Opinion
Civil Action No. 02-0709 (JDB)
August 19, 2003
MEMORANDUM OPINION
This matter comes before the Court on plaintiff Paul Risteen's petition for an award of interim attorney's fees and expenses. On September 12, 2002, the Court granted Risteen's motion for a preliminary injunction and ruled that defendant Youth for Understanding USA ("YFU USA") was the "successor employer" to defendant Youth For Understanding, Inc. ("YFU") pursuant to regulations regarding employer health insurance obligations under the Employment Retirement Income Security Act ("ERISA") and the Consolidated Omnibus Budget Reconciliation Act ("COBRA"). As a result, the Court ordered YFU USA to allow Risteen to participate in YFU USA's group health insurance plan. Thereafter, on October 2, 2002, the Court issued an order requiring YFU USA to provide Risteen with COBRA continuation coverage from May 1, 2002 to November 27, 2002, and ordered the parties to confer regarding any possible award of attorney's fees. The parties have been unable to agree, and therefore Risteen has now moved for $37,240.57 in attorney's fees and expenses pursuant to 29 U.S.C. § 1132(g) and LRCvP 54.2(c). Applying the five-factor test in Eddy v. Colonial Life Ins. Co. of Am., 59 F.3d 201 (D.C. Cir. 1995), the Court grants Risteen's petition for interim attorney's fees.
Risteen's counsel state that they have discounted their billing rates and certain hourly-charges out of public spirit. The final S37,240.57 figure purportedly represents a reduction of 18.5 percent of the overall fees and expenses.
BACKGROUND
Risteen worked for YFU, a non-profit organization that specializes in international high school student exchange programs, for nearly seven years. In September 2001, YFU informed Risteen that it was not extending his employment contract. This civil action challenges the termination of Risteen's employment with YFU. YFU was required by COBRA to allow Risteen the opportunity to participate in YFU's group health plan, at Risteen's expense, for 18 months after his termination. YFU arranged for this coverage. However, due to financial difficulties, YFU ceased operations on March 8, 2002, released its entire staff, and ended its health plan. In turn, Risteen lost the health coverage he was receiving under COBRA. However, at 5:00 p.m. that same day, YFU USA took over YFU's student exchange program, rehired most of YFU's employees (in the same jobs at the same pay), and used YFU's facilities, equipment, databases, copyrights, and trademarks to continue operations.
On May 17, 2002, Risteen filed a motion for a preliminary injunction seeking, inter alia, to obtain his remaining COBRA coverage through YFU USA's group health plan, under the theory that YFU USA was a "successor employer" to YFU. The Court heard oral argument on Risteen's motion, and permitted a short period of time for limited discovery. On September 12, 2002, the Court held that YFU USA was a successor employer to YFU under the governing COBRA regulations, and thus had an obligation to allow Risteen to participate in YFU USA's health plan for the remaining seven months of his COBRA continuation coverage.See Risteen v. YFU, Inc., 245 F. Supp.2d 1 (D.D.C. 2002). On October 2, 2002, the Court ordered YFU USA to provide Risteen with continuation COBRA coverage for the period of May 1, 2002 through November 27, 2002.
Risteen's preliminary injunction motion also sought to prevent YFU USA from receiving or using YFU's assets and accepting donations, without also accepting YFU's liabilities under COBRA.
ANALYSIS
ERISA provides that "in any action under this subchapter, . . . the court in its discretion may allow a reasonable attorney's fee and costs of action to either party." 29 U.S.C. § 1132(g). In Eddy v. Colonial Life Ins. Co. of Am., the D.C. Circuit adopted five factors "as guidelines for the district court in deciding whether to award attorneys' fees under ERISA." 59 F.3d at 206. The factors are: "(1) the losing party's culpability or bad faith; (2) the losing party's ability to satisfy a fee award; (3) the deterrent effect of such an award; (4) the value of the victory' to plan participants and beneficiaries, and the significance of the legal issue involved; and (5) the relative merits of the parties' positions." Id. The court noted that these "factors are neither exclusive nor quantitative, thereby affording leeway to the district courts to evaluate and augment them on a case-by-case basis." Id. Courts, however, should be mindful not to mechanically or rigidly apply these factors in favor of either party, but should weigh them in a neutral fashion. Id. at 205-06 (declining to adopt presumption in favor of awarding attorney's fees in ERISA cases). As Judge Randolph noted in his dissent in Eddy. "[m]ultifactor tests of [this] variety may be easily manipulated."Id. at 210. Upon applying these five factors, although the question of awarding Risteen attorney's fees is a close one, on balance these factors favor an award of fees and costs to Risteen.
1. Culpability or Bad Faith
"The first factor — bad faith or culpability — is distinct from the fifth factor and focuses not on the relative merits of the parties' legal arguments and factual contentions, but on the nature of the offending party's conduct." Eddy, 59 F.3d at 209. The Court finds no evidence that either YFU or YFU USA acted with bad faith. Culpability, on the other hand, has been defined as "impl[ying] that the act or conduct spoken of is reprehensible or wrong, but not that it involves malice or a guilty purpose." Werner v. Upjohn Co., Inc., 628 F.2d 848, 856-57 (4th Cir. 1980) ("culpability" is something "more than simple negligence," conduct that is "blamable" or "wrong").
Again, given the limited record, there is little direct or indirect evidence of any culpability on the part of defendants. Risteen, however, asserts that the transfer of the use of certain assets from YFU to YFU USA occurred under questionable circumstances in which agreements to use the assets were either undefined or not finalized. The record reflects that YFU USA used some of YFU's assets without finalized agreements or transactions. YFU did not enter into final agreements with YFU USA allowing YFU USA to use its databases, logos, office equipment, and even office space at the Rosedale Estate. Nevertheless, there is nothing in the record to suggest that there was some improper or ulterior motive behind the lack of final agreements on these assets. Indeed, YFU USA had been using these assets from YFU for nearly six weeks before Risteen even brought his COBRA challenge to YFU's corporate reorganization. Absent bald speculation, the Court is unwilling to read into the restructuring of the YFU organization an intent to delay finalizing agreements over the use of certain assets in order to avoid any successor liability under the law. There is simply nothing to suggest that the reorganization was designed to evade COBRA obligations. It is also noteworthy that the issue of successor liability before the Court was resolved on a preliminary injunction, and based on an expedited discovery schedule limited to specific, narrow areas. Hence, the Court concludes neither bad faith nor culpability is evident from the record that this factor does not favor the award of attorney's fees.
To be sure, a party seeking attorney's fees under ERISA and COBRA does not need to show bad faith or culpability by the losing party in order to recover attorney's fees; the cumulative effect of the other factors may nonetheless warrant the recovery of attorney's fees. See, e.g., Wright v. Hanna Steel Corp., 270 F.3d 1336, 1344 (11th Cir. 2001) ("[N]either the bad faith/culpability factor nor any other factor is necessarily decisive."); Riley v. Administrator of Supersaver 401K Capital Accumulation Plan. 209 F.3d 780, 782 (5th Cir. 2000) (same); Smith v. CMTA-IAM Pension Trust. 746 F.2d 587, 590 (9th Cir. 1984) ("Although bad faith is a factor that would always justify an award, it is not required.").
2. Ability to Satisfy Fee Award
YFU USA contends that because it is a non-profit organization without a large budget, attorney's fees should not be awarded. However, YFU USA has not submitted affidavits from its financial officers indicating its financial status, nor has it cited anything to suggest that it could not satisfy a fees award of this size. See Connors v. Drivers, Chauffeurs and Helpers Local Union 639, Civ. No. 82-1840, 1983 WL 486593, * 2 (D.D.C. March 4, 1983) ("The Court has no documentation before it concerning Plaintiff's financial status, and it is aware that Defendants' resources are not infinite, but it is a fair assumption that the Union and its Executive Board are better able to bear the costs of Plaintiff's representation in this action than Plaintiff himself."); Kayes v. Pacific Lumber Co., 51 F.3d 1449, 1469 (9th Cir. 1995) (an ERISA "litigant may not be able to continue pursuing the litigation unless attorney's fees are awarded whenever any [interim] relief is obtained"). An organization's non-profit status, by itself, does not mean that it is per se unable to satisfy an award of attorney's fees. If anything, YFU USA is on firmer financial ground than its predecessor YFU, which had compiled significant debt. Indeed, it appears that YFU USA began its operations debt-free, with a financially unencumbered clean slate. The Court further notes that the Rosedale Estate was sold for $12 million, some $2 million more than what it was considered to be worth at the time of YFU's corporate restructuring. At the same time, however, YFU USA is not a large or even medium-sized employer. It is a small, non-profit organization that, on the scale of employers, is less able to afford to pay an award of fees than most others. The Court finds that this factor neither favors nor disfavors an award of attorney's fees.
3. Deterrent Affect of Awarding Attorney's Fees
"When applying this factor, the district court must consider whether the award of fees will likely deter not only similar future ERISA violations but also delayed or otherwise inadequate detection and resolution of such violations." Eddy. 59 F.3d at 207. As the Court of Appeals stated, "[t]he broad nature of [this] deterrence factor arises from the statutory purpose to protect the interests of plan participants and their beneficiaries." Id. While not controlling, the D.C. Circuit places some weight on this deterrent affect. "Given ERISA's remedial purpose, the third factor — whether an award of fees would deter misconduct by ERISA fiduciaries — may prove decisive in an otherwise close case." Id.
YFU USA maintains that there can be no deterrent effect from an award of attorney's fees because the facts of this case are so unique and the circumstances so rare. The Court disagrees, noting that if issues of successor liability in ERISA and COBRA contexts were rare, there would be little justification for detailed regulations like those recently promulgated by the IRS and at issue before the Court. Moreover, given that this is the first judicial ruling construing the regulations on successor liability, an award of attorney's fees would certainly have a deterrent effect on other employers considering corporate reorganization. Indeed, Risteen's victory may dissuade future employers from contesting a former employee's claim to COBRA continuation coverage following a corporate reorganization like YFU's restructuring — otherwise, the glacial pace of litigation could eat into those 18 months of COBRA continuation coverage to which former employees are entitled. As the Court of Appeals reasoned in Eddy:
In the absence of attorneys' fees awards to wronged plan participants and their beneficiaries, insurers and plan carriers will have less incentive to improve procedures to detect (as well as prevent) mistakes. By awarding attorneys' fees, the courts make both delay and litigation less likely, thereby encouraging earlier resolution of claims and the information-gathering to facilitate their resolution.Eddy. 59 F.3d at 208 (citation omitted). Awarding attorney's fees to Risteen will provide future employers added incentive to comply with ERISA and COBRA regulations, and encourage employers to resolve such disputes sooner rather than later, before attorney's fees mount. Simply put, Risteen's victory here "would assist in the resolution of similar future disputes over ERISA compliance." Eddy, 59 F.3d at 209. This factor therefore favors awarding attorney's fees.
4. Value of the Victory to Plan Participants / Significance of Legal Issue
A court must also consider whether the victory "conferred a common benefit by making it less likely that plan participants in [the plaintiff's] predicament will have to litigate their claims and easier for them if they or their beneficiaries do." Eddy, 59 F.3d at 209. Courts should determine whether a party's victory "benefited other plan beneficiaries by providing a clear statement of the law in this circuit and by making the law clear to [the defendant] itself."Id.
After YFU ceased operations on March 8, 2002, and YFU USA began its operations, YFU USA did not rehire all of YFU's former employees. Rather, YFU USA rehired YFU's field staff, but only 27 (out of 50) from YFU's Washington office. Given the Court's ruling that YFU USA is a successor employer to YFU, those former YFU employees who were not rehired by YFU USA may be entitled to COBRA continuation coverage on YFU USA's health plan. Risteen's victory, therefore, could benefit YFU's former employees who would thereby not be forced to relitigate the issue of successor liability. See Eddy, 59 F.3d at 209 ("benefit-to-others is an objective factor"). Be that as it may, there is no evidence that former YFU employees have come forward to claim COBRA continuation benefits from YFU USA. Hence, while Risteen's success on the issue of YFU USA's successor liability could conceivably benefit former YFU employees, Risteen has not shown that any have come forward to take advantage of his success. Without such evidence, the value of Risteen's victory to other employees remains abstract.
Nevertheless, there is no doubt that Risteen's victory resolved a significant legal issue: The Court was the first to construe and apply the COBRA regulations regarding successor employers. Risteen, 245 F. Supp.2d at 12 ("no other courts have had the opportunity to apply the IRS COBRA regulations"): compare Maurer v. Joy Techs., Inc., 212 F.3d 907, 920 (6th Cir. 2000) ("Nor did this lawsuit seek to resolve significant ERISA legal questions inasmuch as this issue has been addressed in numerous cases as evidenced by this Court's Opinions."). As the D.C. Circuit has noted, a plaintiff's victory may be significant if it "did not hinge on a mere factual dispute but addressed a generally applicable legal question important in advancing ERISA's remedial purposes." Eddy, 59 F.3d at 209. Risteen's motion for preliminary injunction did not turn on some prosaic question or factual dispute; instead, his claims required a fact-intensive, sophisticated analysis resulting in a 29-page memorandum opinion by the Court. See Barnes v. Independent Automobile Dealers Assoc., 64 F.3d 1389, 1396 (9th Cir. 1995) (plan participant awarded attorney's fees where court resolved important legal question regarding interpretation of subrogation clauses in ERISA plans). Thus, the Court's opinion may provide critical guidance not only for other courts, but, more importantly, for other employers who will now have a fuller understanding of the IRS regulations and rules governing the issue of successor employers. In short, the Court's analysis provided much-needed meat to the bones of these new IRS regulations on successor liabilities under COBRA. In this regard, this factor favors an award of attorney's fees.
5. Relative Merits of the Parties
The final factor focuses on "the relative merits of the parties' legal arguments and factual contentions." Eddy, 59 F.3d at 209. YFU USA contends that because the issue was one of first impression, and because no other court had construed the regulations at issue, attorney's fees are not warranted. Of course, the Court ultimately ruled in Risteen's favor, and ordered YFU USA to provide Risteen COBRA continuation coverage. While the defendants' position was not unjustified under the regulations, Risteen's position that YFU USA was a successor employer to YFU prevailed. The Court concluded that "YFU USA is essentially running the same business that YFU did." Risteen. 245 F. Supp.2d at 12.
As noted, this was the first construction of the underlying COBRA regulations governing successor employers. In some contexts, the novelty of new regulations may weigh in favor of denying attorney's fees. However, the broader question of successor liability following a corporate reorganization was not a question of first impression; courts have wrestled with successor issues for years. Indeed, the COBRA regulations explicitly pointed to a string of court cases as guidance in determining successor liability resulting from a business reorganization following an asset sale: "The asset sale rules, including the definition of asset sale, are similar to the various formulations of successor employer rules that have been fashioned by the courts for various labor law purposes, adapted to the peculiar circumstances that the COBRA continuation coverage requirements create." 66 Fed. Reg. at 1846. As the Court emphasized in its September 12, 2002, opinion, "the case law cited in the regulations strongly supports the conclusion that YFU transferred substantial assets to YFU USA, and that YFU USA is therefore the successor employer to YFU." Risteen, 245 F. Supp.2d at 14. In this regard, the broader question of successor liability was thus hardly novel or ambiguous. On the merits, then, Risteen's position that YFU USA was the successor to YFU was substantially warranted under the COBRA regulations and case law, thus favoring an award of attorney's fees.
CONCLUSION
These five factors do not each clearly point to an award of attorney's fees. The culpability/bad faith factor does not favor attorney's fees, and YFU USA's small size and nonprofit status arguably cut against any award of fees. Furthermore, there may be only an abstract value of Risteen's victory to former YFU employees, as it does not appear that any have come forward to claim COBRA continuation coverage through YFU USA. Still, three of the five factors of Eddy v. Colonial Life Ins. Co. somewhat favor an award of attorney's fees to Risteen: the deterrent effect of such an award, the significance of the legal issue, and the relative merits of the parties. As the D.C. Circuit reasoned, "[g]iven ERISA's remedial purpose, the third factor — whether an award of fees would deter misconduct by ERISA fiduciaries — may prove decisive in an otherwise close case." Id This is one of those cases.
At the same time, however, the Court notes that while Risteen achieved the overarching goal of obtaining coverage through YFU USA for his remaining COBRA benefits, he did not obtain all of the relief sought in his preliminary injunction motion. Importantly, Risteen did not prevail in his attempt to obtain COBRA coverage for the period from March 8, 2002 through May 1, 2002, as YFU USA did not provide its own employees health insurance then; nor did he prevail on his initial TRO or on six of the seven bases of relief sought in his preliminary injunction motion. Thus, while the Court believes Risteen deserves attorney's fees and expenses, the Court is not inclined to award the full amount of the $37,240.57 requested, particularly in light of the fact that Risteen filed the billing records under seal. YFU USA thus has not had the opportunity to review or challenge the reasonableness of these fees. Therefore, the Court will order that the billing records be unsealed and provided to YFU USA, to allow YFU USA the opportunity to challenge the reasonableness of the fees sought. A separate order is attached.