Pfeiffer v. Begley

2015 IL App (2d) 140271, 389 Ill. Dec. 828

• Court: Appellate Court of Illinois
• Decided: February 19, 2015
• Docket: 2-14-0271
• Status: Unpublished

Opinion

2015 IL App (2d) 140271 No. 2-14-0271 Opinion filed February 19, 2015 ______________________________________________________________________________

IN THE

APPELLATE COURT OF ILLINOIS

SECOND DISTRICT ______________________________________________________________________________

MILTON PFEIFFER, Derivatively on Behalf ) Appeal from the Circuit Court of DeVry, Inc., ) of Du Page County. ) Plaintiff-Appellant and Cross-Appellee, ) ) v. ) No. 12-CH-5105 ) CHRISTOPHER B. BEGLEY, DAVID S. ) BROWN, GARY BUTLER, CONNIE R. ) CURRAN, DANIEL HAMBURGER, ) DARREN R. HUSTON, WILLIAM T. ) KEEVAN, LYLE LOGAN, JULIA A. ) McGEE, FERNANDO RUIZ, HAROLD T. ) SHAPIRO, RONALD L. TAYLOR, and ) LISA W.WARDELL, ) ) Defendants-Appellees and ) Cross-Appellants ) ) Honorable (DeVry, Inc., Nominal Defendant-Appellee ) Paul M. Fullerton, and Cross-Appellant). ) Judge, Presiding. ______________________________________________________________________________

JUSTICE McLAREN delivered the judgment of the court, with opinion. Justices Hudson and Spence concurred in the judgment and opinion.

OPINION

¶1 Plaintiff, Milton Pfeiffer, and defendants, Christopher B. Begley, David S. Brown, Gary

Butler, Connie R. Curran, Daniel Hamburger, Darren R. Huston, William T. Keevan, Lyle

Logan, Julia A. McGee, Fernando Ruiz, Harold T. Shapiro, Ronald L. Taylor, and Lisa W. 2015 IL App (2d) 140271

Wardell (collectively, the Board), appeal from the trial court’s order awarding $75,000 in

attorney fees to Pfeiffer. We affirm.

¶2 I. BACKGROUND

¶3 On October 5, 2012, Pfeiffer, the owner of one share of DeVry, Inc., stock, filed a three-

count shareholder derivative complaint against the Board (and, nominally, DeVry), alleging

breach of fiduciary duty, waste of corporate assets, and unjust enrichment. According to

Pfeiffer, the Board had granted to Hamburger (DeVry’s chief executive officer and a member of

the Board), as part of his compensation in 2010, 2011, and 2012, 159,725 more stock options,

than were allowed pursuant to DeVry’s 2005 shareholder-approved incentive plan. Pfeiffer did

not make a demand on the Board prior to filing suit; such a demand was “futile” according to

Pfeiffer, because the “transactions at issue in this Action did not result from a valid exercise of

business judgment.” In addition, Pfeiffer alleged that various members of the Board were

incapable of objectively considering a demand, because of a lack of independence. Among other

things, Pfeiffer sought (1) rescission of the excess stock options, (2) damages sustained by

DeVry, (3) reform of corporate governance and internal procedures, and (4) an award to him of

“costs and disbursements of this action, including reasonable allowance of fees and costs for

Plaintiff’s attorneys, experts, and accountants.”

¶4 Despite the claim that a demand would be futile, two months later, on December 17,

2012, DeVry filed amended forms with the Securities and Exchange Commission showing that

any grants of stock options to Hamburger beyond the 150,000 per year under the 2005 plan were

“ineffective”; thus, the number of options shown to be held by Hamburger was reduced. For

2010, Hamburger’s non-qualified stock options (NQSOs) were reduced by 34,100, and his 2011

holdings were reduced by 20,200. However, DeVry explained that some of Hamburger’s 2012

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options were granted under a 2003 incentive plan rather than pursuant to the 2005 plan; thus,

Hamburger’s options were reduced by 17,515 instead of the 105,425 that Pfeiffer alleged were

improperly awarded. In February 2013, DeVry awarded Hamburger “restrictive stock units” as

compensation “to replace the value” of stock option grants, which Hamburger had been told he

was receiving “but were not fulfilled to the extent they exceeded the number of stock options that

may be granted” to an individual in one year under the 2005 plan.

¶5 On April 8, 2013, defendants filed a motion to dismiss pursuant to section 2-619.1 of the

Code of Civil Procedure (735 ILCS 5/2-619.1 (West 2012)), arguing that: (1) Pfeiffer’s claims

were now moot (section 2-619(a)(9)); and (2) Pfeiffer had not adequately alleged the futility of

making a demand prior to filing suit (section 2-615). The trial court granted the motion to

dismiss on the ground of mootness. While noting that Pfeiffer contended that a material issue of

fact remained regarding the 2012 options, the court said that the only evidence before it on that

issue showed “that they were awarded under a different plan, the 2003 plan.” Thus, Hamburger

had no more than 150,000 options for the years in question, and DeVry had “remedied the

situation.” The dismissal for mootness would be with prejudice upon adjudication of any fee

petition filed by Pfeiffer. While the court’s written order stated that the court “makes no ruling”

on the section 2-615 motion regarding demand futility, the court orally stated that it was “in

agreement” with defendants in that:

“I don’t believe that there were sufficient allegations, not that they couldn’t be made; but

based on the Complaint I had before me, those allegations, there weren’t sufficient

factual allegations to show the serious threat of liability, the violations were deliberate,

intentional or some type of breach of loyalty or bad faith that would excuse the presuit

demand or that a presuit demand would be futile.”

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The court subsequently denied Pfeiffer’s motion to reconsider.

¶6 On September 25, 2013, Pfeiffer filed a petition for an award of attorney fees and

expenses totaling $820,706. Pfeiffer argued that his instigation of the litigation secured “an

immediate benefit” for DeVry of approximately $2.1 million (the value of the stock options

“surrendered” by Hamburger) and long-term savings of $1.1 million from the “prevention of

future wrongful option grants.” Pfeiffer sought attorney fees of $800,000 (25% of the $3.2

million) plus costs of $20,706. Defendants responded that the lawsuit had not actually resulted

in any real monetary benefit, because DeVry had provided Hamburger with alternate

compensation of equal value; they requested that the court deny Pfeiffer’s petition in its entirety

or, in the alternative, award “no more than $20,000 to $30,000 in fees under a quantum meruit

theory.” After hearing argument, the court found that the litigation created a “common fund” of

$2.1 million for the benefit of DeVry shareholders, but it did “not accept” the alleged future

savings of $1.1 million. The court granted $75,000 in fees and $20,706 in costs, the total amount

being “just under 5 percent of that $2.1 million.” The court also characterized the fee award as

“a lot of fees for the amount of work performed.” The appeal and cross-appeal then followed.

¶7 II. ANALYSIS

¶8 We first note that DeVry is a Delaware corporation. Illinois courts apply the law of the

state of incorporation. Housman v. Albright, 368 Ill. App. 3d 214, 218 (2006). Therefore, we

will apply Delaware law.

¶9 Pfeiffer appeals from the trial court’s award of fees, arguing that the court abused its

discretion in fashioning that award. However, in their cross-appeal, defendants argue that

Pfeiffer failed to show that he was entitled to any fee award. We will address the cross-appeal

first.

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¶ 10 A. CROSS-APPEAL

¶ 11 The trial court found that the litigation created a “common fund” of $2.1 million for the

benefit of DeVry shareholders. The “common fund” doctrine is a commonly recognized

exception to the general, so-called American Rule, under which the prevailing party is

responsible for the payment of his own attorney fees. In re First Interstate Bancorp

Consolidated Shareholder Litigation, 756 A.2d 353, 357 (Del. Ch. 1999). Under this doctrine, a

litigant who confers a common monetary benefit upon an ascertainable class is entitled to an

allowance for fees and expenses, to be paid from the fund or property that his efforts have

created. Id. Fees may be recovered even though the claims in the case had been mooted before a

final judgment had been entered. See id.; Crothall v. Zimmerman, 94 A.3d 733 (Del. 2014). In

such a case, the claims were rendered moot because of actions taken by the defendants, and those

same actions simultaneously created the benefit that the plaintiff had been seeking and for which

the plaintiff thus was entitled to have its fees paid. Crothall, 94 A.3d at 737-38.

¶ 12 Defendants argue that the trial court erred in considering only the value of the withdrawal

of the improperly granted NQSOs in determining whether Pfeiffer’s actions created an economic

benefit. Instead, the court should have considered the “net economic benefit” achieved through

Pfeiffer’s litigation efforts. That is, the court should have considered that, after the options had

been withdrawn, DeVry provided Hamburger with alternate compensation of approximately

equal value. Thus, according to defendants, the withdrawal of the options was offset by the

alternate compensation, leaving DeVry no better off than it had been before the filing of the

lawsuit. Further, according to defendants, because their decision to “make Mr. Hamburger

whole” after Pfeiffer pointed out their improper awards was “directly, causally linked” to

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Pfeiffer’s complaint, that decision was material to whether Pfeiffer had conferred any net benefit

on DeVry.

¶ 13 “Delaware law rewards plaintiffs’ attorneys who provide a benefit to a Delaware

corporation, even if the benefit does not produce immediate monetary rewards.” EMAK

Worldwide, Inc. v. Kurz, 50 A.3d 429, 430 (Del. 2012). The corporate-benefit doctrine provides

that a plaintiff may be reimbursed for his fees and expenses if (1) the suit was meritorious when

filed; (2) the defendants took an action that produced a corporate benefit before the plaintiff

obtained a judicial resolution; and (3) the suit and the corporate benefit were causally related. Id.

at 432. Under the “mootness rule,” when a defendant takes an action that moots a suit, there is a

rebuttable presumption that the suit and the benefit were causally related, because the defendant

is in the best position to know the events, reasons, and decisions behind its action. Id. at 433.

Typically, a successful derivative or class-action suit that results in the recovery of money or

property wrongfully diverted from the corporation, or that results in the imposition of changes in

internal operating procedures that are designed to produce such savings in the future, is viewed

as a fund-creating action. Tandycrafts, Inc. v. Initio Partners, 562 A.2d 1162, 1164-65 (Del.

1989). The definition of a corporate benefit is elastic:

“While the benefit achieved may have an indirect economic effect on the corporation, in

the sense that the interests of the plaintiff class reflect a value not theretofore apparent,

the benefit need not be measurable in economic terms. Changes in corporate policy or, as

here, a heightened level of corporate disclosure, if attributable to the filing of a

meritorious suit, may justify an award of counsel fees.” Id. at 1165.

¶ 14 Defendants attempt to frame Pfeiffer’s claim as procedural, rather than substantive.

Pfeiffer never claimed that Hamburger was compensated excessively; he claimed only that

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elements of Hamburger’s compensation violated the 2005 plan. Thus, while Pfeiffer was

successful in his quest to get Hamburger’s excess stock options cancelled, defendants merely

changed the source of Hamburger’s compensation, not the amount of the compensation.

According to defendants, their decision to make Hamburger whole through alternate sources of

compensation offset the benefit to DeVry, and the trial court should have considered this offset

in its corporate-benefit analysis.

¶ 15 We find unpersuasive the cases cited by defendants in support of this argument. In

Louisiana State Employees’ Retirement System v. Citrix Systems, Inc., No. Civ. A. 18298, 2001

WL 1131364 (Del. Ch. Sept. 19, 2001), the plaintiff challenged Citrix’s planned amendment to

its stock option plan. Citrix withdrew the amendment without ever issuing the proposed 10

million new options. The plaintiff asserted that the withdrawn option plan resulted in a benefit

of $183 million to Citrix shareholders and sought attorney fees of $2 million plus expenses. Id.

at *1. The court granted fees of $140,000 on a quantum meruit basis. Id. at *10 n.56.

¶ 16 Defendants’ analysis of the chancery court’s basis for declining to grant fees on a

corporate-benefit basis is incomplete and misleading. As defendants note, the chancery court did

state that the plaintiff’s analysis failed to recognize possible benefits of the stock option plan,

especially as related to employee morale, attraction, and retention. Id. at *7. However, this was

only one shortcoming that the chancery court found in the plaintiff’s analysis. It also found that

there was no attempt to “offset” the plaintiff’s proposed recovery with those alleged benefits. In

addressing the defendants’ claim that those possible benefits would offset the costs of dilution,

the chancery court noted:

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“Quantitatively speaking, any attempt by this Court to directly calculate the precise value

of the employee recruitment, retention, and motivation effects provided by Proposal 3

seems more like ill-conceived alchemy than science.” Id. at *8.

Ultimately, the chancery court could not “accurately value the net economic benefit conferred by

either the passage or the withdrawal of Proposal 3.” Id. However, the chancery court was not

merely noting the difficulty of quantifying offset components; it was also addressing larger

issues of stock market reactions, the difficulty of quantifying the dilutive effect of stock options

that were never issued, and the difficulty of quantifying the value of stock options that were not

liquid, freely tradable options. Id. at *7. 1

¶ 17 Further, defendants’ decision to “make Mr. Hamburger whole [with alternate

compensation] once the error was pointed out” was not, as defendants argue, “directly, causally

linked” to Pfeiffer’s complaint in any but the most superficial way. Of course, defendants would

not have had to make up for Hamburger’s lost stock options if Pfeiffer had not brought suit and

brought the improper compensation to light. However, defendants’ decision to do so was purely

discretionary; they were not required by Pfeiffer’s suit to make up for that compensation.

Defendants’ decision, while maybe logical, was not inevitable, nor was it an imperative required

by the lawsuit. It was a discretionary action made outside of the boundaries of the suit and its

potential consequences.

¶ 18 Ultimately, defendants have failed to demonstrate that the trial court erred in finding that

Pfeiffer was eligible to be reimbursed for his fees and expenses pursuant to the corporate-benefit

1 Defendants’ reliance on Crothall, 94 A.3d 733, is even more misplaced, as that case

involved a plaintiff’s attorney seeking to obtain fees on a corporate-benefit basis after the

plaintiff abandoned his lawsuit.

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doctrine as defined in EMAK Worldwide, Inc., 50 A.3d 429. See supra ¶ 13. Therefore, we

affirm the trial court as to defendants’ cross-appeal.

¶ 19 B. PFEIFFER’S APPEAL

¶ 20 Pfeiffer contends that the trial court erred in awarding him attorney fees and expenses

totaling only 3.5% of the $2.1 million benefit that his action conferred on DeVry and its

shareholders. This court will review a fee award for an abuse of discretion. EMAK Worldwide,

Inc., 50 A.3d at 432. We will not substitute our own notions of what is right for those of the trial

judge if that judgment was based upon conscience and reason, as opposed to capriciousness or

arbitrariness, and we will not set aside or overturn factual findings unless they are clearly wrong

and justice requires it, or they are not the product of an orderly and logical deductive process. Id.

¶ 21 Typically, when a plaintiff’s efforts on behalf of a corporation result in the creation of a

quantifiable common fund, the court will use a percentage-of-the-benefit approach in

determining an award of attorney fees and costs. Americas Mining Corp. v. Theriault, 51 A.3d

1213, 1255 (Del. 2012). Delaware courts use the factors set out in Sugarland Industries, Inc. v.

Thomas, 420 A.2d 142, 149-53 (Del. 1980), to determine an award’s amount. EMAK

Worldwide, Inc., 50 A.3d at 433. These factors are: (1) the results achieved; (2) the time and

effort of counsel; (3) the complexity of the issues; (4) whether counsel was working on a

contingent basis; and (5) counsel’s standing and ability. Id. at 433 n.22. The first factor, the

benefit achieved, is considered the most important. See Americas Mining Corp., 51 A.3d at

1255.

¶ 22 There is no argument that the trial court failed to apply the Sugarland factors. Indeed, the

court specifically addressed each factor and announced in whose favor each factor weighed. The

court found a common fund of $2.1 million and awarded attorney fees of $75,000 plus costs of

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$20,706. The court noted that the total of $95,706 was “just under 5 percent” of the common

fund and expressed its belief that “that’s a lot of fees for the amount of work performed.”

¶ 23 However, Pfeiffer argues that the court abused its discretion, “inexplicably” granting a

“paltry” 3.5% of the common fund in attorney fees. Pfeiffer requested 25% of the benefit in his

fee petition and argues that courts have recently granted fees in the range of 25% to 33% of the

benefit. Most of Pfeiffer’s argument involves citations to cases in which Delaware courts

awarded fees in that range and his contention that “the Circuit Court did not appear to give any

weight to the fee awards in similar cases.” (Emphasis in original.) However, fee awards in other

cases was not a factor that the trial court was required to consider. The trial court specifically

addressed every factor required. Our review of the record indicates that this award was “based

upon conscience and reason, as opposed to capriciousness or arbitrariness,” and that the court’s

factual findings were “the product of an orderly and logical deductive process.” EMAK

Worldwide, Inc., 50 A.3d at 432. Thus we find no abuse of discretion.

¶ 24 III. CONCLUSION

¶ 25 For these reasons, the judgment of the circuit court of Du Page County is affirmed.

¶ 26 Affirmed.

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