In class actions, particularly large class actions, one or more class members—often represented by lawyers who are, in effect, “professional objectors”—may come forward to contest the fairness, adequacy, reasonableness (and attorneys’ fees for plaintiffs’ counsel) proposed in a settlement of that action. These objectors typically request attorneys’ fees for their counsel for the benefit they claim to be conferring on the class through the objection. On October 21, 2010, however, the New York Court of Appeals held that attorneys for successful objectors are not entitled to attorneys’ fees and expenses from the settlement fund in state court class actions. Flemming v. Barnwell Nursing Home and Health Facilities, Inc., 2010 NY Slip Op. 7414, 2010 N.Y. Lexis 2957 (Oct. 21, 2010).
Background
More than half a decade ago, a resident in the defendant’s skilled nursing facility died of septic shock. After her death, the New York State Department of Health cited the nursing facility for regulatory violations. The decedent’s administrator then began a class action, ultimately obtaining certification of a class of 242 residents of the facility. Six years later, counsel for the class representative and the facility agreed to a total proposed settlement of $950,000, with provisions for distribution among class members, an incentive award to the class representative, payment to the settlement fund administrator, and an award of attorneys’ fees and expenses to the class representative’s counsel.
One class member objected to these terms.
On the objector’s motion, the Appellate Division, Third Department reduced the amount of settlement funds allocated to attorneys’ fees by about 5%, struck the $35,000 incentive award to the class representative, and remanded the $40,000 award to the settlement fund administrator. It rejected, however, the request for attorneys’ fees by the objector’s counsel. Such fees, had they been awarded, would have been drawn from the general settlement fund, thus reducing the funds available to each class member.
The Court of Appeals Decision
On further appeal, the Court of Appeals, over a vigorous dissent, upheld the Third Department’s decision. The Court looked to New York’s class action statute, Article 9 of the New York Civil Practice Law and Rules (the “CPLR”), and to the legislative intent underlying that statute.
In general, New York adheres to the “American Rul,” which provides that attorneys’ fees are not recoverable unless specifically provided for by statute or agreement among the parties. Section 909 of the CPLR specifically provides only for attorneys’ fees for class representatives’ counsel. It is silent as to other counsel. On this basis, the Court of Appeals declined to interpret the CPLR as permitting a successful objector’s counsel to obtain attorneys’ fees from a class action settlement. Instead, it read the statute strictly, holding that if attorneys’ fees were to be awarded to counsel other than that of a class representative, it would be up to the Legislature to provide for such a result.
The Court of Appeals also noted that the 19th-century “common fund” doctrine recognizes that an award of attorneys’ fees may be made out of a “common fund” to be shared by litigants. But, as the Court went on to say, “no modern New York court has applied such rule to authorize an objector’s counsel fee award in a class action suit.”
The dissent, authored by Judge Robert Smith, took a different view of the “common fund” doctrine. It argued that New York’s version of that doctrine, adopted in Woodruff v. New York, Lake Erie & W.R.R. Co., 129 N.Y. 27 (1891), “has long been commonly understood that fees may be awarded to class counsel who benefits a class by winning or settling a lawsuit and to an objector’s counsel who benefits the class by reducing the amount of class counsel’s fees.” The dissent further stated that the “majority gives CPLR 909 the unintended consequence of partially repealing the common fund doctrine and discourages class members from monitoring the inflation of attorneys’ fees.”
Although it was not part of the appeal, the Third Department’s striking of the representative’s incentive award bears mention. The court noted that incentive awards can award a representative plaintiff for being the first to identify wrongful conduct on the part of the defendant and for undertaking extraordinary efforts to assist class counsel. On the other hand, such awards may create perverse incentives in settlement talks for the representative, in conflict with the interests of the class as a whole. In any event, New York law does not expressly authorize such awards, and the Third Department declined to change that.
Analysis
Attorneys’ fees for objectors’ counsel are allowed under the Federal Rules of Civil Procedure. See Advisory Comm. Note to 2003 Amends. of Fed. R. Civ. P. 23. Many states’ class action statutes are modeled after the federal rule and thus may also allow attorneys’ fees for class objectors. New York, however, has its own procedural framework for class actions—and that framework does not permit payment of attorneys’ fees to objectors.