BTZ, Inc. v. Great Northern Nekoosa Corp.

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

Nos. 92-2219
92-2274

BTZ, INC.,

Plaintiff, Appellant,

v.

GREAT NORTHERN NEKOOSA CORP., ET AL.,

Defendants, Appellees.

APPEALS FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MAINE

[Hon. Gene Carter, U.S. District Judge]

Torruella, Selya and Cyr,

Circuit Judges.

David L. Lee, with whom Law Offices of Frederic F. Brace, Jr. was

on brief for appellant.
Peter J. Brann, Assistant Attorney General, with whom Michael E.

Carpenter, Attorney General, and Thomas D. Warren, Director,

Litigation Unit, were on brief for State of Maine, Amicus.
Tami L. Brown for appellee Great Northern Nekoosa Corp.

February 16, 1995

CYR, Circuit Judge. BTZ, Inc., a former shareholder in
CYR, Circuit Judge.

Great Northern Nekoosa Corporation ("Great Northern"), appeals a

district court order disallowing its application for an award of

attorney fees against Great Northern. The fee application was

predicated on the theory that the lawsuit BTZ brought against

Great Northern in the United States District Court for the

District of Maine caused Great Northern to capitulate to a

hostile takeover by Georgia Pacific Corporation ("GPC") which

resulted in substantial benefit to other Great Northern share-

holders. We affirm.

I
I

BACKGROUND1
BACKGROUND

In October 1989, GPC made an unsolicited tender to

acquire Great Northern. The Board of Directors of Great Northern

("Board") balked. GPC commenced suit in Maine federal district

court, seeking a judicial declaration that the Board's anti-

takeover defenses violated state and federal law, as well as the

Board's fiduciary duty to Great Northern shareholders. Several

Great Northern shareholders [hereinafter: "plaintiffs"], includ-

ing appellant BTZ, brought derivative "class action" suits

1We set forth only the facts essential to our holding.
Greater factual detail is provided in other reported decisions.
See Weinberger v. Great Northern Nekoosa Corp., 925 F.2d 518 (1st

Cir. 1991); Weinberger v. Great Northern Nekoosa Corp., 801 F.

Supp. 804 (D. Me. 1992); Georgia-Pacific Corp. v. Great Northern

Nekoosa Corp., 731 F. Supp. 38 (D. Me. 1990); Georgia-Pacific

Corp. v. Great Northern Nekoosa Corp., 727 F. Supp. 31 (D. Me.

1989).

2

against the Board in Maine federal district court. The class

action suits were consolidated and the State of Maine intervened

to defend its anti-takeover statute from constitutional chal-

lenge.

The Board concurrently opened a second line of defense

by instituting an antitrust action against GPC in Connecticut

federal district court. Plaintiffs' counsel took no part in the

Connecticut action. On February 12, 1990, GPC announced its

divestiture of all paper company holdings, thereby effectively

mooting the Board's antitrust action. One week later, the Board

capitulated and accepted GPC's tender offer. See Weinberger v.

Great Northern Nekoosa Corp., 925 F.2d 518, 521 (1991).

Concerned that the plaintiffs in the Maine anti-take-

over suits might impede the GPC-Great Northern settlement and

merger, GPC entered into a "clear sailing" agreement with plain-

tiffs: plaintiffs would dismiss their federal actions in Maine

and "take no steps to attach any part of the funds to be paid to

[Great Northern] shareholders pursuant to the upcoming tender

offer"; GPC-Great Northern, in turn, would "pay the plaintiffs'

attorneys' fees and expenses [up to $2 million,] as shall be

awarded by the United States District Court for the District of

Maine." Id. at 518 n.1, 521.

The federal district court in Maine ultimately denied

plaintiffs' fee applications, however, ruling that their attor-

neys' services were not a significant precipitating "cause" of

the GPC-Great Northern merger. Rather, their legal services

3

merely mimicked GPC's legal efforts in the Maine lawsuits, and

played no role whatever in the truly decisive takeover skirmish

the Connecticut antitrust litigation. Weinberger v. Great

Northern Nekoosa Corp., 801 F.Supp. 804, 811 (D. Me. 1992). BTZ

appeals.2

II
II

DISCUSSION
DISCUSSION

A. The American Rule
A. The American Rule

Under the American Rule, absent a specific statutory

authorization or contractual agreement to the contrary, litigants

are responsible for their own attorney fees. See In re San Juan

Dupont Plaza Hotel Fire Litig., 982 F.2d 603, 606 (1st Cir.

1992). One notable exception to the American Rule obtains in so-

2The State of Maine, as amicus curiae, suggests that we may
lack appellate jurisdiction because the "clear sailing" agreement
obligates GPC-Great Northern, not BTZ, to pay fees to BTZ's

attorneys. Thus, it says, BTZ the only appellant named in the

notice of appeal lacks either standing to appeal from a denial
of the fee application, see United States v. AVX, 962 F.2d 108,

112-13 (1st Cir. 1993), or a demonstrable stake in the outcome of
the appeal.
Although dismissal on jurisdictional grounds might be
warranted, the matter is not without difficulty and there is no
circuit precedent directly in point. BTZ signed no enforceable
fee agreement with its attorneys, but the "clear sailing" agree-
ment, qua contract, might arguably afford BTZ a status analogous

to a "prevailing party" in a statutory fee-shifting case. Cf.

Pontarelli v. Stone, 978 F.2d 773, 775 (1st Cir. 1992) (since

statute specifically authorizes fees to "prevailing party,"
prevailing party's attorney has no independent standing to appeal

from grant or denial of fee award); Benitez v. Collazo-Collazo,

888 F.2d 930, 933 (1st Cir. 1989) (same). We therefore bypass
the jurisdictional issue and turn to the merits. See FDIC v. Bay

Street Dev. Corp., 32 F.3d 636, 639 n.4 (1st Cir. 1994).

4

called "common benefit" cases, where a plaintiff's suit is

prematurely mooted but nonetheless results in a "substantial

[pecuniary or nonpecuniary] benefit" to a larger class [hereinaf-

ter: "beneficiaries"]. In these common benefit cases, a court

may invoke its equitable jurisdiction to assess attorney fees

against beneficiaries of the legal services; and, where the

beneficiaries are corporate shareholders, their assessment may be

imposed upon the corporate defendant. See, e.g., Reiser v. Del

Monte Properties Co., 605 F.2d 1135, 1137-38 (9th Cir. 1979)

(citing cases).

BTZ insists that its legal services fit squarely within

the "common benefit" exception to the American Rule, since the

GPC takeover enhanced the pecuniary interests of all Great

Northern shareholders. The threshold question, of course, is

whether the BTZ lawsuit in Maine federal district court actually

caused the Board to capitulate to the GPC takeover, thereby

contributing substantially to the per-share price increase in

Great Northern shares. The district court rejected BTZ's claim

on two fronts.

B. Causation
B. Causation

First, the court found insufficient evidence that BTZ's

legal services caused the Board to capitulate to the GPC take-

over. As we have noted, "causation questions are grist for the

factfinder's mill . . . ," Dedham Water Co. v. Cumberland Farms

Dairy, Inc., 972 F.2d 453, 457 (1st Cir. 1992) (citing Peckham v.

Continental Cas. Ins. Co., 895 F.2d 830, 837 (1st Cir. 1990)),

5

which we review under the "clear error" standard, see ICC v.

Holmes Transp., Inc., 983 F.2d 1122, 1129 (1st Cir. 1993) (noting

that "clear error" leaves reviewing court with the "definite and

firm conviction that a mistake has been committed"). Cf. Lipsett

v. Blanco, 975 F.2d 934, 937, 941 (1st Cir. 1992) (according

deference to trial court's "front row seat" determination as to

whether legal services contributed to favorable outcome in

underlying litigation) (citation omitted).

The district court finding that the efforts of BTZ's

counsel were neither a substantial nor a material factor in GPC's

"decision to increase its bid or in Great Northern's decision to

auction itself," Weinberger, 801 F. Supp. at 809, is amply

supported by the record. The withdrawal of the Connecticut

antitrust action and the defeat of Great Northern's anti-takeover

mechanisms in the Maine litigation were the decisive factors

contributing to the GPC takeover. See id. at 811 & n.11. BTZ's

counsel took no part in the pivotal Connecticut litigation. Id.

at 809. And to the limited extent that BTZ's counsel participat-

ed in the Maine litigation, they did little more than track GPC's

filings and audit depositions conducted by GPC. Id. at 808-811.

The district court's robust skepticism of the benefits

contributed by BTZ's counsel is especially appropriate given the

increasing concerns that redundant or peripheral legal services

may parasitize the litigation efforts of lead counsel, yet

command a substantial fee. Insofar as lead counsel reasonably

perceive a consequent dilution of the limited resources available

6

for legal services, allowances for phantom legal services frus-

trate the adversary process and undermine the congressional

policy favoring private enforcement of the securities laws.3

C. Burden of Proof
C. Burden of Proof

The district court also rejected BTZ's fallback attempt

to realign the burden of proof on the issue of causation. We

review its legal ruling de novo. Liberty Mut. Ins. Co. v.

Commercial Union Ins. Co., 978 F.2d 750, 757 (1st Cir. 1992).

Under Delaware law, a fee award will be denied in a

common benefit case only if the party opposing it proves that the

applicant's legal services did not contribute to the favorable

outcome in the underlying takeover litigation. Compare Allied

Artists Pictures Corp. v. Baron, 413 A.2d 876 (Del. 1980);

Rosenthal v. Burry Biscuit Co., 209 A.2d 459 (Del. Chan. 1949)4

with Hensley v. Eckerhart, 461 U.S. 424, 437 (1983) ("[T]he fee

3See generally John C. Coffee, Jr., Rescuing the Private

Attorney General: Why the Model of the Lawyer as Bounty Hunter is

Not Working, 42 Md. L. Rev. 215, 249 (1983); John C. Coffee, Jr.,

Understanding the Plaintiff's Attorney: The Implications of

Economic Theory for Private Enforcement of Law Through Class and

Derivative Actions, 86 Colum. L. Rev. 669 (1986); Jonathan R.

Macey & Geoffrey P. Miller, The Plaintiffs' Attorney's Role in

Class Action and Derivative Litigation: Economic Analysis and

Recommendations for Reform, 58 U. Chi. L. Rev. 1, 68 (1991).

4The Delaware Chancery Court explained that "it is reason-
able to impose on the defendants the burden of showing that the
[benefit] was not in any way occasioned by the existence of the
lawsuit," and that, even were the defendant corporation to prove
that the fee applicant's suit in no way contributed to the
benefit conferred, "the [fee applicant's] attorney would still be
entitled to a fee if it is shown that the cause of action was
meritorious." Rosenthal, 209 A.2d at 461. The Delaware Supreme

Court later adopted the Rosenthal reasoning. See Allied Artists

Pictures Corp., 413 A.2d 876.

7

applicant bears the burden of establishing entitlement to a [fee]

award."); Nadeau v. Helgemoe, 581 F.2d 275, 281 (1st Cir. 1978)

(fee applicant has burden to prove suit served as "catalyst");

Koppel v. Wien, 743 F.2d 129, 135 (2d Cir. 1984) (same); 1 Mary

F. Derfner & Arthur D. Wolf, Court Awarded Attorney Fees

9.02[4][c], at 9-24.6 (1991).

The district court correctly interpreted our decision

in Weinberger, 925 F.2d at 522 n.6, to indicate that the BTZ fee

application does not fit squarely within the common benefit

exception to the American Rule, see Weinberger, 801 F.Supp. at

807, since "[BTZ] abjured a claim for fees under the common

benefit doctrine[,]" Weinberger, 925 F.2d at 524, both by negoti-

ating the "clear sailing" agreement, which neutralized Great

Northern's capacity to challenge a fee award, and by relying on

the "clear sailing" agreement as the basis for its alleged fee

entitlement. In contrast, neither Rosenthal nor Allied Artists

involved a "clear sailing" agreement. Their realignment of the

burden of proof was premised on the relative capacities of fee

applicants and fee opponents to establish the "causation" ele-

ment.

Aside from BTZ, three entities had cognizable interests

in the BTZ class action: Great Northern, GPC, and the State of

Maine. None was better positioned than BTZ to establish what

caused Great Northern to succumb to the GPC takeover bid. First,

following its merger with GPC, Great Northern no longer existed

as an independent legal entity. Second, immobilized as a fee

8

opponent by the terms of the "clear sailing agreement," GPC could

not attempt to rebut a presumption of substantial benefit without

breaching its agreement. Nor, finally, has there been any

showing that the State of Maine, intervenor below and amicus on

appeal even assuming it were able and inclined to oppose the

BTZ fee application on policy grounds was better situated than

BTZ to establish causation. There simply is nothing in the

record to suggest that the State of Maine, aligned by happen-

stance with Great Northern below, was privy to its inner workings

or litigation strategy during the decisive stages of the takeover

battle. Thus, the State of Maine likewise was not the "well-

informed" fee opponent whose presence would warrant the burden

shifting urged by BTZ.

Contractual fee shifting in class action suits impinges

on traditional judicial protocols for scrutinizing attorney-fee

allowances, by increasing the potential for conflicts of inter-

est. See id. at 524-25. Consequently, a rebuttable presumption

should not be endorsed in the context of a "clear sailing"

agreement unless the court is well satisfied that "the advantages

of the adversary process" are not blunted by undermining the

parties' incentives to proffer relevant evidence on causation.

Id. The district court prudently ruled out any rebuttable

presumption in the instant case.

As the district court findings and conclusions are

fully supported, its disallowance of the fee application must be

affirmed.

9

The district court order is affirmed. Costs to appel-

lees.

10