In the wake of Kamilewicz: a claim of predatory class counsel fees.

• Jurisdiction: United States
• Author: Ferrini, James T.
• Date: 01 October 1997

There's a message that the core issue of the reasonableness of fees must be resolved with safeguards, not in a staged act

"A class action in Alabama cost Dexter Kamilewicz $91.33 in attorney fees to recover $2.19 on the merits."

That capsule summary by Judge Evans for a panel of the Seventh Circuit captured the gist of the plaintiffs' complaint against their former attorneys in Kamilewicz v. Bank of Boston.(1)

The plaintiffs, who were former members of a plaintiff class of an estimated 715,000 members in an over-escrowing case brought in state court in Mobile County, Alabama,(2) filed a class action in the U.S. District Court for the Northern District of Illinois, naming as defendants their former attorneys in an Alabama state court class action, the bank defendant in that earlier action, and the bank's attorneys. The court had presided over the settlement of the over-escrowing case, requiring the bank to stop overcharging its mortgagors the amounts required to be paid into their mortgage escrow accounts, refund the excess held in those accounts, and pay interest on the sums wrongfully held.

The Alabama court also had determined "fair and reasonable" attorney's fees for counsel representing the class. After hearing evidence of the economic benefits of the settlement, it devised a formula for the calculation of fees and directed the defendant bank to debit the mortgagors' accounts to effect payment of those fees. That resulted in Dexter Kamilewicz's account being debited $91.33 in order to obtain a one-time interest payment of $2.19.

In their federal lawsuit, the plaintiffs charged the defendants with violations of the Racketeering Influenced and Corrupt Organizations Act and the Civil Rights Act of 1871, as well as common law fraud, negligent misrepresentation, legal malpractice, breach of fiduciary duty, and conversion. The plaintiffs' federal complaint, distilled to its essence, charged that the plaintiffs' former class counsel had extracted excessive fees disproportionate to the economic benefits of the class settlement.

That accusation became an effective soundbite that garnered the support of a clamorous national media(3) and earned for the Alabama action the label, "The Willie Horton of class actions."(4) Nevertheless, the federal district court dismissed the case for lack of subject matter jurisdiction under the Rooker-Feldman doctrine, which was established by Rooker v. Fidelity Trust Co.(5) and District of Columbia Court of Appeals v. Feldman.(6) The doctrine is derived from 28 U.S.C. [sections] 1257, which vests review of final state judgments in the U.S. Supreme Court exclusively. Thus, the doctrine proclaims that a federal district court has original jurisdiction only and cannot review a state court judgment. The U.S. Supreme Court is the only federal court authorized to review a state court's judgment in civil litigation.(7)

But what's the story behind Kamilewicz? What are the questions left unanswered and their probable significance?

THE RULING

The Rooker-Feldman doctrine, which is akin to res judicata,(8) was held by the Seventh Circuit to apply, notwithstanding the significant differences between the claims presented by the plaintiffs in their federal lawsuit and the claims alleged in the Alabama class action. The point controlling was that the issues were nevertheless "inextricably intertwined." The Alabama court had decided that the fees it awarded were fair and reasonable, and that decision was dispositive of the federal claim. If, as the Alabama state court found, the fees were fair, there necessarily had been no fraud. Stated another way, the plaintiffs' alleged injuries were the direct result of the Alabama court's ruling on the issue of fees, and the merits of the plaintiffs' accusations thus could be determined only by examining the arguments and evidence earlier presented before the Alabama court.

Affirming the district court, the Seventh Circuit cogently explained that reexamination of issues is precisely what is prohibited by the Rooker-Feldman doctrine:

We won't deny that the Alabama judgment

seems questionable on the surface. How can

it be right that a plaintiff should recover less

than $10 and have to pay nearly $100 in

fees? But how can we--or the district

court--know that we would have ruled another

way? To determine that, we would

have to go through the steps already taken in

the state court--precisely what lower federal

courts are not allowed to do under Rooker-Feldman.

And perhaps if we undertook that

analysis we would find that less tangible economic

benefit to the class justified the settlement.(9)

The plaintiffs' remedy, if they had wished to challenge the Alabama court's fairness of fees determination, would have been to respond to the class notice, participate in the Alabama proceedings, litigate the issue, and perhaps appeal. Alternatively, they could have used the procedural remedy provided by Alabama law to challenge a judgment that had been fraudulently induced.(10) They could not, however, under Rooker-Feldman, collaterally challenge the Alabama court's rulings.

THE DISSENT

The conventional wisdom is that it is more difficult to obtain rehearing en banc from the Seventh Circuit than to secure a writ of certiorari from the U.S. Supreme Court, but the Kamilewicz plaintiffs almost won that prize. It is astounding that five federal circuit judges dissented from the Seventh Circuit's denial of the plaintiffs' petition for rehearing and suggestions for rehearing en banc.

Circuit Judge Easterbrook issued a vociferous opinion, in which the other dissenting judges concurred, essentially making two points:

First, the plaintiffs had alleged that the Alabama court lacked in personam jurisdiction, and Rooker-Feldman does not preclude a collateral attack on a void judgment. A judgment rendered "without personal jurisdiction over the members of the class is not entitled to full faith and credit."

Second, Rooker-Feldman does not apply to legal malpractice actions. Class counsel, who were defendants in the federal court, were not parties to the Alabama proceedings and thus cannot claim the preclusive benefits of that decision.

With regard to the second of these issues, Judge Easterbrook made plain his concern over the precedential implications of the panel's decision:

If the panel is right, no malpractice suit

growing out of state litigation in which the

judge awarded attorney's fees--maybe no

malpractice suit, period--may be brought in

federal court, even if all the requirements of

the diversity jurisdiction have been satisfied.

This holding is sufficiently troubling and affects

so many other cases that it is worth the

time of our court to consider the subject en

banc ....

The panel's decision is important. If I am

right that the state court's award of attorneys'

fees does not matter, then the decision

logically bars all malpractice and related fiduciary-duty

suits arising out of state litigation.

We have entertained many, without seeing

jurisdictional problems. And even if I am

wrong about the sweep of the panel's decision,

the issue is recurrent.(11)

THE DUE PROCESS CLAIM

Judge Easterbrook's dissent identified the due process issue in rather compelling terms:

... for what right does Alabama have to

instruct financial institutions in Florida to

debit the accounts of citizens of Maine and

other states? ... According to Kamilewicz,

the Alabama judgment is doubly flawed, because

the notice was so misleading that it

denied the class members due process of

law. A deficient notice means that the class

members right...