Beacon Associates LLC I et al v. Beacon Associates Management Corp. et al
Filing
133
OPINION AND ORDER re: 122 MOTION for Attorney Fees . filed by Income Plus Investment Fund. For all the foregoing reasons, Defendants' motion for attorneys' fees and costs is denied. SO ORDERED. (Signed by Magistrate Judge James L. Cott on 5/7/2020) (ks)
Case 1:14-cv-02294-JLC Document 133 Filed 05/07/20 Page 1 of 23
5/7/2020
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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BEACON ASSOCIATES LLC I, et al.,
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:
Plaintiffs,
:
:
-v:
:
:
BEACON ASSOCIATES MANAGEMENT :
CORP., et al.,
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Defendants.
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OPINION AND ORDER
No. 14-CV-2294 (JLC)
JAMES L. COTT, United States Magistrate Judge.
Plaintiffs Beacon Associates LLC I, Beacon Associates LLC II, Andover
Associates LP, Andover Associates LLC I, and Andover Associates (QP) LLC
commenced this declaratory judgment action to determine the proper valuation
method for disbursement of certain sums of money. Plaintiffs are investment funds
that heavily invested in the now-infamous Bernard L. Madoff’s investment company
and, since discovery of the fraud perpetrated by Madoff, have been recovering tens
of millions of dollars as a result of Madoff-related lawsuits and settlements. Income
Plus Investment Fund and David Fastenberg, Trustee, Long Island Vitreo – Retinal
Consultants 401K FBO David Fastenberg are investors who advocated for opposing
valuation methods for disbursement of the Madoff-related recoveries and are among
the named defendants in this action. The Court entered judgment on October 31,
2014. Both Income Plus and Fastenberg now jointly move for attorneys’ fees under
the common fund doctrine, arguing that their work in this action resulted in higher
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distributions for—and therefore benefitted—the vast majority of Beacon investors
such that their attorneys’ fees should be reimbursed. For the reasons set forth
below, the motion is denied.
I. BACKGROUND
Plaintiffs Beacon Associates LLC I, Beacon Associates LLC II (collectively,
“Beacon” or the “Beacon Funds”), Andover Associates LP, Andover Associates LLC
I, and Andover Associates (QP) LLC (collectively, “Andover” or the “Andover Funds”
and together with Beacon, the “Funds”) are New York limited liability companies
made up of numerous entities and individuals who hold membership interests in
them. Complaint dated April 2, 2014 (“Compl.”), Dkt. No. 2, ¶¶ 14–15. Defendant
Beacon Associates Management Corp. is the managing member of the Beacon
Funds. Id. ¶ 2. Defendant Andover Associates Management Corp. is the managing
member of the Andover Funds. Id. ¶ 3. Defendants Income Plus Investment Fund
(“Income Plus”) and David Fastenberg, Trustee, Long Island Vitreo – Retinal
Consultants 401K FBO David Fastenberg (“Fastenberg” and together with Income
Plus, “Defendants”) are investors in the Beacon Funds. Id. ¶ 4.1
A. Earlier Litigation Concerning Distribution of Non-Madoff Assets
Since the Funds’ inception, Beacon invested approximately 70% of its assets,
and Andover 30% of its assets, in Bernard L. Madoff Investment Securities LLC
(“BLMIS”), which, between 1995 and December 2008, reported substantial gains on
To be clear, the designation “Defendants” as used in this Opinion and Order does
not include Beacon Management Corp. and Andover Management Corp., neither of
whom are parties to the instant motion.
1
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the Beacon and Andover investments. Id. ¶¶ 23–25. The Funds, in turn, allocated
those reported gains to their members in proportion to each member’s interest in
the Funds. Id. ¶ 25. In December 2008, it was discovered that Madoff had been
operating a massive Ponzi scheme and that virtually all of the money invested with
BLMIS was stolen. Id. ¶ 26. As a result of the Madoff-related losses, the Funds
sought to liquidate, writing down all of their Madoff investment value to zero and
seeking to distribute the remaining non-Madoff invested funds (the “Non-Madoff
Assets”) to the Funds’ investors (subject only to a reserve held for future expenses of
the Funds). Id. ¶¶ 6, 30–31. However, in the effort to effectuate that distribution of
assets, a dispute arose among investors as to the proper method for distributing the
Non-Madoff Assets to individual Fund members. Id. ¶¶ 6, 34. Several alternatives
existed, but each would result in material differences in the valuations of members’
capital accounts. Id. ¶ 7.
The dispute was submitted to the Court for resolution on August 5, 2009, and
on July 27, 2010, Magistrate Judge Andrew J. Peck, to whom this case was
previously assigned on consent until his retirement in 2018, ordered that the NonMadoff Assets be distributed pursuant to the Valuation Method prescribed by
Beacon’s governing documents. Beacon Assocs. Mgmt. Corp. v. Beacon Assocs. LLC
I, 725 F. Supp. 2d 451, 460–63 (S.D.N.Y. 2010). The Valuation Method was
described by the Court as follows:
The first such method, referred to as the “Valuation
Method,” treats the Madoff losses as though they occurred
due to “market fluctuations,” that is, the Madoff-related
losses are reported as having occurred in December 2008
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(the date of discovery) and, pursuant to Beacon’s
Operating Agreement, allocated to each member on a prorata basis. Thus, if a member’s “capital balance
represented 1% of the fund as of December 1, 2008 . . .,
that [member] would be allocated 1% of the losses
attributable to Madoff.”
Id. at 455; see also Compl. ¶ 41.
In reaching its decision, the Court considered alternatives to the Valuation
Method, including the Restatement Method, which would have treated the Funds’
losses as having occurred in the same month that each of their investments in
BLMIS were made. Beacon Assocs. Mgmt., 725 F. Supp. 2d at 455; see also Compl.
¶ 36. One other methodology not directly considered by the Court in that
proceeding but relevant here is the Net Equity Method, described as follows:
The Net Equity formula (sometimes called “cash in/cash
out”) determines each investor’s interest in the Funds by
calculating how much each investor contributed to Beacon
or Andover and subtracting from that the amount
withdrawn by the investor (i.e., cash in / cash out). To
further amplify, an investor’s “Net Equity,” for the
purpose of the distributions at issue here, has been
calculated as the amount of the investor’s investment of
principal less any withdrawals or distributions received
from the Funds, including the distributions made by the
Funds in 2010. Any distribution to be made under the
Net Equity Method would be calculated by taking the
member’s Net Equity percentage (calculated by
comparing the net equity total investment to the total net
equity investment of all Beacon investors) and
multiplying it by the total amount of funds available for
that distribution to Beacon investors.
Compl. ¶ 40.
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B. The Instant Action Concerning Distribution of Madoff-Related Assets
Since the Court’s 2010 ruling pertaining to the Non-Madoff Assets, the Funds
have recovered additional monies that required distribution to members, including
those from the bankruptcy trustee appointed after the discovery of the Madoff fraud
(the “Madoff Trustee”) and from certain other litigation relating thereto. Id. ¶¶ 8–
10, 37–38. As a result, a new dispute arose among investors as to which of the two
methods—the Valuation Method or the Net Equity Method—should be utilized to
distribute these newly-received assets. Id. ¶ 39.
As such, the Funds commenced this action for a declaratory judgment on
April 2, 2014, naming as additional defendants the two lead investors who had
articulated opposing positions on the proper distribution method for Madoff-related
recoveries—Income Plus and Fastenberg. Id. ¶ 4. Income Plus believed that the
Funds should distribute the recovered sums pursuant to the governing documents,
which mandated the use of the Valuation Method, id. ¶ 42, while a group of 160
investors in the Funds, including Fastenberg, considered the Net Equity Method
more appropriate because the sums to be distributed were related to the losses
suffered as a result of the Madoff fraud, id. ¶ 43. Other investors weighed in and
advocated for one method or the other. See Summary Report of Investor Positions
by Fund Counsel dated October 3, 2014, Dkt. No. 39. The Funds themselves did not
take a position on which method of distribution was appropriate. Declaration of
Arthur G. Jakoby filed November 20, 2019 (“Jakoby Decl.”), Dkt. No. 129, ¶ 11.
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After briefing, a fairness hearing was held before Judge Peck on October 7,
2014 during which counsel for the Funds, Fastenberg, Income Plus, and other
interested investors addressed the Court. Minute Entry dated October 7, 2014. At
the close of the hearing, Judge Peck crafted a combination of the two proposed
methods, ordering all money received by the Funds from the Madoff Trustee, and as
otherwise identified in the Complaint, be distributed according to the Net Equity
Method until all investors were made whole (i.e., when investors received back all of
their principal invested in the Funds), at which point distributions would follow the
Valuation Method. Joint Letter dated October 14, 2014, Dkt. No. 41; Fairness
Hearing Transcript, Dkt. No. 43. The Court entered the Final Distribution Order
and Judgment (“Final Distribution Order”) on October 31, 2014, Dkt. No. 51,
pursuant to which the Funds distributed more than $49 million to their investors.
Joint Letter dated January 23, 2015 (“Holdback Issue Letter”), Dkt. No. 53.
C. Post-Judgment Dispute Concerning Net Equity Computations
At the time of the initial distribution of funds, another dispute arose
concerning the computation of one Beacon investor’s net equity for purposes of its
distribution under the Final Distribution Order (the “Holdback Issue”). Id.; see also
Defendant Income Plus’s Memorandum of Law in Support of Motion for Attorneys’
Fees and Expenses (“Def. Mem.”), Dkt. No. 123, at 6–9; Beacon’s Memorandum of
Law in Opposition to Motion for Attorneys’ Fees and Cost (“Pl. Opp.”), Dkt. No. 128,
at 9. According to Beacon, the account of its investor AIJED International LLC
(“AIJED II”) had been opened with a significant deposit of funds—$6.9 million—
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transferred from an existing Beacon account held by AIJED Associates LLC
(“AIJED I”). Pl. Opp. at 9–10; see also Jakoby Decl. ¶ 16. Some of the transferred
funds contained “fictitious Madoff profits,” and because Beacon had no way to
determine how much of the $6.9 million represented such profits, AIJED II’s net
equity calculation was necessarily inflated. Jakoby Decl. ¶¶ 16–17. This issue
affected not only AIJED II but a total of 18 different Beacon accounts (the
“Holdback Investors”). Id. ¶ 20; see also Holdback Issue Letter. No Andover
accounts were affected by this issue. Id.
In order to effectuate a planned January 2015 distribution without delay,
Beacon calculated each investor’s “potential” distribution amount by giving the 18
affected investors full credit for the fictitious Madoff profits transferred to their new
accounts. Jakoby Decl. ¶ 21. However, in calculating the “actual” amount to be
distributed to the affected investors, to the extent that Beacon knew the precise
amount of fictitious Madoff profits transferred to new accounts, it deducted such
profits from that investor’s net equity calculation and held back the difference
between the “potential” distribution amount and the “actual” distribution amount in
escrow (the “Holdback Amount”). Id. The Holdback Amount—a sum of
$4,297,559—was therefore not distributed with the January 2015 distribution. Id.
¶ 23. The bulk of the Holdback Amount consisted of AIJED II’s $3,538,229
holdback. Id.
On January 14, 2015, counsel for Beacon, Income Plus, Fastenberg, and
AIJED II raised with the Court the issue concerning the computation of AIJED II’s
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net equity under the Final Distribution Order. Minute Entry dated January 16,
2015; Conference Transcript, Dkt. No. 61. In the course of briefing the issue, AIJED
II contended that it was a separate legal entity from AIJED I and thus, for net
equity purposes, its initial investment must be treated as a “new” cash contribution.
AIJED II’s Memorandum of Law in Support of Its Application for Release of Funds
Due, Dkt. No. 76, at 1–4. Conversely, Defendants argued that AIJED II’s net equity
should reflect the fact that some of the money transferred in consisted of fictitious
Madoff profits and therefore funds transferred from one Beacon account to another
related account should not be treated as “new money” for the purposes of calculating
net equity under the Final Distribution Order. Income Plus’s Memorandum of Law
Relating to Calculation of Net Equity for Certain Investors, Dkt. No. 69, 2–6;
Fastenberg’s Memorandum of Law in Support of Request for Mandatory Injunction
and Declaratory Judgment, Dkt. No. 72, at 2–4. Beacon remained neutral as to the
treatment of fictitious Madoff profits being transferred from one Beacon account to
another. Jakoby Decl. ¶ 19.
On April 8, 2015, the Court ordered that “in equity and fairness, each related
account should be treated as a single entity for purposes of determining Net
Equity.” Order dated April 8, 2015, Dkt. No. 91, at 1. The Court rejected AIJED
II’s argument that its accounts should not be combined for net equity purposes
because investors in the two AIJED funds were different, finding instead that
“Investor A and Investor B, and not their investors, were members of Beacon.” Id.
at 2. The Court further held that the other “Holdback Investors” identified by
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Beacon should be treated as single entities for purposes of the net equity
calculations. Id. at 3.
AIJED II was the only Holdback Investor that filed an appeal. Notice of
Appeal dated April 14, 2015, Dkt. No. 92. Consequently, it sought and received a
stay of distribution of the amount attributable to the holdback of its funds. Motion
for Stay of Enforcement and Preliminary Injunction Pending Appeal, Dkt. No. 97;
Minute Entry dated May 1, 2015. On July 1, 2015, however, AIJED II advised the
Court that it was withdrawing its appeal. AIJED Letter dated July 1, 2015, Dkt.
No. 116. Therefore, on July 13, 2015, the Court notified the parties that “Beacon
[was] free to distribute the Holdback Funds.” Memo Endorsement dated July 13,
2015, Dkt. No. 117.
D. Defendants’ Motion for Reimbursement of Attorneys’ Fees and Costs
Under the Common Fund Doctrine
On June 13, 2019, Income Plus raised by letter-motion the issue of
reimbursement of legal fees and costs for the first time with the Court. Letter
Motion for Conference dated June 13, 2019, Dkt. No. 118.2 Judge Peck having
retired, the case was reassigned to me on June 14, 2019. Minute Entry dated June
14, 2019. The Court held a telephonic conference on June 20, 2019, setting a
schedule for discovery and briefing on the issue. Order dated June 20, 2019, Dkt.
No. 121.
The parties appear to agree that some discussions about a fee application occurred
among themselves prior to Income Plus reaching out to the Court. Pl. Opp. at 1 n.
1; Defendant Income Plus’s Reply Memorandum of Law in Further Support of
Motion for Attorneys’ Fees and Expenses, Dkt. No. 132, at 5.
2
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On September 20, 2019, Income Plus moved for attorneys’ fees and expenses
under the common fund doctrine. Income Plus Motion for Award of Attorneys’ Fees
and Expenses, Dkt. No. 122; Def. Mem.; Declaration of Brian E. Whiteley dated
September 20, 2019 (“Whiteley Decl.”), Dkt. No. 124; Declaration of John P.
Jeanneret dated September 20, 2019, Dkt. No. 125. Fastenberg joined the motion
by declaration. Declaration of Max Folkenflik dated September 20, 2019
(“Folkenflik Decl.”), Dkt. No. 126, ¶ 2; see also Supplemental Declaration of Max
Folkenflik dated November 1, 2019 (“Folkenflik Supp. Decl.”), Dkt. No. 127.
Defendants seek reimbursement from Beacon of $1.4 million in attorneys’ fees and
expenses—or $700,000 for each of Income Plus and Fastenberg—representing 25%
of an alleged $5.6 million common fund Defendants argue that they helped create in
early 2015. Def. Mem. at 10–11; Folkenflik Supp. Decl. ¶ 2. According to
Defendants, based on the fact that AIJED II—before the recalculation of its net
equity—would have received approximately 6.6% of the $84,904,984 Beacon has
distributed to date, or $5,603,729, that $5.6 million was instead available for
distribution to the balance of the investors in Beacon. Def. Mem. at 9–11. The
actual fees and expenses incurred by Income Plus during the time period of August
2013 through July 2014 totaled more than $175,000. Whiteley Decl. ¶ 17. The
actual fees incurred by Fastenberg through September 2016 amounted to $226,558.
Folkenflik Decl. ¶ 12.3
Fastenberg’s work in this matter was funded by his investment manager Family
Management Corporation. Folkenflik Decl. ¶ 1.
3
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On November 20, 2019, Beacon filed opposition papers, arguing, in short,
that Defendants “did not create a common fund benefit, and even if they did, the
time to seek attorney’s fees would have been before the Holdback Funds were
distributed, not four years later.” Pl. Opp. at 13; see also Jakoby Decl., Dkt. No.
129; Declaration of Debbie Potash-Turner filed November 20, 2019 (“Potash-Turner
Decl.”), Dkt. No. 130. Beacon notes objections to Defendants’ fee application from at
least two investors, including the David Nicholson Living Trust. Jakoby Decl. ¶ 33.
In addition, Beacon investor Howard Siegel submitted through Beacon’s counsel a
declaration of his own opposing the application. Beacon Letter dated November 20,
2019, Dkt. No. 131; Declaration of Howard Siegel dated November 20, 2019 (“Siegel
Decl.”), Dkt. No. 131-1.
On December 10, 2019, Defendants filed reply papers, revising their
calculation of the common fund to $6.4 million, which now includes the other
Holdback Investors’ percentage interest of distributions to date, plus the addition of
the $4.3 million Holdback Amount. Defendant Income Plus’s Reply Memorandum
of Law in Further Support of Motion for Attorneys’ Fees and Expenses (“Def.
Reply”), Dkt. No. 132, at 3–4; Supplemental Declaration of Brian E. Whiteley dated
December 10, 2019, Dkt. No. 132-1; Supplemental Declaration of Max Folkenflik
dated December 9, 2019, Dkt. No. 132-2; Supplemental Declaration of John
Jeanneret dated December 10, 2019, Dkt. 132-3.
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II. DISCUSSION
A. Defendants’ Fee Application Is Untimely
Federal Rule of Civil Procedure Rule 54(d)(2) provides that “[u]nless a statute
or a court order provides otherwise, [a] motion [for attorneys’ fees] must . . . be filed
no later than 14 days after the entry of judgment.” Fed. R. Civ. P. 54(d)(2). “While
many jurisdictions have local rules that preempt Rule 54 by allowing fee motions
thirty or more days after entry of judgment, the Southern District of New York does
not have such a rule.” Freudenberg v. E*Trade Financial Corp., No. 07-CV-8538
(JPO), 2013 WL 12330586, at *1 (S.D.N.Y. April 5, 2013) (quoting Marchisotto v.
City of New York, No. 05-CV-2699 (RLE), 2009 WL 2229695, at *3 (S.D.N.Y. July
27, 2009)). Here, the Final Distribution Order and Judgment was entered on
October 31, 2014. Defendants did not file their application until September 20,
2019, almost five years after the entry of judgment. While it is true that an appeal
was taken in this case, “[a] notice of appeal does not extend the time for filing a fee
claim based on the initial judgment . . . .” Fed. R. Civ. P. 54, 1993 Advisory
Committee’s Notes. Even if there was a tolling effect between the issuance of the
October 31, 2014 Final Distribution Order and Judgment and the date Judge Peck
permitted Beacon to distribute the Holdback Funds on July 13, 2015 after AIJED II
withdrew its appeal, Defendants waited nearly four years, until June 13, 2019, to
raise the issue of seeking reimbursement of their fees.
In response to Beacon highlighting this delay as a basis for the denial of the
motion, Defendants argue that “Beacon’s reliance on [Rule 54(d)(2)] is misplaced
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because the scope of the common fund could not be ascertained within 14 days of
judgment and because the Court retained jurisdiction with respect to the matter.”
Def. Reply at 5. Even if the alleged common fund could not have been ascertained
within 14 days of judgment, it certainly did not take four years for the alleged
common fund as calculated by Defendants to come to fruition. Indeed, because
Defendants’ calculation of the common fund consists of applying AIJED II’s original
percentage interest in Beacon to all distributions to date, Defendants could have at
least computed the initial amount of the common fund after Judge Peck resolved
the Holdback Issue, and disbursements under the Final Distribution Order
commenced thereafter. It does not help Defendants’ claim for fees that their
valuation of the common fund, as further discussed below, is essentially a moving
target. The scope of the common fund cannot be ascertained even now, as
Defendants themselves acknowledge, given “that the common fund at issue is not a
static pool of money that Beacon has already distributed but rather an ongoing
monetary benefit to non-AIJED Beacon investors.” Id. at 1.
In any event, Defendants could have invoked Rule 6(b)(1)(B) of the Federal
Rules of Civil Procedure, which allows the court “for good cause” to extend the Rule
54(d)(2) deadline “on motion made after the time has expired if the party failed to
act because of excusable neglect.” Fed. R. Civ. P. 6(b)(1)(B). However, Defendants
never sought an extension under Rule 6, much less offered any justification for
“excusable neglect.” This failure alone provides an adequate ground for denial of
the motion.
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Defendants also contend that the Court retained jurisdiction over all feerelated issues through its Final Distribution Order, which Defendants quote in part:
IT IS FURTHER ORDERED THAT this Court shall
retain jurisdiction over any issues that arise with respect
to the distribution of funds pursuant to this Order, the
final liquidation of the Funds and any potential
adjustments made to any individual investor with such
investor having the right to challenge any such
adjustment after being advised of the proposed
adjustment by the Funds or the Fund seeking a further
Order from the Court’s [sic] with respect to any such
proposed adjustment upon notice to the investor[.]
Def. Reply at 5–6 (quoting Final Distribution Order at 7–8).
While by the terms of the Order the Court retained jurisdiction over “any
issues that arise with respect to the distribution of funds,” nowhere in the quoted
portion or anywhere else in the Order does it provide that the Court retained
jurisdiction over issues related to fees. Even if it did, the mere retention of such
jurisdiction does not obviate the need to file motions for fees and costs in accordance
with the deadlines contained in the Federal Rules of Civil Procedure, otherwise
counsel could be making fee applications in perpetuity. See, e.g., Tancredi v.
Metropolitan Life Ins. Co., 378 F.3d 220, 227 (2d Cir. 2004) (Rule 54’s “order of the
court” exception to 14-day deadline does not “confer[] on district courts
untrammeled discretion to extend the time to file a fee motion” without finding of
“excusable neglect”); see also In re Veritas Software Secs. Litig., 496 F.3d 962, 973
(9th Cir. 2007) (district court’s final judgment reserving jurisdiction over fee
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applications did not modify Rule 54’s 14-day deadline).4 Finally, there is nothing in
the record provided to suggest that the parties did not have to bear their own costs
and fees, as would normally be the case unless some fee-shifting was provided for by
law or by agreement. For all these reasons, the application is denied as untimely.5
B. Defendants Have Not Established That They Are Entitled to Fees
Under the Common Fund Doctrine
Even if I found the application to be timely and cognizable, I am not
persuaded by Defendants’ argument that they are entitled to attorneys’ fees and
costs under the common fund doctrine.
“Under the common fund doctrine, a party that secured a fund for the benefit
of others, in addition to himself, may recover his costs, including his attorney’s fees,
from the fund itself or directly from the other parties enjoying the benefit.” In re
The Court does not see how any internal discussions the parties may have had
about fees bear on these deadlines, and Defendants cite no authority to suggest that
merely discussing a possible claim for fees somehow preserves the claim. Indeed,
“[t]he fact that the parties were ‘well aware’ that [Defendants] intended to file a fees
motion at some indeterminate date in the future does not excuse noncompliance
with the applicable procedural rules.” Bender v. Freed, 436 F.3d 747, 750 (7th Cir.
2006).
4
Even if Defendants’ claim for attorneys’ fees was considered to be ongoing, it
should be disallowed on laches grounds as well. The doctrine of laches generally
bars claims in which the claimant engaged in unreasonable delay and the
counterclaimant was prejudiced thereby. See, e.g., King v. Innovation Books, a Div.
of Innovative Corp., 976 F.2d 824, 832 (2d Cir. 1992) (citation omitted). Here,
Defendants’ delay in applying for attorneys’ fees—whether the delay is five years
from the issuance of the Final Distribution Order or four years from the Court’s
notice allowing Beacon to distribute the Holdback Funds—is unreasonable.
Furthermore, Beacon is prejudiced by the delay as it will have to either claw back
funds from investors or draw from its operating reserves if fees were awarded. Pl.
Opp. at 4.
5
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Holocaust Victim Assets Litig., 424 F.3d 150, 157 (2d Cir. 2005) (citing Savoie v.
Merchants Bank, 84 F.3d 52, 56 (2d Cir. 1996)) (internal quotations omitted).6 “The
doctrine rests on the perception that persons who obtain the benefit of a lawsuit
without contributing to its cost are unjustly enriched at the successful litigant’s
expense.” Boeing Co. v. Van Gemert, 444 U.S. 472, 478 (1980) (internal citations
omitted).
Both the Supreme Court and the Second Circuit have long recognized that
attorneys whose efforts create a “common fund” are entitled to a reasonable fee from
that fund. See Boeing, 444 U.S. at 478; Goldberger v. Integrated Res., Inc., 209 F.3d
43, 47 (2d Cir. 2000). The Second Circuit uses “the term ‘common fund doctrine’
somewhat broadly so as to incorporate the ‘common benefit’ doctrine—the rule by
which plaintiffs may seek recovery of costs, even where no ‘fund’ has been
recovered, as long as it is possible to spread the burden of those costs
proportionately among members of the class.” Savoie, 84 F.3d at 56 n.3.
For the common fund doctrine to apply, “the applicant’s efforts must confer a
‘substantial benefit on the members of an ascertainable class.’” Maley v. Del Glob.
Techs. Corp., 186 F. Supp. 2d 358, 369 (S.D.N.Y. 2002) (quoting Mills v. Elec. AutoLite Co., 396 U.S. 375, 393–94 (1970)). “[A] substantial benefit must be something
more than technical in its consequence and be one that accomplishes a result which
As such, any reference to “attorneys’ fees” and entitlement thereto is a reference to
entitlement to costs as well.
6
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. . . affect[s] the enjoyment or protection of an essential right to the [party’s]
interest.” Mills, 396 U.S. at 396 (citation omitted).
Additionally, it is within the court’s equitable discretion to award fees and
costs under the common benefit doctrine. See, e.g., Victor v. Argent Classic
Convertible Aribtrage Fund L.P., 623 F.3d 82, 86 (2d Cir. 2010) (no abuse of
discretion in awarding class action lead counsel attorneys’ fees pursuant to common
fund doctrine); McDaniel v. County of Schenectady, 595 F.3d 411, 417 (2d Cir. 2010)
(award of attorney’s fees pursuant to common fund doctrine examined under abuse
of discretion standard).
Defendants argue that Beacon should reimburse their attorneys’ fees because
their efforts in challenging AIJED II’s net equity computation created a $5.6 million
common fund that benefitted a vast majority of Beacon investors and that fund
would not have been created but for Defendants’ efforts. Def. Mem. at 1, 5, 9–11.
Beacon counters that the common fund doctrine does not apply in this case for a
number of reasons: first, no common fund or other common benefit was created, Pl.
Opp. at 13–17; second, this was not a class action such that there was a risk of
unjust enrichment, id. at 17–20; third, counsel for Defendants did not proceed on a
contingency basis and have already been paid, id. at 20–22; and fourth, an award
under these circumstances would be inequitable as Defendants sought to advance
their own interests, id. at 23–24.
As a threshold matter, it is of no moment that this suit is outside the class
action context. See Herbert B. Newberg, Newberg on Class Actions, § 15:53 (5th ed.
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2011) (common fund doctrine not limited to class actions) (citing Sprague v. Ticonic
Nat’l Bank, 307 U.S. 161, 166 (1939)). Or that counsel have already been paid and
Defendants are seeking reimbursement. See, e.g., In re Magazine Antitrust Litig.,
No. 00-CV-4889 (RCC), 2004 WL 253325, at *3 (S.D.N.Y. Feb. 10, 2004) (“[A] party
recovering a fund for the benefit of others may recover his costs, including
attorneys’ fees, from the fund itself or directly from the other parties enjoying the
benefit.”). Or even that Defendants acted out of self-interest. See, e.g., In re
Vitamins Antitrust Litig., No. 99-MC-197 (TFH), 2001 WL 34312839, at *8 (D.D.C.
July 16, 2001) (“[T]he Supreme Court has approved the awarding of fees in
instances where a plaintiff has sued and created a benefit for a class, even though
the plaintiff was not suing on behalf of the persons who subsequently benefitted
from the stare decisis effect of the litigation.”) (citing Fleishmann Distilling Corp. v.
Maier Brewing Co., 386 U.S. 714, 718 (1967)).
What is problematic, however, is that Defendants have failed to establish
that they created a common benefit to Beacon as a whole. “[A] material benefit to
the class is a sine qua non for an attorney’s entitlement to an award of fees from the
common fund.” Holocaust Victim Assets Litig., 424 F.3d at 157; see also In re Joint
Eastern and Southern District Asbestos Litig., 982 F.2d 721, 749 (2d Cir. 1992)
(denying fees where firm failed to identify “any concrete benefit that its efforts
conferred on the class”). According to Defendants, “every time the Madoff Trustee
makes a distribution to the Beacon Fund, the vast majority of Beacon’s investors
benefit from the work done by [Defendants] because a larger pool of money is
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available to them for distribution.” Def. Reply at 1. In particular, Defendants
contend that “Beacon had distributed over $5.6 million more to a majority of
investors than originally projected and will continue to make distributions to the
investors that exceed what they would have received in the absence of the work
performed by” Defendants. Def. Mem. at 6.
Notwithstanding Defendants’ view, it is difficult to discern how their
objections to AIJED II’s original net equity calculation created a $5.6 million
common fund “that would otherwise not have been paid” to Beacon. Def. Mem at 1.
The alleged $5.6 million common fund is AIJED II’s percentage interest of all
distributions Beacon has made to date, that is, a portion of the pre-existing Madoffrelated recoveries that were in place for the benefit of all. Thus, the alleged
common fund did not come into existence through the efforts of Defendants’ counsel.
Indeed, as Beacon observes, the alleged $5.6 million common fund “was
money that would have been distributed to [the Holdback Investors] but was
instead put back into the pool of all funds to be distributed and allocated to the
remaining investors who had not yet . . . broke[] even on its cash in/cash out
position.” Pl. Opp. at 16. In other words, Defendants did not create a separate pool
of funds for the benefit of all Beacon investors. Nor did Defendants’ efforts increase
or otherwise preserve an amount of the recovery that was at risk of being reduced.
Rather, their involvement led merely to a reshuffling of disbursements that allowed
some investors to receive higher distributions while simultaneously reducing the
distributions made to others. Therefore, Defendants have not met the threshold
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showing that their work in these proceedings resulted in substantial enhancement
in the Madoff recoveries.
Arguably, the efforts undertaken by Defendants in challenging the net equity
computation issue were of some value to Beacon by obtaining judicial clarification
for computing net equity under the Final Distribution Order and providing such
guidance as it will for the future.7 But that was the entire point of the Funds
bringing this declaratory action in the first place. Defendants’ critique of AIJED
II’s net equity computation resulted in the reallocation of funds to different
investors but had no impact on the amount of relief available to Beacon as a whole.
Notably, the Second Circuit has refused to approve a district court’s award of
attorneys’ fees under the common fund doctrine where it found the benefit to be
“purely cosmetic and ephemeral.” Kaplan v. Rand, 192 F.3d 60, 72 (2d Cir. 1999)
(internal citations and quotation marks omitted). Nothing Defendants did allowed
Beacon to recover more (or otherwise be in an improved position) than it would have
been in the absence of their efforts.
The parties dispute who first identified the Holdback Issue. While Defendants
urge that they were the ones who identified the issue “during the initial briefing
process,” Def. Mem. at 6, Beacon maintains that the issue was identified by the
Funds’ CFO Debbie Potash-Turner. Pl. Opp. at 3. Investor Siegel also credits
Potash-Turner for first discovering the issue. Siegel Decl. ¶ 8 (“[Potash-Turner]
uncovered the issues surrounding certain accounts that had transfers between
related accounts. . . . . Mr. Whitel[e]y’s claim that they uncovered the issues
surrounding these accounts is neither correct, nor is their claim that they needed to
spend lots of time reviewing schedules. They merely had to ask the CFO, and she
was available to shortcut all their problems.”).
7
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Moreover, it is not even clear that Defendants’ calculation of the alleged
common fund is sound. For example, Defendants do not explain the basis for
applying AIJED II’s percentage interest to all distributions to date. Judge Peck had
ordered that once all investors were made whole under the Net Equity Method, the
funds would then be disbursed under the Valuation Method. Beacon reports that,
as of March 2016, all Beacon investors reached the break-even position. Pl. Opp. at
16; Potash-Turner Decl. ¶ 3. Even if there was some fund-wide benefit flowing from
Defendants’ involvement with AIJED II’s net equity computation, the Court sees no
basis for Defendants to claim continuing credit for AIJED II’s portion of all
distributions to date—which appears wholly arbitrary (the longer Defendants
waited to make this fee application, the greater the common fund would be).
In any event, the precise value of the common fund is immaterial because, as
discussed above, Defendants did not contribute to its creation or preservation.
Viewed most generously, Defendants’ efforts were helpful in clarifying an
accounting issue. This initiative, however, did not confer a material benefit to
Beacon. Defendants cannot be credited for the sums of money recovered from
Madoff-related litigation. Otherwise, “it seems only fair,” as Investor Siegel points
out, that he and anyone who participated in this and related litigation “be allowed
to bill for [their] efforts over the last ten years that have benefitted all Beacon
investors . . . .” Siegel Decl. ¶ 10.
The rationale for creating the common fund exception is to spread the cost of
litigation among those who benefit from an attorney’s work. “The corollary is that
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the entire class should not be responsible for compensating attorneys for efforts that
benefitted only those attorneys or their clients.” In re Citigroup Inc. Securities
Litig., No. 09-MD-2070 (SHS), 2013 WL 12328803, at *1 (S.D.N.Y. Aug. 27, 2013)
(citing Boeing, 444 U.S. at 478). Defendants concede that not all Beacon investors
benefitted from their efforts. Def. Reply at 4 (“[W]ith the exception of AIJED and
the other investors like AIJED, Beacon’s investors have received higher distributions
than they would otherwise have received . . . .”) (emphasis added); see also id. at 1
n.2 (defining “Non-AIJED Beacon Investors”).
While the Court recognizes that, in certain cases, fairness dictates attorneys
be compensated for the extraordinary work they perform on behalf of a large group
of litigants, this case is not one of them. Defendants cannot reasonably claim they
incurred any risk of no recovery, as their participation began after the Madoffrelated recoveries were secured. If anything, the risk to Defendants here was not
receiving a greater portion of the Madoff-related assets—a risk that was uniquely
theirs and cannot be fairly attributed to Beacon. Therefore, the cost should be
Defendants’ alone. See In re Prudential Securities Inc. Ltd. Partnerships Litig., 911
F. Supp. 135, 141 (S.D.N.Y. 1996) (“[W]here legal work has been performed on
behalf of claimants who have elected to exclude themselves from the class . . . it
would be inappropriate to impose the cost of that work on the class.”).
C. Defendants Fail to Substantiate Their Fee Application
Finally, even if Defendants’ work contributed some material benefit to
Beacon, the Court would be unable to grant their request for attorneys’ fees because
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they have not submitted contemporaneous billing records, which “are a prerequisite
for attorney’s fees in this Circuit.” N.Y.S. Ass’n for Retarded Children, Inc. v. Carey,
711 F.2d 1136, 1147 (2d Cir. 1983); see also McDonald ex rel. Prendergast v. Pension
Plan of the NYSA–ILA Pension Trust Fund, 450 F.3d 91, 96–97 (2d Cir. 2006) (to
recover attorneys’ fees, “the prevailing party’s fee application must be supported by
contemporaneous time records, affidavits, and other materials”). Although counsel
for both Defendants each state in their respective declarations the total number of
hours billed and the hourly rates for the attorneys involved and provide a summary
of the tasks completed, neither declaration attaches detailed time records, what
services each lawyer rendered, the qualification of each lawyer, or the basis for each
lawyer's hourly wage. Whiteley Decl. ¶¶ 17–19; Folkenflik Decl. ¶ 12. Given the
lack of evidentiary support that Defendants are each entitled to $700,000, or three
to four times their unsubstantiated lodestars ($225,558 for Fastenberg and
$175,000 for Income Plus, respectively), these cursory declarations fall short.
Defendants’ failure to provide sufficient evidence of their attorneys’ fees thus
provides yet another justification to deny their motion.
III. CONCLUSION
For all the foregoing reasons, Defendants’ motion for attorneys’ fees and costs
is denied.
SO ORDERED.
Date: May 7, 2020
New York, New York
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