Court Opinion

ID: 9465405
Source: CourtListenerOpinion
Date Created: 2023-08-05 00:45:41.092607+00
Date Added: 2024-06-11T17:39:09.948399
License: Public Domain

VAN GRAAFEILAND, J., with whom Judges MULLIGAN and TIMBERS
concur, dissenting:
With all respect to our colleagues in the majority, we believe 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 purportedly performed on behalf of persons who are not their clients and who, themselves, have not received a single penny as a result of the lawyers’ efforts.
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 shareholders’ names. Each warrant was fully negotiable, however, and could be transferred by delivery in blank. The transferee was entitled to use the warrant for subscription without having a new warrant issued. Approximately 7,000,000 rights were issued; and, between July 15, 1958, and July 29, 1958, the date the subscription offer expired, approximately 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 Boeing’s transfer agent.
Between August 4,1958, when the debentures were admitted to trading on the New York Stock Exchange, and March 29, 1966, when trading terminated, over $68 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 coupons 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.
As of March 8, 1966, there were approximately 27,000 debentures 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-converting debenture holders. The Van Gemert action was commenced on June 23,1966. On July 21, 1966, upon the application of Boeing’s attorneys, the district judge signed an order directing all present and former holders of unconverted debentures to show cause before him on September 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 *443editions of the New York Times and the Wall Street Journal. 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 accurately identify all of the class members. Those persons who did receive notice found no reference therein to any 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 attorneys who were subsequently appointed by the district court to serve as the “representative committee” of plaintiffs’ attorneys. 3 H. Newberg, Glass Actions H 6824C at 1147 (1977). Indeed, for most purposes, the absentees could not even be considered parties to the law suit. See In re Four Seasons Securities Laws Litigation, 525 F.2d 500, 504 (10th Cir. 1975); In re Sugar Industry Antitrust Litigation, 73 F.R.D. 322, 348-49 (E.D.Pa.1976); Lamb v. United Security Life Co., 59 F.R.D. 44, 48-49 (D.C. Iowa 1973); Donson Stores, Inc. v. American Bakeries Co., 58 F.R.D. 485, 489 (S.D.N.Y.1973); 2 H. Newberg, Class Actions, supra, If 2780 at 1249-50. Accordingly, we fail to see the significance of the majority’s discussion of attorneys’ 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 attorneys who profess to be representing the interests of absentee 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 Carroll v. American Federation of Musicians, 372 F.2d 155, 162 (2d Cir. 1967), vacated and remanded on other grounds, 391 U.S. 99, 88 S.Ct. 1562, 20 L.Ed.2d 460 (1968); Phillips v. Klassen, 502 F.2d 362, 366 (D.C.Cir.), cert. denied, 419 U.S. 996, 95 S.Ct. 309, 42 L.Ed.2d 269 (1974). If the absentee class members who have received nothing from the escrow fund were to discover that a group of unknown lawyers had received substantial awards from the absentees’ undistributed shares, it is hard to believe that the absentees 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 lawyers who are seeking equitable relief from the courts. Cf. National Association of Regional Medical Programs, Inc. v. Matthews, 179 U.S.App.D.C. 154, 551 F.2d 340, 344-46 (1976), cert. denied, 431 U.S. 954, 97 S.Ct. 2674, 53 L.Ed.2d 270 (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 litigation to date has demonstrated a surprisingly small response by absent members notified of their right to make claims.” Id. at 736 n.4. This is one of the few statements in the *444opinion 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 September 1, 1978.1 Taking into account that the named plaintiffs 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 can be justified simply by pointing to a “common fund” as the source of the lawyers’ fees.
The “equitable” or “common” fund doctrine was created for the purpose of preventing unjust enrichment. Mills v. Electric Auto-Lite Co., 396 U.S. 375, 392, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970); Fleischman Distilling Corp. v. Maier Brewing Co., 386 U.S. 714, 719, 87 S.Ct. 1404, 18 L.Ed.2d 475 (1967); Grace v. Ludwig, 484 F.2d 1262, 1269 (2d Cir. 1973), cert. denied, 416 U.S. 905, 94 S.Ct. 1610, 40 L.Ed.2d 110 (1974). There can be no unjust enrichment unless a benefit has been conferred and knowingly 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 enrichment. 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
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 applies to a fund created through the efforts of an attorney. See Haynes v. Rederi A/S Aladdin, 362 F.2d 345, 351 (5th Cir. 1966), cert. denied, 385 U.S. 1020, 87 S.Ct. 731, 17 L.Ed.2d 557 (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 attorneys’ fees and litigation costs, except when they elect to accept the benefit of the litigation. Absent class members who accept any part of any recovery fund are liable for their proportional share of fees and costs. The attorney who creates a fund is entitled to a fee from each class member who accepts the benefits of the fund.
2 H. Newberg, Class Actions, supra, H 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 enriched. 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. The Special Mas*445ter’s notice to debenture holders made it clear that receipt of the notice did not mean that the recipient would ultimately be found entitled to participate in the award of damages. The burden was placed upon the recipient to establish his right of recovery and to submit executed proofs of claim and supporting documents by September 1, 1978. If the non-claiming absentees were not precluded 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 sharing in the “common fund”, cannot be said to have accepted the benefits of the lawyers’ efforts. Any charge levied against them for attorneys’ fees is clearly in excess of benefits received.
When the panel in Van Gemert I, 520 F.2d 1373, found Boeing’s notice of redemption to be inadequate, it directed that damages be awarded to the seven percent of debenture holders who did not convert, without considering whether their failure to convert might have resulted from some cause other than lack of notice. All the non-converters had to do in order to collect was to file a claim. The Court now holds that, insofar as the attorneys’ right of recovery is concerned, it isn’t even necessary that a claim be filed by the debenture holders. Our brothers will not allow the absentees’ failure to file, whether caused by death, incompetency, incapacity, lack of knowledge, or unwillingness, to prevent the lawyers from taking their cut of the unclaimed moneys.3
This means that attorneys may sue on behalf of unknown and unnamed individuals, secure a money judgment, ostensibly 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.4 We disagree on both counts. If lawyers must receive this sort of favored treatment to encourage the bringing of class actions, perhaps the game is not worth the candle; the public is giving up more than it is receiving in return.
We continue to believe that Van Gemert III was rightly decided, and we adhere to the views expressed therein.

. The notice of availability of proofs of claim stated that any debenture holder who did not file by the deadline date would be precluded from participating in the award of damages.

. It is possible that the September 1st 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 received remains the same, whether the figure is eighty percent or one percent.

. Perhaps, as the majority opinion intimates, we in the dissent are too much influenced by “venerable” works such as Williston on Contracts. 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.
We likewise cannot comprehend how the holder of a $100 debenture, who for any of a number of reasons does not collect, can be said to benefit to the same extent as the holder of a $100 debenture who does collect so that their “pro-rata” shares of attorneys’ fees are the same.

. The majority’s attitude appears to be summed up in footnote 14 of the majority opinion where they say that deducting attorneys’ fees from the “spoils” of the litigation cannot injure absentee class members who are not going to collect anyway.