"Mistakes Were Made" Excessive Rates, Excessive Hours, And Fiduciary Duties In Class Actions

The concept of fiduciary duties has existed since the inception of the legal profession and plays an integral role in class actions. Class counsel serve as both advocates and fiduciaries to members of the class and are charged with acting in the best interests of the class. The court also serves in a fiduciary capacity to members of the class. What happens when class counsel acknowledges that "mistakes were made" in violation of their fiduciary duties to their clients?

 "Mistakes were made" constitutes the ultimate in lawyer-speak. The phrase acknowledges wrongdoing, yet manages to pin the blame on absolutely nobody. In Plumbers Union Local No. 12 Pension Fund v. Ambassadors Group, Inc., a recent securities class action that settled in the Eastern District of Washington, class counsel admitted that "mistakes were made" in computing reimbursements for expenses. These mistakes, in turn, caused the judge to don his auditor's hat and to examine the firm's billed hours and hourly rates before concluding that the law firm's "mistakes" amounted to more than mere "oversights."

The instant case came before the court when class counsel filed a motion for settlement approval. Faced with what the court found to be excessive fees and expenses, the court sua sponte issued an interim memorandum in late February 2012 detailing its concerns over class counsel's proposed fees and ordering class counsel to respond to the court's concerns so that the court could determine future actions. The court highlighted that in class action cases, it possesses a fiduciary duty to members of the class. In its fiduciary role, the court bears the responsibility of ensuring that the attorneys receive "necessary and reasonable" attorney fees.

In a subsequent opinion, the court wholeheartedly embraced its fiduciary role. In determining "necessary and reasonable" fees, the court placed values on the amount of time it estimated each particular lawyer task would take. The court estimated that one of the partners overbilled the clients by 40 hours for completing settlement documents. The court also determined that the rates charged by the firm were excessive.

The court then chided class counsel for attempting to claim reimbursements for excessive expenses. Among other examples, the firm charged its clients for a pre-mediation dinner for four totaling $402 that included two bottles of $70 wine and a $60 tip. The firm also purchased first-class, cross-country airline tickets for investigators and attorneys involved in the case on several occasions, prompting the court to note drily, "From personal experience the court knows that an attorney or judge can accomplish his or her work requirements while flying in the coach section of an aircraft." In total, the court determined that the firm had over-claimed reimbursement expenses by over $100,000.

Faced with such egregious overbilling, the court determined that class counsel acted with "reckless disregard" to accuracy of its submittals for reimbursement and formally notified counsel of its intention to apply sanctions in the form of a formal admonition or a formal written reproval. While class counsel had obtained a fair and reasonable settlement for its clients, and while it was still entitled to reasonable attorneys' fees and actual expenses, the court nevertheless reiterated the importance of properly fulfilling fiduciary roles to avoid unnecessary delays like the present one in distributing settlement proceeds to class members.

Counsel in class actions must remain aware of their dual roles as advocates and as fiduciaries for their clients. Counsel should also remain aware of the court's role as an additional fiduciary to members of a class. Moreover, although the fee issue did not derail the settlement in this case, defense counsel need to recognize that inappropriate fee provisions may endanger approval of a settlement.

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