Legal Definitions - common-fund doctrine

The common-fund doctrine is a legal principle that allows a person or group who successfully creates, recovers, or preserves a sum of money or assets for the benefit of others to be reimbursed for their legal expenses and attorney's fees directly from that fund. This doctrine ensures that those who benefit from the legal action contribute proportionally to the costs incurred to achieve that benefit, preventing the individual who initiated the action from bearing the entire financial burden alone.

Here are some examples to illustrate the common-fund doctrine:

• Class Action Lawsuit: Imagine a large group of consumers who were overcharged by a utility company. One consumer, acting as a lead plaintiff, files a class action lawsuit on behalf of all affected customers. After extensive litigation, the lawsuit results in a significant settlement fund established by the utility company to compensate all the overcharged customers. The attorneys for the lead plaintiff spent considerable time and resources to achieve this outcome.

  How it illustrates the doctrine: The lead plaintiff and their attorneys created a "common fund" (the settlement money) that benefits thousands of other consumers who did not directly participate in the lawsuit. Under the common-fund doctrine, the legal fees and litigation costs incurred by the lead plaintiff's attorneys would be paid out of this settlement fund before the remaining money is distributed to the class members. This ensures that all who benefit from the fund contribute to the costs of creating it.

• Estate Litigation: Consider a situation where a deceased person's will establishes a trust fund for several beneficiaries, including a distant relative. This relative discovers that the appointed trustee is mismanaging the trust's investments, causing substantial losses that diminish the fund's value for all beneficiaries. The distant relative hires an attorney and successfully sues the trustee, recovering the lost funds and restoring the trust to its proper value.

  How it illustrates the doctrine: The distant relative's legal action preserved and increased the value of the trust, which is a "common fund" benefiting all other beneficiaries. Because their efforts directly benefited everyone with a claim to the trust, the common-fund doctrine would allow the relative to seek reimbursement for their attorney's fees and litigation costs from the recovered trust assets, rather than having to pay for it entirely out of their own share.

• Shareholder Derivative Suit: A minority shareholder in a publicly traded company uncovers evidence that the company's board of directors engaged in self-dealing, diverting corporate assets for personal gain. The shareholder initiates a derivative lawsuit on behalf of the corporation itself, seeking to recover the misappropriated funds. The lawsuit is successful, and millions of dollars are returned to the company's treasury, increasing the value of the company for all shareholders.

  How it illustrates the doctrine: The minority shareholder's legal action created a "common fund" (the recovered corporate assets) that benefits all shareholders by increasing the company's overall value. The common-fund doctrine would permit the minority shareholder to recover their reasonable legal expenses and attorney's fees from the money that was returned to the corporation, as their efforts benefited all owners of the company.