Successful class can’t get opposing counsel’s fees

By David E. Frank
Massachusetts Lawyer Weekly

A group of plaintiffs who won a $256 million federal fraud judgment could not use its class status to lay claim to the fees earned by the lawyers on the other side of the case, a judge has ruled.

The class of nearly 260,000 plaintiffs, who recovered the award against Cambridge Credit Counseling Corp. in March 2009, argued that the fees collected by two national law firms were subject to a constructive trust entered in the underlying case.

But U.S. District Court Judge Michael A. Ponsor disagreed, finding that the plaintiffs’ complaint rested on an “unprecedented and startling legal premise.”

A class certified in one action, he said, cannot institute an independent lawsuit without first providing the new defendants an opportunity to challenge the case under Rule 23 of the Federal Rules of Civil Procedure.

“The potential abuse of the class action tool if Plaintiffs’ theory were approved is prodigious,” Ponsor wrote. “It simply cannot be permitted.”

The 13-page decision is Zimmermann, et al. v. Epstein Becker and Green, P.C., et al.,Lawyers Weekly No. 02-159-10. The full text of the ruling can be ordered by clicking here.

‘Casting a net’

Mark E. Goidell, who was counsel for the defendant law firms, said the plaintiffs were seeking fees his clients had rightfully earned after representing the defendants in the underlying fraud litigation. If the plaintiffs’ tactic had succeeded, it would have had devastating consequences for defense counsel in future class actions, Goidell said.

“What lawyer in his right mind would want to take on the defense of a fraud case if this sort of sanction could be imposed?” he asked. “We couldn’t find a single case in our research where attorneys’ fees were disgorged, or even where a party had attempted to seek the return of fees legitimately earned under these circumstances.”

Goidell, who practices in New York and is licensed in Massachusetts, said the only time courts permit the taking of counsel fees is when an attorney had an affirmative duty to inquire about them. Such a finding can be made only if fees are paid in violation of a court order or are the obvious result of theft, he said.

“Neither of those circumstances were even remotely applicable in this case,” Goidell said. “What the class plaintiffs attempted to do, if followed to its logical conclusion, would be to jeopardize legal fees earned at any time by a lawyer in the defense of clients against whom fraud or statutory violations are alleged.”

But plaintiffs’ co-counsel Stephen G. Hennessy of Milton countered that much of the money the defendants in the underlying case collected was stolen. “It never belonged to them,” Hennessy said of the defendants, adding that Ponsor’s findings confirmed that Cambridge Credit Counseling “unlawfully took money from consumers. Our position is that at least some of the parties who subsequently came into possession of that money, including the law firms named as defendants, should have to return it to the class.”

Hennessy, who plans to appeal, said he did not try to “claw back” all the money taken from his clients; his clients unsuccessfully argued that the suit was simply an enforcement action related to Ponsor’s earlier judgment. “We didn’t even name all of the various attorneys who had represented the defendants at various times in the case,” he said. “The main factor that distinguished the law firms that got sued from those that didn’t was that those that were named were firms we believed had actual knowledge or participated in the setting up of the scheme.”

Robert E. DeRight of defendant Epstein, Becker & Green, which has an office in Boston, said the firm is not surprised the plaintiffs are appealing, given the difficulty they have had in recovering the $256 million.

“The class and its counsel are all unpaid, and they are casting a net anywhere they can to recover funds,” he said. “We understand that people were injured by the activities in the original class action, but [Ponsor] determined quite properly that the lawyers were not the place to park that liability.”

Rule 23 requirements

In 2003, plaintiffs Andrew and Kelly Zimmermann filed a complaint under the Credit Repair Organizations Act against a number of defendants, including Cambridge Credit Counseling Corp.

The class was certified in 2007, and the plaintiffs obtained summary judgment. Ponsor eventually awarded $256 million in March 2009.

As part of the judgment, the judge imposed a constructive trust against the assets of the company’s founders, John and Richard Puccio.

The plaintiffs filed a new suit in November against Epstein, Becker & Green and several other defense firms and lawyers involved in the underlying case, alleging they had improperly received money for their services.

The defendants responded with a motion to dismiss.

In dismissing the case, Ponsor said he disagreed with the plaintiffs’ contention that Rule 23 permits class certification to be transferred to a separate suit involving entirely different defendants.

“Plaintiffs cite no precedent, and this court is aware of none, holding that the certification in one proceeding may migrate to satisfy the Rule 23 requirements in a different proceeding against different defendants,” he said.
Ponsor wrote that Rule 23 attempts to balance judicial efficiency against fairness and due process. As a result, courts have been quick to protect defendants, he said, when they confront class claims without an opportunity to challenge certification.

The fact that a constructive trust was established in the underlying suit was not relevant to the complaint against the law firms, the judge said.

“The potential for ancillary jurisdiction over these Defendants (even assuming it exists) does not excuse Plaintiffs from compliance with the Rule 23 requirements,” he said. “The fact that the conditions set forth in [Rule 23] were satisfied in a previous case does not by any means establish that they have been, or even that they could be, satisfied in this case.” MLW

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‘Zimmermann’ ruling good news for defense bar

Civil defense litigators are breathing a sigh of relief in the wake of a judge’s refusal to allow a class of plaintiffs to grab the fees earned by opposing counsel in a fraud suit.

In Zimmermann, et al. v. Epstein Becker and Green, P.C., et al., U.S. District Court Judge Michael A. Ponsor held that the plaintiffs could not use their class status to disgorge the fees earned by two of the law firms that represented the defendants in the underlying suit.

If Ponsor had allowed the case to proceed, plaintiffs would be able to subject a group of defendants, including lawyers, to class-wide liability without the opportunity to contest class certification, Donald R. Frederico of Boston’s Greenberg Traurig said.

“Rule 23 provides procedural protection for plaintiffs and defendants alike, and to deprive any of the parties of those protections not only would violate the rule but also due process,” he said. “This is clearly the right result.”

Ariel D. Cudkowicz of Seyfarth Shaw in Boston said he was aware of cases in which plaintiffs tried to transfer their class status from one complaint to another. However, he said had never seen a case like Zimmermann involving legal fees.

“This appears to be a new tactic in class action litigation, but anecdotally I haven’t heard of a plaintiff ever being successful with it,” he said.

One class action plaintiffs’ lawyer, who asked not to be identified, said he doubts such efforts would ever prove successful.

“For that to fly, you’d really have to have strong, smoking-gun type evidence to show that the law firm had dirty hands,” the attorney said. “Coming up with that kind of evidence is easier said than done.”

But Stephen G. Hennessy of Milton, plaintiffs’ co-counsel in Zimmermann, said the suit was merely an effort to collect money that lawfully belongs to his clients.

“You get into a difficult situation where a law firm says that they were operating at arm’s length when it provided legal services and, therefore, should get to keep their fees,” he said. “The class’s position is that … equity mandates that the money should be returned. But there are obviously a lot of procedural hurdles between here and there.”

– David E. Frank

CASE: Zimmermann, et al. v. Epstein Becker and Green, P.C., et al., Lawyers Weekly No. 02-159-10
COURT: U.S. District Court
ISSUE: Can a group of plaintiffs in a federal fraud case use its class status to go after the counsel fees earned by the lawyers on the other side of the suit?

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