“Managerial Judging” – Judge Hellerstein defends his role in forcing a settlement in WTC cases

Federal District Judge Alvin Hellerstein and his Special Masters Aaron Twerski and James Henderson have mounted a major defense of the court’s role in enhancing the settlement of the World Trade Center cleanup litigation by cutting attorneys fees and forcing defendants to sweeten the pot before he would “approve the settlement” – something the Rules gave him no power to do.  It is a fascinating case study of the pressures on lawyers who undertake complex contingent fee litigation, of the limitations on clients’ ability to meaningfully consent to settlement in aggregate litigation (RPC 1.2), the meaning of a reasonable fee (RPC 1.5), and the power of judges over plaintiffs lawyers working on contingent fee in MDL-type mass tort litigation.

In the aftermath of the 9/11 catastrophe the Congress designated the Southern District of New York as the venue for all tort actions arising from the catastrophe.  A single judge – Alvin Hellerstein – managed the load.  9/11/ Fund dropouts, insurance claims, and the 10,000 tort claims arising from the demolition and clean-up of the World Trade Center disaster site.  The prospects of each plaintiff being able to go to trial were nil, given the limited available judicial resources and the limited resources of plaintiffs attorneys.  The 36 member firm “Napoli Bern Ripka and Worby Groner Edelman by 2010 had borrowed more than thirty million dollars to help finance over seven years of litigation.”  They were facing a behemoth 550 member firm – Patton Boggs which represented the City of New York and its contractors at the disaster site.  Patton Boggs was backed by the World Trade Center Captive Insurance Company – a Congressionally created entity which had authorized an offer of $500 million of the $1.1. billion it had on hand.

In 2010, Judge Hellerstein concluded, the plaintiffs were at risk of being sold short by their lawyers who were under tremendous economic pressure to settle!  Therefore he decided that he had to reject the settlement and try to sweeten the pot by 1) squeezing more money out of the already strapped plaintiffs’ lawyers! and 2) getting some more out of the WTC Captive Insurance Company.  The Captive  planned to withhold $500 million in case the City and its contractors faced suits by cancer victims down the road!  Hellerstein got another $125 million put on the table ($50 million from the captive)  but a huge reserve remained in the WTC Captive’s account.

In a very controversial move the judge cut the plaintiffs attorneys fees to 25% and denied them the right to reimbursement of the $6.1 million in interest they had paid on the $30 million they borrowed to be able to fight Patton Boggs which with other defense counsel had been paid $165 million dollars cash on the barrelhead, with some lawyers billing as high as $585/hour!

But where did Judge Hellerstein get the power to act as he did?  Necessity was the mother of invention the judge and his Special Masters argue.  Although thousands of plaintiffs’ claims were consolidated Judge Hellerstein lacked the power of a judge in a Rule 23 class action.  He could not set the lawyers fees nor could be approve or disapprove a settlement. Because case by case adjudication would take decades, as a practical matter the plaintiffs had no real control over their lawyers and no remedy other than whatever the proposed settlement might yield.

Federal Rule of Civil Procedure 41 empowers parties to agree to dismiss an action without court intervention.  But, Hellerstein et al. argue, FRCP 41 presumes an attorney-client relationship in which the attorney deals with his client as an individual who has substantial input into the decision regarding whether to settle, and on what terms. In the 9/11 litigation each of the 10,000 plaintiffs lacked such effective power.  The settlement was so structured  that plaintiffs could only decide after the settlement was a fait accomplis whether to opt into a settlement that rested on pre-determined categories of injuries and concomitant fixed-dollar-amount recoveries for each category. A plaintiff’s decision to opt out meant facing years of uncertain litigation, with the very real possibility of receiving nothing in the end. Hellerstein asserts that in rejecting the settlement and cutting fees he acted properly – though without explicit authority – to protect the plaintiffs.

I looked at this problem several years ago.  It ended about how I predicted in my 2007 article Post 9/11 World.  But looking back, the plaintiffs’ lawyer in me wants to scream.  Nonetheless I do think that the basic idea urged by Hellerstein, et al is a correct one.  Mass tort actions are `quasi-class actions’ in Judge Jack Weinstein’s phrase and an enhanced power for managing judges should be recognized in the rules of courts.

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