Conolly v Universal Am. Fin. Corp.

[*1] Conolly v Universal Am. Fin. Corp. 2008 NY Slip Op 52018(U) [21 Misc 3d 1109(A)] Decided on October 8, 2008 Supreme Court, Westchester County Scheinkman, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. As corrected in part through October 16, 2008; it will not be published in the printed Official Reports.

Decided on October 8, 2008
Supreme Court, Westchester County

Elizabeth A. Conolly, THOMAS MCCORMACK, SHELLY Z. ZHANG, GREEN MEADOWS PARTNERS, JAMES STELLATO, and ROCCO SORRENTINO, Plaintiffs,

against

Universal American Financial Corporation, RICHARD A. BARASCH, LEE EQUITY PARTNERS LLC, PERRY CAPITAL LLC, UNION SQUARE PARTNERS MANAGEMENT LLC, WELSH, CARSON, ANDERSON & STOWE, BARRY AVERILL, BRADLEY E. COOPER, MARK H. HARMELING, BERTRAM HARNETT, LINDA H. LAMEL, ERIC W. LEATHERS, PATRICK J. MCLAUGHLIN, ROBERT A. SPASS, and ROBERT F. WRIGHT, Defendants.



13422/07



APPEARANCES:

WOLF HALDENSTEIN ADLER FREEMAN & HERZ, LLP

by: Mark C. Rifkin, Esq.

Attorneys for Plaintiffs

270 Madison Avenue

New York, New York 10016

PASKOWITZ & ASSOCIATES

by: Laurence D. Paskowitz, Esq.

Attorneys for Plaintiffs

60 East 42nd Street 46th Floor

New York, New York 10165

WOLF POPPER LLP

by: Carl L. Stine, Esq.

Attorneys for Plaintiffs

845 Third Avenue

New York, New York 10022

ROY JACOBS & ASSOCIATES

by: Roy L. Jacobs, Esq.

Attorneys for Plaintiffs

60 East 42nd Street 46th Floor

New York, New York 10165

LAW OFFICES OF MARC S. HENZEL

by: Marc S. Henzel, Esq.

Attorneys for Plaintiffs

273 Montgomery Avenue Suite 202

Bala Cynwyd, Pennsylvania 19004

LEVI & KORSINSKY, LLP

by: Joseph Levi, Esq.

Attorneys for Plaintiff

39 Broadway Suite 1601

New York, New York 10006

DECHERT LLP

by: Andrew J. Evander, Esq.

Attorneys for Defendants Universal American Financial Corp, Richard

A. Barasch and Mark M. Harmeling

30 Rockefeller Plaza

New York, New York 10112

WILLKIE FARR & GALLAGHER LLP

by: Tariq Mundiya, Esq.

Attorneys for Defendants Barry Averill, Linda H. Lamel, Patrick J.

McLaughlin and Robert F. Wright

787 Seventh Avenue

New York, New York 10019-6099

COVINGTON & BURLING LLP

by: Andrew Ruffino, Esq.

Attorneys for Defendants Union Square Partners Management LLC,

Bradley E. Cooper, Eric W. Leathers, and Robert A. Spass

620 Eighth Avenue

New York, New York 10018-1405

ROPES & GRAY LLP

by: William I. Sussman, Esq.

Attorneys for Defendant Welsh, Carson, Anderson & Stowe X, L.P.

1211 Avenue of the Americas

New York, New York 10036-8704

BERTRAM R. GELFAND

One North Broadway

White Plains, New York 10601

Alan D. Scheinkman, J.

Plaintiffs Elizabeth A. Connolly, Thomas McCormack, Shelly Z. Zhang, Green Meadows Partners, James Stellato and Rocco Sorrentino ("Plaintiffs") move for [*2]the confirmation of the certification of a class consisting of all record holders or beneficial owners, exclusive of Defendants, of any class of the stock of Universal American Corporation f/k/a Universal American Financial Corp. ("Universal" or the "Company"), and for final approval of the proposed settlement of the class action as set forth in a Stipulation of Settlement dated as of May 1, 2008 (the "Settlement Stipulation") (Seq. No. 8). Plaintiffs also move for an award to them of $800,000 in counsel fees and out-of-pocket expenses (Seq. No. 7). Defendants do not oppose the motions. However, two members have requested exclusion from the class and a different class member opposes the fee application, though he does not oppose the certification of the class or the settlement of the case.

BACKGROUND

In 2006, Defendant Richard Barasch, the Chairman of the Company, along with others, offered to purchase the stock of the Company (the "Buy-Out Offer"). This prompted a spate of putative class actions seeking to challenge the Buy-Out Offer. Each of the Plaintiffs in this action filed separate actions; three were filed in this Court; three were filed in Supreme Court, New York County. The three New York County actions were eventually transferred to this Court. The gist of the litigation was that some or all of the present defendants breached their fiduciary duties in connection with the announcement and evaluation of the Buy-Out Offer. In March, 2007, a special committee of independent directors of the Company announced that it had rejected the Buy-Out Offer, thus rendering the actions moot.

While this might have been the end of the matter, it turned out that, back in late 2006, the Company's management started to evaluate the possibility of acquiring MemberHealth, Inc. ("MemberHealth"), one of the Company's competitors. To obtain the money for the acquisition and for working capital, management negotiated for an equity investment by a group of private investors (the "Equity Investors"), some of whom were involved with the Buy-Out Offer. On May 7, 2007, the Company's Board of Directors approved the MemberHealth acquisition and the financing arrangements needed to fund it and also set a shareholders' meeting to vote on proposals to issue stock to the Equity Investors. In July, 2007, the Buy-Out litigation Plaintiffs brought the present action alleging breach of fiduciary duty on the part of the Company and its senior management in connection with the MemberHealth Transaction.

Prior to the August, 2007 shareholder meeting, the Company publicly disclosed the existence of this litigation and the allegations made by Plaintiffs by attaching a copy of the complaint to a Form 8-K filed by the Company with the Securities and Exchange Commission. With notice of the litigation, the shareholders approved the MemberHealth transaction and its related financing arrangements. The acquisition closed on September 21, 2007.

In September, 2007, Defendants moved to dismiss the present complaint, a motion which was fully submitted in November, 2007. However, before a decision [*3]could be rendered, the Court was advised that the parties had reached an agreement in principle to settle the litigation. The agreement contemplated that the Company would give increased scrutiny to certain types of transactions by amending its By-Laws: (a) to expand the definition of "interested" transactions; (b) to identify which transactions are subject to the new policy and those which are not; (c) to require the Board to appoint an ad hoc committee of at least three independent directors, a majority of whom would have to approve the proposed transaction; (d) to identify circumstances under which the Company would have to use its best efforts to obtain an opinion as to the fairness of the transaction, with the special committee being authorized to retain financial and other advisors; and (e) to prohibit the Company from amending this new by-law prior to December 31, 2011, unless approved by a majority of the public shareholders (the "First New By-Law").

Before entering into the agreement in principle, Plaintiffs' counsel conducted discovery relating to the fairness of the proposed settlement. This included review of the Company's board minutes and valuation reports. Of significance, after the MemberHealth transaction, the Company's stock price fell under $18 per share,[FN1] thus providing a market indication of the reasonableness of the $20 per share price paid by the Equity Investors and making it highly unlikely that the Court would find the price unreasonable or unfair.

The Company's Board approved the First New By-Law on February 11, 2008. However, before the settlement could be finalized, the Company learned that MemberHealth had miscalculated its "risk corridor" adjustment receivable for fiscal 2006 and for the fiscal quarter ended March 31, 2007. This error caused MemberHealth to overstate its pre-tax income for 2006 by roughly $3 million and by approximately $26 million for the first quarter of 2007. The incorrect figures appeared in MemberHealth's pre-merger financial statements and in information included in the proxy materials and registration statement. After learning of these developments, the Company directed MemberHealth to re-examine its income projections for 2008. The re-examination led to a finding that MemberHealth's projected 2008 operating income would be substantially lower than previously communicated to the Company because premiums paid by members to MemberHealth would be substantially lower than anticipated. The root cause for the problems with the 2008 projections was that MemberHealth's contract bids submitted to the federal Centers for Medicare and Medicaid Services ("CMS")[FN2] for 2008 contained miscalculations of the members' risk scores and used an inaccurate inflation factor. [*4]

On March 5, 2008, the Company publicly announced downward revised earnings guidance for 2008 and a settlement agreement under which the Company received repayment from certain MemberHealth shareholders of approximately $97 million, of which $62.3 million was paid in cash.[FN3]

Plaintiffs here sought additional discovery in the matters raised by the Company's March 5, 2008 announcements in order to consider whether to proceed with the tentative settlement. After that discovery was conducted, Plaintiffs filed an amended complaint which challenged the sufficiency of the MemberHealth settlement.

THE TERMS OF THE PROPOSED SETTLEMENT

Plaintiffs and Defendants now seek court permission to settle the action. The proposed settlement does not provide for the payment of any monies to the Company or to its shareholders. It does provide for the adoption of the First New By-Law and for the adoption of another new by-law, specifically aimed at ensuring proper corporate oversight of future bids submitted to CMS by MemberHealth. Under the settlement, the Company would create an ad hoc committee to review and consider drafts of the bids prior to submission. This committee would consist of: (a) the Chief Executive Officer of MemberHealth; (b) the Chief Financial Officer of MemberHealth; (c) the Chief Actuarial Officer of MemberHealth; and (d) a director of the Company selected by a majority of the members of the Company's Board who are not directors or employees of either the Company or MemberHealth (the "Second New By-Law"). As to the last point, the requirement that the Company director be selected by the independent Company directors was added in response to concerns voiced by this Court at a hearing held on May 22, 2008 on the issue of preliminary approval.[FN4] The Second New By-Law requires that the ad hoc committee review all bids to be submitted by MemberHealth to CMS and determine whether such bids are appropriate and in the best interests of the Company. The Second New By-Law also establishes committee procedures from record-keeping measures to the recording of committee decisions and the basis for such determinations.

NOTICE TO THE CLASS[*5]

CPLR 908 requires that notice of a proposed class action settlement be given to all members of the class in such manner as the Court directs. In this instance, pursuant to an Order of this Court, dated May 21, 2008, a notice of the class action and its settlement were mailed to class members and institutions, such as brokerage firms and banks. In the aggregate, 12,882 notices were mailed. In addition, notice was published on the website of the Notice Administrator and also, on June 4, 2008, in the New York Times. The Court finds that this notice was in full compliance with the order dated May 21, 2008 and in accordance with the requirements of New York law and constitutional due process.

CERTIFICATION OF THE CLASS

CPLR Article 9, which sets forth the criteria to be considered in granting class action certification, is to be liberally construed (see Jacobs v Macy's East, Inc., 17 AD3d 318, 319 [2d Dept 2004]; Kidd v Delta Funding Corp., 289 AD2d 203 [2d Dept 2001]; Liechtung v Tower Air, Inc., 269 AD2d 363 [2d Dept 2000]; Friar v Vanguard Holding Corp., 78 AD2d 83, 91 [2d Dept 1980]). In order to obtain class certification, Plaintiffs must satisfy each of the five statutory requirements of CPLR 901 - numerosity, predominance, typicality, adequacy, and superiority - and show that certification is also appropriate under the five factors set forth in CPLR 902 interest of class members in controlling the litigation, inefficiency of separate actions, extent of prior litigation of the controversy, desirability of concentrating the litigation in this forum, and difficulties in managing the class action (see Canavan v Chase Manhattan Bank, 234 AD2d 493, 494 [2d Dept 1996]). Plaintiff bears the burden of establishing that the class exists and that the prerequisites are met (id. at 494, citing Brady v State of New York, 172 AD2d 17, 24-25 [3d Dept 1991], affd 80 NY2d 596 [1992], cert denied 509 US 905 [1993]; Weinstein-Korn-Miller, NY Civ Prac ¶ 901.08 [2d ed]). "Whether a lawsuit qualifies as a class action matter is a determination made upon a review of the statutory criteria as applied to the facts presented" (Small v Lorillard Tobacco Co., 94 NY2d 43, 52 [1999]).

CPLR 901(a) sets forth five prerequisites that must be met in all class actions (see Alexander, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR C:901:2). The Court will address each of the requirements in turn.

A.Numerosity

As of June 19, 2008, the Company had over 70 million shares of common stock issued and outstanding. It is evident that the proposed class is so numerous that joinder of all members would be impracticable.

B.Commonality [*6]

CPLR 901(a)(2) requires that there be questions of law or fact common to the class which predominate over any questions affecting only individual class members. This standard requires "predominance, not identity or unanimity, among class members" (Friar, supra, 78 AD2d at 98; see also Freeman v Great Lakes Energy Partners, LLC, 12 AD3d 1170, 1170 [4th Dept 2004]) [common questions of law and fact means similar, though not identical, claims]; Cherry v Resource America, Inc., 15 AD3d 1013, 1013 [4th Dept 2005] [upholding class certification and finding common questions of law and fact predominated concerning defendants' common use of a methodology to manipulate calculation of royalties]).

Here, Plaintiffs complain of common injuries that, if sustained, would have been sustained by all members as the result of the claimed breach of fiduciary duty by Defendants. The issues of fact and law present are common to all members of the proposed class.

C.Typicality

CPLR 901(a)(3) requires that the claims or defenses of the representative parties be typical of the claims or defenses of the class. Indeed, "[t]he essence of the requirement of typicality *** is that not only must the representative party have an individual cause of action but the interest of the representative must be closely identified with the interests of all other members of the class (see Gilman v Merrill Lynch, Pierce, Fenner & Smith, Inc., 93 Misc 2d 941, 945 [Sup Ct NY County 1978], quoting Weinstein-Korn-Miller; NY Civ Prac ¶ 901.09 [2d ed], Fed R Civ P 23[a][3]). Plaintiff's claims need not be identical to those of the class (see Branch v Crabtree, 197 AD2d 557, 557 [2d Dept 1993]). When a plaintiff's claims derive from the same practice or course of conduct that gives rise to the claims of other class members, and are based upon the same legal theory, the typicality requirement is satisfied (see Friar, supra, 78 AD2d at 99). Here, these Plaintiffs were owners of Company common stock when the transactions at issue occurred and, accordingly, the individual Plaintiffs confront the same injuries and have the same claims as all other members of the proposed class.

D.Adequacy of Representation

CPLR 901(a)(4) provides that the Plaintiffs must be able to "fairly and adequately protect the interests of the class." A class representative acts as a fiduciary with respect to the interests of other class members (see City of Rochester v Chiarella, 65 NY2d 92, 100-101 [1985]). The responsibility of a class representative includes the duty to act affirmatively to secure the rights of class members and to oppose adverse interests asserted by others (id.) In determining whether the named Plaintiffs are suitable class representatives, the court may consider: (1) whether a conflict of interest exists between the representative and the class members; (2) the representative's background and personal character, as well as his familiarity with the lawsuit, to [*7]determine his ability to assist counsel in its prosecution; (3) the competence, experience and vigor of the representative's attorneys; and (4) the financial resources available to prosecute the action (see Pruitt v Rockefeller Center Prop. Inc., 167 AD2d 14, 24 [1st Dept 1991]).

The Court finds that the individual Plaintiffs are appropriate class representatives. They have expressed an interest in representing the class through the bringing of this lawsuit and participating in discovery; they have had the financial resources to maintain the action up to this point; and the attorneys they have hired are experienced and have participated in other similar litigation.

E.Class Action as a Superior Method of Litigation

CPLR 901(a)(5) provides that one of the prerequisites for class action status is a finding that a class action is superior to other methods for the fair and efficient adjudication of the controversy. The Court concludes that a class action is a superior method for resolving this controversy. In reaching this conclusion, the Court has evaluated the factors identified in CPLR 902. Those factors are: 1) the interest of members of the class in individually controlling the prosecution or defense of separate actions; (2) the impracticality or inefficiency of prosecuting or defending separate actions; (3) the existence of other litigation regarding the same controversy; (4) the desirability of the proposed class forum; and (5) the difficulties likely to be encountered by management of a class action.

As to the first factor, only two members of the putative class have requested that they be excluded. Neither of them actually expressed an interest in litigating the issues presented here, asking only to be excluded, nor have they indicated the number of shares that they hold. It seems to the Court that, with only two shareholders seeking to control their own destiny, the vast majority of the class members, by their silence, have indicated their disinterest in individually controlling the prosecution of any separate action.

As to the second factor, due to the number of possible class members, it would seem that the prosecution of separate actions may be economically impractical. On the one hand, if the two class members requesting opt-out are excluded, there will only be one, or two, litigations, which is certainly manageable. On the other hand, not certifying a class could lead to a proliferation of litigation. It is far more efficient to resolve thousands of claims in one bundle, even if two claims are left aside for potential (but not necessarily actual) litigation.

As to the third factor, there is no indication that there is any other pending litigation concerning the matters at issue here.

No evidence has been presented as to the undesirability of having this matter heard before this Court or in the State of New York generally. Although class [*8]members may come from around the country, if not also out of the country, no class member has objected to having the case being heard here and none have suggested that there is a better place for the case to be heard. The Court has not encountered any difficulties in managing this action and, indeed, the matter is now before the Court in connection with a request for approval of a final settlement.

Accordingly, weighing all of the factors, class certification is appropriate, with the proviso that the opt-out request of two class members be granted. CPLR 903 permits the Court to limit the class "to whose members who do not request exclusion from the class within a specified time after notice." Neither Plaintiffs nor Defendants have opposed granting their request. The settlement before the Court is not contingent upon universal acceptance by all proposed class members. The Court sees no hardship or other prejudice that would befall either Plaintiffs or Defendants if these two members are granted their wish to chart their own course, other than the possibility that Defendants will have to deal with discrete, individually-focused actions should either or both of the opting-out members decide to bring their own suit. Defendants, by not opposing the opt-out, have effectively agreed to run this risk.

APPROVAL OF THE PROPOSED SETTLEMENT

The Court may approve the settlement of a class action only if the proposed settlement is fair, adequate, reasonable and in the best interest of class members (Klein v Robert's American Gourmet Food, Inc., 28 AD3d 63, 73 [2d Dept 2006]).The factors to be considered in resolving this question include: the likelihood that plaintiffs will succeed on the merits; the judgment of counsel; the presence of good faith bargaining; and complexity and nature of the issues of fact and law. These factors are not to be applied in a formulistic manner; rather the court must decide what weight to give these factors in light of the circumstances presented (Klurfield v Equity Enter., Inc., 79 AD2d 124, 133 [2d Dept 1981). The court should also take into account the risks and costs of continued litigation and balance those risks and costs against the benefits to be derived from the settlement (see Klein, supra, 28 AD3d at 74).

Plaintiffs initially brought this case for the purpose of addressing what they perceived as an inadequate and unfair Buy-Out Offer made by corporate insiders. The plausibility of the initial complaint seems to have been borne out by the fact that the special committee of independent directors reached the same opinion as Plaintiffs that the Buy-Out Offer was inadequate. While it appears that the MemberHealth transaction, if viewed as a stand-alone event, might have not raised questions sufficient to warrant litigation (especially since the price paid exceeded the then current market price), it is understandable why Plaintiffs elected to re-formulate this action to challenge it. The MemberHealth transaction was being formulated at the time as the Buy-Out Offer and the Equity Investors were involved. Plaintiffs and their experienced counsel were warranted in their apprehension that the MemberHealth transaction was the Buy-Out Offer in another guise. But they soon came to the realization that it was not and [*9]proposed a resolution that would not have generated any monetary payment but tightened up the by-laws of the Company regarding interested party transactions.

The discovery of the financial miscalculations by MemberHealth was not made by Plaintiffs but by the Company and/or by MemberHealth. It appears that the Company took prompt action to seek a sales price adjustment. While the fact that Plaintiffs were lurking may have factored into the mind set of the Company and its counsel in the negotiations with the MemberHealth shareholders, it does not appear to the Court, and Plaintiffs do not claim, that Plaintiffs, or the pendency of this action, played any meaningful role in achieving a resolution that resulted in a substantial recovery of monies and stock to the Company. On the other hand, the Court appreciates that, because the Company was settling claims with MemberHealth, Plaintiffs were concerned that the Company might have settled on inadequate terms. The Court has not been provided with any reason to doubt the assertion of Plaintiffs' counsel that they were convinced that the claims were meritorious when filed. Certainly, no one has disputed that.

The class member who disputes the fee award implies, in his letter, that he believes that the action was brought needlessly. He refers to the Company having to pay money "to stop being annoyed" and urges that an award of fees will contribute to "an atmosphere where needless litigation is encouraged at the expense of defenseless stockholders." But this shareholder does not assert that he has reviewed the pleadings or followed the history of this case or is otherwise in a position to attest to the merit, or lack thereof, of the allegations made by Plaintiffs.

Nevertheless, while Plaintiffs' complaint, as it now stands, challenges the sufficiency of the MemberHealth settlement, it does not appear that there is any factual basis for challenging the adequacy of that settlement. Indeed, the point of the revision to the proposed settlement is to ensure that the Company adequately reviews MemberHealth bids to CMS, a subject which is not the subject of the present complaint. Plaintiffs do not contend that the Company failed to adequately investigate the financial condition of MemberHealth, or MemberHealth's CMS bid procedures, before buying it. Nor do Plaintiffs contend that the Company's response to the discovery of flaws by MemberHealth as relate to the CMS bids was inappropriate or insufficient.

The Court believes that there is little, or no, likelihood that Plaintiffs would succeed on any of the theories that they have espoused in this action. Plaintiffs are represented by very experienced counsel and the Court accepts their collective judgment that they confront serious obstacles to recovery and that, if the case is pursued, there is a significant risk that the class might recover nothing, a result that could only be achieved at significant expense to both Plaintiffs and the Company.

While the Court has not been informed as to the amount expended in defense of this litigation by Defendants, the Court must presume that it is substantial, [*10]rising to the amount claimed by Plaintiffs and, possibly, beyond.[FN5] Continuation of the litigation would not benefit the Company. While concerns raised by the fee objector are legitimate, the answer to them is not to disapprove the settlement; disapproval would only result in additional expense to the Company.

The fee objector claims that the proposed by-law amendments are "rather amorphous" and the benefits to be derived from them are "speculative." The Court does not agree. It is important not to fuse together the analysis of a settlement for purposes of deciding whether to approve it with the analysis of whether, and to what extent, attorneys' fees should be awarded.

It is not essential that the settlement of a class action founded in allegations of malgovernance of a corporation end in a money payment. "Corporate therapeutics" procedures which will prevent the same ills from recurring are a benefit to shareholders (Mills v Electric Auto-Lite Co. 396 US 375, 396-397 [1970]; Seinfeld v Robinson, 246 AD2d 291, 298 [1st Dept 1998]). In some ways, a resolution which ends with corporate reforms may be more beneficial to the shareholders than a monetary settlement. All shareholders will benefit from having the corporation run better. A more efficient, more-ethically sensitive corporation may avoid the pitfalls of insider transactions, and closer scrutiny of the corporation's activities, particularly those with significant economic risk, may ward off the making of mistakes and misjudgments that result in losses, not to mention avoid additional, expensive litigation that may occur if a corporation simply buys its way out of a mistake and then proceeds, unreformed, to repeat it. A monetary settlement that is spread over individual shareholders may, if the shareholder base is large enough, mean that the individual small investor will likely receive little.

The fact is that corporate governance provisions, and shareholder rights, vary widely. There is at least some evidence that those firms that have stronger shareholder rights perform better than other firms. There is also evidence that managers may undertake inefficient projects to extract private benefits, a problem that is more severe when managers are entrenched and can better resist outside intervention (see Gompers, Ishii and Metrick, Corporate Governance and Equity Prices, Quarterly Journal of Economics 118[1] [February 2003], annexed as Exhibit 4 to Affidavit of Mark C. Rifkin, sworn to July 25, 2008 ["Rivkin Aff."]). Where a company board is dominated, whether de jure or de facto, by management, or where the board simply defers to management without exercising meaningful oversight, serious difficulties have arisen. [*11]

We live presently in seriously troubled economic times in which, as this Decision and Order is composed, taxpayers have come to the rescue of major financial institutions, whose dire conditions implicate the financial well-being of all and which are attributed, at least to some degree, to corporate executives placing short-term profits, and even personal greed, ahead of the broader corporate, and national, interest. Six years ago, the chief counsel for the Nation's tenth largest public pension fund, wrote, in the wake of the failures of Enron, WorldCom, Adelphia, Tyco, and Global Crossings: We are at a critical point in the history of capitalism. A series of unexpected corporate disasters has rocked the markets and damaged the stature of the American business model. Workers have seen their retirement savings dwindle or even disappear. The media has made headlines out of our anger about the losses created by corporate wrongdoers who made personal fortunes while misleading inventors. Fear has driven shareholders out of the stock market in droves.

(Johnson, Rebuilding Corporate Boards and Refocusing Shareholders For the Post-Enron Era, 76 St John's L Rev 787 [2002]).

These observations seem as on-point now as then. A prescription for reform involves shareholder' reassessment of priorities to focus on preservation and enhancement of long-term value (id. at 799). Shareholders' most direct means for establishing corporate priorities is their representation through the board of directors. Measures which dilute management's influence on the board and which promote the independence of the board serve the long-term interests of shareholders.

The amendments proposed to be implemented under the settlement agreement here are consistent with the goal of promoting effective corporate oversight by avoiding conflicts of interest and mandating the participation of independent directors in major corporate decisions that entail significant financial risk.

For these reasons, the Court will approve the proposed settlement as it is in the best interests of both the Company and its shareholders.

ATTORNEYS' FEES

Counsel for Plaintiffs also seek judicial approval for payment of their attorneys' fees and expenses. The settlement agreement provides that Plaintiffs intend to apply for an award of fees and expenses not exceeding $800,000 and that Defendants will not oppose Plaintiffs' application and will pay the award, provided that the award does not exceed $800,000. There are six individual Plaintiffs and each was represented by separate counsel. [*12]

Five fee applications have been received.[FN6]

Wolf Haldenstein Adler Freeman & Herz, LLP ("Wolf Haldenstein") represented Plaintiff Elizabeth A. Connelly and served as one of the Co-Lead Counsel. Wolf Haldenstein claims to have expended 646.2 hours on this matter, yielding a time value of $288,133, and to have incurred $13,931.00 in expenses (Rivkin Aff., ¶ 32 and Ex. 5).

Another co-lead counsel is Wolf Popper LLP ("Wolf Popper"). Wolf Popper claims to have expended 317.20 hours with a time value of $192,988.00 and to have incurred $9,036.43 (Affidavit of Carl L. Stine, sworn to July 17, 2008 ["Stine Aff."], ¶¶ 5-8 and Exs. 1, 2).

The firm of Levi & Korinsky, LLP ("Levi & Korinsky") claims to have expended 159.85 hours with a time value of $71,428.75 and to have incurred expenses of $1,114.98 (Affidavit of Eduard Korsinsky, sworn to July 21, 2008 ["Korinsky Aff."] ¶¶ 3,5,6, and Ex. A).

The Law Offices of Marc S. Henzel (the "Henzel Firm") claims to have incurred 6.8 hours of time, with a time value of $3,600, and to have incurred $120 in expenses (Affidavit of Marc S. Henzel, sworn to July 18, 2008 ["Henzel Aff."] ¶¶ 5, 7 and Ex. 1).

The firm of Paskowitz & Associates (the "Paskowitz Firm") claims to have incurred 649.55 hours, with a time value of $377,032.25, and to have incurred expenses in the amount of $8,733.02 (Affidavit of Laurence D. Paskowitz sworn to July 21, 2008 ["Paskowitz Aff."] ¶¶ 5, 7, Ex. 1 and 2).

The total hours claimed by all five firms equals 1,779. The total claimed in fees and expenses from all five firms, based on their regular hourly rates, is $946,583. This amount exceeds the $800,000 award that Plaintiffs agreed to ask for and Defendants agreed not to oppose. To fit the fee request into the limitation by agreement, Plaintiffs asked for a "negative multiplier" of 0.799 against their lodestar time. Plaintiffs' counsel do not propose that the Court adjust their specific allotments. The settlement agreement, and the order proposed by Plaintiffs for entry by the Court, contemplates that the $800,000, if approved by the Court, would be paid to Wolf Haldenstein, and counsel have assured the Court that they can resolve between themselves the specific allocation of the award between their respective firms. [*13]

As previously noted, one member of the class objects to the fee award. He asserts that, based on the non-monetary provisions of the settlement, "fees to the attorneys for the Class should be fixed at somewhere between minimal and nothing." He contends that, while he is "all for duly compensating lawyers for necessary work that benefits their clients", he is uncertain that the work done in this class action "fits into this category." He contends that awarding "meaningful fees will contribute to an atmosphere where needless litigation is encouraged at the expense of defenseless stockholders."

The philosophical views expressed by the objector are hardly without support. A debate about the utility of private lawyer-driven business class actions, primarily in the securities field, has been raging for decades.

It has been argued that business class action litigation unnecessarily raises the cost of capital and retards economic growth. This is because, it is contended, many claims are frivolous, but even frivolous claims must be defended. There is a strong incentive for settlement for reasons which are relatively extraneous to the merits of the case and, even if there is monetary recovery for investors, investors lose in the sense that the subject company pays to indemnify its directors and pays for the litigation costs of all parties (see Winter, Paying Lawyers, Empowering Prosecutors, and Protecting Managers: Raising the Cost of Capital in America, 42 Duke L J 945, 947-948 [1993] ["Winter"]). It has even been suggested that class action plaintiffs may be little more than bystanders and that the real reason for the institution of litigation is the quest for attorneys' fees (Winter, supra, at 984). Because of then-extant concerns that securities litigation had gotten out of hand (see Seligman, The Merits Do Matter, 108 Harv L Rev 438, 439 [1994] ["Seligman"]), Congress adopted the Private Securities Litigation Reform Act (Pub L No 104-67, 108 Stat 737 [1995]), creating a number of procedural hurdles in an effort to make it more difficult for plaintiffs' attorneys to bring and maintain non-meritorious securities fraud class actions (see Perino, Did The Private Securities Litigation Reform Act Work, 2003 U Ill L Rev 913, 914 [2002] ["Perino"]).

Others maintain that the volume of securities litigation, and in particular meritless securities litigation, was and is overstated, that the Securities and Exchange Commission lacks resources to pursue enforcement actions, and that even successful enforcement actions by the Commission may not yield recoveries sufficient to compensate shareholder losses. On this view, private actions by investors or classes of investors are indispensable tools which enable investors to recoup losses without having to depend upon government action and which deter corporate wrongdoing (see Seligman, supra, at 441-442; Perino, supra, at 918). Public policy is said to support granting attorneys' fees that are sufficient to encourage counsel to bring securities class actions that supplement the efforts of the Commission (see In re Bristol-Myers Squibb Sec. Litig., 361 F Supp 2d 229, 236 [SD NY 2005]; see also Bateman Eichler Hill, Richards, Inc. v Berner, 472 US 299, 310 [1985]).

The courts must balance these competing concerns in evaluating what is [*14]a reasonable fee under the particular circumstances of a particular case. Doing this is, however, easier said than done because "the adversary system is typically diluted indeed, suspended during fee proceedings" (Goldberger v Integrated Resources, Inc., 209 F3d 43, 52-53 [2d Cir 2000]). Defendants, once having agreed to a settlement and having capped their exposure to fee award, have little reason to spend the money on having their own counsel weigh in on whether the fee should be somewhat lower or how it should be carved up between lawyers for various plaintiffs. Counsel for the class members are seeking to obtain payment for their services and, naturally, will promote the value of what they did. Individual class members have little incentive to spend the time and effort to review the fee filings and offer informed, particularized commentary on the work actually performed by their champions, as they are not paying the award and the award is not likely to have a significant impact on the company's overall finances (if it did, surely defendants would not have agreed not to oppose it).

In New York, the courts must base an award of attorneys' fees to the representatives of the class on "the reasonable value of legal services rendered" (CPLR 909; see generally Haig, 2 NY Prac, Commercial Litigation in New York State Courts, §18:44). This determination involves extensive consideration of the nature and value of the services rendered (Klein, supra, 28 AD3d at 75).

As the first phase of the inquiry into what is the reasonable value of the services rendered, the court must determine the number of hours reasonably expended either by reviewing of contemporaneous time sheets or from an objective and detailed breakown by the attorney of the time and labor expended (id.). However, the hours claimed are not to be automatically accepted and are to be disallowed if not adequately documented. Time which is duplicative or padded is to be discounted; it is necessary to differentiate between in-court services, out-of-court services, and time spent on clerical tasks (Becker v Empire of America Fed. Sav. Bank, 177 AD2d 958 [4th Dept 1991]). Further, the court must consider not only the way that time was spent (discovery, oral argument, negotiation, etc.) but who spent that time (senior partner, junior partner, associate, etc.) (Klein, supra). The court must consider whether the rates assigned to these attorneys are reasonable in light of the fees charges for similar services by lawyers in the community with similar experience and reputation (see Matter of Gamache v Steinhaus, 7 AD3d 525, 527 [2d Dept 2004]).

Of course, the time spent and the rates charged are not the sole factor. The court must bear in mind the results obtained, the standing of counsel and the skill required of them, the novelty, magnitude and complexity of the litigation, the responsibilities undertaken, the risks involved, the time constraints of the case, the undesirability of the case, fees charged in the community by lawyers with like experience and comparable reputation, and awards in similar cases (Becker, supra; Brody v Catell, 16 Misc 3d 1105[A], 2007 NY Slip Op 51297(U) [Sup Ct Kings County 2007] [Demarest, J.]).

[*15]In Klein v Robert's American Gourmet Food, Inc., supra, the Court dealt with a circumstance where the attorneys submitted only brief affirmations attaching the resumes of their firms and disclosed, for each attorney who worked on the matter, the name and standing of the individual and the total hours worked. These affirmations contained only brief and general descriptions of the work performed as a whole and did not indicate the specific tasks performed by any of the individual attorneys. These descriptions were held to be inadequate to support the award of fees of $790,000.

Here, the submissions by counsel are no more informative than the submissions found inadequate in Klein. At best, all that is proffered are generalized descriptions of services and a breakdown of the total time expended by each attorney or paraprofessional. With regard to expenses, some of the information provided raises more questions than answers: for example, the Wolf Haldenstein submission refers to $8,628.93 paid in "Professional Services"; the Paskowitz Firm reports $5,871.52 paid for an expert fee; and the Wolf Popper submission indicates time charges for a financial analyst and indicates receipt of payments, credited to expenses, from both Wolf Haldenstein and the Paskowitz Firm (in the same amount), which may be related to an expert fee.[FN7]

The submissions by Levi & Korinsky and the Henzel Firm are particularly wanting. The Levi & Korinsky submission states that attorneys from that firm "were involved in drafting the operative complaint, drafting discovery requests, and drafting/revising the papers for preliminary approval of the Settlement Brief and the Settlement Brief" (Korinsky Aff., ¶4).

The Henzel Firm claims to have engaged in "pre-Complaint factual and legal review; client contact; drafting and amending the Complaint" (Henzel Aff., ¶2).

The Court is concerned that the attorneys' efforts were duplicative and, potentially, unnecessary. For example, the Wolf Popper submission states that the firm engaged in pre-Complaint factual and legal review, amendment of the initial complaint and subsequent complaints, participating in drafting opposition to Defendants' motion to dismiss, appearing in court, drafting discovery requests, document review, legal and factual research, settlement negotiations, drafting and revising settlement papers, and conducting confirmatory discovery (Stine Aff., ¶2). To the same effect is the submission of the Paskowitz Firm (see Paskowitz Aff., ¶2). It is evident that the work done may be over-lapping. [*16]

The Court is very well aware that this action has its origins in six different actions filed by six different firms on behalf of six different clients. However, counsel, commendably, managed to structure the litigation into a unitary form and counsel should have, and perhaps did, agree between themselves as to an efficient division of labor. But the Court cannot determine who actually did what, much less whether that effort, and the amounts sought for it, are reasonable. Nor can the Court determine from the submissions the extent to which counsel sought to coordinate their efforts and avoid duplication of effort and expense.

Accordingly, the Court finds that the record is presently insufficient to support an award of the magnitude being requested here. Moreover, the Court believes that it is required to make a finding as to what fees and expenses may be reasonably awarded to which firms, rather than just approving a lump-sum and allowing the firms to allocate the payment between themselves. This is a judicial responsibility that must be exercised appropriately in order to be sure that those who actually performed meaningful services and obtained meaningful results for the Company are not undercompensated for their efforts and to assure that those whose efforts were marginal are not overcompensated for their efforts. That apportionment must be undertaken in order that attorneys are not discouraged from bringing securities litigation for the benefit of shareholders by fear that they will not receive adequate compensation, while also assuring that the company and its shareholders are not just creating a trough from which all can feed no matter how light the load they carried.

Each of the firms here state that they have contemporaneous time records with respect to the work performed in this matter. The Court hereby directs that each of the firms seeking compensation submit a narrative affidavit from an attorney which: (a) contains particularized information as to the professional experience and background of each attorney who performed services in the matter, the basis for the establishment of the hourly rate claimed for each, and a statement as to which services each performed; (b) describes in detail the purpose of any expense greater than $500; (c) sets forth what efforts, if any, where made to minimize unnecessary services and work, both within and without that firm; (d) describes in detail the basis for a finding that the services rendered by the firm resulted in a resolution favorable to the class; and (f) contains any other information which the attorney believes appropriate for consideration on the issue of attorneys' fees and expenses; and (e) is supplemented by a complete copy of all time and billing statements. The Court will hold a further hearing following the submission of the affidavits and materials called for herein. Defendants and the attorneys' fees objector may participate in that hearing, though they are not required to do so.

That the Court lacks a sufficient basis to presently determine the fees to be awarded to the five firms does not mean that the Court cannot approve the settlement agreement insofar as it caps Defendants' liability for attorneys' fees and expenses. As noted, the amount of time value and expenses claimed exceeds the $800,000 limitation by a fair margin and, therefore, the provisions of the settlement [*17]which limit the exposure to $800,000 are a clear benefit to all concerned.

CONCLUSION

The Court has considered the following papers in connection with this motion:

1)Order to Show Cause (Seq. # 007), dated July 28, 2008;

2)Order to Show Cause (Seq. # 008), dated July 28, 2008;

3)Affidavit of Jose C. Fraga, sworn to June 27, 2008, together with the exhibits annexed thereto;

4)Affidavit of Mark C. Rifkin, Esq., sworn to July 25, 2008, together with the exhibits annexed thereto;

5)Affidavit of Carl L. Stine, Esq., sworn to July 17, 2008, together with the exhibits annexed thereto;

6)Affidavit of Laurence D. Paskowitz, Esq., sworn to July 21, 2008, together with the exhibits annexed thereto;

7)Affidavit of Marc S. Henzel, Esq., sworn to July 18, 2008, together with the exhibits annexed thereto;

8)Affidavit of Eduard Korsinsky, Esq., sworn to July 21, 2008, together with the exhibits annexed thereto;

9)Memorandum of Law In Support of Plaintiffs' Motion for Final Class Action Settlement Approval, dated July __, 2008; and

10)Memorandum of Law In Support of Plaintiffs' Motion for an Award of Attorneys' Fees and Expenses, dated July __, 2008.

Based upon the foregoing papers, and for the reasons set forth above, it is hereby

ORDERED that Plaintiffs' motion (Seq. No 008) for an order: (a) finally [*18]approving the proposed settlement of this class action set forth in the Stipulation of Settlement dated as of May 1, 2008; and (b) confirming the certification of a class consisting of all record holders or beneficial holders, exclusive of Defendants, of any class of the stock of Universal American Corporation f/k/a Universal American Financial Corp. from October 24, 2006 through and including the date of Judgment is granted, except that EWT, LLC and Darren E. Clemente shall, pursuant to their requests, be excluded from the said class; and it is further

ORDERED that counsel for Plaintiffs shall notify EWT, LLC and Darren E. Clemente of their exclusion from the class certified herein by written or electronic notice to be given within ten (10) days of the date of this Decision and Order; and it is further

ORDERED that Plaintiffs' motion (Seq. No. 008) for an order granting Plaintiffs' counsel $800,000 in attorneys' fees and expenses is restored to the motion calendar of this Court, to be held on December 5, 2008 at 2 p.m.; and it is further

ORDERED that the each of the firms seeking compensation shall serve upon Defendants and the attorneys' fees objector and file with the Court a narrative affidavit from an attorney which: (a) contains particularized information as to the professional experience and background of each attorney who performed services in the matter, the basis for the establishment of the hourly rate claimed for each, and a statement as to which services each performed; (b) describes in detail the purpose of any expense greater than $500; (c) sets forth what efforts, if any, where made to minimize unnecessary services and work, both within and without that firm; (d) describes in detail the basis for a finding that the services rendered by the firm resulted in a resolution favorable to the class; (f) contains any other information which the attorney believes appropriate for consideration on the issue of attorneys' fees and expenses; and (e) is supplemented by a complete copy of all time and billing statements; and it is further

ORDERED that the said affidavit shall be served and filed by not later than November 21, 2008.

The foregoing constitutes the Decision and Order of this Court.

Dated:White Plains, New York

October, 2008

E N T E R :

________________________________

Alan D. Scheinkman

Justice of the Supreme Court [*19]

APPEARANCES:

WOLF HALDENSTEIN ADLER FREEMAN & HERZ, LLP

by: Mark C. Rifkin, Esq.

Attorneys for Plaintiffs

270 Madison Avenue

New York, New York 10016

PASKOWITZ & ASSOCIATES

by: Laurence D. Paskowitz, Esq.

Attorneys for Plaintiffs

60 East 42nd Street 46th Floor

New York, New York 10165

WOLF POPPER LLP

by: Carl L. Stine, Esq.

Attorneys for Plaintiffs

845 Third Avenue

New York, New York 10022

ROY JACOBS & ASSOCIATES

by: Roy L. Jacobs, Esq.

Attorneys for Plaintiffs

60 East 42nd Street 46th Floor

New York, New York 10165

LAW OFFICES OF MARC S. HENZEL

by: Marc S. Henzel, Esq.

Attorneys for Plaintiffs

273 Montgomery Avenue Suite 202

Bala Cynwyd, Pennsylvania 19004

LEVI & KORSINSKY, LLP

by: Joseph Levi, Esq.

Attorneys for Plaintiff

39 Broadway Suite 1601

New York, New York 10006

DECHERT LLP

by: Andrew J. Levander, Esq.

Attorneys for Defendants Universal American Financial Corp, Richard

A. Barasch and Mark M. Harmeling

30 Rockefeller Plaza

New York, New York 10112 [*20]

WILLKIE FARR & GALLAGHER LLP

by: Tariq Mundiya, Esq.

Attorneys for Defendants Barry Averill, Linda H. Lamel, Patrick J.

McLaughlin and Robert F. Wright

787 Seventh Avenue

New York, New York 10019-6099

COVINGTON & BURLING LLP

by: Andrew Ruffino, Esq.

Attorneys for Defendants Union Square Partners Management LLC,

Bradley E. Cooper, Eric W. Leathers, and Robert A. Spass

620 Eighth Avenue

New York, New York 10018-1405

ROPES & GRAY LLP

by: William I. Sussman, Esq.

Attorneys for Defendant Welsh, Carson, Anderson & Stowe X, L.P.

1211 Avenue of the Americas

New York, New York 10036-8704

BERTRAM R. GELFAND

One North Broadway

White Plains, New York 10601

WEIL GOTSHAL & MANGES, LLP

by: Ashley R. Altschuler, Esq.

Attorneys for Defendants Lee Equity Partners LLC,

and Perry Capital LLC

767 Fifth Avenue

New York, New York 10153 Footnotes

Footnote 1:The price fell to $9.11 per share by April 18, 2008.

Footnote 2:CMS is the federal agency responsible for administering Medicare, Medicaid, and other federal health-related programs. CMS was previously known as the Health Care Financing Administration.

Footnote 3:To his credit, lead counsel for Defendants, Joseph F. Donley, had, at a court conference held prior to the March 5, 2008 announcements, advised the Court and Plaintiffs' counsel, that, for reasons he could not divulge, it was inadvisable to proceed with the original settlement, pending further developments.

Footnote 4:The Court appreciates the willingness of counsel on both sides to promptly address the Court's concerns. However, the Court also notes that it may well have conditioned its approval of the settlement on the inclusion of this provision.

Footnote 5:Plaintiffs have been represented by six separate sets of attorneys, though they all advocated the same interests. Defendants have also been represented by six separate sets of attorneys, though the Company may have had some different interests than the other defendants, such as those defendants who are board members.

Footnote 6:While the law firm of Roy Jacobs & Associates is listed on the settlement papers as an attorney for Plaintiffs and someone from that firm signed the settlement agreement, no fee application from that firm has been submitted. No explanation for this has been provided.

Footnote 7:The Wolf Popper submission indicates that the firm received $2,871.52 from each of the other two firms. The Paskowitz Firm's expense list does not reference such a payment (though it lists a $5,871.52 expert fee payment); the Wolf Haldenstein submission indicates the payment of an expert fee of $2,871.52. While it is possible, if not likely, that these three firms each paid a share of a single expert, the Court cannot conclude that such is the case. Further, the other two firms appear not to have paid any experts.