Goodrich v. E.F. Hutton Group, Inc.

• Decision Date: 16 June 1996
• Docket Number: 1995,No. 360,360
• Citation: 681 A.2d 1039
• Parties: Edward O. GOODRICH, on behalf of himself and all others similarly situated, Plaintiff Below, Appellant, v. E.F. HUTTON GROUP, INC., and E.F. Hutton Group & Company, Inc., Defendants Below, Appellees. . Submitted:
• Court: United States State Supreme Court of Delaware

Page 1039

681 A.2d 1039

Edward O. GOODRICH, on behalf of himself and all others similarly situated, Plaintiff Below, Appellant, v. E.F. HUTTON GROUP, INC., and E.F. Hutton Group & Company Inc., Defendants Below, Appellees.

No. 360, 1995.

Supreme Court of Delaware.

Submitted: June 16, 1996.

Decided: Aug. 26, 1996.

Upon appeal from the Court of Chancery. AFFIRMED.

Pamela S. Tikellis of Chimicles, Jacobsen & Tikellis, Wilmington, and C. Oliver Burt, III (argued), of Burt & Pucillo, West Palm Beach, FL, for appellant.

Allen M. Terrell of Richards, Layton & Finger, Wilmington, for appellees.

Lawrence A. Hamermesh (argued), of Widener University School of Law, Wilmington, as amicus curiae.

Before WALSH, HOLLAND, BERGER, JJ., DUFFY and HORSEY, retired Justices ¹ (constituting the Court en Banc).

HOLLAND, Justice:

The plaintiff-appellant, Edward O. Goodrich ("Goodrich"), was certified as the class representative in an action against the defendants-appellees, E.F. Hutton Group, Inc. and E.F. Hutton Group & Company, Inc. (collectively "E.F. Hutton"). The Court of Chancery approved a proposed settlement of this class action as "fair, reasonable, and adequate for the settlement of all claims asserted herein." It also awarded attorney's fees in an amount "equal to one-third of the gross amount paid out to claimants not to exceed $515,000, plus interest on the amount paid as a fee...." Goodrich appeals from the Court of Chancery's attorney's fee award.

In this appeal, Goodrich's sole contention is that $515,000 in attorney's fees should have been awarded unconditionally and paid immediately. Goodrich argues that the Court of Chancery either committed legal error, or abused its discretion, in awarding and disbursing attorney's fees as a percentage of the gross amount paid out to class members. Hutton advised this Court that it would take no position in this appeal with regard to Goodrich's request for an award of attorney's fees, having agreed not to take a position on that issue in the Court of Chancery.

Thus, this is one of those relatively rare cases, in which it was necessary to appoint an attorney "to uphold the side of a question that no party before the Court is willing to advocate." Maurer v. International Re-Insurance Corp., Del.Supr., 95 A.2d 827, 831 (1953). Such an advocate is properly paid from the fund at issue. Id. This Court appointed Lawrence A. Hamermesh, Esquire, as an "amicus curiae for the purpose of briefing and presenting argument in support of the decision of the Court of Chancery." The Court is grateful for the valuable service he rendered in this appeal.

This Court has concluded that the Court of Chancery properly applied established equitable precepts. The attorney's fee awarded to Goodrich's attorneys is supported by the record and the product of a logical deductive process. The judgment of the Court of Chancery is affirmed.

History of Litigation

Goodrich commenced this action on November 27, 1985 on behalf of a class of customers of E.F. Hutton who had received funds from E.F. Hutton. The funds were received during the period since July 1, 1980. The funds were paid by means of checks drawn on accounts maintained in banks located more than 500 miles from the E.F. Hutton office in which the customer transacted business. The complaint charged E.F. Hutton with a wrongful scheme to delay or withhold funds from its customers in order to gain the interest-free use of the money during the period of delayed payment. This conduct was alleged to have violated common law doctrines of fraud and agency; the Delaware Consumer Fraud Act; and to have constituted conversion, breach of contract, and a breach of fiduciary duty to the customers.

The Court of Chancery granted E.F. Hutton's motion to dismiss the complaint as to all claims except the alleged breach of fiduciary duty. Goodrich v. E.F. Hutton Group, Inc., Del.Ch., 542 A.2d 1200 (1988). By order dated April 16, 1993, the Court of Chancery certified the following two subclasses:

All E.F. Hutton & Company, Inc. ("Hutton") customers, both persons and institutions, who received funds from Hutton during the period from July 1, 1980 through November 26, 1982, by means of checks drawn on a Hutton account maintained at the Bank of America, who lived outside of California and dealt with a Hutton office outside of California at the time they received such checks.

All E.F. Hutton & Company, Inc. ("Hutton") customers, both persons and institutions, who received funds from Hutton during the period from November 27, 1982, through July 19, 1987, by means of checks drawn on a Hutton account maintained at the Bank of America, who lived outside of California and dealt with a Hutton office outside of California at the time they received such checks.

Settlement Agreement

On May 11, 1995, the parties submitted a Stipulation of Settlement (the "Settlement") to the Court of Chancery. Under the terms of the Settlement, E.F. Hutton agreed to pay $3.3 million into an interest-bearing escrow account. It was agreed that the escrow account would be "maintained jointly" by counsel for both the class and the defendants as "Escrow Agents."

According to the Settlement, the escrow account would be drawn upon to pay attorney's fees for the class, the costs of notice to the class, and the costs of settlement administration not to exceed $600,000, up to a combined limit of $1.1 million. With respect to the balance of the funds in the escrow account (at least $2.2 million), the Settlement provided for payment to class members, in amounts dependent upon (i) the face value of checks received from E.F. Hutton, (ii) the subclass of which the claimant was a member, and (iii) the prevailing interest rate during the year in which the check(s) were drawn. If claims by class members exceeded the funds available in the escrow account, each claimant would receive payment of a fraction of those funds equal to the ratio of the value of his claim to the total value of the claims submitted.

Pursuant to the Settlement, "No Class Member shall be entitled to participate in the distribution of the proceeds of the Settlement unless such person files an executed Proof of Claim." The Settlement adopted proof of claim requirements. In order to receive funds under the Settlement, class members were required to:

(1) Disclose their residence(s) from July 1, 1980 through July 19, 1987 (the "class period");

(2) List the checks they received from E.F. Hutton during the class period, by year, excluding checks received while a California resident and checks received, other than those drawn on the Bank of America, as a New York resident;

(3) Attach to the Proof of Claim form "documentary evidence such as confirmations, statements or any other documents showing that E.F. Hutton issued checks to the Claimant and that such checks were drawn on the Bank of America."

To the extent class members did not claim funds available in the escrow account, the Settlement established that such remaining funds were to be "returned to Defendant Hutton or its designee."

Notice to Class

The class to which notice of the proposed Settlement was mailed consisted of approximately 581,000 persons. The notice generated many written responses. Those responses were submitted to the Court of Chancery by counsel for the class in a document entitled "E.F. Hutton Customer Compendium."

In describing these responses to the Court of Chancery, Goodrich's attorney noted many class members "complained that they lacked documentation, such as copies of their Hutton account records, necessary to submit properly documented claims forms." For example, one respondent wrote: "Because verification of receipt of E.F. Hutton checks drawn on Bank of America accounts is required for payment, smaller customers of E.F. Hutton are almost automatically excluded. Few individual investors would keep such records going back to 1982."

Attorney Fee Award

The Court of Chancery approved the proposed settlement of this class action as "fair, reasonable, and adequate for the settlement of all claims asserted herein." See Ch.Ct.R. 23(e). Thereafter, the ratio decidendi for the Court of Chancery's award of attorney's fees to Goodrich's counsel was as follows:

[W]here because of the nature of the claim and the settlement there is good ground to suppose that there may well be a substantial non-claim problem, the most sensible way to compensate class lawyers, consistent with the underlying rationale for such awards, is on a contingency basis: that is to do as I did in this instance, to award a fair fee and make its payment coincide with distributions to class members.

The Court of Chancery concluded that a fee of $515,000, or about 16% of the $3.3 million paid into escrow, would be fair and reasonable if the entire $3.3 million settlement fund were distributed to class members (net of fees and expenses). Id.; Ch.Ct.R. 88. Conversely, the Court of Chancery determined that $515,000 would not be a fair and reasonable counsel fee award irrespective of the extent to which class members obtained cash payments pursuant to the Settlement.

The Court of Chancery decided to award to Goodrich's attorneys a fee of 33 1/3% of the total amount actually paid out to class members, up to a limit of $515,000. It noted at the settlement hearing, "if anything like the entire amount gets disbursed, long before that happens, the attorneys will get the $515,000 that they seek." Specifically, if class members submitted claims amounting to only $1,545,000 of the $2.2 million potentially distributable, counsel for the class would receive $515,000 in fees.

American Rule

Attorney Fee Awards

The standards for awarding attorney's fees in litigation by the Court of Chancery are well established. Tandycrafts, Inc. v. Initio Partners, Del.Supr., 562 A.2d 1162, 1164 (1989). The starting principle is a recognition of the so-called "American Rule." Walsh v. Hotel Corp. of America, Del.Supr., 231...