. Stenson, 465 U.S. 886, 898 (1984); Burlington v. Dague, 505 U.S. 557, 562 (1992).
In his case, the lodestar figure, although submitted to the arbitrator, was never expressly "established" by the arbitrator, and the award of $50,000.00 amounted to less than one-third of the lodestar figure, yet no reason or basis for that deviation from the lodestar amount was articulated.
"REASONABLENESS" METHOD
As noted, pursuant to Paragraph 10 of the parties' April 26, 2002 Agreement, "any arbitration award regarding attorneys fees may be vacated upon a determination by the Court that the fee award was clearly erroneous either as to entitlement and/or amount."
If Sec. 33-726(1), C.G.S. was the only basis for determining plaintiff's counsel fees, the "reasonableness" would be limited to the black letter law of that statute. However, by the terms of their Agreement, Paragraph 7, the parties expressly agreed that the plaintiff "may submit . . . a request for payment of [his] reasonable expenses, including attorneys fees . . . in accordance with prevailing shareholder derivative law and Conn. Gen. Stat. Sec. 33-726(1) . . ." (Emphasis added.)
While there may be few, if any, cases in Connecticut which mandate the application of either the "percentage" or "lodestar" method of awarding counsel fees, the federal court is replete with "shareholder derivative law" cases, which mandate the use of one method or the other. Based on the express written agreement of the parties, this court finds that the parties contemplated that such case law could and would have an impact on the disputes in this case.
A more careful reading of the critical finding by the arbitrator regarding the award of plaintiff's counsel fees gives this court reason to believe that even he anticipated the legal dispute pending herein when he characterized the award as being, "in the admittedly subjective amount of $56,000.00 . . ." which he, nevertheless, awarded, but with no articulated reason for its basis. Nor did he articulate whether the lodestar amount of $150,725.00 was, in fact, "established" and, if so, what criteria were used to reduce said sum to the amount awarded.
As previously noted the Agreement of the parties expressly provides that the parties may seek, pursuant to statute, judicial orders confirming, vacating and/or modifying any arbitration award entered pursuant to paragraphs 6 or 7. They also agreed that "any arbitration award regarding expenses (including attorneys fees) that enters pursuant to paragraph 6 may be vacated upon a determination by the court that the fee awarded was clearly erroneous either as to entitlement and/or amount." That portion of the Agreement is worded almost as if one (or both) of them could see this issue on the horizon.
Having considered the arguments of counsel, the applicable statutes and case law, the court finds that the attorney fee portion of the Phase II of the Arbitrator's Award is "clearly erroneous as to entitlement and/or amount" because there is no basis articulated for the "admittedly subjective" award of $50,000.00, which is one-third of the lodestar amount submitted by the plaintiff. Additionally, there is no basis for factoring in "the overall economic impact on the shareholders . . . of the legal fees incurred by the corporation . . ." when determining the award of plaintiff's legal fees. The determination of $50,000.00 as a proper award of plaintiff's legal fees requires articulation.
For the foregoing reasons, the plaintiff's motion to vacate is hereby granted as to that specific portion of the award and Phase II of the arbitrator's award is remanded back to Arbitrator David R. Chipman, Esq. for articulation or other proceedings in accordance with not only Sec. 33-726(1), C.G.S., but also in accordance with "prevailing shareholder derivative law," as well.
The defendant's motion to confirm the arbitrator's award is denied.
By the Court,
Joseph W. Doherty, Judge