Opinion
No. 2 CA-CV 2002-0035
Filed April 29, 2003
APPEAL FROM THE SUPERIOR COURT OF PIMA COUNTY, Cause No. C-316479, Honorable Michael Alfred, Judge.
VACATED AND REMANDED WITH DIRECTIONS
Leonard Felker Altfeld Greenberg Battaile, P.C., By John F. Battaile III, Anne-Marie Brady, and Clifford B. Altfeld, Tucson, Attorneys for Plaintiff/Appellee.
Terry Goddard, Arizona Attorney General, By Daniel P. Schaack, Catherine M. Stewart, Paul E. Carter, and Fred W. Stork, Phoenix, Attorneys for Defendants/Appellants.
OPINION
¶ 1 The Arizona State Retirement System, the Arizona Board of Regents, and the State of Arizona (collectively, "ASRS") appeal from an award of attorney's fees to counsel representing state employee James Burke and a class of similarly situated state employees. ASRS argues the fee award is unreasonably high because the trial court erroneously applied the "common fund doctrine" in a fee-shifting case rather than the hourly "lodestar" method of calculating fees. For the reasons set forth below, we vacate the fee award and remand the matter to the trial court for further proceedings consistent with this decision.
Facts and Procedural Background
¶ 2 Burke filed a complaint against ASRS on behalf of himself and similarly situated state employees in 1996, seeking judicial review of ASRS's administrative decision that their retirement compensation rights were not adversely affected when ASRS transferred the employees from a defined contribution plan to a defined benefit plan. The complaint alleged causes of action for breach of contract, impairment of contract, promissory estoppel, breach of fiduciary duty, violation of 42 U.S.C. § 1983, and related theories. In addition to monetary damages, Burke requested "reasonable attorneys' fees" without specifying a basis for that request. The trial court certified the class as those state employees whom ASRS had transferred from the defined contribution program to the defined benefit program. See Ariz.R.Civ.P. 23, 16 A.R.S., Pt. 1. Shortly thereafter, the court ruled in Burke's favor on his administrative review claim and entered a judgment ordering ASRS to recalculate his retirement benefits and containing language pursuant to Rule 54(b), Ariz.R.Civ.P., 16 A.R.S., Pt. 2. The court awarded Burke his attorney's fees and costs, presumably under A.R.S. § 12-348(A)(2), which permits a court to award fees to a party who prevails against the state in challenging a state agency decision pursuant to the Administrative Review Act. A.R.S. §§ 12-901 through 914. ASRS appealed.
¶ 3 The class moved for partial summary judgment on the ground the court's ruling on Burke's administrative claim constituted the law of the case on the class's impairment-of-contract cause of action, arguing the same analysis also applied to the class. ASRS opposed the motion and filed a cross-motion for summary judgment, arguing that most of the class members had waived their claims by accepting modified pension benefits or had failed to exhaust their administrative remedies and that the claims of class members who had not retired were not ripe. While the motions were pending, the parties agreed to several stays while conducting settlement negotiations. Eventually, they entered into a settlement agreement that provided ASRS would pay each class member the greater amount of benefits to which he or she would be entitled under either the defined contribution program or the defined benefit program. ASRS also agreed to pay "reasonable attorneys' fees for representation of the Class," but reserved the right to challenge class counsel's fee application.
ASRS's appeal of the judgment entered on Burke's administrative review claim was also stayed.
Section 38-771.01, A.R.S., entitled, "Alternative benefits for transferred defined contribution program members," codified the settlement agreement and authorized payment of benefits to the class members. 1999 Ariz. Sess. Laws, ch. 266, § 3. The legislature also appropriated $600,000 "to pay reasonable attorney fees and costs incurred by the plaintiffs in the class action suit." 1999 Ariz. Sess. Laws, ch. 266, § 7.
¶ 4 Class counsel subsequently submitted a fee application, requesting $9,549,824.37 or twenty percent of the increased retirement benefits created by the settlement. Noting that ASRS had agreed to pay "reasonable" attorney's fees, class counsel argued that fees paid by a settling defendant are properly included as part of the common fund of increased retirement benefits for the class members created by the settlement and are properly calculated as a percentage of that fund. ASRS opposed the fee application on the grounds that this was not a fee-sharing case but a fee-shifting case and that fees should be calculated using an hourly lodestar method. The trial court found that fees were "payable pursuant to the negotiated agreement of the parties embodied in the Stipulation of Settlement, which requires a discretionary decision by this Court," and that A.R.S. §§ 12-341.01 and 12-348 did not apply. Pursuant to its findings, the court granted the application and awarded fees of $7,416,893.60, or 16.61 percent of the amount of increased retirement benefits. ASRS moved for a new trial, reasserting its contention this is a fee-shifting, lodestar case and arguing that it had not agreed to assume the class's obligation to its counsel, that the amount of the fee award was not reasonable, and that the record contained no factual basis to support the award. The court ruled that its use of the common fund method was proper, but nonetheless reduced the fee award to about $3.7 million. This appeal followed.
According to class counsel, adding the value of the "fees, costs and administration" recovered by the class to the increased retirement benefits reduces the percentage to 16.67.
Section 12-341.01 permits the trial court to award attorney's fees to the prevailing party in a contract action, while § 12-348 provides generally for fee awards to parties who prevail against the state.
Common Fund Doctrine
¶ 5 ASRS first argues that the trial court erred in applying the common fund doctrine. In granting class counsel's fee application, the trial court concluded that fees were not awardable under any fee-shifting statutes and that the common fund doctrine was the appropriate basis for awarding fees in this case. Whether a fee statute applies is a question of law. See Motel 6 Operating Ltd. Partnership v. City of Flagstaff, 195 Ariz. 569, 991 P.2d 272 (App. 1999); Phoenix Newspapers, Inc. v. Department of Corrections, 188 Ariz. 237, 934 P.2d 801 (App. 1997). Similarly, application of the common fund doctrine is also a question of law. Edwards v. Alaska Pulp Corp., 920 P.2d 751 (Alaska 1996) (concluding common fund doctrine applicable as matter of law). Consequently, this question is subject to de novo review. Pima County v. Hogan, 197 Ariz. 138, 3 P.3d 1058 (App. 1999); Saenz v. State Fund Workers' Compensation Ins., 189 Ariz. 471, 943 P.2d 831 (App. 1997).
¶ 6 It is well established that attorney's fees are awardable in Arizona only when expressly authorized by contract or statute. DVM Co. v. Stag Tobacconist, Ltd., 137 Ariz. 466, 671 P.2d 907 (1983); Sellinger v. Freeway Mobile Home Sales, Inc., 110 Ariz. 573, 521 P.2d 1119 (1974). The common fund doctrine is an equitable exception "to the general rule that, in the absence of statute or contract, each side in a litigated case must bear its own attorneys' fees," allowing a court to award attorney's fees "to counsel for the prevailing side whose efforts in litigation create or preserve a common fund from which others who have undertaken no risk or cost will nevertheless benefit." Kerr v. Killian, 197 Ariz. 213, 19, 3 P.3d 1133, ¶ 19 (App. 2000); LaBombard v. Samaritan Health Sys., 195 Ariz. 543, 991 P.2d 246 (App. 1998). The common fund doctrine serves the twofold purpose of compensating counsel for producing benefits for a class and preventing the unjust enrichment of the class members who receive them. Kerr; LaBombard. Under this doctrine, a reasonable fee award may be calculated as a percentage of the fund created or by using the hourly lodestar method. See In re Washington Pub. Power Supply Sys. Sec. Litigation, 19 F.3d 1291 (9th Cir. 1994); Florida v. Dunne, 915 F.2d 542 (9th Cir. 1990).
Using this method, the court "first calculates the 'lodestar' by multiplying the reasonable hours expended by a reasonable hourly rate." In re Washington Pub. Power Supply Sys. Sec. Litigation, 19 F.3d 1291, 1295 n. 2 (9th Cir. 1994). If necessary, the court may then enhance the lodestar with a "multiplier" to arrive at a reasonable fee. Id.
¶ 7 In Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975), the Supreme Court held the common fund doctrine may be appropriately applied when (1) the class is sufficiently identifiable, (2) the benefits can be accurately traced, and (3) the fee can be apportioned with some exactitude among those receiving the benefits. See also Boeing Co. v. Van Gemert, 444 U.S. 472, 100 S.Ct. 745, 62 L.Ed.2d 676 (1980). The parties agree this case arguably meets the first two prongs of the test. First, as reflected in the settlement agreement, the class members were specifically identified and notified. Second, the benefits to the class members were accurately traced on their individual account statements. The parties disagree only on the third prong, whether application of the common fund doctrine actually apportions the fee obligation among the class beneficiaries.
¶ 8 ASRS argues that shifting the fees to it, the losing party, does not apportion them among the class members and is consequently incompatible with the common fund doctrine. We agree. The common fund doctrine is based on an equitable principle of allocating counsel's fees among the benefitted class members, not shifting them to the losing party. Municipality of Anchorage v. Gallion, 944 P.2d 436 (Alaska 1997); Mountain West Farm Bureau Mut. Ins. Co. v. Hall, 38 P.3d 825 (Mont. 2001). "The common fund doctrine differs from exceptions to the American rule in that the doctrine is a mechanism for fee-spreading, not fee-shifting; the common fund doctrine requires reimbursement of fees 'by the prevailing party, not the losing party.'" Edwards, 920 P.2d at 751, quoting Bowles v. Washington Dep't of Retirement Sys., 847 P.2d 440, 449 (Wash. 1993); see also Boeing (common fund doctrine differs from other theories authorizing attorney's fee awards in that award is borne by prevailing parties, not losing party); Camden I Condominium Ass'n, Inc. v. Dunkle, 946 F.2d 768, 774 (11th Cir. 1991) ("[A] key element of the common fund case is that fees are not assessed against the unsuccessful litigant (fee shifting), but rather, are taken from the fund or damage recovery (fee spreading)."); Brown v. Phillips Petroleum Co., 838 F.2d 451 (10th Cir. 1988) (unlike statutory fees that shift burden to losing party, common fund fees are shared by all who benefitted from litigation); Kuhn v. State, 924 P.2d 1053 (Colo. 1996) (same). Accordingly, the shifting of the burden to ASRS to pay the class's attorney's fees is inconsistent with, and thus precludes, application of the common fund doctrine.
¶ 9 In its decision to apply the common fund doctrine, the trial court relied on two cases class counsel cited, Johnston v. Comerica Mortgage Corp., 83 F.3d 241 (8th Cir. 1996), and In re General Motors Corp. Pick-up Truck Fuel Tank Products Liability Litigation, 55 F.3d 768 (3d Cir. 1995). In both cases, the courts permitted attorney's fees to be calculated under the percentage-of-fund method when the defendants, through settlement agreements, had agreed to pay the classes' attorney's fees. But those cases are distinguishable from the present situation in three important respects. First, the settlement agreement in Johnston provided for both the class award and the attorney's fee award in what the court described as a "package deal." 83 F.3d at 246. Here, the agreement specifically states, "[T]he amount of the attorneys' fees, expenses and costs are not part of the Stipulation." And, as ASRS pointed out during oral argument in this court, the settlement agreement merely reflected the parties' agreement to disagree about the proper method for awarding attorney's fees. Second, in neither Johnston nor General Motors were the defendants challenging the fee awards, although General Motors did reserve the right to do so. Third, as discussed below, the fees here are awardable pursuant to statute. Because the common fund doctrine is a recognized exception to the rule that attorney's fees in Arizona are awarded pursuant only to statute or contract, Kerr; LaBombard; In re Estate of Brown, 137 Ariz. 309, 670 P.2d 414 (App. 1983), it follows that the doctrine does not apply when a statute authorizes a fee award.
Class counsel also relied on an unpublished order of the First Circuit, citing it as legal authority in their answering brief. Rule 28(c), Ariz. R. Civ. App. P., 17B A.R.S., prohibits the citation of unpublished memorandum decisions and applies to memorandum decisions of any court. Walden Books Co. v. Department of Revenue, 198 Ariz. 584, 12 P.3d 809 (App. 2000). Further, First Circuit Rule 36(2)(F) states, "Unpublished opinions may be cited only in related cases. Only published opinions may be cited otherwise. Unpublished means the opinion is not published in the printed West reporter."
Application of § 12-341.01
¶ 10 ASRS argues that fees were properly awardable pursuant to § 12-341.01(A), which states in pertinent part: "In any contested action arising out of a contract, express or implied, the court may award the successful party reasonable attorney's fees." For purposes of this statute, "an action arises out of contract if it could not exist but for the contract." Kennedy v. Linda Brock Automotive Plaza, Inc., 175 Ariz. 323, 325, 856 P.2d 1201, 1203 (App. 1993). Fees are recoverable against the state under § 12-341.01(A). New Pueblo Constructors, Inc. v. State, 144 Ariz. 95, 696 P.2d 185 (1985). As noted above, application of a fee statute is a question of law subject to de novo review. See Motel 6; Phoenix Newspapers.
¶ 11 The complaint requested judicial review under the Administrative Review Act, asserted several contract-based causes of action, and sought "reasonable attorneys' fees" but did not specify a basis for awarding fees. Given these claims, the trial court ostensibly could have awarded fees to the prevailing plaintiffs under § 12-341.01(A) or § 12-348(A)(2). But, as class counsel correctly points out, fees are precluded under § 12-348 by subsection (H)(1). Burke also alleged several contract-related causes of action based on his employment contract, consequently bringing the action within the purview of § 12-341.01(A). See Carley v. Arizona Bd. of Regents, 153 Ariz. 461, 737 P.2d 1099 (App. 1987) (board of regents and university president awarded fees under § 12-341.01 after instructor unsuccessfully challenged their decision not to renew teaching contract); Fleming v. Pima County, 141 Ariz. 167, 685 P.2d 1319 (App. 1983) (for purposes of § 12-341.01, contractual relationship exists between county and its employees), vacated in part on other grounds, 141 Ariz. 149, 685 P.2d 1301 (1984). The judgment entered pursuant to the settlement agreement provided Burke and the class all the relief they had requested, clearly making them the prevailing parties on their contractual claims.
Although 7 § 12-348 provides generally for fee awards to parties who prevail against the state, subsection (H)(1) precludes fees in actions when the state's role "was to determine the eligibility or entitlement of an individual to a monetary benefit or its equivalent." See Burke v. Arizona State Retirement Sys., 152 Ariz. 323, 732 P.2d 214 (App. 1986) (statute prohibited attorney's fee award to plaintiff seeking retirement benefits). Consequently, the only basis for the trial court's award of fees to Burke was § 12-341.01(A).
¶ 12 Class counsel argues, however, that § 12-341.01 applies only when the parties' contract has not provided for attorney's fees and asserts that the settlement agreement here provided for the payment of fees, citing Sullivan v. State Land Dep't, 172 Ariz. 599, 838 P.2d 1360 (App. 1992); Connor v. Cal-Az Properties, Inc., 137 Ariz. 53, 668 P.2d 896 (App. 1983); and Sweis v. Chatwin, 120 Ariz. 249, 585 P.2d 269 (App. 1978). These cases hold that, when the contract upon which the cause of action is based contains an attorney's fee provision, § 12-341.01(A) does not apply. But, as ASRS points out, that is not the case here. The causes of action the class asserted are based upon their employment contracts, and no evidence in the record indicates any of them contained an attorney's fee provision. Furthermore, as noted above, the settlement agreement reflects the parties' agreement to disagree about the proper basis for awarding fees.
Disposition
¶ 13 We vacate the trial court's attorney's fee award and remand the matter for the court to further determine a reasonable award by applying the guidelines set forth in Schweiger v. China Doll Restaurant, Inc., 138 Ariz. 183, 673 P.2d 927 (App. 1983). In making that determination, the trial court must ascertain a reasonable billing rate and the hours reasonably expended on the case. Id.; see also ABC Supply, Inc. v. Edwards, 191 Ariz. 48, 952 P.2d 286 (App. 1996). "[E]vidence of reasonableness is required even in contingency fee cases, . . . [and] '"[t]he most useful starting point for determining the amount of a reasonable fee is the number of hours reasonably expended on the litigation multiplied by a reasonable hourly rate."'" Sanborn v. Brooker Wake Property Management, Inc., 178 Ariz. 425, 430, 874 P.2d 982, 987 (App. 1994), quoting Timmons v. City of Tucson, 171 Ariz. 350, 357, 830 P.2d 871, 878 (App. 1991), quoting Hensley v. Eckerhart, 461 U.S. 424, 433, 103 S.Ct. 1933, 1939, 76 L.Ed.2d 40, 50 (1982); see also City of Burlington v. Dague, 505 U.S. 557, 562, 112 S.Ct. 2638, 2641, 120 L.Ed.2d 449, 456 (1992), quoting Pennsylvania v. Delaware Valley Citizens' Council for Clean Air, 478 U.S. 546, 565, 106 S.Ct. 3088, 3098, 92 L.Ed.2d 439, 456 (1986) ("We have established a 'strong presumption' that the lodestar represents the 'reasonable' fee [for purposes of federal fee-shifting statutes].").
¶ 14 Vacated and remanded.
_______________________________ PHILIP G. ESPINOSA, Chief Judge
CONCURRING:
______________________________ JOHN PELANDER, Presiding Judge
_________________________________ WILLIAM E. DRUKE, Judge (Retired)