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Bankruptcy Court Denies Motion for Fee Enhancement Under 'Common Fund Doctrine'
In a bankruptcy case filed 91 years ago (and reopened 85 years later), the U.S. Bankruptcy Court for the Western District of Virginia recently denied creditors' counsel's motion for a fee enhancement under the "common fund doctrine," finding it could not award the requested fees absent statutory authority. In particular, the court determined it would be an abuse of its equitable powers to award fees beyond the scope of applicable bankruptcy law in In re Yellow Poplar Lumber, Case No. 605 B.R. 416 (Bankr. W.D. Va. 2019).
Background
In July 1928, White Oak Lumber Co. filed an involuntary Chapter 7 petition in the U.S. District Court for the Western District of South Carolina, seeking to have Yellow Poplar Lumber Co., Inc. "adjudged a bankrupt" under the Bankruptcy Act of 1898, n 1931, the district court adjudged Yellow Poplar as bankrupt and closed the case.
In 2013, the case was reopened in connection with a dispute over ownership rights in certain gas estates on parcels of land in Virginia, and it ultimately found its way to the U.S. Bankruptcy Court for the Western District of Virginia. The dispute resulted in a settlement whereby Yellow Poplar's bankruptcy estate stood to receive approximately $2 million in gas royalties. The Chapter 7 trustee appointed in the reopened case, with the assistance of a genealogist, identified several of the original creditors' existing heirs or successors-in-interest. The bankruptcy court, in turn, directed the trustee to file a brief addressing the appropriate interest rate on the anticipated distribution to creditors, and invited any other party-in-interest to do the same. While the trustee contended that the interest rate should be 2.4%, counsel for the heirs of two creditors advocated a 7% rate, which reflected the legal rate in effect in South Carolina when Yellow Poplar's bankruptcy case was filed. The court ultimately ordered the application of a rate of 3.6%.
Creditors' counsel, however, successfully appealed the court's ruling, which resulted in general unsecured creditors receiving 7% interest on their distributions, and increasing the asset pool to be distributed to general unsecured creditors by approximately $740,000. Notably, the efforts of creditors' counsel did not increase the amount of funds in the bankruptcy estate, but rather increased just the proportion of estate funds going to the class of general unsecured creditors, effectively diverting funds from one class of constituents to another. Creditors' counsel then filed a motion with the bankruptcy court seeking a fee enhancement of $164,164.90 under the "common fund doctrine." The trustee opposed the motion, arguing, among other things, that the common fund doctrine does not apply in bankruptcy cases.
Common Fund Doctrine
The common fund doctrine is an exception to the American Rule, i.e., the general rule prevailing in the United States that each litigant is responsible to pay its own attorney fees. The doctrine generally applies where a litigant, acting to recover on its own claim, recovers property from which others may satisfy their claims as well, entitling the litigant to payment of attorney fees and costs from the "common fund" used for payment of all claims.
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