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Silberman v. Bogle

June 28, 1982

JOSEPH SILBERMAN, INDIVIDUALLY AND ON BEHALF OF ALL OTHER SHAREHOLDERS OF WELLINGTON FUND, INC. AND ALL OTHER PERSONS SIMILARLY SITUATED
v.
JOHN C. BOGLE, ROBERT W. DORAN, PAUL B. FIRSTENBERG, DANIEL S. GREGORY, BARBARA B. HAUPTFUHRER, JOHN T. JACKSON, JOHN JEPPSON, III, CHARLES D. ROOT, JR., JAMES O. WELCH, JR., BURTON G. MALKIEL, JAMES S. RIEPE, RAYMOND J. KLAPINSKY, RICHARD F. HYLAND,; WILMINGTON TRUST COMPANY, EXECUTOR OF THE ESTATE OF RICHARD F. CORROON, DOROTHY HELEN HILL AND CITIBANK, N.A., EXECUTORS OF THE ESTATE OF JAMES T. HILL, JR.; THE VANGUARD GROUP, INC., VANGUARD MARKETING CORPORATION, WELLINGTON MANAGEMENT COMPANY AND THE WELLINGTON FUND, INC. AND WINDSOR FUND, INC., IVEST FUND, INC., EXPLORER FUND, INC., W. L. MORGAN GROWTH FUND, INC., WELLESLEY INCOME FUND, INC., WESTMINISTER BOND FUND, INC., WHITEHALL MONEY MARKET TRUST, QUALIFIED DIVIDEND PORTFOLIO, INC., QUALIFIED DIVIDEND PORTFOLIO II, INC., FIRST INDEX INVESTMENT TRUST, AND WARWICK MUNICIPAL BOND FUND, INC.; PLAINTIFF, JOSEPH SILBERMAN AND FRED LOWENSCHUSS ASSOCIATES, COUNSEL FOR PLAINTIFF ABOVE-NAMED, APPELLANTS



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

Author: Gibbons

Before: ALDISERT, GIBBONS and HIGGINBOTHAM, Circuit Judges

Opinion OF THE COURT

GIBBONS, Circuit Judge.

Joseph Silberman and his counsel appeal from an order awarding attorneys' fees and expenses in connection with the settlement of a shareholders derivative suit and related proceedings before the SEC.*fn1 They contend that the amount of the award is inadequate. We affirm.

I.

Wellington Fund, Inc. (Wellington), an open-end mutual fund, is a member of the Vanguard Group of Investment Companies (Vanguard Funds), a mutual fund complex. The Wellington Management Company (WMCo.) is Wellington's investment adviser and The Vanguard Group, Inc. (Vanguard) provides it with administrative services. Plaintiff, Joseph Silberman, is a shareholder of Wellington. He has been represented in this action and related SEC proceedings by Fred Lowenschuss Associates.

In February 1977, Vanguard Fund applied to the Securities Exchange Commission (SEC) pursuant to the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq., for approvals and exemptions of a change in the manner of distributing shares of member funds. The SEC gave temporary approval to the proposed arrangement and ordered a full hearing. Silberman, who had earlier requested the SEC to hold public hearings on Vanguard Funds' application, intervened in the SEC proceeding as a limited participant under SEC Rule of Practice 9(c), 17 C.F.R. § 201.9(c). He was denied full party status.After extensive hearings an administrative law judge found Vanguard Funds' formula for allocating costs among the various funds unfair to Wellington, but approved a revised formula. The full Commission, in an order dated February 25, 1981, approved the decision of the administrative law judge. In the interim, Wellington had negotiated with WMCo. for a prospective advisory fee reduction of approximately $450,000 to $500,000.

This shareholders derivative action was instituted on October 31, 1977 against a number of defendants including Wellington, its principal officers and directors, Vanguard, WMCo. and 12 investment company members of Vanguard Funds.*fn2 Silberman alleged that the various defendants had violated fiduciary obligations to Wellington, that the Wellington shareholders' approval of the distribution arrangement was unlawful because it was procured by a false and misleading proxy statement, and that the proposed distribution arrangement was unlawful and unfair.*fn3 He initially sought to enjoin Wellington, its officers and directors, from participating in Vanguard Funds' plan and from being represented before the SEC by the same counsel representing the other funds. Upon the district court's refusal to issue an injunction and the SEC's approval of Vanguard Funds' modified plan, Silberman amended his complaint to seek reimbursement for legal fees and expenses incurred in the SEC proceedings. The amended complaint thus requested relief in the form of an injunction, damages, and attorneys' fees.

Settlement discussions resulted in a court approved settlement in which Wellington received $200,000 from its insurance carrier, as well as reimbursements of attorneys' fees; costs and expenses incurred in defending this action, $50,000 form WMCo., and the right to receive $20,000 a year from WMCo. for the next ten years.*fn4 Consequently the derivative action was dismissed with prejudice on October 17, 1980.

Soon thereafter plaintiff's counsel filed an application for attorneys' fees and expenses totaling $579,420.12. After a hearing, the court awarded $85,000.50 in fees and $3,469.23 in expenses. Siblerman and his counsel appeal from that determination. They contend that the court erred in not compensating counsel for time and effort spent in the SEC proceedings. They also contend that the court should have increased the fee award because of the contingent nature of counsel's work and the high quality of their performance. Finally, they contend that the court erred in refusing to reopen the hearing to accept evidence of a more detailed breakdown of the hours spent jointly on both the SEC proceeding and this litigation.

II.

The generally applicable American rule is that litigants bear their own legal costs and expenses. Federal courts, however, have had the "historic power of equity to permit the trustee of a fund or property, or a party preserving or recovering a fund for the benefit of others in addition to himself, to recover his costs, including his attorneys' fees, from the fund or property itself or directly from the other parties enjoying the benefit." Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 257, 44 L. Ed. 2d 141, 95 S. Ct. 1612 (1975). See, e.g., Trustees v. Greenough, 105 U.S. 527, 26 L. Ed. 1157 (1882). As we stated in Lindy Bros. Builders, Inc. v. American Radiator & Standard Sanitary Corp. (Lindy I, 487 F.2d 161, 165 (3d Cir. 1973): "[T]he award of fees under the equitable fund doctrine is analogous to an action in quantum meruit: the individual seeking compensation has, by his actions [in commencing, pursuing or settling litigation] benefited another and seeks payment for the value of the service performed."

We have set forth the standards governing the award of attorneys' fees in Lindy I and Lindy Bros. Builders, Inc. v. American Radiator & Standard Sanitary Corp., 540 F.2d 102 (3d Cir. 1976) (Lindy II ).A district court must first inquire into the hours spent by the attorneys on their services and value those services by multiplying the hours billed by a reasonable hourly rate. This amount constitutes "the lodestar of the court's fee determination, [to be modified by] at least two factors that must be taken into account." Lindy I, supra, 487 F.2d at 168.One factor is the contingent nature of success which may increase the recovery. The second factor is "the extent, if any, to which the quality of an attorney's work mandates increasing or decreasing the amount to which the court has found the attorney reasonably entitled." Id. at 168. Such an increase or decrease is intended to take into account only an unusual degree of skill, superior or inferior, exhibited by counsel in the specific case before the court. The general quality of the attorney's practice and reputation is not to be considered in setting this factor, but ...


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