Mashburn v. National Healthcare, Inc., Civ. A. No. 87-D-0070-S.

• Decision Date: 08 April 1988
• Docket Number: Civ. A. No. 87-D-0070-S.
• Citation: 684 F. Supp. 679
• Parties: Mariann S. MASHBURN, et al., Plaintiffs, v. NATIONAL HEALTHCARE, INC., a corporation; et al., Defendants.
• Court: U.S. District Court — Middle District of Alabama

684 F. Supp. 679

Mariann S. MASHBURN, et al., Plaintiffs, v. NATIONAL HEALTHCARE, INC., a corporation; et al., Defendants.

Civ. A. No. 87-D-0070-S.

United States District Court, M.D. Alabama, S.D.

April 8, 1988.

COPYRIGHT MATERIAL OMITTED

Rufus Smith and Edward Price, Jr., Farmer, Price & Smith, Dothan, Ala., Edward L. Hardin, Jr., Hardin & Hollis, J. Michael Rediker, David J. Guin, David R. Donaldson, Ritchie & Rediker, Birmingham, Ala., for plaintiffs.

Kenneth L. Millwood, John L. Latham, Smith, Gambrell & Russell, Atlanta, Ga., Alan C. Livingston, Lee & McInish, Dothan, Ala., for Nat. Healthcare, Inc., William H. Cassels, Thomas C. Shepard, Charles E. Baxter, James R. Stephenson & John S. Schwart.

Thad G. Long, J. Barry Jones, Bradley, Arant, Rose & White, Birmingham, Ala., for L. Stanton Tuttle.

Henry B. Gutman, Charles E. Bachman, John S. Beckerman, O'Sullivan Graev & Karabell, New York City, Robert W. Bradford, Jr., Hill, Hill, Carter, Franco, Cole & Black, Montgomery, Ala., for Robert F. Higgins, Howard C. Landis, Anders K. Brag, Regional Financial Enterprises, L.P., Regional Financial Enterprises II, L.P., Charles River Partnership V, Hambro Intern. Venture Fund, and Hambro Intern. Venture Fund Offshore.

Robert M. Brinson, Brinson, Askew & Berry, Rome, Ga., for Tom E. Greene, III, Med Capital Investors, Greene Family Trust and Healthtech Investors II.

Dan F. Laney, III, C.B. Rogers, Richard H. Sinkfield, Rogers & Hardin, Atlanta, Ga., for Stephen L. Phelps.

George G. Lynn, A. Inge Selden, III, Luther M. Dorr, Jr., Maynard, Cooper, Frierson & Gale, Birmingham, Ala., for Joseph D. Bohr, Jr., Dale R. Mulder, Jay Russell.

Frank M. Wilson, Beasley, Wilson, Traeger, Allen & Mendelsohn, John M. Pappanastos, Susan Shirock DePaola, Pappanastos & Samford, Montgomery, Ala., for Drexel Burnham Lambert Inc., Bear, Stearns & Co. Inc., Robertson, Colman & Stephens.

Robert D. Segall, Copeland, Franco, Screws & Gill, Montgomery, Ala., for Mont-Med Associates.

Thomas S. Lawson, Jr., J. Lister Hubbard, James N. Walter, Jr., Capell, Howard, Knabe & Cobbs, Montgomery, Ala., for Curtis L. Adams, Scott W. Bauman, Robert E. Johnstone and Charles G. Taylor.

James D. Farmer, Farmer & Farmer, Dothan, Ala., for Holders of Subordinated Debentures.

Paul W. Brock, W. Ramsey McKinney, Rayford L. Etherton, Jr., Hand, Arendall, Bedsole, Greaves & Johnston, Mobile, Ala., for Wood, Lucksinger and Epstein.

Thomas W. Thagard, Jr., Michael L. Edwards, Balch & Bingham, Birmingham, Ala., Eugene R. Erbstoesfer, Associate General Counsel, Arthur Young and Co., New York City, for Arthur Young & Company.

J. Vernon Patrick, Patrick & Lacy, P.C., Birmingham, Ala., for National Healthcare, Inc.

MEMORANDUM OPINION

DUBINA, District Judge.

There is presently pending in this cause a joint application by class counsel for an award of attorneys' fees and reimbursement of expenses.¹ In their petition, class counsel jointly make application to this Court on behalf of all firms who represented the plaintiff class for an aggregate award of $3,400,000 in attorneys' fees and expenses to be paid out of the settlement fund created for the class through the efforts of said counsel. Any fees and expenses awarded by this Court shall be payable from the aggregate of approximately $17,425,000 gross amount of settlement proceeds to be paid into this Court, which sum does not include interest to be earned on the settlement funds to the date of distribution. Class counsel request the Court that the total sum of the fees and expenses be awarded in the aggregate for all three firms, which amount shall then be allocated among the firms by agreement of counsel. Class counsel further request that the $3,400,000 in aggregate fees and expenses be awarded upon final approval of the settlement of this case and that distribution of such fees and expenses be allowed on the 31st day after a final judgment is entered in this cause by the Court pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, provided that no appeal or motion for rehearing by a party to this cause has been timely filed and/or perfected.

In support of their joint application, class counsel submitted separate detailed affidavits of J. Michael Rediker, Esq.; David J. Guin, Esq.; David R. Donaldson, Esq.; the Honorable Carolyn L. Duncan; Edward L. Hardin, Esq.; R. Randy Smith, Esq.; and Ed Price, Esq., as to services rendered and litigation expenses incurred respectfully by the plaintiffs' class law firms, with listing of hours and/or matters accomplished, and summaries as to their respective backgrounds. Additionally, at the final hearing on the proposed settlement conducted by the Court on February 29, 1988, the plaintiffs submitted testimony from numerous witnesses concerning the reasonableness of the settlement and the amount of attorneys' fees and expenses class counsel are requesting this Court to award. These witnesses included well-regarded attorneys-at-law and even one former judge.² It is significant to this Court that every witness who testified at the final settlement hearing stated that the proposed settlement was fair and the amount of attorneys' fees and expenses requested by class counsel was reasonable. No one appearing at the final settlement hearing had any objection to the amount of attorneys' fees and expenses class counsel are seeking herein. Indeed, the Court inquired specifically of counsel representing the "Maddox Class," who did appear for the purpose of making an objection to the proposed final settlement, whether he or any of his clients had any objection to the application for attorneys' fees. Counsel for the "Maddox Class" stated that he and his clients had no such objection and were of the opinion that class counsel earned the fee they are requesting this Court to award.

I. STATEMENT OF FACTS

National Healthcare, Inc. (hereinafter "NHC") is a publicly-held rural health care management corporation. The company was begun in late 1981 by three of the named defendants: Steven L. Phelps (also the former Chairman, CEO, and President), Joseph D. Bohr, Jr. (a former Director and Chief Financial Officer), and William H. Cassels (a division Vice President). In its early years, NHC remained a relatively small company. As of December 31, 1984, the company had acquired nine hospitals. Each of those hospitals averaged fewer than fifty beds. By November 1985, the company had acquired several additional hospitals bringing its total to fifteen. At that time, NHC's plan was to continue purchasing small hospitals in rural communities and to then use what the company's leaders believed to be unique management techniques to turn such poorly-managed rural hospitals around in a very short time and into profitable facilities.

To finance the company's growth, NHC "went public" in November 1985 by issuing and selling to the public through a "firm commitment" underwriting 2,000,000 shares of its common stock. Through the exercise of an over-allotment option, the underwriters acquired from certain venture capitalist/selling warrantholders and sold an additional 300,000 shares of such stock. The initial offering price of such 2,300,000 shares of stock was $9.00 per share. In addition to the stock offering, NHC issued subordinated debentures having a principal amount of $30,000,000 and bearing interest at the rate of 14½% per annum.

NHC announced earnings for the first quarter of 1986 (for the quarter ended September 30, 1985) showing that the company had earned $.05 per share for the quarter, and by the end of December 1985, the stock price had risen to approximately $13.00 per share. On February 4, 1986, the company announced increased earnings for the second quarter of fiscal 1986 (for the quarter ended December 31, 1986) of $.09 per share, and the stock then rose to approximately $15.00 per share. From December 31, 1985, until April 1986, NHC acquired or signed letters of intent to purchase nine additional hospitals.

In April 1986, NHC followed its initial public offering with a second offering of 2,000,000 shares of common stock, this time at a price of $13.50 per share. Again, the initial allotment was sold and the underwriters exercised their over-allotment option to purchase from the selling warrantholders and sell an additional 300,000 shares. No new debentures were offered in this second public offering. Thus, a total of 4,600,000 shares was issued and sold in the two public offerings.

In each of the two public offerings, the defendant law firm of Wood, Lucksinger & Epstein served as securities counsel to NHC, and the defendant public accounting firm of Arthur Young & Company prepared the financial statements contained in the registration statements and prospectuses (with the exception of certain financial statements for individual hospitals prepared by other accounting firms before NHC's acquisition of such hospitals). Drexel Burnham Lambert, Inc.; Bear Stearns & Company, Inc.; and Robertson Coleman & Stephens served as lead underwriters of each of the two stock offerings and Drexel Burnham and Bear Stearns co-underwrote the November 1985 offering of debentures. Another 70-plus underwriters participated in the "underwriting syndicate" in each of the two public stock offerings. All of the remaining defendants are either officers, directors, selling warrantholders, or control persons (or affiliates thereof of NHC).

In mid-1986, NHC announced third-quarter earnings (for the period ending March 31, 1986) of $.22 per share. After that announcement, the company stock quickly rose to approximately $17.00 per share, but had declined to around $14.00 per share by the late summer of 1986. On September 18, 1986, NHC announced earnings for the fourth-quarter of fiscal 1986 of only $.02 per share. For the year, NHC announced earnings of $.38 per share, much less than the $.53 per share figure that had been publicly forecasted. Accordingly, the day of that announcement, the...