§ 3.09 Attorney Fees

• Jurisdiction: Washington

§ 3.09 ATTORNEY FEES

[1] Common-Fund and Substantial-Benefit Rules

Washington courts generally award attorney fees only where recovery of fees is provided by statute, contract, or recognized equitable grounds. Pierce County v. State, 159 Wn.2d 16, 50, 148 P.3d 1002 (2006). This is known as the American Rule. Panorama Vill. Condo. Owners Ass'n Bd. of Dirs. v. Allstate Ins. Co., 144 Wn.2d 130, 143, 26 P.3d 910 (2001). Where a basis for recovery exists, the grant of fees lies within the court's discretion. Leppaluoto v. Eggleston, 57 Wn.2d 393, 407, 357 P.2d 725 (1960). To recover fees, the shareholder derivative action must be prosecuted "not only nominally, but actually in the corporation's behalf." Id.

One recognized exception to the American Rule is the common-fund approach. Under this exception, a court may award attorney fees to a litigant whose legal action creates or preserves a fund of money for others as well as itself. Pierce County, 159 Wn.2d at 50. This exception is grounded in the equitable principles of quantum meruit and unjust enrichment. Polonski v. Trump Taj Mahal Assocs., 137 F.3d 139, 145 (3d Cir.), cert. denied, 525 U.S. 823 (1998). The common-fund doctrine does not apply where the fund benefits the plaintiff alone (as may be the case where the corporation is a close corporation) and the corporation and its creditors are in no better position because of the suit. Gustafson v. Gustafson, 47 Wn. App. 272, 282, 734 P.2d 949 (1987), review denied, 109 Wn.2d 1024 (1988).

Another exception to the American Rule is the "substantial benefit" theory. It is closely related to the common-fund exception and authorizes a court to award attorney fees where a prevailing plaintiff creates a substantial benefit for an ascertainable class. See Weiss v. Bruno, 83 Wn.2d 911, 912-13, 523 P.2d 915 (1974) (citing Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 90 S. Ct. 616, 24 L. Ed. 2d 593 (1970), which described the preservation of shareholder rights as a substantial benefit). Washington courts have recognized that shareholder derivative actions can confer a substantial benefit, making attorney fees recoverable regardless of whether a specific monetary fund is created or preserved. See Seattle Tr. & Sav. Bank v. McCarthy, 94 Wn.2d 605, 612-13, 617 P.2d 1023 (1980). Thus, in Washington, the common-fund and substantial-benefit theories have coalesced: "While at an earlier time these theories carried different requirements, they are now generally phrased in the same manner. Each theory authorizes attorney fees only when the litigants preserve or create a common fund for the benefit of others as well as themselves." Bowles v. Wash. Dep't of Ret. Sys., 121 Wn.2d 52, 70-71, 847 P.2d 440 (1993).

Two rationales support a fee award to a shareholder-plaintiff in a derivative action. The first is that the plaintiff's efforts confer on the corporation a benefit for which the corporation itself would otherwise...