A New Jersey appeals court recently expanded the “fund in court” rule to affi rm an award of attorney’s fees to a plaintiff in a shareholder derivative lawsuit even though no money had ever been deposited with the court. The ruling in Trimarco v. Trimarco, 396 N.J. Super. 207 (App. Div. 2007), is signifi cant because New Jersey courts had not previously awarded attorney’s fees under this rule unless a discrete fund had fi rst been established by the court.
Plaintiff Elizabeth Trimarco inherited from her late husband a one-sixth share in Inman Shopping Plaza, Inc., a closely-held company owned and run by the Trimcaro family. The company’s sole asset was a parcel of real estate in Woodbridge, New Jersey, on which is situated a shopping center consisting of two buildings housing approximately ten tenants. During her short tenure as comanager of the company, plaintiff uncovered evidence that her in-laws were engaged in acts of misconduct, corporate malfeasance and improper use of company assets for their own personal benefi t. Plaintiff was fi red by the company after discovering these problems. Plaintiff sued the company and her in-laws individually for wrongful termination and also asserted claims derivatively on behalf of the company for shareholder oppression, breach of fi duciary trust and mismanagement.
During the course of the litigation, a shareholder’s meeting was held, at which time the defendant shareholders were ousted by plaintiff and the other shareholders. Plaintiff was elected president of the company on a temporary basis. In that capacity, plaintiff attempted to use $263,647.92 in corporate funds to pay two law fi rms for their outstanding attorney’s fees and to reimburse herself for legal fees she had already expended on behalf of the company. The non-defendant shareholders resisted and the court ordered plaintiff and the law fi rms to disgorge the fees. The judge acknowledged that, while reimbursement of attorney’s fees may be proper in a shareholder derivative action, it was premature.
As a result of further discovery, plaintiff filed an amended complaint asserting additional derivative claims for malfeasance. Among other things, plaintiff alleged that her mother-in-law usurped a corporate opportunity by purchasing a contiguous lot onto which she intended to move the company’s anchor tenant for her sole benefi t. The parties eventually settled all substantive claims. Plaintiff’s mother-in-law was required to sell the disputed lot to the company, and plaintiff’s employment claims were dismissed. The only outstanding issue was whether the company was required to reimburse plaintiff and the law firms for legal fees related to the shareholder derivative claims.
The trial court ruled that the defendants had to reimburse plaintiff for legal fees she incurred pursuing claims on behalf of the company. After separating the legal fees expended for the derivative claims from the fees for plaintiff’s individual claims, the court awarded plaintiff $38,215.84 of the total of $64,759.81 requested. The court also awarded the law firms a portion of their unpaid fees. The defendants settled their fee dispute with the law fi rms but appealed the award of fees to plaintiff. On appeal, defendants argued that plaintiff was not entitled to fees under the “fund in court” doctrine because no fund had actually been deposited into the court. The appeals court rejected that argument. The court explained that the “fund in court” rule is an exception to the “American Rule” that usually requires parties to pay their own attorney’s fees. The rule is based on the proposition that it would be unfair to require a litigant to pay the full costs of its legal fees when the litigant is doing more than advancing its own interests. Here, because plaintiff’s lawsuit benefi ted the company, it was appropriate to require the company to reimburse plaintiff for that portion of her legal fees that advanced the company’s interests.
The court explained that a “fund in court” is a term of art. Therefore, it is not necessary for a “pot of money” to be deposited into the court for the rule to be applied. Rather, the “fund in court” rule applies generally when a party’s actions have “created, preserved or increased property to the benefi t of a class in which he is a member.” In this case, the company received undisputed title to a portion of the land where its shopping center sits, retained its anchor tenant, and eliminated wasteful management and misconduct. Under these circumstances, plaintiff’s shareholder derivative action preserved the assets of the company, thus creating a “fund in court” from which a portion of her legal fees could be paid.
The Trimarco case will no doubt spur increased use of derivative claims by oppressed shareholders hoping to use the “fund in court” rule to recover all or some of their fees.