Hughes v. DeRoy

Filed 9/26/07 Hughes v. DeRoy CA2/7

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION SEVEN

APPEAL from an order of the Superior Court of Los Angeles County. Ralph W. Dau, Judge. Order vacated; remanded with directions.

Law Offices of Thomas J. Weiss, Thomas J. Weiss and Hyrum K. Hunt for Cross-Petitioners and Appellants.

Sheppard, Mullin, Richter & Hampton, Randolph B. Godshall, Brian Daucher, Karin Dougan Vogel; Greenberg Traurig and Vincent H. Chieffo for Cross-Petitioners and Respondents.

No appearance for Defendant and Respondent

_______________________

When multiple parties are represented by counsel and successfully oppose a petition by a trustee of a claims trust for compensation, may the trial court apply the common fund doctrine to reallocate some counsels fees and costs across all non-settling beneficiaries, including the litigants who were separately represented by other counsel? We conclude that this is prohibited by California law, and therefore vacate the trial courts order.

FACTUAL AND PROCEDURAL BACKGROUND

The Six Flags Claim Trust was formed in 1997 for the purpose of conducting litigation that resulted in an award of more than $640 million to the trust. In 2003, the trustee of the trust, George DeRoy, filed a petition seeking instructions to disburse nearly $45 million in compensation to himself and others involved with the trust.

A number of beneficiaries objected to the petition, and litigation on the petition ensued. Ultimately, the trial court ruled that the trustee was not entitled to the requested instructions to pay himself and others, or to an instruction to pay reasonable compensation to himself and to others.

Appellants and respondents[1]are all beneficiaries of the claims trust. Disagreements between the beneficiaries began after the trustees petition was defeated. Respondents, represented primarily by Sheppard, Mullin, Richter and Hampton and Greenberg Traurig, sought a court order apportioning their attorney fees and costs across all the beneficiaries who benefited from their opposition to the trustees petition. Specifically, they requested that the court order the trustee to reimburse the Objecting Beneficiaries[2]from the common fund that they preserved for the benefit of all non-settling and certain settling beneficiaries . . . the attorneys fees and costs incurred by the Objecting Beneficiaries in successfully opposing the Trustees Compensation Petition, with each such beneficiary being charged its proportionate share of such fees and costs based on its proportionate share of the common fund that was preserved. They also filed a motion for reallocation of attorney fees and costs under the common fund doctrine in which they requested that the trial court find that Objecting Beneficiaries have preserved for the benefit of Non-Settling Beneficiaries a common fund comprised of those dollars withheld by the Trustee from Non-Settling Beneficiaries . . . in respect of compensation claims;  . . . [and] that Objecting Beneficiaries have incurred reasonable attorneys fees and costs in such effort of approximately $3.55 million or in such other amount as the Court determines to be appropriate. They further asked that the court order that the trustee assess each Claims Trust interest of the Non-Settling Beneficiaries, or any subgroup thereof that the Court deems proper, a pro rata share of the approved fees and costs and pay out such assessment to Objecting Beneficiaries according to their respective approved fees and costs.

Appellants opposed the reallocation request on the ground that they had hired their own counsel to oppose the trustees petition, and therefore should not be required to bear their own counsels fees plus a portion of respondents attorneys fees and costs. To the extent that the request was granted, they asked that their own counsels fees be similarly allocated across beneficiaries.

The court addressed the allocation issue in several orders. First, in a February 27, 2006 order, the court concluded that the common fund doctrine should apply, but stated that further proceedings would be necessary to determine the amount of fees and costs as well as the recipients. An evidentiary hearing was later held, and in an order dated July 10, 2006, the court incorporated its earlier order and further ruled that the fees and costs incurred by Greenberg Traurig, Sheppard Mullin, and the costs incurred by one additional attorney, Charles Baumeran amount of $2.6 millionwould be allocated on a common fund basis to non-settling beneficiaries. The court also held that [t]he beneficiaries who engaged and paid counsel (i.e., those filing the Common Fund Petition and the Semel Group) are entitled to have their actual litigation expenses (i.e., attorneys fees and costs) credited against the resulting share [ultimately] allocated to each beneficial unit. The court set another hearing for the determination of how the order would be implemented.

Ultimately the court ordered that the trustee of the claims trust disburse $1,100,108 to Greenberg Traurig, $1,235,322 to Sheppard Mullin, and $165,515 for joint defense costs to the Law Offices of Charles Baumer. The court gave non-settling beneficiaries who had retained their own separate counsel a credit against their allocable share of the common fund for the fees they had individually incurred, up to the amount of their allocable share. Appellants appealed.

DISCUSSION

The common fund principle is a well-established common law equitable doctrine providing that when a number of persons are entitled in common to a specific fund, and an action brought by a plaintiff or plaintiffs for the benefit of all results in the creation or preservation of that fund, such plaintiff or plaintiffs may be awarded attorneys fees out of the fund. (Serrano v. Priest (1977) 20 Cal.3d 25, 34.) The California Supreme Court has explained that the principle is grounded in the historic power of equity to permit the trustee of a fund or property, or a party preserving or recovering a fund for the benefit of others in addition to himself, to recover his costs, including his attorneys fees, from the fund of property itself or directly from the other parties enjoying the benefit. [Citation.] (Id. at p. 35.) The doctrine is applied when it will promote fairness to the successful litigant, who might otherwise receive no benefit because his recovery might be consumed by the expenses; correlative prevention of an unfair advantage to the others who are entitled to share in the fund and who should bear their share of the burden of its recovery; encouragement of the attorney for the successful litigant, who will be more willing to undertake and diligently prosecute proper litigation for the protection or recovery of the fund if he is assured that he will be promptly and directly compensated should his efforts be successful. (Estate of Stauffer (1959) 53 Cal.2d 124, 132 [discussing, though ultimately not applying, common fund principle in probate context], quoted in Estate of Korthe (1970) 9 Cal.App.3d 572, 575 (Korthe).)

In applying this doctrine, the court has made a distinction between the active litigant and the passive beneficiary: one who expends attorneys fees in winning a suit which creates a fund from which others derive benefits, may require those passive beneficiaries to bear a fair share of the litigation costs. (Quinn v. State of California (1975) 15 Cal.3d 162, 167, footnote omitted (Quinn).) Accordingly, the threshold question is whether a party who may be subject to reallocation of fees under the common fund principle was an active litigant or a passive beneficiary. (Ibid.) To determine whether a party has been active or passive, the key inquiry for the trial court is not whether that party has made an appearance in the case through counsel, but whether counsels activities contributed to securing or preserving the fund. (See Draper v. Aceto (2007) 26 Cal.4th 1086, 1095; Walsh v. Woods (1986) 187 Cal.App.3d 1273, 1278-1279 (Walsh) [the pivotal issue of active participation by separate counsel is a question of fact for the trial court alone].) The mere retention of separate counsel is not enough to defeat the common fund doctrine. (Id. at p. 1278.)

As the court said in Walsh, supra, 187 Cal.App.3d at page 1279, The common fund doctrine rewards only a litigant whose efforts benefit a passive beneficiary. Where there is no passive beneficiary . . . the general rulethat the major party litigant is not entitled to recover attorney feesprevails. If there has been active participation by other counsel, then the trial court is not to weigh the comparative degree of activity among counsel and may not apportion attorney fees among those counsel. (Id. at pp. 1278-1279 [rejecting argument that the trial court should be permitted to weigh the relative contribution of each counsels participation so that the one who did the most work would be compensated accordingly, and holding that in light of interveners counsels active participation in the litigation, plaintiff was not entitled to an apportionment of attorney fees notwithstanding his counsels comparatively greater degree of active participation].)

We recognize that the courts in Vincent v. Hughes Air West, Inc. (9th Cir. 1977) 557 F.2d 759 and Hobson v. First State Bank (Tenn. App. 1990) 801 S.W.2d 807 each endorsed the application of the common fund doctrine where the parties counsel made unequal contributions to the preservation of a common fund, but this variation on the common fund doctrine has not been recognized in California law.[3] (See, e.g., Korthe, supra, 9 Cal.App.3d at pp. 576-577 [refusing to apply common fund doctrine where there were multiple represented parties even though the court appreciate[s] that the record here indicatesand it is not really disputedthat [one attorney] did the lions share of the work which led to the highly favorable settlement]; Walsh, supra, 187 Cal.App.3d at pp. 1278-1279.)

Here, the trial court concluded that appellants counsel had actively participated in the underlying litigation but nonetheless subjected them to allocation of other counsels fees under the common fund principle. The court stated that appellants here had been represented by counsel, who was also actively involved in opposing the Trustees Petition. Despite this acknowledgment of active participation, the court rejected appellants contention that because they participated in the trial through counsel chosen by them, they are immune as a matter of law from further contribution under the common fund doctrine. The court wrote, The court concludes that the rule applied in Estate of Korthe [supra, 9 Cal.App.3d 572] is not applicable in all circumstances. (See Vincent v. Hughes Air West, Inc. (9th Cir. 1977) 557 F.2d 759, 772 [declining to apply Estate of Korthe where contribution of attorneys was unequal].) The fees and costs being claimed by the Common Fund Petitioners in this case total approximately $3.5 million, with two sets of attorneys accounting for about two-thirds of that number, whereas the Semel Group beneficiaries [appellants] have incurred liability for fees and costs amounting to approximately $293,000, and the evidence shows that attorney Weiss was involved in considerably less than all the work, which was organized and le[]d by the Greenberg and Sheppard attorneys, to defeat the Trustees compensation petition. The court finds the rule in Estate of Korthe to be inapplicable in the circumstances of this case. [] The Court has considered the evidence presented . . . and has concluded that the reasonable attorneys fees incurred in preserving the fund that was being sought by the Trustee for compensation amount to $2,335,000 and that the reasonable costs amount to $265,000, a total of $2,600,000. These amounts are the attorneys fees and costs incurred by the Greenberg and Sheppard firms and the costs incurred by attorney Charles Baumer in connection with the Joint Defense Fund. The Court finds that the efforts of these attorneys benefit[]ed all of the beneficiaries not represented by these firms, and the Court was not persuaded that the efforts of counsel representing other beneficiaries, valuable though they may have been, benefit[]ed parties other than those directly represented by such counsel.

It is evident from the trial courts ruling that although the court made the factual finding that appellants counsel was actively involved in the work that led to the creation of the fund, it nonetheless allocated respondents fees and costs to appellants because appellants counsel was involved in considerably less than all the work and his work did not benefit beneficiaries other than appellants. This is inconsistent with California law, which holds that a trial court may not apportion fees to those whose hired counsel did participate in the creation or preservation of the fund. (Quinn, supra, 15 Cal.3d at p. 167; Draper v. Aceto, supra, 26 Cal.4th at p. 1095; Walsh, supra, 187 Cal.App.3d at pp. 1278-1279.) Accordingly, the order is vacated and the matter remanded to the trial court with directions that in exercising its discretion to make any further allocation orders under the common fund principle, it may not assess against appellants any portion of respondents attorney fees or costs.

DISPOSITION

The order is vacated and the matter remanded to the trial court for proceedings not inconsistent with this opinion. Appellants shall recover their costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.

ZELON, J.

We concur:

PERLUSS, P. J.

JOHNSON, J.

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[1] We use the term respondents to mean plaintiffs and respondents and do not include trustee George DeRoy, who is designated as a respondent but has not appeared in this appeal.

[2] All the plaintiffs and respondents were Objecting Beneficiaries.

[3] We also observe that neither of these cases purports to apply Georgia law with respect to the common fund doctrine. Respondents suggest that Georgia law may apply to this matter and make a brief assertion that Georgia law governs the trust. Respondents, however, do not demonstrate that they challenged the application of California law to this matter in the trial court, nor do they make any argument on appeal that the outcome of this matter depends on whether the law of California or Georgia applies. Instead, respondents point out that both California and Georgia recognize the common fund doctrine. As the respondents have not made any cognizable appellate argument concerning the application of Georgia law, nor have they demonstrated that they preserved this question for appeal, to the extent respondents intended to argue that Georgia law applies to this question we consider that argument forfeited.