I have been complaining about  the fees approved by the NC Business Court for those lawyers obtaining disclosure only settlements since there was a Wachovia Bank.  Some of you may not be old enough to remember that venerable bank.

Now, at last, Judge Gale has found a disclosure only settlement to have yielded (almost)

If you’ve been reading this blog for any length of time, you know that I am very sour on substantial attorneys’ fees being awarded to the lawyers for class action plaintiffs who obtain nothing more for the class than valueless additional disclosures with regard to a merger transaction.  You can read some of those posts here and here.

The Business Court has routinely been awarding substantial fees for disclosure only settlements up until now, but the Business Court’s decision last week in In re Newbridge Bancorp Shareholder Litig., 2016 NCBC 87 sends the message that its relaxed examination of the value of such settlements is probably at an end.  That is partly based on the Delaware Court of Chancery’s decision in In re Trulia, Inc. Stockholder Litig., 129 A.3d 886 (Del. Ch. 2016), which was characterized as the "death knell" there for such settlements.

Judge Bledsoe said in the Newbridge Opinion:

the North Carolina Business Court has historically been guided in its consideration of motions to approve, and award attorneys’ fees in connection with, “disclosure-based” settlements of merger-based class action litigation by the body of persuasive case law developed by the Delaware courts over a period of many years. The Court is also aware that the Delaware courts have recently subjected such motions to much more exacting scrutiny than they have in the past.  See, e.g., In re Trulia, Inc. Stockholder Litig., 129 A.3d 886 (Del. Ch. 2016).

In the absence of contrary instructions from the North Carolina appellate courts, the Court finds the recent trend in the Delaware case law requiring enhanced scrutiny of disclosure-based settlements to merit careful consideration for potential application in this State.  The Court recognizes, however, that the application of Delaware’s recent case law to the Motions would represent a marked departure from this Court’s past practices in connection with the consideration of such motions. As a result, the Court declines to apply enhanced scrutiny to its consideration of the Motions in this case but expressly advises the practicing bar that judges of the North Carolina Business Court, including the undersigned, may be prepared to apply enhanced scrutiny of the sort exercised in Trulia to the approval of disclosure-based settlements and attendant motions for attorneys’ fees hereafter.

Op. Pars. 4 and 5.

Notwithstanding Judge Bledsoe’s decision that "enhanced scrutiny" would not be applied in the case before him, he did undertake a pretty close review of the value of the disclosures obtained for the class, and also the amount of the attorneys fees being awarded.

The Disclosures Obtained By Class Counsel Did Not Justify The Amount Of Fees Sought

He said that some of the disclosures touted as the basis for the fee award were "not material" or of "marginal benefit." Op. Pars. 64-65, 71 & n. 10.  He said that the Delaware Court of Chancery had "long rejected" the fallacy "that increasingly detailed disclosure is always material and beneficial disclosure."  Op. ¶64 (quoting Dent v. Ramtron Int’l Corp., No. 7950-VCP, 2014 Del. Ch. LEXIS 110, at *47  (Del. Ch. June 30, 2014)).

After that review, he sliced in half the amount of fees sought by class counsel, finding their fee request (of almost $275,000 based on an implied hourly rate of almost $525) was "not fair and reasonable, but rather excessive based on the circumstances of this case and the record before the Court."  Op. ¶69.

On the limited fee information provided by the class plaintiff’s counsel, Judge Gale said that the $135,000 fee award he made yielded an implied average hourly rate of $258.  That probably seemed pretty skimpy to those lawyers, who said that the "usual and customary rates" for  the senior lawyers for the Court-approved Co-Lead Counsel ranged from $650-$850 per hour.  Op. ¶50.

But the lawyers for the class did little to justify their fees.  They did not offer any affidavits of North Carolina attorneys attesting to “the fees customarily charged in the locality for similar legal services,”  as contemplated by the Revised Rule 1.5(a)(3) of Professional Conduct.  Instead, they premised their fee request on a 2015 survey of billing rates published in the National Law Journal.  Judge Bledsoe rejected that, saying that "the NLJ Survey does not report the specific range of hourly rates customarily charged in North Carolina for legal services of the sort Plaintiffs’ counsel provided here."  Op. ¶51.

The Business Court Said That "Typical Fees" In North Carolina For Complex Litigation Are $250-$450 Per Hour

Left without any benchmarks for what North Carolina lawyers charged as "customary rates" for complex commercial litigation, Judge Bledsoe looked to affidavits offered to the Business Court in other class action fee applications which stated that "typical fees charged in North Carolina for handling complex commercial litigation range from $250 to $450 per hour."  Op. ¶52.  He also relied on the hourly fees charged by lawyers appointed by the Business Court to serve as receivers or as counsel for receivers (which ranged from $225 to $475 per hour). Op. ¶54.

Another Important Caution For Future Fee Applications

Another deficiency in the fee application was the failure to supply detailed time records justifying the time spent.  The fee applicants instead presented only summary charts showing the total hours spent on the lawsuit.  In another caution for lawyers requesting approval of fee applications, Judge Bledsoe said:

the Court notes that attorneys’ fees’ petitions in this Court are typically supported by detailed attorney time records and advises that the Court will be reluctant to approve future petitions for attorneys’ fees lacking such evidentiary support.

Op. ¶45 & n. 8 (emphasis added).

Judge Bledsoe also said that there was nothing so special about the work done by class counsel to justify the higher hourly rate that they requested.  He said that: the nature of the work performed by Plaintiffs’ counsel "could have been performed fully by competent North Carolina counsel and that the demands of the [litigation] did not require Plaintiffs to retain counsel from outside North Carolina in order to prosecute the [litigation].  Op. ¶55.

If you think that I am being too hard on Plaintiffs’ counsel, I should point out that Judge Bledsoe said he found that:

Plaintiffs’ counsel are highly-regarded, highly-experienced class action counsel that have been involved in a number of significant class action matters including matters resulting in substantial monetary recovery for the class.

Op. ¶46.

Regardless of their qualifications, in the future these lawyers (who were undoubtedly disappointed in this ruling due to their success last year in getting a $550,000 fee award approved by a different Business Court Judge) and other lawyers for class action plaintiffs expecting big fees for anticipated disclosure only settlements of marginal value might need to find some other state in which to file those claims.

No more feeding at the trough in North Carolina.

A Couple Of Other Notes On This Opinion

One of the remarkable things about this Opinion is that there were no objections to the fees sought by the attorneys for the class.  Judge Bledsoe resolved, on his own accord, to closely review and reduce the fees sought.

Second, I recognize that even class actions leading to immaterial disclosure only settlements involve the need for North Carolina lawyers to defend those claims.  So it would be a shame if those out of state lawyers filing the suits leading to these settlements were to stay away from North Carolina altogether.


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Disclosure only settlements are in deep trouble in Delaware based on the Court of Chancery’s decision last month in In re Trulia Inc. Stockholder Litigation.  That decision is said to have sounded a "death knell" in Delaware for such settlements.

If you are not familiar with disclosure only settlements, David Wright provides a good

Last week (well, two weeks ago, I’m kind of behind) seemed like class action week at the Business Court.  Judge Gale issued three rulings in class action cases.

Two of the rulings were in consolidated class actions that had been settled.  Those were in In re Pike S’holders Litig., 2015 NCBC 89 and  90.  The third decision was in a case just at its commencement: Raul v. Burke, 2015 NCBC 91, about whether the plaintiff challenging a merger transaction was entitled to expedited discovery on her claims. 

In The Pike Order, The Court Awarded Twice The Amount Of Fees Which The Defendants Had Agreed To Pay

There”s not much worthy of note in the first Pike "decision."  It is merely an Order approving the settlement cut in the four separate class action lawsuits attacking Pike’s merger.

The decision in the second Pike case, In re Pike S’holders Litig., 2015 NCBC 90, concerned an award of attorneys” fees to the lawyers for the class.  The case is notable since the class’ lawyers were awarded double the amount of fees ($550,000) than the amount which the Defendants’ lawyers had agreed not to oppose ($275,000).

How did the Plaintiffs’ lawyers pull that off?  They had to first get past the Defendants’ argument that the Court did not have the authority to award fees in excess of the amount that they had agreed not to contest.  That argument was pretty much foreclosed by the language of the Memorandum of Understanding which led to the settlement.  It said:

[i]f the parties are unable to reach agreement with respect to the amount of such attorneys’ fees, costs, and expenses to which Plaintiffs’ counsel are entitled, then Plaintiffs reserve the right to submit an application for an award of attorneys’ fees, costs, and expenses to be paid to Plaintiffs’ counsel (the "Contested Fee Application"). . . . In the event of a Contested Fee Application, Defendants agree to pay whatever award of attorneys’ fees, costs, and expenses that the Court awards.

Op. ¶17.

Judge Gale, relying on the COA’s recent decision in Ehrenhaus v. Baker, held that:

when the parties agree to fee shifting but do not agree on the amount of fees to be awarded, the Court may award the amount that it determines to be fair and reasonable.

Op. ¶29.

The Court assessed the reasonableness of the half million dollar plus fee by breaking the fee down to an hourly rate (for the 1394.60 hours of time) of $550 per hour for lead counsel, $375 per hour for partner hours of non-lead counsel, and $250 per hour for associate time. Op. ¶37.  Judge Gale said that those rates were "within, but at the higher end of, the range that this Court has found to be reasonable for complex business litigation in North Carolina."  Id.

The Court Awarded Fees Based On "North Carolina Rates"

Out of state lawyers looking to take on class action cases in the Business Court might want to take caution from this part of Judge Gale’s ruling:

the affidavit of Lead Counsel [who was from Pennsylvania] reflects billing rates that exceed those typically charged in North Carolina.  The Court believes that there are North Carolina lawyers who are fully capable of pursuing similar litigation and, thus, that it would be unnecessary and inappropriate to apply billing rates higher than those typically charged by skilled counsel in North Carolina.

Op. ¶36 (relying on GE Betz, Inc. v. Conrad, ____ N.C. App. __, 752 S.E.2d 634, 657 (2013).

This Was A "Disclosure-Only" Settlement

Also significant was that this doubling of attorneys’ fees came in a disclosure only settlement.  Judge Gale expressed this view regarding this type of settlement :

[t]he Cpurt is mindful of substantial commentary that disclosure settlements might often reflect more of a tax cost of a merger transaction rather than a meaningful substantive benefit to the settlement class, particularly when the accompanying release is the broadest possible.  Those considerations perhaps underlie the Delaware Court of Chancery’s recent caution that fee requests in disclosure-only settlements may now face more searching scrutiny, particularly when accompanied by the broadest possible releases.  See In re Riverbed Tech., Inc. S’holders Litig., C.A. No, 10484-VCG, 2015 Del. Ch. LEXIS 241, at *21-22 (Del. Ch. Sept. 17, 2015).

Op. ¶39.

The Court found that the supplemental disclosures obtained by the class plaintiffs could not "be fairly characterized as ‘routine’" and that they "were clearly required to correct prior material disclosures that erroneously described circumstances related to negotiations between the corporation, its CEO, and its suitor."  Op. ¶41.

Expedited Discovery Denied In Class Action Attacking Ecolab’s Acquisition Of Swisher Hygiene

It is common in litigation involving merger transactions for the plaintiff to ask for expedited discovery.  Often, there is a rapidly approaching date for a shareholder vote to approve or disapprove of the transaction, and the class representative seeks to develop evidence which will warrant an injunction preventing the vote.

In Raul v. Burke, 2015 NCBC 91, the Plaintiff was attacking the sale of Swisher’s assets to Ecolab for $40 million in cash.  With a shareholder vote only a week away (set for October 15th), The Business Court denied a Motion for Expedited Discovery (on October 8th).

Plaintiff”s argument was that the disclosure of the transaction did not disclose how much of the $40 million sale price would be distributed to Swisher shareholders. The proxy statement stated repeatedly that the management and directors of Swisher could not reliably estimate any shareholder distribution.  Op. ¶12. In fact, it said that "[w]e can provide no assurance as to if or when such distribution will be made." Op. ¶11.

Where is all of that $40 million going?  Well, Swisher is in financial trouble, facing "continuing recurrent losses."  Op. ¶13.  Its accountants have issued an opinion with a "going concern" qualification.  Op. Par. 13.  Moreover, there is a criminal proceeding ongoing in the Western District of North Carolina regarding accounting irregularities.  Op. ¶9.

The Proxy Statement says that:

[t]he balance of the proceeds will be retained to pay ongoing corporate and administrative costs and expenses associated with winding down the Company, liabilities and potential liabilities relating to or arising out of our outstanding litigation matters, any fines or penalties and other costs and expenses relating to or arising out of the USAO/SEC inquiries, and potential liabilities relating to our indemnification obligations, if any, to Ecolab or to current and former officers and directors.

Op. ¶11.

The Court said that it had to balance the substantiality of the Plaintiff’s claim against the harm or burden that might be imposed on the Defendant if it had to go through the expense and "potential business delay" that would result from expedited discovery.  Op. ¶7.


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Is the certification of a class by an NC state court set in stone or can it be modified during the course of the litigation?

The federal rule vs. the state rule

There is a difference between the federal rule governing class actions (FRCP 23) and the North Carolina equivalent (NCRCP 23).  The length and precision of the federal rule is overwhelming when measured against the short and simple state rule.

The Federal rule contains a specific provision allowing the presiding judge to alter or amend a class certification order: It says that "[a]n order that grants or denies class certification may be altered or amended before final judgment."  FRCP 23(c)(1)(C).

The NC Rule, by contrast, is silent on this subject.

The Original Class Certification

The ability of a Business Court to alter or amend a previously entered class certification order was at issue last week in an unpublished Order in  Elliott v. KB Home North Carolina, Inc.  Judge Jolly had certified a class in the case three years ago, in 2012.  I wrote about that case at the time the class was certified.The class members had in common the issue whether Defendant KB Home should have installed a weather resistant barrier (a "WRB") behind the HardiePlank® siding on homes which they had purchased from KB Homes in two developments in Cary, North Carolina.  

Judge Jolly certified a class of "all persons who own a home that was constructed by Defendant KB Home without a weather restrictive barrier" behind the HardiePlank.  Class notice went out in March 2012.

Three and a half years later, the case is now before Judge McGuire after a couple of trips to the Court of Appeals and Judge Jolly’s retirement.

Change In Ownership Of The Homes Owned By The Class Memberrs

Here was the issue for Judge McGuire: Even before the class notice was sent, 38 of the members of the potential class sold their homes ("Pre-Notice Sellers") to others.  And following the mailing of the class notice, 79 of the class members sold their homes ("Post-Notice Sellers") to others. Who are proper class members? Are all of the homeowners who owned the homes without a WRB on the date of class notice members of the class, even if they had sold their homes?  Or should membership in the class be confined to homeowners who originally bought their homes from KB Homes and continued to own them through the date of final judgment in the case (who knows how long it will be before that happens?).  

A request for modification to the class definition was made by the Plaintiff.

There are multiple issues regarding those potential class members who sold their homes after receiving the class notice.  They either did or did not disclose the existence of this litigation or the absence of a WRB to their buyer.  If they did not, there might have been no impact on the sales price and they therefore might have no damages.  And they certainly did not have a continuing interest in the installation of a WRB, no longer being owner of the house.

Did Judge McGuire have the power to modify Judge Jolly’s order certifying the class?  If Judge McGuire were a federal judge, yes.  But as a state court judge, maybe not.  The NC Court of Appeals held ten years ago that:

Clearly, the federal rule contemplates continuing review of the class certification status of an action. See 3B Moore’s Federal Practice ¶ 23.50 at 23-410. Rule 23 of the North Carolina Rules of Civil Procedure contains no such provision, Nobles v. First Carolina Communications, 108 N.C.App. 127, 423 S.E.2d 312 (1992), rev. denied 333 N.C. 463, 427 S.E.2d 623 (1993), and we will not judicially legislate one.

Dublin v. UCR, Inc., 115 N.C. App. 209, 444 S.E.2d 455, 461 (1994).

But given that a class certification order is an interlocutory order, Judge McGuire held that Judge Jolly’s order was:

‘subject to change at any time to meet the justice and equity of the case’ and [was] ‘modifiable for changed circumstances.’

Order ¶9 (quoting Dublin, supra, 115 N.C. App. at 220). 

He said, however,  that there would have to be "a change in circumstances since [the date of the certification order] that has altered the legal foundation upon which Judge Jolly based his decision to certify the class." Op. ¶10.

As to the homeowners who had purchased from the Pre-Notice Sellers, Judge McGuire ruled that Judge Jolly had "at least impliedly" considered the existence of persons buying the homes before the class was certified, and that he had not intended to limit the class to those who had purchased their homes directly from KB Homes.  The existence of the homeowners buying their homes from the Pre-Notice Sellers was therefore not a "changed circumstance warranting modification of the class definition. Op. ¶16.

The Home Owners Who Had Sold Their Homes After The Class Was Certified Became Members Of A Subclass

Judge McGuire rejected the argument that the potential that the Post-Notice Sellers might have different damages from other class members (in that they would not need the benefit of an WRB being installed or that they might not have suffered damage upon the sale of their home) was a "changed circumstance warranting modification of the class.  He said that:

such individual differences in damages, by themselves, are not sufficient to defeat class certification where they do not predominate over common questions of law or fact affecting an entire class.

Op. ¶22.

But the Post-Notice Sellers nevertheless did represent a "changed circumstance."  That was due to the reason that the Post-Notice Sellers would need to individually establish that they had suffered any injury at all.

The overarching common question in the case remains whether KB Homes complied with the building code and the manufacturer’s recommendations regarding the need for a WRB.  (Judge McGuire recently denied KB Home’s motion for summary judgment on this issue in another unpublished Order).

borrowing from the U.S. Supreme Court”s recent Wal–Mart decision on class certification, Judge McGuire held that:

‘[w]hat matters to class certification . . . is not the raising of common "questions" — even in droves — but, rather the capacity of a class-wide proceeding to generate common answers apt to drive the resolution of the litigation.  Here, the answer to the question of whether the failure to install a WRB violated the then-existing building code will ”drive the resolution’ of Plaintiff’s claims.

Op. ¶26 (quoting Wal-Mart Stores v. Dukes, 131 S.Ct. 2541, 2550-511 (2011)).

The "changed circumstances" allowed a modification of the class definition to create a sub-class of the Post-Notice Sellers.  Counsel for the class were directed to add a named Plaintiff who was a Post-Notice Seller to represent the interests of the class. Op. ¶29.

Are you confused about which homeowners are in this class and which are not?  Here’s my take on that:

Time of Transaction In Or Out Of Class?
Sold before class notice Out (neither party sought their inclusion (Op. ¶14 & n.18)
Bought before class notice In
Sold after class notice In
Bought after class notice Out

II haven”t written about a class action issue for a while given the entry of the Robinson Bradshaw firm into the elite class of law firms with blogs.  Lawyers there write an excellent blog devoted entirely to the subject of class actions in North Carolina: the Carolinas Class Action blog.


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