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United States District Court, Southern District of New York

October 28, 1999


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


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.

In 1989, WestPoint merged with a company called Farley, Inc. Immediately following the merger, WestPoint tendered to each of the plaintiffs — and to twenty-seven other EPI Program participants*fn4 — a lump sum payment of benefits discounted at an interest rate of 9.3%. It is this present value discount rate that sparked a decade of litigation. Krumme and the Allen plaintiffs believed that a lower discount rate of 5% should have been used to calculate their lump sum payments, while WestPoint maintained that 9.3% was the proper figure. Krumme filed his complaint in 1989, and the Allen plaintiffs filed their complaint in 1990. The merits of both cases were vigorously litigated until May 1998 when the Second Circuit held that 9.3% was, in fact, the appropriate discount rate. See Krumme, 143 F.3d at 84-86 (reversing district court's finding that 5% was the appropriate discount rate).

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:



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:



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" were a requisite factor, a cap on fees is still inappropriate because the true "amount in controversy" exceeds plaintiffs' requested fee awards.

1. "Amount in Controversy" is Not A Bright-Line Rule

The Magistrate treated the general rule that reasonable attorneys' fees should not exceed the amount in controversy as a per se bar to plaintiffs' recovery of their requested fees. That is, once the Magistrate determined that the requested fee applications were greater than the amount in controversy, he radically reduced plaintiffs' fee requests without considering any of the other factors of reasonableness listed above. Such a result was not compelled by either the cases the Magistrate relied upon or by New York law.

To begin, the three Second Circuit cases cited by the Magistrate make clear that there is no bright-line rule — even with regard to the amount in controversy — for the calculation of reasonable attorneys' fees. See In Time, 38 F.3d at 667-68; Diamond D, 979 F.2d at 20; F.H. Krear & Co. v. Nineteen Named Trustees, 810 F.2d 1250, 1263-64 (2d Cir. 1957). For example, although the court in Diamond D found that the amount in controversy in the litigation "is generally the ceiling on the fees that may be awarded pursuant to a fee-shifting clause", it went on to conclude that "[t]his is only a rule of thumb. . . . It is a starting point in the process of ultimately determining whether a fee award is reasonable." Diamond D, 979 F.2d at 19-20 (emphasis added). Similarly, F.H. Krear refers to the "general rule in New York, i.e., that it is rarely proper to award fees in an amount that exceeds the amount involved in the litigation." Krear, 810 F.2d at 1250 (emphasis added).

More important, however, is that the New York case law upon which the Second Circuit relied in F.H. Krear and Diamond D explicitly states that there are circumstances where reasonable attorneys' fees can exceed the amount in controversy. See Simmons v. Government Employees Ins. Co. (In re Simmons), 59 A.D.2d 468, 400 N.Y.S.2d 99 (2d Dep't 1977) (cited in F.H. Krear and Diamond D for proposition that under New York law an award of fees in excess of amount in controversy is generally unreasonable); Colon v. Automatic Retailers Assoc. Serv. Inc., 74 Misc.2d 478, 343 N.Y.S.2d 874 (Civ.Ct. N YCo. 1972), rev'd on other grounds, 74 Misc.2d 665, 347 N.Y.S.2d 312 (App.Term 1st Dep't 1973) (same).

For example, in Colon, the seminal New York case with respect to the "amount in controversy" rule, defendant British Overseas Airways Corporation ("BOAC") sought reimbursement for attorneys' fees from its co-defendant pursuant to an indemnification clause. 74 Misc, 2d 478, 343 N.Y.S.2d 874. BOAC requested an award of $10,236.54 based on hours expended times an hourly rate. Id. at 882. In evaluating the reasonableness of BOAC's requested fees, the court found that "the amount of time expended considering the complexities involved in [the] case was fair and reasonable. . . . In the court's opinion, subtle and complex questions of law and fact were skillfully analyzed, researched and briefed by BOAC's lawyers." Id. With respect to the amount involved in the litigation, however, the court's jurisdiction was limited to $10,000, and thus the requested fee exceeded the amount in controversy. Id. Although the court recognized the general rule that "[a] fee in excess of the amount involved in a litigation would normally appear to be unreasonable", id. at 883, it concluded that there were circumstances where this general rule was inapplicable:

  Every gentleman of the Bar well knows that there
  cannot be any one rule of charges in the nature of a
  horizontal tariff on all cases.

    Every lawyer knows that there are some cases where
  the fee must be greater than the amount of money
  involved in the litigation. True, these are the
  exceptions to the rule. An action to recover a small
  disability payment under a disability insurance
  policy, an action to recover rent or other payment
  under a lease which would be determinative of the
  validity of the policy are two exceptions which come
  to mind. There are other cases where there are
  transcending principles involved which make it
  economically feasible and reasonable that a fee be
  paid in excess of the amount involved in the

Id. (internal quotations omitted). In Colon, the court found that "transcending principles" were involved in the litigation because in defending the action, BOAC and its co-defendant raised and resolved issues regarding their indemnification agreement that would benefit both BOAC and its co-defendant in the future. Id. As a result, the court concluded that BOAC should receive its full request for attorney's fees regardless of the amount in controversy.*fn10

Like the Colon case, the Krumme and Allen cases involve circumstances which warrant an exception from the general rule regarding fees in excess of the amount in controversy. As discussed below, the unique nature of the EPI fee provision together with the policy reasons underlying the provision render consideration of the amount in controversy inappropriate. Moreover, both cases involve "transcending principles" that further justify a fee award in excess of the amount involved in the litigation.

(a) EPI Fee Provision

F.H. Krear, Diamond D and In Time Prods, all involved requests for attorneys' fees pursuant to classic "fee-shifting" clauses. A fee-shifting clause provides "that in the event of litigation[,] the losing party will pay the attorneys' fees of the prevailing party." F.H. Krear, 810 F.2d at 1263 (emphasis added). The term "fee-shift" is descriptive. That is, once a party prevails in the litigation, his or her responsibility for payment of attorneys' fees literally "shifts" to the other party.

In contrast, the EPI fee provision is not a classic fee-shifting clause. Indeed, it is technically not a fee-shifting clause at all because responsibility for payment of attorneys' fees never shifts; it begins and ends with WestPoint regardless of who wins the litigation. Rather than a fee-shift, the EPI fee provision is a contract between WestPoint and the plan participants pursuant to which WestPoint agreed to provide costs and attorneys' fees to participants "for any dispute" concerning the EPI Program, "regardless of whether the participant is the prevailing party." EPI Amendment, Ex. A to Hansen Aff., ¶ 16. In addition, WestPoint agreed to pay those costs, not at the end of the litigation, but on a current basis.

The purpose behind such a broad provision for attorneys' fees was clearly to allow individual plan participants to enforce their rights under the plan against the company in the event of a hostile takeover or other "change in control". See Allen, 933 F. Supp. at 269. Providing funding on a current basis ensures that participants can retain effective counsel and pursue litigation on a "level playing field" against a large corporation with immeasurably greater resources. It also ensures that regardless of the monetary value of an individual participant's claim, as long as that claim is not frivolous, he or she can seek full redress. To now limit or cap the amount of attorneys' fees plaintiffs can recover to a percentage of the amount in controversy would undermine the purpose of the contract provision.

Although this Court was unable to find any case law construing a private contractual fee arrangement of similar breadth and purpose as the EPI fee provision, an analogy can be drawn between the EPI provision and fee-shifting statutes in civil rights litigation. For example, in Quaratino v. Tiffany & Co., 166 F.3d 422 (2d Cir. 1999), a prevailing Title VII plaintiff sought $139,022 as reasonable attorney's fees pursuant to Title VII's fee-shifting clause. The district court conducted a "lodestar analysis"*fn11 evaluating the attorney's hourly rate and the time expended and determined that an award of $124,645 was appropriate. See id. at 425. However, the district court declined to award the lodestar amount and instead recalculated the award using a "billing judgment approach." See id. Under the billing judgment approach

  an attorney's requested fee would be judged
  "reasonable" if it were rationally related to the
  monetary recovery that the attorney could have
  anticipated ex ante. The district court would have had
  [plaintiff's] attorney estimate ex ante the total
  possible financial recovery in the case . . . discount
  that amount for the "substantial" risk of no
  recovery, and proceed to expend time on the case only
  up to the time value of an appropriate fraction of
  that expected recovery.

Id. at 425-26 (citation omitted). Using the billing judgment approach, the district court awarded plaintiff attorneys' fees in an amount equal to one-half of plaintiff's trial recovery of $158,145 or $79,072. Id. at 425.

In reviewing the district court's decision, the Second Circuit found that not only did it have "considerable misgivings as to the feasibility of such precise ex ante calculations" but that the approach "conflicts with the legislative intent and rationales of the fee-shifting statute." Id. at 426. According to the Second Circuit:

  Congress enacted fee-shifting in civil rights
  litigation precisely because the expected monetary
  recovery in many cases was too small to attract
  effective legal representation. Were we to adopt the
  "billing judgment" approach that the district court
  advocates we would contravene that clear legislative
  intent by relinking the effectiveness of a civil
  rights plaintiff's legal representation solely on the
  dollar value of her claim.

Id. at 426 (citation omitted). The Second Circuit vacated the district court's award and remanded the case for further analysis using the lodestar approach.

Obviously, EPI plan participants were not litigating their civil rights. However, they were litigating their rights under an employee benefits plan. Moreover, like Congress, WestPoint evidenced a clear intent to allow plaintiffs "to attract effective legal representation" regardless of the monetary amount of their claim. Just as the Quaratino Court found that the business judgment rule would contravene Congress's intent in enacting the statute, so too would the Magistrate's cap — which is in essence a business judgment approach — undermine the purposes of the EPI fee provision.

Not only would a cap on fees undermine the purpose of the EPI fee provision, it would also deprive plaintiffs of the benefit of their bargain. Plaintiffs signed the EPI Amendment relying in part on the provision for attorneys' fees. WestPoint agreed to fund litigation of any nonfrivolous claim; it never tied its obligation to the expected amount of recovery for those claims. And plaintiffs have, in fact, relied on the terms of the fee provision in pursuing litigation for the past ten years. To now cap plaintiffs' recovery at a percentage of the amount in controversy would unjustly penalize them for their reasonable reliance on the plain language of their contract with WestPoint.

Finally, there is no unfairness to WestPoint in enforcing the EPI fee provision to its full extent. WestPoint is a sophisticated corporation with experience in drafting and entering into contracts. The company had access to both in-house and outside counsel and likely drafted the EPI Amendment — including its extremely broad fee provision — with the benefit of legal advice. In addition, that a plan participant might in the event of litigation incur legal costs in excess of their individual claims was not only foreseeable, it was, as explained above, the purpose behind the provision for attorneys' fees. In other words, rather than craft a fee provision which reduced or capped attorneys' fees in the foreseeable and likely event that litigation expenses exceeded the amount in controversy, WestPoint instead offered plaintiffs an extremely broad fee provision which is not conditioned on either the amount or success of plaintiffs' claims.

Similarly, the unconditional nature of the EPI fee provision eliminates the uncertainty and resulting unfairness typically associated with classic fee-shift provisions where neither party knows whether they will be responsible for legal costs until the litigation ends and one party prevails. Under the EPI fee provision, WestPoint knew from the time Krumme and the Allen plaintiffs filed their complaints that it was responsible for plaintiffs' legal expenses. Therefore, as the litigation proceeded through its various stages, WestPoint was itself in a position to assess whether pursuing litigation was reasonable in light of its obligation to pay both plaintiffs' and its own legal bills. Indeed, had WestPoint compensated plaintiffs on a "current basis" as per its obligation under the EPI fee provision, it would have been able to track plaintiffs' litigation expenditures exactly. There is simply no escaping the fact that WestPoint was in the driver's seat with respect to litigation costs. WestPoint had both the incentive and the ability to end the litigation when it no longer made economic sense to pursue its defense of plaintiffs' claims.*fn12 If WestPoint determined that its combined litigation costs were too great, then it could have and should have settled or otherwise disposed of the litigation. That WestPoint continued to vigorously defend itself against plaintiffs' claims gives rise to a strong presumption that defendant found it economically rational to proceed. That presumption is supported by consideration of the parallel state court litigation to which I now turn.

(b) Transcending Principles

In addition to the unique nature of the EPI fee provision which in and of itself warrants an exception to the amount in controversy rule, there are transcending principles which further justify an award of fees in excess of the amount of the underlying claim. As set forth above, in addition to Krumme and the nine Allen plaintiffs, twenty-seven former senior executives of Cluett received lump sum payments calculated at a discount rate of 9.3% upon WestPoint's merger with Farely Inc. These twenty-seven executives, who are also represented by Krumme and Chadbourne, could not bring a diversity action in federal court because they lacked either diversity or the requisite jurisdictional amount. See Barefoot v. West Point-Pepperell, 129307/93, slip. op. at 6 (Sup.Ct.N.Y.Co., Sept. 19, 1994). Because all of the plan participants could not bring a single action in federal court, they decided to bring a test case comprised of nine plan participants — the Allen plaintiffs — in the Southern District of New York where the Krumme case had been underway for more than a year. See Allen Obj. at 11. In 1993, fearful that their claims would be time-barred, the twenty-seven executives filed an action in New York State Court. Id.

The gravamen of the state court action is identical to the federal court action. Like Krumme and the Allen plaintiffs, the Barefoot plaintiffs allege that "the lump sum payout should have been calculated on the basis of a 5% discount rate rather than the 9.3% discount rate used by defendants." Barefoot, 129307/93, slip. op. at 3. In fact, defendant has conceded that the Barefoot complaint is `essentially identical' to the complaint in the Allen case." Id. at 4.

The similarity between the federal and state court actions is significant because "[t]he doctrine of collateral estoppel precludes a party from relitigating an issue which has previously been decided against him in a proceeding in which he had a fair opportunity to fully litigate the point." Kaufman v. Eli Lilly & Co., 65 N.Y.2d 449, 455, 492 N.Y.S.2d 584, 482 N.E.2d 63 (1985) (internal quotations omitted). Because of the similarity between the Krumme, Allen and Barefoot actions, it is almost certain that the resolution of the federal action in favor of WestPoint will bar the Barefoot plaintiffs from relitigating the issue of the proper discount rate and the validity of their releases in state court.*fn13 Thus, there is no question that the issues underlying the Krumme and Allen litigation "transcend" those cases. Every issue that was fully litigated and resolved in the federal cases had, and will continue to have, a direct and immediate effect on the parties in the Barefoot case. Accordingly, it was economically feasible and reasonable for the parties in Allen and Krumme to pursue each issue vigorously, even where such pursuit ultimately raised legal costs above the amount in controversy in those cases. See, e.g., National Union Fire Ins. Co. of Pittsburgh v. Hartel, 782 F. Supp. 22 (S.D.N.Y.), aff'd, 972 F.2d 1328 (2d Cir. 1992) (awarding attorneys' fees in excess of amount in controversy because "favorable precedent established will benefit [plaintiff insurance company] if the issue is raised by other defendants, and it will reduce or eliminate [plaintiff's] potential liability."); see also F.H. Krear, 810 F.2d at 1264 (citing Colon for the proposition that exceptions may be made to the general amount in controversy rule "where the court finds that the benefits of the litigation reached far beyond the amount sought in the immediate suit").

Defendant argues that the rulings in the federal litigation conferred no "benefit" on the Barefoot plaintiffs because those rulings were ultimately adverse to the state plaintiffs' interests. See WestPoint Stevens Inc.'s Consolidated Memorandum in Response to Plaintiffs' Objections to the Report and Recommendation of Chief Magistrate Judge James C. Frances, IV ("Westpoint Resp. Obj.") at 6-8. Defendant's argument misses the point of the transcending principles exception. Whether the Barefoot plaintiffs or WestPoint finally prevail in the state court action is irrelevant. What is important is that during ten years of litigation, both parties were aware that their success in the federal action would impact their success in the state court action. Krumme and the Allen plaintiffs litigated their case vigorously in the hope that the outcome would benefit their colleagues in the Barefoot case. Similarly, WestPoint launched a top-notch legal defense knowing full well that if it prevailed in the federal action, it would almost certainly prevail in the state case without having to endure another decade-long legal battle.*fn14 As it turns out, WestPoint Point "benefitted" in the sense that it prevailed on the key issues. However, both parties are benefitted in the sense that the meaning of the EPI Amendment has been conclusively settled and the years of litigation are finally at an end. Compare Colon, 343 N.Y.S.2d at 883 (finding that interpretation of indemnification agreement in favor of one party "will be of benefit to both parties").

(c) Lodestar Analysis

The foregoing discussion does require WestPoint to pay all of plaintiffs' legal expenses no matter how exorbitant they may be. Indeed, pursuant to the language of the EPI provision itself, WestPoint agreed to pay plaintiffs' "reasonable" attorneys' fees; it did not agree to pay inflated and unjustified fees or expenses. Thus, plaintiffs' fee requests must meet the factors of reasonableness set forth above, see supra Part III.A, with the caveat that the amount in controversy is not an applicable factor in this case.

After reviewing the voluminous compilations of billing statements and affidavits submitted by plaintiffs and their counsel, and after presiding over this action for almost five years, I find that the majority of plaintiffs' requested attorneys' fees are reasonable for the following reasons. First, this litigation involved several complex and novel issues of law which required extensive briefing in both this Court and the Second Circuit, not to mention two trials. Second, plaintiffs' counsel are highly skilled attorneys and Morgan Lewis and Chadbourne are well-established and preeminent law firms. Plaintiffs' counsel litigated the Krumme and Allen cases responsibly and vigorously, and their briefs and trial-work reflected a high degree of preparation and in-depth analysis that was of benefit to both the Court and their clients.*fn15 Third, the difficulty of the legal issues and the complexity and duration of the litigation required an extensive amount of time and labor on the part of plaintiffs' counsel.

Fourth, the rates charged by Morgan Lewis and Chadbourne over the ten-year period of litigation were in line with the customary legal fees charged in the Southern District of New York, and they were also the customary rates charged by Morgan Lewis and Chadbourne for their other clients. See Hausen Aff. (Chadbourne) ¶ 6; 1/22/99 Affidavit of James W. Harbison, Jr., Counsel for Plaintiff Krumme (Morgan Lewis) ¶ 12. Fifth, there is absolutely no indication of fraud or manipulation on the part of plaintiffs and their counsel which would cause me to reduce their requests for fees. Again, I was impressed and appreciative of the high-quality work produced by all counsel in these cases. This was a long and, at times, bitter dispute that was hotly and ably litigated for more than a decade. As the Colon court aptly stated at the conclusion of its opinion:

  I am convinced that BOAC's retainer agreement was made
  in good faith and that it was untainted by any acts of
  fraud, collusion, overreaching or attempts to foist an
  excessive attorney's fee upon [the co-defendant]. . . .
  Upon what equitable basis then should BOAC receive
  less than it obligated itself to pay its attorneys?
  Frankly, I can see no equitable reason why BOAC should
  not be fully reimbursed; nor why the court should
  interfere with the retainer agreement between BOAC and
  its attorneys by reducing the amount.

Id. at 883.

Like the court in Colon, I see no equitable reason why plaintiffs' requests for attorneys' fees should not be granted in their current form. That said, however, in reviewing bills submitted for the ten-year period, I found several charges by plaintiff's counsel that were duplicative and excessive. Again, I do not believe that these charges were motivated by any ill-purpose or an attempt to manipulate WestPoint. Rather they are the almost unavoidable result of many attorneys at large law firms working on the same legal issues for a long period of time. Rather than setting forth a line-by-line analysis here, I reduce each of plaintiffs' requests by 20%*fn16 and award attorneys' fees exclusive of interest as follows:*fn17


Krumme  Krumme      $121,350

Morgan  Lewis       $683,551

Allen   Krumme      $319,860

Chadbourne  $1,503,699

  2. Arrangement Plaintiffs Would Have Made Absent Fee Provision
     is Inapplicable

F.H. Krear, Diamond D and In Time Prods. set forth an additional "index" of reasonableness: "whether the fee arrangement is `grossly disproportionate to the arrangement the plaintiff would have been expected to make with counsel in the absence of a fee-shifting agreement.'" Diamond D, 979 F.2d at 20 (quoting F.H. Krear, 810 F.2d at 1263); see also In Time Prods., 38 F.3d at 667. As set forth above, the Magistrate relied upon this index in capping plaintiffs' award at one-third the amount in controversy, reasoning that absent the EPI fee provision, plaintiffs would have entered into a one-third contingency arrangement with their counsel. See Report at 25. Similar to the amount in controversy, consideration of the arrangement plaintiffs would have made with their counsel absent the EPI fee provision is inappropriate in the instant case.

To begin, the Second Circuit has applied this index of reasonableness solely in cases involving classic fee-shifting clauses where there is a concern that parties may "`manipulate the actual damage incurred by burdening [his adversary] with an exorbitant fee arrangement.'" See Diamond D, 979 F.2d at 20 (quoting F.H. Krear, 810 F.2d at 1263) (alteration in original). As discussed above, however, the EPI provision is not a fee-shift, and it does not raise the same concerns regarding manipulation and fraud that are typically associated with a loser-pays arrangement. In addition, I have already determined, after carefully examining the bills submitted by plaintiffs in support of their fee applications, that there is absolutely no evidence of manipulation, fraud or an attempt to burden WestPoint with an exorbitant fee arrangement.

This additional requirement — that plaintiffs enter into the same agreement with counsel that they would have entered absent a provision for attorneys' fees — also contravenes the purpose of the EPI fee provision. As set forth above, plaintiffs were meant to rely on the EPI fee provision so that they could retain effective legal counsel and litigate their claims against the company on a level playing field. Moreover, the EPI fee provision is not conditional. WestPoint is obligated to compensate plaintiffs for their attorneys' fees no matter what the outcome of the litigation. Put simply, there is no reason that plaintiffs should not have relied on the fee provision when retaining counsel, and to retroactively require that plaintiffs' agreements with their counsel mirror the agreements they would have made absent the EPI fee provision is patently unfair.

A contingency fee arrangement such as the one imposed by the Magistrate similarly contravenes the terms of the EPI fee provision. The EPI fee provision obligates WestPoint to compensate plaintiffs "on a current basis." That means that as time and effort is expended by counsel, WestPoint is obligated to compensate plaintiffs for those expenses. In contrast, a contingency fee arrangement provides payment of attorneys' fees only at the end of the litigation, not on a regular basis during the proceedings. Accordingly, to sua sponte craft an award of attorneys' fees based on a contingency arrangement makes little sense in light of the terms of the EPI provision.

Plaintiffs entered into reasonable agreements with their counsel in justified reliance on the EPI fee provision. To the extent plaintiffs' fees should be reduced, the lodestar approach applied above is the appropriate method because it honors the nature and the terms of the EPI fee provision.

3. Amount in Controversy

Assuming, arguendo, that the EPI fee provision was not exempt from the general rule that reasonable attorneys' fees should not exceed the amount in controversy, a cap is still inappropriate because plaintiffs' requested fees do not, in fact, exceed the true amount in controversy. In determining the amount in controversy in Krumme and Allen, the Magistrate included only "the value of the benefits that the plaintiffs in Allen and Krumme would have been entitled to had they fully prevailed in the litigation with the contractual interest that would have accrued." See Report at 24. The Magistrate found that the amount in controversy was $692,159 in Krumme and $2,815,981 in Allen. See id. at 24-25. The Magistrate did not aggregate the monies at issue in the two federal cases. Moreover, he declined to include approximately $7 million dollars at issue in the Barefoot litigation stating that "[i]n the absence of the fee-shifting provision, the plaintiffs in Krumme and Allen would never have agreed to pay a fee based on any additional recovery made by plaintiffs in an entirely separate case." See id. at 22. In their objections, plaintiffs contend that the amount in controversy should include the monies at issue in all three cases which would total more than $11 million. See Krumme Obj. at 11-14; Allen Obj. at 15. I agree for the following reasons.

As discussed in the preceding section, there is no reason for plaintiffs' litigation decisions to be considered "absent the [EPI fee] agreement". Thus, it is irrelevant that Krumme and the Allen plaintiffs would not have "agreed to pay a fee based on additional recovery" in the state court case absent the EPI fee provision. Instead of considering what plaintiffs would have done absent the fee agreement, the Magistrate should have considered what actually occurred in the litigation.

The state and federal plaintiffs were colleagues and victims of what they perceived to be the same violation of their rights to benefits under the EPI Program. Moreover, all thirty-seven plaintiffs had a contract with WestPoint whereby WestPoint agreed to compensate them for their litigation expenses. That the thirty-seven plaintiffs decided to jointly plan and litigate their state and federal actions is understandable, reasonable and efficient.*fn18 According to plaintiffs, they and their counsel concentrated all of their resources on the federal action in an effort to avoid litigating the same case in two forums. See Allen Obj. at 12-13. The apparent hope was that if Krumme and the Allen plaintiffs were successful, the Barefoot plaintiffs would receive an identical judgment without having to engage in further litigation. Thus, the plaintiffs perceived the three actions as joined, and they considered the total amount of their claims as in excess of $11 million.

Also relevant is the fact that WestPoint surely must have considered the amount in controversy to be $11 million. If the federal plaintiffs prevailed in their litigation, the state plaintiffs would almost certainly prevail and WestPoint would be liable for damages in excess of $11 million. WestPoint's perception of the amount in controversy is relevant because litigation is a dynamic process. WestPoint litigated this case vigorously based on its understanding of the monies at stake, and plaintiffs were required to respond in kind. Moreover, as discussed above, WestPoint was in a position to end the litigation in the event that its costs exceeded its liability. That WestPoint continued to litigate this case rather than pursuing other options is evidence that it did, in fact, consider the amount in controversy to be in excess of $11 million. Accordingly, there is no prejudice to WestPoint in aggregating the potential recoveries in the three actions.

I have no doubt that during that during their ten years of federal litigation, both parties considered the monies at issue in the state litigation as part of the "amount in controversy". I therefore find that the amount in controversy was in excess of $11 million dollars. As a result, plaintiffs' fee requests do not, in fact, exceed the amount in controversy.*fn19

B. Fees on Fees

The Magistrate declined to compensate plaintiffs for legal expenses incurred to collect attorneys' fees — commonly referred to as "fees on fees" — finding that under New York law, "`a general contract provision for the shifting of attorneys' fees does not authorize an award of fees for time spent in seeking the fees themselves.'" See Report at 20 (quoting Krear, 810 F.2d at 1266). In their objections, plaintiffs argue that fees on fees should be awarded because if the EPI fee provision had been properly followed and WestPoint had reimbursed plaintiffs on a current basis, the instant fee application would have been unnecessary. See Krumme Obj. at 15; Allen Obj. at 19. Plaintiffs also contend that because the EPI fee provision allows recovery for "any dispute as to the validity, interpretation or application of any term or condition of the Agreement", and because "reasonable attorneys' fees" is a term of the agreement, fees on fees should be awarded. See Krumme Obj. at 15; Allen Obj. at 19. I agree in part with both the Magistrate and the plaintiffs.

To the extent that plaintiffs seek to recover fees in connection with litigation of unique aspects of the EPI fee provision, I find that those fees are recoverable. For example, in Allen, the defendants contended that the EPI fee provision only applied to disputes between plan participants and a hostile acquirer. See 933 F. Supp. at 269. The parties also disputed whether a change of control had occurred for purposes of triggering the fee provision. See id. at 270. Similarly, in Krumme, the parties litigated the effect of the Allen plaintiffs' releases on their ability to recover attorneys' fees. See 22 F. Supp.2d at 179-80. These examples represent more than an action to collect attorneys' fees. Instead, they were bonafide disputes over the terms of the EPI fee provision, and thus plaintiffs are entitled to recover legal costs in connection with the litigation of those issues. Accordingly, to the extent plaintiffs' fee requests include expenses incurred in litigating the terms of the attorneys' fees provision, those costs are awarded.

On the other hand, fees incurred in connection with the instant application to collect attorneys' fees are not recoverable. Although it is possible to contract for the payment of fees incurred to collect fees, "specific language would be needed to show such an agreement." Swiss Credit Bank v. International Bank, Ltd., 23 Misc.2d 572, 200 N.Y.S.2d 828, 831 (Sup. Ct.N.Y.Co. 1960). I agree with the Magistrate that the EPI fee provision includes no specific language that would allow the plaintiffs to recover the costs of collecting an award of reasonable attorneys' fees. Plaintiffs' arguments to the contrary are not persuasive. True, defendant's timely payment of fees under the EPI provision may have eliminated the need for a separate application. However, that is not necessarily the case. Even if defendant had paid plaintiffs' fees on a current basis, there is no guarantee that disputes regarding a "reasonable" amount of fees would not have arisen intermittently. Moreover, as the Magistrate stated in his Report, "[i]f [the EPI fee provision] were construed as satisfying the specificity requirement under New York law, the exception would swallow the rule." Report at 21.

Accordingly, the plaintiffs cannot recover fees in connection with the instant proceeding before the Magistrate and this Court for the collection of reasonable attorneys' fees.

C. Calculation of Interest

In their Objections to the Report, the plaintiffs state that "[i]f the Court finds that the fees should not be capped as recommended by Magistrate Judge Francis, then the interest formula used by the Report would not be materially inaccurate and plaintiffs would not object to use of the formula." See Allen Obj. at 19 n. 6; Krumme Obj. at 17-18. Because I find that the Magistrate's formula provides a simple and accurate way to calculate the appropriate interest on both the reduced (but uncapped) attorneys' fees and the reduced costs, and because the plaintiffs do not object,*fn20 the amount of contractual interest through March 31, 1999 is recalculated below using the Magistrate's formula:*fn21


  (1) Krumme
          245,259           x (121,350  814) = $196,468
      151,688  814

  (2) Morgan Lewis
          786,748           x (683,551  46,660) = $632,540
      854,439  53,791


  (1) Krumme
          192,682          x (319,860  5,830) - $154,699
      399,825  5,830

  (2) Chadbourne
        965,652            x (1,503,699  91,583) = $763,332
      1,879,624  138,484

Because interest accrues through the date of judgment, however, plaintiffs are entitled to an additional seven months of contractual interest for the time period between March 31, 1999 and the date of this Opinion and Order, October 28, 1999. That additional interest is calculated by determining the total amount due for each counsel through March 31 (total fees total costs total interest through 3/31/99)
*fn22 and multiplying that principal by the contractual interest rate.*fn23 Accordingly, interest is awarded as follows:

                          3/31/99       3/31/99 to 10/28/99
  Krumme  Krumme         $196,468            $16,399        $212,867

Morgan Lewis   $632,540            $81,209        $713,749

Allen   Krumme         $154,699            $28,629        $183,328

Chadbourne     $763,332            $140,556        $903,888

IV. Supplemental Report

In his Supplemental Report, the Magistrate awarded Krumme $9,359 in costs for expert fees charged by Skadden in May 1996.*fn24 However, the Magistrate declined to add contractual interest to the award finding that "[a]lthough Skadden billed the plaintiffs in May 1996, it never sought to collect, and therefore the plaintiffs have not lost the time value of money." Supplemental Report at 2. The Magistrate also stated that "there is no evidence that Skadden imposed interest charges on the plaintiffs in connection with the delayed payment of its bill." Id. I am puzzled by the Magistrate's reasoning, because it contradicts the reasoning he followed in awarding contractual interest on all of plaintiffs' other fees and costs.

To begin, there is evidence that Skadden imposed interest charges on plaintiffs for the late payment of its bill. In his initial fee application submitted to the Magistrate, Krumme included the following explanation:

  Tab 6 contains the fees of Skadden retained as an
  expert witness and used in the Joint Actions. This
  firm was to be paid on a current basis but is relying
  on my contract right for interest under the Amendment
  to make it whole. The amount I receive for this firm
  will be paid over to it upon receipt of the funds from

1/15/99 letter from Krumme to Judge Francis. Moreover, Tab 6 includes a bill for $9,359 that was sent from Skadden to Krumme on May 28, 1996.

In his Report, the Magistrate concluded with respect to awards of contractual interest that WestPoint's "liability for interest arises as soon as payment must be made, and the payment of fees and costs was required `on a current basis' [under the EPI Amendment]. . . . Therefore, the plaintiffs are entitled to interest at the contractual rate from the date the fees and costs were incurred until the date of judgment." Report at 30. Thus, in accordance with the Magistrate's own findings, interest accrues from the date costs are incurred. Skadden's charges for expert fees should be treated no differently than all of plaintiffs' fees and costs. The Magistrate did not make counsels' collection efforts or disbursement of funds by plaintiff a condition to contractual interest on any other award of fees and costs, and I see no reason why such a condition should be imposed here. As plaintiffs argued in their objections to the Supplemental Report:

  Had Mr. Krumme, in his legal capacity, or other
  plaintiffs' counsel paid the Skadden bill, it would
  have been an attorneys' disbursement. Such
  disbursements were correctly awarded by the Magistrate
  Judge with full contract interest. Given the
  Executives' contract right to payment by WestPoint of
  such costs on a current basis, their use of the
  contract was a perfectly appropriate means of
  negotiating payment with Skadden. Plaintiffs' expert
  should not be penalized for loss of the value of money
  by its reliance upon its expert fee to be awarded as
  costs, with interest, as called for by the contract
  . . . The EPI amendment does not require Skadden to
  perform an artificial step of demanding fee payment on
  a current basis or of demanding interest in order to
  be entitled to both, given the EPI Amendment which on
  its faces calls for WestPoint to pay both,

Plaintiffs' Partial Objection to Supplemental Report and Recommendation at 3. Krumme incurred $9,359 in legal costs from Skadden in May 1996. Accordingly, Krumme is entitled to contractual interest on Skadden's expenses from May 28, 1996 to the present.*fn25 Such interest is calculated below using the interest accumulation factor from May 31, 1996 to March 31, 1999 as set forth in plaintiffs' submissions, see Allen Obj., Ex. A at 2, and multiplying the resulting amount by the contractual interest rates for April 1999 through October 1999, compounded monthly:

(1) Principal and interest through March 31, 1999

$9,359 x 1.339176156 = $12,533

(2) Interest From March 31, 1999 through October 28, 1999

      $12,533 x [contractual interest rate = $748
                from 3/31/99 to 10/28/99,
                compounded monthly

(3) Total Interest

      $12,533  $9,159 = $3,174
      $748     $3,174 = $3,922.

Accordingly Krumme is awarded $3,922 interest on Skadden's expert fees.

V. Conclusion

For the foregoing reasons, I decline to cap the award of attorneys' fees at one-third the amount in controversy and instead award plaintiffs the full amount of attorneys' fees requested, less twenty percent and including fees incurred in litigating the terms of the EPI fee provision. In addition, I award Krumme $3,922 in interest on the expert fees charged by Skadden. Accordingly, the Magistrate's fee award is modified as follows:



Krumme  Krumme        $121,350   $814      $212,867   $335,031

Morgan Lewis  $683,551   $46,660   $713,749   $1,443,960

  Allen   Krumme        $319,860   $5,830    $183,328   $522,299
                                   $9,359    $3,922
         Chadbourne    $1,503,699  $91,583   $903,888   $2,499,170

Now that all outstanding issues have been resolved, a judgment should be entered and the Clerk of the Court is directed to close these cases.

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