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DUBIN v. E.F. HUTTON GROUP

January 31, 1995

JAMES DAVID DUBIN, on behalf of himself and all persons similarly situated, Plaintiffs, against THE E.F. HUTTON GROUP INC., E.F. HUTTON & COMPANY, INC., Defendants.

Peter K. Leisure, U.S.D.J.


The opinion of the court was delivered by: PETER K. LEISURE

LEISURE, District Judge:

 This is an appeal by the plaintiff class, its lead counsel, Roger W. Mehle, Esq. ("Mehle"), and Mehle's co-counsel, Kelley Drye & Warren ("Kelley Drye") from an Opinion and Order of Magistrate Judge Kathleen A. Roberts, dated March 4, 1994 (the "Order"). The parties had previously consented to present their case before Magistrate Judge Roberts. The Order made a determination regarding the application for attorneys' fees by Mehle and Kelley Drye, and by intervenors Vladeck, Waldman, Elias & Engelhard, P.C. ("Vladeck") and Christopher Lovell, P.C. ("Lovell"), counsel in two other class actions. For the reasons stated below, Mehle's and Kelley Drye's appeal is granted in part and denied in part, and the Order is modified.

 BACKGROUND

 This action was commenced on February 8, 1988, as an individual action by named plaintiff James David Dubin ("Dubin") against the E.F. Hutton Group Inc. and its wholly owned subsidiary E.F. Hutton & Company Inc. (collectively "Hutton"). On September 19, 1988, Dubin's complaint was amended to restate one of his claims, arising under section 12(1) of the Securities Act, as a class action claim (together with the four individual claims, the "Dubin action"). The Court certified the class by its Opinion and Order, dated July 19, 1990. In order to prepare for trial, on April 26, 1992, plaintiffs retained Kelley Drye to assist Mehle.

 On June 15, 1993, the parties to the Dubin action executed definitive settlement agreements settling the class claim for the amount of $ 4,128,674.50 and the four individual claims for the amount of $ 21,325.50. Order at 17. On June 29, 1993, with the consent of the parties and by order of the Court, the case was assigned to Magistrate Judge Roberts for the conduct of all further proceedings to effectuate the settlement. On or about July 1, 1993, Mehle sent Dubin class members a notice advising them of the pendency and terms of the proposed settlement and informing them that lead counsel, Mehle, and co-counsel, Kelley Drye, sought attorneys' fees of $ 979,912.50 and $ 401,005.05 respectively, plus reimbursement of Dubin's expenses not to exceed $ 90,000. *fn1"

 On July 23, 1993, Vladeck, counsel for Harris, and Lovell, counsel for Kaplan, indicated an intention to seek a fee from the Dubin settlement fund. They sought $ 250,000 and "at least $ 84,828.56," respectively. The fee applications by Harris and Kaplan class counsel arose as a result of the certification of overlapping classes in the three actions. *fn2" On September 8 and 9, 1993, Judge Roberts conducted a fairness hearing, and on September 15, 1993, Judge Roberts approved the settlement as proposed, but reserved decision as to attorneys' fees and reimbursement of expenses.

 In the Order, Judge Roberts awarded reduced fees and expense reimbursements to Mehle and Kelley Drye and awarded Vladeck and Lovell the full amount of the fees they requested.

 Mehle and Kelley Drye appeal that award. This Court has jurisdiction to hear this appeal under 28 U.S.C. § 636(c)(4) and Fed. R. Civ. P. 73(d), which provide for an optional appeal to the District Court, rather than the Court of Appeals, from a final order of a Magistrate Judge rendered under 28 U.S.C. § 636(c)(1). The standard of review on appeal for facts determined by the Magistrate Judge is the "clearly erroneous" standard. See Fed. R. Civ. P 52(a); United States v. United States Gypsum Co., 333 U.S. 364, 395, 92 L. Ed. 746, 68 S. Ct. 525 (1948). The standard of review on appeal where the matter for decision entailed the exercise of discretion by the Magistrate Judge is the "abuse of discretion" standard. See Lindy Brothers Builders, Inc. v. American Radiator & Standard Sanitary Corp., 487 F.2d 161, 166 (3d Cir. 1973). The Magistrate Judge's legal determinations are reviewable without limitation. See Clark v. John Lamula Investors, Inc., 583 F.2d 594, 603 (2d Cir. 1978).

 DISCUSSION

 A. Notice to Dubin Class

 
Rule 5. Fees in Stockholder and Class Actions
 
Fees for attorneys or others shall not be paid upon recovery or compromise in a . . . class action . . . except as allowed by the court after a hearing upon such notice as the court may direct. The notice shall include a statement of the names and addresses of the applicants for such fees and the amounts requested respectively and shall disclose any fee sharing agreements with anyone. . . . Where the court directs notice of a hearing upon a proposed . . . settlement of a . . . class action, the above information as to the applications shall be included in the notice.

 S.D.N.Y. Civ. R. 5.

 Judge Roberts dismissed as unimportant Vladeck's and Lovell's failure to provide notice because they sought only a portion of the fee requested by Dubin counsel. Mehle contends that any award to Vladeck and Lovell would deprive the Dubin class of the benefit of any reduction in Dubin counsel's fees. In other words, Mehle argues that it is not simply a matter of reducing Dubin counsel's fees to compensate Harris and Kaplan counsel, thereby leaving Dubin class members unaffected. Rather, Mehle contends that if Dubin counsel truly deserve reduced fees, the deduction should accrue to the benefit of Dubin class members. In addition, Mehle maintains that although Dubin class members may have approved paying Dubin counsel up to $ 1,380,917.55, it is not clear that they would have accepted disbursing the identical sum had they been informed that part of the disbursement would be distributed to Harris and Kaplan counsel. Therefore, concludes Mehle, it is not permissible merely to pay Harris counsel and Kaplan counsel from the monies already allocated for attorneys' fees because doing so violates both Civil Rule 5 and the due process requirements of Fed. R. Civ. P. 23.

 The instant case presents the Court with an unusual situation. Vladeck and Lovell have not conformed with the technical rules of Rule 5 notification, but as will later be discussed, they are, in fact, entitled to the payment awarded to them. This Court notes that it is important that courts avoid awarding windfall fees and that they should avoid any appearance of having done so. See City of Detroit v. Grinnell Corp. 495 F.2d 448, 469-70 (2d Cir. 1974). Fee awards, under the equitable fund doctrine, are proper "only if made with moderation and a jealous regard to the rights of those who are interested in the fund. . . ...


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