A federal appeals court has denied a Wall Street law firm's request to stop the flow of settlement money from a body armor company's bankruptcy so that the firm could establish a $15 million reserve for attorney fees.

The U.S. Court of Appeals for the Third Circuit's precedential ruling from Tuesday is the latest development in the legal debacle surrounding the downfall of David H. Brooks, the late CEO of Delaware-incorporated DHB Industries whose conviction on insider trading charges spawned a flurry of class action lawsuits and the ultimate demise of his company.

In its ruling Tuesday, the Third Circuit upheld the U.S. Bankruptcy Court of the District of Delaware's denial of an emergency stay filed by Carter Ledyard & Milburn, a New York-based law firm representing DHB, now known as S.S. Body Armor I Inc., in consolidated class action and derivative lawsuits brought under section 304 of the Sarbanes Oxley Act of 2002 in the Second Circuit,

In 2016, Brooks—whose company supplied the U.S. military and police departments with bullet-resistant vests—died while serving time in a Connecticut federal prison for defrauding investors. Afterward, a New York federal judge abated some of Brooks' convictions and restitution obligations, for which his estate was on the hook, according to Third Circuit Judge Joseph A. Greenaway's opinion.

However, after several rounds of settlement talks, DHB was still responsible for paying out $142 million as part of a second bankruptcy settlement. During this time, Carter Ledyard pursued $1.86 million in fees for a decade's worth of litigation in the SOX 304 matter, Greenaway said. The bankruptcy court, however, ruled that Carter Ledyard would only receive attorney fees if and when DHB actually received funds in the SOX 304 matter.

Carter Ledyard, fearing the possibility that it could get nothing if DHB failed to receive fund from the SOX 304 matter, next sought to set aside $25 million in settlement funds to pay attorney fees. The U.S. Bankruptcy Court for the District of Delaware granted Carter Ledyard's motion in part, but earmarked only $5 million, without specifying the amount owed to the firm, Greenaway said. The firm argued that the amount was insufficient.

Carter Ledyard later requested a stay of distribution of settlement funds while it appealed the ruling, but a district judge denied it. That led to the firm's appeal to the Third Circuit, which presented questions of whether the court had jurisdiction to hear the case as well as whether the district court was right to deny the stay.

After concluding that the court did have jurisdiction in the case, Greenaway said although the exact amount owed to Carter Ledyard is yet to be determined, the Third Circuit's job was only to determine whether the $5 million set aside was enough.

“A $5 million attorneys' fees award for 1,502.2 hours of legal work totaling $549,472.61 of documented fees would yield an hourly rate of $3,328.45 and a lodestar multiplier of over nine. But we have previously noted that, in common fund cases where attorneys' fees are calculated using the lodestar method, 'multiples ranging from one to four' are the norm,” Greenaway said, adding that there was no reason to stray from that formula.

“To be sure, CLM showed tremendous skill and expended substantial time in preserving a highly valuable claim,” he continued. “But its attempts to argue that it is somehow due attorneys' fees more than $5 million are belied by its initial fee application in the bankruptcy court. There, CLM sought attorneys' fees totaling $1.86 million using a lodestar multiplier of 3.38, which it stated was 'entirely reasonable in light of … the value of the asset preserved and benefits conferred, the risks undertaken by counsel[,] and the public policies that were vindicated' by preserving the SOX 304 claim.”

Greenaway concluded, ”We see no reason why CLM's prior analysis should not hold now, especially given the current record.”

Gary D. Sesser of Carter Ledyard, who argued the case on behalf of his firm, did not respond to a request for comment. Nor did Alan J. Kornfeld of Pachulski Stang Ziehl & Jones in Los Angeles, who argued the case for DHB.