Opinion ID: 1165326
Heading Depth: 3
Heading Rank: 1

Heading: fee awards in common-fund and substantial-benefit cases

Text: Since 1796 the rule in this country has been that counsel fees are not recoverable absent statute or enforceable agreement. (See Arcamel v. Wiseman (1796) 3 U.S. (3 Dall.) 306 [1 L.Ed. 613]; see also, e.g. Code Civ. Proc., § 1021; Alyeska Pipeline Co. v. Wilderness Society (1975) 421 U.S. 240, 247-257 [44 L.Ed.2d 141, 147-153, 95 S.Ct. 1612].) Courts have, however, carved out exceptions to the rule, principally the common-fund, substantial-benefit (or common-benefit), and private-attorney-general theories. [8] The common-fund exception was articulated in Trustees v. Greenough (1882) 105 U.S. 527 [26 L.Ed. 1157]. Greenough held that an act of Congress which limited costs recoverable by prevailing parties did not restrict courts' equitable powers to permit the trustee of a fund, or a party recovering or preserving a fund for the benefit of himself and others, to recover his costs (including attorney fees) from either the fund or the benefited parties directly. The fee-bill is intended to regulate only those fees and costs which are strictly chargeable as between party and party, and not to regulate the fees of counsel and other expenses and charges as between solicitor and client.... (105 U.S. at p. 535 [26 L.Ed. at p. 1161].) The central theory underlying the trustee's right was the prevention of unjust enrichment, i.e., prevention of an unfair advantage to the others who are entitled to share in the fund and who should bear their share of the burden of its recovery.... ( Estate of Stauffer (1959) 53 Cal.2d 124, 132 [346 P.2d 748].) Justifying the denial of recovery to the attorney was the fact that he could recover his fee from his client, the trustee. Yet Central Railroad & Banking Co. v. Pettus (1885) 113 U.S. 116 [28 L.Ed.915, 5 S.Ct. 387], held that the attorney had an independent right against the fund. [9] The theory was that he, like the client, had conferred a benefit on class members and thus, to avoid unjust enrichment, should be compensated. As the court explained in Lindy II, supra, 540 F.2d 102, on which defendants rely: `[t]he award of fees under the equitable fund doctrine is analogous to an action in quantum meruit: the individual seeking compensation has, by his actions, benefited another and seeks payment for the value of the service performed.' [ Lindy I ] 487 F.2d at 165. Accordingly, `a benefit to the fund is supposedly required.... The standard formula [of benefit] ... mix[es] together three distinct ideas: that a fund can be benefited by being created, increased or protected (or preserved).' ( Lindy II, supra, 540 F.2d 102, 110, citing Dawson, op. cit. supra, 87 Harv. L. Rev. 1597, 1626.) Therefore, just as the trustee was not permitted to surcharge the fund with personal expenses ( Greenough, supra, 105 U.S. 527, 538 [26 L.Ed. 1157, 1162]), the attorney's fee-related services were not compensable. Services performed in connection with the fee application are necessary to the attorney's recovery. They benefit him, for without them, the attorney cannot ... recover. But such services do not benefit the fund  they do not create, increase, protect or perserve it.... There being no benefit to the fund ... there should be no attorneys' fee award from the fund for those services. ( Lindy II, supra, 540 F.2d 102, 111; accord, Grinnell II, supra, 560 F.2d 1093, 1102, italics in original.) A second basis for the rule that attorneys could not recover from the fund for fee-related services was the potential for conflict of interest. Since Pettus, supra, 113 U.S. 116, it has been accepted that the attorney's claim is independent of and in addition to his client's claim for costs, including attorney fees. (See Dawson, op. cit. supra, 87 Harv.L.Rev. 1597, 1640.) To the extent counsel was permitted to surcharge for fees significantly beyond those to which he was entitled from his client, his motives to protect the client's interest might have been diluted. To the extent he succeeded in asserting the claim, both his client and other fund beneficiaries would lose. The prevailing rule is that one cannot be assessed the cost of effecting one's own loss. Thus the prohibition of an award for fee-related services in common-fund cases is an expression of the proscription against awarding any fees if competing interests are involved ( Lindy II, supra, 540 F.2d 102, 110)  a rule which, in turn, embodies the governing principle of the American rule. The conflict-of-interest basis for the rule in the attorney's instance is illustrated by this court's holding in Gabrielson, supra, 56 Cal.2d 224. The client's aim had been to aggregate monies against which she might ultimately assert rights. She succeeded in creating a $200 million fund from which her lawyer was denied fees. Affirming that result this court said, An attorney retained to recover or protect a common fund so that it would be available when and if his client could establish an adverse right thereto might be induced to forsake his client's interest in the hope of securing more substantial fees from the common fund. ( Gabrielson v. City of Long Beach, supra, 56 Cal.2d 224, 229-230.) Those two considerations were deemed fully applicable in cases arising under the substantial-benefit doctrine (see, e.g., Mandel II, supra, 92 Cal. App.3d 747, 760; County of Inyo v. City of Los Angeles, supra, 78 Cal. App.3d 82, 91), which developed as a variant of the common-fund theory in cases where no money fund had been created but a nonetheless concrete and significant benefit, impecuniary in nature, had been conferred on an ascertainable class. Courts reasoned, again under the principle of preventing unjust enrichment, that those benefited should share the burden of producing the fruits of litigation. Aside from the nature of the benefit, the rule differed little from the common-fund exception except in one respect: the beneficiaries could be the defendants or a class represented by them. The extension of the rule flowed from the fact that substantial-benefit developed from corporate litigation, wherein shareholder derivative actions were deemed to have conferred a benefit on the corporations against which they were directed. (See, e.g., Mills v. Electric Auto-Lite (1970) 396 U.S. 375, 390 [24 L.Ed.2d 593, 605, 90 S.Ct. 616]; Fletcher v. A.J. Industries (1968) 266 Cal. App.2d 313, 318-325 [72 Cal. Rptr. 146].) Even as a remedy against corporate defendants, however, substantial-benefit was sometimes deemed an instrument of public policy. [10] And, absent a theory designed solely to implement that policy, it was invoked increasingly in cases against government entities. (See e.g., Mandel v. Hodges (1976) 54 Cal. App.3d 596, 622-623 [127 Cal. Rptr. 244, 90 A.L.R.3d 728] [ Mandel I ]; Knoff v. City etc. of San Francisco (1969) 1 Cal. App.3d 184, 203-204 [81 Cal. Rptr. 683].) During this period the doctrinal lines became blurred between substantial-benefit theory and what ultimately developed as the private-attorney-general rationale. [11] The Mandel litigation is illustrative. There a state employee successfully challenged  as an establishment of religion  the practice of allowing government employees paid time off on Good Friday. The action saved the state $2 million in 1973 alone; and the trial court awarded plaintiff $25,000 in counsel fees, finding her a member of an ascertainable class of state employees. The court further found that her attorneys had acted `not only on her behalf, but in the general public interest and on behalf of members of [her] class....' (See Mandel I, supra, 54 Cal. App.3d 596, 622.) The Court of Appeal affirmed the judgment and also remanded for attorney fees on appeal, reasoning that plaintiff had rendered a substantial benefit to the citizens and taxpayers of the state. ( Id., at p. 624.) On remand the court awarded an additional $75,000. The state again appealed, and the Court of Appeal reversed as to the amount and held that counsel who had brought the suit could get fees for services on the prior, but not the current, appeal. ( Mandel II, supra, 92 Cal. App.3d 747, 760.) Relying on common-fund cases cited by defendants herein, the court reasoned that counsel on the second appeal had vindicated solely their own interest and that no benefit flowed to the public. Respondent's attorneys are... representing essentially their own interest at this time, as distinguished from those of the public to whom the benefits of the antecedent litigation stand secured. In consequence, the `substantial benefit' theory may not now be applied in their favor. ( Ibid. ) [12] So holding, the Court of Appeal merely applied the rule articulated by this court in Gabrielson, the Third Circuit in Lindy II, and the Second Circuit in Grinnell II, that considerations peculiar to common-fund and common-benefit cases require that counsel not be compensated for fee-related services. Both federal circuits have held squarely, however, that those considerations are absent when the fee is awarded under a statute embodying a private-attorney-general concept. In statutory fee award cases, the considerations of Lindy II and the equitable fund cases do not apply. Statutorily authorized fees are not paid out of the plaintiffs' recovery, and the attorney in seeking his fee is not acting in any sense adversely to the plaintiffs' interest. Hence the time expended by attorneys in obtaining a reasonable fee is justifiably included in the attorneys' fee application, and in the court's fee award. ( Prandini v. National Tea Co. (3d Cir.1978) 585 F.2d 47, 53; accord, Gagne v. Maher (2d Cir.1979) 594 F.2d 336, 344, affd. sub nom. Maher v. Gagne (1980) 448 U.S. 122 [65 L.Ed.2d 653, 100 S.Ct. 2570].) Defendants urge that all three theories should be deemed similar because, under each, lawyers seek fees from an involuntary client where payment would reduce funds otherwise available to plaintiff or to defendant for use in plaintiffs' behalf. We have rejected that view. Serrano III, for example, noted that the enormous service plaintiffs rendered to the state would nonetheless not support a fee award under the substantial-benefit theory because no concrete benefits were conferred by this court's holding. The fundamental holding of Serrano  i.e., that the existing school finance system, insofar as it operates to deny equality of educational opportunity to the school children of this state, is thereby violative of state equal-protection guarantees  does nothing in and of itself to assure that concrete `benefits' will accrue to anyone.... [C]oncrete `benefits' can accrue to the state or its citizens in the wake of Serrano only insofar as the Legislature, in its implementation of the command of equality which that case represents, chooses to bestow them. ( Serrano III, supra, 20 Cal.3d at p. 41, fn. omitted.) Defendants view the private-attorney-general theory as another version of common-fund. Justice Marshall, dissenting in Alyeska, similarly suggested that, under private-attorney-general approach, one consideration should be the extent to which shifting [the litigation] cost to the defendant would effectively place it on a class that benefits from the litigation. (421 U.S. at p. 285 [44 L.Ed.2d at p. 169].) The majority observed that Congress had imposed no such common-fund conditions upon the award under fee-shifting statutes embodying the private-attorney-general theory, and concluded that the condition disserve[d] that basis for fee shifting by imposing a limiting condition characteristic of other justifications. [¶] That condition ill suits litigation in which the purported benefits accrue to the general public. (421 U.S. 240, 264-265, fn. 39 [44 L.Ed.2d 141, 157].) As we said in Serrano III : The `private attorney general' theory must be accepted or rejected on its own merits  i.e., as a theory rewarding the effectuation of significant policy  rather than as a policy-oriented extension of the `substantial benefit' theory burdened with the limitations of that rationale. (20 Cal.3d at p. 45, fn. 16.)