Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit
9-10-2001
Zucker v. Westinghouse Elec
Precedential or Non-Precedential:
Docket 00-3783
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"Zucker v. Westinghouse Elec" (2001). 2001 Decisions. Paper 207.
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Filed September 10, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 00-3783
ALBERT ZUCKER; STANLEY HERSHFANG;
JACOB JOSEPH MILLER
v.
WESTINGHOUSE ELECTRIC CORPORATION;
J. C. MAROUS; P. E. LEGO
(D.C. Civil No. 91-cv-354)
DANIEL MOGELL, in his capacity as shareholder,
suing derivatively, and individually
v.
BARBARA H. FRANKLIN; RICHARD M. MORROW; HAYS
T. WATKINS; DONALD F. HORNING; JOHN B. CARTER;
JOHN C. MAROUS; ROBERT W. CAMPBELL; RENE C.
MCPHERSON; FRANK CARLUCCI; RICHARD R.
PIVIROTTO; PAUL E. LEGO; WILLIAM A. POWE; GARY M.
CLARK; WILLIAM H. GRAY; PAULA STERN; DAVID T.
MCLAUGHLIN; LEO W. YOCHUM; MICHAEL H. JORDAN;
ROBERT E. CAWTHORN; GEORGE H. CONRADES; DAVID
K.P. LI; ROBERT D. WALTER; CBS CORPORATION f/k/a
Westinghouse Electric Corporation
(D.C. No. 99-cv-596)
WILLIAM C. RAND, Stockholder Objector, owner of
100 shares of CBS Corporation common stock,
Appellant
On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. Civ. Nos. 91-00354 and 99-00596)
District Judge: Honorable D. Brooks Smith
Argued August 2, 2001
BEFORE: MCKEE, AMBRO, and GREENBERG,
Circuit Judges
(Filed: September 10, 2001)
Richard D. Greenfield
Greenfield & Goodman
222 West Lancaster Avenue
P.O. Box 1785
Paoli, PA 19301
Mark C. Rifkin (argued)
Rifkin & Associates
222 West Lancaster Avenue
Suite 201
Paoli, PA 19301
Attorneys for Appellee
Daniel Mogell
Leonard Fornella
Heintzman, Warren, Wise &
Fornella, P.C.
The 35th Floor, Gulf Tower
707 Grant Street
Pittsburgh, PA 15219-1913
Attorneys for Defendant-Appellees
Westinghouse Electric Corporation
and CBS Corporation
2
Dennis J. Block
Caldwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Stephen A. Radin
Weil, Gotshall & Manges LLP
767 Fifth Avenue
New York, NY 10153
Joseph A. Katarincic
Thorp Reed & Armstrong, LLP
One Oxford Center
301 Grand Street
Pittsburgh, PA 15219
Attorneys for Defendants-Appellees
Robert W. Campbell, Frank C.
Carlucci, Robert E. Cawthorn, Gary
M. Clark, George H. Conrades,
William H. Gray, III, Barbara H.
Franklin, Donald F. Hornig, Michael
H. Jordan, Paul E. Lego, David
K.P. Li, John C. Marous, David T.
McLaughlin, Rene C. McPherson,
Richard M. Morrow, Richard P.
Pivirotto, William A. Powe, Paul
Stern, Robert D. Walter, Hays T.
Watkins and Leo Yochum
William C. Rand (argued)
1150 Fifth Avenue
New York, NY 10128
Appellant pro se
3
OPINION OF THE COURT
GREENBERG, Circuit Judge.
I. INTRODUCTION
This matter comes on before this court on an appeal by
William C. Rand, a shareholder in CBS Corporation, the
successor to Westinghouse Electric Corporation, from an
order entered on October 19, 2000, awarding plaintiff
Daniel Mogell attorney's fees of $582,443.44 out of the
$750,000 requested in this derivative litigation upon its
settlement. Rand objected in the district court to the award
of any fee and, in the alternative, objected to the quantum
of the fee requested.1 Rand repeats those two objections on
this appeal. Inasmuch as we hold that the district court
erred in awarding any fee, we do not consider whether the
fee as awarded was excessive.
We only need summarize the convoluted procedural
history of this case. The appeal arises from the settlement
of derivative litigation against Westinghouse Electric
Corporation and its successor in interest, CBS Corporation,
as well as certain of the corporations' directors and officers.
As a matter of convenience, we will refer to the corporate
defendants simply as CBS even though much of the alleged
wrongdoing charged in the litigation took place before CBS
succeeded to Westinghouse's interests. The derivative
litigation was related to a shareholders' class action
commenced in 1991 following CBS's announcement that it
would incur multi-million dollar losses on account of
certain loans it had made. The class action was based on
alleged statutory securities and common law violations,
while the derivative litigation was based on allegations that
CBS's officers and directors grossly mismanaged CBS and
had been reckless with respect to its affairs. There is no
doubt that the prosecution and defense of both the class
action and derivative litigation were time consuming and
costly.
_________________________________________________________________
1. There were other objectors as well.
4
In 1998, after extensive pretrial proceedings, the class
action parties reached a tentative settlement subject to
court approval providing for a cash payment of
$67,500,000 to the class action plaintiffs to be paid in large
part by insurance companies pursuant to liability policies
covering CBS's officers and directors. The settlement,
however, required the termination of the derivative litigation
because some of the insurance policies covered claims
asserted in both the class action and derivative litigation
and the companies were unwilling to pay the amount
needed to settle the class action without receiving a release
of their obligations in both sets of litigation. But the
defendants in the derivative litigation were unwilling to
provide those releases unless they, in turn, received a
release of all claims asserted against them in that litigation.
Ultimately, in 1999 the derivative litigation, like the class
action litigation, was settled subject to court approval. See
Fed. R. Civ. P. 23.1. Mogell emphasized the relationship
between the class action and derivative litigation to the
district court in his application for approval of the
derivative litigation settlement and allowance of fees as
follows:
Accordingly, without the release of the defendants in
the Derivative Litigation, CBS cannot obtain the
substantial funds needed to `bridge the gap' to settle
the Class Action Litigation. Thus, by obtaining these
releases, which were a material component of the
conditions set down by the Carriers, CBS was relieved
of having to pay many millions more of the settlement
of the Class Action. Even more significantly, such
settlement, if approved by this Court, will relieve it of
many hundreds of millions of dollars of potential
liability exposure from the underlying claims asserted
in the Class Action.
App. at 111-12. Mogell then went on to explain the need for
the settlement of the derivative action as follows:
CBS also will not release the insurers who wrote those
director and officer insurance policies without a
simultaneous settlement of the Derivative Litigation
because CBS is financially obligated under bylaws
5
adopted in accordance with Pennsylvania law to
indemnify the defendants in the Class Action and in
the Derivative Litigation for any liabilities and for all
defense costs that are not covered by insurance. Thus,
even if the defendants in the Derivative Litigation
would agree to release their insurers without a
settlement of the Derivative Litigation, CBS would not
agree to incur liabilities and defense costs in both the
Class Action and the Derivative Litigation that
otherwise would be covered by insurance. The release
of the defendants in the Derivative Litigation is,
therefore, an integral element of the settlement of the
Class Action, which can now be concluded with
approval by the Court.
Id. at 112.
Mogell then summed up what he thought was the benefit
to CBS of a settlement of the derivative litigation as follows:
Settlement of the Class Action, which could not be
consummated without global releases from the
Carriers, directly benefits CBS because, as indicated
above, CBS is a defendant in that litigation, yet will not
be the principal source of funds for the litigation
settlement. Thus, settlement of the Derivative Litigation
permits CBS to be provided with many millions in
funds from the Carriers to conclude the Class Action,
which otherwise poses a substantial risk of liability in
the hundreds of millions of dollars to CBS if it were not
settled. In addition, settlement of the Derivative
Litigation relieves CBS of any obligation to indemnify
the defendants, a savings that cannot be readily
quantified, but which could well exceed many millions
of dollars.
Id. at 112-13.
The "Derivative Action Stipulation of Settlement" dated
May 11, 1999, included a provision by which CBS was to
receive certain benefits which included "$250,000 that
otherwise would have been paid to settle the Class Action
Litigation," to be paid by the insurance companies that had
issued the officers' and directors' policies. Id. at 88. The
stipulation also stated that CBS was to receive the benefit
6
that both the class action and derivative litigation would be
ended. Mogell, however, did not assert in his application for
approval of the settlement how the derivative litigation had
benefitted CBS, focusing instead on the benefits of its
termination.
The stipulation in the derivative action provided that if
the court approved the settlement, Mogell's attorney could
submit an application for attorney's fees and
reimbursement of expenses in the amount of $750,000
divided between $631,000 in attorney's fees and $119,000
for reimbursement of expenses. CBS took no position with
respect to the allowance of the fees but agreed to pay any
award up to $750,000. The granting of the fee application,
however, was "not a condition of the Settlement," id. at 95,
and was to be considered by the court separately from the
court's consideration of whether the settlement"is fair,
reasonable, adequate and in the best interests of CBS and
the holders of shares of CBS common stock." Id. Of course,
if the court denied the fee application, the settlement
nevertheless was to stand. As could be expected, Mogell
applied for the fees as the settlement contemplated.
The district court approved the settlement of both the
class action and derivative litigation on October 18, 1999.
At that time, however, the court did not rule on Mogell's fee
application. Instead, one year later on October 18, 2000, it
issued a memorandum order entered on October 19, 2000,
on the point. The memorandum recited that "[i]n this case,
CBS Corporation, Westinghouse's successor, has derived a
benefit from the disposition by settlement of the two new
derivative claims and the ability to obtain a global
settlement of the underlying securities action." Id. at 4. The
court, however, did not indicate that CBS received a benefit
from the institution of the derivative litigation, as
distinguished from its settlement. The court, after
determining that a fee should be awarded, addressed the
quantum of the award, pointing out that Mogell's attorney
submitted a lodestar computation of $1,456,108.60 for the
value of the legal services. The court concluded, however,
for reasons that we need not explain, that a 60% deduction
was appropriate and thus it awarded $582,443.44 in fees.
Rand then appealed from the order of October 19, 2000.
7
II. DISCUSSION
The district court had jurisdiction in this action under 28
U.S.C. S 1331 and we have jurisdiction under 28 U.S.C.
S 1291. Rand, as an objecting shareholder, has standing to
appeal. See Bell Atl. Corp. v. Bolger, 2 F.3d 1304, 1310 (3d
Cir. 1993). In general, we review the award of a fee for an
abuse of discretion, although there are clear error and
plenary aspects in a review including examination of factual
findings and legal conclusions. See Watson v. Southeastern
Pa. Transp. Auth., 207 F.3d 207, 224 (3d Cir. 2000), cert.
denied, 121 S.Ct. 1086 (2001); Holmes v. Millcreek
Township Sch. Dist., 205 F.3d 583, 589 (3d Cir. 2000). In
this case, as will be seen, we hold that as a matter of law
the district court erred in awarding any fee as the derivative
litigation did not benefit CBS and thus we are exercising
plenary review. We note, however, that if we were reviewing
this matter on an abuse of discretion basis our result
would be the same.
It is useful at the outset of our discussion of the
substantive issues to refer to and dispose of the four issues
that Mogell in his brief indicates are raised on this appeal:
1. May an objector who does not object to the prop osed
settlement of a derivative action later be heard to object
to a fee award on the basis that the settlement did not
justify an award of attorneys fees and reimbursement
of expenses?
2. Whether the district court's finding that the
settlement conferred benefits upon CBS Corporation
was clearly erroneous?
3. May an objector who does not object to the lode star
of the derivative plaintiffs' counsel later be heard to
object to a fee award based upon the lodestar?
4. Whether the district court's determination that the
lodestar of the derivative plaintiffs' counsel was
reasonable was within its discretion?
Br. at 1. Consideration of these issues does not long detain
us.
First, the fact that Rand did not object to the settlement
does not mean that he cannot object to the fee application.
8
The settlement of the derivative litigation was not
dependent on the disposition of the fee application and the
stipulation of settlement did not and probably could not
provide that Mogell's attorney would be paid any fees
without court approval. The settlement merely provided
that Mogell's attorney could apply for fees to which CBS
would not object if the application did not seek an award of
over $750,000. Accordingly, Rand, by not objecting to the
settlement, did not waive the right to object to the fee
application.
Second, the district court's finding that the settlement
conferred benefits on CBS is immaterial as we assume that
that finding was correct and thus we are not concerned
with whether it was clearly erroneous. Finally, Rand's
alleged failure to object to the lodestar and the court's
determination of it are not germane to our disposition of
this appeal as Mogell is not entitled to any attorney's fees
at all.
What, then, is the question the answer to which controls
the outcome of this appeal? The question is quite
uncomplicated. What we must determine is whether CBS
obtained any benefit from the institution and settlement of
the derivative litigation. We derive this formulation of the
issue from Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 395,
90 S.Ct. 616, 627 (1970), in which, after recognizing that
attorney's fees historically have been awarded from
financial recoveries, the Court indicated that "an increasing
number of lower courts have acknowledged that a
corporation may receive a `substantial benefit' from a
derivative suit, justifying an award of counsel fees,
regardless of whether the benefit is pecuniary in nature."
The viability of the Mills standard is demonstrated by the
recent case of Kaplan v. Rand, 192 F.3d 60, 69 (2d Cir.
1999), in which, after noting that an attorney's fee could be
awarded from a fund created by litigation, the court
continued on and, citing and quoting Mills, indicated that
"[i]t is by now also well established that an award of
counsel fees is only justified where the derivative action
results in a substantial non-monetary benefit to the
corporation." See also Crasto v. Estate of Kasel, 63 F.R.D.
25, 27 (S.D.N.Y. 1974) ("Plaintiffs cite no authority, nor
9
have we found any, extending the `substantial benefit' rule
to cases in which the benefit conferred was not
accomplished by the culmination of successful litigation.").
Frequently when a corporation receives a substantial
benefit from the settlement of derivative litigation it will be
obvious that the settlement is also a benefit attributable to
the institution of the litigation itself and thus a court
reviewing the settlement need not focus on the question of
whether the litigation benefitted the corporation.
Consequently, there seems to be a paucity of precedent
dealing with the distinction between institution and
settlement of litigation for purposes of defining what is a
benefit to the corporation. But see Joy Mfg. Corp. v.
Pullman-Peabody Co., 729 F. Supp. 449, 453 (W.D. Pa.
1989) ("[W]here [a] party has by his or her effort and
expense through litigation created a benefit for others a fee
award is appropriate whether or not the litigation is mooted
before judgment and regardless of whether there is a
monetary fund created from which fees may be paid.").2 We
do find, however, a useful analogy to the situation here, in
which, as will be seen the derivative litigation did not
benefit CBS, in fee shifting statutes providing for the
allowance of fees to a "prevailing party." In those cases, to
recover a fee a plaintiff must demonstrate that he obtained
"some relief on the merits of his claim,""some of the benefit
sought" in the action, or "relief on a significant claim in the
litigation." Buckhannon Board & Care Home, Inc. v. W.Va.
Dep't of Health & Human Res., 121 S.Ct. 1835, 1840
(2001); Watson, 207 F.3d at 224; Holmes , 205 F.3d at 593.
It seems to us that the principle recognized in those cases,
though based on statutes, should be applied in the
nonstatutory context here. A plaintiff should not receive a
fee in derivative litigation unless the corporation, by
judgment or settlement, receives some of the benefit sought
in the litigation or obtains relief on a significant claim in
the litigation. See also Chrysler Corp. v. Dann , 223 A.2d
384, 387 (Del. 1966) ("[T]he rule [allowing attorney's fees]
_________________________________________________________________
2. We are not concerned in the context of this case with the possible
impact of Buckhannon Board & Care Home, Inc. v. W.Va. Dep't of Health
& Human Resources, 121 S.Ct. 1835 (2001), on the proposition for which
we cite Joy.
10
requires that not only must the action confer some benefit
upon the corporation, but, also, that the action, when filed,
was meritorious and had a casual connection to the
conferred benefit."); Baron v. Allied Artists Pictures Corp.,
395 A.2d 375, 379 (Del. Ch. 1978), aff 'd, 413 A.2d 876
(Del. 1980).
It is, of course, obvious that the derivative litigation did
not confer any benefit on CBS and the district court never
held that it did. In his brief, though Mogell argues
vigorously, and we will assume correctly, that CBS received
a benefit from the derivative litigation settlement, he makes
no contention that CBS is better off because of the
institution and settlement of the derivative litigation than it
would have been if the litigation had not been brought in
the first place.
In fact, the derivative litigation plainly proved to be a
detriment to CBS because it was an impediment to the
settlement of the class action. We reiterate that Mogell's
brief may be read with the greatest care from cover to cover
but the reader will find nothing in it explaining how CBS
benefitted from the institution and settlement of the
derivative litigation as contrasted with the mere settlement
of the litigation. Moreover, when we repeatedly asked
Mogell's attorney at oral argument how the derivative
litigation benefitted CBS he never could answer the
question. Indeed, he did not even make an argument that
unless the derivative litigation had been brought the class
action could not have been settled in 1998 because of a
concern that derivative litigation arising out of the alleged
wrongdoing could have been brought later.3 Of course
Mogell had the burden in the district court to show that the
derivative litigation conferred a benefit on CBS and he
simply did not meet this burden. In fact, he never even
tried to do so as he merely contended in his application for
_________________________________________________________________
3. Obviously it would have been a complete speculation as to whether
such litigation would have been brought which, in any event, probably
would have been time barred, at least in part. Moreover, for purposes of
an award of attorney's fees, a benefit from the litigation cannot be based
on fanciful, speculative theories. See Schechtman v. Wolfson, 244 F.2d
537, 540 (2d Cir. 1957).
11
approval of the settlement, as the district court found, that
CBS received a benefit because the derivative litigation was
settled and the settlement made the class action settlement
possible.
We have not overlooked the circumstance that CBS
received a cash payment of $250,000 from the derivative
litigation settlement and we recognize the obvious, i.e., the
receipt of cash can be a benefit. But in this case Mogell
does not argue that because of the cash settlement CBS
made a net financial gain on account of the institution of
the derivative litigation. Plainly, it did not. While there is
nothing in the record that permits us to make any findings
as to what CBS's attorney's fees were in the derivative
litigation, we note that Mogell's attorneys' lodestar
computation for their services was $1,456,108.60. In the
circumstances, it is not conceivable that CBS's attorney's
fees did not exceed $250,000.4 Consequently, CBS certainly
did not obtain a direct financial benefit from the derivative
litigation. Thus, inasmuch as CBS derived no other benefit
from the derivative litigation we must reverse the award of
attorney's fees.
We realize that the result we reach may complicate the
settlement of complex corporate litigation.5 Nevertheless,
sound principles require that we reach it. Mogell alleges
that the officers and directors caused CBS enormous losses
but in the end he was willing to settle the case for
$250,000 being paid to CBS and the opportunity to apply
for an attorney's fee of three times that amount. In this
case the tail surely wagged the dog. In fact, the derivative
litigation when ended was being used for nothing more
than, as Rand accurately states in his brief, a"hold up" as
_________________________________________________________________
4. At oral argument when we inquired of Mogell's attorney whether we
should remand the case to the district court to determine what fees CBS
paid in the derivative litigation he said that it was not necessary to do
so because the fees must have exceeded $250,000.
5. The opinion may have a salutary affect if it discourages attorneys from
bringing insubstantial derivative litigation as they should recognize that
they will not in the end be able to terminate the case with a stipulation
of dismissal on the basis of their fees being paid unless the corporation
somehow benefitted from the litigation.
12
it stood in the way of the class action settlement. Overall,
it is clear beyond doubt that the derivative litigation in itself
did not yield a benefit to CBS.
We close our discussion by pointing out that we live in a
real world and thus anticipate that attorneys may seek to
circumvent the effect of this opinion by constructing
elaborate frameworks within which fee applications will be
included. Accordingly, the district courts must review
settlements in derivative litigation in which attorney's fees
will be sought with great care to ensure that a fee is not
assessed against a corporation following the settlement of
derivative litigation unless the corporation has received a
substantial benefit from the litigation itself and not simply
from its settlement. After all, when derivative litigation is
terminated a corporation always can be said to have
obtained a benefit as it will save further legal fees. Of
course, if the litigation results in a substantial monetary
recovery by the corporation it should be readily apparent
that it received a substantial benefit from the litigation. But
where, as here, the settlement is for what in the context of
the case is a nominal amount not even exceeding the
corporation's legal expenses in the litigation, the fees
cannot be justified on the basis of the monetary recovery.6
III. CONCLUSION
For the foregoing reasons, the order entered October 19,
2000, will be reversed and the matter will be remanded to
the district court for the purpose of entering an order
denying Mogell's application for fees.
_________________________________________________________________
6. We do not suggest that the mere fact that a recovery exceeds the
corporation's direct legal fees means that the corporation benefitted from
the litigation, for the corporation may have had other expenses
attributable to the litigation and its participation in the litigation may
have diverted its officers and employees from other corporate functions.
Of course, even if it can be said that the corporation benefitted from the
litigation, a court in the exercise of its discretion might deny fees on a
theory that the benefit was contrived to support a fee application. A
question of whether the benefit is contrived is particularly likely to
arise
when the plaintiff asserts that the corporation received a substantial
nonmonetary benefit in a settled case.
13
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
14