Lorillard Tobacco Co. v. Chester, Willcox & Saxbe

• Decision Date: 13 November 2008
• Docket Number: No. 07-3589.,07-3589.
• Citation: 546 F.3d 752
• Parties: LORILLARD TOBACCO COMPANY, et al., Plaintiffs-Appellees, v. CHESTER, WILLCOX & SAXBE, LLP, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

546 F.3d 752

LORILLARD TOBACCO COMPANY, et al., Plaintiffs-Appellees, v. CHESTER, WILLCOX & SAXBE, LLP, et al., Defendants-Appellants.

No. 07-3589.

United States Court of Appeals, Sixth Circuit.

Argued: September 17, 2008.

Decided and Filed: November 13, 2008.

ARGUED:

John A. DeVault III, Bedell, Dittmar, DeVault, Pillans & Coxe, Jacksonville, Florida, for Appellants. Thomas W. Hill, Kegler, Brown, Hill & Ritter, Columbus, Ohio, for Appellees.

ON BRIEF:

John A. DeVault III, Patrick P. Coll, Bedell, Dittmar, DeVault, Pillans & Coxe, Jacksonville, Florida, William James Pohlman, Vorys, Sater, Seymour & Pease, Columbus, Ohio, for Appellants. Thomas W. Hill, Christopher J. Weber, Kegler, Brown, Hill & Ritter, Columbus, Ohio, Dale C. Christensen, Jr., John J. Galban, Seward & Kissel, New York, New York, for Appellees.

Before: CLAY and COOK, Circuit Judges; OLIVER, District Judge.^*

OPINION

CLAY, Circuit Judge.

Plaintiffs, Lorillard Tobacco Company, Phillip Morris USA Inc., and R.J. Reynolds Company, brought this interpleader action against a number of attorneys, including the five Defendants-Appellants ("Florida Counsel"),¹ to determine the proper recipients of four annual $125 million payments that Plaintiffs agreed to pay as part of an attorneys' fee agreement related to the 1998 tobacco settlement. Florida Counsel, five law firms that represented the State of Florida in the tobacco litigation, appeal the district court's order overruling their objections to claims to the proceeds of the settlement of the interpleader action by five limited liability companies and Deutsche Bank Trust Company of America ("Deutsche Bank"). For the reasons that follow, we REVERSE the district court's ruling and REMAND for further proceedings.

BACKGROUND

I. The Fee Payment Agreements

In the 1990s, a number of states filed lawsuits against tobacco companies, seeking damages for the states' treatment of smoking-related illnesses. In 1997 and 1998, Plaintiffs entered settlement agreements with the states, many of which were represented by private counsel. Mississippi, Texas and Florida were the first states to initiate the suits and the first states to settle, and as part of these first three settlements, Plaintiffs entered fee payment agreements with the private counsel representing the three states ("MTF Counsel"). In September 1998, Florida's outside counsel entered a Florida Fee Payment Agreement ("Florida FPA") with Plaintiffs. Like the fee payment agreements entered by counsel for Mississippi and Texas, the Florida FPA called for a panel of arbitrators to determine the fee award for Florida's outside attorneys. Pursuant to the three fee payment agreements, in December 1998, a panel of arbitrators awarded a total of approximately $8.17 billion to MTF Counsel, including a fee award for Florida's outside counsel of approximately $3.43 billion. The three fee payment agreements anticipated that private counsel from other states would have to be paid once those states settled; the agreements therefore required Plaintiffs to make quarterly payments of $125 million until the fees of all states' private counsel were paid, including the $8.17 billion owed to MTF Counsel. Each counsel would receive a pro rata share of each quarterly payment, based on the outstanding balance owed to the counsel as a percentage of the total outstanding balance of fees owed to all private counsel.

In November 1998, Plaintiffs entered a Master Settlement Agreement ("MSA") with forty-six states and territories to settle the remaining tobacco lawsuits. Pursuant to the MSA, Plaintiffs entered a Model Fee Payment Agreement ("Model FPA") with the states to structure the payment of attorneys' fees to outside counsel for the forty-six jurisdictions. Under the terms of the Model FPA, each jurisdiction's private counsel could either receive a negotiated payment from Plaintiffs up front (a "liquidated fee"), or elect to arbitrate and be paid an arbitration award by receiving a pro rata share of the $125 million quarterly payments which Plaintiffs had already committed to paying. The Model FPA required Plaintiffs to set aside $1.25 billion for the private counsel who negotiated liquidated fees, and to pay in full all liquidated fees by the end of 2003.

Plaintiffs negotiated liquidated fees with counsel from approximately twenty-one jurisdictions, while counsel from the remaining jurisdictions opted for arbitration and a pro rata share of the quarterly payments. Counsel from the states and territories that opted for arbitration received a total award of approximately $6.08 billion; including the fee awards to MTF Counsel, Plaintiffs' total arbitration fee payments totaled approximately $14.25 billion. Plaintiffs' liquidated fees to the twenty-one jurisdictions that negotiated such fees totaled approximately $625 million. Pursuant to the Model FPA, Plaintiffs were required to use the remaining $625 million of the $1.25 billion that it had earmarked for liquidated fees as "supplemental payments" to the arbitration fee award recipients, in addition to the $125 million quarterly payments. Plaintiffs were to make the supplemental payments in five annual installments of $125 million in the fourth quarter of every calendar year beginning in 2004. All of Plaintiffs' payments were to be made without interest and were unsecured.

In 2001, rather than accept periodic, unsecured, non-interest bearing payments, Florida Counsel sold their interest in the fee award for a lump sum at a discounted price. As part of this transaction, each Florida Counsel formed a limited liability company ("LLC") and assigned its interest in the fee award to the LLC. The LLCs then issued and sold secured notes to public investors, with the proceeds going to Florida Counsel in exchange for their interest in the attorneys' fees. Additionally, the LLCs pledged their interest in the fee payments to Deutsche Bank, the indenture trustee, as collateral to secure payment of the principal and interest on the notes. Upon forming the LLCs, each Florida Counsel sold its interest in its LLC to an outside investor.

II. The Interpleader Action

In 2004, a dispute arose concerning the supplemental payments that Plaintiffs were required to make to arbitration fee award recipients in the fourth quarters of 2004 through 2008. To resolve the dispute, Plaintiffs filed a class action suit for interpleader relief on August 5, 2004. The complaint alleged that MTF Counsel claimed a right to the supplemental payments, even though the fee payment agreements with Mississippi, Texas and Florida did not mention the supplemental payments. The complaint further alleged that the non-MTF Counsel who had entered the Model FPA and received fee awards in arbitration claimed that MTF Counsel were not entitled to the supplemental payments. The complaint named, as the two classes of defendants, MTF Counsel and the non-MTF Counsel who were entitled to arbitration fee awards. Upon filing their complaint, Plaintiffs deposited approximately $66.34 million—the amount of the 2004 supplemental payment claimed by MTF Counsel as their pro rata share—into the district court's registry.

On September 10, 2004, Florida Counsel filed an answer in which they argued that

[f]or the protection of the Plaintiffs and for the benefit of all "Private Counsel" retained by states and territories in connection with any "Tobacco Case" (defined as any tobacco and health case), the Mississippi, Texas and Florida Fee Payment Agreements set forth a national single payment schedule with quarterly aggregate national caps and the allocation of such proportionally between all Private Counsel having unpaid fees. In essence, the combination of provisions treats all Private Counsel equally and, therefore, operates as a "Most Favored Nations" clause for the benefit of all Private Counsel.

(Joint Appendix ("J.A.") at 271-72) (emphasis supplied). Citing the Model FPA, Florida Counsel noted that "any portion of the $1.25 billion that was not used to `liquidate fees' was expressly designated to be paid into the arbitrated fee fund for payment of fees of `each Private Counsel' who elected for arbitration." (J.A. at 256) Florida Counsel contended that because "Private Counsel" is defined in the Model FPA as "all private counsel for all plaintiffs in a Tobacco Case (including State outside counsel)" (J.A. at 274), Florida Counsel were entitled to a share of the supplemental payments, based on the combined structure of the Florida FPA, the MSA and the Model FPA.

In the alternative, Florida Counsel asserted a counterclaim against Plaintiffs, alleging that if the district court found that Florida Counsel were not entitled to share in the supplemental payments, "then Plaintiffs have breached their express agreement as well as their implied covenant of good faith and fair dealing with Florida Counsel" in promising that Florida Counsel would share equally in all future attorneys' fee payments. (J.A. at 257)

In December 2004, the parties reached a settlement in the interpleader action (the "Settlement"). MTF Counsel agreed to be paid half of the $66.34 million that they claimed from the 2004 supplemental payment and half of their pro rata share of the next four supplemental payments, with the remainder paid to the other states' private counsel who took arbitration awards. The district court granted Plaintiffs' motion for certification of the two classes of Defendants and Plaintiffs' motion for preliminary approval of the Settlement. On January 10, 2005, following a fairness hearing, the district court granted final approval of the Settlement. Pursuant to the Settlement, all parties claiming a share of the Settlement then filed acknowledgment forms with the district court.

Deutsche Bank and the LLCs, contending to be the assignees of the entirety of Florida Counsel's fee award, filed acknowledgment forms. Florida Counsel objected, contending that Deutsche Bank and the LLCs were...