Ladewig v. Arizona Dept. of Revenue

• Decision Date: 21 January 2003
• Docket Number: No. TX 1997-000075.,TX 1997-000075.
• Citation: 63 P.3d 1089,204 Ariz. 352
• Parties: Helen H. LADEWIG v. ARIZONA DEPT. OF REVENUE
• Court: Arizona Tax Court

63 P.3d 1089

204 Ariz. 352

Helen H. LADEWIG v. ARIZONA DEPT. OF REVENUE

No. TX 1997-000075.

Tax Court of Arizona.

January 21, 2003.

Randall Wilkins, Paul Bonn, D. Michael Hall of Bonn & Wilkins Chartered, and Eugene O. Duffy of O'Neil, Cannon & Hollman, SC. for Plainiff.

Michael Kempner and Lisa Neuville, Assistant Attorneys General, for Defendant.

OPINION

PAUL A. KATZ, J.

Nature of the Case

In 1991, taxpayer Helen H. Ladewig ("Ladewig") filed an administrative refund claim with the Arizona Department of Revenue ("ADOR"), claiming that its denial of analogous deductions for dividends received from corporations not doing more than half their business in Arizona, i.e. former A.R.S. § 43-1052 (1992) (current version at A.R.S. § 43-1128 (1998)) was unconstitutional as a violation of the Commerce Clause. This Court will not reiterate the entire factual history of this case which is well stated by our Arizona Supreme Court in the special action taken in this matter, captioned Arizona Department of Revenue v. Dougherty, 200 Ariz. 515, 29 P.3d 862 (2001).

The remaining issue for this Court's determination is the reasonable amount of attorneys' fees and costs to be awarded to class counsel, Bonn & Wilkins, Chartered and O'Neil, Cannon & Hollman, S.C. (collectively "Class Counsel") from the $350 million common fund which was created by the efforts of Class Counsel in successfully litigating and settling the immediate case. Lead counsel from the Bonn & Wilkins firm, Paul Bonn, testified on December 19, 2002, that as of that date Class Counsel had invested approximately 11,564 hours of time in the litigation of this matter and had out-of-pocket costs in the amount of $1,053,448.00. This figure includes the approximate $800,000.00 that Class Counsel anticipates having to expend in the administration, processing and payment of claims. In reviewing the voluminous billing records of Class Counsel which were filed with this Court under seal, this Court concludes that they are somewhat duplicative. The records delineate work, particularly by the O'Neil firm, in which they assisted counsel in other state and United States Supreme Court matters. Although those other cases paved the way for the result in the immediate litigation, the work performed in those cases is not compensable hereunder. For the purpose of computing the reasonable attorneys' fees amount in this matter, this Court will allow 10,000 hours of Class Counsel's time as one of the bases upon which attorneys' fees will be calculated. The Court will accept the avowals and affidavits of counsel with respect to the costs incurred herein and reasonably anticipated to be incurred in the closure of this litigation.

As a final factual note, the Court observes that the parties have entered into a settlement agreement that has created a $350 million common fund from which the estimated 650,000 class members as well as attorneys' fees and costs will be paid. As part of the stipulated to settlement, the parties agree that they would not appeal an award of attorneys' fees between 9% and 12% of the common fund, the amount recommended by the mediator hired by the parties, Bruce E. Meyerson. Mr. Meyerson's recommendations are attached to Class Counsel's Motion for a Common Fund Attorneys' Fee Award and Request for Hearing which was filed with this Court on September 20, 2002.

Legal Discussion

This Court recognizes that it owes several duties when considering an award for attorneys' fees. The Court has a duty to ensure that fees stemming from common funds are reasonable under the circumstances of the particular case. In re Washington Pub. Power. Supply Sys. Sec. Litig., 19 F.3d 1291, 1296 (9th Cir.1994). The Court owes a duty to the attorneys to ensure they receive appropriate compensation for the reasonable value of their services performed for the benefit of the class members. City of Detroit v. Grinnell Corp., 560 F.2d 1093 (2nd Cir.1977). Lastly, the Court owes a duty to class members or beneficiaries to protect them from potential exploitation by attorneys seeking large fees at the expense of the class. Id. Courts have held that because the attorneys' relationship with their clients turns adversarial at the fee-setting stage, courts must assume the role of fiduciary for the class members. In re Washington, 19 F.3d at 1302. With these principles and duties in mind, this Court makes the following legal analysis.

The common fund doctrine is appropriate for application in this case. See, Kerr v. Killian, 197 Ariz. 213, 3 P.3d 1133 (App. 2000)

. Under this exception to the American Rule, the attorney who recovers a fund for the benefit of others is entitled to a reasonable fee to be paid from the fund as a whole. E.g., Boeing Co. v. Van Gemert, 444 U.S. 472, 100 S.Ct. 745, 62 L.Ed.2d 676 (1980). There is nothing in the common fund doctrine as adopted in Arizona, however, that suggests the application of this doctrine is to be without regard to the ultimate determination of a reasonable attorneys' fees to be awarded from the common fund.

The United States Court of Appeals for the Third Circuit, and many other courts have analyzed two basic methods for calculating attorneys' fees in this type of case. In In Re Prudential Ins. Co. America Sales Practices Litigation, 148 F.3d 283, 333 (3rd Cir. 1998), the court said,

There are two basic methods for calculating attorneys' fees—the percentage-of-recovery method and the lodestar method. [E]ach method has distinct advantages for certain kinds of actions which will make one of the methods more appropriate as a primary basis for determining the fee.... The percentage-of-recovery method is generally favored in cases involving a common fund, and is designed to allow courts to award fees from the fund `in a manner that rewards counsel for success and penalizes it for failure'.... The lodestar method is more commonly applied in the statutory fee-shifting cases, and is designed to reward counsel for undertaking socially beneficial litigation in cases where the expected relief has small enough monetary value that a percentage-of-recovery method would provide inadequate compensation. It may also be applied in cases where the nature of the recovery does not allow the determination of the settlement's value necessary for application of the percentage-of-recovery method. Although each of these methods is generally applied to certain types of cases, we have noted previously that "it is sensible for a court to use the second method of fee approval to cross check" its initial fee calculations.

Professor Charles Silver who was an expert witness for Class Counsel maintains that a percentage based formula, or market approach, harmonizes the interests of class counsel and absent Plaintiffs' better than time-based formulas like the lodestar approach. In Professor Silver's testimony, and in his Tulane Law Review article, Charles Silver, Due Process and the Lodestar Method: You Can't Get There From Here, 74 Tul. L.Rev. 1809 (2000), he further contends that,

[A]cademics, judges, and others who continue to support the lodestar method do so for reasons of legal ethics or professionalism, not because the lodestar minimizes principle-agent conflicts. This defense of the lodestar is fatally flawed, however, because the Due Process Clause trumps state bar rules. The option of using state bar rules to build avoidable conflicts into class actions is closed.

This Court is somewhat troubled by the trend in American courts in abandoning the lodestar method in favor of a percentage based formula as advocated by Professor Silver and Class Counsel. The Court disagrees with the viewpoint that the application of the lodestar method is fatally flawed and that the application of ethical rules, such as our own ER 1.5 tend to violate the due process rights of class members. The one thing that the percentage-based formulas do, is make the work of the judge easier. The judge is not compelled to scrutinize the billing rates of counsel, or what genuinely constitutes a reasonable and fair award of fees, taking into consideration such factors as counsel's actual investment of time in the case, the novelty and difficulty of the issues involved and the skill requisite to perform the legal services properly. This Court believes that the abandonment of the lodestar methodology in favor of a market approach which is largely founded in fiction, particularly in a novel case such as the one at bar, is inappropriate. Most class action cases, even those which result in a common fund recovery, usually involve an "evil" wrong-doer, or intentional tortfeasor who has willfully introduced unreasonably dangerous products into the stream of commerce, or committed a form of securities fraud. In these cases, there are usually seriously injured parties who are willing to maintain independent litigation or a significant number who are willing to be designated as class representatives, the legal issues are complex, and the need for fact intensive discovery great. In these cases, particularly when there are a group of plaintiffs who are ready, willing and able to negotiate an attorneys' fees agreement with class counsel, the market-based or percentage of recovery method would appear to be reasonable and appropriate.

Class actions in the tax arena are rare not only because of the risks assumed by counsel in the litigation of novel and often complex or obscure issues as suggested by class counsel, but because it is highly unlikely that state legislatures will pass blatantly unconstitutional statutes that will long withstand the passage of time.

The statute at issue in this case was promulgated by the Arizona legislature in 1979 and was based upon a statutory method of corporate dividend taxation which was approved by the United States Supreme Court in Colgate v. Harvey, 296 U.S. 404, 56 S.Ct. 252, 80 L.Ed. 299 (1935). While the Court cannot ignore the need to maintain an adequate incentive...