# Petition — Boeing Co. v. Van Gemert

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1980
- **Citation:** 444 U.S. 472

## Text

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

3a

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, inc

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385006_0069%3A01. Public record. Not legal advice.