In re Prudential Ins. Co.

• Decision Date: 20 March 1997
• Docket Number: No. MDL 1061.,No. 95-4704.,MDL 1061.,95-4704.
• Citation: 962 F.Supp. 572
• Parties: In re THE PRUDENTIAL INSURANCE COMPANY OF AMERICA SALES PRACTICES LITIGATION
• Court: U.S. District Court — District of New Jersey

962 F.Supp. 572

In re THE PRUDENTIAL INSURANCE COMPANY OF AMERICA SALES PRACTICES LITIGATION

No. MDL 1061.

No. 95-4704.

United States District Court, D. New Jersey.

March 20, 1997.

COPYRIGHT MATERIAL OMITTED

OPINION

WOLIN, District Judge.

The Court here decides the petition for attorneys' fees and expenses jointly submitted by plaintiffs' counsel in the class action lawsuit (the "Class Action") against the Prudential Insurance Company of America ("Prudential"). All interested parties have had the opportunity to submit written arguments with respect to the fee petition, and on March 17, 1997, the Court held a public hearing (the "Fee Hearing") at which all interested parties were provided the opportunity to voice either their support or opposition to the fee petition.

At the heart of the Class Action complaint are allegations that, during the time period between 1982 and 1995, Prudential defrauded millions of policyholders by selling them life insurance products through improper sales tactics. In October 1996, plaintiffs and Prudential agreed on the terms of a proposed settlement of the Class Action (the "Settlement Agreement"). The Court recently reviewed and approved the Settlement Agreement as fair, adequate and reasonable. See In re Prudential Ins. Co. of Am. Sales Practices Litig., 962 F.Supp. 450 (D.N.J.1997) (the "Fairness Opinion").¹

I. Introduction

Section K of the Settlement Agreement is entitled "Attorneys' Fees, Costs and Expenses." Pursuant to Section K, the parties agreed, subject to Court approval, that plaintiffs' counsel would make, and Prudential would not oppose, an application for an award of attorneys' fees and expenses not to exceed $90 million. Settlement Agreement ¶ K.1.² Under the Settlement Agreement, Prudential is responsible for paying the entire award; payment of the attorneys' fees and expenses will not directly or indirectly reduce, limit or modify the remedies provided to class members through the Alternative Dispute Resolution ("ADR") Process or Basic claim Relief ("BCR") — the two remedial options established under the Settlement Agreement.³ Id. ¶¶ K.1, K.4.

Section K further provides that one-half of the fees awarded, plus all reasonable and documented expenses incurred as of the date of the Fairness Hearing (February 24, 1997), shall be paid within five business days after the Court files an Order approving the Settlement Agreement. Id. ¶ K.2. The parties, therefore, contemplated that once the Court approved the Settlement Agreement and the $90 million fee petition, Prudential would immediately pay to plaintiffs' counsel $45 million plus expenses. Section K provides that the balance of the attorneys' fees award becomes payable only after all appeals of the Fairness Opinion and fee decision have been adjudicated fully. Id. Finally, Section K provides that lead counsel for the class will be responsible for the allocation and distribution of the attorneys' fees among the various counsel representing plaintiffs. Id.

In accordance with Section K, plaintiffs' counsel submitted an application for $90 million on November 22, 1996 (the "Fee Petition").⁴ As discussed more fully below, plaintiffs' counsel argue that the benefits created under the Settlement Agreement are analogous to a "common fund"⁵ and that they are entitled to an award of fees and expenses based on a reasonable percentage of that fund.⁶

To establish the value of the benefits or "fund" created under the Settlement Agreement, from which a percentage award could be calculated, plaintiffs' counsel submitted with the Fee Petition the affidavit of Robert Hoyer, the Managing Partner of Arthur Andersen LLP's Life & Health Actuarial Services Group (the "Hoyer Affidavit"). In his affidavit, Hoyer values the settlement at $1.987 billion. Hoyer Aff. ¶ 19. Based on this valuation, the requested $90 million fee would equal 4.5% of the total fund.

Of the $1.987 billion, Hoyer attributes $863.7 million to the Task Force plan⁷ and $1,123,300,000 to the enhancements built into the plan negotiated by plaintiffs' counsel. Id. ¶ 19. Moreover, Hoyer estimates the value of the BCR at $799.6 million and, based on a projected remediation rate of 3% (330,000 remediated claims), calculates the approximate value of the ADR Process at $1,187,400,000. Id. ¶¶ 6 11, 15.

Hoyer, however, points out that his valuations are estimates: "The ultimate remediation rate is a key assumption relative to the costs to Prudential of the ADR program. The extent and form of communications to the owners of the 10.7 million eligible policies will influence the actual results." Id. ¶ 13. Later in his affidavit, Hoyer again emphasizes that his valuations are largely based on projections: "The nature of these proceedings is unique and the opinions provided in this affidavit relate to future events which are not under the control of Arthur Andersen LLP and can be influenced not only by the involved parties, but also by external factors. As a result, all values shown in this affidavit should be considered approximations." Id. ¶ 18.

As contemplated by Section K of the Settlement Agreement, Prudential has not opposed plaintiffs' counsel's Fee Petition. See Fee Hr'g Tr. at 13. Additionally, no state's insurance commissioner has opposed the Fee Petition. A few class members, however, have filed objections to the Fee Petition.⁸ The Court will discuss these objections, as necessary and relevant, throughout this Opinion.

In anticipation of the Fee Petition and in order to assist the Court in determining an appropriate award of attorneys' fees, the Court, by Order dated November 6, 1996, appointed an independent fee examiner, Stephen Greenberg (the "Fee Examiner"), to review the Fee Petition and to render a Report and Recommendation.⁹ Pursuant to this Order, the Fee Examiner was given the authority to examine all materials he deemed pertinent to the Fee Petition The Fee Examiner filed his seventy page Report and Recommendation on February 13, 1997 (the "Fee Report").¹⁰ Without delving into the reasoning of the Fee Report, the Fee Examiner concluded that the $90 million fee request is fair and reasonable and should be awarded to plaintiffs' counsel as contemplated under Section K of the Settlement Agreement. Fee Report at 70.

Krell was the only objector to the Fee Report. As with the objections to the Fee Petition generally, the Court, as necessary, will discuss below Krell's objections to the Fee Report.¹¹

For the reasons expressed below, the Court will deny the Fee Petition, as proposed, and will not adopt the Report and Recommendation of the Fee Examiner.¹² Instead, the Court will award plaintiffs' counsel a bifurcated attorneys' fee that will total no less than $45 million and no more than $90 million. The fee will be equal to the sum of (1) 11% of the value of Prudential's guaranteed minimum payout under the Settlement Agreement — $410 million, and (2) either (a) in the event that 330,000 election forms are filed requesting relief under the ADR program by June 1, 1997, $45 million (less expenses already paid) or (b) in the event the 330,000 ADR elections threshold is not satisfied, 5% of the total actual value of the settlement in excess of $410 million. As discussed below, this fee award reflects the structure of the Settlement Agreement and is fair and reasonable under the circumstances of this Class Action.

Finally, the Court will deny the fee petitions brought by the attorneys for objectors Treadway, Parnell and Ginsberg and for objector Beauvias.

II. Judicial Review of Fee Requests/Legal Standards for Assessing a Fee

A. General

A district court must thoroughly review the fee application in any class action settlement. See In re General Motors Corp. Pick-Up Truck Fuel Tank Prod. Liab. Litig., 55 F.3d 768, 819 (3d Cir.) ("GM Trucks"), cert. denied, ___ U.S. ___, 116 S.Ct. 88, 133 L.Ed.2d 45 (1995). This is true even where the parties to the class action have agreed on an award of attorneys' fees because there exists the "danger . . . that the lawyers might urge a class settlement at a low figure or on a less-than-optimal basis in exchange for red-carpet treatment for fees." Id. at 820 (quoting Weinberger v. Great Northern Nekoosa Corp., 925 F.2d 518, 524 (1st Cir.1991)). The self-interest of a defendant who is paying both the settlement amount and the attorneys' fees often fails to protect against this danger because "a defendant is interested only in disposing of the total claim asserted against it; . . . the allocation between the class payment and the attorneys' fees is of little or no interest to the defense." GM Trucks, 55 F.3d at 820 (quoting Prandini v. National Tea Co., 557 F.2d 1015, 1020 (3d Cir.1977)). Accordingly, the Third Circuit has warned that "the district court must be alert to the presence in the fee agreement of any actual abuse or appearance of abuse capable of creating a public misunderstanding." Id.

Here, the parties obviated the danger of an actual or apparent conflict of interest on the part of class counsel by negotiating in a manner expressly recommended by the Third Circuit in Prandini and by a Task Force appointed by the Third Circuit to report on the subject of court awarded attorneys' fees. Court Awarded Attorneys' Fees, Report of the Third Circuit Task Force, 108 F.R.D. 237 (Oct. 8, 1985).¹³ In Prandini, the Third Circuit rejected a settlement agreement specifying the plaintiff's attorneys' fees. The Court held that class action counsel should not simultaneously negotiate both a settlement and attorneys' fees. Prandini, 557 F.2d at 1021.

The Third Circuit Task Force, however, recognized that the rule established in Prandini "may well tend to discourage settlement ... [by] mak[ing] it difficult for the defendant to ascertain precisely what its liability will be, thereby eliminating the very certainty that makes settlement attractive to the defendant." Court Awarded Attorneys' Fees, 108 F.R.D. at 267....