Continental Illinois Securities Litigation, Matter of

• Decision Date: 22 May 1992
• Docket Number: Nos. 90-3701,90-3716,90-3702,s. 90-3701
• Citation: 962 F.2d 566
• Parties: In the Matter of CONTINENTAL ILLINOIS SECURITIES LITIGATION: Fred L. STEINLAUF, on behalf of himself and all others similarly situated, Plaintiff, v. CONTINENTAL ILLINOIS CORPORATION, et al., Defendants. Appeals of MUCH, SHELIST, FREED, DENENBERG, AMENT & EIGER, et al., counsel for plaintiff class, Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 566

962 F.2d 566

In the Matter of CONTINENTAL ILLINOIS SECURITIES LITIGATION Fred L. STEINLAUF, on behalf of himself and all others similarly situated, Plaintiff, v. CONTINENTAL ILLINOIS CORPORATION, et al., Defendants Appeals of MUCH, SHELIST, FREED, DENENBERG, AMENT & EIGER et al., counsel for plaintiff class, Appellants.

Nos. 90-3701, 90-3702, 90-3716.

United States Court of Appeals Seventh Circuit.

Argued Dec. 12, 1991.

Decided April 22, 1992.

As Amended on Denial of Motions for

Rehearing and Clarification May 22, 1992.

Lowell E. Sachnoff, Sachnoff & Weaver, Lawrence Walner, Walner & Associates, Chicago, Ill., Edward A. Grossmann, Bernstein, Litowitz, Berger & Grossmann, Daniel W. Krasner, Wolf, Haldenstein, Adler, Freeman & Herz, New York City, for plaintiff in No. 90-3701.

Joan C. Laser, Asst. U.S. Atty., Office of the U.S. Atty., Criminal Div., Fern Bomchill, Michele Odorizzi, George Vurdelja, Scott J. Davis, Harley Hutchins, Mayer, Brown & Platt, Chicago, Ill., Daniel F. Kolb, Davis, Polk & Wardwell, Washington, D.C., for defendants in No. 90-3701, 90-3702.

Deborah Schmitt Bussert, Michael J. Freed, Michael B. Hyman, Much, Shelist, Freed, Denenberg, Ament & Eiger, Chicago, Ill., Nicholas E. Chimicles, Greenfield & Chimicles, Haverford, Pa., for appellants in No. 90-3701.

Lowell E. Sachnoff, Jeffrey A. Schumacher, Gary S. Caplan, Sachnoff & Weaver, Deborah Schmitt Bussert, Michael J. Freed, Michael B. Hyman, Much, Shelist, Freed, Denenberg, Ament & Eiger, Chicago, Ill., Nicholas E. Chimicles, Greenfield & Chimicles, Haverford, Pa., Edward A. Grossmann, Bernstein, Litowitz, Berger & Grossmann, Daniel W. Krasner, Wolf, Haldenstein, Adler, Freeman & Herz, New York City, for plaintiff in No. 90-3702.

Lawrence Walner, Sheldon Klein, Robert Lifton, Walner & Associates, Chicago, Ill., for appellants in No. 90-3702.

Michael B. Hyman, Much, Shelist, Freed, Denenberg, Ament & Eiger, Lawrence Walner, Walner & Associates, Chicago, Ill., Nicholas E. Chimicles, Greenfield & Chimicles, Haverford, Pa., for plaintiff in No. 90-3716.

Lowell E. Sachnoff (argued), Jeffrey A. Schumacher, Gary S. Caplan, Sachnoff & Weaver, Chicago, Ill., Edward A. Grossmann, Bernstein, Litowitz, Berger & Grossmann, New York City, for appellants in No. 90-3716.

Before POSNER, RIPPLE, and MANION, Circuit Judges.

POSNER, Circuit Judge.

These are consolidated appeals from an order by Judge Grady cutting by roughly one-half the attorneys' fees requested by the plaintiffs' counsel in a class action. 750 F.Supp. 868 (N.D.Ill.1990). The principal defendant, the Continental Bank, had purchased more than a billion dollars in oil and gas loans from the Penn Square Bank, an Oklahoma bank whose collapse in 1982 made the loans that Continental Bank had bought from Penn Square largely uncollectable. Caught thus in the undertow of the Penn Square disaster, Continental itself became insolvent and was taken over by the Federal Deposit Insurance Corporation. Several class actions were brought against Continental and its officers in 1982 under the federal securities laws on behalf of investors who had bought stock in the bank before the crash and who claimed that Continental had made misleading statements about its financial condition. These suits were consolidated before Judge Grady. Extensive discovery and collateral litigation ensued. Between 1986 and 1988 the suits were settled for a total (including interest to the end of 1989) of $45 million.

Having employed their professional skills to create a cornucopia for the class, the lawyers for the class were entitled under the principles of restitution to suitable compensation for their efforts. Boeing Co. v. Van Gemert, 444 U.S. 472, 100 S.Ct. 745, 62 L.Ed.2d 676 (1980). They had agreed at the outset that they would not seek an award of attorneys' fees in excess of 20 percent of the amount of recovery. That capped their request at $9 million. But proceeding under the so-called "lodestar" method, by which the fee award is built up from the number of hours spent by the lawyers on the case, Blanchard v. Bergerson, 489 U.S. 87, 94, 109 S.Ct. 939, 944, 103 L.Ed.2d 67 (1989), they managed to justify (to their own satisfaction anyway) an award that, but for the ceiling, would have been even higher. So they requested the entire $9 million, which Judge Grady, in a meticulous 81-page order, reduced as we have said by roughly a half. We respect the care with which he reviewed the lawyers' submissions, despite the absence of an adversary presentation. (The class was notified of the fee request, but no member of the class objected. There is no appellee.) And we review his decision under a deferential standard. Hensley v. Eckerhart, 461 U.S. 424, 437, 103 S.Ct. 1933, 1941, 76 L.Ed.2d 40 (1983); Rivera v. Benefit Trust Life Ins. Co., 921 F.2d 692, 698 (7th Cir.1991); Ustrak v. Fairman, 851 F.2d 983, 987 (7th Cir.1988). Even so, we are unable to accept most of his rulings.

1. The judge placed a ceiling of $175 on the hourly rates of all lawyers for the class, including lawyers whose regular billing rates were almost twice as high. He did this on the theory that the most demanding work on the case had been done by a rather junior lawyer whose billing rate is only $175. The more experienced, higher-paid lawyers simply were not, in the judge's view, needed for this case. This is highly implausible, when one considers that the defendants hired a crowd of pricey lawyers to defend the case and that the FDIC, in a parallel suit, hired one of the class counsel and paid him the same market rate that the district judge refused to authorize--even though the class action was contingent, and the FDIC suit was not. Nor were the lawyers who defended Continental and its officers against the class, at rates similar to the normal billing rates of the lawyers for the class, at risk of not being paid.

It is apparent what the district judge's mistake was. He thought he knew the value of the class lawyers' legal services better than the market did. What the market valued at $350 he thought worth only half as much. He may have been right in some ethical or philosophical sense of "value" but it is not the function of judges in fee litigation to determine the equivalent of the medieval just price. It is to determine what the lawyer would receive if he were selling his services in the market rather than being paid by court order. Missouri v. Jenkins, 491 U.S. 274, 285, 109 S.Ct. 2463, 2470, 105 L.Ed.2d 229 (1989); Harsch v. Eisenberg, 956 F.2d 651, 663 (7th Cir.1992); Bandura v. Orkin Exterminating Co., 865 F.2d 816, 822 (7th Cir.1988); Tomazzoli v. Sheedy, 804 F.2d 93, 98 (7th Cir.1986) (per curiam); Kirchoff v. Flynn, 786 F.2d 320, 323-26 (7th Cir.1986); Henry v. Webermeier, 738 F.2d 188, 195 (1984).

2. The judge committed the same error when he refused to allow paralegal services to be compensated at market rates but instead attempted to compute an hourly expense of each paralegal, consisting of the paralegal's weekly salary divided by 40 plus overhead directly attributable to that paralegal, such as health benefits, but excluding general office overhead, such as rent. Paralegals take up space, and they're paid even when they're not working; so the judge plainly underestimated their hourly expense. But his mistake went deeper. He was again trying to determine the value of a service that the market has set its own value on. The Supreme Court has disapproved the approach of basing reimbursement for paralegal expenses on the "cost" of the paralegal, as distinct from the market value of his services, when it is customary to bill separately for the value of those services. Missouri v. Jenkins, supra, 491 U.S. at 287-89, 109 S.Ct. at 2470-72. The approach is not only unsound; it is futile from the standpoint of economizing on the expense of litigation. It will lead lawyers to substitute their own time, for which they are entitled to be compensated at market rates rather than at some constructed hourly cost, for that of cheaper paralegals.

3. The judge refused to award a risk multiplier--that is, to give the lawyers more than their ordinary billing rates in order to reflect the risky character of their undertaking. This was error in a case in which the lawyers had no sure source of compensation for their services. Suppose a lawyer can get all the work he wants at $200 an hour regardless of the outcome of the case, and he is asked to handle on a contingent basis a case that he estimates he has only a 50 percent chance of winning. Then if (as under the lodestar method) he is still to be paid on an hourly basis, he will charge (if risk neutral) $400 an hour for his work on the case in order that his expected fee will be $200, his normal billing rate. If the fee award is to simulate market compensation, therefore, the lawyer in this example is entitled to a risk multiplier of 2 (2 X $200 = $400). The need for such an adjustment is particularly acute in class action suits. The lawyers for the class receive no fee if the suit fails, so their entitlement to fees is inescapably contingent.

The example is oversimplified, because the risk of loss varies over the life of a case. It may be very high at first, but if the plaintiff surmounts the hurdles of the defendant's pretrial motions to dismiss or for summary judgment and proceeds to trial before a jury, it may fall dramatically. That is a refinement a district judge may or may not want to take into account. We are not trying to put him into a straitjacket but are merely emphasizing that the failure to make any provision for risk of loss may result in systematic undercompensation of plaintiffs' counsel in a class action case, where as we have said the only fee that counsel can obtain is, in the nature of the case, a contingent one.

The judge understood all this but said there was no need for any contingency adjustment here because there was no contingency--the risk of the suit's...