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Torres v. SGE Management, L.L.C.

United States Court of Appeals, Fifth Circuit

December 18, 2019

JUAN RAMON TORRES as Representative of the Estate of Eugene Robison; CHRISTOPHER ROBISON, as Representative of the Estate of Eugene Robison; LUCAS ("LUKE") THOMAS, individually and on behalf of a class of similarly situated individuals, Plaintiffs - Cross Appellants
SGE MANAGEMENT, L.L.C., Defendant SCOTT M. CLEARMAN, individually and on behalf of The Clearman Law Firm, P.L.L.C., Appellant- Cross Appellee
ANDREW JACK KOCHANOWSKI, individually and on behalf of Sommers Schwartz, P.C.; ERIC FRANKLIN CITRON, individually and on behalf of Goldstein; Russell, P.C.; JEFFREY WEST BURNETT, individually and on behalf of Jeffery W. Burnett, PLLC; MATTHEW J. M. PREBEG, individually and on behalf of Prebeg, Faucett; Abbott, Appellees - Cross Appellants THOMAS GOLDSTEIN, individually and on behalf of Goldstein; Russell, P.C., Cross Appellant

          Appeals from the United States District Court for the Southern District of Texas

          Before HIGGINBOTHAM, STEWART, and ENGELHARDT, Circuit Judges.


         After settlement of this class action, the district court awarded approximately $10 million in fees to the plaintiffs' attorneys. At issue here is how the court allocated this award among the attorneys. To split the money, the court adhered to the "spirit" of unconsummated or outdated contracts among the attorneys. The allocation that resulted may well be equitable; we do not reach this question because the trial court explicitly disclaimed the use here of the Johnson factors for assessing the reasonableness of fee awards, contrary to our decision in High Sulfur.[1] We must vacate the allocation order and remand for elaboration of the trial court's reasoning under the Johnson framework.


         Appellant Scott Clearman, who sought half of the total award but received roughly $1, 500, 000, advances several challenges to the fee allocation. All other class counsel ("Appellees") argue that the allocation is sound, but they conditionally cross-appeal on the basis that if there is any defect, it is that Clearman received too much.

         The underlying litigation began when two distributors for Stream Energy, LLC, retained attorney Jeffrey Burnett because they suspected that Stream's multi-level marketing program was a fraudulent pyramid scheme. Burnett hired Scott Clearman to bring a RICO class action, any fee to be shared 25 percent to Burnett and 75 percent to Clearman. Stream filed successful motions to dismiss in the cases filed in Georgia (dismissal sustained by the Eleventh Circuit[2]) and in Texas (dismissal reversed by this Court[3]). Clearman partnered with Matthew Prebeg to form Clearman Prebeg LLP ("CP"), assigning the prior fee interest of The Clearman Law Firm LLP to CP. With the case revived and class-certification discovery underway, Burnett and CP were joined in the litigation by Andrew Kochanowski and Sommers Schwartz, P.C. ("Sommers"). A new fee agreement was signed: 60 percent to CP (split among its four partners), 20 percent to Sommers, 20 percent to Burnett.

         After the joinder of Kochanowski and Sommers, the parties dispute Clearman's involvement. Appellees claim that

[b]y the time this case became active again in 2011, Mr. Clearman, who was the designated attorney-in-charge, was severely struggling with substance abuse issues. His condition was characterized by extreme paranoia, highly aggressive behavior, delusional thinking, memory loss and the inability to remember important facts, and the inability to accomplish complex, and at times even simple, tasks. At times Mr. Clearman was rational and productive, and at other times he was not. . . . However, as time progressed, the periods of his ability to accomplish tasks diminished, so petitioners were required to monitor his work product to protect the interests of the clients, and reduce the potential for liability.

         Clearman claims he took half the depositions relied on in the class-certification motion, but concedes he did not participate in the class-certification hearing and entered inpatient treatment for alcoholism shortly thereafter. Prebeg was substituted as attorney-in-charge in October 2013. In January 2014, the remaining CP partners formed Prebeg, Faucett & Abbott, PLLC ("PFA") and began winding up CP. Also in January 2014, the district court certified the class and named Clearman, Kochanowski, and Prebeg as co-class counsel.

         Kochanowski and Prebeg engaged Goldstein & Russell ("G&R") to defend the class certification against Stream's appeal. Another fee arrangement was reached under which G&R would receive between 16 and 18 percent, depending on the size of the fee award. (The actual award exceeded $8 million, so under these terms G&R would get 16 percent.) Burnett would receive another 17 percent of the total. After the shares of Burnett and G&R were paid, the remainder would be distributed to Sommers (30.67 percent), Clearman (17.34 percent) and PFA (51.99 percent). All attorneys signed the agreement save Clearman. On June 25, 2014, the terms of this new fee agreement were memorialized without Clearman's participation.

         Next, although a panel had reversed the district court's class certification, the en banc court reinstated the certification on September 30, 2016.[4] This led to a settlement, which included $10, 275, 000 million in expenses and fees for class counsel. As directed, counsel filed applications for fees. The non-Clearman attorneys sought a total of $9, 056, 071.80 in fees and $378, 062.01 in expenses, which was $840, 866.19 short of the total award. A single fee petition could not be prepared, Kochanowski explained, because of ongoing state-court litigation stemming from CP's dissolution and because Clearman did not keep time sheets. Clearman concedes he did not keep contemporaneous hour logs: "I started this case, and I never cared to record my hours as I would rather focus on getting results and being rewarded accordingly." Although they lacked Clearman's cooperation, Appellees contend that "having both the general fee-splitting agreements as a guidepost and cooperating in sharing time records," their fee petitions supported the total award.

         Clearman's fee petition sought 50 percent of the fees remaining after expenses, or roughly $5 million. He stated that the other counsel "have written about as much about the law of fees in the Fifth Circuit as could be necessary" and he "will not, for the sake of making myself look smart, repeat what they have each written." In response, the class representatives moved to strike Clearman's fee petition. The representatives claimed his petition valued his time at a lodestar of between 3.5 and 20 times that of any other lawyer and was premised on an hourly rate between $1, 700 and $10, 000. They challenged Clearman's failure to keep and offer contemporaneous time sheets and his suggestion that the court need not subject his fees to a reasonableness crosscheck. The district court then ordered Clearman to resubmit his petition "setting forth time expended and [Clearman's] usual and customary rates[.]"[5]The same day, the court approved the settlement and entered final judgment, retaining jurisdiction over the fee-allocation issue.

         Clearman filed a new petition with "reconstructed" time records. Clearman again sought half the fees, and Appellees note several concerns with the revised petition. For example, Clearman revised his "estimate" of 3, 000 hours upward to 4, 150 hours, now claiming a $950 hourly rate to arrive at his roughly $5 million request. Further,

[n]otwithstanding his earlier admissions about his alcoholism, Mr. Clearman now claims to have spent another 2000 or so hours between 2012 and 2015 on this case. That claim is incredible. In his earlier motion, Mr. Clearman submitted a declaration that admitted he was unable to practice, and sought to excuse that circumstance with a declaration by Charles Silver. Now, the Court is asked to believe that Mr. Clearman was hale and hearty in those years, and working 10 hours a day on the case.

Based on these and other irregularities, the class members filed a renewed objection to Clearman's new fee petition.

         On November 7, 2018, the district court issued its Order on Allocation of Attorney's Fees and Costs. That order, which is the subject of this appeal, noted that no party contested the previously determined award of fees and costs. Since there was no dispute as to the size of the award, the district court found it "unnecessary to engage in determining the reasonableness of the fee and costs under the Johnson fee calculation factors." Turning to proper allocation, the district court described the several iterations of the counsels' fee agreements:

Initially, the Clearman firm was to receive 75% of any fee recovered and the Burnette [sic] firm would receive 25%. Later, the Sommers firm was engaged as additional counsel and the fee arrangement changed. The Clearman firm would receive 60%, the Burnett firm 20% and the Sommers firm 20%. Later, the Clearman firm split and Scott Clearman left the firm. However, the Prebeg group of the Clearman firm [PFA] continued with the litigation along with the Sommers and Burnett firms, and added the Goldstein firm [G&F] as appellate counsel. Scott Clearman did not join the fee split agreement that resulted. Nevertheless, under this agreement, the Prebeg firm would receive 46%, the Burnett firm 20%, more or less. It was estimated that Clerman [sic] would receive, more or less, one third of Prebeg's 46%.

         The district court, "having examined the various agreements, and the spirit behind the documents determine[d] that the last arrangement, even though Scott Clearman did not join it, is fair and equitable." The court's two- page order elaborated no further on its reasons. The court split the $458, 367 in expenses-$975 to Burnett, $5, 183 to Goldstein, $187, 557 to PFA, $184, 347 to Sommers, and $80, 305 to Clearman. It then split the remaining $9, 816, 633 in fees-$1, 963, 327 to Burnett (roughly 20 percent), $1, 570, 661 to G&F (roughly 16 percent), $3, 010, 428 to PFA (roughly 30 percent), $1, 766, 994 to Sommers (roughly 18 percent), and $1, 505, 223 to Clearman (roughly 15 percent).

         Clearman filed a motion for entry of findings of fact and conclusions of law and for amendment of the allocation order, which the court denied. He now appeals the allocation of fees. The remaining attorneys who shared the award conditionally cross-appeal-if the ...

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