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Chieftain Royalty Co. v. Enervest Energy Institutional Fund XIII-A, L.P.

United States Court of Appeals, Tenth Circuit

April 11, 2018

CHIEFTAIN ROYALTY COMPANY, Plaintiff-Appellee,
v.
ENERVEST ENERGY INSTITUTIONAL FUND XIII-A, L.P.; ENERVEST ENERGY INSTITUTIONAL FUND XIII-WIB, L.P.; ENERVEST ENERGY INSTITUTIONAL FUND XIII-WIC, L.P.; ENERVEST OPERATING, L.L.C.; FOURPOINT ENERGY, L.L.C., Defendants-Appellees, and SM ENERGY COMPANY, (including predecessors, successors and affiliates), Defendant. DANNY GEORGE, personally and as Executor of the Estate of Beverly Joyce George, Objector-Appellant. CHIEFTAIN ROYALTY COMPANY, Plaintiff-Appellee,
v.
ENERVEST ENERGY INSTITUTIONAL FUND XIII-A, L.P.; ENERVEST ENERGY INSTITUTIONAL FUND XIII-WIB, L.P.; ENERVEST ENERGY INSTITUTIONAL FUND XIII-WIC, L.P.; ENERVEST OPERATING, LLC; FOURPOINT ENERGY, LLC, Defendants-Appellees, and SM ENERGY COMPANY, including predecessors, successors and affiliates, Defendant. CHARLES DAVID NUTLEY, Objector-Appellant.

          Appeal from the United States District Court for the Western District of Oklahoma (D.C. No. 5:11-CV-00177-D) (W.D. Okla.)

          John J. Pentz, Sudbury, Massachusetts, for Objector-Appellant Danny George.

          Eric Alan Isaacson, La Jolla, California (C. Benjamin Nutley, Pasadena, California, and John W. Davis, San Diego, California, with him on the briefs), for Objector-Appellant Charles David Nutley.

          Daniel S. Volchok, WilmerHale, Washington, D.C. (Bradley E. Beckworth, Susan Whatley, and Jeffrey J. Angelovich, Nix, Patterson & Roach, LLP, Austin, Texas, and Robert N. Barnes, and Patranell Britten Lewis, Barnes & Lewis, LLP, Oklahoma City, Oklahoma, on the briefs), for Plaintiff-Appellee Chieftain Royalty Company.

          Mark D. Christiansen, McAfee & Taft, P.C., Oklahoma City, Oklahoma, for Defendants-Appellees, Enervest Energy Institional Fund XIII-A, L.P., et al.

          Before HARTZ and HOLMES, Circuit Judges. [*]

         ORDER

         These matters are before the court on Chieftain Royalty Company's Petition for Rehearing and Rehearing En Banc. We also have a joint response from the appellants.

         Upon consideration, the request for panel rehearing is denied by the original panel members. We have, however, amended the original opinion sua sponte. The amendments are limited, and have been made at pages 12 and 26 of the decision. A copy of the revised Opinion is attached to this order. The Clerk is directed to vacate the prior Opinion and to file the attached revised decision nunc pro tunc to the original filing date of July 3, 2017.

         The Petition and response, as well as the amici briefs on rehearing, were also circulated to all the judges of the court who are in regular active service and who are not recused. See Fed. R. App. P. 35(a). As neither judge on the original panel nor any judge in regular active service asked that a poll be called, the request for en banc rehearing is likewise denied.

          HARTZ, Circuit Judge.

         After settlement of a class action for royalties from gas wells, the United States District Court for the Western District of Oklahoma awarded attorney fees to class counsel and an incentive award to the lead plaintiff to be paid out of the common fund shared by class members. The court rejected claims by two objectors, and they appealed. Exercising jurisdiction under 28 U.S.C. § 1291, we reverse and remand. The district court failed to compute attorney fees under the lodestar method, as required by Oklahoma law in this diversity case, and the incentive award is unsupported by the record.

         I. BACKGROUND

         The underlying class action alleged underpayment of royalties by the defendants on gas from wells in Oklahoma. The parties reached a settlement for a cash payment of $52 million, to be distributed pro rata to the class members after payment of expenses and fees. Class counsel moved for attorney fees in the amount of 40% of the settlement fund, plus interest; and the lead plaintiff, Chieftain Royalty Company, requested an incentive award of 1% of the fund. Appellants Charles David Nutley and Danny George were class members who objected to these requests. After a hearing on the settlement and fee requests, the court awarded class counsel 33 1/3% of the fund ($17, 333.333.33) as attorney fees and awarded Chieftain 1/2% of the fund ($260, 000) as an incentive award. The objectors appealed each award. We address them in turn.

         II. ATTORNEY FEE

         There are two primary methods for determining attorney-fee awards in common-fund class-action cases. The first is the percentage-of-the-fund method, which awards class counsel a share of the benefit achieved for the class. See Newberg on Class Actions § 15:63 (5th ed. 2016) (Newberg). Many courts, including this circuit, consider 12 factors to determine the appropriate percentage. See Gottlieb v. Barry, 43 F.3d 474, 482 & n.4 (10th Cir. 1994). These factors were first set forth in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 717-19 (5th Cir. 1974), which was not a common-fund case. We have stated the factors as:

the time and labor required, the novelty and difficulty of the question presented by the case, the skill requisite to perform the legal service properly, the preclusion of other employment by the attorneys due to acceptance of the case, the customary fee, whether the fee is fixed or contingent, any time limitations imposed by the client or the circumstances, the amount involved and the results obtained, the experience, reputation and ability of the attorneys, the "undesirability" of the case, the nature and length of the professional relationship with the client, and awards in similar cases.

See Gottlieb, 43 F.3d at 482 n.4. The second method is the lodestar approach. The court first determines the lodestar by multiplying the number of hours reasonably spent on the litigation by a reasonable hourly rate. See Anchondo v. Anderson, Crenshaw & Assocs. LLC, 616 F.3d 1098, 1102 (10th Cir. 2010). This "produces a presumptively reasonable fee, " but it "may in rare circumstances be adjusted to account for the presence of special circumstances." Id.

         This court has approved both methods in common-fund cases, although expressing a preference for the percentage-of-the-fund approach. See Gottlieb, 43 F.3d at 483 ("In our circuit, following Brown [v. Phillips Petroleum Co., 838 F.2d 451 (10th Cir. 1988), ] and Uselton [v. Commercial Lovelace Motor Freight, Inc., 9 F.3d 849 (10th Cir. 1993)], either method is permissible in common fund cases; however, Uselton implies a preference for the percentage of the fund method."). Our approach also "has been called a 'hybrid' approach, combining the percentage fee method with the specific factors traditionally used to calculate the lodestar." Id. at 482-83.

         The district court chose the percentage-of-the-fund analysis, explaining that this is "[t]he preferred method of determining a reasonable attorney fee award in common fund cases." JA at 523 (Dist. Ct. Order). It overruled the objectors' argument that the lodestar approach should govern and that the fee is excessive under that analysis. The court stated that "[b]oth state and federal cases recognize and/or permit a percentage of fund recovery under the common fund doctrine." Id. It added that in any event, the result would not have differed under a lodestar analysis, citing Newberg on Class Actions § 14.6 at 551 (4th ed. 2002), for the proposition that empirical studies show that the average fee award is about one-third of the recovery, whichever method is used. See id. at 524.

         Although a contingency-fee agreement allowed class counsel to recover 40% of any common-fund recovery, the district court ruled that "in fairness and consistent with the best interest of the Class, " counsel should recover 33 1/3% of the settlement. Id. at 523. It stated that an award of that percentage was not unusual, pointing out that "[t]he Tenth Circuit has previously identified the typical fee range as 23.7% to 33.7%." Id. at 526 (citing Brown, 838 F.2d at 455 n.2). It then recited the Johnson factors and found that "most, if not all, . . . support Class Counsel's fee request, as reduced by the Court." Id. It explained:

Class Counsel has conducted the Litigation and achieved the Settlement with skill, perseverance and diligent advocacy;
The Litigation involved complex factual and legal issues and was actively prosecuted for over four years;
Had Class Counsel not achieved the Settlement, there would remain a significant risk that Class Representative and the other members of the Settlement Class may have recovered ...

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