Appendix — Boeing Co. v. Van Gemert

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FILED

APPENDIX JUN 27 1979

| MICHAEL RODAK, JR., CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1978

No. 78-1327

THE BOEING COMPANY

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

Petitioners,

WILLIAM R. VAN GEMERT, e¢ al.,

Respondents.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

PETITION FOR CERTIORARI FILED FEBRUARY 26, 1979

CERTIORARI GRANTED MAY 14, 1979

TABLE OF CONTENTS

Opinion of the Court of Appeals en banc .......... la

Opinion of the Court of Appeals in Van Gemert III 27a

Order of the District Court dated June 30,1977 .... 39a

Order of the District Court dated September 22,1977 43a

Opinion of the Court of Appeals in Van Gemert II 45a

Opinion of the Court of Appeals in Van Gemert I... 58a

Opinion of the District Court dated May 11,1978 .. 83a

Chronological List of Relevant Docket Entries .... 87a

APPENDIX A

UNITED STATES COURT OF APPEALS

For tHE Seconp Crcuit

—o—

No. 551—September Term, 1977.

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

Docket No. 77-7547

En Bane

—-

Wim R. Van Gemeant, et al.,

Plaintiffs-Appellees,

ili

Tue Bortne Company

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

Defendants-Appellants.

—

Before:

Kavurman, Chief Judge,

Fernserc, MAnsFIELD, MuLLican, OaKEs,

Timpers, Gurretn, VAN GRAAFEILAND and

Mesku11, 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

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

rehearing en banc.

The order of the district court is affirmed.

Bn.

Davis Pouk AND WarpweLi, New York, New

York, for Defendants-A ppellants.

Kass, GoopkinD, 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) ;

Natuan, MANNHEIMER, ASCHE, WINER AND

Frrepman (Norman Winer), New York,

New York;

Irvinc Sternman, New York, New York,

for Plaintiff s-A ppellees.

Louis J. Lerxowrrz, 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. SoLLepER, JR., Special Master, New

York, New York, amicus curiae.

Mon.

ae ae

Kaurman, 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

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.

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

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 Kyan for a determination of damages. Van

Gemert v. Boeing Co., 520 F.2d 1373, 1383 (2d Cir, 1975)

[Van Gemert I}.

Judge Ryan then proceeded to calculate damages based

on the difference between the redemption price of the 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

—S

1 15 U.S.C. §78f. The plaintiffs contended that Bocing was liable

under the Act for violating the New York Stock Exchange Listing

Agreement and Section A1l0 of the New York Stock Exchange Com

pany Manual, on the theory that the statute requires stock exchanges

to adopt such rules.

2 15 U.8.C. § 77a et seq.

3 15 U.S.C. $§77aaa et seq.

4 This claim was heard pursuant to the pendent jurisdiction of the

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

5288

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. Id. at 815-16. Such a plan, we held, constituted a

form of fluid class recovery, involving distribution of the

unclaimed portion of the judgment to a “next-best” class

in contravention of Eisen v. Carlisle & Jacquelin, 479 F.2d

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

grounds, 417 U.S. 156 (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 curiac, 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

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 III).°

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.

7 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 J11, 573 F.2d at 738.

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

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

Gemert 11 precludes the reeovery of costs and attorneys’ fees from

the unclaimed portion of the bondholders’ judgment. We cannot

accept this contention.

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

could not be uwarded 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 abscntees,

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

5290

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 U.S. 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

disbursemerts 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 2.3

(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, ¢.g., Zdanok v.

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

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 contro] over a “res”. In City of

Detroit v. Grinneil 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.S. 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

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

(1974).

5292

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 we 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 eases 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. Klementary 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 Steclworkers of America, 553 F.2d 586 (3d

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

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

not be small in “absolute numbers.” Id. at 606. Sce 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 that 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 cestuts

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 Sce 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

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. Fach 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 heretieal. At common law, an attor-

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

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 Greenough.

Moreover, as Jlaynes vo Rederi A/S Aladdin, 362° Fitd 345, 3051

(Sth Cir, 1966), cert. denied, 385 U.S. 1020 (1967) noted, it is sufficient

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

pliedly” accepted. Manifestly, plaintiffs in a 238 (b)(3) ehiss 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 ease, 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 clase members, Beeause

clasa certification represents ao 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 benctita of the litigation.

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

way harmed by our decision. Tt simply does not aeeord with fact to

argue, as the minority seems to, that) beeause ao deduction: from the

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

are being held liable for more than they have gained. Lf, 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 Booing, then it is difficult to

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

said to have injured them. The disacnters 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 himsclf 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, e.g. Donson Stores, Inc. V.

American Bakeries Co., 58 F.R.D. 485, 489 (S.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 only

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

efforts, that fees are assessed.

5297

l4a

poset eis some plaintiffs at the expense of

‘ ach plaintiff will receive i

share of the recovery, less attorneys’ un nae

~ size of the unclaimed portion of the fund ” 1} is j :

a “fluid recovery” case. . mes

We believe, moreover, that a ruling for Boeing would

be unfair to both the claiming plaintiffs and the aa i

torneys, and would deter lawyers from bringing resent

si lawsuits. In setting attorneys’ fees in class aulien

thi 8 courts must multiply the number of hours spent

pe : — by an appropriate hourly rate, and then

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

the attorney’s risk in eo

undertak ’

representation." ing it, and the quality of

If victorious attorneys were permitted to charge fees on]

against claiming class members, the standards ented rd

the courts to ensure rationality and fairness in fee sett z

would go for nought, because the compensation the ong

Ph therefore do not find apposite to our holding

absent ae A hs ¢ II that claimants may be encouraged to kee

In any sk a uninformed about the judgment in their ht

me gl eget nee 0 Judge will invariably require that adequate

. provided. In the instant

a ¥ : case, Jud

spin mater forth pups, nh wasn

Pea gy sh ye quel could be ascertained, and to all brokerage

perch a biol = —— a with instructions to

— ercat< c ients, Notice .

once a week for three consecutive weeks in the we wae ae publtehed

the New York Times.

An . : :

y alleged conflict of interest between the attorneys and the

unnamed plaintiffs is vitiated

here .

supervision of the fee award. ere, as in every class action, by judicial

today the concern

Wall Street Journal and

17 We intimate no vi

iew as to . : ;

the remainder of the to the appropriate ultimate disposition of

18 8 i i

ee, ¢.9., City of Detroit v. Grinnell Corp., 495 F.2d 448 (2d Cir

1974); Lindy Brothers Bui

hte uilders, Inc. v. A :

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

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 (ificulty 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

16a

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 to 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 J udge 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. Sce, c.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 h, at 4.

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

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

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

See 3 HU. 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.

paallnnee

Van GraaFEILaND, J., dissenting

(with whom Judges Mutiican and TimBERs 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

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, hetween 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 were 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 7 6824C at

i147 (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

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

Umited Security Life Co., 59 F.R.D. 44, 48-49 (D.C. Towa

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

i de-

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

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

from participating in the award of damages.

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.2 We in the

dissent do not believe that such a bizarre state of affairs

ean be justified simply by pointing to a “eommon fund”

as the source of the lawyers’ feces.

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 in 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. Rederi 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 afund 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., supra, 100 F.2d at 578;

Dunn 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

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-cunverters 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

vor Ain ill ot

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

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 s $100 debe

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

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

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

the same.

4 The majority's attitede appears to be summed sp in feotane, U6

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

from the “spoils” of the litigation cannot injure abeentes clas mem

bers who are not going to collect anyway.

5309

APPENDIX B

UNITED STATES COURT OF APPEALS

For tHE Seconp Circuit

No. 551—September Term, 1977.

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

Docket No. 77-7547

—

Wu.utiam R. Van Gemesrt, et al.,

Plaintiff s-Appellees,

Tue Borrnc Company

(Formerly the Boeing Airplane Company) et al.,

Defendants-Appellants.

Before:

Mu.Luican, Oakes and Van GRAAFEILAND,

Circuit Judges.

a ane t

Appeal from a final order of Judge Sylvester J. Ryan

of the United States District Court for the Southern Dis-

triet 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 Giuiespiz, 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 al.

Invinc Sremvman, 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.

-—_ =

a ie ie ae

Van GraareILand, 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 v. 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 elaim 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 issne on this appeal is whether that portion of the

escrow fund which is not claimed hereafter by class mem-

hers can be charged with a pro rata share of the attorneys’

1 The district court ordered that affidavits in support of counsels’ appli-

cation for fees be submitted within twenty days of the entry of judg-

ment.

2094

29a

nd expenses. We hold that until absent class mem-

on saeny—n benefit of the attorneys’ labors by claiming

their portions of the award, “A See, or assessment

id from their undistributed shares. :

"Sake of unclaimed funds has been before this

Court on a prior appeal which followed our original de-

cision on liability. Van Gemert v. Boeing Co., 553 F.2d 812

(2d Cir. 1977). On that appeal, we rejected a request that

the shares of non-claiming class members be distributed

pro rata among claiming members in order to assist them

in paying their legal fees and disbursements. Citing Eisen

v. Carlisle & Jacquelin, 479 F.2d 1005 (2d Cir. 1973),

vacated and remanded on other grounds, 417 U.S. 156

(1974), we held that the “extraordinary remedy” of fluid

class recovery was not justified under the circumstances of

this case.? Van Gemert, 553 F.2d at 815-16. Appellees now

seek to avoid the effect of our prior holding by requesting

only a portion of the unclaimed funds, with payment there-

of to be made directly to their attorneys.

In so doing, they rely upon the eqaitable or common fund

doctrine fathered by the leading cases of Trustees v.

Greenough, 105 U.S. 527 (1881), and Central Railroad dé

Banking Co. v. Pettus, 113 U.S. 116 (1885). Under this

doctrine, an attorney who creates or preserves a fund for

the benefit of others in addition to his client may be awarded

compensation from those who accept the fruits of his la-

bors. Pettus, 113 U.S. at 125, 127. This award is not based

upon the existence of an attorney’s lien against the fund,

but rather upon the equitable principle that those who ben-

efit from the attorney’s services should pay for them.

e Supreme Court vacated and remanded Kisen on other

: eames = pass upon the issue of fluid class recovery. How-

ever, the Ninth Circuit appears to share this Circuit's unwillingness to

treat the class as a whole as a judicial entity for purposes of suit. See

In re Hotel Telephone Charges, 500 F.2d 86, 89-90 (9th Cir. 1974).

2095

30a

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

975, 976 (W.D.N.Y. 1933) (quoting Jn re Gillaspie, 190 ¥.

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 the

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. Ticontic Bank, 307 U.S. 161 (1939); Kopet v. 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 enly

appears to be reasonable, but also is simple to apply.

There are, however, other factors which must be eonsid-

ered in weighing the merits of appellees’ proposal.

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

see Developments in the Law—Class Actions, 89 Marv. L.

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

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

fees awarded to class attorneys. Sec, e.g., Alpme Phar-

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

(2d Cir.), cert. denied, 414 U.S. 1092 (1973). Terms such

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

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

“ast ronomical fees”, M. Blecher, Is the Class Action Rule

Doing the Job? (Plaintiff’s Viewpoint). 55 FR. 265 366

(1972), and “enormous fees”, Comment, 54 U. Dot J Un

L.. Ong, 611 (1977), are used to deseribe the siniesinces:

which often run into the million of dollars.’ Qrities vnalest

—_—_—— —.

3 Counsel in this ¢ : :

Pa ase are requesting fees of approximately two million

2096

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 members. 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. Eisen, 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 scttle-

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 bas demonstrated a surprisingly

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

Sec F. Kirkham, Compler Civil Litigation—Have Good Intentions Gone

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

Tol or Engine of Deatruction?, 55 ¥F.R.D. 375, 877-78 (1978).

5 Rut ace B & B Investment Clud v. Kleinert’s Inc., 62 F.R.D. 140, 150

(F.1. 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. Fisen,

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

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

This Court expressed in Lisen, supra, its unwillingness

to adopt the concept of fluid class reeovery, 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 Lisen 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 Alyeska Pipeline Service Co. v. Wildcrness

Society, 421 U.S. 240, n.39 (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 secks payment

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

Binlders v. American Radiator & Standard Sanitary ( ‘orp.,

487 I'.2d 161, 165 (3d Cir. 1973).6 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 (2a

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

depending upon the claima presented, for a return of any excoss to the

defendants.”

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

1974), this Court, quoting Lindy, snid: “Tn its simplest terms, the pur.

pose of the feo award is to ‘compensate the attorney for tho reasonable

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

2098

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. 8S. Dak. 1973) ; cf. City of Miami Beach

v. Jacobs, 341 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).

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

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 an

additional reason why attorneys’ fees should not now be

charged against the entire escrow fund.

Reversed and remanded for further proceedings in ac-

cordance with this opinion.

-—

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 justice

against a defendant whose resourees enable it to obtain

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

covery and other litigation techniques that one, two or three

plaintiffs otherwise could never afford to conduct the law-

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 fluid class recovery who view class actions pri-

marily as deterrents against wrongful conduct urge that unclaimed funds

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

of trusts, or that they oncheat to the state. 7A Wright & Miller, Fed.

eral Practice and Procedure $1784 at 64 (Supp. 1976); 8. Gordon,

Manageability Under the Proposed Uniform Class Actions Act, 31 Sw.

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

(1977). However, even somo proponents of fluid class recovery concede

that under some circumatances it may he appropriate to return unclaimed

funds to the defendant. See, ¢.7., Uniform Class Actiona Aet (U.T.A.)

§15(b).

2100

Mii

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

v. 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 II 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

1 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?

g Van Gemert II rejected the proposition that clase members who file

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

unclaimed portion of the damage award. In doing eo, 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

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

264-65 n.39 (1975), expressly preserved the common fund doctrine.

2102

;

PRMD Nina ian ie csi wats A

378

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

not make common sense. I therefore dissent in part.

4 Of course, if the filing claimants were required to absorb the total

disbursements out of their pro rata share of the recovery, the attorneys

would obtain complete reimbursement. But this would reduce the filing

claimants’ compensation and, in turn, be unfair to them.

The result of the majority decision, ante at 2099-2100, is either that

the attorneys absorb the disbursements attributable to unfiled claims or

that the claiming members of the class end by being responsible for

paying all attorneys’ disbursemente—perhaps even feee—from their

shares of the award. With either result I disagree.

2103

ade

APPENDIX C

oe: »——ee

39a

Judgment and Order

UNITED STATES DISTRICT COURT

Soutuern District or New York

66 Civ. 1820 (SJR)

Wuwiam R. Van Gement, ef al.,

Plaintiffs,

—against—

THe Borinc Company (formerly Bozinc AIRPLANE

Company) and Tomas R. Wixcox,

Defendants.

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

the District Court, Southern District of New York, affirming

the damages awarded to plaintiffs and the class and revers-

ing that portion of the judgment which directed that no

pre-judgment interest be awarded, holding that under

N.Y.C.P.L.R. § 5001(a) an award of interest at the legal

rates from the date of the breach, March 29, 1966, was

mandatory.

Now upon the said opinion and mandate of the United

States Court of Appeals for the Second Circuit in the

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

Orperep, Avsupcep anv Decreep that plaintiffs in behalf

of all members of the plaintiff class, which consists of all

holders on Mareh 29, 1966 of 4'49% Convertible Subordi-

nated Debentures of the Boeing Company who failed to

exercise their conversion right before it terminated on

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

the defendants the principal sum of $3,289,359 together

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 judgment, with costs to be taxed: and it is

further

Orperep 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 plaintiff class who has

not heretofore redeemed his debenture shall be entitled to

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

debenture together with interest as set forth above, plus

interest upon the redemption value of $103.25 from March

29, 1966 to the date of payment to the debenture-holders,

after deducting such class member’s proportionate share

of the total amount allowed for attorneys’ fees, expenses

and disbursements; each class member’s proportionate

and

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

OrperED 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-

pens¢s incurred by the Special Master, including his fee,

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

OrbERED 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.

43a

Wiuutam R. Van Gemert, ct al. v. Tne Borina Company

and THomas R. Wicox

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.

“ORDERED 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 legal expenses of the claiming members.

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/ Syivester J. Ryan

Semior U.S. District Judge

(sh NRE

ATS LACT

<a.

APPENDIX D

45a

UNITED STATES COURT OF APPEALS

Seconp Circuit

Nos. 879, 880, Dockets 77-7009, 77-7031

Argued Feb. 25, 1977

Decided April 18, 1977

Witutiam R. Van Gement et al.,

Plaintiffs-A ppellants,

THe Borinc Company anp THomas R. Witcox,

Defendants-A ppellees.

“&

Before MansrieLp and Van GraaFEiLanp, Circuit Judges,

and Misuuer, District Judge.*

Van GraaFEILAnD, Cireuit Judge:

This appeal arises from a consolidated class action

brought by non-converting holders of the Boeing Com-

pany’s 414% convertible 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.

‘he 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 note |

previously, was the cut-off date for the exercise of conver-

sion privileges. He awarded no prejudgment 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 1o provide the Dis-

trict Court with jurisdiction over the case. Jd. 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 Cir.

1956); see 13 C. Wright, A Miller & E. Cooper, Federal

Practice and Procedure § 3567, at 462 (1975). Conse-

quently, in determining the proper measure of damages,

New York State law is controlling.

Appellants urge us to apply the “fluctuating value” rule

formulated by the New York courts for situations where

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, re-

gardless of when the conversion may have occurred

.... (Citations omitted).

Hartford Accident & Indemnity Co. v. Walston & Co., 22

N.Y.2d 672, 673, 291 N.Y.S.2d 366, 367, 238 N.E.2d 754

(1968). This rule does not apply to the facts of the instant

case, however.

In both Baker v. Drake, 53 N.Y. 211 (1873) and Mayer v.

Monzo, 221 N.Y. 442, 117 N.E. 948 (1917), cases relied upon

by appellants, it was alleged that stockbrokers sold their

principal’s stock without authorization. The owners of the

stock were holding these securities, hoping to realize a

profit from their sale. Baker v. Drake, supra, 53 N.Y. at 216.

The Baker court explained the theory on which damages

48a

would be awarded when stock held for this purpose was

converted.

Tf, 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 ease 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 o., supra, 520 F.2d at 1383. We are

confident that, faced with the facets 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 ent-off date, March 29, 1966. Tn Simon v. Electrospace

a a

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.F.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 ie

breach occurred on March 29, 1966; and, for the purpose ot

computing damages herein, the Boeing stock should

‘alued as of that date.

yee 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-

50a

wein v. Provident Mutual Life Insurance Co., 3

vife . d N.Y.2d 491,

494, 168 N.Y.S.2d 964, 146 N.F.2d 693 (1957), Boeing argues

that the awarding of interest was di ‘

. . ° as iscret Md

District Court. lonary with the

B, 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 selahthe

on the part of the debenture holders occasioned by Boeing’s

fraud. We did find significant, however, the fact that il

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 eall. In doing so, we

merely applied the settled principle, “that in every aliens

there is an implied covenant that neither party shall ie

anything which will have the effeet 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 dated,

every contract contains the implied requirement of pane

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

atin is mandatory. See Spang Industries, Inc. v. iaion

Casualty & Surety Co., 512 F.2d 365, 371 (2d Cir. 1975).

‘On remand, the District Court should c i

: , ompute interest 4

pow legal rates applicable under New York ae during the aia

; fers be ig 29, 1 to the date that judgment is entered. Span,

a " nc. Vv. Aetna Casualty & Surety Co., supra, 512 F.2d at

oon see —— v. Chase Manhattan Bank National Association

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 he 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,

contends that the unclaimed money should be returned to

the corporation.

We see no reason to change our position, firmly stated in

Kisen 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 of the unclaimed

portion to a “next-best” class. Moreover, there is even less

to recommend appellants’ proposal than the similar relief

suggested in Eisen?

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 bought or sold odd

lots on the New York Stock Exchange in the period from May 1,

1962 through June 20, 1966. The undistributed funds were to be

used, “for the benefit of all odd-lot traders by reducing the odd-lot

differential ‘in an amount determined reasonable by the court until

such time as the fund is depleted’”. Eisen v. Carlisle & Jaquelin,

supra, 479 F.2d at 1011.

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

direetly, 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-

ward to the constitutionality of a “fluid class” award, Hisen

\. Carlisle & Jaquelin, supra, 479 F.2d at 1018, the eireum-

stanees 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 E

Opinion of the Court of Appeals

UNITED STATES COURT OF APPEALS

For tHE Seconp CIRCUIT

-—_

———

Nos. 321-25—September Term, 1974.

(Argued February 26, 1975 Decided July 14, 1975.)

Docket Nos. 74-1157-59, -1165, -1185

-_—

Wruuiam R. Van Geert, et al.,

Appellants,

—_—V

Tue Borneo Co., et al.,

Appellees.

Before:

Lumcarp, 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

54a

conversion rate. Held, that the appellants had stated a

valid claim,

Judgment reversed.

Sruart D. WecHsLeER, Kass, Goopkinp, WECHSLER

& Gerstein, New York, N.Y.; Sachnoff,

Schrager, Jones & Weaver, Ltd., Chicago,

Ill.; Elson, Lassers & Wolfe, Chicago, Il,

for Appellants.

NorMan Winer, NatHan, MANNHEIMER, ASCHE,

Winer & Friepman, New York, N.Y., for

Appellants.

S. Hazarp Gituespiz, Davis Potk & WarpweELL,

New York, N.Y. (David E. Wagoner, Per-

kins, Coie, Stone, Olsen & Williams, Seattle,

Wash., William H. Levit, Jr., Hughes, Hub-

bard & Reed, Los Angeles, Cal., of counsel),

for Appellees.

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 “412%. Con-

vertible Subordinated Debentures, due July 1, 1980.” The

complaint was jurisdictionally based on the Securities 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 and 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.

rights before the deadline in the call of midnight, March

99, 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 common stock for each $100 of

principal amount of debentures, the stock was worth

$316.95 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 seq., was not violated; that if

Boeing’s Listing Agreement with the New York Stock Ex-

change (NYSE) were violated, it gave appellants no claim

for relief; and that even if, as appellants claim, an adjust-

ment in the conversion rate were required, and that failure

to make the adjustment gave rise to a cause of action, ap-

pellants had no standing to raise the claim since they did

not exercise their conversion rights. We reverse and re-

mand on the ground that there was an obligation on

Boeing’s part to give reasonably adequate notice of the

redemption to the debenture holders, which obligation was

not fulfilled in this instance.

Most of the facts are not in dispute; indeed, we com-

mend the parties, and the court below, for agreeing to a

59-page statement as to facts, incorporating some 55 ex-

hibits, and to what certain witnesses would testify if called

at trial.

56a

Tut Issue or DEBENTURES

On July 15, 1958, each Boeing shareholder was given the

right to purchase $100 of convertible debentures for each

93 shares of stock then held.? The debentures were to pay

interest of 414 per cent per annum and were to be con-

vertible by the debenture-holder into common stock at a

rate (subject to adjustment) of two shares per $100 prin-

cipal amount of debentures. Chase was appointed trustee

under the Indenture Agreement, and the debentures, as

well as the stock reserved for issuance upon conversion of

the debentures, were listed on the NYSE. Application for

such listing had been made pursuant to a Listing Agree-

ment between Boeing and the Exchange.

Subscrintions for a total of $29,578,500 of debentures

were received? and the balance of $1,019,100 was purchased

by the underwriters. Chase as trustee then authenticated

and the subscription agent delivered by registered mail

the entire $30,597,600 aggregate amount of debentures in

coupon form to the persons designated in the warrants

surrendered or their agents,‘ but no list of these was kept

by Boring or Chase.*

2 Total trading in the debenture rights was 1,702,200, but since no in.

formation is available on the number or retrades there is no way of

knowing exactly how many rights were not traded. At the least, huw-

ever, 5,335,248 rights were not traded on the Exchange.

3 One may estimate, from the number of rights not traded on the Ex

change, approximately $21 million worth of the debentures were pur-

chased by Boeing stockholders or their donees.

4 Between August 4, 1958, when the debentures were admitted to

trading on the NYSE, and March 29, 1966, when conversion rights

expired, a total of $68,694,000 face amount of debentures were traded.

It is not known how many of the debentures were held by original

subecribers at the later date.

5 City Bank-Farmers Trust Company, the subscription agent, retained

through the ultimate date on which conversion rights expired the names

and addresses of stockholders to whom the warrants were sent, as well

57a

A number of provisions in the debenture, the Indenture

Agreement, the prospectus, the registration statement for

the debentures and the Listing Agreement with the NYSE

dealt with the possible redemption of the debentures by

Boeing and the notice debenture-holders were to receive

of a redemption call so that they might timely exercise

their right to convert the debentures into common stock

rather than have their debentures redeemed at face value.

The debentures themselves provided:

The holder of this Debenture is entitled, at his option,

at any time on or before July 1, 1980, or in case this

Debenture shall be called for redemption prior to such

date, up to and including but not after the tenth day

prior to the redemption date, to convert this Debenture

. at the principal amount hereof, or such portion

hereof, into shares of Capital U.ock of the Company...

The Debentures are subject to redemption as a whole

or in part, at any time or times, at the option of the

Company, on not less than 30 nor more than 90 days’

prior notice, as provided in the Indenture, at the fol-

lowing redemption prices (expressed in percentages of

the principal amount) ...

This Debenture may be registered as to principal

upon presentation at the office or agency of the Com-

pany, in the Borough of Manhattan, The City of New

York, New York,...

(Emphasis added.)

as lists of the names and addresses of stockholders of record for the

payment of dividends in May and August of 1958, and the warrants

themselves when they were tendered. Although the list of stockholders

was destroyed in 1964, the warants which bear the names and addrenses

of the original subscribers are presently in the possession of a snecessor

agent.

58a

The Indenture itself, a 113-page printed booklet, pro-

vides in Art. V, § 5.02, as follows:

In case the Company shall desire to exercise the

right to redeem all or any part of the debentures, as

the case may be, pursuant to Section 5.01, it shall pub-

lish prior to the date fixed for redemption a notice of

such redemption at least twice in an Authorized News-

paper, the first such publication to be not less than 30

days and not more than 90 days before the date fixed

for redemption. Such publication shall be in succes-

sive weeks but on any day of the week... . hs

The Indenture also provided that debenture-holders who

registered their bonds would receive notice by mail of any

redemption call by the Boeing directors.

While the prospectus for the debenture issue did not

refer to any registration rights, it did state that redemp-

tion could occur “on not less than 30 days’ and not more

than 90 days’ published notice.”

The NYSE Listing Agreement dated November 5, 1957,

incorporated by reference into the listing application filed

by Boeing in respect to the debenture issue, provided in

Part III, Paragraph 4, as follows:

4. The Corporation will publish immediately to the

holders of any of its securities listed on the Exchange

any action taken by the Corporation with respect to

dividends or to the allotment of rights to subscribe or

to any rights or benefits pertaining to the ownership

of its securities listed on the Exchange; and will give

prompt notice to the Exchange of any such action; and

will afford the holders of its securities listed on the

6 An “Authorized Newspaper” is defined as one published at least five

days a week and of general circulation in the horough of Manhattan,

N.Y. See Indenture, Art. I, § 1.01.

59a

Exchange a proper pertod within which to record their

interests and to exercise their rights. . . .

(Emphasis added.)

Section A10 of the NYSE “Company Manual” specif-

ically defines what is meant by publicity in the Listing

Agreement:

Publicity: The term “publicity,” as used . . . below,

and as used in the listing agreement in respect of

redemption action, refers to a general news release,

and not to the formal notice or advertisement of re-

demption sometimes required by provisions of an inden-

ture or charter.

Such news release shall be made as soon as possible

after corporate action which will lead to, or which looks

toward, redemption is taken... and shall be made by

the fastest available means, i.e., telephone, telegraph

or hand-delivery.

To insure coverage which will adequately inform

the public, the news should be released to at least one

or more newspapers of general circulation in New

York City which regularly publish financial news, or

to one or more of the national news-wire services

(Associated Press, United Press International), in

addition to such other release as the company may

elect to make.

Section A10 of the Company Manual also provides spe-

cifically that when a convertible security is to be redeemed,

the news release must include the rate of conversion and

the date and time when the conversion privilege expires.

It further provides that in addition to the immediate news

release the company must give notice immediately to the

NYSE itself, so as to enable the NYSE to take any neces-

sary action with respect to further trading in the security.

A eee

60a

Tue Cay anv Its CrrcuMSTANCES—HEREIN OF THE

Notice AcTUALLY GIVEN

On February 28, 1966, the Boeing board of directors

inter alia authorized the president, vice president-finance

or treasurer to call for redemption on a date to be selected

by them or any one of them, all of the convertible deben-

tures outstanding under the indenture of July 1, 1958. That

same (lay a news release, headlining 1965 sales and net

earnings, and referring to a contemplated stock increase,

stock split and post-split dividends, mentioned that “Tt}he

company’s management was also authorized to call for re-

demption at a future date all of company’s outstanding

41%, percent convertible subordinated debentures.” This

statement, which did not mention even the tentative dates

for redemption and expiration of the conversion rights of

debenture holders that had been settled upon, was released

by the Bocing “News Bureau” nationally to the financial

editors of the New York Times, the New York Herald-

Tribune, the Wall Street Journal and other major national

newspapers, in addition to the major wire services (Asso-

ciated Press, United Press International and Dow Jones

& Co.).

A short time after the February 28 board mecting,

Boeing fifmed up the key dates, complied with the inden-

ture notice requirements and communicated to some extent

with the Exchange proper. On March 2, 1966, at the home

office in Seattle, at a meeting of Boeing officers, bankers and

lawvers, it was decided to fix March 8 as the date for the

first publication of the formal notice of redemption, April

8 as the redemption date and March 29 as the date for

expiration of the conversion privilege. The second date

for publication of the formal notice, March 18, was also

fixed upon at this March 2 meeting, and Chase was notified

to publish the redemption notice on those dates in all edi-

tions of the Wall Street Journal. All editions of the Journal

carried the formal notices on March 8 and 18; the notices

were in due form if not of extensive size.’ It is conceded

by the appellants that the formal requirements of the In-

denture were met by the Company and Trustee.

It was not until March 7, the day before the publication

of the first formal notice of redemption, that the NYSE

was itself notified of the firmed-up dates for redemption,"

conversion and notice. This was done by a telephone call

from Company counsel in Seattle to the Exchange. While

the court below found in part that “Boeing did comply

with the publicity requirements of the Exchange” and

while Company counsel “felt” on the basis of his tele-

phone call “that we had complied with the recommended

procedures [of the Stock Exchange Manual],” this find-

ing and feeling are in the face of Boeing’s response

admitting appellants’ demand for admission

That Boeing did not issue any general publicity re-

lease, as that term is defined in Section A-10 of the

New York Stock Exchange Company manual, con-

cerning the call of the debentures during the period

from March 1, through March 24, 1966.

This admission was reconfirmed by counsel for Boeing

below and on appeal in the course of an “opening” state-

ment to the court. The original news release of February

98 did not qualify sinee the dates of conversion and re-

demption had not heen fixed and the Manual requires in

the ease of convertible securities that the publicity set

forth “the rate of conversion and the date and time when

the conversion privilege will finally expire” and that if

—

7 We estimate their size as 5” x 5%".

R The Exchange had been sent a communication concerning the redemp-

tion on March 1, 1966, but at that time no redemption date had heen

established.

Ee ————————————

62a

such data are not known at the time publicity is given

initially, “similar publicity shall be given immediately it

becomes known or determined.” The formal notices did

not qualify since the Manual refers to a “general news

release,” and not to the formal notice or advertisement

of redemption. In this regard it is interesting to note

that a letter dated March 9 from the stock list depart-

ment of the Exchange to Boeing indicates that “We have

noted the recent advertisement advising of the call for

redemption” and also asks for a copy of the authorizing

resolution.

There was, in short, no general news release as called

for by the Listing Agreement as amplified in the Com-

pany Manual until on the eve of expiration of the conver-

sion rights, March 25, 1966, it appeared that $10,849,300

face amount of debentures—over one-half of those out-

standing at that time—remained unconverted. At that

point Boeing issued a press release’ and then on March

9 DEBENTURE CONVERSION DaTE MaRCH 29

Final date for conversion of The Boeing Company's 4% per

vent convertible subordinated debentures to Boeing common stock

is Tuesday, March 29, as announced in advertising by the company

on March 8, 9 and 10.

The conversion rights provide for issuance of two shares of

common stock in the company for each $100 bond. The company's

notice of redemption announced that all outstanding debentures

would be redeemed on or after April 8 at the redemption price of

103.25 per cent of their principal amount, together with accrued

interest to that date.

Closing price of the stock as of March 25 was $154.5, represent-

ing a substantial advantage to holders of the bonds if the conversion

is elected.

From January 1, 1965 through March 25, 1966, the sales price

for the common stock of The Boeing Company ranged from a high

of $175.25 to a low of $60.375 per share. As was pointed out in

the notice of redemption, so long as the market price of the common

stock is $52.24 or more per sharo, a debenture holder would receive

upon conversion before the March 29 deadline, common stock

having a greater value than the cash he would receive if he sur-

rendered the debenture for redemption.

63a

98 the Company republished its earlier advertisement in

all editions of the Wall Street Journal (Eastern, Mid-

Western, Pacific Coast and South-West) and the New

York Times, and additionally advertisements were placed.

This later action had what the court below termed a “dra-

matic and widespread rippling effect.” Some $9,305,000

of debentures were converted on March 28 and 29. The

ripples, however, had not spread to the appellants’ class

by the midnight deadline on the 29th; they literally went

to sleep with $1.5 million of debentures’ that were worth

$4 million if only converted.

It is true, however, and the court did properly find, that

in addition to the publication of the two formal indenture

notices, notices of the dates of the call and the expiration

of the conversion privilege on March 29, 1966, were carried

on the following services: NYSE ticker on March 8, 23, 24,

25, 26 and 28, 1966; NYSE Bulletin on March 11, 18 and

25, 1966; The Commercial and Financial Chronicle on

March 14, 21 and 28, 1966; Standard & Poor’s Bond Out-

look on March 19, 1966; Standard & Poor’s Called Bond

Record on March 9, 11, 18 and 29, 1966 ; Moody’s Industrials

on March 11, 1966. Articles about these dates were also

carried in the Seattle Post Intelligencer on March 25, 1966;

the Seattle Times on March 27, 1966; and the Financial

World on March 23, 1966; and the notice was also carried

in the Associated Press Bond Tables published on one or

more days in at least 30 newspapers published in major

cities across the United States. But almost all of these

notices or items were in fine print, buried in the multitude

of information and data published about the financial mar-

kets and searecly of a kind to attract the eye of the average

lay investor or debenture holder. On March 9, 1966, the

listing in the New York Times for the convertible deben-

tures read, for example: “Boeing ev 4% s 80.” The change

64a

on March 10 was to “Boeing 4% s 80 eld,” giving the in-

vestor in Dubuque or Little Rock or Lampasas only 19

days to pick up this change and figure that “cld” meant

“called.” Proof of the inadequacy of these notices lies in

the fact that, despite the dramatic disparity between the

value of the debentures unconverted and the conversion

stock, over one-half of the debentures outstanding on the

date of the first notice remained unconverted until the gen-

eral publicity release on the eve of expiration of the con-

version privilege.’

Because the appellants place some emphasis on the fact,

although we do not reach their contention of unreasonable

notice based on it, we should mention that Boeing made

no attempt to mail notice to the original subscribers (which

could have been done at concededly nominal expense), and

neither Boeing nor Chase inquired of or gave notice to col-

lecting banks which had tendered for collection coupons

bearing the payment dates of July 15, 1965, or January 15,

1966, the last two coupons before the redemption, either

of which might have had some beneficial effect."

THe CoNTENTIONS OF THE PARTIES

Bocing rests its defense primarily upon the notice spe-

cified in the debentures and Indenture, pointing out that

in 1958 when the debentures were issued, “the risk that

actual notice might not be received by subsequent holders

of the debentures was clearly accepted by all even re-

10 On March 8, 1966, $21,514,700 face amount of debentures were still

outstanding. On March 25, 1966, as stated, four days before the expira-

tion of the conversion privilege, over one-half of these $10,849,300, had

not been converted.

1} Nor do we reach the legal argument under the Trust Indenture Act,

15 U.8.C. §77bbb, based upon the Indenture's provisions requiring

Boeing to give Chase lists of the names and addresses of debenture

holders obtained by the former, and the token compliance therewith.

69a

motely familiar with the nature of such debentures.” (Brief

at 20-21.) It was “just such a risk” that led Boeing to ex-

tend to its stockholders and others who were investing

$30 million in these securities the opportunity to register,

see Kaplan v. Vornado, Inc., 341 F. Supp. 212, 216 (N.D.

Ill. 1971), an opportunity availed of by only 7 per cent of

the debenture holders.? For the proposition that notice by

publication provided for here was “standard and con-

formed with the custom and practice prevailing in the trade

in 1958,” we are referred by Boeing to Gampel v. Burling-

ton Industries, Inc., 43 Misc. 2d 820, 252 N.Y.S.2d 500 (Sup.

Ct. 1964), where Justice Korn did not discuss the custom

and practice in the trade but did hold that publication in

the Wall Street Journal even during a newspaper delivery

strike conformed to a provision in the Burlington Indus-

tries debentures similar to the one in the case at bar."

There are four main strings to the appellants’ bow. The

first is that Boeing is civilly liabie under federal law for

violation of the NYSE Listing Agreement and Section

A10 of the NYSE Company Manual since their require-

ments are an extension of the Securities Exchange Act of

1924 and an integral part of the statutory scheme under

which exchanges are required to adopt rules, 15 U.S.C.

&78f, which may be ordered by the Commissiém to be

altered, 15 U.S.C. §¢ 78s, and the violation of which may

give rise to a civil action under federal law. Cf. Buttrey

«. Merril! Lynch, Pierce, Fenner & Smith, Inc., 410 F.2d

135 (7th Cir.), cert. denied, 396 U.S. 838 (1969). The second

12 Through April & 1966, $1,838,000 in face amount of the debentures

were registered as to principal and interest and $337,700 as to principal

only; thus, approximately 7 per cent of the debentures were in fact

registered so that their holders thereby automatically received notice

from the trustee.

13 See generally Miller, How to Call Your Convertibles, Har. Bus. Rev.

66 (May/June 1971).

66a

is that appellants are third party beneficiaries under state

law of the Boeing-NYSE Listing Agreement, as amplified

by the Company Manual. Lawrence v. Fox, 20 N.Y. 268

(1859). See Weinberger v. New York Stock Exchange, 335

F. Supp. 139 (S.D.N.Y. 1971) (Gurfein, J.) (Exchange li-

able under agreement with SEC to limited partner of bank-

rupt member firm inadequately supervised by Exchange).

The third claim of appellants is that the Indenture is in

the nature of a contract of adhesion, a standardized con-

tract between parties of disparate bargaining power, un-

conscionable features of which are unenforceable as a

matter of policy, a concept perhaps first advanced as to

indentures of trust covering convertible debentures in a

student note, Convertible Securities: Holder Who Fails to

Convert Before Expiration of the Conversion Period, 54

Cornell L. Rev. 271 (1969). Cf. Gray v. Zurich Insurance

Co., 65 Cal.2d 263, 269, 419 P.2d 168, 171, 54 Cal. Rptr. 104,

107 (1966). See Kessler, Contracts of Adhesion—Sume

Thoughts About Freedom of Contract, 43 Colum. I.. Rev.

629 (1943). The fourth ground is that the call was illegal

and therefore void because it was based upon a conversion

rate of 2.00 shares per $100 face amount of debentures

when as a result of two stock dividends and an acquisition

it should have been on a 2.05 or a 2.08 ratio.

THE FeperaL Law Cuam

The claim that Boeing is civilly liable under federal law

for violation of the NYSE Listing Agreement and Section

A10 of the Company Manual is a colorable one. The List-

ing Agreement and Company Manual are “instruments

corresponding” to rules of the Exchange within Section

6(a)(3) of the Securities Exchange Act of 1934, 15 U.S.C.

§ 78f(a)(3). For the debentures here in question to be

listed on the Exchange, application under the Listing

67a

Agreement had to be made. Boeing did not comply with

the publicity requirements of the Exchange. In O N eill v.

Maytag, 339 F.2d 764, 770 (2d Cir. 1964), we did say,

however, in the context of a stockholder’s derivative suit

arising out of an air carrier’s purchase of its own stock,

that a transaction which violated at Exchange rule did

not give rise to a cause of action under federal law, at least

against a listed company or its officers.

But as the Supreme Court held in J. I. Case Co. v. Borak,

377 U.S. 426 (1964), private parties have both derivative

and direct rights of action to bring suit for violations of

the Securities Exchange Act of 1934 and SEC rules and

regulations issued thereunder, rights the explication of

which take up a fair amount of Second Circuit judicial

time. We extended this at least by dictum to include viola-

tion of stock exchange and securities dealers’ association

rules designed for the direct protection of investors, at

least in a suit against an Exchange member, in Colonial

Realty Corp. v. Bache & Co., 358 F.2d 178 (2d Cir.), cert.

denied, 385 U.S. 817 (1966). There, Judge Friendly, speak-

ing for a unanimous court, pointed out that “the concept

of supervised self-regulation is broad enough to encompass

a rule which provides what amounts to a substitute for a

regulation by the SEC itself.” 358 F.2d at 182. Again, “(al

particular stock exchange rule could thus play an integral

part in SiC regulation notwithstanding the Commission’s

devision to take a back-seat role in its promulgation and en-

foreement ...,” id., giving as an example NYSF Rule 452

whieh prohibits a member from voting stock held in a

street name without specific instructions from the beneficial

owner. Id. at n.4. Judge Friendly then went on to say that

what emerges is that whether the courts are to imply

federal civil liability for violation of exchange or

denler association rules by a member cannot be deter-

68a

mined on the simplistic all-or-nothing basis urged

by the two parties; rather, the court must look to the

nature of the particular rule and its place in the reg-

ulatory scheme, with the party urging the implication

of a federal liability carrying a considerably heavier

burden of persuasion than when the violation is of the

statute or an SEC regulation. The case for implication

would be strongest when the rule imposes an explicit

duty unknown to the common law.

Id." See Lowenfels, Liability under Exchange Rules, 2

Rev. of Securities Regulation 841 (1969). See also But-

trey v. Merrill Lynch, Pierce, Fenner & Smith, Inc., supra

(upholding implied private right based. upon the so-called

“Know Your Customer” rule, which is Rule 405 of the

NYSE, against a party not a stock exchange member).

Nevertheless, we do not now take the position that ap-

pellees advance and the court below apparently accepted

that violation of an exchange rule cannot under any arin

cumstances give rise to civil liability under the federal

acts. Such a position would be in conflict with our own

most recent stutements on this subject as well as some

of the developing case law. See, e.g., Judge Weinfeld’s

opinion in Starkman v. Scroussi, CCH Fed. Sec. 1. Rep.

7 94,600 [1973-74 transfer binder] (S.D.N.Y. 1974) (con-

14 The court went on to hold, however, that the rules at issue in Colonial

Realty Cory v. Bache & Co., 358 F.2d 178 (21 Cir.), cert. denied, 385

U.B. 817 (1966), were “near the opposite pole,” that is to say ‘they

were “something of u« catchall” which related to unethical behasiae as

well as illegal conduct. It is to be noted that Colonia! Realty was not

the first Second Cireuit case dealing with stock exchange ‘Velen In

Baird v. Franklin, 141 F.2d 238 (2d Cir.), cert. dented, 323 Us. 737

(1944), the court recognized that culpable failure by a stock miteane

to enforce rules adopted pursuant to ¢6(h) of the Securities Exchange

Act might give rise to a federal claim against the erchange = :

investor injured thereby. Sce also Silver v. NYSE, 302 F.2d 114, 719

(2d Cir. 1962), rev'd on other orounds, 373 UB. 241 (1963)

ee —_—=—

duct in violation of Rule 345.17 of the Exchange prohibit-

ing registered representatives from guaranteeing any cus-

tomer against loss in his account or receiving a share in

the profits or sharing in the losses of a customer’s account,

held actionable); SEC v. First Securities Co. of Chicago,

463 F.2d 981 (7th Cir.), cert. denied, 409 U.S. 880 (1972)

(violation of NASD rule protecting public gives rise to

private damage action). Cf. Landy v. Federal Deposit In-

surance Corp., 486 F.2d 139, 164-66 (3d Cir. 1973), cert.

denied, 416 U.S. 960 (1974).

It would also run contrary to a position we find in-

viting, that to the American investing public listing on

the New York Stock Exchange carries with it implicit

guarantees of trustworthiness. The public generally under-

stands that a company must meet certain qualifications of

financial stability, prestige, and fair disclosure, in order

to be accepted for that listing, which is in turn so helpful

to the sale of the company’s securities. Similarly it is

held out to the investing public that by dealing in secur-

‘ties listed on the New York Stock Exchange the investor

will be dealt with fairly and pursuant to law. This would

be particularly true as to the convertible securities market

which differs from the market for other corporate debt

in that it is composed primiraly of individuals. See 1A

Dewing, The Financial Policy of Corporations 268-71 (5th

15 The aggregate amount of convertible bonds outstanding of companies

lixted on the New York Stock Exchange in March of 1963, according to

Standard & Poor's Earnings and Rating Bond Guide, was $2,300,000,000,

of those listed on the American Stock Exchange $92,000,000, and of

unlisted companies $380,000,000, See 2 Report of Special Study of

Securities Markets made pursuant to Section 19(d) of Securities Ex-

change Act of 1924 at 23. The Commission is well aware that individual

aharcholdera to whom rights to subscribe to debentures are distributed

by the corporations have no control over the time of distribution or

whether there should be a distribution. Hence they are “participating

in the market involontarily, so to speak... .” Id. at 24.

———

70a

and of expiration of conversion rights, while others “do

not know that they should look for them.” Note, 54 Cornell

L. Rev. at 274 n.16."*

Appellees argue, however, that the self-regulation system

of the 1934 Act applies in its terms only to Exchange mem-

bers, as opposed to issuers, and that the legislative history

indicated congressional intention not to extend coverage

of the Exchange rules and regulations to issuers. In this

connection appellees maintain that Congress did consider

such an extension as evidenced by a proposed § 12(b) (1)

to the Securities Exchange Act quoted in Cong. Ree. 8584

(1934), which was never adopted. Id. at 8586. The provi-

sion, however, was to require listed companies to agrec

with the Exchange to comply with the Exchange Act and

the Commission’s rules and regulations, and much of the

debate related to whether the provision was necessary at

all since such companies would have to comply with the law

regardless of any such agreement.'” Omitting the section

Cases involving generally broad standards of conduct and having

nothing to do with disclosure, see, ¢.9., Hecht Vv. Harris, Upham & Co.,

283 F. Supp. 417 (N.D. Cal. 1968), modified on other grounds, 430 F.2d

1202 (9th Cir. 1970), require the presence of fraud to create a right

of action under federal law, but this is because the only action or

conduet proscribed by the rule in fraudulent conduct. Here, however,

is involved a notice or notification rule.

Senator Hastings made the following statement in connection with

the legislation :

I do not quite understand why they want to get the issuer of the

security on record, in the form of an agreement, not to violate a

particular law, because it must be admitted that, if the law itself

is valid, and if the rules and regulations made by tho commission

are valid, and the person entering into the agreoment has brought

himself within the law by offering hin securities for sale, then

certainly, it seems to me, the point of compelling him to sign a

paper that he will abide by the laws and rules made by the com.

mission must have back of it something which those of us who

studied the bill do not quite understand.

78 Cong. Rec. at 8585 (1934). While Senator Hastings’ amendment was

defeated, the language he objected to was deleted in conference.

Tle

in question would apparently indicate merely a recognition

that the provision was unnecessary. The legislative his-

tory is thus at most equivocal on the question whether

Congress intended to insulate issuers from liability in the

event that they violated an Exchange rule.”

Appellees argue also that the Exchange’s remedies are

limited to delisting. See Report of Special Study of Se-

curity Markets of the Securities and Exchange Commis-

sion, H.R. Doe. No. 95, 88th Cong., 1st Sess., Pt. IV, ch.

XII at 566-67; Intercontinental Industries, Inc. v. Amer-

ican Stock Exchange, 452 F.2d 935 (5th Cir. 1971), cert.

denied, 409 U.S. 842 (1972) (permitting delisting). But

no authority holds that the exclusive remedy against &

listed company is delisting. The claim for relief is suffi-

cient for jurisdictional purposes in any event."*

18 Provisions of the Listing Agreement requiring the corporation to, ¢.9.

“promptly notify the Exchange of any changes of officers or directors,”

Part I, 2, would not seem to give rise in any event to & liability to a

securities holder. The provisions of the Listing Agreement here in

question, however, were to “afford the holders of its securities listed on

the Exchange a proper period within which . . . to exercise their

rights..."

19 United Mine Workers v. Gibbs, 383 U.S. 715, 724 (1966). See Hudak

y. Economic Research Analysts, Inc., 499 F.2d 996, 1001 (5th Cir.

1974); Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123, 129 (7th Cir.

1972). The writer of the opinion for himself alone would hold that

even if there were such a duty it would be essentially coterminus with

a contractual duty to the appellants as third party beneficiaries. As

he views it, the limited notification provisions of the Indenture and

debenture were modified by virtue of the application for listing on the

ntock exchange, which specifically incorporated by reference the Listing

Agreement of November 5, 1957, to which we have 60 frequently alluded.

Sree Lawrence v. For, 20 N.Y. 268 (1859) ; Seaver v. Ransom, 224 N.Y.

242, 120 N.F. 629 (1918); Weinberger v. NYSE, 335 F. Supp. 139

(@.D.N.Y. 1971). The duty of a listed company to its own securities

holders to treat them fairly is founded in fundamental concepts of

the law pertaining to corporate fiduciaries. Cohen v. Beneficial Indus-

trial Loan Corp., 337 U.S. 541 (1949) ; Pepper v. Litton, 308 UB. 295

(1929); Chrie-Cra/t Industries, Ino. ¥. Piper Aircraft Corp., 480 F.2d

441 (2d Cir.), cert. denied, 414 U.S. 910 (1978). Security holders of a

72a

Tue INADEQUACY oF THE Boginc NoTICcE

The notice Boeing gave, we hold, had two deficiencies.

First, Boeing did not adequately apprise the debenture

holders what notice would be given of a redemption call.

Investors were not informed by the prospectus or by the

debentures that they could receive mail notice by reg-

istering their debentures, and that otherwise they would

have to rely primarily on finding one of the scheduled ad-

vertisements in the newspaper or on keeping a constant

eye on the bond tables. Second, the newspaper notice

given by Boeing was itself inadequate.

The first factor we think highly significant. Many of

the debenture holders might well have decided to register

their bonds, had the significance of registration, or of the

failure to register, been brought home in the materials

generally available to the purchasers of the debentures.

No detailed information as to notice was given on the face

of the debentures, even in the fine print. The debentures

stated simply:

The debentures are subject to redemption, as a whole

or in part, at any time or times, at the option of the

Company, in not less than 30 nor more than 90 days’

nrior notice, as provided in the Indenture . . . )

corporation are in a very real sense creditor beneficiaries, see 1 Restate.

ment of Contracts $136 (1932), to whom an underlying duty of fair

treatment is owed by the corporation or majority stockholders or

controlling directors and officers thereof. While it may he said that the

Indenture itself is a contract, Kaplan v. Vornado, Inc., 341 F. Supp

212 (N.D. IN. 1971); Buchman v. American Foam Rubber Corp., 250

F. Supp. 60 (8.D.N.Y. 1965), it was clearly entered into with listing

on the NYSE in mind and was substantially simultaneous in execution

and coordinate in operation with the listing application. On this basis

it would be unnecessary in the writer's view to reach the ground upon

which the court relies, but since this view ic individual only, he join

in the ground for decision taken. oe

73a

There was no indication that registration would mean

that a debenture holder would receive mail notice. Nor

was there any indication of the extent of newspaper no-

tice to be provided—either as to the papers that would

be used or how often the notice would be published. De-

benture holders were simply referred by the debenture,

us well as by the prospectus, to the 113-page Indenture

Agreement, which, to be sure, was available to debenture

holders or prospective purchasers upon request, but which

was not circulated generally with the warrants or deben-

tures.

We have dwelt at length in the facts on the newspaper

notice actually given. While it may have conformed to the

requirements of the Indenture it was simply insufficient

to give fair and reasonable notice to the debenture holders.

The duty of reasonable notice arises out of the contract

between Boeing and the debenture holders, pursuant to

which Boeing was exercising its right to redeem the de-

bentures. An issuer of debentures has a duty to give ade-

quate notice either on the face of the debentures, Abram-

son v. Burroughs Corp., CCH Fed. Sec. L. Rep. [1971-72

transfer binder] {| 93,456 (S.D.N.Y. 1972) (Lumbard, C.J.,

sitting by designation), or in some other way, of the

notice to be provided in the event the company decides

to redeem the debentures. Absent such advice as to the

specific notice agreed upon by the issuer and the trustee

for the debenture holders, the debenture holders’ reason-

able expectations as to notice should be protected.

For less sophisticated investors (it will be recalled that

warrants for the purchase of debentures were issued to all

Boeing shareholders), putting the notice provisions only

in the 113-page Indenture Agreement was effectively no

notice at all. It was not reasonable for Boeing to expect

these investors to send off for, and then to read under-

74a

IE the 113-page Indenture Agreement referred to

oth the prospectus and the debentures themselves in

order to find out what notice would be provided in th

event of redemption. ;

Bocing could very easily have run more than two ad

vertisements in a single paper prior to the huneaatl ‘o o

(March 28), at which time it issued its belated news =

lease and advertised for the third time in the Wall SI ~s

Journal and for the first time in the New York Time

Moreover, in the same period that the debentures meg

the process of being redeemed, Boeing was sae ies

its annual meeting (to be held April 24). Proxy sauna

were being prepared throughout March and om finally

mailed sometime between March 24 and Mareh 0, an

a could readily have arranged the redemption dates

e proxy mailing so that notice of the redemptio

dates could have been included in the envelope with the

proxy materials. Thus at no extra cost except that t

printing brief ‘notices, at least all Boeing sharehold "

would have received mail notice, and peaeianaiiey a ‘i if.

icant number of the plaintiff class owned Bocing ae

stock, as well as debentures, in 1966. Had Boein ar

tempted such mail notice, or mail notice to bana. ne

scribers, and also given further newspaper publicity oith :

by appropriate news releases or advertising earlier in

the redemption period, we would have a different

and nennemeniee and sufficient notice might well be ead

Nothing that we have said is inconsistent with ake

Abramson v. Burroughs Corp., supra, or with Kaplan 4

Vornado, Inc., supra. These eases are dleidneraidhable

on their facts as well as in respect to the legal arg , ‘

Sa guments

In Abramson the court was presented with the claim

that Rule 10b-5 was violated in connection with the sale

73a

of certain convertible debentures. As here, a nonconvert-

ing debenture holder was suing for the amounts lost when

he failed to convert before the expiration of the conver-

sion period and he challenged the notice procedures in

connection with the redemption. In Abramson, however,

the principal contention was that there were material omis-

sions in the prospectus issued in connection with the sale

of the debentures. Abramson alleged that the notice pro-

visions in the prospectus were misleading in that they

omitted the nature and frequency of notice that bond-

holders would receive.

Judge Lumbard in Abramson found quite to the con-

trary that the face of the debentures—unlike those here—

stated exactly what notice would be provided, notice which

incidentally was at least twice that required here, making

specific reference to publication once a week for four weeks

in a newspaper of general circulation in New York and one

in Detroit. Thus the Burroughs debentures in Abramson

specifically informed the investor where and how often

notice of redemption would be published so that he could

make a reasonable evaluation of the likelihood that he

would receive such notice or take steps to increase the

chances that he would see it either by subscribing to the

Wall Street Journal or the like, by contacting a broker to

handle the matter for him, or by registration.”

The notice provisions in Abramson were minimal but

sufficient to clear judicial approval; the notice here was

ee ee

20 In Abramson, moreover, the court emphasized that the debentures

in issue specifically stated on their face that the bonds could be regis-

tered, and if registered that notice of a call would be provided to

registered holders by mail. The court therefore concluded that the

nonconverting debenture holders had themselves to blame for not receiv-

ing notice. Here, there was no such explicit information on the Boeing

debentures. While the debentures did, state that they could be regis-

tered, as we have said, there was no indication that registration would

protect the investor by providing him with notice by mail.

76a

significantly less. Moreover, the Boeing debentures them-

selves were somewhat misleading. While they indicated

that redemption could be made on not less than 380 days’

notice, one would have had to have been, if not a lawyer,

at least an experienced and knowledgeable investor, to

read the fine print two paragraphs previously which said

that the conversion right ran only “to and including but

not after the tenth day prior to the redemption date... .”

In Kaplan v. Vornado, Inc., supra, where the percentage

of nonredeeming debenture holders was under 5 per cent

as opposed to the 7 per cent here, in addition to notices

published in the New York ‘Times in accordance with the

indenture agreement there was a press release prior thereto

which resulted in publications of the announcement of

redemption in the Wall Street Journal, Women’s Wear

Daily, Daily News Record, Homes Furnishing Daily, and

on the Reuters and Dow-Jones wire services. The court

in Kaplan specifically found that “the essential facts of

the defendant’s redemption and of the termination of the

holders’ conversion rights were printed in these news

items.” 341 F. Supp. at 213.?!

What one buys when purchasing a convertible deben-

ture in addition to the debt obligation of the company

incurred thereby is principally the expectation that the

stock will increase sufficiently in value that the conversion

right will make the debenture worth more than the debt.

The debenture holder relies on the opportunity to make a

proper conversion on due notice. Any loss oceurring to

him from failure to convert, as here, is not from a risk

inherent in his investment but rather from unsatisfactory

notification procedures. See Note, 54 Cornell L. Rev. at

21 The writer would note that in Kaplan the company did indeed comply

with the NYSE Listing Agreement-Company Manual requirement of a

general news release at the start of the redemption.

77a

971. See also Miller, How to Call Your Convertibles, Harv.

Bus. Rev. 66, May/June 1971.” The debenture holder’s

expectancy is that he will receive reasonable notice and

it is his reliance on this expectancy that the courts will

protect. See generally Fuller & Perdue, The Reliance In-

terest in Contract Damages, 46 Yale L.J. 52, 373 (1936-

37). See, e.g., Associated Perfumers, Inc. Vv. Andelman,

316 Mass. 176, 55 N.E.2d 209 (1944). See also Schlick v.

Penn-Dixie Cement Corp., 507 F.2d 374 (2d Cir. 1974),

cert. denied, 43 U.S.L.W. 3611 (U.S. May 19, 1975). Had

there been proper publication, a reasonable investor un-

doubtedly would have taken action to prevent the loss

occurring to him. ' P

Of course, it may be suggested that the appellee -

poration itself was not the beneficiary of the appellants

loss; rather, the corporate stockholders benefited by not

having their stock watered down by the number of shares

necessary to convert appellants’ debentures. But an award

against Boeing will in effect tend to reduce pro tanto the

equity of shareholders in the corporation and thus to a

large extent those who were benefited, one might almost

say unjustly enriched, will be the ones who pay appellants

loss.”

22 Obviously, where a conversion is not made there may be costs to

the company itself which unnecessarily has to make redemption pay-

outs. Miller, Harv. Bus. Rev. at 67. Miller goes on to say that “news-

papers have not proved an effective conduit, and because of odio

corporate officer must concentrate on the mailing approach.” Perhaps

one solution to the overall problem would be the English one, whereby

the convertible debenture is considered converted once the total principal

amount of the issue outstanding is less than 25 per cent of its original

aise. Id. at 70.

23 On the remand for a determination of damages, it might be appro-

priate for the district court to allow Boeing to meet the liability

resulting from this case by issuing stock. That is what the plaintiffs

would have had if they had received notice of the redemption call,

and one of the purposes of the redemption was to enable the company

78a

On the foregoing basis it is unnecessary for us to de-

termine whether there is any cause of action under the

Trust Indenture Act, 15 U.S.C. § 77bbb, as appellants con-

tend. Nor, because appellants would not have standing

to assert it, do we ground liability upon or make reference

in the context of liability to appellants’ argument that the

call was illegal in the first instance because it was based

upon an improper conversion rate.

DAMAGES AND THE “CONVERSION RATE”

We must, however, in remanding to the district court

for a determination of damages, take note of the conversion

rate argument which was rejected by the court below. That

argument was essentially that the 4 per cent stock dividend

declared in November, 1958, the 2 per cent stock dividend

declared in November, 1959, and the acquisition by Boeing

on March 31, 1960, of substantially all the assets of Vertol

Aircraft Corp. necessitated an adjustment in the conver-

sion rate of two shares of Boeing stock for each $100

of debentures in accordance with Section 4.05 of the In-

denture.** At all times after these three transactions,

Boeing treated the conversion rate as 2.0448. Because

that rate was under 2.045, no adjustment was required

under the Indenture § 4.05(f), which provided in part that

Whenever the amount by which the conversion rate

would be changed in accordance with the foregoing

provisions of this Section 4.05 is less than one-twen-

tieth of a share of Capital Stock the Company at its

option need not make such adjustment at that time.

to exchange debt for equity capital. It would thus seem appropriate

for Boeing to be able to issue stock to meet all or part of this liability,

with, of course, the shares being valued according to their market

value at date of issuance.

24 The section is four printed pages long and therefore wil) not be

reprinted here in its entirety.

+ a

79a

Appellants on the other hand contend that the proper

conversion rate was at least 2.045 or as high as 2.08.

On November 4, 1958, Boeing declared a 4 per cent stock

dividend and issued 281,537 shares therefor. Section

4.05(b)iv states that in the case of shares so issued the

consideration therefor shall be “deemed to be the number

of shares so issued multiplied by the market value

thereof.” *5 Boeing initially calculated the market value

by including the stock dividend shares in the number of

shares outstanding to obtain the market value of the post

dividend stock, i.e., by dividing the closing price of the

stock on November 4 of $56.875 by 1.04 since there were

104 shares where there had been 100. This resulted in a

market value figure rounded off to $54.75 which, multiplied

by the number of stock dividend shares issued, gave a total

consideration therefor of $15,414,151.%* On this basis the

calculated rate was 1.9927 but since the indenture re-

quired that the conversion rate not be below 2.00, note

25 Market value in connection with a limited stock dividend is defined

in Section 1.01 as follows:

For the purposes of this definition market value shall mean the

last reported sale price of the Capital Stock of the New York

Stock Exchange (or if not listed on the New York Stock Exchange,

then on any national securities exchange where listed) on the date

of declaration of each stock dividend involved or, if there shall not

have been a sale on such date, on the basis of the average of the

bid and asked quotations therefor on said exchange on such date,

or if the Capital Stock shall not then be listed on any national

securities exchange, on the basis of the average of the bid and

asked quotations in the over-the-counter market on such date.

26 That consideration and the number of shares issued were to be added

to the initial consideration of $351,872,350 and 7,037,447 (valued at

$50 per share) shares. Under the basic conversion rate formula the

product of $100 and the number of resulting shares is divided by the

aggregate consideration. “The resulting quotient, adjusted to the nearest

one-hundredth, shall thereafter be the conversion rate (until further

adjusted) if it is greater than the basie conversion rate {of 2.00

shares for each $100 debenture].” Sec. 4.05(a). But if the adjusted

rate is less than 2.00 the basic conversion rate of 2.00 governs.

80a

26 supra, the rate remained at 2.00. Appellants agree

that the rate should be 2.00 but contend that the con-

sideration for the stock dividend shares should be treated

as at $14,076,850, the figure which would result from a flat

2.00 or $50 per share rate (above which stock dividend

shares could not be valued under the limitations of Section

4.05(a), note 26 supra).

Initially the 2 per cent stock dividend of 147,489 shares

on November 2, 1959, was treated by Boeing in the same

way as the previous year’s dividend. The November 2,

1959, closing price of $30.375 per share was divided by

1.02 to obtain a quotient of $29.77 which, multiplied by

the number of shares (147,489), gave additional con-

sideration of $4,390,748 to be added to the aggregate con-

sideration (under Section 4.05(b))*’ after the prior stock

dividend.

The gist of appellants’ complaint about the conversion

rate is that in connection with the acquisition of Vertol

Aircraft assets in 1960 for 472,736 shares of Boeing, not

only were the Vertol assets overevaluated and evaluated

at the wrong time so as to obtain the highest evaluation,

but the prior stock dividend adjustments were recomputed

to the debenture holders’ disadvantage. The argument

is that all this was done having the conversion rate pre-

cisely in mind and with the purpose of keeping it at

2.044999 or below so as to avoid adjustment. (See Ex-

hibit 28.)

The recomputation of the stock dividend adjustments

was as follows. The full share price of $56.875 at the

close of the 1958 dividend day was taken, that is, the

stock dividend shares were not included in the number of

shares outstanding. Thus the consideration received was

calculated at $16,012,417 (281,537 x 56.875) rather than

27 Appellanta overlook the aggregate aspect of Section 4.05(b).

TR Ye

STAUNTON TOPE OS OTE

PITS BOM IM TEEREUER I un rms

8la

the $15,414,151 previously used. The same was done in

connection with the 1959 2 per cent stock dividend, result-

ing in increased consideration of $4,479,979 rather than

the $4,390,748 previously used. Appellants urge that

Boeing thereby “added” consideration received of $1,935,-

567 from the 1958 dividend (because appellants would treat

that as $14,075,850) and $87,843 from the 1959 dividend,

thus leaving at the end of this recomputation a conversion

rate of 2.0052 rather than one of 2.0161. But the lower

court found, and we agree, that while appellants’ computa-

tions, or at least Boeing’s original ones, better represent

the economic realities and more accurately follow general

accounting practice, there was discretion in the Board

under Section 1.01, note 25 supra, not to include the

dividend shares in computing the market value.

In connection with the Vertol acquisition, the value

placed on it for purposes of determination of the con-

version rate was the market value of the Boeing stock

on November 13, 1959, at 335%, for a total of $15,895,748.

Appellants argue that three different valuations would

have been more accurate and fairer: the valuation on

March 31, 1960, of the Vertol assets as recorded on the

Boeing books at $12,435,138.47; that on January 18, 1960,

when the contract of acquisition was signed and the Boeing

stock worth 305; or that on March 30, 1960, when the

contract was closed and the Boeing stock worth 24%. Any

one of these valuation measures would have increased the

conversion ratio to over 2.045. But Section 4.05(b)(2) of

the Indenture provided that “in the case of the issuance

of shares for consideration in whole or in part other than

cash, the consideration other than cash shall be deemed

to be the fair value thereof as determined by the board

of directors.” The district court’s finding was that there

was no evidence that Boeing “had any purpose of delib-

82a

erately hurting its debenture holders” and that while it

was true that on November 13, 1959, the acquisition was

still tentative, the board of directors had a colorable right

to fix the fair value of the consideration as of November 13,

1959. That decision was one made, the court below found,

in good faith and with the approval of accountants, audi-

tors, investment bankers and counsel. Consequently, the

court found that the decision was not subject to attack.

See Morris v. Standard Gas & Electric Co., 31 Del. Ch.

20, 63 A.2d 577 (1949). We do not believe the trial court’s

findings clearly erroneous. On those findings the conclu-

sion of law was correct. In short, we affirm so much of the

trial court’s opinion as relates to the conversion rate.

Judgment affirmed in part; reversed and remanded in

part.

APPENDIX F

~ Were, cht iihe ws exis Bigs

ee - Bs

. ae

GT ote

SNP CELE Rows

83a

Opinion

UNITED STATES DISTRICT COURT

SoutHern District or New York

66 Civ. 1820

Wim R. Van Gemert, et al.,

Plaintiffs,

onion

Tue Bozrne Company

(formerly Bozmva Armpiane Company), et al.,

Defendants.

¢—-

Plaintiffs’ counsel in these consolidated class actions have

moved for an award of attorneys’ fees. These actions were

filed in 1966 by non-converting holders of certain subor-

dinated debentures of the Boeing Company. The gravamen

of the complaints is that plaintiffs and other class members

had inadequate and unreasonable notice of Boeing’s in-

tention to “call” the convertible debentures, in question,

and were unable to exercise their conversion rights before

the deadline.

In November 1973, after trial, I rendered a decision dis-

missing the action and entering judgment for defendants.

On July 14, 1975, the Court of Appeals held that the notice

of redemption was deficient and constituted a violation of

the securities laws. Van Gemert v. Boeing, 520 F2d 1375

(2d Cir. 1975).

Sb A MS ae I a a a ee

84a

Opinion

On June 30, 1977, this court signed a judgment in favor

of plaintiffs in the amount of $5,749,005.83. On or about

July 20, 1977, Boeing deposited, pursuant to the judgment,

$5,749,990.83, which with interest has grown today to more

than $6,000,000.00.

The Judgment provided that plaintiffs’ counsel would be

awarded fees and expenses from the total amount of the

judgment. Boeing appealed this porticn of the judgment,

and on March 27, 1978 the Court of Appeals issued an

opinion holding that attorneys’ fees and expenses may not

be paid from any amount of the judgment which is not

claimed by absent class members. The decision of the Court

of Appeals states that the payment of attorneys’ fees and

expenses must be deferred until after all the proofs of

claims have been processed.

After entry of the judgment and before the Court of Ap-

peals’ decision of March 27, 1978, plaintiffs’ attorneys filed

extensive fee applications. I have reviewed those applica-

tions and am familiar with the excellent quality of the work

performed by plaintiffs’ counsel. Plaintiffs’ counsel have

made new law and have been involved in a trial on the

merits and three appeals to the Court of Appeals. They

have not received any remuneration for their services to

date in the nearly twelve years that this litigation has lasted.

They deserve to be well compensated.

Nevertheless, in light of the Court of Appeals’ recent

opinion, it would be premature for me to make a fee award

at this time.

The Special Master is in the process of attempting to

locate class members. This is complicated by the fact that

the debentures in question were ‘‘bearer’’ bonds.

eS. Sra Pee

85a

Opinion

After all claims have been finally determined, I will issue

an award to plaintiffs’ attorneys taking into consideration

the quality of their work and the length of time that this

litigation has lasted.°

So OnpERED.

/s/ Syivester J. Ryan

United States District Judge

Dated: New York, New York

May 11, 1978

* The Court also has in mind the fact that interest is etn on

the settlement fund. Because of the delay in paying attorneys fees,

I will consider at the time the fees are set whether the interest on that

portion allotted to fees should also be paid to the attorneys.

87a

Chronological List of Relevant Docket Entries

APPENDIX fay UNITED STATES DISTRICT COURT

SouTHERN Distnict or New York

66 Civ. 1820

DATE PROCEEDINGS

6-23-66 Filed complaint and issued summons.

7- 7-66 Filed summons & ret—Served Boeing Co. 6-24-66

—Chase Manhattan Bk. 6-27-66—Unable to find

Artemus S. Gates—Served Thomas R. Wilcox

6-24-66.

7-15-66 Filed stip & order extending deft’s time to ans

to 8-12-66—Tyler,

7-15-66 Filed ANSWER of deft. Boeing Co.

7-19-66 Filed pltff’s notice to take deposition of the

following defts. T.R. Wilcox, Boeing Co. & the

Chase Manhattan Bank.

7-20-66 Filed defts. notice of motion for appointment of

Rule 2 Judge.

7-20-66 Filed Memo Endorsed on motion of 7-20-66.

After hearing, this motion is denied without

prejudice to renewal when the shortage of ju-

dicial manpower in this district is relieved. So

ordered, Ryan, Ch.J.

7-28-66 Filed stip. & order adjourning the time of defts.

Boeing Co, Wilcox & Chase Man. depositions to

9-20-66 Palmieri, J.

8-10-66 Filed stip. & order—extending deft. (Chase Man-

hattan Bk) to answer to 9-15-66—Tenney, J.

88a

Chronological List of Relevant Docket Entries

DATE

8-15-66

8-29-66

9- 6-66

9-12-66

9-13-66

9-23-66

9-27-66

PROCEEDINGS

Filed order—ordered that an explanatory note,

in the form annexed hereto, be included with the

notice to be seni by direct mailing as prescribed

in the third ordering paragraph of the order to

show cause herein dated 7-21-66 Ryan, Ch. J. m/n

Filed defts’ (Boeing, etano) notice of mailing re:

supplemental list of debenture holders.

Filed affdvt. of service on persons in charge

(filed in court).

Filed affdvt. of Robert F. Dobbin (filed in court).

Filed stip & order extending deft’s (Chase Man-

hattan) time to answer to 10-18-66—Levet, J.

Filed notice of appearance for Marian S.

Mitchell.

Filed stip. & order adjourning depositions to

10-20-66—Bryan, J.

Filed affdvt. of S. Hazard Gillespie.

Filed special appearance by Henry J. Hoff to

object to his inclusion in a class represented by

pltffs.

Filed defts’ (Boeing & Wilcox) affdvt. & show

cause order to determine action to be maintained

as a class action, ete.—hefore Judge Ryan 3-29-66

—Room 129.

Filed memo endorsed on show cause order filed

9-27-66—This application is granted; see opinion

filed herewith; submit order—Ryan, J.

Een POO Oe IRE ET,

89a

Chronological List of Relevant Docket Entries

DATE.

9-27-66

9-28-66

PROCEEDINGS

Filed memorandum of pltffs. in support of mo-

tion for preliminary injunction.

Filed memorandum of defts. in opposition to mo-

tion for preliminary injunction.

Filed pltffs’ affdvt. & notice of motion for a

preliminary injunction—ret. before Ryan, J.—

9-19-66—rm. 129.

Filed affdvt. of Everett I. Willis.

Filed memo endorsed on pltffs’ motion for pre-

liminary injunction filed 9-27-66—Motion denied ;

So ordered—Ryan, J.—maiied notice.

Filed affdvt. of S. Hazard Gillespie in opposition.

Filed transcript of record of proceedings of

9-19-66.

Filed Opinion # 32,776—motion to determine

action as a class action is granted and that all

the actions pending in this court should be

consolidated. Let an appropriate order be sub-

mitted granting the relief sought—Ryan, J.

Filed application of Abraham Freedman that

counsel in the Philadelphia action be permitted

to participate in the within proceeding pending

the formal transfer of the proceeding from

Philadelphia to N.Y.

Filed memo endorsed—application to participate

granted—So Ordered—Ryan, Ch.J.

elation

90a

Chronological List of Relevant Docket Entries

DATE

9-28-66

PROCEEDINGS

Filed petitioner’s notice of motion for leave to

appear & to extend time to file pleadings.

Filed memo endorsed—motion to intervene as

party pltff is granted—J. Weil is permitted to

appear for J. Weil & S. Weil within 30 days

designates an atty within this Dist—So Ordered

—Ryan, J.

Filed pltff’s notice of motion to consolidate ac-

tion of Jack Diener with 66-1820.

Filed memo endorsed—imotion to consolidate ac-

tion transferred from Dist. of Columbia with

66-1820 is granted—B. Gordon & M. Miller—

firm of Danzansky & Dickey of Wash., D.C. are

permitted to appear as atty for Jack Diener in

the consolidated action provided within 30 days

they designate an atty with offices in this Dist.—

So Ordered—Ryan, J.

Filed pltff’s affidvt & notice of motion to amend

complaint ret 9-6-66.

Filed memo endorsed—no opposition to amend-

ing complaint—motion granted—So Ordered—

Ryan, J.

Filed pltff’s affdvt & notice of motion to consoli-

date ret 9-6-66.

Filed memo endorsed—application for consolida-

tion is granted—settle order on notice further &

additional provisions will be made later Re:

proceedings etc. So Ordered—Ryan, J.

7 oe hie ela de

9la

Chronological List of Relevant Docket Entries

DATE

10- 4-66

10-14-66

10-17-66

10-18-66

PROCEEDINGS

Filed order consolidating this action with 6 other

actions for all pretrial proceedings and for trial

purposes and the present & former debenture-

holders be permitted to intervene and come into

this consolidated action as pty. pltffs.—& caption

be deemed amended to include their names—

Ryan, J.

Filed order that a pretrial conference in each of

the consolidated actions shall be held on 10-25-66

—at 2:00 p.m. in Room 3001—Ryan, J.

Filed amended complaint.

Filed statement of James I. McClintock as

counsel.

Filed memo endorsed on statement of counsel—

The within application of James I. McClintock

is granted—said counsel be permitted to appear

as an atty. in this & related consolidated action;

he has designated Mendel Lurie as the person

within this district to receive service of papers

on his behalf in this action—So ordered—Ryan,J.

Filed notice of appearance for Vincente J. Bon-

nard.

Filed affdvt. & notice of motion of Chase Man-

hattan Bank to dismiss amended complaint—ret.

before Ryan, J.—10-27-66—room 3001.

Filed memorandum in support of motion by

Chase Manhattan Bank.

92a

Chronological List of Relevant Docket Entries

DATE

10-25-66

10-26-66

10-31-66

11- 1-66

11-21-66

11-29-66

12- 2-66

12-19-66

PROCEEDINGS

Filed stip. & order extending time for deft.

Chase Manhattan Bank to answer amended com-

plaint to 11-17-66—MaeMahon, J.

Before Ryan, J.—pre-trial hearing.

Filed pltffs’ (Van Gemert) affdvt. & notice of

motion to appoint Gen’l counsel ret. before

Ryan, J.

Filed memo endorsed on motion filed 10-26-66—

Motion withdrawn without prejudice, Ryan, J.

Filed pre-trial order + 1-actions consolidated to

bear No. 66-1820—the consolidated amended com-

plaint shall be filed & served on or before 11-21-66

—defts’ answers or motions as to the consoli-

dated amended complaint shall be filed & served

on or before 12-12-66—ete.—Ryan, J.

Filed affdvt. of Everett I. Willis.

Filed copy of pre-trial order # 1.

Filed stip & order extending pltffs’ Committee

to file a consolidated amended complaint to

11-28-66—Ryan, J.

Filed stip & order extending time of pltffs’ to

serve a consolidated complaint to 12-5-66—Ryan,

Filed stip & order extending pltffs’ time to file a

consolidated amended complaint to 12-19-66—

Ryan, J.

Filed consolidated complaint.

a ae ee

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DATE

12-29-66

1- 3-67

1-11-67

1-18-67

1-30-67

PROCEEDINGS

Filed affdvt. of Abraham E. Freedman in re-

buttal to reply affdvt. of Chase Manhattan Bank.

Filed affdvt. of Stuart D. Wechsler.

Filed reply affdvt. of Everett I. Willis.

Filed affdvt. of S. Edward Mittler in opposition

to motion for dismissal of amended complaint.

Filed

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