Harris v. Chicago Great Western Ry. Co.

• Decision Date: 25 July 1952
• Docket Number: No. 10481.,10481.
• Citation: 197 F.2d 829
• Parties: HARRIS et al. v. CHICAGO GREAT WESTERN RY. CO.
• Court: U.S. Court of Appeals — Seventh Circuit

197 F.2d 829 (1952)

HARRIS et al. v. CHICAGO GREAT WESTERN RY. CO.

No. 10481.

United States Court of Appeals Seventh Circuit.

July 25, 1952.

Bryce L. Hamilton, Harold A. Smith, Keehn Landis, John C. Slade, Chicago, Ill., Winston, Strawn, Black & Towner, Chicago, Ill., of counsel, for appellant.

Max Swiren, Ben W. Heineman, William P. Rosenthal, Alex Elson, Edward R. Johnston, James A. Sprowl, Wesley G. Hall, Chicago, Ill., Johnston, Thompson, Raymond & Mayer, Chicago, Ill., Swiren & Heineman, Chicago, Ill., of counsel, for appellees.

Before MAJOR, Chief Judge, and DUFFY and LINDLEY, Circuit Judges.

LINDLEY, Circuit Judge.

After extended preparation by the respective parties, two consolidated preferred stockholder class suits against the defendant railway company and its board of directors were, on the eve of trial, settled by written contract of the parties, agreeing that all claims of plaintiffs and their class asserted in the complaints had been fully adjudicated and settled. Following the agreement, the trial court entered a consent judgment finding, among other things, that the actions were proper class suits; that plaintiffs adequately represented all members of the class; that plaintiffs had charged the company and its officers with certain improper action in deferring preferred stock dividends; that defendants had denied the charges, and that the parties had settled their differences. The court entered, as it said, "a final decree," declaring all matters at issue adjudicated, but retaining jurisdiction for enforcement of the judgment and for the purpose of determining reasonable fees and expenses of plaintiffs' attorneys which, by the contract incorporated in the decree, defendant had agreed to pay. Upon hearing of petitions for fees and expenses presented pursuant to the latter provision of the decree, the court allowed a fee of $500,000, to be divided, in specified amounts, among the two sets of attorneys representing the respective plaintiffs, and expenses in the sum of $45,907.76, including a fee of $10,500 to Thos. H. Healy, an expert witness.

Upon appeal defendants contend that, in fixing the fees, the court improperly took into consideration the merits of the litigation, and erroneously held all dividend payments provided for by the agreement to be benefits secured by plaintiffs for their class, whereas the only funds gained which it was proper to consider were the dividends in arrears and they only to the extent of the acceleration and additional assurance of payment provided by the settlement. They insist further that the court improperly gave weight to services not rendered in achieving the benefis obtained, and that the fees and expenses allowed were unjustified in certain other respects.

The two suits, before consolidation, were the Harris and the Zimmerman complaints. The first was instituted by Ray Harris on March 15, 1949 as a preferred stockholder claiming to represent adequately other preferred stockholders and suing as a representative and in behalf of the class. Zimmerman filed a similar complaint on June 8, 1949, which was amended September 25, 1950 to include eight additional preferred stockholders as plaintiffs. In each, defendant railway's directors were named as defendants and in the Zimmerman suit, one Bowles, not a director, was an additional defendant. After May 2, 1950, the two complaints continued as a consolidated cause.

In substance the charges were that certain common stockholders of the railway company, in control of the corporation, had so manipulated its affairs as to enhance the value of the common stock and depress that of the preferred stock. Important events asserted in support of this charge were the discontinuance of dividends on preferred stock after March 1, 1946, the action of the company in applying its earnings to retirement of debts and for repairs and maintenance of the railway's roadbeds, terminal facilities and other properties, and an attempt to secure from the Interstate Commerce Commission an order authorizing, and to persuade the preferred stockholders to accept, certain debentures in place of preferred stock, all being acts alleged to have been unnecessary, wasteful and wrongful. Plaintiffs insisted that at all times after the deferment of dividends the company's earnings had been sufficiently large to justify payment of accruing current dividends on preferred stock, and prayed that the court direct the company to make whole the preferred stockholders.

Defendants denied all improper actions or motives, saying that, in the judgment of the board and the management, it had been thought advisable to reduce the indebtedness, acquire Diesel locomotives and rehabilitate generally the company's run-down physical properties rather than to pay dividends to preferred stockholders, and that the earnings were not sufficient to do both. They denied that the company had wastefully expended any money for improvements, repairs and maintenance. They asserted that the attempt to secure exchange of preferred stock for debentures had been made for the benefit of preferred stockholders, some of whom were desirous of receiving income immediately, and that the program of debt reduction, dieselization and rehabilitation had improved the position of and enhanced the value of the preferred stock. They admitted that no dividends had been paid on the preferred stock between March 31, 1946 and December, 1949, and that, as of March 31, 1948, unpaid dividends in the amount of $7.50 had accumulated on each share.

In 1950 another committee for preferred stockholders, known as the Campbell Committee, intervened, opposing the relief sought by plainiffs.

The case having come to issue, extended preparation for trial followed. The cause was eventually set for trial in May, 1951. On May 4, the parties entered into the settlement agreement whereby each released and discharged the other forever from any and all claims and liabilities of any nature arising from or by virtue of any charges in the complaints or in the answers. The settlement further provided that the company would pay, at all events, its regular annual preferred dividend of $2.50 per share for the calendar year 1951, and, on or before July 16, 1951, $3 per share on account of the accumulated arrearages; that, during the year 1952 and thereafter, until all remaining dividend arrearages amounting to $3.37½ per share should be fully paid, it would devote at least 60% of its net earnings to the payment, first, of the regular annual preferred dividends, and second, of the balance of the accumulated arrearages. In addition, the company agreed to pay the reasonable expenses incurred by plaintiffs in prosecuting the litigation and the reasonable fees of their attorneys, in such amounts as the District Court should allow, subject, however, to the right to appeal. On June 7, 1951, the court entered the consent judgment heretofore mentioned, whereby it found that the agreement was fair and for the best interests of the preferred stockholders and that by the "final decree" all matters were finally disposed of, except for the reserved jurisdiction mentioned.

Upon the hearing upon application for fees, voluminous evidence was submitted by the respective parties. The court, on June 28, 1951, entered findings of fact, conclusions of law and an order allowing to the attorneys for Zimmerman, fees in the sum of $305,555 and plaintiffs' reasonable expenses of $23,045.09, and, to the attorneys for Harris, $194,445 and reasonable expenses of $12,362.67. In addition the court directed the company to pay Healy, an expert witness, for services, $10,500.

The court found that, despite some differences in the original complaints, the objectives of the consolidated proceedings had been in substance, (a), to compel the resumption of regular annual dividends of $2.50 per share upon the preferred stock, amounting to $915,260 per year; (b), to liquidate accumulated arrearages upon the preferred stock amounting to $2,745,780, or $7.50 per share; (c), to obtain a declaration that dividends unpaid which had not been accumulated upon the books of the company had in fact continued and still would continue to accumulate upon the preferred stock, which unpaid and unaccumulated dividends, at the time of the filing of the suit, amounted to $915,260, or $2.50 per share, and eventually grew to $1,487,297, or $4.06¼ per share, and, (d), to compel the discontinuance of an application of the railway then pending before the Interstate Commerce Commission for approval of the plan to exchange certain new securities for the preferred stock.

It found that each of plaintiffs had employed New York and Chicago lawyers, members of three different firms in each instance, who had represented them; that preferred dividends were cumulative for three years but not thereafter; that no dividends had been declared between March 31, 1946 and December, 1949, and that the accumulated arrearage was then $7.50 per share; that the company resumed payment of dividends upon preferred stock in December, 1949; that the regular annual dividends declared and paid subsequent to the filing of proceedings amounted to $3.43¾ per share, and that, in addition, during 1950 and 1951 the railway company had paid $1.12½ per share upon the accumulated arrearage and thereby reduced it to $6.35½ per share.

The court found that plaintiffs' attorneys had examined voluminous documentary evidence, made exhaustive pre-trial oral examination of numerous witnesses, and taken numerous depositions, containing in all some 3,452 pages; that this preparation was "equivalent to a complete trial of a major piece of litigation covering some six trial weeks"; that, after preparation for trial, on May 4, the parties had settled their controversies in an agreement approved by the court as fair and reasonable; that plaintiffs' attorneys had expended 7,818¾ hours and in addition 21½ days in attending to the...