Making the Other Guys Pay: Attorney Fees and the Common Fund Theory

• Publication year: 2005
• Author: By Margaret M. Hand

MAKING THE OTHER GUYS PAY: ATTORNEY FEES AND THE COMMON FUND THEORY

By Margaret M. Hand^*

I. INTRODUCTION; THE AMERICAN RULE

Code of Civil Procedure § 1021 codifies what is often called the "American Rule" of attorney's fees, the rule that says unless otherwise provided by statute, the measure and manner of paying attorney fees is left to the agreement of the parties.¹ Parties to litigation so rarely agree to pay their opponent's fees, the American Rule has come to be known as the rule that each party bears its own attorney fees. This rule applies in proceedings under the Probate Code, as well as in general civil litigation.² When advised of the American Rule, many clients are incredulous. Petitioners, the indignant victims of wrongdoing, cannot believe they must pay for justice. Defendants, the innocent victims of false allegations, cannot believe the injustice of having to pay for a defense. In some instances, the injustice and inequity of the American Rule is so great, the courts have reacted to create nonstatutory exceptions, despite the Code of Civil Procedure prohibition against doing so. One of those exceptions, payment of fees under the common fund theory, is the subject of this article, which begins with a brief discussion of some statutory exceptions to the American Rule.

II. SOME STATUTORY EXCEPTIONS TO THE AMERICAN RULE

Anticipating the question most clients ask, "shouldn't the bad guy have to pay?" most probate litigators have committed to memory the Probate Code's exceptions to the American Rule. These exceptions include fee-shifting statutes that penalize those who object to a fiduciary's accounting without reasonable cause and in bad faith³ and statutes that penalize fiduciaries who oppose objections to their accounts, if the opposition is without reasonable cause and in bad faith.⁴ In probate proceedings, there is a statute that awards reasonable litigation expenses, including attorney's fees to the prevailing party in a suit on a rejected claim, provided the prosecution or defense of the action was unreasonable⁵ and there is a similar statute that governs when trustees elect to use the optional procedure of Probate Code § 19003 (notice by trustees to creditors).⁶

There are many statutes that punish misbehavior in formal probates. One statute penalizes anyone who unreasonably and for the purpose of hindering the personal representative seeks to suspend his powers.⁷ Another statute penalizes personal representatives who must be compelled to file an inventory and appraisal.⁸ Another penalizes personal representatives or others who abuse the discovery methods of Probate Code § 8870 (petition for citation to answer interrogatories or appear for questioning about decedent's assets).⁹ Two statutes penalize probate referees, in certain circumstances.¹⁰ Another penalizes anyone who, without reasonable cause and good faith, objects to an appraisal.¹¹

There are also many statutes meant to curtail misbehavior in the diverse arena of non-court supervised transfers. There are statutes that penalize third persons who refuse to honor powers of attorney,¹² statutes that penalize persons who commence actions under Probate Code § 4541 (to determine the effect of a power of attorney, to challenge the agent's exercise of power, etc.) without reasonable cause¹³ and statutes that penalize attorneys-in-fact who violate their fiduciary duties and who fail to account or report for their actions.¹⁴ One statute penalizes those who in bad faith claim an adverse interest in property that would otherwise pass subject to a nonprobate transfer, for example, life insurance or a pay-on-death account.¹⁵ Another statute penalizes those who unreasonably refuse to transfer the decedent's property to the decedent's successor in interest, after being presented with an affidavit or declaration under Probate Code § 13101.¹⁶ Another statute penalizes employers who unreasonably interfere when the decedent's surviving spouse tries to collect the decedent's back wages.¹⁷ Probate Code § 13541 penalizes one who records a notice claiming an interest in the real property that would otherwise pass to the decedent's surviving spouse, if that notice is recorded for the purpose of slandering title to the property.

Two statutes give teeth to the so-called "disqualified persons" rules of Probate Code § 21350 et seq. One penalizes the disqualified person who receives a transfer, if the court finds that a transfer was the product of the disqualified person's fraud, menace, duress, or undue influence.¹⁸ The other penalizes the disqualified person who serves as trustee if on a petition for removal of trustee, the court finds that the settlor designated the disqualified person because of the person's fraud, menace, duress or undue influence, or that designation of the person was inconsistent with the settlor's intent.¹⁹

There are a handful of statutes meant to penalize bad behavior during a trust administration.²⁰ And finally, the Uniform Health Care Decisions Act contains several statutes meant to curtail abuse or disregard of advance health care directives.²¹

III. THE COMMON FUND THEORY AND ITS COROLLARY, THE SUBSTANTIAL BENEFIT THEORY

In addition to the statutory exceptions and despite the seemingly clear rule of Code of Civil Procedure §1021, justice and equity have created three non-statutory exceptions to the American Rule.²² Two²³ of these theories have recognized applications in estate and trust cases and though they do not necessarily force the bad guy to pay the good guy's attorney fees, when applicable, these theories do force those who benefit from an action to share in its expense. If the bad guy is among the class of people who "benefit," the court may force the bad guy to pay a portion of the good guy's attorney fees, even if the bad guy's benefit is purely theoretical. Indeed, if the class of people benefitted is small enough, the bad guy may end up paying as

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much as half of the good guy's attorney fees. The theories that compel this result are the common fund theory and its corollary, the substantial benefit theory.

The common fund theory was first approved in 1895²⁴ and its application in estates and trust cases is well developed.²⁵ The common fund theory also has broad application in class action cases, however, and it is in these cases that the theory is evolving. Of specific interest to the estates and trusts attorney is the question of whether the common fund theory ever applies in cases in which more than one person participates in creating or preserving the fund. The opinion in estates and trusts cases²⁶ says it does not, but in many class action cases,²⁷ the answer is otherwise. It remains to be seen whether the modern application of this theory will affect its use in trust and estate cases.

A. Policy Underpinnings

Both the common fund theory and the substantial benefit theory have their underpinnings in the policy that it is equitable and just "to compel those for whose benefit the action or proceeding was taken to bear their share of the expenses of the litigation."²⁸ In Estate of Reade,²⁹ one of eight heirs objected to the administratrix's inventory and final account on the grounds that she had pocketed life insurance she should have treated as an estate asset. As a result of the one heir's objection, the proceeds were returned to the estate and the objecting heir was awarded attorney fees for her efforts. Estate of Reade did not mention the common fund theory by name, but within two decades, the case had come to stand for the "well established 'common fund' principle," the elements of which are: (1) two or more people are entitled in common to a specific fund, and (2) an action brought by a plaintiff or plaintiffs creates, enlarges or preserves the fund.³⁰ The bases of this equitable rule are those cited in Estate of Stauffer:³¹

[F]airness to the successful litigant, who might otherwise be consumed by the expenses;
correlative prevention of an unfair advantage to the others who are entitled to share in the fund and who should bear their share of the burden of its recovery;
encouragement of the attorney for the successful litigant, who will be more willing to undertake and diligently prosecute proper litigation for the protection or recovery of the fund if he is assured that he will be promptly and directly compensated should his efforts be successful.³²

Over the years, these bases have evolved into a rule, each element of which must be proven before the court will apply the common fund theory. No one case states all of the elements, but collectively, those elements are the following:

1. An identifiable fund was created or preserved.³³
2. The efforts of the participant (plaintiff, petitioner or objector) were essential to the creation or preservation of the fund.³⁴
3. Fewer than all the beneficiaries participated in creating or preserving the fund.³⁵
4. The participant was not acting in his or her role as personal representative or trustee.³⁶

B. For the Common Fund Theory, There Must Be a Fund

In each instance when use of the common fund theory has been upheld, the party awarded fees has preserved or recovered a "certain or easily calculable sum of money—out of which sum or 'fund' the fees are to be paid."³⁷ In Serrano v. Priest, the Supreme Court affirmed a judgment that California's public school financing system was unconstitutional and must be brought into constitutional compliance within six years. Plaintiffs' counsel sought attorney fees under three non-statutory theories, the common fund theory, the "substantial benefit" theory and the "private attorney general" theory, but the court awarded fees under the latter theory only. On review, the Supreme Court analyzed each theory carefully and it is this analysis that makes Serrano interesting to the trust and estate litigator. Serrano makes it clear that in the absence of a clearly identifiable fund, the common fund theory does not apply, though an outgrowth of that theory, the substantial...