The opinion of the court was delivered by: Royce C. Lamberth, Chief Judge
This attorney's fee dispute comes before the Court after a day and a half bench trial. At issue is the proper compensation owed to plaintiff Ernest M. Fleischer, an attorney hired as a consultant for litigation surrounding a tax claim against the Federal Deposit Insurance Corporation ("FDIC") receivership of the Benj. Franklin Federal Savings and Loan Association ("Benj. Franklin"). Mr. Fleischer has already been paid a total of $89,465.34 by the FDIC, including $1408.34 for expenses and $88,057 for approximately 250 hours of work at $340 to $390 per hour. Mr. Fleischer argues that he should instead be paid according to one of two alternative methods. First, he argues he is entitled to 2% of the $43.4 million surplus preserved after settlement of the tax claims. This would result in a judgment of $778,535 more than what he has been paid, or a total award of ten times his hourly fee. In the alternative, he requests a success fee of twice his hourly rate plus fees on fees, which would result in an award of $223,075 over what the FDIC has already paid him.
Having carefully reviewed the evidence presented and all representations made during trial, the record in this case, and the applicable law, the Court now finds that Mr. Fleischer has already been reasonably compensated by the FDIC and is not entitled to additional fees.
As one witness testified, nothing about this case is typical. Stewart Test., Sept. 24, 2012. The matter involves a group of attorneys (the "shareholder attorneys") who sought compensation for their involvement in settlement discussions, and ultimately a settlement agreement, in a tax case to which their shareholder clients were not parties and in which the attorneys were not of record. Mr. Fleischer did not directly represent any of the shareholders or the parties; he was hired, pursuant to an oral agreement with another shareholder attorney, as a consultant. Moreover, Mr. Fleischer does not seek compensation from a fund created by his efforts, but from surplus funds held in receivership by the FDIC (a receivership surplus being a rarity in itself) that remain after payment of the tax settlement. Finally, because of the current stage of the litigation, fees for all other participating attorneys have already been determined through arbitration, mediation, and order of this Court. Thus, some of the legal theories now advanced by Mr. Fleischer have been previously rejected during the litigation and the payments already determined for other shareholder attorneys necessarily shape the equities at play with respect to Mr. Fleischer.
Because the facts of this case are unusual, and necessarily inform the outcome, they are discussed in some detail here. In the midst of the savings and loans crisis of the 1980s and 1990s, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989. The Act prevented federal regulators from, in most cases, counting supervisory goodwill toward capitalization requirements. This change rendered Benj. Franklin unable to satisfy minimum regulatory capitalization requirements, and federal regulators seized Benj. Franklin in February, 1990. The Resolution Trust Corporation ("RTC") acted as Benj. Franklin's receiver from 1990 to 1995, after which the FDIC took over.
As receiver, the FDIC succeeds to "all rights, titles, and privileges of the insured depository institution" and may "take over the assets of and operate the insured depository institution with all the powers of the members or shareholders, the directors, and the officers . . . ." 12 U.S.C. §§ 1821(d)(2)(A)--(B)(i). The FDIC may also "collect all obligations and money due the institution," and "preserve and conserve the assets and property of such institution." 12 U.S.C. § 1821(d)(2)(B)(ii), (iv). Ultimately, the FDIC is tasked with liquidating the remaining assets of the institution. After all depositors, creditors, other claimants, and administrative expenses are paid, the FDIC then distributes any surplus to the institution's shareholders. 12 U.S.C. § 1821(d)(2)(E); 12 C.F.R. § 360.3(a)(10).
The present attorney's fees litigation is shaped by several related developments regarding the receivership of Benj. Franklin. First, the value of the assets in receivership exceeded liabilities, resulting in a surplus of over $90 million. This is unusual in that most receiverships under RTC or FDIC supervision have resulted in deficits. Darmstadter Test., Sept. 24, 2012. Given the surplus, Benj. Franklin shareholders will receive pro rata distributions of any remaining liquidated assets.
Second, a nearly $1.2 billion claim by the Internal Revenue Service ("IRS") for unpaid taxes, penalties, and interest was lodged against the receivership in 1992 and remained until the settlement of tax litigation in 2006. Tax claims against receiverships have typically been irrelevant given than most receiverships faced deficits rather than surpluses. However, the Benj. Franklin receivership had surplus funds with which to pay at least part of the taxes owed. Moreover, because the receiver and IRS expected the Benj. Franklin receivership to face a deficit, it appears that the receivership's early tax returns were not closely scrutinized by either the FDIC or IRS. The impact this had on the tax liability and progress of the tax litigation is not entirely clear.
Third, in September 1990, a group of shareholders filed a shareholder derivative suit against the United States in the U.S. Court of Federal Claims, contending that the seizure of Benj. Franklin constituted, among other things, a breach of contract. See C. Robert Suess v. United States, 52 Fed. Cl. 221 (2002) ("CFC suit"). The shareholders were represented by Oregon attorney Don Willner and by Tom Buchanan of Winston & Strawn. The CFC suit remained pending until August 2012 when an appeal to the Federal Circuit was voluntarily dismissed pursuant to Fed. R. App. Proc. 42(b). See Suess v. United States, Fed. Cir. Ct. App. 2011-5101. However, until dismissal, the shareholders and attorneys involved in the CFC suit expected that a possible damages award might increase the surplus available for shareholders. The shareholders also knew that the pending tax claim could deplete the entire surplus and any damages won in the Court of Claims and thus sought to participate in discussions and litigation surrounding the tax claim.
b. IRS Claim Against the Receivership
i.Initial Proof of Claim and Filing of Suit
In September 1992, while the shareholder suit was pending, the IRS filed its first proof of claim for unpaid federal income taxes with the Benj. Franklin receivership in the amount of $862 million with $166 million in interest and $280 million in penalties accruing through November 5, 1992. Complaint at 5--6, United States v. FDIC-Receiver, No. 02-1427 (D.D.C. July 17, 2002).
In 1998, Mr. Willner filed an action seeking appointment of an independent trustee but the action was dismissed after the FDIC-Receiver agreed to attempt to minimize the tax claim and keep the shareholders' attorneys informed about negotiations with the IRS. See Blackwell Pls.' Statement Facts 4, ECF No. 120-1; FDIC's Partial Stipulation to Blackwell Pls.' Statement Facts 2, ECF No. 120-2. For reasons that remain unclear, little progress was made between 1992 and 2002 to resolve the tax claim.
By 2002, Benj. Franklin had a surplus of more than $90 million. Id. After an April 2002 judgment of $34.7 million in favor of shareholders in the CFC suit, Mr. Willner sought renewed assurances from the FDIC-Receiver that it would "'make a good faith effort to minimize the IRS tax claim'" and would not make any payments to the IRS without first consulting with the shareholders. Letter from Don Willner to Bruce Taylor, FDIC Legal Division (May 20, 2002), Pl.'s Ex. 6. The FDIC responded that it had not agreed to consult with shareholders before paying and that a decision might be made shortly regarding the IRS claim. Letter from Bruce Taylor, FDIC Legal Division, to Don Willner (June 6, 2002), Pl.'s Ex. 8. Willner thus became concerned that the FDIC would pay the tax claim and exhaust the surplus. Willner Dep. 9:18-- 12:8, Jan. 18, 2007, Pl.'s Ex. 60.
At some point in early- to mid-June 2002, Mr. Willner hired Ernest Fleischer, a tax attorney in Kansas City, Missouri who was Of Counsel to the firm then known as Blackwell Sanders Peper Martin, to serve as a tax consultant. Fleischer Test., Sept. 21, 2012; Willner Dep. 39:11--20 (stating that Willner "would certainly have talked to Mr. Fleischer before [filing] for the TRO" on June 17, 2002). Willner explained to Fleischer that he lacked funds to pay him and that Fleischer would have to work on the case on contingency. Willner Dep. 22:14--20. Specifically, Mr. Fleischer testified at trial that Willner had told him that, if they were successful, a fee would be set by a federal district court judge based on Mr. Fleischer's contribution and benefit to his clients. Mr. Fleischer stated that no specific contingency amount was discussed, but that he understood that something more than his hourly rates would be paid. Fleischer Test., Sept. 21, 2012.
In June 2002, based in part on Fleischer's advice regarding the tax claim, Mr. Willner filed suit in the U.S. District Court for the District of Oregon to restrain the FDIC from paying the surplus to the IRS. Fleischer Test., Sept. 21, 2012. Willner obtained an ex parte TRO and, although this was rescinded just two weeks later for lack of jurisdiction, Willner testified that during the relevant preliminary injunction hearing, the FDIC agreed to advise him before making any payment to the IRS. Thus, Willner "felt that [he] had the protection [he] needed." Willner Dep. 42:7--21.
On July 17, 2002, the IRS sued the FDIC-Receiver in the U.S. District Court for the District of Columbia seeking a determination that approximately $1.2 billion in tax and related interest and penalties were due and owing. Complaint, United States v. FDIC-Receiver ("Tax Case"). The tax case was assigned to Judge Emmet Sullivan. The only attorneys to enter an appearance for the receivership were those for the FDIC-Receiver. Although Mr. Willner filed a motion to intervene on behalf of the Benj. Franklin shareholders, the motion was denied without prejudice after the case was stayed. At some point, the FDIC-Receiver and IRS agreed to permit the shareholders' attorneys to participate in negotiations with the IRS, despite the formal position of the IRS and DOJ that the FDIC was the taxpayer and only party in interest with standing to challenge the tax liability. Darmstadter Test., Sept. 24, 2012.
ii.Settlement of Tax Case and Negotiation of Attorneys' Fees Attorneys from at least four law firms participated in tax settlement discussions on behalf of the shareholders, including lawyers from Winston & Strawn and Spriggs & Hollingsworth, as well as Mr. Willner and Mr. Fleischer. Mr. Willner was lead counsel for shareholders in these discussions and Mitch Moetell from Winston & Strawn was the lead tax counsel for shareholders. Fleischer Test., Sept. 21, 2012; Buchanan Test., Sept. 21, 2012. During at least parts of the settlement discussions, the shareholder clients paid reduced hourly fees to Willner, Winston & Strawn, and Spriggs & Hollingsworth with the understanding that these attorneys would seek a success fee if successful. Mr. Fleischer does not appear to have been paid anything throughout the settlement discussions.
In November 2005, the parties reached a proposed agreement to settle the tax claim for $50 million. Letter from Eileen J. O'Connor, Assistant Attorney Gen., Tax Div., U.S. Dep't of Justice, to Richard Aboussie, Assoc. Gen. Counsel, FDIC (Nov. 16, 2005), Def.'s Ex. 18. This amount would preserve an estimated $44 million for distribution to the shareholders. As discussed in more detail below, neither party to the current litigation can say exactly why the IRS agreed to settle for this amount.
The FDIC and shareholders' attorneys also agreed to a mechanism by which the attorneys could collect their fees through the FDIC claims process.*fn1 The tax case was not a class action or derivative suit which would have required notice of the settlement to class members or shareholders. However, because of the "unusual facts and somewhat unique situation presented by [the] receivership," the FDIC argued that its responsibility to distribute surplus funds to shareholders raised considerations analogous to those in class or derivate suits. See Unopposed Motion for Fairness Hearing, United States v. FDIC-Receiver, No. 02-1427 (D.D.C. July 17, 2002). Thus, on February 3, 2006, the FDIC-Receiver requested that the Court approve a Notice to Shareholders describing the proposed settlement. Id. According to the Notice, which the Court approved, the FDIC-Receiver agreed that the shareholders' attorneys would be paid "reasonable fees and expenses . . . in connection with [their] work to reduce the $1.2 billion tax liability alleged by the IRS down to the $50 million settlement amount." Notice of Proposed Settlement 8, Def.'s Ex. 19. The Notice further stated that "[w]hile the FDIC has not yet determined the total amount of legal fees and expenses it will approve pursuant to its receivership claims procedures, the amount will likely be between $1 and $2 million." Id. at 8-- 9. The Notice was sent to shareholders and on May 2, 2006, the Court held a fairness hearing and approved the settlement.
One of the attorneys involved in settlement discussions, Rosemary Stewart of the firm then known as Spriggs & Hollingsworth, testified that she drafted the Notice to Shareholders and provided it to FDIC counsel who made a few edits before filing it. Ms. Stewart acknowledged that the attorneys were to be paid "reasonable" fees and would have to file claims through the FDIC's receivership process. Her testimony, along with correspondence in the record, suggests that she and Don Willner negotiated this agreement with the FDIC one and a half to two years prior to approval of the settlement agreement.
It is unclear the extent to which attorneys from other law firms
participated in the negotiation of this attorneys' fee provision.
However, the other attorneys, including Mr. Fleischer, appear to have
had notice of the agreement as early as November 2004.*fn2
See Letter from Don Willner to Robert Clark, FDIC (Nov. 8, 2004), Def.'s Ex. 11;
see also E-mail from Rosemary Stewart to Tom Buchanan, Michael
Moetell, Ernest Fleischer, and Don Willner (Nov. 22, 2004, 2:14 PM),
Pl's Ex. 43 (attaching the "side-agreement with FDIC"); E-mail from
Rosemary Stewart to Tom Buchanan, Michael Moetell, Ernest Fleischer,
and Don Willner (Nov. 22, 2004, 3:26 PM), Pl's Ex. 43 ("As to
attorneys' fees, Par.5(c) allows us to seek only the reasonable fees
and expenses related to the tax work.").
Ms. Stewart testified that it was the attorneys, not the FDIC, who calculated the estimated $1 to $2 million range in legal fees. Ms. Stewart, Don Willner, and an attorney with Winston & Strawn determined that compensation calculated at their hourly rates would amount to approximately $1 million. Because they planned to seek a multiplier of two in their fee petitions to the FDIC, the outer range was set at $2 million.*fn3 Ms. Stewart's testimony is bolstered by the November 8, 2004 letter from Don Willner to Robert Clark of the FDIC in which Mr. Willner stated that he understood "reasonable" attorney's fees "as approved by the Court and as determined through the receivership process" would be distributed by the receivership "pursuant to FDIC receivership and ...