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KRUMME v. WESTPOINT STEVENS INC.

October 28, 1999

ROBERT D. KRUMME, PLAINTIFF,
v.
WESTPOINT STEVENS INC., FORMERLY KNOWN AS WEST POINT-PEPPERELL, INC., DEFENDANT. GORDON E. ALLEN, ET AL., PLAINTIFFS, V. WESTPOINT STEVENS INC., FORMERLY KNOWN AS WEST POINT-PEPPERELL, INC., DEFENDANT.



The opinion of the court was delivered by: Scheindlin, District Judge.

OPINION AND ORDER

For more than ten years, the parties in the above-captioned cases have been involved in litigation concerning the terms of an executive pension plan. During that time, the parties have briefed dozens of issues, conducted two trials before this Court and perfected two appeals to the Second Circuit. The instant dispute regarding the amount of attorneys' fees to be awarded represents the final battle in a long and hard-fought war.

In two previous opinions, I concluded that plaintiffs*fn1 were entitled to recover attorneys' fees and costs pursuant to a contractual provision in the disputed pension plan. See Allen v. WestPoint-Pepperell, Inc., 933 F. Supp. 261, 269-70 (S.D.N.Y. 1996); Krumme v. West Point-Pepperell, Inc., 22 F. Supp.2d 177, 180 (S.D.N.Y. 1998). I referred the calculation of the appropriate award of attorneys' fees and costs to Magistrate Judge James C. Francis, IV, who issued a Report and Recommendation on June 17, 1999 ("Report") and a Supplemental Report and Recommendation on June 30, 1999 ("Supplemental Report"). In July 1999, the parties submitted objections to the Magistrate's findings.

Pursuant to 28 U.S.C. § 636(b)(1)(C), this Court has conducted a de novo review of those portions of the Report and Supplemental Report to which the parties object. For the reasons that follow, I decline to adopt the Magistrate's findings with respect to capping the amount of recoverable attorneys' fees at one-third the amount in controversy, see Report 21-27; and (ii) declining to add contractual interest to an award of expert fees charged by the law firm of Skadden, Arps, Slate, Meagher & Flom ("Skadden"), see Supplemental Report at 2. In addition, I am modifying the Magistrate's decision with respect to plaintiffs' ability to recover expenses incurred to collect attorneys' fees. See id. at 19-21. I accept and adopt all of the remaining findings of the Magistrate's thorough and thoughtful Report and Supplemental Report.*fn2

I. Background*fn3

Robert Krumme, plaintiff in the Krumme case, and the nine individual plaintiffs in the Allen case (the "Allen plaintiffs") are former senior executives of Cluett, Peabody & Company ("Cluett"), an apparel manufacturer. In 1975, Cluett established an employee benefit plan for its senior executives known as the Executive Permanent Insurance Program ("EPI Program"). Defendant WestPoint Stevens, Inc. ("WestPoint") acquired Cluett in 1986 and operated the company as a wholly-owned subsidiary. In 1988, in an effort to protect the retirement benefits of EPI Program participants against a hostile takeover of the company, WestPoint offered participants an opportunity to subscribe to an amendment to the EPI Program ("EPI Amendment"). Pursuant to the EPI Amendment, in the event WestPoint experienced a "Change in Control", participants would receive a lump sum payment in an amount equal to the present value of their future stream of benefits. Krumme and the Allen plaintiffs all agreed to the Amendment.

As an additional measure of protection, the EPI Amendment also includes a provision which requires the company (Cluett/WestPoint) to compensate EPI Program participants for legal fees and costs expended in enforcing their rights under the plan after a change in control. Specifically, the attorneys' fees clause provides:

  If at any time upon or after a Change of Control there
  should arise any dispute as to the validity,
  interpretation or application of any term [or]
  condition of this Agreement . . . Cluett agrees, upon
  written demand by an Executive, to provide sums
  sufficient to pay on a current basis (either directly
  or by reimbursing the Executive or his legal
  representative) the Executive's costs and reasonable
  attorneys' fees (including expenses of investigation
  and disbursements for the fees and expenses of
  experts, etc.) . . . incurred by the Executive in
  connection with any dispute or litigation, regardless
  of whether the Executive is the prevailing party,
  involving any provision of this Agreement, provided
  that the court in which such litigation is pursued
  determines, upon application of any party, that the
  Executive or his legal representative did not initiate
  frivolously such litigation.

EPI Amendment, Ex. A. to 1/22/99 Affidavit of Robert J. Hausen, Attorney for the Allen Plaintiffs ("Hansen Aff."), ¶ 16. Thus, under the EPI Amendment, WestPoint must compensate participants for legal expenses regardless of whether the participants prevail on their claims. And, not only is WestPoint required to compensate participants for attorneys' fees and costs, it is required to do so "on a current basis." The only conditions to payment of reasonable attorneys' fees under the clause are that (i) a change of control must have occurred; and (ii) the participant's claims must not be frivolous.

Following the Second Circuit's decision on the merits, this Court affirmed its prior holding that both Krumme and the Allen plaintiffs were entitled to attorneys' fees under the EPI Amendment and referred the case to Magistrate Judge Francis for calculation of the proper award.*fn5 See Krumme, 22 F. Supp.2d at 180.

II. Magistrate's Report

The Krumme case was litigated both by Krumme, acting pro se, and by the law firm of Morgan, Lewis & Bockius LLP ("Morgan Lewis"). The Allen plaintiffs were represented during the litigation by Krumme and by the law firm of Chadbourne & Park ("Chadbourne"). Krumme and the Allen plaintiffs have requested an award of attorneys' fees based on their counsels' billable hours multiplied by an hourly rate plus costs and contractual interest. Their original fee applications are summarized in the following chart:

PLAINTIFFS' FEE APPLICATIONS

CASE   COUNSEL       FEES        COSTS      INTEREST    TOTAL
Krumme Krumme        $151,688    $814       $245,259    $397,761
Morgan Lewis  $854,439    $53,791    $786,748    $1,694,978
Allen  Krumme        $399,825    $5,830     $192,682    $598,337
Chadbourne    $1,879,624  $138,484   $965,652    $2,983,760

See Report at 9.

Rather than awarding attorneys' fees based on billable hours as requested by Krumme and the Allen plaintiffs, see "fees" column above, the Magistrate determined the total amount in controversy in each case, and he awarded counsel an aggregate of one-third of the amount in controversy in their respective cases.*fn6 See id. at 21-27. The Magistrate also reduced Morgan Lewis's and Chadbourne's requested costs based on his findings that the firms' rates for in-house photocopying were inflated compared with the rates of outside vendors and that certain costs that were routinely included in the firms' operating budgets should not have been charged to the Krumme and Allen clients. See id. at 27-29. Finally, the Magistrate awarded contractual interest on the allowed fees and costs by determining the ratio of interest requested as a percentage of the fees and costs requested and applying that ratio to the fees and costs actually awarded. See id. at 29-33. The Magistrate declined to compensate plaintiffs for expenses incurred to collect attorneys fees. The Magistrate's award of attorney's fees and costs is summarized in the following chart:

MAGISTRATE'S FEE AWARD

CASE   COUNSEL       FEES     COSTS     INTEREST    TOTAL
Krumme Krumme        $34,839   $814     $57,401     $93,054
Morgan Lewis  $195,881  $46,660  $211,011  $453,552
Allen  Krumme        $164,266  $5,830   $79,945   $250,041
Chadbourne    $774,394  $91,583  $415,669  $1,281,646

See id. at 33.

In his Supplemental Report, the Magistrate awarded Krumme an additional $9,359 in costs for expert fees charged by Skadden in May 1996. See Supplemental Report at 1-2. However, the Magistrate declined to add contractual interest to that amount. See id.

III. Objections to the Report

As set forth above, both parties object to various portions of the Magistrate's Report. Defendant objects to the Magistrate's award of (i) attorneys' fees to the Allen plaintiffs; (ii) contractual interest to plaintiffs in both cases; and (iii) attorneys' fees to Krumme for his pro se work. See WestPoint Stevens Inc.'s Objections to the Report and Recommendation of Chief Magistrate Judge James C. Francis, IV ("WestPoint Obj."). I find that defendant's objections to these awards of fees and interest are without merit for the reasons set forth in the Report. See Report at 11-16; 18-19; 29-32.

Plaintiffs' objections to the Report are more persuasive. Plaintiffs' main contention is that the Magistrate erred in capping attorneys' fees at one-third the amount in controversy. See [Krumme's] Objections to Certain Parts of the Magistrate Judge's Report and Recommendation for Attorney's Fee Awards ("Krumme Obj.") at 4-14; [Allen Plaintiffs'] Objection to Report and Recommendation ("Allen Obj.") at 8-16. Plaintiffs also assert that under the circumstances of the instant case they should be allowed to recover expenses incurred to collect attorneys' fees. See Krumme Obj. at 15-17; Allen Obj. at 19-20. Plaintiffs' arguments are discussed in turn below.*fn7

A. Cap on Attorneys' Fees

  Under New York law, there is no single formula for the calculation of
 reasonable attorneys' fees.*fn8 Whether a fee request is appropriate
 depends upon the circumstances surrounding a particular case and an
 evaluation of the following factors: "the difficulty of the questions
 involved; the skill required to handle the problem; the time and labor
 required; the lawyer's experience, ability and reputation; the customary
 fee charged by the Bar for similar services; and the amount involved."
 Beary v. Verbel (In re Schaich), 55 A.D.2d 914, 391 N.Y.S.2d 135, 136
 (2d Dep't 1977).

In analyzing the appropriate award of attorneys' fees in Krumme and Allen, the Magistrate considered only one of the factors listed above, namely the amount involved in the litigation. Citing Diamond D Enterprises USA, Inc. v. Steinsvaag, 979 F.2d 14 (2d Cir. 1992), the Magistrate found that "[f]ees in excess of the amount involved in the litigation are presumptively unreasonable." Report at 21 (citing Diamond D, 979 F.2d at 19). The Magistrate also set forth the additional criterion that "the fee award should be `reasonably related to the fee arrangement that the prevailing party would have made with counsel absent a fee-shifting agreement.'" Id. at 22 (quoting In Time Prods. Ltd. v. Toy Biz, Inc., 38 F.3d 660, 667 (2d Cir. 1994)).

Relying on the above-quoted language from Diamond D and In Time Prods., the Magistrate concluded that regardless of the amount of time and effort actually expended by plaintiffs' counsel, plaintiffs were only entitled to attorneys' fees in an amount less than the total amount in controversy in their respective cases. See id. at 25-27. The Magistrate also concluded that in the absence of a contractual attorneys' fee provision, both Krumme and the Allen plaintiffs would have entered into a one-third contingency arrangement with their counsel:

  Since it is highly unlikely that the plaintiffs would
  have agreed to pay their attorneys more than one-third
  of their maximum recoveries (or to pay them on a
  straight hourly basis) in the absence of the
  contractual fee-shifting provision, their fee award
  must be limited to those amounts.

Id. at 25.*fn9 Accordingly, the Magistrate determined what he considered to be the "amount in controversy" in each case, see infra Part III.A.3, and he capped the aggregate attorneys' fees in each case at one-third that amount. See Report 25-27. If adopted, the Magistrate's cap would effectively reduce the amount of requested attorneys' fees in the Krumme and Allen cases by 77% and 59% respectively.

Plaintiffs claim that the Magistrate erred in capping their recovery of attorneys' fees at one-third the amount in controversy. I agree for several reasons. First, due to the unique nature of the EPI Amendment's provision for legal expenses ("EPI fee provision"), the "amount in controversy" is not a meaningful or necessary gauge of reasonableness. Second, consideration of the arrangement plaintiffs would have made with counsel absent the EPI fee provision is similarly inapplicable in the instant case. Third, even assuming that the "amount in controversy" ...


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