Paul, Johnson, Alston & Hunt v. Graulty

• Decision Date: 14 December 1989
• Docket Number: No. 88-15364,88-15364
• Parties: PAUL, JOHNSON, ALSTON & HUNT, Special Counsel to Plaintiff Reynaldo Graulty, Appellant, v. Reynaldo D. GRAULTY, Trustee, Trustee in Reorganization for WPMK Corporation, and Paradise Palms Vacation Club; James Lombardi, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 268

886 F.2d 268

PAUL, JOHNSON, ALSTON & HUNT, Special Counsel to Plaintiff Reynaldo Graulty, Appellant, v. Reynaldo D. GRAULTY, Trustee, Trustee in Reorganization for

WPMK Corporation, and Paradise Palms Vacation

Club; James Lombardi, Appellees.

No. 88-15364.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 27, 1989.

Decided Sept. 27, 1989.

As Amended Dec. 14, 1989.

Paul Alston, Paul, Johnson, Alston & Hunt, Honolulu, Hawaii, for appellant.

Robert J. Faris, Gelber & Gelber, Honolulu, Hawaii, for appellees.

Appeal from the United States District Court for the District of Hawaii.

Before TANG, REINHARDT and WIGGINS, Circuit Judges.

WIGGINS, Circuit Judge:

The law firm of Paul, Johnson, Alston & Hunt ("PJAH") timely appeals an order of the district court awarding it roughly $855,000 less than the amount of fees it had requested as compensation for creating a "common fund." PJAH contends that the district court misconstrued the common fund doctrine so that the fee awarded is unreasonable. We agree, and therefore we vacate the district court's order and remand for another fee determination.

I

This case evolves from the separate, yet related filings for bankruptcy by Paradise Palms Vacation Club, a non-profit association of purchasers of time-share condominium apartments, and the WPMK Corporation, a time-share development company. The bankruptcy court appointed separate trustees to oversee the affairs of each of these insolvent entities. Thereafter the bankruptcy court approved a settlement agreement that resolved any conflicts between the two bankrupt estates and that authorized a single trustee, Reynaldo Graulty (the "Trustee"), to administer any claims common to both. The Trustee then entered into a contingency fee agreement with PJAH for its representation of the two estates in an adversary proceeding against those allegedly responsible for their financial ruin. The bankruptcy court approved that agreement, which, depending on the stage of the proceedings, compensated PJAH as much as one-third of all the funds recovered on behalf of the estates, plus PJAH's reasonable expenses.

PJAH expended considerable time and effort in pursuing the estates' claims. At one point, however, Judge King, who presided over the adversary proceedings, ruled that many of the estates' claims for damages were personal rights belonging to those who had purchased time-share memberships. PJAH pressed the defendants for a settlement of the estates' valid claims, but the defendants refused to agree to a settlement without a simultaneous release from the purchasers of time-share memberships. A class action was then commenced to represent the interests of these parties. Almost immediately thereafter some of the major defendants, the Trustee, and the proposed class representatives agreed to a settlement releasing the defendants from all claims for roughly $4,736,000. The Trustee and the proposed class representative separately agreed to deduct from this settlement amount all fees and expenses, including those of PJAH, and then to divide the net proceeds of the settlement so that the class received 70 percent and the estates 30 percent. The division of the settlement amount was specifically tailored so that the class would bear a proportionate share of the estates' costs of litigation.

The district court, Judge Pence presiding, subsequently approved the certification of the class and the separate settlement agreements. At the same time, Judge Pence considered applications for compensation submitted by PJAH and the other parties' representatives. PJAH requested fees of roughly $1,600,000, an amount equal to one-third of the gross settlement, plus its expenses of approximately $200,000. At first the district court was inclined to abide strictly by PJAH's contingency fee agreement with the Trustee by awarding it $475,000--an amount roughly equivalent to one-third of the estates' recovery--plus expenses of around $200,000. PJAH argued, however, that because it had conferred a substantial benefit on the class, it had satisfied the "common fund" doctrine and was therefore entitled to an award measured by the total settlement amount.

Judge Pence was reluctant to characterize the case as falling within the common fund doctrine. Still, after reconsideration, he opted in favor of awarding PJAH 19.5 percent of the gross settlement amount, a figure which was to include PJAH's costs. Judge Pence found this compensation, amounting to about $923,000, to be fair because PJAH's "outstanding" work "materially benefited" the class by permitting its representative to do substantially less work in securing a settlement for the class. At the same time, however, Judge Pence felt constrained by Judge King's earlier ruling that many of the estates' claims were personal rights belonging to members of the class. He therefore adamantly opposed PJAH's invitation to base the percentage of the award on one-third of the full settlement amount rather than the court's figure of 19.5 percent. Still dissatisfied, PJAH appeals the district court's order, which was certified as final pursuant to Fed.R.Civ.P. 54(b). We have jurisdiction under 28 U.S.C. Sec. 1291 (1982).

II

The amount of attorney fees awarded by a district court is reviewed for an abuse of discretion. Quesada v. Thomason, 850 F.2d 537, 538 (9th Cir.1988). A district court abuses its discretion if its decision is based on an erroneous conclusion of law or if the record contains no evidence on which it rationally could have based its decision. In re Hill, 775 F.2d 1037, 1040 (9th Cir.1985).

III

According to the terms of the contingency fee agreement between PJAH and the Trustee, PJAH is entitled to one-third of any recovery made on behalf of the two estates plus PJAH's reasonable expenses. The parties more or less agree that PJAH's one-third share of the estates' recovery of thirty percent of the settlement amount is fairly calculated to be $475,000. The parties also agree that PJAH's reasonable expenses amounted to roughly $200,000. According to the specific terms of the contingency fee agreement, then, PJAH would be entitled to compensation in the amount of $675,000. But the district court actually awarded PJAH almost $250,000 more than this amount. Since ordinarily every litigant is supposed to bear the burden of his own litigation expenses, see Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 257-58, 95 S.Ct. 1612, 1621-22, 44 L.Ed.2d 141 (1975), the district court's additional award is warranted only if PJAH "recover[ed] a common fund for the benefit of persons other than himself or his client...." Boeing Co. v. Van Gemert, 444 U.S. 472, 478, 100 S.Ct. 745, 749, 62 L.Ed.2d 676 (1980).

Although the common fund doctrine does not permit the shifting of the burden of the litigation expenses to the losing party, it does permit the burden to be shared among those who are benefited by the litigant's efforts. See Brown v. Phillips Petroleum Co., 838 F.2d 451, 454 (10th Cir.), cert. denied, --- U.S. ----, 109 S.Ct. 66, 102 L.Ed.2d 43 (1988); Vincent v. Hughes Air West, Inc., 557 F.2d 759, 770 (9th Cir.1977). "The doctrine rests on the perception that persons who obtain the benefit of a lawsuit without contributing to its costs are unjustly enriched at the successful litigant's expense." Van Gemert, 444 U.S. at 478, 100 S.Ct. at 749. Such an inequitable result is easily avoided if a court has control over the fund--even one created pursuant to a settlement, as here, see City of Klawock v. Gustafson, 585 F.2d 428, 431 (9th Cir.1978)--and assesses the litigation expenses against the entire fund so that the burden is spread proportionally among those who have benefited. See Van Gemert, 444 U.S. at 478, 100 S.Ct. at 749. The common fund doctrine is properly applied, however, only if "(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 benefiting." Hill, 775 F.2d at 1041 (9th Cir.1985).

These criteria are easily met where, as here, "each member of a certified class has an undisputed and mathematically ascertainable claim to part of a lump-sum [settlement] recovered on his behalf." Van Gemert, 444 U.S. at 479, 100 S.Ct. at 749. Judge King's earlier ruling in the adversarial proceedings made clear that a large portion of the estates' claims belonged to a class later composed of those who had purchased time-share memberships. While thirty percent of the settlement amount is strictly attributed to the claims of the two estates, seventy percent of the settlement amount can be traced to the claims of members of this class. Furthermore, according to Judge Pence, the net settlement amount is attributed...