Van Gemert v. Boeing Co.

• Decision Date: 21 December 1978
• Docket Number: D,No. 551,551
• Citation: 590 F.2d 433
• Parties: Fed. Sec. L. Rep. P 96,720 William R. VAN GEMERT, et al., Plaintiffs-Appellees, v. The BOEING COMPANY (formerly The Boeing Airplane Company), et al., Defendants-Appellants. ocket 77-7547. Second Circuit
• Court: U.S. Court of Appeals — Second Circuit

Page 433

590 F.2d 433

Fed. Sec. L. Rep. P 96,720

William R. VAN GEMERT, et al., Plaintiffs-Appellees, v. The BOEING COMPANY (formerly The Boeing Airplane Company) et al., Defendants-Appellants.

No. 551, Docket 77-7547.

United States Court of Appeals,Second Circuit.

Submitted Aug. 18, 1978.

Decided Dec. 21, 1978.

Davis, Polk & Wardwell, New York City, for defendants-appellants.

Kass, Goodkind, Wechsler & Gerstein, New York City (Stuart D. Wechsler, William A. Kass, Robert S. Churchill, Samuel K. Rosen, Joseph V. Sternberg, New York City, of counsel), Nathan, Mannheimer, Asche, Winer & Friedman, New York City (Norman Winer, New York City, of counsel), Irving Steinman, New York City, for plaintiffs-appellees.

Louis J. Lefkowitz, Atty. Gen. of State of N.Y., New York City (Samuel A. Hirshowitz, First Asst. Atty. Gen., Warren M. Goidel, Carole L. Weidman, Arthur B. Wolfish, New York City, of counsel), for New York State Dept. of Audit and Control, amicus curiae.

George J. Solleder, Jr., Sp. Master, New York City, amicus curiae.

Before KAUFMAN, Chief Judge, and FEINBERG, MANSFIELD, MULLIGAN, OAKES, TIMBERS, GURFEIN, VAN GRAAFEILAND and MESKILL, Circuit Judges.

IRVING R. KAUFMAN, Chief Judge:

Attorneys litigating class actions have been variously described as "economically rational entrepreneurs," champions of aggrieved individuals for whom a conventional lawsuit would not be feasible, and the recipients of a "golden harvest of fees." These diverse perspectives, however, are united by a common theme of which we are not unaware. The conduct of class action litigation is affected by the principles governing the compensation of the attorneys who bring them.

Today we decide, in a case of first impression, that the fees and costs of counsel may be assessed against the unclaimed portion of a class action judgment. Our conclusion is predicated on considerations of equity and sound policy and is sustained as well by longstanding precedent. To hold otherwise, we believe, would engender serious unfairness to claiming class members and their lawyers, without any corresponding benefit to absentees. Moreover, a contrary result would place enormous pressure on attorneys to settle at all costs, and would deter them from instituting meritorious suits.

I.

In February 1966, the Boeing Company decided to call for redemption its issue of 41/2% Converted Subordinated Debentures, due July 1, 1980. Pursuant to the terms of the Indenture Agreement, Boeing published notices of its intention in two national newspapers. Boeing also mailed notices to those investors who had registered their debentures. Holders of $1,544,300 of unregistered debentures, however, did not learn of the call until after the conversion deadline of midnight, March 29, 1966, set by Boeing.

At the stroke of twelve their right to convert $100 in principal of bonds into two shares of common stock expired. The two shares were worth $316.25 that day, but the unwitting bondholders were left only with the small consolation of having the right to redeem for $103.25, a figure fixed in the Indenture.

William Van Gemert and several other nonconverting bondholders brought a class action against Boeing, alleging that they had received inadequate and unreasonable notice of Boeing's decision. The plaintiffs contended that Boeing was civilly liable under the Securities Exchange Act of 1934, ¹ the Securities Act of 1933, ² the Trust Indenture Act of 1939, ³ and New York law. ⁴

After a full trial, Judge Ryan dismissed the complaint, having held that Boeing was required to do no more than fulfill notice requirements stated in the Trust Indenture Agreement. On appeal, we decided that the New York law of contracts imposed an implied duty on Boeing not satisfied by its newspaper advertisements and "eleventh hour" news release to provide reasonable notice of its intention to redeem the debentures. Accordingly, we held that Boeing was liable despite its compliance with the notice provisions of the Indenture Agreement and remanded the case to Judge Ryan for a determination of damages. Van Gemert v. Boeing Co., 520 F.2d 1373, 1383 (2d Cir. 1975) (Van Gemert I).

Judge Ryan then proceeded to calculate damages based on the difference between the redemption price of the debentures and the value, as of March 29, 1966, of the shares of common stock into which they could have been converted. We affirmed this ruling, but held, contrary to Judge Ryan, that the plaintiffs were entitled to prejudgment interest. Van Gemert v. Boeing Co., 553 F.2d 812, 813 (2d Cir. 1977) (Van Gemert II). Since $1,544,300 in principal amount of unregistered debentures had not been converted, it was a simple task to determine that the class members had suffered damages in the sum of $3,289,359. ⁵

In the Van Gemert II appeal, the law firm of Kass, Goodkind, Wechsler and Gerstein, a member of the committee of attorneys for the plaintiffs, ⁶ urged for the first time that members of the class who filed proper proofs of claim should be permitted to receive, on a pro rata basis, the unclaimed portion of the total damage award. Boeing responded in opposition that these funds should be returned to it. Without reaching a conclusion as to the ultimate disposition of unclaimed damages, we rejected the firm's proposal. Id. at 815-16. Such a plan, we held, constituted a form of fluid class recovery, involving distribution of the unclaimed portion of the judgment to a "next-best" class in contravention of Eisen v. Carlisle & Jacquelin, 479 F.2d 1005 (2d Cir. 1973), Vacated and remanded on other grounds, 417 U.S. 156, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974). We stated that the procedure suggested by the Kass firm would result in the expropriation of the claims of the silent class members and accordingly, create a windfall for those who filed claims. The panel also concluded that the proposal could not be justified on the ground that claiming class members would use a portion of the unclaimed funds to defray their legal expenses. This, it was decided, would require Boeing to pay indirectly for the legal expenses of successful litigants.

Upon a second remand to Judge Ryan for entry of judgment, he ordered that plaintiffs' attorneys be awarded their fees, expenses and disbursements from the total amount of the judgment. He concluded that it was equitable for all class members claiming and nonclaiming alike to bear a pro rata share of the costs of producing the judgment in their favor. ⁷ Boeing appealed this ruling as contrary to the mandate of Van Gemert II, contending that the attorneys should receive compensation only from the claimed portion of the judgment.

A panel of this court, in an opinion written by Judge Van Graafeiland, held that the claims of individual class members could not be treated collectively, as if they belonged to the class as a whole, and that because absent class members had not received the benefit of the attorneys' labors, no charge or assessment may be made against their undistributed shares. Van Gemert v. Boeing Co., 573 F.2d 733, 736 (2d Cir. 1978) (Van Gemert III). ⁸

Because of the significance of the issues in this case for the conduct of class action litigation, we decided to rehear the case En banc. ⁹ We now affirm the judgment of the district court.

II.

Any consideration of the propriety of awarding attorneys' fees in the federal courts must begin with Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975). In that seminal case, the Supreme Court decided that, absent statutory authorization, the federal courts may not shift the costs of litigation from the winning to the losing party. The Alyeska Court noted, however, that there are two exceptions to this rule. First, there is inherent power in the courts to assess attorneys' fees for the "willful disobedience of a court order," or when a party has acted in bad faith, Id. at 258-59, 95 S.Ct. at 1622. Second, historically, the federal courts have exercised an equitable power to allow attorneys' fees and costs to be charged against a fund created, increased, or protected by successful ¹⁰ litigation. Id. at 257-58, 95 S.Ct. 1612.

The application for the fees may be made by the plaintiffs themselves, Trustees v. Greenough, 105 U.S. 527, 26 L.Ed. 1157 (1881), on the ground that they have performed a service benefiting others similarly situated. But a plaintiff's attorney may himself present a claim to compensation and reimbursement for expenses from the fund, on the theory that he has provided or preserved a benefit the fund itself and that the reasonable value of his services should be borne proportionately by all plaintiffs. Central R.R. & Banking Co. v. Pettus, 113 U.S. 116, 5 S.Ct. 387, 28 L.Ed. 915 (1885).

The paradigmatic common fund is an express trust, as in Greenough. Litigation can also "create" a fund, as when the assets of a debtor are brought within the reach of creditors, Pettus, supra. Nevertheless, the common fund doctrine has not been restricted to equitable actions in which the court exercised control over a "res". In City of Detroit v. Grinnell Corp., 495 F.2d 448, 454, 468-69 (2d Cir. 1974), we awarded attorneys' fees out of the settlement fund in a private antitrust class action suit. Similarly, since a money judgment is itself an identifiable asset on which the trial court may impose a charge, such judgments have also been accorded common fund treatment, See, e. g., Union Cent. Life Ins. Co. v. Hamilton Steel Prods., Inc., 493 F.2d 76 (7th Cir. 1974); See generally, Dawson, Lawyers and Involuntary Clients in Public Interest Litigation, 88 Harv.L.Rev. 849, 920 (1975); Dawson, Lawyers and Involuntary Clients: Attorney Fees from Funds, 87 Harv.L.Rev. 1597, 1620-24 (1974).

In Alyeska Pipeline Service Co., supra, 421 U.S. at 265 n.39, 95 S.Ct. 1612, 1625, the Supreme Court established criteria for determining whether benefits derived from litigation could properly be...