ANITA B. BRODY, District Judge.
Plaintiff Lehman Brothers Holdings, Inc. ("Lehman") sued Defendant Gateway Funding Diversified Mortgage Services, L.P. ("Gateway") for breach of a contract related to Lehman's purchase of four loans from Gateway's predecessor, Arlington Capital Mortgage Corporation ("Arlington"). I held that Arlington had breached its contractual obligations with respect to all but one of the loans, and that Gateway was liable for the loans that were breached under the de facto merger doctrine. See ECF Nos. 46, 92. Gateway appealed my ruling, and, on May 7, 2015, the Third Circuit affirmed.
On December 31, 2013, Lehman had filed a motion to award attorneys' fees and to fix prejudgment interest pursuant to Federal Rule of Civil Procedure 54. See ECF No. 94. On June 8, 2015, Lehman filed an application for an award of attorneys' fees for the appeal. See ECF No. 114. On July 21, 2015, the Third Circuit remanded Lehman's application for me to decide. Lehman now moves for an award of these fees.
In August 2001, Arlington and Lehman entered into a Loan Purchase Agreement ("LPA"), under which Lehman purchased four mortgage loans from Arlington. The LPA incorporated a Seller's Guide that provided various representations, warranties, and covenants.
In 2007, Arlington acknowledged misrepresentations in three of the four loans. Arlington entered into an Indemnification Agreement with Lehman in which it agreed to indemnify Lehman for any losses suffered on these three loans. Arlington never paid Lehman on the Indemnification Agreement. Lehman claimed that a fourth loan (the "McNair Loan") also contained misrepresentations, although Arlington never admitted any such misstatements. In 2008, Arlington sold most of its assets to Gateway.
On September 28, 2011, Lehman sued Gateway, claiming that it was liable for Arlington's breach of the LPA and the Indemnification Agreement. On January 31, 2013, Lehman moved for summary judgment. On April 25, 2013, I found that there was no dispute as to whether Arlington breached the Indemnification Agreement with respect to three of the four loans. See ECF No. 46, at 20. But questions of fact remained as to whether the McNair Loan had been breached. There were also genuine issues of material fact regarding whether Gateway was liable for these breaches under the de facto merger doctrine. See id. at 17-19. After a bench trial on August 21 and 22, 2013, I held that Gateway had entered into a de facto merger with Arlington, and was therefore liable for Arlington's contractual breaches. I also held that Arlington had not breached its contractual obligations with respect to the McNair Loan. Gateway appealed, and on May 7, 2015, the Third Circuit affirmed the ruling. See Lehman Bros. Holdings, Inc. v. Gateway Funding Diversified Mortgage Servs., L.P., 785 F.3d 96 (3d Cir. 2015).
Lehman now seeks $150,056.22 in attorneys' fees and $15,694.95 in expenses for the district court litigation. See ECF No. 94 at 7, 9. It also requests $154,408.00 in attorneys' fees and $15,672.69 in expenses for the appeal. See ECF No. 114, at 9-10. Gateway challenges both the timeliness and the reasonableness of Lehman's requests. As explained below, I will award $109,505.60 in attorneys' fees for the district court litigation and $121,017 in attorneys' fees for the appeal. I will deny Lehman's requests for reimbursement of expenses for both the district court and appellate litigation.
Lehman seeks attorneys' fees under a clause of the Seller's Guide,
Seller's Guide at 21.
The Third Circuit has held that "for Erie purposes, a party's asserted right to attorneys' fees is a matter of substantive state law." Chin v. Chrysler LLC, 538 F.3d 272, 279 (3d Cir. 2008). Thus, contractual agreements for attorneys' fees such as that contained in the Seller's Guide are enforceable "if the contract is valid under applicable state law." Dunkin' Donuts Inc. v. Guang Chyi Liu, Nos. 99-3344, 00-3666, 2002 WL 31375509, at *3 (E.D. Pa. Oct 17, 2002). State law "also controls the method of calculating the size of the award." Blanchette v. Cataldo, 734 F.2d 869, 878 (1st Cir. 1984); see also Mangold v. Cal. Pub. Utils. Comm'n, 67 F.3d 1470, 1479 (9th Cir. 1995) ("The method of calculating a fee is an inherent part of the substantive right to the fee itself, and a state right to an attorneys' fee reflects a substantial policy of the state.").
The Seller's Guide provides that it "shall be construed in accordance with the substantive law of the State of New York." Seller's Guide at 21. Because contractual provisions governing attorneys' fees are valid under New York law, the Seller's Guide attorneys' fees clause is enforceable. See Devon Robotics, LLC v. ITOCHU Int'l, Inc., Nos. 09-1819, 09-4123, 2013 WL 5525093, at *3 (E.D. Pa. Oct. 4, 2013) (collecting New York state court cases). New York courts use the lodestar method to calculate contractual attorneys' fees: they "multiply the hours reasonably spent by counsel, as determined by the [c]ourt, by the reasonable hourly rate." Id. at *3 & n.8; see Matakov v. Kel-Tech Const., Inc., 924 N.Y.S.2d 344, 346 (N.Y. App. Div. 2011) (upholding the application of the lodestar method to calculate class counsel's fee pursuant to a settlement agreement); see also GFI Secs., LLC v. Levin, No. 102411/08, 2009 WL 1575183, at *5 (N.Y. Sup. Ct. 2009). The court may then adjust the lodestar amount based on various case-specific factors, including "the nature and extent of the services, the actual time spent, the necessity therefor, the nature of the issues involved, the professional standing of counsel, and the results achieved." Bankers Fed. Sav. Bank FSB v. Off W. Broadway Developers, 638 N.Y.S.2d 72, 74 (N.Y. App. Div. 1996) (internal quotation marks omitted).
Gateway argues that Lehman's request for attorneys' fees is untimely because attorneys' fees based on contractual agreements must be raised during trial, and cannot be sought through a post-trial motion under Federal Rule of Civil Procedure 54.
Rule 54 requires that a claim for attorneys' fees "be made by motion unless the substantive law requires those fees to be proved at trial as an element of damages." Fed. R. Civ. P. 54(d)(2)(A). As noted above, the Seller's Guide is governed by New York substantive law. See Richardson v. Wells Fargo Bank, N.A., 740 F.3d 1035, 1037 (5th Cir. 2014) (applying Texas law to determine whether, under Rule 54(d)(2)(A), contractual attorneys' fees must be proven as an element of damages). New York courts do not require that attorneys' fees be proven as an element of damages. See Elkins v. Cinera Realty, Inc., 402 N.Y.S.2d 432, 433 (N.Y. App. Div. 1978) (stating that the determination of attorneys' fees could only be made once the "ultimate outcome of the controversy, whether or not such outcome is on the merits," was known); see also Gamache v. Steinhaus, 776 N.Y.S.2d 310, 312 (N.Y. App. Div. 2004) (emphasizing that a party was "clear[ly] . . . entitled to an attorney's fee," even though the issue was raised in a post-trial motion); 737 Park Ave. Acquisition, LLC v. Jetter, 997 N.Y.S.2d 101 (N.Y. Civ. Ct. 2014) (involving a post-trial hearing on an application for attorneys' fees). Thus, New York law does not require Lehman to prove its attorneys' fees claim at trial, and Lehman's request for attorneys' fees is timely.
Under the lodestar method, the reasonableness of Lehman's requested attorneys' fees turns on an assessment of the hourly rates charged by Lehman's counsel and the number of hours spent by counsel on the litigation. To determine the appropriateness of counsel's hourly rate, a court must consider the "customary fee charged for similar services by lawyers in the community with like experience and of comparable reputation to those by whom the prevailing party was represented." Gamache v. Steinhaus, 776 N.Y.S.2d 310, 311 (N.Y. App. Div. 2004) (internal quotation marks omitted); accord Rahmey v. Blum, 95 A.D.2d 294, 302 (N.Y. App. Div. 1983).
Attorney Matthew Spohn, who charged an hourly rate of $385 in 2012 and $395 in 2013, billed the majority of the time spent on the district court litigation. See ECF No. 94, Spohn Decl., at 3. In addition, attorney Caleb Durling billed significant hours on this case; he charged an hourly rate of $340 in 2012 and $375 in 2013. See id., Durling Decl., at 2. Local counsel, Thomas Donnelly, billed $250 per hour over the relevant time period. See id., Donnelly Decl., at 2.
Gateway argues that the rates charged by Mr. Spohn and Mr. Durling are excessive because local counsel, Mr. Donnelly, has more experience but charged only $250 per hour. Gateway's position is unpersuasive. Mr. Spohn has been practicing law for two years longer than Mr. Donnelly. Compare ECF No. 94, Spohn Decl., at 2 (indicating that Mr. Spohn graduated law school in 2001) with id., Donnelly Decl., at 2 (stating that Mr. Donnelly graduated in 2003). Both Mr. Spohn and Mr. Durling also graduated from law school with honors and obtained judicial clerkships. See id., Spohn Decl., at 2; id., Durling Decl., at 2. Mr. Durling has been recognized for his work in industry publications, and served as "national coordination counsel for [Lehmnan's] litigation across the country." Id., Durling Decl., at 2. In short, Mr. Spohn and Mr. Durling's skill and experience justify the higher hourly rates they charged; their rates are reasonable.
In one respect, however, the rate charged by Mr. Spohn is excessive. Mr. Spohn spent 12.4 hours traveling to Philadelphia and back for a pretrial conference between July 31 and August 1, 2013. He typically charged half his hourly rate (or $197.50) while traveling, a practice that seems reasonable. See Gonzalez v. Bustleton Servs., Inc., No. 08-4703, 2010 WL 3282623, at *3 (E.D. Pa. Aug. 18, 2010); RMP Capital, Corp. v. Victory Jet, LLC, No. 6197-12, 2013 WL 5303582, at *12 (N.Y. Sup. Ct. 2013). But for this particular trip, he only billed 6.3 hours at this reduced rate. See ECF No. 94, Spohn Decl., Ex. A. The remaining 6.1 hours were improperly billed at his full hourly rate of $395. Id. I will therefore reduce Lehman's attorneys' fees award by $1,204.75
The reasonableness of the number of hours spent on the litigation "turns upon . . . the type of work done, the specificity of counsel's time records, the competence and necessity of the services performed, and the results achieved." Katzer v. Cty. of Rensselaer, 767 N.Y.S.2d 474, 476 (N.Y. App. Div. 2003). Over the course of the district court litigation, Lehman's counsel billed 484 hours. See ECF No. 94, at 7. To justify these hours, Lehman has submitted contemporaneous records indicating the date, the number of hours billed, the attorney billing those hours, and the tasks performed during those hours. See Rahmey, 95 A.D.2d at 300 (stating that a court should look to "contemporaneous time sheet[s] indicating the date, number of hours worked, an explanation of how the hours were spent . . . and identifying the specific claim to which the hours pertain"); see also Gamache, 776 N.Y.S.2d at 312 (concluding that the attorneys had failed to establish the reasonableness of the hours spent where they did not submit contemporaneous time sheets).
Gateway has submitted a list of various billing entries that it claims are either duplicative or erroneous. See ECF No. 96, Ex. A. Based on my independent review of Lehman's billing records, I conclude that they are largely reasonable given the type and complexity of the work involved. However, the 23.2 hours spent by counsel on drafting a post-trial supplemental brief were excessive. See ECF No. 94, Spohn Decl., Ex. A. This brief did not require new legal research; many of the citations and legal arguments are identical to those contained in Lehman's summary-judgment brief. Compare ECF No. 87 with ECF No. 33. Instead, the additional work that went into producing this brief consisted of reviewing the 433 page trial transcript and drafting 12 pages of legal argument. The brief could have reasonably been prepared in 16 hours—6 hours to review the transcript and 10 hours for drafting. See Decarmen v. Comm'r of Social Sec., No. 09-427, 2015 WL 5286620, at *7 (W.D. Pa. Sept. 8, 2015) (finding "nothing unreasonable in the expenditure of 6 hours to review the 460-page transcript in th[e] case"); Seifert v. Comm'r of Social Sec., No. 10-188J, 2013 WL 357568, at *3 (W.D. Pa. Jan. 29, 2013) (reducing time spent on a 32 page brief to 25 hours where the issues raised were familiar to counsel). I will reduce the requested hours for preparing the post-trial supplemental brief from 23.2 to 16 hours. This equates to a reduction in the fee award of $2,844.
Gateway contends that Lehman's attorneys' fees should be reduced by 25% because it did not prevail on its claim that Arlington made misrepresentations regarding the McNair Loan. See ECF No. 96, at 6-7. Under New York law, a court must account for several factors in determining the "reasonable value of the services rendered" by an attorney, including "the amount involved and benefit resulting to the client from the services . . . [and] the results obtained." Diaz v. Audi of Am., Inc., 57 A.D.3d 828, 830 (N.Y. App. Div. 2008); see also Matter of Freeman, 311 N.E.2d 480, 484 (N.Y. 1974).
In this case, Lehman sought damages for losses on four different loans. Gateway essentially conceded that Arlington breached its contractual obligations with respect to three of the loans. See ECF No. 46, at 20. Lehman succeeded in proving that Gateway was liable for the losses on these three loans under the de facto merger doctrine. Lehman failed, however, to demonstrate that Arlington itself had violated its agreement with respect to the McNair Loan. Ultimately, Lehman obtained monetary recovery for the losses suffered on three of the four loans. Thus, a 25% reduction in the fee award will align Lehman's attorneys' fees with the results its counsel obtained, and I will therefore reduce the fee award by $36,501.87.
Lehman also seeks to recover $15,694.95 for legal research
As such, I will decline to award Lehman the $15,694.95 in expenses it seeks.
After reducing the requested fee award of $150,056.22 by $1,204.75 for improperly-billed travel time, and $2,844 for the hours unreasonably spent on the post-trial supplemental brief, Lehman's lodestar amount is $146,007.47. Because of Lehman's limited success in the district court litigation, this amount will be reduced by 25%. Thus, Lehman is entitled to a reasonable fee award of $109,505.60. Lehman cannot recover for the travel and research costs incurred by counsel.
Lehman also seeks $154,408.00 in attorneys' fees and $15,672.69 in expenses for its successful defense of Gateway's appeal. See ECF No. 114, at 9-10. It argues that it is entitled to these fees and expenses either under Federal Rule of Appellate Procedure 38, which authorizes courts of appeals to award damages and costs for frivolous appeals, or the Seller's Guide. I will award Lehman $121,017 in reasonable attorneys' fees under the Seller's Guide and will deny its request to be reimbursed for expenses incurred in using online legal research services.
Lehman claims that it is entitled to attorneys' fees and expenses under Federal Rule of Appellate Procedure 38, which states that "[i]f a court of appeals determines that an appeal is frivolous, it may . . . award just damages and single or double costs to the appellee." Fed. R. App. P. 38.
In order to award attorneys' fees based on the frivolousness of the appeal, the issues raised must be so meritless that, "following a thorough analysis of the record and careful research of the law, a reasonable attorney would conclude that the appeal is frivolous." Quiroga v. Hasbro, Inc., 943 F.2d 346, 347 (3d Cir. 1991) (internal quotation marks omitted). That is, a court asks whether the appeal is "wholly without merit." Id. at 347; see also Hilmon Co. (V.I.) Inc. v. Hyatt Int'l, 899 F.2d 250, 251 (3d Cir. 1990) (stating that a frivolous appeal is one that is "utterly without merit, or without colorable arguments raised in support" (citation omitted) (internal quotation marks omitted)).
The Third Circuit chastised Gateway for violating Federal Rule of Appellate Procedure 10 by failing to include in the appellate record the transcript of a hearing. This transcript, the Court of Appeals noted, was "necessary to evaluate [Gateway's] principal claim" that I had improperly deemed one of its arguments waived. Lehman Bros. Holdings, Inc., 785 F.3d at 101. The Court of Appeals found that Gateway's conduct "at best show[ed] a remarkable lack of diligence and at worst indicate[d] an intent to deceive th[e] Court." Id. The Third Circuit then went on to address three other arguments raised by Gateway related to (1) my denial of a continuance to obtain expert witnesses; (2) my denial of Gateway's motion to consolidate Lehman's case against Gateway with Gateway's separate action against Arlington for contribution and indemnification; and (3) my finding that a de facto merger had occurred. Ultimately, the court found these contentions to be "unpersuasive." Id. at 102.
The Third Circuit's strong language and its willingness to find Gateway's primary claim forfeited suggest that at least one of Gateway's arguments was potentially frivolous. But in order for the appeal to be frivolous, Rule 38 requires that it be "wholly without merit." Quiroga, 943 F.2d at 347 (emphasis added). While Lehman argues that "Gateway had no appreciable hope of securing reversal" on its three other challenges, see ECF No. 114, at 16, Lehman has not demonstrated that these challenges meet the difficult standard for frivolousness under Rule 38. See Hilmon, 899 F.2d at 253 (cautioning that courts should be reluctant to classify an appeal as frivolous "so that novel theories will not be chilled and litigants advancing any claim or defense which has colorable support . . . will not be deterred").
Although Gateway's arguments on appeal failed to persuade the Third Circuit, there were colorable bases to support at least some of its claims. For example, with respect to my denial of its motion to consolidate, Gateway pointed out that the two actions involved questions of fact that centered on the same series of transactions and occurrences. See Fed. R. Civ. P. 42(a) (noting that a court may consolidate actions that "involve common questions of law or fact"). Gateway also challenged my conclusion that Lehman had established continuity of ownership under the de facto merger doctrine. Given that continuity of ownership is one of the required elements of a de facto merger, see Fizzano Bros. Concrete Prods, Inc. v. XLN, Inc., 42 A.3d 951, 956 (Pa. 2012), Gateway's argument was not so utterly without merit to be frivolous.
In sum, because a reasonable attorney might conceivably have expected to prevail on at least some of the arguments raised in Gateway's appeal, it was not "wholly without merit," and Lehman is not entitled to attorneys' fees and expenses under Rule 38.
Even though Gateway's appeal was not frivolous, Lehman may still recover attorneys' fees under the Seller's Guide, as interpreted in accordance with New York law.
Three attorneys billed significant hours on the appeal. Jonathan Franklin, a partner, billed $865 per hour in 2014 and $900 per hour in 2015. See ECF No. 114, at 8. Mr. Spohn, who also worked on the district court litigation, billed $415 per hour in 2014 and $500 per hour in 2015. See id. Finally, Benjamin Hayes, an associate, billed at an hourly rate of $280 in 2014 and $295 in 2015. See id. To support the reasonableness of these rates, Lehman submitted the affidavit of Barry E. Cohen, an attorney in Washington, D.C. with extensive experience in fee-setting and billing practices.
Mr. Cohen's affidavit is not particularly helpful, however, because he only attests that Lehman's counsel's hourly rates were "within the range of hourly rates charged by other lawyers of comparable skill and experience in the Washington, D.C. market." Id., Cohen Decl., at 6 (emphasis added). But New York courts have held that the relevant community for calculating the hourly rate is the district where the action is litigated—which, in this case, is Philadelphia. See, e.g., RMP Capital, Corp., 2013 WL 5303582, at *8; Francis v. Atlantic Infiniti, Ltd., No. 19953/06, 2012 WL 398769, at *5 (N.Y. Sup. Ct. 2012); Daimlerchrysler Corp. v. Karman, 782 N.Y.S.2d 343, 346 (N.Y. Sup. Ct. 2004); see also Behavior Research Inst. v. Ambach, 535 N.Y.S.2d 465, 467 (N.Y. App. Div. 1988) (upholding a lower court judge's determination of hourly rates based on his knowledge of the local community where the case was litigated).
Because Lehman has submitted no evidence regarding prevailing market rates in Philadelphia in 2014 and 2015, I will utilize the fee schedule rates established by Community Legal Services, Inc. ("CLS"). See Maldonado v. Houstoun, 256 F.3d 181, 187-88 (3d Cir. 2001) (approving the use of the CLS schedule to fix hourly rates).
Lehman's counsel billed 342.9 hours for the appeal: 78.1 hours for Mr. Franklin, 77.6 hours for Mr. Spohn, and 188.3 hours for Mr. Hayes. See ECF No. 114, at 9. Gateway contends that these hours are excessive, but it has not identified which hours it is challenging and why it believes counsel's billing to be unreasonable. Instead, it merely requests a hearing on reasonableness. Without any evidence to undermine Lehman's billing records, a hearing on the appellate fees motion is not justified. See SO/Bluestar, LLC, 825 N.Y.S.2d at 82; Podhorecki, 607 N.Y.S.2d at 819.
Based on my review of the billing records submitted to support Lehman's appellate fee petition, I find that 342.9 hours is reasonable in order to research and draft the 47 pages of legal argument in the appellate brief, produce a supplemental appendix, and prepare for oral argument (even though oral argument was ultimately not held in the case).
Lehman seeks reimbursement of $15,672.69, primarily for online research expenses. See ECF No. 114, at 9-10. As noted above, however, New York courts treat research expenses as part of an attorney's base fee, and do not permit separate recovery for these expenses. See In re City of New York, 913 N.Y.S.2d at 527; Cox, 2007 WL 7045224, at *4; Meyers, 634 N.Y.S.2d at 646 n.2.
In sum, Gateway's appeal is not frivolous under Federal Rule of Appellate Procedure 38 because at least some of the issues raised were supported by a colorable legal or factual basis. Nevertheless, Lehman is still entitled to reasonable attorneys' fees of $121,017 under the Seller's Guide.
In entering judgment in favor of Lehman, I held that it was entitled to $448,533.08 plus 6% prejudgment interest. See ECF No. 93. In the Third Circuit, "state prejudgment interest rules are to be applied in diversity cases." Jarvis v. Johnson, 668 F.2d 740, 746 (3d Cir. 1982). As I previously determined, the Indemnification Agreement breached by Arlington is governed by Pennsylvania law, and Pennsylvania courts calculate prejudgment interest at 6% per annum from the date that payment was wrongfully withheld. See ECF No. 46, at 21; see also Daset Min. Corp. v. Indus. Fuels Corp., 473 A.2d 584, 595 (Pa. Super. 1984).
In this case, prejudgment interest should be calculated starting on June 8, 2011, when the 30-day deadline imposed by the Indemnification Agreement for Gateway to respond to Lehman's demand for payment expired. See ECF No. 46, at 19. Final judgment in the case was entered on December 17, 2013. For the 923 days that elapsed between Gateway's wrongful withholding of payment and the entry of final judgment, Lehman is entitled to $68,054.14 in prejudgment interest.
As explained above, I will grant in part and deny in part Lehman's motions for attorneys' fees for the district court litigation and appeal. With respect to the district court motion (ECF No. 94), I will award Lehman reasonable attorneys' fees of $109,505.60, and will deny its request for reimbursement of research and travel expenses. I will also fix prejudgment interest at $68,054.14. With regard to Lehman's appellate attorneys' fees motion (ECF No. 114), I will award Lehman $121,017 in attorneys' fees and deny it reimbursement for research expenses.
