The Journal of The DuPage County Bar Association

Back Issues > Vol. 24 (2011-12)

How “Common” is the “Common Fund” Doctrine?
by Ronald J. Hennings

An important issue to consider when deciding to take a particular case is how to get paid.  While the legal knowledge and time spent representing an individual or entity entitles the attorney to payment, the right to recover for professional services must still rest on the terms of a contract of employment, either express or implied, with an actual client, and cannot be based on a benefit derived by a third party from the services rendered by the attorney.[1]  That said, there are times when someone other than a client benefits from the attorney’s work.  In those situations, responsibility for the attorney’s fees can be an issue.

The general “American” rule is that each party is responsible for paying its own attorney fees.[2]  This differs from other legal systems where a losing party must pay the prevailing party’s attorney’s fees.  As in any general rule, the American rule has exceptions.  Some statutes have fee shifting provisions that provide for the losing party to pay the prevailing party’s attorney fees while other statutes have the doctrine written into the act itself.[3]  Of course, the parties themselves can also contractually agree that the prevailing party is entitled to attorney fees from the losing party should a dispute arise between them. 

Another exception, and the basis for this article, addresses the fee issue when a third party benefits as a result of an attorney’s work, without contracting with the attorney for those services.  This exception is known as the “Common Fund” doctrine.  The doctrine provides that “a litigant or a lawyer who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorney’s fee from the fund as a whole.” [4]   An attorney may collect attorney fees under the common fund doctrine only if: (1) the fund from which the fees are sought was created as a result of legal services performed by the attorney; (2) the claimant of the fund did not participate in its creation; and (3) the claimant benefited or will benefit from its creation.[5]  Though the requirements seem straightforward, the Common Fund’s application is not as simple as its definition implies. This article will review the origin of the common fund doctrine and trace its development showing the situations where the doctrine can be applied and were it cannot be applied.

Origins of the Common Fund Doctrine: Subrogation. The common fund doctrine has been recognized for some time.[6] The Illinois Supreme Court decided three cases between 1977 and 1979 that provide the underlying rationale for the doctrine’s application.  In the first case, Baier v. State Farm Insurance,[7] the court was asked to decide whether an insurance company that was subrogated to the rights of an injured insured was required to contribute to the cost of the insured’s suit against a tortfeasor.  The insured’s recovery included money for hospital and doctor bills paid by the insurer under the medical pay provision in the insurance policy.  The insured/plaintiff sought to reduce the subrogation lien by the proportionate share of the fees incurred in creating the fund from which the lien was satisfied.  The court found that State Farm should contribute to the cost of recovery and reduced State Farm’s lien by one-third.  The court held that “this theory of recovery, known as the ‘fund doctrine,’ is based on the equitable concept that an attorney who performs services in creating a fund should in equity and good conscience be allowed compensation out of the whole fund from all those who seek to benefit from it.”[8] 

An important element in applying the common fund doctrine was that Baier was only required to reimburse State Farm from money it collected from the tortfeasor.  Absent the creation and existence of the fund, State Farm had no right of reimbursement from the plaintiff.  The deciding factor that allowed application of the doctrine in the case was the subrogee/subrogor relationship of the parties.  State Farm argued that the doctrine should also be applied to the separate bills of the physicians and hospital in the case, but the court stated that “this record presents no such question, and the contention need not be further discussed.”[9]

Expending to Class Actions. The second case involved the doctrine’s applicability in a class action suit.  In Fiorito v. Jones[10] the court extended the common fund doctrine to class action suits.  The court held that an attorney who created a common settlement fund for members of the class was entitled to a fee from that fund.  The third case, Maynard v. Parker,[11] answered the medical provider question left open in Baier.  The Illinois Supreme Court—considering whether the common fund doctrine applied to medical bills—refused to extend the doctrine to hospital lien cases.  The court distinguished Baier by noting that the plaintiff’s liability to the hospital was not dependent upon the creation of a fund; rather, the plaintiff was a debtor obligated to pay for the hospital services out of any available resources.[12]  The difference between a subrogee/subrogor relationship, where the money is owed only after the creation of a fund, and a debtor/creditor relationship, where the money is owed regardless of the creation of a fund, was the main reason for the opposite results in Baier and Maynard.  That difference was eloquently explained in the appellate court decision of the case.[13]  The appellate court decision cited Sisters of Charity v. Nichols[14] holding that:

“The attorneys and their client additionally contend, however, that the hospital here is obligated to share in the attorneys’ fees and costs of collection on the same basis that a subrogated insurer is obligated to share attorneys’ fees and costs with its insured in recovery against a third party.  This analogy is inapt and the principle inapplicable here.  The obligation of the subrogated insurer to share in the costs of recovery from a third party wrongdoer arises because the insurer occupies the position of the insured with coextensive rights and liabilities and no creditor-debtor relationship (exists) between them.  But here, unlike that situation, the hospital’s claim and lien is based upon a debt owed the hospital by its patient in whose shoes it does not stand for any purpose, the debt being owed to it by its patient irrespective of the patient’s rights against a third party wrongdoer.  Because the substitution principle does not apply here, no obligation arises on the part of the hospital to share in the costs of recovery against a third party, and the attempted analogy fails.”[15] 

This difference still controls in Illinois today. 

Denied to Debtor/Creditor Relationships. The Illinois Appellate Court, Second District, has also ruled on the common fund doctrine.  In DeFontaine v. Passalino, the doctrine was allowed in a shareholder derivative suit, which the court construed as similar to a class action[16].  However, the court did not allow the doctrine in a consumer action against a phone company[17], nor in another hospital lien case,[18] citing the creditor/debtor situation present in both as the reason for the decision.  In The Village of Clarendon Hills v. Mulder,[19] the Second District Appellate Court refused to apply the doctrine to a lawsuit involving a mortgagee in a condemnation case. In that case, the attorney obtained a settlement in a condemnation suit on behalf of his client. He argued that he was entitled to fees from the payoff of the mortgage because the mortgage holder directly benefitted as a result of his legal work in creating the fund used to satisfy the mortgage. The court indicated that the benefit to the mortgage holder was merely incidental to the primary purpose of obtaining compensation for the condemned property and that the mortgage holder was still entitled to payment absent the creation of the fund.  The court further held that because the common fund doctrine is an exception to the general rule that each party pays its own attorney’s fees, the doctrine must be narrowly construed.[20] The Court found Maynard v. Parker persuasive, equating the mortgagors in its case with the hospital in Maynard, and not with the insurance company in Baier.  Accordingly, the court did not apply the common fund doctrine finding that Illinois courts have refused to extend the doctrine to creditor/debtor relationships.[21]

The Federal Courts having jurisdiction in Illinois have also ruled on the common fund doctrine in this the creditor/debtor context under Illinois law, and recognized the same distinction.  In McGee-Berger-Mansueto, Inc. v. Board of Education of the City of Chicago,[22] the Seventh Circuit Court of Appeals noted that:

“Recent case law in Illinois has restricted the application of the fund doctrine to class actions and insurance subrogation cases.  In particular, one recent decision refused to apply the doctrine in favor of an attorney who sought to collect part of his fees from a creditor of his client which asserted a statutory lien on the proceeds of the litigation” [citing Maynard v. Parker].[23]   

The court rejected the common fund theory advanced by the attorney who sought fees from a fund that incidentally benefited other judgment creditors.  The Seventh Circuit later strengthened its view on the doctrine in Insurance Company of North America v. Norton,[24]  holding that “the allowance of counsel fees from a fund is capable of great abuse, and should be exercised with the most jealous caution in regard to the rights of creditors.”[25] The court continued, “In cases such as this it is better to leave those concerned to contract for the compensation to be paid for the services rendered or received.”[26] 

 Despite these cases defining the doctrine’s application, attorneys still try to extend the doctrine beyond its current limits. In Bishop v. Burgard,[27], the Illinois Supreme Court was faced with another common fund case involving a medical payment lien from an ERISA fund.  Finding that the ERISA Fund’s lien was a subrogation lien, the Court applied the same rationale from Scholtens and Baier, concluding that the common fund doctrine applied in subrogee/subrogor relationships, such as the case at bar.[28]  While language in the decision seemed to imply that the Court may “expand” the doctrine, essentially the ruling concerned only a subrogation issue, and not a creditor/debtor situation.[29] 

At the time the Supreme Court decided Bishop, the First District Appellate Court issued a decision on the common fund doctrine in Watkins v. GMAC Financial Services.[30]  In Watkins, the court was asked to extend the doctrine to the holder of an installment note for an automobile damaged in an accident.  The case was settled, and part of the settlement fund was applied to the outstanding balance on the note.  When the attorney invoked the doctrine to reduce the amount owed under the installment note, the court found that the obligation to GMAC existed before the settlement, was not dependent on the creation of a settlement fund, and therefore was not subject to the common fund doctrine.[31]  The case was appealed to the Supreme Court, who remanded the case to the Appellate Court, with directions to reconsider the opinion in light of Bishop.[32]  The Appellate Court reconsidered its opinion, but reached the same result, finding that the creditor/debtor situation in Watkins was factually distinguishable from the subrogee/subrogor relationship in Bishop.[33]  The Supreme Court denied Watkins’ petition for leave to appeal the second opinion, effectively refusing to extend the doctrine to creditor/debtor situations.[34]

2011 Sup. Ct.: Debtor/Creditor Relationships Still Excluded. Despite the Watkins decisions, the plaintiffs in the consolidated cases of Howell v. Dunaway[35] and Wendling v. Woolard[36] were temporarily successful in using Bishop to get both the Circuit Court of Williamson County and the Fifth District Appellate Court to extend the common fund doctrine to a hospital lien filed under the Health Care Services Liens Act.[37]  This victory was short-lived though, as the Illinois Supreme Court revered the appellate and circuit courts, refusing to overturn its previous decision in Maynard v. Parker and holding that its decision in Bishop did not extend the common fund doctrine to creditor/debtor situations.[38] The Supreme Court held that the hospital was not unjustly enriched because the claims were not contingent upon the creation of the fund as the claims were in Bishop.[39] The court identified two additional characteristics that set Wendling and Howell apart from cases where the common fund doctrine was applied. First, the court found that, unlike a subrogee or class member, the Hospitals had no standing to participate in the plaintiffs’ personal injury lawsuits, nor could they bring independent causes of actions against the tortfeasors.  Second, the fund was not created for the benefit of an entire class, but rather for the benefit of the attorneys’ clients. “Because the attorneys obtained the funds for the plaintiffs’ benefits, regardless of the Hospitals’ interests, the plaintiffs and Hospitals are not similarly situated with respect to the fund and do not share the same interests in the fund.”[40]  These two characteristics will determine whether the common fund doctrine applies in any given situation where attorney fees are at issue with a third party.

Exception to the Exception: The Tenny Letter. As is the case with many “exceptions to the rule,” there is always an “exception to the exception.” The common fund doctrine is no different, having its own exception in subrogation cases.  As discussed above, one characteristic found when the fund applies is the ability of a third party to “step in the shoes” of a plaintiff, giving that party the same rights and obligations of the plaintiff.  Unlike a medical provider, an insurance company has the ability to file its own action against a tortfeasor to protect the subrogation rights in its policy, and this is when the exception to the exception occurs. When the insurance company protects its interests by filing its own suit or participating in the injured party’s suit, the plaintiff’s attorney is not entitled to a fee under the common fund doctrine.  Unsurprisingly, the amount of work that must be done by the insurance company to protect its rights and avoid the common fund doctrine is also the subject of much litigation.In Tenney v. American Family Mutual Insurance Company,[41] the common fund doctrine was not applied, even though the subrogee/subrogor relationship existed.  The Tenney case differed from other subrogation cases in two important ways.  First, the insurance company sent a letter—referred to as a “Tenney letter” is later cases—to the plaintiff’s attorney stating that it did not want him to represent the insurance company’s interests against the tortfeasor and would not pay him if he did.  Second, the plaintiff’s attorney did not file suit until nine months after he had received the letter.  The court wondered why the plaintiff did not file the suit on behalf of his client for damages minus the insurer’s subrogation claim, as the insurance company had the right to file its own suit for its subrogation interests.[42]  The court found that it would be “inequitable” to apply the fund doctrine for services knowingly provided for an unwilling recipient.[43]

The Tenney case reached a different conclusion than the earlier case of Powell v. Inghram.[44]  In Powell, the insurance company did not send a letter to the plaintiff’s attorney until ten months after the suit had been filed seeking the total amount of damages arising from the tortfeasor’s negligence.  The insurance company’s letter, while disclaiming any intention of employing the plaintiff’s attorney, nonetheless asked the attorney to “protect” its interests in the event of a settlement.  The court found that the refusal to employ the attorney, while seeking to benefit from his work in obtaining a fund from which the subrogation lien would be reimbursed, required application of the doctrine.[45]

The use of a “Tenney letter” to defeat the common fund doctrine also failed in another subrogation case.  In Meyers v. Hablutzel,[46] the insurance company sent the “Tenney letter” to the plaintiff, plaintiff’s attorney, defendant’s attorney, and defendant’s insurance company notifying them that they would represent their own subrogation interests.  However, the insurance company did not participate in the case, did not file an appearance, and did not participate in the settlement discussions.  The insurance company raised two arguments against the doctrine’s application. First, since the statute of limitations had not run on the right to bring a subrogation action, the insurance company could still bring an action to enforce its rights. Second, because of the “Tenney letter,” the parties knew that the insurance company did not agree to be represented by the plaintiff’s attorney.[47]  The court first addressed whether the elements of the common fund doctrine existed.  The court held that they did, finding that the plaintiff’s attorney procured the settlement with the insurance company’s assistance, and thereby conferring a benefit on the insurance company.[48]  The court then concluded that by failing to join the case as a plaintiff, either by filing its own action or seeking an interpleader counterclaim, and failing to participate in settlement negotiations, the insurance company “reaped the benefits of the settlement procured by the plaintiff’s attorney while expending nothing.”[49] The court stated that “Such a situation is ‘most suitable for the application of the doctrine.’”[50] The doctrine was applied in this case, despite the use of the “Tenney letter.”  Had the insurance company taken a more active role in the case, the result would probably have been quite different.  It appears that, to avoid the common fund doctrine, one must actively pursue its rights in one’s own case, or in the injured party’s case.

Conclusion. While litigation of the doctrine is common, application is not.  Therefore, it is helpful to remember the following guidelines. The Common Fund Doctrine is the exception to the American rule that each party pays its own attorney fees. Under Illinois Supreme Court cases, the doctrine is only applicable in subrogee/subrogor and class action situations. However, a party with subrogation rights can actively participate in a case and protect their interests without having to pay someone else’s attorney, just as a class participant can avoid the doctrine by hiring their own attorney and opting out of the class. A creditor holding a debtor’s obligation that is not dependent on the creation of a fund for payment is not subject to the doctrine. While the creditor undoubtedly receives a benefit from the work of another attorney in getting its account paid, the payment is deemed “incidental” to the representation of the debtor, because the creditor does not “stand in the shoes” of the debtor for purposes of the settlement.  Therefore, the doctrine does not apply when the third party has no rights to sue the tortfeasor.

[1]  Maynard v. Parker, 54 Ill.App.3d 141, 143, 369 N.E.2d 352, 354 (Ill.App. 3rd Dist, 1977).

[2]  Hamer v. Kirk, 64 Ill.2d 434, 437, 356 N.E.2d 524 (Ill.1976) (“a successful party may not recover fees or the costs of litigation in the absence of a statute or an agreement of the parties.”).

[3]  The Employee Retirement Income Security Act, 29 U.S.C. 1132(g), is just one of the many Federal and State Statutes that has a fee shifting provision. The Comprehensive Health Insurance Plan Act, 215 ILCS 105/8(h)(5), and Illinois Public Aid Code, 305 ILCS 5/11-22b are examples of statutes that expressly incorporate the common fund doctrine.

[4] Scholtens v. Schneider, 173 Ill.2d 375, 385, 671 N.E.2d 657 (Ill. 1996) (quoting Boeing Co. v. Van Gemert, 444 U.S. 472, 478 (1980)).  Also see Brundidge v. Glendale Federal Bank, F.S.B., 168 Ill.2d 235, 238, 659 N.E.2d 909 (Ill.1995).

[5] Tenney v. American Family Mutual Insurance Co. 128 Ill.App.3d 121, 122, 470 N.E.2d 6 (Ill.App. 4th Dist., 1984).

[6] State Life Insurance Co. v. Board of Education, 401 Ill. 252, 81 N.E.2d 877 (Ill. 1948).

[7] 66 Ill.2d 119, 361 N.E.2d 1100 (Ill. 1977).

[8] Baier, 66 Ill.2d at 124, 361 N.E.2d at 1102.

[9] Baier, 66 Ill.2d at 127, 361 N.E.2d at 1103.

[10] 72 Ill.2d 73, 377 N.E.2d 1019 (Ill. 1978).

[11] 75 Ill.2d 73, 382 N.E.2d 298 (Ill. 1979).

[12] Maynard, 75 Ill.2d at 75, 387 N.E.2d at 300.

[13] Maynard v. Parker, 54 Ill.App.3d 141, 369 N.E.2d 352 (Ill.App. 3rd Dist., 1977).

[14]  483 P.2d 279 (Mont. 1971).

[15] 483 P.2d at 283.

[16] DeFontaine v. Passalino, 222 Ill. App 3d 1018, 584 N.E.2d 933 (Ill.App. 2nd Dist. 1992).

[17] Independent Voters of Illinois v. Illinois Commerce Commission, 189 Ill.App.3d 761, 545 N.E.2d 557 (Ill.App. 2nd Dist., 1989).

[18] Carlson v. Powers, 225 Ill.App.3d 410, 587 N.E.2d 1240 (Ill.App. 2nd Dist, 1992).

[19] 278 Ill.App.3d 727, 663 N.E.2d 435 (Ill.App. 2nd Dist, 1996).

[20] Village of Clarendon Hills, 663 N.E.2d at 440 (citing In Re The Estate of Dyniewicz 217 Ill.App.3d 616, 628, 648 N.E.2d 1076 (Ill.App. 1st.Dist., 1995)).

[21] Village of Clarendon Hills, 663 N.E.2d at 440.

[22] 691 F.2d 828 (7th Cir. 1981).

[23] Id. at 835.

[24] 716 F.2d 1112 (7th Cir. 1983).

[25] Id. at 1116-1117.

[26] Id.

[27] 198 Ill.2d 495, 764 N.E.2d 24 (2002).

[28]  Bishop, 198 Ill.2d at 501, 764 N.E.2d at 29.

[29]  Bishop, 198 Ill.2d at 510.

[30] 333 Ill.App.3d 281, 775 N.E.2d 148 (Ill.App. 1st. Dist. 2002).

[31] Watkins, 333 Ill.App.3d at 288, 775 N.E.2d at 154.

[32]  Watkins v. GMAC Fin. Servs., 202 Ill.2d 664, 779 N.E.2d 901 (2002).

[33] Watkins v. GMAC Fin. Servs., 337 Ill.App.3d 58, 785 N.E.2d 40 (Ill.App. 1st Dist. 2003).

[34]  Watkins v. GMAC Fin. Servs., 203 Ill.2d 571, 788 N.E.2d 735 (Ill. 2003).

[35] 398 Ill.App.3d 1078, 924 N.E.2d 1190 (Ill.App. 5th Dist. 2010).

[36] 398 Ill.App.3d 1078, 924 N.E.2d 1190 (Ill.App. 5th Dist. 2010).

[37] Id.

[38] Wendling v. Southern Illinois Hospital Services consol with Howell v. Southern Illinois Hospital Services, Dkt. Nos.110199, 110200, cons., Slip Op. at 7 (Ill. 2011).

[39] Id.

[40] Id. at  8.

[41] 128 Ill.App.3d 121, 470 N.E.2d 6 (Ill.App. 4th Dist., 1984).

[42]  Tenney, 128 Ill.App.3d at 124 (citing Hitchcock Air Conditioning, Heating & Piping Co. v. Hazen 43 Ill.App.3d 483, 357 N.E.2d 69 (1976); Ill. Rev. Stat. 1981, ch. 110, par. 2-403(a)).

[43] Id. at 124-125.

[44] 117 Ill.App.3d 895, 453 N.E.2d 1163 (Ill.App. 3rd Dist.1983).

[45] Id. at 899-900.

[46] 236 Ill.App.3d 705, 603 N.E.2d 91 (Ill.App. 2nd Dist. 1992).

[47]  Meyers, 603 N.E.2d at 93.

[48] Id. at 93.

[49] Id. at 94 (citing Powell, 117 Ill.App.3d at 899-900).

[50] Id.

Ron is the owner of The Law Offices of Ronald J. Hennings, P.C., an Illinois law firm located in St. Charles. For the last 23 years, Ron has represented health care providers with respect to their reimbursement and managed care issues. Ron’s practice also includes commercial and retail collection accounts, and real estate transactions. Ron is licensed in the State of Illinois, as well as in the Federal District Courts in Illinois and the Northern District Court of Indiana. Ron received a B.A. in Economics from Northwestern University, and his J.D. with honors from IIT-Chicago Kent College of Law.

 
 
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