FYI: 8th Cir Affirms Use of Borrower's Proposed Rate for Payments in Chapter 12 Bankruptcy

In an appeal involving a Chapter 12 bankruptcy, the U.S. Court of Appeals for the Eighth Circuit recently affirmed that the borrower's use of the twenty-year treasury bond rate sufficiently ensured that the total present value of future payments to the lender over the plan period equaled or exceeded the allowed value of the claim.

 

A copy of the opinion is available at: Link to Opinion

 

A farmer (debtor) in Iowa filed for Chapter 12 Bankruptcy. A Chapter 12 bankruptcy is specifically intended for family farmers. A lender financed a portion of debtor's farming operations and filed a $595,00.00 claim in the bankruptcy proceeding concerning debtor's default on various loans.

 

The loans were secured by over one million dollars' worth of debtor's real estate. The debtor's loans included interest rates ranging from 3.5% to 7.6%.

 

In Chapter 12 proceedings, secured creditors are entitled to full payment based on the debtor's future earnings proposed in a plan. However, the debtor's plan must accommodate each secured creditor by either (1) by obtaining the creditor's acceptance of the plan; (2) by surrendering the property securing the claim; or (3) by providing the creditor both a lien securing the claim and a promise of future property distributions whose total value "as of the effective date of the plan" is not less than the allowed amount of the claim. § 11 U.S.C. 1225(a)(5).

 

The lender objected to debtor's plan and the debtor did not surrender his property. Ultimately, the parties agreed to a twenty-year repayment period but disagreed as to the appropriate interest rate to determine the present value of future payments.

 

The debtor proposed starting with twenty-year treasury bond rate at the time (1.87%) and adding 2% for a rate of 3.87%. Lender proposed using the current national prime rate (3.25%) with a 2% risk adjustment for a rate of 5.25%. The bankruptcy court affirmed the debtor's proposal and rounded up the rate to 4%.

 

The lender appealed to a trial court who affirmed the bankruptcy court's plan. The lender appealed again to the U.S. Court of Appeals for the Eighth Circuit. 

 

The Court of Appeals noted how the issue on appeal concerned ensuring that the total present value of future payments to the lender over the plan period equaled or exceeded the allowed value of the claim. 11 U.S.C. § 1225(a)(5); see Till v. SCS Credit Corp., 541 U.S. 465, 474 (2004) (plurality opinion). This essentially meant the discount rate used for the present value calculations "should consist of a risk-free rate, plus additional interest to compensate a creditor for risks posed by the plan." See United States v. Doud, 869 F.2d 1144, 1146 (8th Cir. 1989).

 

In arguing for the higher discount rate that included the prime rate in the calculation, the lender relied an opinion by the Supreme Court of the United States in which the SCOTUS utilized the prime rate in a formula-based approach resolving a Chapter 13 bankruptcy matter. See Till v. SCS Credit Corp., 541 U.S. 465, 474 (2004). The Appellate Court acknowledged that many courts used Till as guidance to utilize the prime rate in their calculations of the discount rate, the Eighth Circuit held that Till was not applicable to this case because the question involved evidence that was not before it.

 

Specifically, the Court of Appeals held that the dispute over prime vs. treasury rate was a factual finding about the appropriate discount rate and not a purely legal question. Because the bankruptcy court considered the length of the proposed maturity period, the fact that lender's claim was substantially over-secured, and the overall risk of nonpayment, the Court of Appeals held the lower courts did not commit clear error when they ruled in favor of debtor's rate calculation.

 

Additionally, the Eighth Circuit noted that by focusing on the starting rate rather than the ultimate rate, the lender failed has failed to show that the bankruptcy court clearly erred in its determination that a 4% rate was sufficient to ensure full payment on "the value, as of the effective date of the plan," of the secured claim. See § 1225(a)(5)(B)(ii).

 

Accordingly, the Court of Appeals affirmed the judgment of the bankruptcy court.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

  

 

 

 

 

FYI: 9th Cir Reverses $1.7MM Attorney Fee Award to Class Counsel for Lack of Proportionality

The U.S. Court of Appeals for the Ninth Circuit recently reversed a trial court's $1.7 Million attorney fee award to plaintiffs' counsel in a class action because the fee award was not proportional to the amount recovered by the class members.

 

A copy of the opinion is available at:  Link to Opinion

 

In 2016, putative class of copyright owners ("plaintiffs") whose musical compositions were played on a company's music streaming service sued a music company ("defendant") for copyright infringement. The plaintiffs asserted that defendant infringed their copyrights by reproducing and distributing their musical compositions without obtaining a voluntary or compulsory license to do so.

 

By 2018, the defendant negotiated a resolution with the National Music Publishers Association (NMPA) that resolved the same copyright issues were raised in plaintiffs lawsuit. Defendant and the NMPA eventually reached a settlement. However, to receive payment under that settlement, copyright owners had to waive their right to make claims in plaintiffs' lawsuit against Defendant. Defendant informed plaintiffs that around 98% of the potential class chose to participate in the NMPA settlement. As a result, the potential class of plaintiffs decreased significantly. 

 

In January of 2019, plaintiff and defendant executed a settlement agreement. In the agreement, defendant denied liability for copyright infringement but agreed to pay class members for musical compositions played on its streaming service. In exchange, the plaintiffs agreed that defendant would pay a maximum of $20 million on class members' claims. Because the NMPA settlement limited the potential class, very few class members submitted claims for this settlement. As a result, defendant paid only $52,841.05 to satisfy class members' claims.

 

Additionally, the settlement also required to defendant establish an Artist Advisory Board with an annual budget of at least $30,000 to advance both parties' goals of protecting artists' rights and promoting defendant's business. After settling, counsel for plaintiff's sought an award of their legal fees.

 

Plaintiff's counsel calculated their fee request using the lodestar method and sought approximately $2.1 million. Additionally, they requested a 2.87 multiplier, claiming that they achieved "exceptional" results in a complicated case. The trial court ultimately found that no multiplier should apply and awarded $1.7 million.

 

On appeal, the Ninth Circuit examined the trial court's attorneys' fees award under an abuse of discretion standard. Kim v. Allison, 8 F.4th 1170, 1178 (9th Cir. 2021). As an initial matter, the Appellate Court noted that trial courts must ensure that attorneys' fees awards in class action cases are reasonable. In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d 935, 941 (9th Cir. 2011).

 

In support of their request for attorney's fees, plaintiffs argued the potential $20 million settlement supported the trial court's fee award. Plaintiffs further argued that even though they only recovered a little more than $50,000.00 the recovery could have been up to $20 million and this potential recovery supported the trial court's fee award.

 

Plaintiff's argument relied on the case of Boeing Co. v. Van Gemert, 444 U.S. 472 (1980).  In Boeing, the Supreme Court of the United States held that a fee award to class counsel could be calculated based on the entire settlement fund –– even if part of the fund went unclaimed –– because the defendant had been held liable for a "sum certain.". Id. at 478–79 & n.5. However, the Court in Boeing also suggested that this holding would not apply if the amount of the defendant's liability had been "contingent upon the presentation of individual claims." Id. at 479 n.5.

 

Here, the Ninth Circuit disagreed that the settlement agreement established defendant's willingness to pay up to $20 million if necessary to satisfy class members' claims because the defendant actually never agreed to pay class members a penny more than the amount that class members claimed. The $20 million figure was contingent and not a sum certain because defendant's monetary liability remained contingent upon the amount claimed by the class. As a result, the trial court held that the settlement of the class should not be valued by the hypothetical $20 million dollar but by the $52,841.05 in payments that the class members actually received.

 

The Court of Appeals further held that trial courts must consider the actual or realistically anticipated benefit to the class — not the maximum or hypothetical amount — in assessing the value of a class action settlement. Additionally, the Appellate Court instructed the trial court to disregard the hypothetical $20 million settlement cap and start with the $52,841.05 that the class claimed.

 

Notably, the Ninth Circuit addressed the importance of the class redemption rate and how plaintiffs' counsel should have known that the NMPA settlement would result in an extremely low redemption amount nowhere near the $20 million cap.

 

Because the plaintiffs' counsel should have known the redemption rate and ultimate class recovery would be low, the Court of Appeals held there was no realistic possibility that the actual payout to class members would approach anywhere near $20 million since the NMPA settlement dramatically reduced the applicable class.

 

Next, the Ninth Circuit further held that the trial court should consider cross-checking its lodestar calculation to ensure that it is reasonably proportional to the benefit provided to the class. A cross-check can "assure that counsel's fee does not dwarf class recovery." In re Bluetooth, 654 F.3d at 942 at 945 (9th Cir. 2011).  In the In re Bluetooth case, the Appellate Court clearly stated that, an award of $1.7 million in attorneys' fees is unreasonable and not proportional to the benefit received by the class.

 

Although plaintiffs argued that that courts have recognized that fee awards do not have to be proportional to the monetary recovery in some cases, the Ninth Circuit did not agree because plaintiffs' argument largely relied on a string of civil rights related cases.

 

Appellate courts have held that attorneys' fees awarded in civil rights cases need not be strictly proportional to monetary damages, but this generally applies to civil rights lawsuits that provide significant nonmonetary, injunctive relief, and can end institutional civil rights abuses. See Gonzalez v. City of Maywood, 729 F.3d 1196, 1209–10 (9th Cir. 2013).  The Court of Appeals distinguished copyright infringement cases like the one brought by the plaintiffs from the civil rights lawsuits. In examining the latter,  that do not require strict proportionality in examining an award of attorney's fees. Therefore,  courts awarding attorneys' fees in class actions under the Copyright Act must still generally consider the proportion between the award and the benefit to the class to ensure that the award is reasonable.

 

Accordingly, the Ninth Circuit reversed the trial court's attorneys' fees award of $1.7 million and remanded the case for the trial court to determine the class action settlement's actual value to the class members and then award attorneys' fees proportional and reasonable to the benefit actually received by the class.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

  

 

 

 

 

FYI: 8th Cir Upholds Denial of Motion to Compel Arbitration in Putative Class Action Against Real Estate Brokers

The U.S. Court of Appeals for the Eighth Circuit recently held that the court, and not an arbitrator, must decide whether the defendant real estate brokers could enforce the arbitration agreements at issue against unnamed class members.

 

In so ruling, the Eighth Circuit also held that the brokers could not enforce the subject arbitration agreements because the brokers were neither parties nor third-party beneficiaries of the agreements. Thus, the Court held, the arbitration agreements were inapplicable including as to the unnamed class members.

 

A copy of the opinion is available at:  Link to Opinion

 

Several Missouri homesellers filed a putative class action against a group of national real estate brokerage firms, alleging that the brokers enforced anticompetitive rules that resulted in damages. Specifically, the homesellers alleged that the rules required them to compensate the home buyer's broker.

 

At the trial level, the brokers conceded that neither the named plaintiffs nor any purported class member had any contract or direct relationship with the brokers relevant to the claims asserted in this case. Additionally, the Listing Agreements the brokers' agents executed with the homesellers, which included Arbitration Agreements incorporating the American Arbitration Association (AAA) rules, did not name the actual brokers as parties or third-party beneficiaries.

 

Therefore, the trial court denied the brokers' motion to compel arbitration. The brokers timely appealed.

 

On appeal, the brokers argued that an arbitrator instead of the court must decide the gateway issue of whether unnamed class members must arbitrate their claims. Specifically, the brokers asserted that the incorporation of the AAA Rules into the Arbitration Agreements was a clear and unmistakable indication that the parties intended for the arbitrator to decide threshold questions of arbitrability, pursuant to Eckert/Wordell Architects, Inc. v. FJM Props. of Willmar, LLC, 756 F.3d 1098, 1100 (8th Cir. 2014).

 

The brokers also argued that the Missouri Supreme Court has held that the following language – "[a]ny controversy or claim between the parties to this Contract, its interpretation, enforcement or breach… will be settled by binding arbitration" – which is found in the Arbitration Agreements, "constitutes a 'delegation clause' that is 'clear in evincing a manifest intention to delegate threshold  questions of arbitrability to a neutral arbitrator.'" Id. at 16–17 (quoting Soars v. Easter Seals Midwest, 563 S.W.3d 111, 113–14 (Mo. 2018) (en banc)).

 

The Eighth Circuit began by noting that Missouri law does permit contracting parties to make arbitration agreements that commit issues such as arbitrability to their chosen arbitrator. Theroff v. Dollar Tree Stores, Inc., 591 S.W.3d 432, 439 (Mo. 2020) (en banc). Furthermore, the Court noted that it previously held that the incorporation of the AAA Rules into a contract requiring arbitration is a "clear and unmistakable indication the parties intended for the arbitrator to decide threshold questions of arbitrability." Eckert, 756 F.3d at 1100 (citing Green v. SuperShuttle Int'l, Inc., 653 F.3d 766, 769 (8th Cir. 2011)).

 

However, the Eighth Circuit also observed that, in Missouri, "[o]nly parties to a contract and any third-party beneficiaries of a contract have standing to enforce that contract. To be bound as a third-party beneficiary, the terms of the contract must clearly express intent to benefit that party or an identifiable class of which the party is a member." Id. (quoting Verni v. Cleveland Chiropractic Coll., 212 S.W.3d 150, 153 (Mo. 2007) (en banc)). A "strong presumption" exists "[i]n cases where the contract lacks an express declaration of that intent" "that the third party is not a beneficiary and that the parties contracted to benefit only themselves." Id. (quoting Verni, 212 S.W.3d at 153).

 

Here, because the brokers conceded to the trial court that they did not have any contracts or direct relationships with any of the named plaintiffs, and because the Listing Agreements and Arbitration Agreements did not name the brokers as parties or third-party beneficiaries, the Eighth Circuit determined that the trial court correctly concluded that the court must decide whether the brokers could enforce the Arbitration Agreements.

 

The Eighth Circuit concluded that the brokers could not enforce the Arbitration Agreements because the brokers were neither parties nor third-party beneficiaries of the Listing

Agreements or Arbitration Agreements. Thus, the Arbitration Agreements were also inapplicable to any dispute between the unnamed class members and the brokers.

 

Accordingly, the Eighth Circuit affirmed the judgment of the trial court and held that the trial court did not err in denying the brokers' motion to compel.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars