Coggins v. New England Patriot Football Club, Inc.

Supreme Judicial Court of Massachusetts · Corporations

CorporationsDerivative actionsAttorney's feesderivative suitattorney's feescommon fundrescissory damagesclass action

Facts

The parties settled the plaintiffs' claims for $584,000, which was placed in an interest-bearing account for the benefit of the plaintiffs. The plaintiffs then sought to have their fees and costs assessed against the defendants, arguing that their derivative claim for waste of corporate assets had been reinstated in Coggins I and that Massachusetts law permits fee awards in successful derivative actions. The trial judge concluded that Coggins I reinstated the derivative claim only to permit recalculation of rescissory damages for the class action, not to produce corporate damages on a live derivative claim. The judge therefore denied assessment of fees against the defendants and instead awarded fees and expenses out of the settlement fund.

Issue

Whether the plaintiffs were entitled to have attorney's fees and expenses assessed against the defendants on the ground that they had prevailed on a derivative claim, or whether fees could properly be paid only from the actual settlement fund. Relatedly, the court considered whether fees could be based on a hypothetical "common fund" that never actually came into existence.

Rule

A judge may, in discretion, award attorney's fees to a party who has successfully brought a derivative action on behalf of a corporation. But no recovery of counsel fees may be had in the action to redress a plaintiff's own wrong, and common-fund fees are payable only from an actual fund or proceeds of the suit received, not from a fictional or nonexistent fund; if no funds are due to the corporation, no allowance should be made from such a purported corporate recovery.

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Minority investors in Lakefront Robotics, Inc., a closely held Ohio corporation, sued in Cleveland over a cash-out merger. Their complaint included a direct class claim for breach of fiduciary duty and a derivative count alleging that managers had diverted corporate inventory. On appeal, the court held rescissory damages should be recalculated using the company's present value and said the diverted inventory should be considered in valuing the company, but it did not order any payment to the corporation. The case later settled with $900,000 paid into a fund for the former minority investors.

The investors ask the trial judge to require the defendants personally to pay their attorney's fees because the derivative count was 'revived' on appeal. Under the governing rule, what is the best answer?

Explanation. Attorney's fees may be awarded in the judge's discretion only to a party who has successfully brought a derivative action on behalf of the corporation. Here, as in the governing case, the derivative allegations were used only to help calculate the investors' direct rescissory recovery, and no corporate accounting or payment to the corporation was ordered. Because the recovery redressed the plaintiffs' own wrong directly, the judge should not shift fees to defendants under derivative-action fee principles. (Derived from Coggins v. New England Patriot Football Club, Inc. (n.d.).)