Lawyers to Battle for Keating Case Fees : Thrifts: At issue is how to split $38 million allotted for payments to attorneys who represented investors.

Lawyers who represented small investors in litigation involving Charles H. Keating Jr.’s failed financial empire are headed for a major court battle over how to split up $38 million in attorney fees.

The initial money for legal bills is expected to be released this month, along with nearly $101 million for investors in Keating’s American Continental Corp., the Phoenix company that owned Irvine-based Lincoln Savings & Loan.

An additional $13 million is being set aside to pay court costs and other legal expenses that investors’ lawyers advanced.

The funds represent about 60% of the money recovered in settlements with most of the 99 defendants sued by investors. The biggest group of investors, those who bought bonds at Lincoln’s Southern California branches, will get about 40 cents on the dollar in the first distribution of funds this month.

The proposed division of fees, recommended in a court filing Monday by Joseph W. Cotchett, chief trial lawyer for the investors, has angered a number of lawyers from some of the 18 plaintiffs’ law firms that worked on the case.

At least two law firms--Alvarado, Rus & Worcester in Orange and Horton, Barbaro & Reilly in Santa Ana--plan to challenge Cotchett’s allocation of fees at a federal court hearing Sept. 14 in Tucson.

“There’s a potential for a major donnybrook,” said Frank P. Barbaro, who was involved in the early stages of the complex litigation. “I’m not a happy camper. Hopefully, we’ll work this out while objections are pending. My hope is that we won’t start World War III over this.”

Any fight over fees should not delay the return of money to bondholders, said Barbaro.

While Cotchett said that some lawyers are upset with his recommended division of fees, he said in court papers it was based on a “rough, non-scientific amalgam” of such concepts as ability, efficiency, sacrifice and work ethic.

“Some people are happy, some aren’t. Hey, it’s lawyers,” said Cotchett, whose firm would receive $9.85 million in fees, or about $414 an hour, for attorney time.

What angers Barbaro is the “unequal allocation” of fees.

Cotchett’s proposed fee split gives Barbaro’s firm $600,000--barely $74 an hour--for more than 8,000 hours of lawyer work. Yet Leonard Ring & Associates in Chicago would get $95,000--or $625 an hour--based on 152 hours of lawyer time put into the case. Firms also filed for paralegal and clerk time, which is paid at a much lower rate.

Barbaro contended that his firm was getting the short end of the stick for important work that “paved the way” for the settlements. He also asserted that lawyers who have worked in the past with Cotchett and the San Diego law firm of Milberg, Weiss, Bershad, Specthrie & Lerach would be paid more for their efforts than several local firms that started the cases and worked directly with many of the 23,000 investors.

Ronald Rus, whose law firm has played a pivotal role throughout the three years of litigation, also is upset with the amount his firm received. Alvarado Rus would receive the third biggest chunk--$3.8 million--but it works out to $168 an hour for 22,751 hours of attorney time.

Rus was co-lead counsel with Cotchett in seven class actions filed in state court. Cotchett and Leonard B. Simon of the Milberg Weiss firm were co-lead counsel in eight federal court class actions. All 15 were consolidated for trial before U.S. District Judge Richard M. Bilby in Tucson.

Like Cotchett’s firm, Milberg Weiss is slated to receive $9.85 million in fees.

The initial payout to investors and their lawyers comes from $251 million in settlements reached with most defendants sued in the wake of the April, 1989, collapse of Keating’s empire.