Witchko v. Schorsch

Background

Joanne Witchko brought the action derivatively on behalf of nominal defendant American Realty Capital Properties, Inc., which the opinion says is now known as VEREIT, Inc. The court had already granted final approval of the derivative-action settlement and had approved a settlement and fee award in a coordinated class action. The court deferred the fee decision in the derivative action so derivative counsel could revise its time records and expense reports and submit additional briefing with VEREIT’s counsel.

The opinion states that the derivative settlement’s primary benefit was that non-VEREIT defendants would pay $286.5 million toward the $1.025 billion class-action settlement. No cash payment would be made in the derivative action itself. VEREIT also benefited from paying less than the full class-action settlement, ending costly litigation, and obtaining a release of potential counterclaims. The court said it could not conclude that the derivative action alone caused the $286.5 million payment.

Fee analysis

Under Maryland law, counsel for a derivative plaintiff may recover fees and expenses under the common-fund doctrine, which allows compensation when litigation creates or preserves a benefit for others. The court considered the time and labor involved, the litigation’s magnitude and complexity, its risks, the quality of representation, the requested fee compared with the settlement, and public-policy considerations.

The court chose the lodestar method. Under that method, the fee starts with reasonable hours multiplied by reasonable hourly rates and may be adjusted. Derivative counsel reported a revised lodestar of $10,501,488 for 16,766 hours across seven law firms and requested $15,752,232, representing a 1.5 multiplier. Counsel for VEREIT argued that $6 million would be sufficient.

The court credited derivative counsel for pursuing a complex and risky case, surviving dispositive motions and motions to stay, conducting extensive discovery involving 846,000 documents and 35 depositions, and reaching a resolution accepted by VEREIT under new leadership. The court also said the derivative action’s legal claims were distinct from those in the class action and focused attention on related-party transactions allegedly involving waste and mismanagement.

The court reduced the requested amount because the derivative action relied heavily on work in the class action, sometimes distracted from that action, and involved billing that was not proportional to the case’s needs. The court identified excessive background research, overstaffed depositions, and duplicated work among law firms. It awarded $7,500,000, approximately 75% of the lodestar.

Expenses and disposition

Derivative counsel revised its expense request by removing certain expert-consulting fees and charges for in-house administrative tasks. The court found the remaining $548,267 in expenses reasonable and ordered reimbursement.

Judge Hellerstein awarded derivative counsel $7,500,000.00 in attorneys’ fees and $548,267.00 in expenses, to be paid by VEREIT under the stipulation and settlement agreement. This is a fee award ancillary to the underlying settlement, not a decision on the merits of the derivative claims.