CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT.
Powell, J., delivered the opinion of the Court, in which Burger, C. J., and Brennan, Stewart, White, Marshall, Blackmun, and Stevens, JJ., joined. Rehnquist, J., filed a dissenting opinion, post, p. 482.
MR. JUSTICE POWELL delivered the opinion of the Court.
The question presented in this class action is whether a proportionate share of the fees awarded to lawyers who represented the successful class may be assessed against the unclaimed portion of the fund created by a judgment.
In March 1966, The Boeing Co. called for the redemption of certain convertible debentures. Boeing announced the call through newspaper notices and mailings to investors who had registered their debentures. The notices, given in accordance with the indenture agreement, recited that each $100 amount of principal could be redeemed for $103.25 or converted into two shares of the company's common stock. They set March 29 as the deadline for the exercise of conversion rights. Two shares of the company's common stock on that date were worth $316.25. When the deadline expired, the holders of debentures with a face value of $1,544,300 had not answered the call. These investors were left with the right to redeem their debentures for slightly more than face value.
Van Gemert and several other nonconverting debenture holders brought a class action against Boeing in the United States District Court for the Southern District of New York. They claimed that Boeing had violated federal securities statutes as well as the law of New York by failing to give them reasonably adequate notice of the redemption. As damages, they sought the difference between the amount for which their debentures could be redeemed and the value of the shares into which the debentures could have been converted. The District Court dismissed the action on the ground that Boeing had given its debenture holders the notice required by the indenture agreement. The Court of Appeals for the Second Circuit reversed and remanded. It held that, under the New York law of contracts, the indenture agreement contained an implied obligation to give debenture holders reasonable notice of a redemption. The court concluded that the notice actually given was inadequate. 520 F.2d 1373, cert. denied, 423 U.S. 947 (1975).
On remand, the District Court awarded as damages the difference between the redemption price of the outstanding debentures and the price at which two shares of Boeing's
common stock traded on the last day for exercising conversion rights. The court, however, refused to assess prejudgment interest against Boeing. There followed a second appeal. The class claimed that the stock should have been valued as of a later date and that Boeing was liable for prejudgment interest. Class members who had filed individual claims also contended that they were entitled to receive pro rata shares of any unclaimed damages. At the least, they argued, they should receive enough of the unclaimed money to pay their legal expenses.
The Court of Appeals found the class entitled to prejudgment interest on the award, but it approved the valuation date. The court also concluded that class members who proved their individual claims should not share in the unclaimed portion of the judgment. Allowing these class members to receive a proportionate part of the unclaimed money, the court held, would create the sort of "fluid class" recovery rejected in Eisen v. Carlisle & Jacquelin, 479 F.2d 1005 (CA2 1973), vacated and remanded on other grounds, 417 U.S. 156 (1974). Such a recovery would expropriate funds belonging to class members who had not asserted their claims and give a windfall to those who had claimed. Finally, the court decided that claiming class members could not use the unclaimed portion of the judgment to defray their legal expenses. Since Boeing could have a right to money that never was claimed, the court thought that awarding attorney's fees from the remaining funds might shift fees to the losing party in violation of the American rule reaffirmed in Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240 (1975). 553 F.2d 812 (1977).
On the second remand, the District Court entered the judgment now at issue. The court first established the amount of Boeing's liability to the class as a whole. It provided that respondents, "in behalf of all members of the plaintiff class, . . . shall recover as their damages . . . the principal sum
of $3,289,359 together with [prejudgment] interest. . . ." App. 40a.*fn1 The court then fixed the amount that each member of the class could recover on a principal amount of $100 in debentures. Each individual recovery was to carry its proportionate share of the total amount allowed for attorney's fees, expenses, and disbursements.*fn2 That share, the court declared, "shall bear the same ratio to all such fees, expenses and disbursements as such class member's recovery shall bear to the total recovery" awarded the class. Id., at 40a-41a. Finally, the court ordered Boeing to deposit the amount of the judgment into escrow at a commercial bank,*fn3 and it appointed a Special Master to administer the judgment and pass on the validity of individual claims.*fn4 The court retained jurisdiction pending implementation of its judgment.
Boeing appealed only one provision of the judgment. It claimed that attorney's fees could not be awarded from the unclaimed portion of the judgment fund for at least two reasons. First, the equitable doctrine that allows the assessment of attorney's fees against a common fund created by the lawyers' efforts was inapposite because the money in the judgment fund would not benefit those class members who failed to claim it. Second, because Boeing had a colorable claim for the return of the unclaimed money, awarding attorney's fees from those funds might violate the American rule against shifting fees to the losing party. Therefore, Boeing contended, the District Court should award attorney's fees from only the portion of the fund actually claimed by class members. A panel of the Court of Appeals agreed with Boeing, 573 F.2d 733 (1978), but the court en banc affirmed the District Court's judgment, 590 F.2d 433 (1978).
The Court of Appeals en banc found that each class member had a "present vested interest in the class recovery" and that each could collect his ...