MEDIA

February 11, 2010

Rates For Attorney’s Fees, Sentence For Securities Fraud

Published in: New York Law Journal | volume 243

This column reports on several significant, representative decisions handed down recently in the U.S. District Court for the Eastern District of New York. Judge Frederic Block reinstated an award of $179,722.50 in attorney’s fees on remand from the U.S. Court of Appeals for the Second Circuit. Judge Jack B. Weinstein discussed the reasons for a sentence more lenient than the guidelines range. Judge Nicholas G. Garaufis denied motions to intervene as un-timely. And Judge Eric N. Vitaliano decided a variety of insurance disclaimer issues in the context of summary judgment motions

Attorney’s Fees

In Luca v. The County of Nassau, 04 CV 4898 (EDNY, Jan. 25, 2010), Judge Block adhered to an earlier award of $179,722.50 in attorney’s fees after the Second Circuit had remanded the case for reconsideration of applicable hourly rates in light of its recent intervening decision in Simmons v. New York City Transit Authority, 575 F.3d 170 (2d Cir. 2009).

In the district court, Frederick Brewington successfully represented plaintiff Luca in her Title VII litigation against Nassau County for failing to hire her as a police officer. The jury awarded her $150,000 in compensatory damages, and the court awarded her $604,589 for future lost wages and pension benefits as well as $15,622.36 in costs. The Second Circuit affirmed these awards.

In awarding $179,722.50 in attorney’s fees, Judge Block considered the hourly rates charged by attorneys in both the Eastern and Southern Districts of New York. Mr. Brewington’s law office is in Hempstead.

After Judge Block’s fee award, the Second Circuit held in Simmons that, when evaluating a request to use higher out-of-district rates, a district court ‘must first apply a presumption in favor of’ the prevailing rates of its district. ‘[T]o overcome that presumption, a litigant must persuasively establish that a reasonable client would have selected out-of-district counsel because doing so would likely (not just possibly) produce a substantially better net result.’ Simmons, 575 F.3d at 175.

In its remand order here, the Second Circuit stated:

[A]n examination of out-of-district rates is proper only in a narrow set of circumstances. Because the fees in this case were awarded prior to Simmons, the record is insufficient to determine whether those circumstances obtain here.

In responding to the remand order, Judge Block reiterated that the Eastern and Southern District courthouses ‘are each juxtaposed to the Brooklyn Bridge, within an easy stroll from each other.’ Even apart from this ‘geographic reality,’ a strict application of the forum rule ‘would create an unreasonable disincentive for Manhattan-based attorneys to bring suits in Brooklyn, as well as an incentive for lawyers based in the Eastern District not to take cases in their own backyard because higher rates for the same work lie just across the East River.’ Slip op. 3.

The Simmons court had reasoned that, as to fee awards, a defendant ‘should not be required to pay for a limousine when a sedan would have done the job.’ Judge Block commented on limousines versus sedans:

In conjuring this metaphor, the circuit court presumably did not intend to suggest that there was a qualitative difference in the competency of counsel within the two districts, yet it regrettably may be perceived by lawyers whose offices are in the Eastern District as having a condescending tone. To be sure, the court has throughout the years presided over trials with Eastern District lawyers – such as Brewington – who deserve to drive in limousines, and has had trials with some Southern District lawyers who should have been driving clunkers.

In Judge Block’s view the Simmons court would attribute rate differences between the districts to differences in overhead.

On remand, Mr. Brewington did not seek to rebut the Simmons presumption in favor of the Eastern District’s prevailing rates. Rather, he contended that the hourly rate of $400 previously selected by Judge Block was reasonable within the Eastern District. Pointing to Mr. Brewington’s broad experience, the high quality of his representation, and rates applied in certain other Eastern District cases, Judge Block once again granted Mr. Brewington’s request.

Judge Block ordered defendant to pay an additional attorney’s fee of $125,915 incurred during the appeal on the merits and on fees, plus costs and post-judgment interest. Slip op. 16.

Sentencing

In United States v. Butler, 08 CR 370 (EDNY, Jan. 22, 2010), Judge Weinstein set forth the court’s reasons for imposing a sentence below the advisory guidelines range with respect to a defendant convicted of a major securities fraud. See 18 U.S.C. §3553.

Following a jury trial, defendant was found guilty of making untrue and misleading statements in connection with the purchases and sales of auction-rate securities, conspiring to do the same, and wire fraud conspiracy.

The government sought a sentence of at least 15 years’ incarceration and restitution of about $1.1 billion.

At Judge Weinstein’s request the Chief Judge convened an advisory panel of Eastern District judges and an expert on sentencing guidelines from the Probation Department to meet with Judge Weinstein before the sentence. The panel suggested a sentence of 6 to 10 years in prison.

The guidelines range of imprisonment was between 87 and 108 months. The loss attributable to the offenses could not be assessed, in part because the securities sold to the defrauded investors might in time prove to possess some or all of their original value. The court thereafter based the offense level calculation on the proven gain of $250,000 resulting from the crimes.

Judge Weinstein imposed concurrent sentences of 5 years’ imprisonment plus 3 years’ supervised release on each count, plus concurrent fines totaling $5 million. The court ordered all of defendant’s assets – some $3,988,856, minus forfeiture payable in the amount of $250,000 (the proven gain) – to be applied to the fines. Any remaining unpaid fine was to be payable at the rate of 5 percent of his net income per month, with interest to be waived. No restitution was ordered given the impossibility of determining the extent of loss.

Judge Weinstein imposed this lesser sentence for two primary reasons: (1) defendant’s ‘young child and loving wife’ show the desirability of his early presence at home, to provide economic and psychological support; and (2) defendant’s strong supportive network and his positive reaction to supervision since his arrest ‘indicate a high probability of rehabilitation.’

Judge Weinstein commented on the seriousness of the offense, defendant’s abuse of power and trust, and the arguable magnitude of the fraud. Defendant, the court observed, was motivated by his own short-term financial gain in the form of commissions.

The sentence, as Judge Weinstein saw it, would on balance ‘reflect the seriousness of the offense,’ ‘promote respect for law’ and ‘provide just punishment.’ The sentence would also, to the extent possible, satisfy the goal of general deterrence, and would achieve specific deterrence through defendant’s incarceration, the loss of his securities license, the impact on his employability, his continuing supervision, and factors relating to his family and friends.

Judge Weinstein ascribed the offense here to ‘multiple failures’ – by government regulators and legislators; institutional investors who did not reasonably supervise transactions; Credit Suisse, defendant’s employer; the financial industry, which never implemented a compensation system adequate to prevent fraud; and the rating agencies.

Timely Intervention

In Disability Advocates, Inc. v. Paterson, 03 CV 3209 (EDNY, Dec. 23, 2009), Judge Garaufis denied as untimely the motions of two nonprofit trade associations representing the interests of assisted living residences and adult homes throughout New York State to intervene in an action brought on behalf of individuals with mental illness residing in ‘impacted adult homes’ in New York City.¹

Plaintiff commenced this action in 2003 seeking an injunction allowing individuals with mental illness in New York City ‘the opportunity to receive services in the most integrated setting appropriate to their needs.’ Following several years of discovery and a five-week bench trial, Judge Garaufis found that defendants, including the governor, the New York State Department of Health and Office of Mental Health and their commissioners, had denied thousands of mentally ill people in New York City the opportunity to receive services in the most appropriate setting and that these actions violated the Americans with Disabilities Act.

After the liability finding, two non-parties – the Empire State Association of Assisted Living (ESAAL) and the New York Coalition for Quality Assisted Living (NYCQAL) – moved to intervene. While those motions were pending, the court allowed the two non-parties to submit amicus curiae briefs regarding the appropriate remedy. Attorneys for both ESAAL and NYCQAL had worked with litigants during discovery and had sat in on parts of the trial.

In moving to intervene, both associations expressed concern about the economic ramifications for adult homes of any remedy that might be imposed, including the elimination of adult home grant programs, reduction or reallocation of public funding for adult homes, revocation of operating certificates for certain adult homes or interference with the homes’ private contracts with residents. ESAAL and NYCQAL also stated concerns that plaintiff’s requested relief – moving qualified adult home residents into supported housing – would threaten the business model and continued viability of the affected homes, and require recipients to be assessed for mental and physical readiness before being moved, necessitating implementation measures to be coordinated with adult home operators.

Judge Garaufis focused on the requirement of timeliness for intervention as of right under Federal Rule of Civil Procedure 24(a), noting that the motions to intervene were made at a very late stage in the litigation: ‘six years after the filing of the Complaint, three years after the close of discovery, two years after the parties’ motions for summary judgment and four months after a five-week bench trial.’ The proposed intervenors claimed not to realize that a remedy might impair their interests until they saw the court’s decision two months before they made their motions. But as Judge Garaufis noted, the possibility of a remedy that could adversely affect their interests arose when the action was filed.

The complaint made explicit reference to the need for alternative settings for current and future residents of adult homes, which would be achieved by moving residents and funds from adult homes with 120 or more beds to community-based residential programs. The motions for summary judgment also discussed this remedy. Rejecting the intervenors’ ‘absurd’ contention that they had known of their interest for less than two months, Judge Garaufis found that ‘the lengthy and intentional delay in this case weighs in favor of denying intervention. ‘ Slip op. 8.

Consideration of the adult homes’ new claims might require evidentiary hearings or reopening discovery. In addition, ESAAL and NYCQAL sought to undo the court’s decision. The resulting delay would be highly prejudicial to the existing parties. Slip op. 9-10.

Any prejudice to ESAAL and NYCQAL, the court added, would arise from their own failure to seek to intervene during six years of litigation. Judge Garaufis viewed their delay as a tactical decision, spurred by optimism about the likely result, with a plan to jump in at the last minute if necessary. Prejudice on this front was mitigated by their amicus curiae status and the opportunity they would have to challenge any threat to their interests in state funding, contracts or operating certificates.

Finally, the intervention of the United States was not an ‘unusual circumstance’ that could lead to a broadening of the potential scope of the remedy. Because the United States supported plaintiff’s plan, ESAAL and NYCQAL’s fears were unfounded. Slip op. 11.

Insurance Disclaimer Issues

In U.S. Underwriters Insurance Company v. Landau, 05 CV 2047 (EDNY, Jan. 15, 2010), a declaratory judgment action brought by an insurer, Judge Vitaliano, deciding summary judgment motions, addressed a disclaimer of coverage and other issues.

In April 2003 defendant Rachel Landau purchased a three-story residential building in Brooklyn. Her husband Mordechi, the property manager, sought coverage from retail broker Secure Insure Brokerage, Inc. (SIB), which, in turn, applied for policies through wholesale broker Silver Associates with Greenwich Insurance and U.S. Underwriters Insurance Company (USU). The Landaus did not have direct communication with either Greenwich or USU. Silver Associates was an agent of USU pursuant to an ‘Agency and Brokerage Agreement.’ The Greenwich policy provided property damage coverage, and the USU policy provided third-party liability coverage.

In June 2004, a gas leak developed in the building from a pipe that was left uncapped by a plumber hired by the general contractor who was renovating the building. The plumber was aware of the leak, but left the building without fixing it. The next morning a tenant in the building lit his stove and set off a fire and explosion that killed him and destroyed the premises. The plumber was indicted and pled guilty to criminally negligent homicide.

Mordechi called SIB’s president immediately to report the explosion and fire. SIB’s president called an adjuster and subsequently faxed an ‘Acord’ form to Silver Associates which listed Greenwich as ‘the company.’ Silver Associates sent notice to Greenwich in June 2004, but did not contact USU. USU first learned about a claim against the Landaus in October 2004 from Allstate Insurance Company, the subrogee of owners of a neighboring property. USU began an investigation shortly thereafter and sent a disclaimer of coverage on Dec. 28, 2004, based on untimely notice and an independent contractor exclusion. Other lawsuits followed, including one by the Public Administrator of Kings County alleging that defendants failed to prevent hazards in connection with the work performed on the property. USU issued disclaimers of each of the claims and sought a declaratory judgment.

Judge Vitaliano held that a declaratory judgment of non-coverage binding on all parties was appropriate to address coverage issues even though no underlying tort claimant had yet obtained a judgment. Slip op. 10.

The injured parties’ complaints all alleged that the damage and injuries were sustained as a direct result of the negligence of the independent contractor hired by the Landaus. The independent contractor exclusion, moreover, was ‘valid and applicable.’ Slip op. 13. Contrary to defendants’ contention, the exclusion was not unconscionable. The court also rejected the argument that independent contractor involvement had not been adequately proven as the cause of the fire, because unlitigated issues of fact do not bar declaratory judgment.

Judge Vitaliano next considered whether the untimeliness of the disclaimer resulted in the waiver of the right to disclaim. Under New York Insurance Law, §3420(d), an insurer must give ‘written notice as soon as is reasonably possible’ of a disclaimer of liability. Here, notice of the occurrence was provided to USU when Silver Associates received the ‘Acord’ form in June from SIB, because Silver Associates was an agent of USU, ‘vested with authority to receive notice of an occurrence on behalf of USU.’ Slip op. 19. Under its agreement with USU, Silver Associates was obligated to report claims and losses suffered by USU’s clients. USU therefore had imputed knowledge of the explosion more than six months prior to the issuance of its initial disclaimer.

Factual issues existed as to when USU was on notice that the explosion stemmed from the actions or omissions of the ‘independent contractor.’ Slip op. 20.

In contrast, Judge Vitaliano did grant summary judgment for USU with respect to coverage for the property damage claims of neighbors because defendants failed to establish both reliance on USU’s coverage to their detriment and prejudice by its delay in disclaiming. Thus, there was no equitable estoppel. Slip op. 21.


1.  The authors’ firm represents Governor Paterson in his official capacity in unrelated cases, and this case has no connection to that representation.

Harvey M. Stone and Richard H. Dolan are partners at Schlam Stone & Dolan. Bennette D. Kramer, a partner of the firm, assisted in the preparation of the article.

[This article is reprinted with permission from the February, 2010, issue of the New York Law Journal. Copyright © 2010 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.]