In re Second Pennsylvania Real Estate Corp.
| Decision Date | 02 November 1995 |
| Docket Number | Bankruptcy No. 92-25302 JLC. Adversary No. 92-2299. |
| Citation | 192 BR 663 |
| Parties | In re SECOND PENNSYLVANIA REAL ESTATE CORPORATION, Debtor. The COMMITTEE OF CREDITORS HOLDING UNSECURED CLAIMS, The Estate Representatives of Papercraft Corporation, Plaintiffs, v. SABLE, MAKOROFF & GUSKY, P.C., First Pennsylvania Funding Company, Inc. and Second Pennsylvania Real Estate Corporation, Defendants. |
| Court | U.S. Bankruptcy Court — Western District of Pennsylvania |
Stephen J. Laidhold, Robert G. Sable, Sable, Makoroff & Gusky, P.C., Pittsburgh, PA, for Sable, Makoroff & Gusky, P.C./Second Pennsylvania Real Estate Corp.
David A. Murdoch, Kirkpartick & Lockhart, Pittsburgh, PA, for First Pennsylvania Funding Co., Inc.
Philip E. Beard, II, Stonecipher, Cunningham, Beard & Schmitt, Pittsburgh, PA, for Committee of Creditors Holding Unsecured Claims, the Estate Representatives of Papercraft Corp.
The matter before the court is a complaint to interplead funds which are subject to competing claims of entitlement between Sable, Makoroff & Gusky, P.C., as counsel for Second Pennsylvania Real Estate Corporation, and First Pennsylvania Funding Company, Inc. The funds in the amount of $400,000 have been paid into the court registry by Papercraft Corporation pursuant to a Settlement Agreement in its bankruptcy at Case No. 91-903. For the reasons expressed below, this court holds that Sable, Makoroff & Gusky, P.C. is entitled to payment of its fees in the amount requested at trial from the funds presently held in the court registry.
In May of 1988, Papercraft Corporation ("Papercraft") sold a warehouse facility and office complex located in O'Hara Township known as Papercraft Park to Second Pennsylvania Real Estate Corporation ("Second PA"). The transaction was a lease/purchase arrangement in which Papercraft leased back a portion of the building from Second PA for a fifteen year term. The funding for the acquisition was accomplished through the establishment of a corporate entity known as First Pennsylvania Funding Company, Inc. ("First Funding"). First Funding loaned Second PA approximately $15.3 million dollars. As security for repayment of the debt, Second PA executed a Purchase Money Mortgage, Mortgage Note, Security Agreement, Assignment of Leases, UCC-1 financing statements and other documents in favor of First Funding.
On March 22, 1991, Papercraft filed a voluntary Chapter 11 bankruptcy petition. Papercraft was represented in the bankruptcy proceeding by Kirkpatrick & Lockhart. As landlord of Papercraft, Second PA was an interested party in the Papercraft bankruptcy. At the inception of the case, settlement discussions took place between Papercraft, Second PA and the Creditors' Committee of Papercraft. The initial offer of settlement at that time was $432,000. The offer was unacceptable to Second PA and thereafter litigation regarding all aspects of the case ensued. During the administration of the case, a motion to reject the lease and numerous other matters were zealously litigated by the parties. During the period of protracted litigation, Sable Makoroff & Gusky, P.C. ("SM & G") incurred fees of which approximately $117,000 remain unpaid. A settlement was ultimately reached pursuant to which Papercraft would pay to Second PA the sum of $825,000 in two installments. The first installment of $425,000 was paid as provided in the settlement. The second installment of $400,000 that is the subject of this interpleader action has been paid to the bankruptcy court's registry pending the resolution of this case. In addition to the $825,000, Papercraft agreed to provide up to $300,000 in remediation costs for environmental cleanup at Papercraft Park and to relinquish a claim it had previously made to monies being held in escrow in the amount of $50,000. Further, Second PA was to be released from obligations pertaining to a note in the amount of $1,150,000.
As a result of Papercraft's bankruptcy and rejection of the Second PA lease, Second PA was unable to meet its financial obligations to First Funding. After confirmation of the Papercraft plan, First Funding commenced foreclosure proceedings against Second PA seeking payment of the rents and monies due pursuant to the Mortgage and Assignment regarding Papercraft Park. The Court of Common Pleas of Allegheny County, PA ordered that all rents and other payments regarding Papercraft Park were to be paid to First Funding. Subsequently, Second PA filed its own Chapter 11 bankruptcy.
In May of 1993, First Funding was granted relief from stay to foreclose on its interest in Papercraft Park. First Funding purchased Papercraft Park at a sheriff's sale conducted in September of 1993 by bidding in its claim.
SM & G asserts that it is entitled to a portion of the funds for its remaining unpaid fees on the theory that its efforts created the settlement fund, that the fund directly benefitted First Funding and therefore it is entitled to receive payment from this "common fund".
First Funding filed a motion for summary judgment on the issue of entitlement to the fund. That motion was denied and an evidentiary hearing was held.
In its dispute with Second PA, First Funding has been represented by Kirkpatrick & Lockhart. Kirkpatrick & Lockhart also represented Papercraft in its bankruptcy.
SM & G asserts initially that it is entitled to receive payment from the settlement proceeds for its legal fees related to the creation of the settlement fund on the basis of a common fund theory. It contends that its efforts created the fund and that the fund benefitted others aside from its client and, in particular, directly benefitted First Funding. A common fund was, therefore, created from which SM & G argues it is entitled to payment. Alternatively, it argues that it has an equitable charging lien on the monies.
SM & G contends that the creation of the fund was a result of its efforts evidenced by the fact that the settlement offer grew from $432,000 at the beginning of the case to the substantially higher amount. These efforts included the filing of motions seeking payment of administrative rent, objecting to the rejection of the lease, engaging in discovery, appeals, filing a motion to reconstitute the Creditors' Committee, a motion to appoint an examiner based on alleged improper claims trafficking, a complaint to compel resumption of environmental remediation, a complaint seeking an injunction against Papercraft, and objections to various fee petitions.
Because First Funding had a secured interest in the assets of Second PA, SM & G contends that First Funding had a strong economic interest in the outcome of the dispute between Second PA and Papercraft. Further, SM & G asserts that First Funding was aware of and approved the litigation efforts of SM & G.
First Funding disputes SM & G's entitlement to payment from the fund and contends that SM & G's legal fees cannot take precedence over their prior perfected security interest. It argues that SM & G knew of the security interest and did not seek a carve out. Therefore, to allow their payment would be inequitable. First Funding also argues that SM & G did not meet the requirements for an equitable charging lien and that its "common fund" theory is inapplicable.
The common fund doctrine was recognized by the Supreme Court in Boeing Co. v. Van Gemert, 444 U.S. 472, 100 S.Ct. 745, 62 L.Ed.2d 676 (1980) (citations omitted) as providing that a litigant or a lawyer who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorney's fee from the fund as a whole. The common fund doctrine is an exception to the general principle of the American Rule which requires litigants to bear their own attorney's fees.
The common fund doctrine is rooted in the principle that those who would obtain a benefit from litigation without contributing to the cost would be unjustly enriched. Courts that have jurisdiction over the fund created by the litigation can prevent unjust enrichment by allocating fees from the fund. It is designed to spread the costs proportionately so that the active beneficiary does not bear the whole burden while the "stranger" beneficiaries receive benefits without bearing any of the costs. Vincent v. Hughes Air West, Inc., 557 F.2d 759, 769 (9th Cir.1977).
Generally, the common fund doctrine is considered applicable when: "(1) the class of beneficiaries is sufficiently identifiable, (2) the benefits can be accurately traced, and (3) the fee can be shifted with some exactitude to those benefitting." Paul, Johnson, Alston & Hunt v. Graulty, 886 F.2d 268, 271 (9th Cir.1989) citing Petition of Hill, 775 F.2d 1037 (9th Cir.1985).
In Pennsylvania, the common fund concept is incorporated into the state statute at 42 Pa.C.S.A. § 2503(8) which provides that:
Participants are defined in 42 Pa.C.S.A. § 102 as litigants, witnesses and their counsel. In addition to the codification of the common fund doctrine, Pennsylvania case law also supports the "common fund" concept. In Couy v. Nardei Enterprises, 402 Pa.Super. 468, 587 A.2d 345 (1991), the Superior Court of Pennsylvania applied the common fund doctrine in a case involving a partnership where limited partners and the general partner benefitted from litigation which resulted in the creation of a fund. In Couy, the limited partners were awarded a $106,000 judgment against the managing partner for improperly using partnership funds. The funds were paid to the partnership. The partners paid their respective counsel...
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