Petition — Boeing Co. v. Van Gemert

4} FEB 27 so79

,3 bated

IN THE 4

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ernst .

wat. 4 { “

Mie cook Ie oi ree

Supreme Court of the United Statea —-

OCTOBER TERM, 1978

No.

THE BOEING COMPANY

(formerly The Boeing Airplane Company), eé al.,

Petitioners,

v.

WILLIAM R. VAN GEMERT, e¢ al.,

Respondents.

Taos aii

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE SECOND CIRCUIT

S. Hazarp GILLESPIE

1 Chase Manhattan Plaza

New York, New York 10005

(212) 422-3400

EE GO a

TABLE OF CONTENTS

PAGE

Opinions Below .............. “a ae 2

ee US a ees cee tevecseccces 2

EE 2

LE +

ea asc ss nescecencccces 4

Reasons for Granting the Writ ................... 7

Pornt I—The Decision of the Court of Appeals Is

Contrary to This Court’s Decision in Alyeska Pipe-

line Service Co. v. Wilderness Society .......... 9

Pornt II]—The Decision of the Court of Appeals

Will Significantly Affect the Conduct of Class

Action Litigation by Allowing Class Action At-

torneys to Collect Fees Which Are Disproportion-

ate to the Benefits Actually Conferred ......... 12

EE Oe 15

NEC cca rcesecececcescces la

ee Vase sevcsrsecevcceces 27a

es ne bed se sispesccccess 37a

Eee swesdcncsecsesese 49a

EE Tee 53a

li

PAGE

TABLE OF AUTHORITIES

Cases

Alyeska Pipeline Service Co. v. Wilderness Society,

421 US. 240 EE ha eiee beta 1, 4, 6, 7, 9, 10, 11, 12, 15

American Timber & Trading Co. v. First National

Bank, Civ. No. 70-687 (D. Oregon) .............. 8

Central Railroad & Banking Co. v. Pettus, 113 U.S.

SN 6 bhi eons kde pcb wee eid 9,10

Coopers & Lybrand v. Livesay, 98 S.Ct. 2454 (1978) 8,13

Decker v. Fillis, 306 F. Supp. 613 (D. Utah 1969) ... 13

Eisen v. Carlisle & Jacquelin, 479 F.2d 1005 (2d Cir.

1973), vacated and remanded on other grounds,

ee ae 5, 10, 13

Eisen v. Carlisle € Jacquelin, 391 F.2d 555 (2d Cir.

NS Kins sp Vedat ene hd beds as ei ce Swed 8

Gardner v. Westinghouse Broadcasting Co., 98 S.Ct.

SE UE 0 kis ds eadceund cowie ck venkat 8

In re Hotel Telephone Charges, 500 F.2d 86 (9th Cir.

RP Haan bares Sees viru dn Galore Gans ence coh «xx 14

Oppenheimer Fund, Inc. v. Sanders, 98 S.Ct. 2380

SOE ace hie Gh ath ana Wate sT ocak oko 8, 13

Sprague v. Ticonic National Bank, 307 U.S. 161

EE Malach dae a wnrkoisce ates Gen cele etKclcck cei 11,12

Trustees v. Greenough, 105 U.S. 527 (1882) ...... 9-10, 12

Statutes d Rules

We EN ED og a)d no sid dew Wahev'akaineceedes 2

eT can ds och iced ine see cee kkes 2-3, 7

NSS Ee a en ne 3,7

Federal Rules of Civil Procedure, Rule 23 .......... 13

IN THE

Supreme Court of the United States

October Term, 1978

No.

a

wo

THe Boretnc CoMPANY

(formerly The Boeing Airplane Company), e¢ al.,

Petitioners,

We

WituraM R. Van Gement, et al.,

Respondents.

a

-

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE SECOND CIRCUIT

Petitioner prays that a writ of certiorari issue to review

the judgment entered on December 21, 1978, by the United

States Court of Appeals for the Second Circuit, sitting en

banc, reversing the decision of a panel of that court, and

affirming a judgment of the United States District Court for

the Southern District of New York which, in class action

litigation, vastly alters the American Rule on attorneys’

fees defined by this Court in Alyeska Pipeline Service Co.

v. Wilderness Society, 421 U.S. 240 (1975).

The Court of Appeals established, as a matter of federal

law, that prevailing class action attorneys are to be paid

attorneys’ fees not only from money actually claimed by

class members in the litigation, but also from money that

belongs to others because it has not been claimed by the

class.

Opinions Below

The opinion of the United States Court of Appeals for

the Second Circuit en banc, filed December 21, 1978 has not

yet been officially reported and is set forth as Appendix A

hereto. The opinion of the panel, reported at 573 F.2d 733

(2d Cir. 1978) (“Van Gemert III”) is set forth as Appendix

B hereto. The orders of the District Court dated June 30

and September 22, 1977 which were affirmed by the Court

of Appeals en banc are set forth as Appendix C hereto.

The opinions of the Second Cireuit on the previous appeals

in this action are reported at 553 F.2d 812 (2d Cir. 1977)

(“Van Gemert II”) set forth as Appendix D hereto, and

520 F.2d 1373 (2d Cir.), cert. denied, 423 U.S. 947 (1975)

(“Van Gemert I”) set forth as Appendix E hereto. None

of the other opinions of the District Court other than its

opinion certifying the actior as a class action, 259 F. Supp.

125 (S.D.N.Y. 1966), has ever been reported.

Jurisdiction

The judgment of the Court of Appeals en banc was en-

tered on December 21, 1978. No petition for rehearing was

filed. The mandate of the Court of Appeals was stayed by

order dated February 23, 1979, pending filing of this petition

for certiorari. The jurisdiction of this Court is based upon

28 U.S.C. § 1254(1).

Statutes Involved

62 Stat. 955, 28 U.S.C. § 1920 provides:

A judge or clerk of any court of the United States

may tax as costs the following:

(1) Fees of the clerk and marshal;

(2) Fees of the court reporter for all or any part

of the stenographic transcript necessarily obtained

for use in the case;

(3) Fees and disbursements for printing and wit-

nesses ;

(4) Fees for exemplification and copies of papers

necessarily obtained for use in the case;

(5) Docket fees under section 1923 of this title.

A bill of costs shall be filed in the case and, upon

allowance, included in the judgment or decree.

68 Stat. 253, 28 U.S.C. § 1923 provides:

(a) Attorney’s and proctor’s docket fees in courts

of the United States may be taxed as costs as follows:

$20 on trial or final hearing (including a default

judgment whether entered by the court or by the

clerk) in civil, criminal, or admiralty cases, except

that in cases of admiralty and maritime jurisdiction

where the libellant recovers less than $50 the proc-

tor’s docket fee shall be $10;

$20 in admiralty appeals involving not over $1,000;

$50 in admiralty appeals involving not over $5,000;

$100 in admiralty appeals involving more than

$5,000 ;

$5 on discontinuance of a civil action;

$5 on motion for judgment and other proceedings

on recognizances ; | :

$2.50 for each deposition admitted in evidence.

(b) The docket fees of United States attorneys shall

be paid to the clerk of court and by him paid into the

Treasury.

(c) In admiralty appeals the court may allow as

costs for printing the briefs of the successful party

not more than:

4

$25 where the amount involved is not over $1,000;

$50 where the amount involved is not over $5,000;

$75 where the amount involved is over $5,000.

Question Presented

Does the American Rule on attorneys’ fees, as defined

in Alyeska Pipeline Service Co. v. Wilderness Society, 421

U.S. 240 (1975), permit an award of attorneys’ fees in class

actions to prevailing class action attorneys which award of

fees is taken not only from money actually claimed by class

members, but also from money that belongs to others?

Statement of the Case*

Respondents are a class of holders of bearer debentures

of the petitioner Boeing Company (“Boeing”) who, when

Boeing called for redemption of the debentures, failed to

convert them before the expiration of the conversion privi-

lege.** After trial on both federal securities law and state

law claims, the District Court held that Boeing had given

all the notice required by the contract under which the

debentures were sold and hence was not liable for the

debentureholders’ failure to convert. While the Court of

Appeals in Van Gemert I agreed that Boeing had given all

notice required by this contract, it held that Boeing should

have given even more notice because the debentureholders

* A more detailed procedural history may be found in the panel and

en banc opinions of the Court of Appeals (Appendices A and B).

++ At the time of the call for redemption, the two shares of Boeing

stock into which each $100 in principal amount of debentures was

convertible were worth $316.25. The redemption value of the deben-

tures was $103.25. Hence, holders who failed to convert on time lost

$213 in value for each $100 in principal amount of debentures. 3a, 40a.

had an implied right to expect it. 73a. The Court of Appeals

did not find that Boeing had engaged in any fraud or even

that it had made any money as a result of its failure to

convert late-tendered debentures. Boeing was merely held

liable for the profit that the debentureholders could have

made if they had converted and sold the common stock

at prevailing market prices. 77a.

On remand, the District Court fixed damages without

awarding interest and set the method of calculating at-

torneys’ fees. The respondents appealed again, arguing,

in relevant part, that class members filing claims for dam-

ages should be allowed to divide among themselves all

damages remaining unclaimed, if only for the purpose of

paying attorneys’ fees. However, the Court of Appeals in

Van Gemert II held that claiming class members had no

right to unclaimed damages for any purpose, including

paying attorneys’ fees in whole or in part, because any

such award would constitute a fluid class recovery or one

benefitting a “next best class” contrary to Eisen v. Carlisle

é Jacquelin, 479 F.2d 1005 (2d Cir. 1973), vacated and

remanded on other grounds, 417 U.S. 156 (1974). 5la-52a.

On remand from Van Gemert II, Boeing deposited the

damages and interest, which today amount to over $6,500,000,

in a fund held by the Chase Manhattan Bank to be disbursed

under the auspices of a Special Master, as directed by the

District Court.* 41a-42a. The District Court also held that

even though claiming class members could not directly

invade the sums remaining unclaimed in order to pay their

attorneys’ fees, as Van Gemert II had held, these funds

could be used on a pro rata basis to pay the attorneys’ fees

of the class. 40a-4la. It was and is undisputed that all

* Claims totalling approximately $2,000,000 have been filed to date.

if

money remaining unclaimed does not belong to the class.*

Van Gemert II, supra, at 5la-52a.

In Van Gemert III, a panel of the Court of Appeals re-

versed, holding that under the American Rule on attorneys’

fees, as defined by this Court in Alyeska Pipeline Service

Co. v. Wilderness Society, 421 U.S. 240 (1975), attorneys’

fees could be taken only from the shares of those class

members who made a claim for them and received a benefit

from their attorneys’ actions. Because the unclaimed money

belonged to others for whose benefit the litigation had not

been brought, attorneys’ fees could not be charged against

it. 29a, 33a-34a.

The Court of Appeals en banc, however, affirmed the

District Court and by a divided vote held that class action

attorneys could be paid fees not only from money actually

claimed by class members, but also from money that did not

belong to the class because it was never claimed.** 3a.

Three grounds were stated for the decision.

First, a contrary decision would be inequitable to claim-

ing class members and their lawyers “without any cor-

responding benefit to absentees”. 3a. Since the unclaimed

money, irrespective of ownership, is nevertheless “the

spoils of ... victory,” those “spoils” could be used to pay

attorneys’ fees. lla n.14.

* Petitioner believes any unclaimed portions should be returned

to it. New York State also asserted in a brief amicus curiae to the

Court of Appeals en banc that unclaimed funds belong to it by virtue

of their deposit in a New York bank.

** In its order granting review en banc, the Court of Appeals also

asked the parties whether it was bound by Van Gemert II and the law

of the case doctrine. In a footnote and contrary to decisions in two

a the Court of Appeals held that it was not so bound.

n9,

Second, a contrary decision would not be “sound policy”

because it would “place enormous pressure on attorneys

[for a class] to settle.” 3a.

Third, “long-standing precedent” is said to support the

decision. 3a. This precedent consists of but two cases,

neither of which dealt with the issue before this Court and

both of which were explicitly disavowed by this Court

insofar as they might be construed to address this issue in

Alyeska Pipeline Service Co. v. Wilderness Society, 421

U.S. 240, 257-58 & n.30 (1975).

The three dissenting judges stated that the majority had

“allowed [its] enthusiasm for class litigation to lead them

into approving an award to attorneys that cannot be justi-

fied.” 17a. The minority saw nothing in the case which

“justifie[d] an award of substantial fees to lawyers for

work purportedly performed on behalf of persons who are

not their clients and who, themselves, have not received a

single penny as a result of the lawyers’ efforts.” Id.

Reasons for Granting the Writ

There are two reasons why a writ of certiorari should

issue to review the decision of the Court of Appeals for the

Second Circuit. First, the decision of the Court of Appeals

is contrary to the decision of this Court in Alyeska Pipeline

Service Co. v. Wilderness Society, 421 U.S. 240 (1975).

Alyeska restated and defined a corollary to the American

Rule on attorneys’ fees, that in certain instances under 28

U.S.C. §§ 1920 and 1923 attorneys’ fees may be borne by

parties who are intended to be and actually are benefited by

the efforts of the prevailing attorneys. The Court of Ap-

peals decision destroys that holding as it relates to class

actions by imposing such fees on non-beneficiaries of the

lawsuit. This Court has consistently rejected, and repeat-

8

edly admonished against, attempts to alter established prin-

ciples of law in connection with class action litigation, and

the Court of Appeals decision substantially cuts away from

those holdings. See, e.g., Oppenheimer Fund, Inc. v. San-

ders, 98 S. Ct. 2380 (1978); Gardner v. Westinghouse

Broadcasting Co., 98 8. Ct. 2451 (1978) ; Coopers & Lybrand

v. Livesay, 98 S. Ct. 2454, 2459, 2462 (1978); Eisen v.

Carlisle & Jacquelin, 417 U.S. 156, 176 (1974).

Second, a writ of certiorari should issue because, as the

Court of Appeals en banc stated, this case is unusually

“Tsignificant] ... for the conduct of class action litigation.”

6a. A decision which enlarges so substantially the source

from which class action attorneys’ fees can be drawn, and

which specifically denies that the size of that source should

depend on whether class members care enough about the

lawsuit to claim damages, will both encourage the bringing

of lawsuits “not likely to benefit anyone but the lawyers

who bring them,” Hisen v. Carlisle & Jacquelin, 391 F.2d

559, 567 (2d Cir. 1968), and will encourage the continuation

of such suits even after class members have lost interest in

them. Indeed, the Court of Appeals admits that it is

“structur[ing]” class action fee awards so that class action

lawyers will not “be tempted to consider settling . . . for less

than adequate sums.” 16a-17a. In the short time since the

Court of Appeals decision was filed, a case in which another

court must decide whether to apply its rationale has already

arisen. American Timber ¢ Trading Co. v. First National

Bank, Civ. No. 70-687 (D. Oregon).

POINT I

The Decision of the Court of Appeals Is Contrary to

This Court’s Decision in Alyeska Pipeline Service Co.

v. Wilderness Society.

In Alyeska Pipeline Service Co. v. Wilderness Society,

421 U.S. 240, 247 (1975), this Court stated:

“In the United States, the prevailing litigant is

ordinarily not entitled to collect a reasonable attor-

neys’ fee from the losers. We are asked to fashion a

far-reaching exception to this ‘American Rule’; but

having considered its origin and development, we are

convinced that it would be inappropriate for the Ju-

diciary, without legislative guidance, to reallocate the

burdens of litigation in the manner and to the extent

urged by respondents and approved by the Court of

Appeals.”

The statement could serve for this case as well. By holding

that the attorneys for a class may receive their fees from

claimed as well as unclaimed portions of a class action

judgment, the Court of Appeals has directed that the legal

fees of the victorious class be paid by some other person,

i.e., out of property that does not belong to the class. The

Court did so by altering, for the benefit of class action

lawyers, the American Rule and the “common benefit”

corollary thereto.

This “common benefit” doctrine holds that in certain

instances the financial burden of a lawsuit may be spread

among unnamed parties for whose benefit the suit was

brought and who were actually enriched by the results

obtained. The early cases of Trustees v. Greenough, 105

U.S. 527 (1882), and Central Railroad &€ Banking Co. v.

Pettus, 113 U.S. 116 (1885) are illustrative. In Greenough,

10

one beneficiary of a trust fund recovered assets which he

and eleven other identifiable beneficiaries of the fund

equally shared. In Pettus, one creditor established a lien

on certain assets of a debtor, to the benefit of himself and

a number of other creditors. In Pettus, this Court held that

the attorneys’ fee would be taken only from “the amount of

all claims filed” against the assets on which the plaintiffs

had established a lien. 113 U.S. at 127. Thus, attorneys’

fees were taken only from the property of those who were

actually enriched by the action.

In Alyeska, this Court set forth the unifying character-

istics of cases falling within the common benefit doctrine:

first, the classes of beneficiaries should be “small in number

and easily identifiable”; second, the benefits should be able

to be “traced with some accuracy”; and third, there should

be “reason for confidence that the costs [can] indeed be

shifted with some exactitude to those benefiting.” 421 U.S.

at 264 n.39.

In this case, it is not disputed that unclaimed portions

of the judgment do not belong either to the class as a whole

or to those members of the class who in fact file proofs of

claim. Van Gemert II, supra, at 5la-52a; Eisen v. Carlisle

& Jacquelin, supra, 479 F.2d at 1018.*

Nonetheless, the Court of Appeals held that attorneys’

fees for class lawyers can be taken from these unclaimed

funds. As a result, costs will not be imposed “with some

exactitude” on those who benefit from this class action as

Alyeska requires. Instead these costs will be extracted from

the property of others. The Court of Appeals attempts to

avoid this conclusion by ignoring those who will own the

* This unclaimed money belongs either to Boeing, the loser in this

litigation, or to one or more state governments under theories of

abandoned property. The Court of A s expressly declined to

determine ownership of any unclaimed funds. 14a n.17.

11

property when the time for making claims on the fund

expires and by creating a “benefit” in non-claiming members

of the class solely for the purpose of assessing attorneys’

fees. This “benefit” consists of no more than an “interest”

in the class recovery which is never realized and which

vanishes entirely after attorneys’ fees are calculated.* 1la-

12a. Even the generalized interest in protecting the en-

vironment which this Court found an insufficient benefit in

Alyeska is far more real than this chimera.

The Court of Appeals relied principally on Sprague v.

Ticonic National Bank, 307 U.S. 161 (1939), a case which

was extensively argued to this Court in Alyeska by the

respondents and amici curiae,** and was expressly limited

in Alyeska insofar as Sprague suggests a view of the com-

mon benefit exception which is broad enough to justify

imposing attorneys’ fees on the property of a loser or other

non-beneficiary of the litigation. 421 U.S. at 257-58 & n.30.

As this Court stated in rejecting the argument that Sprague

supported such a broad definition of the common benefit

doctrine:

“Sprague . . . might be read as suggesting that

the Court in Greenough said that a federal court

could tax [attorneys’ fees] against the losing party

. But any such suggestion is without support

either in the opinion in Greenough, which is limited

to a common-fund rationale, or in [any federal]

statute.”

* The Court of Appeals also evaded the requirements of Alyeska

that the beneficiaries be “easily identifiable” and traceable “with some

accuracy,” by tracing, not the many unknown and unfound debenture-

holders, but the debentures themselves, as if these numbered pieces of

paper reaped the benefits of this action. 10a-1la.

** See Brief for Respondents at 3, 4, 36, 37, 38, 72, 81, 88-89,

Brief of the Lawyers’ Committee for Civil Rights Under Law Amicus

Curiae at 5, 9, 10, 11.

12

Sprague holds only that because the plaintiff had estab-

lished the indefeasible right of fourteen other trust funds

as well as her own to certain assets of a bank, she could

obtain attorneys’ fees from these assets. The Court was

not faced with the claim that attorneys’ fees should be

taken from property that had been determined not to

belong to bene.iciaries of the litigation.

Trustees v. Greenough, supra, the only other case relied

on by the Court of Appeals, is still further from the mark.

While this Court noted in Greenough that not all of the

bondholder beneficiaries of the litigation had yet redeemed

their bonds, an indefeasible right to a redemption for full

value had been created which could be exercised at any

time. 105 U.S. at 531. Thus an assessment of attorneys’

fees on the entire fund was sure to be spread proportion-

ately among all those who had concretely benefited from

the lawsuit. The “favorable decree [had given] them all a

proportionate advantage.” 105 U.S. at 534. As this Court

noted in Alyeska, the idea that attorneys’ fees can be taken

from one who is not enriched by the litigation “conflicts

with any fair reading of Greenough.” 421 U.S. at 258 n.30.

The decision of the Court of Appeals, imposing attorneys’

fees on property which does not belong to the class, is

directly contrary to this Court’s holding in Alyeska.

POINT Il

The Decision of the Court of Appeals Will Signifi-

cantly Affect the Conduct of Class Action Litigation

by Allowing Class Action Attorneys to Collect Fees

Which Are Disproportionate to the Benefits Actually

Conferred.

Behind the Court of Appeals decision that attorneys’

fees in a class action may be paid from portions of a judg-

ment which are unclaimed and thus do not benefit any

13

class member, is the explicit premise that to do otherwise

would be inequitable and unsound policy because class mem-

bers would receive less money and class attorneys would be

induced to settle cases in which few claims were expected.

3a, 16a-17a. Petitioner submits that the more important

policy against abuse of the class action device that has been

recognized by this Court was not considered by the Court

of Appeals.

Rule 23 of the Federal Rules of Civil Procedure creates

several special rules that make class actions different from

other litigation. This Court has held, however, that outside

those special rules class actions are governed “by the same

standards that govern . .. other types of litigation.”

Coopers & Lybrand v. Livesay, 98 8. Ct. 2454, 2459 (1978).

One of those standards is the requirement in any action

for damages that a plaintiff be willing to aver that he seeks

compensation before that compensation will be paid to him.

See, e.g., Decker v. Fillis, 306 F. Supp. 613, 615-16 (D. Utah

1969). Rule 23 merely defers to the end of a case the

requirement that, before any party receives damages, he

be willing to prove his entitlement to them. This is done in

order to allow entry into court of those willing to claim in-

jury but not to undertake alone the expense of proving it.°

Once injury has been proven, the differences between class

actions under Rule 23 and ordinary actions comes to an end.

Each class member, like any other injured party, must come

to court and make claims for damages in order to be paid.

Eisen v. Carlisle & Jacquelin, 479 F.2d 1005, 1010 (2d Cir.

1973), vacated and remanded on other grounds, 417 U.S.

156 (1974). This is not a burden on a class member who

feels his injury sufficiently to seek compensation for it.

* Expenses of instituting an action and notifying the class of the

atime: of the litigation must of course be borne by the class.

Oppenheimer Fund Inc. v. Sanders, 98 S. Ct. 2380 (1978).

14

Thus, a rule which compensates class attorneys on the basis

of the number of class members who feel sufficiently injured

to step forward brings into balance the benefits actually ac-

corded with legal fees actually paid.

On the other hand, if class action attorneys are compen-

sated, as the Court of Appeals held they must be, on the

basis of the maximum possible award to the class, irrespec-

tive of whether or not anyone in the class actually receives

any such benefits, these attorneys could be richly rewarded

for establishing technical legal violations without regard to

the possibility that any actual benefit will be conferred. See

In re Hotel Telephone Charges, 500 F.2d 86, 91 (9th Cir.

1974). Indeed, under the Court of Appeals decision, maxi-

mum incentive would be given to such attorneys seeking

such rewards. To reduce this potential, legal fees should be

proportionate to benefits actually received by the class.

Further, if fees to the class’ attorneys are awarded irre-

spective of the amounts actually claimed by the class for

whose benefit the action is initially brought, there will be

no incentive for such attorneys to play any role in seeking

out their clients. If class attorneys may rely on being

compensated on the basis of a theoretical maximum without

regard to actual benefits conferred, they will have little

incentive to expend much effort in locating class members.

The most vigorous representation of the interests of the

entire class could cease just at the time when such rep-

resentation becomes most important.

The new rule of the Court of Appeals will also render

more difficult the settlement of class actions because plain-

tiffs’ attorneys will insist upon compensation for themselves

based on the full fund claimed, even if it is agreed that a

fair settlement for claiming class members is a much

smaller amount. Thus a wider gap will be created between

15

what is sought by class plaintiffs and what defendants are

willing to proffer. No public purpose other than enrichment

of attorneys can possibly result from such a development.

It is submitted that the Court of Appeals decision in

this case will ensure the proliferation of class action litiga-

tion by compensating attorneys far beyond any benefits in

fact conferred by their efforts. The decision will also

ensure protraction of these actions by class attorneys even

when the class they represent has lost interest in the case.

The importance to all class action litigation and of the

issue raised by the Court of Appeals merits authoritative

disposition by this Court.

CONCLUSION

Both because of the important effect of this decision on

class action litigation, and because the decision is con-

trary to the common benefit exception to the American Rule

on attorneys’ fees as set forth in Alyeska Pipeline Service

Co. v. Wilderness Society, 421 U.S. 240 (1975), petitioners

pray that a writ of certiorari issue to review the judgment

of the Court of Appeals (en banc).

Dated: New York, New York

February 26, 1979

Respectfully submitted,

S. Hazarp GILLESPIE

1 Chase Manhattan Plaza

New York, New York 10005

(212) 422-3400

APPENDIX A

la

UNITED STATES COURT OF APPEALS

For tHE Seconp Crrecurtr

—

~

No. 551—September Term, 1977.

(Submitted August 18,1978 Decided December 21, 1978.)

Docket No. 77-7547

En Banc

— '

—_

WituuMm R. Van Gemenrt, et al.,

Plaintiff s-Appellees,

hie

Tue Borrna Company

(formerly The Boeing Airplane Company), et al.,

Defendants-Appellants.

—

Before:

Kaurnan, Chief Judge,

Frrnserc, MANSFIELD, MULLIGAN, OaKEs,

Timers, GurFeIN, VAN GRAAFEILAND and

MeskuL, Circuit Judges.

—*

Appeals from an order entered in the United States

District Court for the Southern District of New York,

Sylvester J. Ryan, J., awarding counsel fees, expenses and

disbursements to be paid from the total amount of a class

action judgment. Following a decision by a panel of this

5285

aS se BE

oe ee ees

2a

court, 573 F.2d 733 (2d Cir. 1978), the court granted a

rehearing en banc.

The order of the district court is affirmed.

Ae.

-

Davis PotkK anp Warpweti, New York, New

York, for Defendants-Appellants.

Kass, Goopkinp, WECHSLER AND Gerstein, New

York, New York (Stuart D. Wechsler, Wil-

liam A. Kass, Robert S. Churchill, Samuel

K. Rosen, Joseph V. Sternberg, of counsel) ;

NatHAN, MANNHEIMER, ASCHE, WINER AND

FriepMan (Norman Winer), New York,

New York;

Invinc Steinman, New York, New York,

for Plaintiff s-A ppellees.

Louis J. Lerxowirz, Attorney General of the

State of New York (Samuel A. Hirshowitz,

First Assistant Attorney General, Warren

M. Goidel, Carole L. Weidman, Arthur B.

Wolfish, of counsel), for New York State

Department of Audit and Control, amicus

curiae.

Grorce J. Sotteper, Jr., Special Master, New

York, New York, amicus curiae.

,..

~~

Kavurman, Chief Judge:

Attorneys litigating class actions have been variously

described as “economically rational entrepreneurs,” cham-

pions of aggrieved individuals for whom a conventional

lawsuit would not be feasible, and the recipients of a

“golden harvest of fees.” These diverse perspectives, how-

5286

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ever, 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 at-

torneys who bring them.

Today we decide, in a case of first impression, that the

fees and costs of counsel may be assessed against the un-

claimed portion of a class action judgment. Our conclu-

sion 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 un-

fairness to claiming class members and their lawyers, with-

out any corresponding benefit to absentees. Moreover, a

contrary result would place enormous pressure on attor-

neys to settle at all costs, and would deter them from in-

stituting meritorious suits.

A

In February 1966, the Boeing Company decided to call

for redemption its issue of 444% 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 deben-

tures. 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 ex-

pired. 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, alleg-

5287

ee

ee

a A Rl eR os te

. “

4a

ing 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,’ the Securities Act of 1933,? the Trust Inden-

ture Act of 1939,° and New York law.‘

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 satis-

fied by its newspaper advertisements and “eleventh hour”

news release—to provide reasonable notice of its intention

to redeem the debentures. Accordingly, we held that Boe-

ing was liable despite its compliance with the notice provi-

sions 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 hased

on the difference between the redemption price of the de-

bentures and the value, as of March 29, 1966, of the shares

of common stock into which they could have been con-

verted. We affirmed this ruling, but held, contrary to Judge

Ryan, that the plaintiffs were entitled to prejudgment in-

terest. Van Gemert v. Boeing Co., 553 F.2d 812, 813 (2d

1 vs U.S.C. §78f. The plaintiffs contended that Boeing was liable

rv er the Act for violating the New York Stock Exchange Listing

greement and Section Al0 of the New York Stock Exchange Com.

pany Manual, on the theory that the statut ;

er

to adopt such rules. equires stock exchanges

2 15 U.8.C. § 77a et seq.

3 15 U.S.C. §77aaa et seq.

4 This claim was heard pursuant to th juri

e pendent jurisdiction of the

federal courts. See United Mine Workers v. Gibbs, 383 U.S. 715 (1966).

5288

5a

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."

In the Van Gemert II appeal, the law firm of Kass, Good.

kind, Wechsler and Gerstein, a member of the committee

of attorneys for the plaintiffs,’ 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 re-

sponded in opposition that these funds should be returned

to it. Without reaching a conclusion as to the ultimate dis-

position of unclaimed damages, we rejected the firm’s pro-

posal. Jd. 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 (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 por-

tion of the unclaimed funds to defray their legal expenses.

This, it was decided, would require Boeing to pay indi-

rectly for the legal expenses of successful litigants.

Upon a second remand to Judge Ryan for entry of judg-

ment, he ordered that plaintiffs’ attorneys be awarded

5 According to the report of the Special Master appointed by Judge

Ryan, filed with this court as a brief amicus curiae, the judgment fund

now exceeds $6,500,000, including prejudgment interest.

6 The other members of the committee were Nathan, Mannheimer,

Asche, Winer & Friedman, and Irving Steinman.

5289

ba

their fees, expenses and disbursements from the total

amount of the judgment. He concluded that it was equi-

table for all class members—claiming and nonclaiming

alike—to bear a pro rata share of the costs of producing

the judgment in their favor.’ 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 be-

longed 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 II1).*

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.® We now affirm the judgment of

the district court.

r Under Judge Ryan’s order, each class member’s contribution to the

total amount of attorneys’ fees must bear the same ratio to all such

fees as his own recovery bears to the total class recovery.

8 Judge Oakes dissented in part on the ground that the principles

governing the award of attorneys’ fees are inapplicable to costs and

disbursements. Van Gemert III, 573 F.2d at 738.

9 Having briefed the issue at our request, Boeing presents the thresh

old argument that under the “law of the case doctrine,” Van

Gemert II precludes the recovery of costs and attorneys’ fees from

the unclaimed portion of the bondholders’ judgment. We cannot

accept this contention.

Van Gemert II held that class members who filed proofs of claim

could not be awarded the unclaimed portion of the judgment on a

pro rata basis, even if some of those funds were to be used to pay

their lawyers. To allow the money judgment to be distributed in such

a fashion would countenance “expropriation” of the shares of absentees

and would enable well-informed claimants to avoid paying any at.

5290

‘a

Il.

Any consideration of the propriety of awarding attor-

neys’ fees in the federal courts must begin with Alyeska

Pipeline Service Co. v. Wilderness Society, 421 US. 240

(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 “will-

torneys’ fees at all. Van Gemert III raises the wholly different ques-

tion whether the lawyers for the class may be awarded their fees and

disbursements from the judgment considered as a common fund. The

claiming class members will not receive a “windfall,” for no pay-

ment of funds to a “next-best” class of persons is contemplated by

Judge Ryan’s order. Rather, the costs of the litigation will be borne

by the entire fund, and each class member will be required to pay his

proportionate share of attorneys’ fees.

Even if Van Gemert II had reached the issue raised on this appeal,

the law of the case doctrine would not dictate that we treat its ruling

as dispositive. Boeing, citing Bromley v. Crisp, 561 F.2d 1351, 1363

(10th Cir, 1977) (en banc), cert. denied, 98 8. Ct. 1458 (1978), and

Lathan v. Brinegar, 506 F.2d 677, 691 (9th Cir. 1974) (en banc),

argues that it would be prudent for the court sitting en banc to con-

sider itself bound by the law of the case established by a panel on an

earlier appeal, when that ruling was not reviewed en banc.

We believe, however, that such a rule would be far too restrictive

and that, sitting en banc, we may overrule any panel decision that a

majority of the active judges believes was wrongly decided, unless a

party would be seriously prejudiced as a result, First National Bank

of Hollywood v. American Foam Rubber Corp., 530 F.2d 450, 453 n.3

(2d Cir. 1976). The purpose of the “law of the case” doctrine is to

prevent the continuous relitigation of issues decided by a panel at an

earlier stage of a suit. The doctrine, which is in any event no more

than an appeal to the “good sense” of the court, see, ¢.9., Zdanok Vv.

Glidden Corp., 327 F.2d 944, 952-53 (2d Cir. 1964), is properly ap-

plied to the district court and to other panels of the Court of Appeals.

It cannot immunize panel decisions from review by the court en banc.

Accord, In re Central R.R. Co., 485 F.2d 208, 210-11 (3d Cir. 1973)

(en banc). And, given the rarity with which petitions for rehearing

en banc are granted, the spectre conjured by Boeing of continual

“second guessing” of panel decisions is insubstantial indeed.

5291

or

a ee ee.

8a

ful disobedience of a court order,” or when a party has

acted in bad faith, id. at 258-59. 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’® litigation.

Id. at 257-58.

The application for the fees may be made by the plain-

tiffs themselves, Trustees v. Greenough, 105 U.S. 527

(1881), on the ground that they have performed a service

benefiting others similarly situated. But a plaintiff’s at-

torney 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 (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.,

10 The common fund doctrine may be invoked only by successful liti-

gants, see Alyeska Pipeline Service Co. v. Wilderness Society, 421

U.8. 240, 275 (1975). It “would be a strange inversion if the

[common fund] doctrine enabled losers in adversary contests to charge

their counsel fees to winners.” Dawson, Lawyers and Involuntary

prone Attorney Fees from Funds,” 87 Harv. L. Rev. 1597, 1626-27

5292

9a

Union Cent. Life Ins. Co. v. Hamilton Steel Prods., Inc.,

493 F.2d 76 (7th Cir. 1974); see generally, Dawson, Law-

yers 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, the Supreme Court established criteria for determin-

ing whether benefits derived from litigation could properly

be treated as a common fund. The Court stated that the

common fund rationale was ill-suited to public interest

litigation involving nebulous benefits accruing to a vast

class of people. Accordingly, a common benefit did not

accrue from litigation over the environmental impact of the

trans-Alaska pipeline. The Court declared:

In this Court’s common-fund and common-benefit deci-

sions, the classes of beneficiaries were small in number

and easily identifiable. The benefits could be traced

with some accuracy, and there was reason for confi-

dence that the costs could indeed be shifted with some

exactitude to those benefiting. In this case, however,

sophisticated economic analysis could be required to

gauge the extent to which the general public, the sup-

posed beneficiary, as distinguished from selected ele-

ments of it, would bear the costs. Id.

We believe that the judgment against Boeing constitutes

a common fund within the meaning of Alyeska.” The class

ll The common fund doctrine also presupposes that the court has

“the authority to adjudicate the rights and duties” of those with an

interest in the fund, Dawson, supra, note 10 at 1618. Although the

beneficiaries need not sue as a class to meet this criterion, United

States v. ASCAP, 466 F.2d 917, 919 (2d Cir. 1972), a class action

presents the clearest case for the exercise of such judicial authority.

The plaintiffs in the suit before us were certified as a 23 (b) (1) class

5293

10a

of debenture holders here is comparable in size to that of

the creditors in Pettus and the bondholders in Greenough.

Moreover, the Van Gemert class is smaller than the class

of 85,000 union members in Hall v. Cole, 412 U.S. 1 (1973)

and the 8,987 shareholders in Mills v. Electric Auto-Lite

Co., 396 U.S. 375 (1970)—two cases cited with approval in

Alyeska.* Nor is the class membership here difficult to

identify for the purposes of tracing the benefits accurately.

Unlike the sprawling throng of potential beneficiaries in

Alyeska—all those who would derive benefits from a pris-

tine Alaskan wilderness—the beneficiaries of this action

form a well-defined class, limited to those who failed to

convert unregistered bonds of a specific issue of Boeing

debentures. The names of the individual bondholders are

not, to be sure, always ascertainable. But since each un-

converted debenture is readily identifiable—and in fact

bears an explicit number—it is quite evident that the dam-

ages owed to each plaintiff can be traced to each deben-

ture with perfect accuracy. Elementary arithmetic, not

“sophisticated economic analysis”, is all that is required

to determine the distribution of benefits. To calculate the

amount of the judgment, it was necessary only to subtract

the redemption price of each debenture from the value of

the two shares of common stock to which it could have

been converted. And it is equally simple to prorate the

under the Federal Rules. No class member could have opted out of

such a suit even if he had desired to do so; once the class was certified,

no other forum could have adjudicated their rights with respect to

the fund.

12 In Brennan v. United Steelworkers of America, 553 F.2d 586 (3d

Cir. 1977), the court ruled that a common benefit could accrue to a

class of 1,400,000 union members, noting that the plaintiff class need

not be small in “absolute numbers.” Jd. at 606. See also, Yablonski

v. United Mine Workers of America, 466 F.2d 424 (D.C. Cir. 1972),

cert. denied, 412 U.S. 918 (1973) (class of 162,000 union members).

5294

lla

cost of the suit with complete exactitude so chat each deben-

ture holder’s recovery is taxed with the cost of vindicating

his interest.** Indeed, the “identification” and “tracing”

criteria are met more completely in the case before us than

in either Hall or Mills, neither of which involved tangible

economic benefits at all.

III.

The panel in Van Gemert III held that the common fund

doctrine requires that expenses be assessed only against

those who have actually claimed the fruits of the litigation,

because no one else has benefited from the suit. We believe

this construction of the concept of a “benefit” is too narrow

and is not supported by the common fund case law. In

Greenough, the Court noted that not every bondholder had

filed claims against the fund, but nevertheless charged

the entire fund with costs and fees. 105 U.S. at 529, 531.

In Sprague v. Ticonic National Bank, 307 U.S. 161 (1939),

the plaintiff sued individually to establish her right, as a

beneficiary of a trust consisting of bonds held by a bank,

to a lien on the proceeds from the sale of the bonds. In

the process, she established the right of thirteen other

beneficiaries to recover a share of the trust’s assets. The

Court, in an opinion by Justice Frankfurter, allowed the

plaintiff to recover her attorney’s fees out of those assets,

although it was by no means clear that the other cestuis

que trust would bring suit. If a plaintiff class-member is

adjudicated to have an interest in a fund, he has benefited

within the meaning of the common fund doctrine.**

13 See note 7 supra,

14 Citing the venerable Williston, our Brother Van Graafeiland main-

tains that the common fund doctrine is inapplicable unless the benefit

conferred is knowingly accepted. Any requirement that the absentees

5295

l2a

The rationale for such a rule is evident,.as the case

before us indicates. A portion of the judgment won by

plaintiffs’ attorneys—at least $213 for each unconverted

debenture—is due every member of the class. Each plain-

tiff has a present vested interest in the class recovery, and

his share of the judgment may be received on request. It

cannot be urged convincingly, then, that the absent plain-

tiffs have not received a benefit from the litigation.

Our conclusion that the district court properly charged

attorneys’ fees against the shares of nonclaiming class

members is far from heretical. At common law, an attor-

ney’s lien attached to a judgment obtained for his client,

as security for his fees and expenditures. See Restatement

(2d) Agency § 464(e). Under this doctrine, which is as

actually file claims, however, is foreclosed by Sprague and Greenouyh.

Moreover, as Haynes v. Rederi A/S Aladdin, 362 F.2d 345, 351

(5th Cir, 1966), cert. denied, 385 U.S. 1020 (1967) noted, it is su‘ticient

if the attorneys’ services and the benefits accruing from it are “iin-

pliedly” accepted. Manifestly, plaintiffs in a 23(b)(3) class action,

who have been provided with notice and an opportunity to opt out of

the suit, must be said to have accepted the attorneys’ services, and the

benefits that may flow from them.

Of course, class actions certified under Rule 23(b)(2) or, as in

this case, 23(b)(1), do not contain an opt-out privilege. This reflects

the conclusion of those who drafted the Rules that individual choice

should be subordinated to the interests of the class as a whole to avoid

inconsistent judgments or prejudice to absent class members. Because

class certification represents a judicial determination that the absen-

tees are adequately represented, it would frustrate the Rule if we

were to require an investigation into each plaintiff’s willingness to

accept the benefits of the litigation.

Our conclusion rests on firm foundations, for absentees are in no

way harmed by our decision. It simply does not accord with fact to

argue, as the minority seems to, that because a deduction from the

shares of unnamed plaintiffs has been made for attorneys’ fees, they

are being held liable for more than they have gained. If, as we hold,

they have benefited from the judgment, it is appropriate to charge

them their pro rata share. And if, as the dissent contends, they have

gained nothing by the victory against Boeing, then it is difficult to

understand how a deduction from the spoils of that victory can be

said to have injured them. The dissenters cannot have it both ways.

5296

l3a

American as the “American Rule” against charging the

losing party with the fees of his adversary, the attorney

is himself entitled to have the judgment enforced and com-

pensation paid, id. and comment n.; Falcone v. Hall, 235

F.2d 860 (D.C. Cir. 1956). Indeed, in Pettus, Justice

Harlan noted that under state law the lien of plaintiffs’

attorney could not be defeated by the successful purchase

of the plaintiffs’ claims. 113 U.S. at 127-28. Thus, since

the attorney’s right to his fee arose out of his creation of

the judgment and not his client’s receipt of the proceeds,

our interpretation of the common fund doctrine is in har-

mony with time-honored principles of the common law.”*

In contrast to the “expropriation” feared in Van Gemert

II, deducting fees from each plaintiff’s share in the judg-

15 The argument that there is no attorney-client relationship between

the absentees and class counsel is not persuasive. A certification under

Rule 23(c) makes the class the attorney’s client for all practical pur-

poses, Developments in the Law: Class Actions, 89 Harv. L. Rev. 1318,

1592-97 (1976). The judgment in a class action is not secure from

collateral attack unless the absentees were adequately and vigorously

represented. Without question, it is settled that the attorney is not

free to advocate the interests of the named plaintiffs alone. See

Gonzales v. Cassidy, 474 F.2d 67, 75-76 (Sth Cir. 1973). And absen

tees do not cease to be clients simply because they fail to claim their

portion of the class recovery.

It begs the question to argue that since absentees are not parties for

all purposes, they cannot be parties when the objective is to award

attorneys’ fees. The absentees are certainly parties in the most

fundamental sense, for, as we have already indicated, they are bound

by the judgment. Whether a given procedural rule should be applied

to those who are not named plaintiffs depends on the function of

the rule. Absentees are not considered parties against whom counter-

claims under Fed. R. Civ. P. 13 may be asserted, because “the right

to counterclaim is readily subject to abuse as a tactical device to

encourage plaintiffs to opt out.” See, ¢.g., Donson Stores, Ine. V.

American Bakeries Co., 58 F.R.D, 485, 489 (8.D.N.Y. 1973). There

can be no comparable objection to treating unnamed plaintiffs as

parties for the purpose of assessing attorneys’ fees, for no affirmative

burden is placed on them by our ruling today. Indeed, it is -

when the case is resolved in their favor, because of their counsel’s

efforts, that fees are assessed.

5297

a

l4a

ment will not benefit some plaintiffs at the expense of

others."* Each plaintiff will receive only his pro rata

share of the recovery, less attorneys’ fees, independent of

the size of the unclaimed portion of the fund.” This is not

a “fluid recovery” case.

We believe, moreover, that a ruling for Boeing would

be unfair to both the claiming plaintiffs and the class at-

torneys, and would deter lawyers from bringing meritori-

ous lawsuits. In setting attorneys’ fees in class action

litigation, courts must multiply the number of hours spent

on the litigation by an appropriate hourly rate, and then

adjust the fee to take into account the difficulty of the case,

the attorney’s risk in undertaking it, and the quality of

representation.”

If victorious attorneys were permitted to charge fees only

against claiming class members, the standards evolved by

the courts to ensure rationality and fairness in fee setting

would go for nought, because the compensation the attor-

16 We therefore do not find apposite to our holding today the concern

expressed in Van Gemert II that claimants may be encouraged to keep

absent class members uninformed about the judgment in their favor.

In any event, the district judge will invariably require that adequate

notice of the judgment be provided. In the instant case, Judge Ryan

appointed a special master for this purpose, who sent notices to each

individual whose name could be ascertained, and to all brokerage

firms, banks, and other financial institutions, with instructions to

transmit the notice to interested clients. Notice was also published

once a week for three consecutive weeks in the Wall Street Jvurnal and

the New York Times.

Any alleged conflict of interest between the attorneys and the

unnamed plaintiffs is vitiated here, as in every class action, by judicial

supervision of the fee award.

17 We intimate no view as to the appropriate ultimate disposition of

the remainder of the fund.

18 See, ¢.g., City of Detroit v. Grinnell Corp., 495 F.2d 448 (2d Cir.

1974); Lindy Brothers Builders, Inc. v. American Radiator and Stand-

ard Sanitary Corp., 487 F.2d 161 (3d Cir. 1973).

5298

15a

ney received would be dependent on a purely fortuitous

event. It would not suffice to adopt a rule that the attor-

ney’s fee should be set at a fixed sum, calculated by con-

sidering the factors described above, but chargeable only

against the recovery of those who claimed their shares.

In suits in which a relatively small number of claimants

come forward, the attorney’s fee would leave those claim-

ants with no recovery at all—if, in fact, sufficient funds

were claimed to pay the entire fee. In the instant case,

each debenture holder had an economically significant in-

terest in the litigation—and yet deducting attorneys’ fees

only from the claimed portion of the judgment may leave

each plaintiff bereft of benefits.’* Such a rule would indeed

make this a “lawyer’s lawsuit,” Van Gemert III, supra,

573 F.2d at 735.

On the other hand, if we were to protect the plaintiffs

by limiting the attorney to a fixed percentage of the judg-

ment actually claimed, the resulting fee would be entirely

dependent on the number of plaintiffs who came forward.

Considerations of the difficulty of the case, the quality of

representation, and the hours spent by the attorney, would

not determine the ultimate size of the fee. Nor can the

attorney always determine whether it would be worthwhile

for him to undertake the risks of litigation, for the number

of plaintiffs who will come forward after judgment is often

unpredictable, Of course, the risk that only a fraction of

plaintiffs will claim is greatest if the individual claims are

small.” The percentage of class members who file claims,

19 Judge Ryan has not yet fixed the attorneys’ fees in this case.

20 The drafters of Rule 23 (b) (3) contemplated that class actions

would be utilized to enable those with individually non-viable claims to

vindicate their interests. See Kaplan, Continuing Work of the Civil

Committee: 1966 Amendments of the Federal Rules of Civil Procedure I,

5299

l6a

however, is not a function solely of the value of each plain-

tiff’s stake in the litigation. In this very case, although the

judgment gives each class member the right te twice his

original investment in damages, only 20% of the judgment

has been claimed after months of diligent efforts to locate

absentees. The Special Master appointed by Judge Ryan

attributed the low response to “both the passage of 12 years

and the fact that the debentures were unregistered.” ” If

the number of claiming plaintiffs were to become the domi-

nant—indeed determinative—factor in setting appropriate

attorneys’ fees, lawyers would be discouraged from bring-

ing class suits, regardless the merits of the case.

Refusing to charge fees against the entire judgment

fund would also put a high premium on settling cases.

When a class action is settled, the attorney’s fee conven-

tionally comes “off the top”. See, e.g., Blank v. Talley

Industries, 390 F. Supp. 1, 3 (S.D.N.Y. 1975) (Weinfeld,

J.). The attorney is assured of the full amount of the fee

that the court has found to be reasonable, regardless of

whether some of his clients have failed to claim.” To be

sure, in determining fair compensation the judge may take

into account the number of plaintiffs likely to claim, id.,

but the claimed portion of the fund does not place a ceiling

on the fee. See, e.g., Voege v. Ackerman, 70 F.R.D. 693

(S.D.N.Y. 1976) (Weinfeld, J.). If an attorney’s fee in a

class action that goes to final judgment were so restricted,

lawyers would be tempted to consider settling their clients’

81 Harv. L. Rev. 356, 397-98 (1967). The rule propounded by the dis-

senters would have a devastating effect on (b) (3) class suits.

21 Report of the Special Master, supra note 5, at 4.

22 Interim fees are often awarded after a settlement has been ap-

proved but before the parties have arrived at a plan of distribution to

sub-classes—and, of course, before individual claims have been filed.

See 3 H. Newberg, Class Actions § 6975 at 1263-66 & n.10 (1977).

5300

17a

claims for less than adequate sums. Fee awards should not

be so structured as to encourage such conduct.”

Finally, our holding is perfectly consistent with the

“American rule”. The rationale of that doctrine is that

litigants should not be deterred from pursuing bona fide

claims or defenses by fear that they will be burdened by

the costs and attorneys’ fees of their successful adversary.

See Fleischman Distilling Corp. v. Maier Brewing Co., 386

U.S. 714, 718 (1967). Under today’s decision, however, the

fees of the attorneys for the class will be deducted from the

amount for which Boeing has already been held liable.

There is no “surcharge” on the defeated litigant.

Affirmed.

i

Van GRAAFEILAND, J., dissenting

(with whom Judges Muttican and Trmsers concur) :

With all respect to our colleagues in the majority, we be-

lieve they have allowed their enthusiasm for class litigation

to lead them into approving an award to attorneys that

cannot be justified under either contract or quasi-contract

principles of law. In our view, there is no attorney-client

relationship between the named plaintiffs’ attorneys and the

non-claiming absentee debenture holders upon which to base

a claim reading in contract. Nor have the non-claiming

absentees been unjustly enriched, so as to give the lawyers

a quasi-contractual right of recovery based on quantum

meruit. In short, we see nothing in this case that justifies

an award of substantial fees to lawyers for work pur-

portedly performed on behalf of persons who are not their

clients and who, themselves, have not received a single

penny as a result of the lawyers’ efforts.

23 See generally Dam, Class Actions: Efficiency, Compensation, Deter-

rence, and Conflict of Interest, 4 J. Legal Studies 47, 56-60 (1975).

5301

c=

18a

Little purpose would be served by simply repeating in this

dissent what has already been said in prior opinions and

is now being rejected by this en banc court. However, some

repetition of both the law and the facts is necessary as a

framework for the discussion that follows.

When Boeing, on July 15, 1958, offered its shareholders

the right to subscribe to its debentures, the subscription

rights were evidenced by warrants issued in the sharehold-

ers’ names. Each warrant was fully negotiable, however,

and could be transferred by delivery in blank. The trans-

feree was entitled to use the warrant for subscription with-

out having a new warrant issued. Approximately 7,000,000

rights were issued; and, between July 15, 1958, and July

29, 1958, the date the subscription offer expired, approxi-

mately 1,700,000 of them were traded on the New York

Stock Exchange. During this same period, subscriptions

having a total value of $29,578,500 were received by Boe-

ing’s transfer agent.

Between August 4, 1958, when the debentures were ad-

mitted to trading on the New York Stock Exchange, and

March 29, 1966, when trading terminated, over $69 million

in debentures were traded. Because the debentures, like the

warrants, were in bearer form and negotiable upon delivery,

there was no way of knowing in 1966 how many of them

were still held by the original subscribers. Semi-annual

interest on the debentures was collected by detaching a

coupon and forwarding it to the Chase Manhattan Bank,

the indenture trustee. A vast majority of the interest cou-

pons were tendered to Chase by collecting banks on behalf

of unidentified debenture holders. In those instances where

coupons were tendered directly by debenture holders,

Chase made a list of the tenderers which it retained for

approximately six months.

5302

19a

As of March 8, 1966, there » ere approximately 27,000 de-

bentures outstanding in the aggregate principal amount of

$21,514,900. As of March 29, 1966, conversion rights had

not been exercised for debentures in the face amount of

$1,544,300.

During the next several months, ten separate actions

were commenced against Boeing on behalf of non-convert-

ing debenture holders. The Van Gemert action was com-

menced on June 23, 1966. On July 21, 1966, upon the ap-

plication of Boeing’s attorneys, the district judge signed

an order directing all present and former holders of un-

converted debentures to show cause before him on Septem-

ber 6, 1966, why an order should not be entered determining

that the action be maintained as a class action on their

behalf, why they should not be permitted to appear and

intervene in the action and present claims, if any, and why

they should not be included in the class and bound by the

final judgment. The court directed that Boeing give notice

to the present and former debenture holders by mailing a

court-approved form to those “whose addresses may be

known to the defendants” and by publishing the notice

twice a week for two successive weeks in the national

editions of the New York Times and the Wall Street Jour-

nal. Because there was no way Boeing could identify each

holder of the bearer debentures as of March 29, 1966, it

compiled a list of persons who it believed might at some

time have had an interest in the unconverted debentures

and addressed notices to all of them.

No one knows, of course, whether each putative class

member received a copy of the notice. No one knows how

many of them may have been dead or incompetent when

the notice was sent. Indeed, to this date, no one can ac-

curately identify all of the class members. Those persons

who did receive notice found no reference therein to any

5303

20a

legal representation for the class. No attorneys except

Boeing’s were named or described. Nothing was said about

attorneys’ fees or disbursements. No mention was made of

a “fund” from which the attorneys would be paid.

These absentee debenture holders did not become clients

of the attorneys for the named plaintiffs, nor of those at-

torneys who were subsequently appointed by the district

court to serve as the “representative committee” of plain-

tiffs’ attorneys. 3 H. Newberg, Class Actions J 6824C at

1147 (1977). Indeed, for most purposes, the absentees

could not even be considered parties to the law suit. See

In re Four Seasons Securities Laws Litigation, 525 F.2d

500, 504 (10th Cir. 1975); In re Sugar Industry Antitrust

Ihtigation, 73 F.R.D. 322, 348-49 (E.D. Pa. 1976) ; Lamb v.

United Security Life Co., 59 F.R.D. 44, 48-49 (D.C. Iowa

1973); Donson Stores, Inc. v. American Bakeries Co., 58

F.R.D. 485, 489 (S.D.N.Y. 1973); 2 H. Newberg, Class

Actions, supra, § 2780 at 1249-50 Accordingly, we fail to

see the significance of the majority’s discussion of attor-

neys’ liens, “clients” who have failed to claim, and “parties”

who must bear their own attorneys’ fees.

We do see significance, however, in the fact that attor-

neys who profess to be representing the interests of ab-

sentee class members have no hesitancy in leaving them

without representation when the matter of attorneys’ fees

is at issue. Cf. Cherner v. Transitron Electronic Corp.,

221 F.Supp. 55, 61 (D. Mass. 1963). We believe that once

an attorney undertakes to represent class interests, it

makes no difference by whom he was retained; he owes to

all class members a duty of equal and fair representation.

Berner v. Equitable Office Bldg. Corp., 175 F.2d 218, 220

(2d Cir. 1949). A conflict of interest that prevents full and

fair representation not only violates Rule 23 but also

raises a serious question of lack of due process. See Car-

roll vy. American Federation of Musicians, 372 F.2d 155,

5304

2la

162 (2d Cir. 1967), vacated and remanded on other grounds,

391 U.S. 99 (1968); Phillips v. Klassen, 502 F.2d 362, 366

(D.C. Cir.), cert. denied, 419 U.S. 996 (1974). If the ab-

sentee class members who have received nothing from the

escrow fund were to discover that a group of unknown law-

yers had received substantial awards from the absentees’

undistributed shares, it is hard to believe that the absen-

tees would not strenuously object to what must appear to

them to be a lawyer’s windfall. This is a viewpoint that

should be expounded by the lawyers who claim to be the

absentees’ representatives. Instead, the lawyers advocate

only their own cause and, as an incident thereto, the cause

of their clients. This is a strange position indeed for law-

yers who are seeking equitable relief from the courts. Cf.

National Association of Regional Medical Programs, Inc.

v. Matthews, 551 F.2d 340, 344-46 (D.C. Cir. 1976), cert.

denied, 431 U.S. 954 (1977).

In Van Gemert III, 573 F.2d 733, we held that an award

of fees under the equitable fund doctrine must be based on

a theory of quantum meruit and that class attorneys should

not be compensated for potential benefits not accepted by

absent members of the class. Although we had no way of

knowing at that time how much of the escrow fund would

remain unclaimed, we stated that “the history of class liti-

gation to date has demonstrated a surprisingly small re-

sponse by absent members notified of their right to make

claims.” Id. at 736 n.4. This is one of the few statements

in the opinion that has withstood the careful scrutiny of

our learned colleagues. As Chief Judge Kaufman points

out, claims representing only twenty percent of the escrow

account have been filed, and the filing deadline was Septem-

ber 1, 1978. Taking into account that the named plaintiffs

1 The notice of availability of proofs of claim stated that any de-

benture holder who did not file by the deadline date would be precluded

from participating in the award of damages.

5305

—

22a

in the ten original lawsuits owned over ten percent of the

unconverted debentures for which damages are being

sought, the response by absentee holders is indeed small.

At the present juncture, it appears that eighty percent of

the fees and disbursements of the lawyers for the named

plaintiffs will be paid from funds earmarked for absent

class members who will not receive a penny.? We in the

dissent do not believe that such a bizarre state of affairs

can be justified simply by pointing to a “common fund”

as the source of the lawyers’ fees.

The “equitable” or “common” fund doctrine was created

for the purpose of preventing unjust enrichment. Mills v.

Electric Auto-Lite Co., 396 U.S. 375, 391 (1970); Fleisch-

man Distilling Corp. v. Maier Brewing Co., 386 U.S. 714,

719 (1967) ; Grace v. Ludwig, 484 F.2d 1262, 1269 (2d Cir.

1973), cert. denied, 416 U.S. 905. There can be no unjust

enrichment unless a benefit has been conferred and know-

ingly accepted. Woodruff v. New State Ice Co., 197 F.2d

36, 38 (10th Cir. 1952); In re Irving-Austin Bldg. Corp.,

100 F.2d 574, 578 (7th Cir. 1938). Williston on Contracts

puts it this way:

Three elements must be established in order that a

plaintiff may establish a claim based on unjust en-

richment. These elements are:

1. A benefit conferred upon the defendant by the

plaintiff ;

2. An appreciation or knowledge by the defendant

of the benefit; and

2 It is possible that the September Ist deadline may be extended

by the district court and that additional filings may reduce somewhat

the eighty percent figure. However, the principle that one should not

be required to pay for something he has neither requested nor re-

ceived remains the same, whether the figure is eighty percent or one

percent.

5306

23a

3. The acceptance or retention by the defendant

of the benefit under such circumstances as to make it

inequitable for the defendant to retain the benefit

without payment of its value.

12 Williston on Contracts § 1479 at 276 (3d ed. 1970).

This rule requiring a knowing acceptance of benefits ap-

plies to a fund created through the efforts of an attorney.

See Haynes v. Redert A/S Aladdin, 361 F.2d 345, 351

(5th Cir. 1966), cert. denied, 385 U.S. 1020 (1967); Lea v.

Paterson Sav. Inst., 142 F.2d 932, 934 (5th Cir. 1944).

Newberg describes its application to class recovery funds

as follows:

Absent class members have no obligation to pay at-

torneys’ fees and litigation costs, except when they

elect to accept the benefit of the litigation. Absent

class members who accept any part of any recovery

fund are liable for their proportional share of fees

and costs. The attorney who creates a fund is entitled

to a fee from each class member who accepts the bene-

fits of the fund.

2 H. Newberg, Class Actions, supra, § 2780 at 1249.

Another established rule of quasi-contract law is that an

innocent recipient of benefits cannot be held liable to any

greater extent than the amount by which he has been en-

riched. Hill v. Waxberg, 237 F.2d 936, 939 (9th Cir. 1956) ;

In re Irving-Austin Bldg. Corp., swpra, 100 F.2d at 578;

Dumn v. Phoenix Village, Inc., 213 F. Supp. 936, 952-53

(W.D. Ark. 1963); Restatement of Restitution § 1 comment

e, § 155; Beale, The Measure of Recovery Upon Implied and

Quasi Contracts, 19 Yale L.J. 609, 620-21 (1910).

No matter which of the foregoing rules is applied to

the facts of this case, the order appealed from is wrong.

5307

Sg

24a

The Special Master’s notice to debenture holders made it

clear that receipt of the notice did not mean that the re-

cipient would ultimately be found entitled to participate in

the award of damages. The burden was placed upon the re-

cipient to establish his right of recovery and to submit

executed proofs of claim and supporting documents by Sep-

tember 1, 1978. If the non-claiming absentees were not pre-

cluded after September 1, 1978, from participating in the

fund, the day will surely come when they will be. We are

convinced that these individuals, thus precluded from shar-

ing in the “common fund”, cannot be said to have accepted

the benefits of the lawyers’ efforts. Any charge levied

against them for attorneys’ fees is clearly in excess of

benefits received.

When the panel in Van Gemert I, 520 F.2d 1373, found

Boeing’s notice of redemption to be inadequate, it directed

that damages be awarded to the seven percent of debenture

holders who did not convert, without considering whether

their failure to convert might have resulted from some

cause other than lack of notice. All the non-converters had

to do in order to collect was to file a claim. The Court now

holds that, insofar as the attorneys’ right of recovery is

concerned, it isn’t even necessary that a claim be filed by

the debenture holders. Our brothers will not allow the ab-

sentees’ failure to file, whether caused by death, incom-

petency, incapacity, lack of knowledge, or unwillingness,

to prevent the lawyers from taking their cut of the un-

claimed moneys.’

3 Perhaps, as the majority opinion intimates, we in the dissent are

too much influenced by “venerable” works such as Williston on Con-

tracts. Whatever the reason, we are unable to visualize a situation

in which a non-converting debenture holder who died before the action

was commenced can become a client of the “class” attorneys or can

“impliedly” accept the benefits of the attorneys’ efforts.

(footnote continued on next page)

5308

—

EB)

Re

fe

MME

25a

This means that attorneys may sue on behalf of unknown

and unnamed individuals, secure a money judgment, osten-

sibly on their behalf, and pocket a substantial part of the

judgment funds earmarked for non-claiming absentees,

without these absentees even knowing what has happened.

Apparently, our colleagues in the majority either believe

this is not occurring in the instant case or else deem its

occurrence to be of no consequence.* We disagree on both

counts. If lawyers must receive this sort of favored treat-

ment to encourage the bringing of class actions, perhaps

the game is not worth the candle; the public is giving up

more than it is receiving in return.

We continue to believe that Van Gemert III was rightly

decided, and we adhere to the views expressed therein.

We likewise cannot comprehend how the holder of a $100 deben-

ture, who for any of a number of reasons does not collect, can be

said to benefit to the same extent as the holder of a $100 debenture

who does collect so that their “pro-rata” shares of attorneys’ fees are

the same.

4 The majority’s attitude appears to be summed up in footnote 14

of the majority opinion where they say that deducting attorneys’ fees

from the “spoils” of the litigation cannot injure absentee class mem-

bers who are not going to collect anyway.

5309

APPENDIX B

27a

UNITED STATES COURT OF APPEALS

For tHE Seconp Circuit

vy

-—_

a

No. 551—September Term, 1977.

(Argued December 12, 1977 Decided March 27, 1978.)

Docket No. 77-7547

wows

——

Wim R. Van Gemert, et al.,

Plaintiff s-A ppellees,

V.

Tue Borrnc Company

(Formerly the Boeing Airplane Company) et al.,

Defendants-Appellants.

cs

Y

Before:

Muuuiean, Oakes and VAN GRAAFEILAND,

Circuit Judges.

Appeal from a final order of Judge Sylvester J. Ryan

of the United States District Court for the Southern Dis-

trict of New York which directed that plaintiffs’ attorneys’

fees be paid from the entire class fund rather than from

that portion which is claimed by class members.

Reversed and remanded with instructions.

S. Hazarp Ginuesprr, New York, N.Y. (Davis

Polk & Wardwell of counsel), for Appel-

lants, The Boeing Company (Formerly The

Boeing Airplane Company), et al.

2093

28a

Stuart D. Wecuster, New York, N.Y. (Kass,

Goodkind, Wechsler & Gerstein of counsel),

for Appellees, William R. Van Gemert, et all.

Irvinc Sremman, New York, N.Y. (Samuel

Weinstein of counsel), for Appellees, Wil-

liam R. Van Gemert, et al.

Norman Winer, New York, N.Y. ( Nathan, Mann-

heimer, Asche, Winer & Friedman, of coun-

sel), for Appellees, William R. Van Gemert,

et al.

~~.

ee

Van Graarer.ann, Circuit Judge:

In 1975, this Court ruled that appellant Boeing did not

give adequate notice of its intention to call certain con-

vertible debentures and held it liable in this class action

brought on behalf of debenture holders who failed to con-

vert. Van Gemert vy. Boeing Company, 520 F.2d 1373 (2d

Cir.), cert, denied, 423 U.S. 947 (1975). Subsequent pro-

ceedings in district court resulted in an order directing the

deposit of the amount of the judgment award, approxi-

mately six million dollars, in an escrow account in a New

York City bank. A Special Master was appointed, with

authority to receive and pass upon proofs of claim and to

supervise the administration of the judgment.

The order provided further that the members of plain-

tiffs’ committee of attorneys be awarded their fees, ex-

penses and disbursements, as fixed by the court, payment

thereof to be made from the total amount of the judgment.!

The sole issue on this appeal is whether that portion of the

escrow fund which is not claimed hereafter by class mem-

bers can be charged with a pro rata share of the attornevs’

1 The district court ordered that

cation for fees be submitted wi

ment.

affidavits in support of counsels’ appli-

thin twenty days of the entry of judg-

2094

a

BROS oT ee

EF II

29a

fees and expenses. We hold that —_ absent nayeaenad

bers receive the benefit of the attorneys’ labors by Se

their portions of the caine’ ¢ Hse vn ctiad ass

i ir undistribute .

Tila’ aise of cnaden’ funds has been before this

Court on a prior appeal which evi HH er =

isi iabili Gemert v. Boein bes :

ace. ah. ep appeal, we rejected : gre a

the shares of non-claiming class ero : : = . =n

pro rata among claiming members in order pos pen

i ing their legal fees and disbursements. ©1 ing

ry Carlisle & Jacquelin, 479 F.2d 1005 (2d a i gpe

vacated and remanded on other grounds, es ‘ : payin

(1974), we held that the “extraordinary remedy Be dirage

class recovery was not justified under the grime sgt

this case.2 Van Gemert, 553 F.2d at 815-16. Appe wo

seek to avoid the effect of our prior holding by tia

only a portion of the sting secre “i paymen

| ade directly to their attor :

— ~ they rely upon the equitable or gerne a

doctrine fathered by the leading cases of a ni :

Greenough, 105 U.S. 527 oo. poet 7: ae

ing Co. v. Pettus, 113 U.S. ,

pei an attorney who creates or preserves = a

the benefit of others in addition to his client may “ =

compensation from those who accept the fruits Oo silane

bors. Pettus, 113 U.S. at 125, 127. This award - A ia

upon the existence of an attorney's lien agains : —

but rather upon the equitable principle that wre : a

efit from the attorney’s services should pay for

2 Because the Supreme Court vacated and ee ae Boy a

grounds, it did not pass upon the issue of . a iin &

ever, the Ninth Circuit appears to share this , oe ak ine

treat the class as a whole as a judicial entity ~ z oe po

In re Hotel Telephone Charges, 500 F.2d 86, 89-

2095

Rg ie ee ee maiamice

Stee

Sad

athe.

30a

General Finance Corp. v. New York State Rys., 3 F. Supp

975, 976 (W.D.N.Y. 1933) (quoting In re Gillaspie, 190 F-

88, 91 (N.D, W. Va. 1911)). More recent decisions, expand-

ing on the concept of unjust enrichment, have held that

under appropriate circumstances an attorney may have a

right to compensation from the beneficiaries of his labors

even though his efforts have not been directed toward we

creation or preservation of a fund. See, e.g., Mills v. Elec-

tric Auto-Lite Co., 396 U.S. 375, 391-97 (1970); Sprague

v. Ticonic Bank, 307 U.S. 161 (1939); Kopet . Esquire

Realty Co., 523 F.2d 1005, 1008 (2d Cir. 1975). |

Appellees contend that the foregoing line of authorities

justifies an award for attorneys’ fees from the six-million

dollar class award regardless of whether the entire award

is distributed to class members. This argument has a sur-

face appeal because it suggests a procedure that not onl

appears to be reasonable, but also is simple to seni

There are, however, other factors which must be cones

ered in weighing the merits of appellees’ proposal.

Class actions, termed by some as “lawyer’s lawsuits”

sec Developments in the Law—Class Actions, 89 Harv 1 |

Rev. 1318, 1605 (1976), have received a good deal of wren

cism; and much of this has been directed at the substantial

fees awarded to class attorneys. See, e.g., Alpine Phar-

macy, Ine. v. Chas. Pfizer & Co., 481 F.2d 1045 1049-50

(2d Cir.), cert, denied, 414 U.S. 1092 (1973). Borme wiih

as “golden harvest of fees”, Free World Foreign Cars 7 ne

v. Alfa Romeo, 8.p.A., 55 F.R.D. 26, 30 (S.D.N.Y 1972),

‘astronomical fees”, M. Blecher, Zs the Class Action Rule

Doing the Job? (Plaintiff's Viewpoint), 55 F.R.D. 365 986

(1972), and “enormous fees”, Comment, 54 U, Det | 7 Url

L. 598, 611 (1977), are used to describe the Siotsanner

which often run into the million of dollars.’ Critics point

3 C

Younsel in this case are requesting fees of approximately two million

dollars.

2096

oer

PLP IGIE 5 RPO FOOL LIES

3la

particularly to over-generous applications of the equitable

fund doctrine, by means of which massive fees are awarded

attorneys with too little regard for the interests of the

class memhers. See City of Detroit v. Grinnell Corp., 560

F.2d 1093, 1098 (2d Cir. 1977). This criticism, much of

which is justified, prompts careful inquiry into whether it

would be a misapplication of the equitable fund doctrine

to permit counsel herein to collect part of their fees and

expenses from the allocable shares of class members who

claim none of the proceeds of the recovery.

Although the amendments to Rule 23 have been in effect

since 1966, only a few class actions for damages have gone

through a trial on the merits to judgment. Hisen, 479 F.2d

at 1018-19; C. Wolfram, The Antibiotics Class Actions,

1976 Am. B. Foundation Research J., 251, 357; W. Simon,

Class Actions—Useful Tool or Engine of Destruction?, 55

F.R.D. 375, 378 (1972) ; Note, The Cy Pres Solution to the

Damage Distribution Problems of Mass Class Actions, 9

Ga. L. Rev. 893, 900 (1975). As a result, there has been

little need to resolve the “troublesome question” of what

to do with the unclaimed portion of a judgment for dam-

ages in favor of a class. See Eisen, 479 F.2d at 1012.

Fluid class recovery concepts have been adopted by a num-

ber of courts in actions which have terminated in settle-

ment. See, ¢.g., State of West Virginia v. Chas. Pfizer &

Co., 314 F. Supp. 710 (S.D.N.Y. 1970), aff’d., 440 F.2d 1079

(2d Cir.), cert. denied, 404 U.S. 871 (1971).5 However,

4 Although we do not know that there will be any unclaimed funds,

the history of class litigation to date has demonstrated a surprisingly

small response by absent members notified of their right to make claims.

See F. Kirkham, Complex Civil Litigation—Have Good Intentions Gone

Awry?, 70 F.R.D. 199, 206 (1976); W. Simon, Class Actions—U seful

Tool or Engine of Destruction?, 55 F.R.D. 375, 377-78 (1972).

5 But see B & B Investment Club v. Kleinert’s Inc., 62 F.R.D, 140, 150

(E.D. Pa. 1974) where the Court said: “We do not perceive any reason

2097

32a

precedents involving settlements are of little help when a

case has been litigated through trial to judgment. Eisen,

479 F.2d at 1012; City of Philadelphia v. American Oil Co.

53 F.R.D. 45, 71 (D.N.J. 1971).

This Court expressed in Hisen, supra, its unwillingness

to adopt the concept of fluid class recovery, and, on a

prior appeal, we refused to apply it in this litigation,

which is fundamentally a private dispute arising out of

the debenture contract. Van Gemert, 553 F.2d at 815, 816.

In Eisen we said that “the claims of many may not be

treated collectively or as ‘the class as a whole’... .” 479

F.2d at 1014. The compensation of appellees’ attorneys

must come therefore from the individual class members,

not from the “class as a whole.”

Although the holdings which follow Greenough and

Pettus speak broadly of recovering attorneys’ fees from

funds, intrinsic in every case is the requirement that bene-

fits must accrue to those against whom expenses are as-

sessed. See Alycska Pipeline Service Co. v. Wilderness

Society, 421 U.S. 240, n.89 (1975). “The award of fees

under the equitable fund doctrine is analogous to an action

in quantum meruit: the individual seeking compensation

has, by his actions, benefited another and seeks payment

for the value of the service performed.” Lindy Bros.

Builders v. American Radiator ¢& Standard Sanitary Corp.,

487 F.2d 161, 165 (3d Cir. 1973). Those who receive no

benefit from the lawyer’s work should not be required to

pay for it. Schechtman v. Wolfson, 244 F.2d 537, 540 (2d

why maximum exposure could not be provided for with provisions made,

depending upon the claims presented, for a return of any excess to the

defendants.”

6 In City of Detroit v. Grinnell Corporation, 495 F.2d 448, 470 (24

1974), this Court, quoting Lindy, said: “In its simplest terms, the pur-

pose of the fee award is to ‘compensate the attorney for the reasonable

value of services benefiting the . . . claimant.’”

2098

er cee

a

33a

Cir. 1957); Nolte v. Hudson Nav. Co., 47 F.2d 166, 168

(2d Cir. 1931); Simmons v. Friday, 190 F.2d 849, 852 (8th

Cir, 1951); In re Irving-Austin Bldg. Corp., 100 F.2d 574,

578 (7th Cir. 1938); Baltic Independent School District v.

South Dakota High School Activities Association, 362 F.

Supp. 780, 786 (D. S. Dak. 1973) ; cf. City of Miami Beach

v. Jacobs, 34% So. 2d 236 (Fla. Dist. Ct. App. 1976), cert.

denied, 348 So. 2d 945 (Fla.), cert. denied, 98 S.Ct. 430

(1977). In a private action for damages such as this,

“t]here is no reason why the attorneys should be com-

pensated for potential benefits not accepted by members

of the class.” Blank v. Talley Industries, Inc., 390 F. Supp.

1, 6 (S.D.N.Y. 1975); see also 2 H. Newburg, Class Ac-

tions, 12780 at 1249 (1977) ; E. Labowitz, Class Actions in

the Federal System and in California: Shattering the

Impossible Dream, 23 Buf. L. Rev. 601, 647 (1974) ; cf.

Miller v. Union Barge Line Corporation, 299 F. Supp. 718,

721 (W.D. Pa. 1969). a

The application of this rule should cause no administra-

tive difficulties on remand. Having directed the creation

of an escrow account for the total amount of the possible

recovery, the district court must now set a reasonable

period of time for the proof of claims by class members.

Because both administrative expenses and attorneys’ fees

and disbursements are to be charged pro rata against the

awards to class members, payment of the awards must be

deferred until the Special Master has completed processing

the claims and his fees and expenses can be determined.

At that point, the benefits accruing to class members can

be “traced with some accuracy”, and the costs can be

“shifted with some exactitude to those benefiting.” Alyeska,

421 U.S. at 265 n.39. The district court may then make

an appropriate award for attorneys’ fees and expenses.

If any funds remain unclaimed, the Court must make

appropriate disposition of them. Because it is conjectural

2099

peuaithadaddenkebtin cd eek ae ee —s

34a

as to whether there will be any unclaimed funds and be-

cause we have not been asked to consider the question of

their disposition on this appeal, we express no present

view on this matter. Recognizing, however, the possibility

that unclaimed funds will be returned to the defendant,’

we point to the Supreme Court holding in Alyeska as i

additional reason why attorneys’ fees should not now be

charged against the entire escrow fund.

Reversed and remanded for furth

; er proceed hia a

cordance with this opinion. . oe

Oakes, Circuit Judge (dissenting in part) :

I first disavow the rhetoric of the majority directed at

class actions and “class action lawyers.” Class actions often

are valuable tools for the individual plaintiff seeking juation

against a defendant whose resources enable it to obtain

the highest-paid lawyers to engage in such extensive dis-

covery and other litigation techniques that one, two or thre

plaintiffs otherwise could never afford to conduct the “oi

suit. This very case exemplifies the usefulness of class

actions. Holders of $1.5 million of debentures that were

worth $4 million only if converted by a given deadline were

given inadequate and unreasonable notice of Boeing’s in-

tention to redeem the debentures and of the conversion

7 Those advocates of fiuid class recovery who view class actions pri

marily as deterrents against wrongful conduct urge that unclaimed Auet

disposed of in a manner similar to the cy pres doctrine of the law

0 bape. or that they escheat to the state. 7A Wright & Miller, Fed-

= dae and Procedure § 1784 at 64 (Supp. 1976); 8. Gordon

sym ty Under the Proposed Uniform Class Actions Act, 31 8

“ 715, 725 (1977); Uniform Class Actions, 63 A.B.A.J 837 842

biewtt f However, even some proponents of fiuid class recovery concede

under some circumstances it may be appropriate to return unclaimed

funds to the defenda . ;

$16(). endant. See, ¢.9., Uniform Class Actions Act (U.1..A.)

2100

PONE DIELS

(Ak Pees

35a

deadline. The class members therefore failed to exercise

their conversion rights by the deadline. Van Gemert v.

Boeing Co., 520 F.2d 1373, 1378, 1383 (2d Cir.) (Van Gemert

1), cert. denied, 423 U.S. 947 (1975). A decade of hard-

fought difficult litigation has at last resulted in an award

to the debenture holders which, had the original notice

been sufficient, would have rightfully been theirs for the

asking. In the process, against uphill odds, the lawyers for

the now successful plaintiffs did an extraordinarily capable

job, having even “made new law” on a complicated set

of facts. Thus, criticism against class actions generally or

plaintiffs’ attorneys’ fees in particular’ falls flat when

focused on the case at bar.

I am required to agree, however, with the basic theory

of the majority opinion—that attorneys’ fees are recover-

able solely from the class members who file proper proofs

of claim, rather than from the entire class fund—because

so-called fluid class recovery was rejected in Van Gemert

vy. Boeing Co., 553 F.2d 812, 815-16 (2d Cir. 1977) (Van

Gemert II),? relying on Eisen v. Carlisle & Jacquelin, 479

F.2d 1005 (2d Cir. 1973), vacated and remanded on other

grounds, 417 U.S. 156 (1974). Van Gemert IT is the “law

of the circuit”; absent en banc treatment of the issue I

am bound to follow it, therefore, whether or not I agree.

But this court’s rejection of fluid class recoveries does

not end the inquiry here. It seems to me that there is a

J Those who criticize the fees of class action plaintiffs’ lawyers seem

to overlook the fees charged by class action defendants’ lawyers. Could

it be that a double standard is being applied?

2 Van Gemert II rejected the proposition that class members who file

proper proofs of claim should be entitled to pro rata distribution of the

unclaimed portion of the damage award. In doing so, it found uncon-

vineing the argument that the unclaimed funds should be awarded to

the claiming members of the class to defray their legal expenses. I

agree with the majority to the extent that this holding precludes use

of the unclaimed funds to pay the legal fees of class action attorneys.

2101

36a

sharp distinction between attorneys’ fees and attorneys’

disbursements. Plaintiffs’ attorneys’ fees in class actions

generally being contingent, as they are here, are earned

only if there is recovery. And Van Gemert II’s implicit

holding, see note 2 supra, that attorneys’ fees may not be

imposed on unclaimed funds, must be based on a similar

theory—when there are no claimants, there is no “re-

covery”; thus this portion of the fund has not been

“earned.” Reimbursement of disbursements, by contrast,

is not dependent on success. In fact, attorneys are pre-

cluded from expending funds on behalf of their clients un-

less the client remains ultimately liable for the expenses.

See ABA Code of Professional Responsibility, Canon 5,

Ethical Consideration 5-8, Disciplinary Rule 5-103(B).

Accordingly, the number of ultimate claimants should not

affect an attorney’s right—perhaps his duty—to recover

all disbursements from the entire fund. Additionally,

fundamental principles of fairness underlying established

law relating to recovery of expenses from a common fund,’

see Mills v. Electric Auto-Lite Co., 396 U.S. 375, 389-97

(1970), militate in favor of permitting repayment of attor-

neys’ disbursements out of the fund as soon as it is estab-

lished. These expenses, incurred for the benefit of all, are

necessary if there is to be recovery by anyone. Attorneys

who advance such sums do so expecting, as they must, re-

imbursement. Furthermore, if they are only repaid per

claimant—that is, by computing the amount that each class

member would have to contribute if the whole award were

claimed, and then charging the claiming class members for

disbursements as if all potential claimants had filed—the

attorneys would have to bear the loss for the portion of

out-of-pocket costs attributable to entitled class members

8 Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 257,

264-65 0.39 (1975), expressly preserved the common fund doctrine.

2102

ST aT TT? seis

RIEL LG. NF CLE LIE LOLI OL OE

FIO LILLE SS

37a

who failed to file their claims.‘ This result simply does

not make common sense. I therefore dissent in part.

emp ye i uired to absorb the total

4 Of course, if the filing claimants were aie recovery, the attorneys

i hare of t

isbursements out of their pro rata 8 on

iat udtain complete reimbursement. But this would reduce the g

claimants’ compensation and, in turn, be unfair ba — gram

The result of the majority decision, ante at 2 = pd oye tg

the attorneys absorb the disbursements a an soneanak te

that the claiming members of the class end by dere Pear

paying all attorneys’ disbursements—perhaps even

shares of the award. With either result I disagree.

2103

APPENDIX (7

39a

Judgment and Order

UNITED STATES DISTRICT COURT

Soutuern District or New York

66 Civ. 1820 (SJR)

a

vv

WiuuuM R. Van Gemert, et al.,

Plaintiffs,

—against—

Tse Borinc Company (formerly Borrna AIRPLANE

Company) and THomas R. Witcox,

Defendants.

a

vv

A judgment having been duly entered in the above action

on December 30, 1976 pursuant to an order of this Court

dated December 27, 1976 adjudging and decreeing that

plaintiffs, in behalf of all members of the plaintiff class,

shall recover as their damages herein the principal sum of

$3,289,359 and that all members of the plaintiff class shall

be entitled to receive interest at the rate allowed in this

District from the date of said judgment to the date of pay-

ment, and containing other provisions as therein more fully

set forth, and an appeal having been taken by plaintiffs

individually and on behalf of the members of the class to

the United States Court of Appeals for the Second Circuit

from so much of the judgment and order which denied pre-

judgment interest on said sum of $3,289,359 from March 29,

1966 and denied plaintiffs appellants’ claim that said dam-

age sum awarded should be increased to $4,026,762, and

the Court of Appeals having rendered its decision on April

18, 1977 affirming in part and reversing in part the judg-

ment and order appealed from and remanding the case to

40a

mg District Court, Southern District of New York, affirming

t e pst awarded to plaintiffs and the class and revers-

ing t at portion of the judgment which directed that no

Apion ed interest be awarded, holding that under

nS wr a ag parags an award of interest at the legal

e date of the b

aie reach, March 29, 1966, was

Phe upon the said opinion and mandate of the United

‘ 8 Court of Appeals for the Second Circuit in the

above entitled action decided April 18, 1977, it is hereby

Reo so AND Dercreep that plaintiffs in behalf

“oh rs of the plaintiff class, which consists of all

olders on March 29, 1966 of 414% Convertible Subordi

nated Debentures of the Boeing Company who failed t

exercise their conversion right before it terminated

March 29, 1966, shall recover as their damages herein fro

the defendants the principal sum of $3,289,359 to ther

with interest thereon at the legal rates fixed by the State of

New York, N.Y.C.P.L.R. § 5001(a) from March 9, 1966 to

the date of this j

preston 8 judgment, with costs to be taxed; and it is

Onperep that the members of the Plaintiffs Committee of

Attorneys be awarded their fees, expenses and disburse-

ments as fixed by the Court to be paid out of said total

amount of this judgment; and it is further

Orperep that each member of the plainti

not heretofore redeemed his portal sce ~ eon

receive the sum of $316.25 for each $100 face amount of

debenture together with interest as set forth above, plus

rene upon the redemption value of $103.25 from March

Page to the date of payment to the debenture-holders

r deducting such class member’s proportionate édinee

of the total amount allowed for attorneys’ fees, expenses

and disbursements; each class member’s proportionate

LT IPO ATER MOTE A

4la

share shall bear the same ratio to all such fees, expenses

and disbursements as such class member’s recovery shall

bear to the total recovery provided for herein; and it is

further

Orperep that each member of plaintiff class who has

heretofore redeemed his debenture shall be entitled to

receive the sum of $213 for each $100 face amount of de-

bentures together with interest as set forth above, plus

interest upon the redemption value of $103.25 from March

29, 1966 to the date of redemption, after deducting such

class member’s proportionate share of the total amount

allowed for attorneys’ fees, expenses and disbursements ;

each class member’s proportionate share shall bear the

same ratio to all such fees, expenses and disbursements as

such class member’s recovery shall bear to the total recovery

provided for herein; and it is further

Orperep that within 15 days after the entry of this judg-

ment the defendants shall deposit the amount of this

judgment plus interest at the rate of 6% per annum to the

date of such deposit, in a commercial bank, a savings in-

stitution or other depository in the Borough of Manhattan,

City of New York, upon which interest shall accumulate

until disbursed, and that such monies shall be so held in

escrow pending the further order of this Court; and it is

further

Orperep that affidavits in support of the fees to be

awarded to the attorneys for the class shall be submitted

to this Court within twenty days after the entry of this

judgment; and it is further

Orperep that George J. Solleder Jr., Esq., of 19 Rector

Street, New York, New York, Telephone Number BO 9-2222,

is hereby appointed Special Master with all the powers

enumerated in Rule 53 of the Federal Rules of Civil Pro-

42a

cedure to direct the parties in the necessary ministerial

steps to effectuate the Judgment, receive all proofs of claim

to participate in the Fund established by the Judgment,

pass on the validity of same, direct the giving of notices

to interested persons of hearings on disputed claims, con-

duct the necessary hearings, submit reports thereon and in

general supervise the administration of the Judgment and

decide all disputed questions of law and fact connected

therewith subject to confirmation by the Court; all ex-

penses incurred by the Special Master, including his fee

shall be paid out of the Fund; and it is further

Orperep that this Court shall reserve and retain jurisdic-

tion of this action pending the implementation of this order

and judgment, for the making of such further orders or

any other acts as may be necessary to carry out the purpose

of this order and judgment.

Dated: New York, New York

June 30, 1977

/s/ Syuvester J. Ryan

U.S.D.J.

Pree

43a

WriuiaM R. Van Gemert, et al. v. THE Bozixe CoMPANY

and Tomas R. Wiicox

ENDORSEMENT

66 Civ. 1820

Defendants’ motion for an Order amending a portion of

the Judgment and Order of this Court dated June 30, 1977

is denied.

The following parts of the Judgment and Order are

claimed by the movants to be contradictory and violative of

the Court of Appeals decision in this case (553 F.2d 812)

and the holdings in other cases cited in the supporting

memorandum.

“Orperep that the members of the Plaintiffs Com-

mittee of Attorneys be awarded their fees, expenses

and disbursements as fixed by the Court to be paid

out of said total amount of this judgment;.. .”.

“after deducting such class member’s proportionate

share of the total amount allowed for attorneys’ fees,

expenses and disbursements; each class member’s

proportionate share shall bear the same ratio to all

such fees, expenses and disbursements as such class

member’s recovery shall bear to the total recovery

provided for herein; . . .”,

These provisions do not depart from the Court of Appeals

decision. The Court of Appeals ruled that those class

members who file proofs of claim are not entitled to either

a pro rata portion of the damage award which remains

unclaimed nor to the unclaimed funds in order to defray

the legai expenses of the claiming members.

Me RR PRL OR es

44a

Under the circumstances of this protracted suit, it is

equitable that all class members both claiming and non-

claiming, if any, bear a pro rata portion of the fees,

expenses, disbursements and administration costs and the

Judgment and Order so provides.

So ordered.

Dated: New York, New York

September 22, 1977

/s/ Sytvester J. Ryan

Senior U.S. District Judge

APPENDIX D

TNA eee ee

ang |)

45a

UNITED STATES COURT OF APPEALS

Seconp Circuit

Nos. 879, 880, Dockets 77-7009, 77-7031

Argued Feb. 25, 1977

Decided April 18, 1977

Wittiam R. Van Gemert et al.,

Plaintiffs-Appellants,

v.

Tur Bortnc Company anp THomas R. WILcox,

Defendants-A ppellees.

es

A

Before MANSFIELD and VAN GRAAFELLAND, Cireuit Judges,

and Misuuer, District Judge.*

Van GraaFEILann, Cireuit Judge:

This appeal arises from a consolidated class action

brought by non-converting holders of the Boeing Com-

pany’s 412% cunvertible subordinated debentures due July

1, 1980. The amended complaint alleges that appellants had

received inadequate notice of Boeing’s intention to call the

convertible debentures in question and were therefore

unable to exercise their conversion rights prior to the

deadline for the call which was midnight, March 29, 1966.

The redemption price for each $100 of principal amount of

debentures was $103.25. However, if appellants had been

able to meet the call deadline, they could have converted

each $100 of principal amount of debentures into at least

* Chief Judge, Eastern District of New York, sitting by designation.

46a

two shares of common stock. On March 29, 1966 the com-

mon stock obtainable for each $100 of debentures was

worth $316.25. Within thirty days thereafter the stock

was worth $364. Damages demanded by appellants are

based on the difference between the redemption price and

the value of the common stock.

Originally, the District Court dismissed the complaint.

On appeal, this Court reversed that judgment and re-

manded to the District Court for a determination of dam-

ages. Van Gemert v. Boeing ('o., 520 F.2d 1377 (2d Cir.),

cert. denied, 423 U.S. 947, 96 S.Ct. 364, 46 L.Ed.2d 282

(1975). District Judge Ryan has now made that determina-

tion, and the case is once again before this Court.

Judge Ryan awarded damages based on the value of

Boeing’s common stock on March 29, 1966, which, as noted

previously, was the cut-off date for the exercise of conver-

sion privileges. He awarded no prejudgiment interest. Ap-

pellants take exception to both of these rulings. They

contend that, under New York’s “fluctuating value” test,

Judge Ryan should have valued the Boeing common stock

as of April 14, 1966, when two shares of that stock were

worth $364. Additionally, appellants assert that the Dis-

trict Court should have awarded prejudgment interest. We

believe that Judge Ryan properly valued the stock as of

March 29, 1966. However, we agree with appellants that

they are entitled to pre-judgment interest.

[1] We are satisfied that New York law controls both of

these questions. In our prior opinion, we found that ap-

pellants’ federal claims were sufficient to provide the Dis-

trict Court with jurisdiction over the case. Id. at 1382.

However, the relief granted appellants was founded on

State law. In finding that Boeing had failed to provide

the debenture holders with reasonably adequate notice of

the redemption, we held that:

47a

The duty of reasonable notice arises out of the con-

tract between Boeing and the debenture holders, pur-

suant to which Boeing was exercising its right to

redeem the debentures.

Id. at 1383. It is the source of the right, not the basis of

federal jurisdiction, which determines the controlling law.

United Mine Workers v. Gibbs, 383 U.S. 715, 726, 86 S.Ct.

1130, 16 L.Ed.2d 218 (1966) ; Maternally Yours, Inc. v.

Your Maternity Shop, Inc., 234 F.2d 538, 540 n.1 (2d cot

1956); see 13 C. Wright, A Miller & E. Cooper, Federa

Practice and Procedure § 3567, at 462 (1975). Conse-

quently, in determining the — measure of damages,

State law is controlling.

gp eet in us to apply the “fluctuating value” a

formulated by the New York courts for situations w oa

there has been a conversion of stock. Succinctly stated, this

rule provides that:

The measure of damages for conversion of stock

certificates is the cost of replacement within a reason-

able period after the discovery of the conversion,

gardless of when the conversion may have occurr

.... (Citations omitted).

ord Accident & Indemnity Co. v. Walston & Co., 22

ee ve 672, 673, 291 N.Y.S.2d 366, 367, 238 N.E.2d tn

(1968). This rule does not apply to the facts of the instan

ver.

in ere v. Drake, 53 N.Y. 211 (1873) and Mayer v.

Mongo, 221 N.Y. 442, 117 N.E. 948 (1917), cases _— —

by appellants, it was alleged that stockbrokers 80 : a

principal’s stock without authorization. The owners : Neat

stock were holding these securities, hoping to rea he

profit from their sale. Baker v. Drake, supra, 53 a a ee

The Baker court explained the theory on which damag

ae ene

48a

would be awarded when stock held for this’ purpose was

converted.

If, upon becoming informed of the sale, he desired

further to prosecute the adventure and take the chances

of a future market, he had the right to disaffirm the

sale and require the defendants to replace the stock.

If they failed or refused to do this, his remedy was to

do it himself and charge them with the loss reasonably

sustained in doing so. The advance in the market price

of the stock from the time of the sale up to a reasonable

time to replace it, after the plaintiff received notice of

the sale, would afford a complete indemnity.

Baker v. Drake, swpra, 53 N.Y. at 217.

The situation presented in the instant case is wholly dif-

ferent from the circumstances existing in Baker and its

progeny. Here, appellants never owned any common stock

of Boeing and do not claim to have purchased any. See

Hartford Accident € Indemnity Co. v. Walston & Co., supra,

22 N.Y.2d at 673, 291 N.Y.S.2d 366, 238 N.E.2d 754. In

reality, appellants are asking us to treat them as if they

were owners of the stock on the cut-off date, March 29, and

to speculate that they would have sold these shares at the

highest price reached within a reasonable time thereafter.

Such a theory of damages was specifically rejected in Simon

v. Electrospace Corp., 28 N.Y.2d 136, 145, 320 N.Y.S.2d 225,

269 N.E.2d 21 (1971).

[2] In our former opinion we held that appellants’ right

to damages arose out of their contract with Boeing. Van

Gemert v. Boeing Co., supra, 520 F.2d at 1383. We are

confident that, faced with the facts presented here, the New

York courts would apply a breach of contract theory of

damages, resulting in the Boeing stock being valued as of

the cut-off date, March 29, 1966. In Simon v. Electrospace

49a

Corp., supra, the defendant breached its contract to deliver

shares of stock to the plaintiff for services rendered. The

Simon court stated :

The proper measure of damages for breach of con-

tract is determined by the loss sustained or gain pre-

vented at the time and place of breach .... The rule

is precisely the same when the breach of contract is

nondelivery of shares of stock .. .. Plaintiff was

never the owner of the stock of Electrospace just be-

cause defendant breached its contract to deliver the

shares. That breach and the loss caused was fixed and

determined in 1967... [and that was] the time when

the value to him of defendant’s performance was to be

measured. It was then that plaintiff was to be made

whole and not at some future time never specified in

the agreement. (Citations omitted).

Simon v. Electrospace Corp., supra, 28 N.Y.2d at 145, 320

N.Y.S.2d 225, 232-233, 269 N.E.2d 21, 26. The cases dealing

with converted stock were referred to by the Simon court

but did not control, because there, as here, the plaintiff did

not own the stock. Boeing had the right to call the deben-

tures as of March 29, 1966. However, it breached its con-

tract with the debenture holders by failing to give them

reasonably adequate notice of its action, thereby precluding

them from participating in the call. We hold that the

breach occurred on March 29, 1966; and, for the purpose of

computing damages herein, the Boeing stock should be

valued as of that date.

New York law also controls on the issue of pre-judgment

interest. Appellants contend that the awarding of interest

is mandatory under N.Y.C.P.L.R. § 5001 (a). Boeing, on the

other hand, asserts that our previous decision in effect re-

formed the contract between it and the debenture holders.

Because reformation is an equitable doctrine, see Brand-

:

{

:

;

;

;

7

t

}

no

Pi

= ns

50a

wein v. Provident Mutual Life Insurance Co., 3 N.Y.2d 491,

494, 168 N.Y.S.2d 964, 146 N.E.2d 693 (1957), Boeing argues

that the awarding of interest was discretionary with the

District Court.

[3,4] Boeing’s reliance on the doctrine of reformation is

misplaced. In our prior decision, we did not rely on a

mutual mistake between the parties in expressing the terms

of their agreement. Neither did we find unilateral mistake

on the part of the debenture holders occasioned by Boeing’s

fraud. We did find significant, however, the fact that the

debentures did not explicitly set forth the type of notice

which appellants could expect if Boeing decided to call the

bonds. Without such a declaration, we held as a matter of

law that appellants were entitled to expect that Boeing

would employ a method of notification reasonably calculated

to inform the debenture holders of the call. In doing so, we

merely applied the settled principle, “that in every contract

there is an implied covenant that neither party shall do

anything which will have the effect of destroying or injur-

ing the right of the other party to receive the fruits of the

contract ....” Kirke La Shelle Co. v. Paul Armstrong Co.,

263 N.Y. 79, 87, 188 N.E. 163, 167 (1933). Simply stated,

every contract contains the implied requirement of good

faith and fair dealing. Boeing was found liable therefore

because it breached its contract with appellants, and dam-

ages were awarded. Under N.Y.C.P.L.R. §5001(a), an

award of interest from the date of the breach, March 29,

1966, is mandatory. See Spang Industries, Inc. v. Aetna

Casualty & Surety Co., 512 F.2d 365, 371 (2d Cir. 1975).

*On remand, the District Court should compute interest at the

various legal rates applicable under New York law during the period

from March 29, 1 to the date that judgment is entered. Spang

Industries, Inc. v. Aetna Casualty & Surety Co., supra, 512 F.2d at

372; see Kaufman v. Chase Manhattan Bank National Association,

370 F.Supp. 279, 280 (S.D.N.Y. 1974).

5la

[5] On March 30, 1966, $1,544,300 in principal amount of

unregistered debentures had not been converted. Therefore

the class as a whole suffered damages of $3,289,359, exclu-

sive of pre-judgment interest. This sum with interest repre-

sents the maximum amount to be distributed should all

possible class members be identified and file proofs of claim.

On appeal, certain appellants raise the question of whether

class members who file proper proofs of claim should be

entitled to receive on a pro rata basis any portion of the

damage award which remains unclaimed. Boeing, of course,

sontends that the unclaimed money should be returned to

the corporation.

We see no reason to change our position, firmly stated in

Eisen v. Carlisle & Jaquelin, 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), disallowing a “fluid

class” recovery such as sought by appellants. Although, in

Eisen, the fund created by the unclaimed damages was to

be used to benefit individuals who were arguably not mem-

bers of the class, there is no difference in concept between

the relief at issue in that case and the relief requested

here, which in effect seeks distribution oi the unclaimed

portion to a “next-best” class. Moreover, there is even less

to recommend appellants’ proposal than the similar relief

suggested in Kisen.?

The problems inherent in appellants’ proposal are readily

apparent.

[T]his method expressly contemplates that silent

class members will not receive any compensation, even

2 In Eisen the class consisted of those who had yught or sold odd

lots on the New York Stock Exchange in the from May

1962 through June 20, 1966. The undistributed aes wane So

used, “for the benefit of all odd-lot traders by reducing the odd- .

differential ‘in an amount determined reasonable by the court -*

such time as the fund is depleted’”. Essen v. Carlisle & Jaquelin,

supra, 479 F.2d at 1011.

OER OO am

52a

indirectly. The claims of the silent class members

would be expropriated and a windfall might result

for those who appeared and collected their share of

the damages. Consequently, this procedure might en-

courage the bringing of class actions likely to result in

large uncollected damage pools. It also raises serious

questions as to the adequacy of representation where

the interests of the named plaintiffs lie in keeping the

other class members uninformed. In sum, the deficien-

cies of this method of distribution make it a generally

unacceptable alternative. (Footnote omitted).

Note, Damage Distribution in Class Actions: The Cy Pres

Remedy, 39 U.Chi.L.Rev. 448, 453 (1972). Appellants

argue, however, that they should receive the unclaimed

funds to defray the legal expenses of the claiming members

of the class; in essence, that Boeing should pay, at least in

part, their legal fees and disbursements. The simple answer

to this argument is that, what appellants may not gain

directly, see Alyeska Pipeline Service Co. v. Wilderness

Society, 421 U.S. 240, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975),

they may not gain indirectly, and certainly not through such

an imperfect vehicle as they have proposed. Without re-

gard to the constitutionality of a “fluid class” award, Eisen

v. Carlisle @ Jaquelin, supra, 479 F.2d at 1018, the cireum-

stances here simply do not eall for this extraordinary

remedy.

The case is remanded to the District Court for entry of

a judgment in accordance with this opinion.

APPENDIX §

Opinion of the Court of Appeals

UNITED STATES COURT OF APPEALS

For tHE Seconp Circuit

—e

Nos. 321-25—September Term, 1974.

(Argued February 26, 1975 Decided July 14, 1975.)

Docket Nos. 74-1157-59, -1165, -1185

= =

—S

Wim R. Van Gement, et al.,

Appellants,

——

Tue Boerne Co., et al.,

Appellees.

4

>

y

Before:

LumBarD, Oakes and TIMBERS,

Circuit Judges.

Suit by holders of convertible debentures who failed to

convert prior to company’s redemption claiming insufficient

notice of redemption provided. The United States District

Court for the Southern District of New York, Sylvester J.

Ryan, Judge, held that the notice provided by the com-

pany complied with the provisions in the debenture and

underlying Trust Indenture; that the Trust Indenture Act

of 1939 and the company’s Listing Agreement with the

New York Stock Exchange were not violated; and that

_ appellants had no standing to raise a claim based upon

an alleged failure to make a necessary adjustment in the

é

—

d4a

conversion rate. Held, that the appell

valid claim. ppellants had stated a

Judgment reversed.

<td te

or

Stuart D. Wecuster, Kass, GoopkKi1nD, WECHSLER

& Gerstein, New York, N.Y.; Sachnoff,

Schrager, Jones & Weaver, Ltd., Chicago,

Ill.; Elson, Lassers & Wolfe, Chi

, ’ cago, IIl.,

for Appellants, ,

Winer & FriepmMan, New York, N.Y., for

Appellants. - |

S. Hazarp Gittespm, Davis Pouk & WakDWELL,

New York, N.Y. (David E. Wagoner, Per-

kins, Coie, Stone, Olsen & Williams, Seattle

Wash., William H. Levit, J r., Hughes, Hub.

bard & Reed, Los Angeles, Cal., of counsel)

for Appellees.

-— =

i as

Oaxes, Circuit Judge:

This appeal is from a judgment dismissing the amended

complaint in a consolidation class action brought by non

converting holders of The Boeing Company’s “AI, es

vertible Subordinated Debentures, due July 1 1980.” The

complaint was jurisdictionally based on the Securitise Ex-

change Act of 1934 as amended, the Securities Act of

1933 as amended, the Trust Indenture Act of 1939 as

amended and the principles of pendent jurisdiction.’ The

gist of the complaint was that the appellants ena their

class had inadequate and unreasonable notice of Boeing’s

intention to redeem or “call” the convertible debentures in

question and were hence unable to exercise their conversion

1 See note 19 infra.

50a

rights before the deadline in the call of midnight, March

29, 1966. Their damage lay in the fact that the redemption

price for each $100 of principal amount of debentures

was only $103.25, while under the conversion rate of, at

a minimum, two shares of commou stock for each $100 of

principal amount of, debentures, the stock was worth

$316.25 on March 29, 1966, the cut-off date for the exercise

of conversion privileges, or within 30 days thereafter,

$364.00. The named appellants number 56, and the total

loss alleged is over $2 million.

The United States District Court for the Southern Dis-

trict of New York, Sylvester J. Ryan, Judge, held that

Boeing complied with the notice provisions spelled out in

the debentures and in the Indenture of Trust Dated July

1, 1958 (the Indenture), between Boeing and The Chase

Manhattan Bank (Chase), Trustee, and that it was re-

quired to do no more; that the Trust Indenture Act of

1939, 15 U.S.C. §§77aaa et seg., was not violated; that if

Boeing’s Listing Agreement with the New York Stock Ex-

change (NYSE) were violated, it gave appellants no claim

for relief; and that even if, as appellants claim, an adjust-

ment in the conversion rate were required, and that failure

to make the adjustment gave rise to a cause of action, ap-

pellants had no standing to raise the claim since they did

not exercise their conversion rights. We reverse and re-

mand on the ground that there was an obligation on

Boeing’s part to give reasonably adequate notice of the

redemption to the debenture holders, which obligation was

not fulfilled in this instance.

Most of the facts are not in dispute; indeed, we com-

mend the parties, and the court below, for agreeing to a

59-page statement as to facts, incorporating some 55 ex-

hibits, and to what certain witnesses would testify if called

at trial.

56a

Tue Issue or DEBENTURES

On July 15, 1958, each Boeing shareholder was given the

right to purchase $100 of convertible debentures for each

23 shares of stock then held.? The debentures were to pay

interest of 4144 per cent per annum and were to be con-

vertible by the debenture-holder into common stock at a

rate (subject to adjustment) of two shares per $100 prin-

cipal amount of debentures. Chase was appointed trustce

under the Indenture Agreement, and the debentures, as

well as the stock reserved for issuance upon conversion of

the debentures, were listed on the NYSE. Application for

such listing had been made pursuant to a Listing Agree-

ment between Boeing and the Exchange.

Subscriptions for a total of $29,578,500 of debentures

were received’ and the balance of $1,019,100 was purchased

by the underwriters. Chase as trustee then authenticated

and the subscription agent delivered by registered mail

the entire $30,597,600 aggregate amount of debentures in

coupon form to the persons designated in the warrants

surrendered or their agents,‘ but no list of these was kept

by Bovsing or Chase.‘

2 Total trading in the debenture rights was 1,702,200, but since no in

formation is available on the number or retrades thee is no wa ”

knowing exactly how many rights were not traded. At the least. He

ever, 5,335,248 rights were not traded on the Exchange. é ,

3 One may estimate, from the number of rights not traded on the Ex.

change, approximately $21 million worth of the were

debentures .

chased by Boeing stockholders or their donees. 1

4 Between August 4, 1958, when the debentures were admitted to

trading on the NYSE, and March 29, 1966, when conversion rights

expired, a total of $68,694,000 face amount of debentures were traded.

It is not known how many of the debentu were riginal

subscribers at the later date. gi site

5 City Bank-Farmers Trust Company, the subscription agent, retained

through the ultimate date on which conversion rights expired the names

and addresses of stockholders to whom the warrants were sent, as well

57a

A number of provisions in the debenture, the Indenture

Agreement, the prospectus, the registration statement for

the debentures and the Listing Agreement with the NYSE

dealt with the possible redemption of the debentures by

Boeing and the notice debenture-holders were to receive

of a redemption call so that they might timely exercise

their right to convert the debentures into common stock

rather than have their debentures redeemed at face value.

The debentures themselves provided:

The holder of this Debenture is entitled, at his option,

at any time on or before July 1, 1980, or in case this

Debenture shall be called for redemption prior to such

date, up to and including but not after the tenth day

prior to the redemption date, to convert this Debenture

. at the principal amount hereof, or such portion

hereof, into shares of Capital Stock of the Company ...

The Debentures are subject to redemption as a whole

or in part, at any time or times, at the option of the

Company, on not less than 30 nor more than 90 days’

prior notice, as provided in the Indenture, at the fol-

lowing redemption prices (expressed in percentages of

the principal amount) ...

This Debenture may be registered as to principal

upon presentation at the office or agency of the Com-

pany, in the Borough of Manhattan, The City of New

York, New York, ...

(Emphasis added.)

as lists of the names and addresses of stockholders of record for the

payment of dividends in May and August of 1958, and the warrants

themselves when they were tendered. Although the list of stockholders

was destroyed in 1964, the warants which bear the names and addresses

of the original subscribers are presently in the possession of a anecessor

agent.

58a

The Indenture itself, a 113-page printed booklet, pro-

vides in Art. V, § 5.02, as follows:

In case the Company shall desire to exercise the

right to redeem all or any part of the debentures, as

the case may be, pursuant to Section 5.01, it shall pub-

lish prior to. the date fixed for redemption a notice of

such redemption at least twice in an Authorized News-

paper, the first such publication to be not less than 30

days and not more than 90 days before the date fixed

for redemption. Such publication shall be in succes-

sive weeks but on any day of the week... .§

The Indenture also provided that debenture-holders who

registered their bonds would receive notice by mail of any

redemption call by the Boeing directors.

While the prospectus for the debenture issue did not

refer to any registration rights, it did state that redemp-

tion could occur “on not less than 30 days’ and not more

than 90 days’ published notice.”

The NYSE Listing Agreement dated November 5, 1957,

incorporated by reference into the listing application filed

by Boeing in respect to the debenture issue, provided in

Part ITI, Paragraph 4, as follows:

4. The Corporation will publish immediately to the

holders of any of its securities listed on the Exchange

any action taken by the Corporation with respect to

dividends or to the allotment of rights to subscribe or

to any rights or benefits pertaining to the ownership

of its securities listed on the Exchange; and will give

prompt notice to the Exchange of any such action; and

will afford the holders of its securities listed on the

6 An “Authorized Newspaper” is defined as one published «1. least five

days a week and of general circulation in the borough of Manhattan,

N.Y. See Indenture, Art. I, § 1.01.

Exchange a proper period within which to record their

interests and to exercise their rights. ...

(Emphasis added.)

Section A10 of the NYSE “Company Manual” specif-

ically defines what is meant by publicity in the Listing

Agreement:

Publicity: The term “publicity,” as used ..» below,

and as used im the listing agreement in respect of

redemption action, refers to a general news release,

and not to the formal notice or advertisement of re-

demption sometimes required by provisions of an inden-

charter.

a news release shall be made as soon as. possible

after corporate action which will lead to, or which looks

toward, redemption is taken . . . and shall be made by

the fastest available means, i.e., telephone, telegraph

-delivery.

<7 o ie a which will adequately inform

the public, the news should be released to at least one

or more newspapers of general circulation in New

York City which regularly pubiish financial news, OF

to one or more of the national news-wire services

(Associated Press, United Press International), in

addition to such other release as the company may

elect to make.

ion A10 of the Company Manual also provides spe-

Prsmissay when a convertible security is to be —

the news release must include the rate of conversion an

the date and time when the conversion privilege expires.

It further provides that in addition to the immediate “8

release the company must give notice immediately to the

NYSE itself, so.as to enable the NYSE to take any neces-

sary action with respect to further trading in the security.

= i a al ee ie ee ee

wo

Tue Cauu anp Its Crrcumstances—HEREIN OF THE

Notice AcTruaLLy GIven

On February 28, 1966, the Boeing board of directors

inter alia authorized the president, vice president-finance

or treasurer to call for redemption on a date to be selected

by them or any one of them, all of the convertible deben-

tures outstanding under the indenture of July 1, 1958. That

same clay a news release, headlining 1965 sales and net

earnings, and referring to a contemplated stock increase,

stock split and post-split dividends, mentioned that “[t]he

company’s management was also authorized to call for re-

demption at a future date all of company’s outstanding

4% percent convertible subordinated debentures.” This

statement, which did not mention even the tentative dates

for redemption and expiration of the conversion rights of

debenture holders that had been settled upon, was released

by the Bocing “News Bureau” nationally to the financial

editors of the New York Times, the New York Herald-

Tribune, the Wall Street Journal and other major national

newspapers, in addition to the major wire services (Asso-

ciated Press, United Press International and Dow Jones

& Co.).

A short time after the February 28 board meeting,

Boeing fitmed up the key dates, complied with the inden-

ture notice requirements and communicated to some extent

with the Exchange proper. On March 2, 1966, at the home

office in Seattle, at a meeting of Boeing officers, bankers and

lawyers, it was decided to fix March 8 as the date for the

first publication of the formal notice of redemption, April

8 as the redemption date and March 29 as the date for

expiration of the conversion privilege. The second date

for publication of the formal notice, March 18, was also

fixed upon at this March 2 meeting, and Chase was notified

to publish the redemption notice on those dates in all edi-

tions of the Wall Street Journal. All editions of the J ournal

carried the formal notices on March 8 and 18; the notices

were in due form if not of extensive size.’ It is conceded

by the appellants that the formal requirements of the In-

denture were met by the Company and Trustee.

It was not until March 7, the day before the publication

of the first formal notice of redemption, that the NYSE

was itself notified of the firmed-up dates for redemption,"

conversion and notice. This was done by a telephone call

from Company counsel in Seattle to the Exchange. While

the court below found in part that “Boeing did comply

with the publicity requirements of the Exchange” and

while Company counsel “felt” on the basis of his tele-

phone call “that we had complied with the recommended

procedures [of the Stock Exchange Manual],” this find-

ing and feeling are in the face of Boeing’s response

admitting appellants’ demand for admission

That Boeing did not issue any general publicity re-

lease, as that term is defined in Section A-10 of the

New York Stock Exchange Company manual, con-

cerning the call of the debentures during the period

from March 1, through March 24, 1966.

This admission was reconfirmed by counsel for Boeing

below and on appeal in the course of an “opening” state-

ment to the court. The original news release of February

28 did not qualify since the dates of conversion and re-

demption had not been fixed and the Manual requires in

the case of convertible securities that the publicity set

forth “the rate of conversion and the date and time when

the conversion privilege will finally expire” and that if

7 We estimate their size as 5” x 5%".

the redemp-

8 The Exchange had leen sent a communication concerning

tion on March 1, 1966, but at that time no redemption date bad been

established.

62a

such data are not known at the time publicity is given

initially, “similar publicity shall be given immediately it

becomes known or determined.” The formal notices did

not qualify since the Manual refers to a “general news

release,” and not to the formal notice or advertisement

of redemption. In this regard it is interesting to note

that a letter dated March 9 from the stock list depart-

ment of the Exchange to Boeing indicates that “We have

noted the recent advertisement advising of the call for

redemption” and also asks for a copy of the authorizing

resolution.

There was, in short, no general news release as called

for by the Listing Agreement as amplified in the Com-

pany Manual until on the eve of expiration of the conver-

sion rights, March 25, 1966, it appeared that $10,849,300

face amount of debentures—over one-half of those out-

standing at that time—remained unconverted. At that

point Boeing issued a press release’ and then on March

9 DEBENTURE CONVERSION DaTE MARCH 29

Final date for conversion of The Boeing Company's 4% per

cent convertible subordinated debentures to Boeing common stock

is Tuesday, March 29, as announced in advertising by the company

on March 8, 9 and 10.

The conversion rights provide for issuance of two shares of

common stock in the company for each $100 bond. The company’s

notice of redemption announced that all outstanding debentures

would be redeemed on or after April 8 at the redemption price of

103.25 per cent of their principal amount, together with accrued

interest to that date.

Closing price of the stock as of March 25 was $154.5, represent-

ing a substantial advantage to holders of the bonds if the conversion

is elected.

From January 1, 1965 through March 25, 1966, the sales price

for the common stock of The Boeing Company ranged from a high

of $175.25 to a low of $60.375 per share. As was pointed out in

the notice of redemption, so long as the market price of the common

stock is $52.24 or more per share, a debenture holder would receive

upon conversion before the March 29 deadline, common stock

having a greater value than the cash he would receive if he sur-

rendered the debenture for redemption.

28 the Company republished its earlier advertisement in

all editions of the Wall Street Journal (Eastern, Mid-

Western, Pacific Coast and South-West) and the New

York Times, and additionally advertisements were placed.

This later action had what the court below termed a “dra-

matic and widespread rippling effect.” Some $9,305,000

of debentures were converted on March 28 and 29. The

ripples, however, had not spread to the appellants’ class

by the midnight deadline on the 29th; they literally went

to sleep with $1.5 million of debentures’ that were worth

$4 million if only converted.

It is true, however, and the court did properly find, that

in addition to the publication of the two formal indenture

notices, notices of the dates of the call and the expiration

of the cowversion privilege on March 29, 1966, were carried

on the following services: NYSE ticker on March 8, 23, 24,

25, 26 and 28, 1966; NYSE Bulletin on March 11, 18 and

25, 1966; The Commercial and Financial Chronicle on

March 14, 21 and 28, 1966; Standard & Poor’s Bond Out-

look on March 19, 1966; Standard & Poor’s Called Bond

Record on March 9, 11, 18 and 25, 1966 ; Moody’s Industrials

on March 11, 1966. Articles about these dates were also

carried in the Seattle Post Intelligencer on March 25, 1966 ;

the Seattle Times on March 27, 1966; and the Financial

World on March 23, 1966; and the notice was also carried

in the Associated Press Bond Tables published on one had

more days in at least 30 newspapers published in major

cities across the United States. But almost all of these

notices or items were in fine print, buried in the multitude

of information and data published about the financial mar-

kets and scarcely of a kind to attract the eye of the average

lay investor or debenture holder. On March 9, 1966, the

listing in the New York Times for the convertible deben-

tures read, for example: “Boeing cv 4% s 80.” The change

64a

on March 10 was to “Boeing 4% s 80 cld,” giving the in-

vestor in Dubuque or Little Rock or Lampasas only 19

days to pick up this change and figure that “cld” meant

“called.” Proof of the inadequacy of these notices lies in

the fact that, despite the dramatic disparity between the

value of the debentures unconverted and the conversion

stock, over one-half of the debentures outstanding on the

date of the first notice remained unconverted until the gen-

eral publicity release on the eve of expiration of the con-

version privilege.’°

Because the appellants place some emphasis on the fact,

although we do not reach their contention of unreasonable

notice based on it, we should mention that Boeing made

no attempt to mail notice to the original subscribers (which

could have been done at concededly nominal expense), and

neither Boeing nor Chase inquired of or gave notice to col-

lecting banks which had tendered for collection coupons

bearing the payment dates of July 15, 1965, or January 15,

1966, the last two coupons before the redemption, either

of which might have had some beneficial effect."

THE CoNTENTIONS OF THE PaRTIES

Boeing rests its defense primarily upon the notice spe-

cified in the debentures and Indenture, pointing out that

in 1958 when the debentures were issued, “the risk that

actual notice might not be received by subsequent holders

of the debentures was clearly accepted by all even re-

10 On March 8, 1966, $21,514,700 face amount of debentures were still

outstanding. On March 25, 1966, as stated, four days before the expira-

tion of the conversion privilege, over one-half of these $10,849,300, had

not been converted.

11 Nor do we reach the legal argument under the Trust Indenture Act,

15 U.8.C. §77bbb, based upon the Indenture's provisions requiring

Boeing to give Chase lists of the names and addresses of debenture

holders obtained by the former, and the token compliance therewith.

63a

motely familiar with the nature of such debentures.” (Brief

at 20-21.) It was “just such a risk” that led Boeing to ex-

tend to its stockholders and others who were investing

$30 million in these securities the opportunity to register,

see Kaplan v. Vornado, Inc., 341 F. Supp. 212, 216 (N.D.

Ill. 1971), an opportunity availed of by only 7 per cent of

the debenture holders."* For the proposition that notice by

publication provided for here was “standard and con-

formed with the custom and practice prevailing in the trade

in 1958,” we are referred by Boeing to Gampel v. Burling-

ton Industries, Inc., 43 Misc. 2d 820, 252 N.Y.S.2d 500 (Sup.

Ct. 1964), where Justice Korn did not discuss the custom

and practice in the trade but did hold that publication in

the Wall Street Journal even during a newspaper delivery

strike conformed to a provision in the Burlington Indus-

tries debentures similar to the one in the case at bar.”

There are four main strings to the appellants’ bow. The

first is that Boeing is civilly liable under federal law for

violation of the NYSE Listing Agreement and Section

A10 of the NYSE Company Manual since their require-

ments are an extension of the Securities Exchange Act of

1934 and an integral part of the statutory scheme under

which exchanges are required to adopt rules, 15 U.S.C.

§78f, which may be ordered by the Commissidn to be

altered, 15 U.S.C. § 78s, and the violation of which may

give rise to a civil action under federal law. Cf. Buttrey

v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 410 F.2d

135 (7th Cir.), cert. denied, 396 U.S. 838 (1969). The second

12 Through April 8, 1966, $1,838,000 in face amount of the debentures

were registered as to principal and interest and $337,790 as to principal

only; thus, approximately 7 per cent of the debentures were in fact

registered so that their holders thereby automatically received notice

from the trustee.

18 See generally Miller, How to Call Your Convertibles, Har. Bus. Rev.

66 (May/June 1971).

66a

is that appellants are third party beneficiaries under state

law of the Boeing-NYSE Listing Agreement, as amplified

by the Company Manual. Lawrence v. Fox, 20 N.Y. 268

(1859). See Weinberger v. New York Stock Exchange, 335

F. Supp. 139 (S.D.N.Y. 1971) (Gurfein, J.) (Exchange li-

able under agreement with SEC to limited partner of bank-

rupt member firm inadequately supervised by Exchange).

The third claim of appellants is that the Indenture is in

the nature of a contract of adhesion, a standardized con-

tract between parties of disparate bargaining power, un-

conscionable features of which are unenforceable as a

matter of policy, a concept perhaps first advanced as to

indentures of trust covering convertible debentures in a

student note, Convertible Securities: Holder Who Fails to

Convert Before Expiration of the Conversion Period, 54

Cornell L. Rev. 271 (1969). Cf. Gray v. Zurich Insurance

Co., 65 Cal.2d 263, 269, 419 P.2d 168, 171, 54 Cal. Rptr. 104,

107 (1966). See Kessler, Contracts of Adhesion—Some

Thoughts About Freedom of Contract, 43 Colum. I. Rev.

629 (1943). The fourth ground is that the call was illegal

and therefore void because it was based upon a conversion

rate of 2.00 shares per $100 face amount of debentures

when as a result of two stock dividends and an acquisition

it should have been on a 2.05 or a 2.08 ratio.

THe FeperaL Law Ciam

The claim that Boeing is civilly liable under federal law

for violation of the NYSE Listing Agreement and Section

A10 of the Company Manual is a colorable one. The List-

ing Agreement and Company Manual are “instruments

corresponding” to rules of the Exchange within Section

6(a)(3) of the Securities Exchange Act of 1934, 15 U.S.C.

§ 78f(a)(3). For the debentures here in question to be

listed on the Exchange, application under the Listing

67a

Agreement had to be made. Boeing did not comply with

the publicity requirements of the Exchange. In O’Neill v.

Maytag, 339 F.2d 764, 770 (2d Cir. 1964), we did say,

however, in the context of a stockholder’s derivative suit

arising out of an air carrier’s purchase of its own stock,

that a transaction which violated an Exchange rule did

not give rise to a cause of action under federal law, at least

against a listed company or its officers.

But as the Supreme Court held in J. J. Case Co. v. Borak,

377 U.S. 426 (1964), private parties have both derivative

and direct rights of action to bring suit for violations of

the Securities Exchange Act of 1934 and SEC rules and

regulations issued thereunder, rights the explication of

which take up a fair amount of Second Circuit judicial

time. We extended this at least by dictum to include viola-

tion of stock exchange and securities dealers’ association

rules designed for the direct protection of investors, at

least in a suit against an Exchange member, in Colonial

Realty Corp. v. Bache & Co., 358 F.2d 178 (2d Cir.), cert.

denied, 385 U.S. 817 (1966). There, Judge Friendly, speak-

ing for a unanimous court, pointed out that “the concept

of supervised self-regulation is broad enough to encompass

a rule which provides what amounts to a substitute for a

regulation by the SEC itself.” 358 F.2d at 182. Again, “[a]

particular stock exchange rule could thus play an integral

part in SEC regulation notwithstanding the Commission’s

decision to take a back-seat role in its promulgation and en-

forcement ... ,” id., giving as an example NYSF Rule 452

which prohibits a member from voting stock held in a

street name without specific instructions from the heneficial

owner. Id. at n.4. Judge Friendly then went on to say that

what emerges is that whether the courts are to imply

federal civil liability for violation of exchange or

dealer association rules by a member cannot be deter-

68a

mined on the simplistic all-or-nothing basis urged

by the two parties; rather, the court must look to the

nature of the particular rule and its place in the reg-

ulatory scheme, with the party urging the implication

of a federal liability carrying a considerably heavier

burden of persuasion than when the violation is of the

statute or an SEC regulation. The case for implication

would be strongest when the rule imposes an explicit

duty unknown to the common law.

Id.* See Lowenfels, Liability under Exchange Rules, 2

Rev. of Securities Regulation 841 (1969). See also But-

trey v. Merrill Lynch, Pierce, Fenner & Smith, Inc., supra

(upholding implied private right based upon the so-called

“Know Your Customer” rule, which is Rule 405 of the

NYSE, against a party not a stock exchange member).

Nevertheless, we do not now take the position that ap-

pellees advance and the court below apparently accepted,

that violation of an exchange rule cannot under any cir-

cumstances give rise to civil liability under the federal

acts. Such a position would be in conflict with our own

most recent statements on this subject as well as some

of the developing case law. See, e.g., Judge Weinfeld’s

opinion in Starkman v. Seroussi, CCH Fed. Sec. 1. Rep.

94,606 [1973-74 transfer binder] (S.D.N.Y. 1974) (con-

14 The court went on to hold, however, that the rules at issue in Colonial

Realty Corp. v. Bache ¢ Co., 358 F.2d 178 (21 Cir.), cert. denied, 385

U.8. 817 (1966), were “near the opposite pole,” that is to say, they

were “something of u catchall” which related to unethical behavior as

well as illegal conduct. It is to he noted that Colonia! Realty was not

the first Second Cirevit case dealing with stock exchange rules. In

Baird v. Franklin, 141 F.2d 238 (24 Cir. ), cert. denied, 323 U.8. 737

(1944), the court recognized that culpable failure by a stock exchange

to enforce rules adopted pursuant to §6(b) of the Securities Exehange

Act might give rise to a federal claim against the exchange by an

investor injured thereby. See also Silver v. NYSE, 302 F.2d 714, 719

(2d Cir. 1962), rev'd on other grounds, 373 U.S. 341 (1963).

duct in violation of Rule 345.17 of the Exchange prohibit-

ing registered representatives from guaranteeing any cus-

tomer against loss in his account or receiving a share in

the profits or sharing in the losses of a customer's account,

held actionable); SEC v. First Securities Co. of Chicago,

463 F.2d 981 (7th Cir.), cert. denied, 409 U.S. 880 (1972)

(violation of NASD rule protecting public gives rise to

private damage action). Cf. Landy v. Federal Deposit ~

surance Corp., 486 F.2d 139, 164-66 (3d Cir. 1973), cert.

denied, 416 U.S. 960 (1974). of

It would also run contrary to a position we find in-

viting, that to the American investing public listing ne

the New York Stock Exchange carries with it implici

guarantees of trustworthiness. The public generally oe

stands that a company must meet certain qualifications 0

financial stability, prestige, and fair disclosure, in ee

to be accepted for that listing, which is in turn so help u

to the sale of the company’s securities. Similarly it is

held out to the investing public that by dealing in “al

ities listed on the New York Stock Exchange the inves -

will be dealt with fairly and pursuant to law. ‘This ‘vel

be particularly true as to the convertible securities ig" 4

which differs from the market for other corporate re

in that it is composed primiraly of individuals. a he

Dewing, The Financial Policy of Corporations 268- : e

ed. 1953)."* Some investors miss the notices of redempti

15 The aggregate amount of convertible bonds outstanding of companies

70a

and of expiration of conversion rights, while others “do

not know that they should look for them.” Note, 54 Cornell

L. Rev. at 274 n.16."*

Appellees argue, however, that the self-regulation system

of the 1934 Act applies in its terms only to Exchange mem-

bers, as opposed to issuers, and that the legislative history

indicated congressional intention not to extend coverage

of the Exchange rules and regulations to issuers. In this

connection appellees maintain that Congress did consider

such an extension as evidenced by a proposed § 12(b) (1)

to the Securities Exchange Act quoted in Cong. Rec. 8584

(1934), which was never adopted. Id. at 8586. The provi-

sion, however, was to require listed companies to agree

with the Exchange to comply with the Exchange Act and

the Commission’s rules and regulations, and much of the

debate related to whether the provision was necessary at

all since such companies would have to comply with the law

regardless of any such agreement.’ Omitting the section

16 Cases involving generally broad standards of conduct and having

nothing to do with disclosure, see, ¢.g., Hecht v. Harris, Upham ¢ Co.,

283 F. Supp. 417 (N.D. Cal. 1968), modified on other grounds, 430 F.2d

1202 (9th Cir. 1970), require the presence of fraud to create a right

of action under federal law, but this is because the only action or

conduct proscribed by the rule is fraudulent conduct. Here, however,

is involved a notice or notification rule.

17 Senator Hastings made the following statement in connection with

the legislation :

I do not quite understand why they want to get the issuer of the

security on record, in the form of an agreement, not tc violate a

partioular law, because it must be admitted that, if the law itself

is valid, and if the rules and regulations made by the commission

are valid, and the person entering into the agreement has brought

himself within the law by offering his securities for sale, then

certainly, it seems to me, the point of compelling him to sign a

paper that he will abide by the laws and rules made by the com.

mission must have back of it something which those of us who

studied the bill do not quite understand.

78 Cong. Rec. at 8585 (1934). While Senator Hastings’ amendment was

defeated, the language he objected to was deleted in conference.

Tia.

in question would apparently indicate merely a recognition

that the provision was unnecessary. The legislative his-

tory is thus at most equivocal on the question whether

Congress intended to insulate issuers from liability in the

event that they violated an Exchange rule.”

Appellees argue also that the Exchange’s remedies are

limited to delisting. See Report of Special Study of Se-

curity Markets of the Securities and Exchange Commis-

sion, H.R. Doc. No. 95, 88th Cong., 1st Sess., Pt. IV, ch.

XII at 566-67; Intercontinental Industries, Inc. v. Amer-

ican Stock Exchange, 452 F.2d 935 (5th Cir. 1971), cert.

denied, 409 U.S. 842 (1972) (permitting delisting). But

no authority holds that the exclusive remedy against a

listed company is delisting. The claim for relief is suffi-

cient for jurisdictional purposes in any event.”

18 Provisions of the Listing Agreement requiring the corporation to, o-

“promptly notify the Exchange of any changes of officers or directors,

Part I, 2, would not seem to give rise in any event to a liability to a

securities holder. The provisions of the Listing Agreement here in

question, however, were to “afford the holders of its securities listed on

the Exchange a proper period within which . . . to exercise their

rights... .”

19 United Mine Workers v. Gibbs, 383 U.8. 715, 724 (1966). See Hudak

v. Economic Research Analysts, Inc., 499 F.2d 996, 1001 (5th Cir.

1974); Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123, 129 (7th Cir.

1972). The writer of the opinion for himself alone would hold that

even if there were such a duty it would be essentially coterminus with

a contractual duty to the appellants as third party beneficiaries. As

he views it, the limited notification provisions of the Indenture and

debenture were modified by virtue of the application for listing on the

stock exchange, which specifically incorporated by reference the Listing

Agreement of November 5, 1957, to which we have so frequently alluded.

See Lawrence v. Fox, 20 N.Y. 268 (1859); Seaver v. Ransom, 224 N.Y.

233, 120 N.E. 689 (1918); Weinberger v. NYSE, 335 F. Supp. 189

(8.D.N.Y. 1971). The duty of a listed company to its own securities

holders to treat them fairly is founded in fundamental concepts of

the law pertaining to corporate fiduciaries. Cohen v. Beneficial Indus-

trial Loan Corp., 337 U.8. 541 (1949); Pepper v. Litton, 308 US. 295

(1939); Chris-Craft Industries, Ino. v. Piper Aircraft Corp., 480 F.2d

841 (2d Cir.), cert. denied, 414 U.S. 910 (1978). Security holders of a

72a

Tue [napEQuacy or THE Borinc Notice

The notice Boeing gave, we hold, had two deficiencies.

First, Boeing did not adequately apprise the debenture

holders what notice would be given of a redemption call.

Investors were not informed by the prospectus or by the

debentures that they could receive mail notice by reg-

istering their debentures, and that otherwise they would

have to rely primarily on finding one of the scheduled ad-

vertisements in the newspaper or on keeping a constant

eye on the bond tables. Second, the newspaper notice

given by Boeing was itself inadequate.

The first factor we think highly significant. Many of

the debenture holders might well have decided to register

their bonds, had the significance of registration, or of the

failure to register, been brought home in the materials

generally available to the purchasers of the debentures.

No detailed information as to notice was given on the face

of the debentures, even in the fine print. The debentures

stated simply:

The debentures are subject to redemption, as a whole

or in part, at any time or times, at the option of the

Company, in not less than 30 nor more than 90 days’

prior notice, as provided in the Indenture .. .

corporation are in a very real sense creditor beneficiaries, see 1 Restate-

ment of Contracts § 136 (1932), to whom an underlying duty of fair

treatment is owed by the corporation or majority stockholders or

controlling directors and officers thereof. While it may be said that the

Indenture itself is a contract, Kaplan v. Vornado, Inc., 341 F. Supp.

212 (N.D. Il. 1971); Buchman v. American Foam Rubber Corp., 250

F. Supp. 60 (8.D.N.Y. 1965), it was clearly entered into with listing

73a

There was no indication that registration would mean

that a debenture holder would receive mail notice. Nor

was there any indication of the extent of newspaper no-

tice to be provided—either 2s to the papers that would

be used or how often the notice would be published. De-

benture holders were simply referred by the debenture,

as well as by the prospectus, to the 113-page Indenture

Agreement, which, to be sure, was available to debenture

holders or prospective purchasers upon request, but which

was not circulated generally with the warrants or deben-

tures.

We have dwelt at length in the facts on the newspaper

notice actually given. While it may have conformed to the

requirements of the Indenture it was simply insufficient

to give fair and reasonable notice to the debenture holders.

The duty of reasonable notice arises out of the co, ‘ract

between Boeing and the debenture holders, pursuant to

which Boeing was exercising its right to redeem the de-

bentures. An issuer of debentures has a duty to give ade-

quate notice either on the face of the debentures, Abram-

son v. Burroughs Corp., CCH Fed. Sec. L. Rep. [1971-72

transfer binder] {[ 93,456 (S.D.N.Y. 1972) (Lumbard, C.J.,

sitting by designation), or in some other way, of the

notice to be provided in the event the company decides

to redeem the debentures. Absent such advice as to the

specific notice agreed upon by the issuer and the trustee

for the debenture holders, the debenture holders’ reason-

able expectations as to notice should be protected.

For less sophisticated investors (it will be recalled that

warrants for the purchase of debentures were issued to all

Boeing shareholders), putting the notice provisions only

in the 113-page Indenture Agreement was effectively no

notice at all. It was not reasonable for Boeing to expect

these investors to send off for, and then to read under-

-

74a

standingly, the 113-page Indenture Agreement referred to

in both the prospectus and the debentures themselves in

order to find out what notice would be provided in the

event of redemption.

Boeing could very easily have run more than two ad-

vertisements in a single paper prior to the eleventh hour

(March 28), at which time it issued its belated news re-

lease and advertised for the third time in the Wall Street

Journal and for the first time in the New York Times.

Moreover, in the same period that the debentures were in

the process of heing redeemed, Boeing was preparing for

its annual meeting (to be held April 24). Proxy materials

were being prepared throughout March and were finally

mailed sometime between March 24 and March 30. Man-

agement could readily have arranged the redemption dates

and the proxy mailing so that notice of the redemption

dates could have been included in the envelope with the

proxy materials. Thus at no extra cost except that of

printing brief ‘notices, at least all Boeing shareholders

would have received mail notice, and presumably a signif-

icant number of the plaintiff class owned Boeing common

stock, as well as debentures, in 1966. Had Boeing at-

tempted such mail notice, or mail notice to original sub-

scribers, and also given further newspaper publicity either

by appropriate news releases or advertising earlier in

the redemption period, we would have a different case

and reasonable and sufficient notice might well be found.

Nothing that we have said is inconsistent with either

Abramson v. Burroughs Corp., supra, or with Kaplan v.

Vornado, Inc., supra. These cases are distinguishable

on their facts as well as in respect to the legal arguments

made,

In Abramson the court was presented with the claim

that Rule 10b-5 was violated in connection with the sale

7da

of certain convertible debentures. As here, a nonconvert-

ing debenture holder was suing for the amounts lost when

he failed to convert before the expiration of the conver-

sion period and he challenged the notice procedures in

connection with the redemption. In Abramson, however,

the principal contention was that there were material omis-

sions in the prospectus issued in connection with the sale

of the debentures. Abramson alleged that the notice pro-

visions in the prospectus were misleading in that they

omitted the nature and frequency of notice that bond-

holders would receive.

Judge Lumbard in Abramson found quite to the con-

trary that the face of the debentures—unlike those here—

stated exactly what notice would be provided, notice which

incidentally was at least twice that required here, making

specific

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