Bondholders Criticize Lincoln Case Legal Fees : S&Ls;: The approved formula would give attorneys $37.5 million if they recover $150 million of the money lost by small investors in the collapse of American Continental.

Small investors who lost their life savings in the collapse of American Continental Corp. and its Irvine-based Lincoln Savings & Loan unit are grumbling about the fees their attorneys will be paid to recover some of about $275 million that they lost.

A federal judge in Phoenix has approved a formula that would give the investors’ attorneys $37.5 million if they recover $150 million of the money lost by American Continental debt holders.

The formula gives the attorneys 25% of the first $150 million recovered and 29% of any amount over that. It also provides million-dollar incentives to recover certain amounts by specified dates, plus out-of-pocket costs, according to a recent notice seeking investor approval of settlements reached with two defendants so far.

If the attorneys recover $250 million--and few insiders expect that to happen--they would receive $81 million in fees, plus millions more in costs and incentive payments.

“This is the biggest windfall that has hit the legal market,” said Harold Rosenberg, a bondholder from Van Nuys who also is a lawyer. “Of course, the lawyers should be rewarded--but how much?”

Rosenberg said more than a dozen bondholders have expressed disapproval with the fee formula, especially because they generally thought that fees would not exceed 15% of the amount recovered. One plaintiff’s attorney, Richard Greenfield of Philadelphia, said last year that legal fees have been as low as 7% in major class actions.

But Frank P. Barbaro of Santa Ana, one of the bondholders’ attorneys, defended the formula. The case is “incredibly” complex, he said, with 50 attorneys working more than a year without any compensation.

They have also spent $5 million of their own money to pay such expenses as travel, filing fees and photocopying some of the 14 million pages of documents from the case.

“The judge is free to give whatever fees he believes are appropriate,” Barbaro said. “These fees are absolutely justified.”

In class actions, plaintiffs’ attorneys are typically paid from the pool of money they recover. The fee is usually set by the court when the case in completed.

The American Continental litigation is unusual in that U.S. District Judge Richard M. Bilby set the fee formula with the first settlements, according to Ronald Rus of Orange, another attorney for the investors.

Earlier this year, Bilby appointed a U.S. bankruptcy trustee in Phoenix to negotiate a fee with the attorneys. Bilby’s order fixed the initial percentage at a rate--25%--that has become the latest benchmark in class actions, Rus said.

“Twenty-five percent may sound like a lot,” Rus said, “but 25% of nothing is nothing.”

As part of the pending settlements, Bilby approved the reimbursement of $2.3 million in out-of-pocket costs and expenses to attorneys.