Court Hits Sale Leaseback Peddlers With $33K+ In Plaintiff's Legal Fees; Declines To Apply Contingent Risk Fee Enhancement, Opts Against Punitives

A U.S. Bankruptcy Court in Newark, New Jersey that recently found two men liable for violation of several consumer protection statutes in connection with a sale leaseback, equity stripping foreclosure rescue scam (see O'Brien v. Cleveland (In re O'Brien), 423 B.R. 477 (Bankr. D.N.J. 2010))(1) has made additional rulings in the case with respect to:

• the tab for the homeowner/victims' attorneys fees it will stick the pair with, and
• the imposition of punitive damages it will impose on the duo.

With respect to the attorney's fees, the court:

• Granted an award for the entire base amount (ie. lodestar calculation) requested Plaintiffs' attorneys in the net amount of $33,932.50 for 81.5 hours of work,
• Declined to enhance this amount by applying a contingent risk multiplier (ie. lodestar multiplier).(2)

With respect to punitive damages, the court declined to impose said damages, saying that:

• "[I]n large part because the Defendants' ability to pay such damages has not been adequately established by the Plaintiffs[]"(3) and
• "[T]he Defendants have been adequately punished for their wrongdoing, particularly in light of the treble damages awarded Plaintiffs under the New Jersey Consumer Fraud Act."(4)

For the most recent ruling in this case, see O'Brien v. Cleveland II (In re O'Brien), Case No. 03-17448 (RTL), Adversary Proceeding Case No. 08-1676 (RTL) (Bankr. D.N.J., May 18, 2010).

(1) See also, Foreclosure Rescue Operator, Closing Attorney Found Jointly Liable For $690K+ In Bogus Sale Leaseback, Equity Stripping Ripoff.

The court found that Defendants' actions were fraudulent and constituted an unconscionable commercial practice in violation of New Jersey's Consumer Fraud Act ("CFA"). Furthermore, the sale leaseback was found to be a financing transaction subject to the Truth In Lending Act ("TILA") as amended by the Home Ownership and Equity Protection Act ("HOEPA") as well as the New Jersey Home Ownership Security Act of 2002 ("HOSA").

(2) In declining to enhance the base, or lodestar, fee by a contingent risk multiplier, the court said (bold text is my emphasis, not in the original text):

• The Plaintiffs urge the court to enhance their attorneys' fees to the tune of fifty percent. The basis for the enhancement is the novelty of the issues and the fact that Counsel took the case on "primarily" a contingent fee basis.

• Admittedly, there was a $10,000 retainer paid by the Plaintiffs and split equally between Mr. Halpern's firm and the Plaintiffs' former counsel. In Rendine v. Pantzer, 691 A.2d 1202 (N.J. 1995), the New Jersey Supreme Court "authorize[d] the award of contingency enhancements based on the risk of nonpayment." 661 A.2d at 1229. The court reasoned that a fee "awarded under a fee-shifting statue cannot be `reasonable' unless the lodestar, calculated as if the attorney's compensation were guaranteed irrespective of result, is adjusted to reflect the actual risk that the attorney will not receive payment if the suit does not succeed." 661 A.2d at 1228.

• This rule is limited by certain standards set forth by the court that "require a relationship between the amount of the enhancement awarded and the extent of the risk of nonpayment assumed by counsel for the prevailing party." Id. at 1228-29. Factors the court should consider when determining the amount of an enhancement include: mitigation of the risk of nonpayment, such as receiving part of their hourly fee regardless of the result; if there are substantial damages at stake; and the likelihood of success. Id. at 1229-30.

• Federal fee shifting statutes do not permit enhancement of the lodestar fee on the basis of contingency. See City of Burlington v. Dague, 505 U.S. 557, 567 (1992) (applying this holding to the Solid Waste Disposal Act and Clean Water Act); Rendine, 661 A.2d at 1223 (interpreting the holding of Dague to apply to all federal fee-shifting statutes).

• The Defendants argue that Mr. Halpern was not paid on a contingent basis but rather was paid a flat fee. In Mr. Halpern's declaration in support of counsel fees submitted on January 25, 2010, he declared he was entitled to fee enhancement based on "the complexity of the issues, the novelty of the issues presented and the results obtained for the Plaintiffs." Counsel did not state that he was paid on a contingent basis. In Mr. Halpern's memorandum docketed May 7, 2010, he adds, "counsel took this case on primarily a contingency because of the fee shifting."

• In light of this discrepancy, and also considering that the attorneys' fees for the TILA and HOEPA claims, an extremely large and important part of this case, do not permit enhancement, the court finds that the net fees are sufficiently reasonable and therefore declines to enhance the award.

(3) On this point, the court said:

• The New Jersey Supreme Court has identified several relevant factors to consider when determining entitlement to punitive damages and the appropriate amount of such an award —
  
  In addition to bearing a reasonable relationship to actual injury, the amount of punitive damages should account for the profitability of the defendant's . . . misconduct, the plaintiff's litigation expenses, the punishment the defendant will probably receive from other sources, the defendant's financial condition, and the effect on its condition of a judgment for the plaintiff.
  
  Herman v. Sunshine Chemical Specialties, Inc., 627 A.2d 1081, 1086 (N.J. 1993) (citation omitted). In the instant case, while the Defendants advance various arguments in opposition to an award of punitive damages, the court is particularly concerned with the Defendants' financial condition. It is part of the Plaintiffs' burden of proof to establish the "ability of the wrongdoer to pay punitives." Id. The court should consider net worth but place more emphasis on income. Id. at 1089-90.

• The Plaintiffs deposed both Defendants in an attempt to ascertain their respective financial conditions. Unable to discover any significant assets or income, the Plaintiffs submit that Mr. Gahwyler is "secreting assets" and that Mr. Cleveland's testimony is simply not believable. In the absence of any evidence to back up these suspicions, the court is not convinced that the Plaintiffs have met their burden on this issue and declines to award any punitive damages to the Plaintiffs.

(4) On this point, the court said:

• Additionally, the court is satisfied that the Defendants have been adequately punished for their wrongdoing, particularly in light of the treble damages awarded Plaintiffs under the New Jersey Consumer Fraud Act. Treble damages awarded under the Consumer Fraud Act are punitive in nature. See Fineman v. Armstrong World Industries, Inc., 980 F.2d 171, 219 (3d Cir. 1992) ("Although treble damages are not solely punitive in character, they do serve a penal and deterrent function in addition to a remedial one, and as a consequence do overlap somewhat with punitive damages."); Lettenmaier v. Lube Connection, Inc., 741 A.2d 591, 593 (N.J. 1999) (finding that among the purposes of the CFA is to punish the wrongdoer through the award of treble damages); St. James v. Future Finance, 776 A.2d 849, 867-68 (N.J. Super. Ct. App. Div. 2001) (holding that a defendant cannot be subjected to treble damages under state RICO statute and punitive damages for breach of fiduciary duty claim because both claims arose from the same course of conduct). Furthermore, the treble damages in this case are sufficient to deter future wrongdoing by these defendants and others.