The Common Fund Doctrine is an exception to the “American Rule,” which obligates each party in a lawsuit to pay its own attorneys’ fees. This Doctrine is applicable in situations where one party’s success in litigation creates a “common fund” which benefits a third party. The third party is obligated to pay a pro rata attorney’s fee to the attorney who created the “common fund.” A classic example is subrogation, where an insured’s attorney files a personal injury action from which an insurer is able to recover benefits it paid under a policy of insurance with the insured. As the theory goes, without the hard work of the insured’s attorney, the insurer would not have recovered. Equity compels the insurer to compensate the attorney for his or her efforts out of the reimbursed subrogation interest.
For years, North Dakota has passively applied the Common Fund Doctrine, but never in connection with a subrogation claim. Matter of Estate of Rohrich, 496 N.W.2d 566 (N.D. 1993). It does so mainly in connection with a beneficiary’s action in probate with regard to the assets of an estate. Id. However, the use of the Doctrine in such a case is similar to its application in subrogation settings, where the Court notes that if a beneficiary’s action brings about enhancement in value or increase in the assets of an estate, the beneficiary may be awarded attorney’s fees if the facts justify the award. Id. The North Dakota Supreme Court discussed the Common Fund Doctrine in a 2007 decision, stating:
North Dakota applies the American Rule that every litigant is responsible for his own attorney’s fees, and therefore successful litigants are not entitled to recover attorney’s fees unless authorized by statute or contract. Deacon’s Dev., LLP v. Lamb, 2006 ND 172, ¶ 11, 719 N.W.2d 379. The Common Fund Doctrine is a recognized exception to the general principle that every litigant should bear his own attorney’s fees, and the Doctrine provides that a litigant who recovers a common fund for the benefit of others is entitled to reasonable attorney’s fees from the fund as a whole. Boeing Co. v. Van Gemert, 444 U.S. 472, 478 (1980). The purpose of the Common Fund Doctrine is to spread out the attorney’s fees proportionately among those who benefit from the suit, recognizing “that persons who obtain the benefit of a lawsuit without contributing to its cost are unjustly enriched at the successful litigant’s expense.” Id. The Common Fund Doctrine is consistent with the American Rule because the expense is spread out among those who benefit from the suit rather than requiring the losing party to pay the cost of the litigation. Id. at 481. Mann v. North Dakota Tax Comm’r., 736 N.W.2d 464 (N.D. 2007).
Still, the decision fell short of applying the Doctrine to subrogation. In 2011, the Supreme Court confirmed that the Common Fund Doctrine applies only in limited types of cases including probate and class actions. First Int’l. Bank & Trust v. Peterson, 797 N.W.2d 316 (N.D. 2011). It has never been applied or even discussed in a subrogation setting.
In 2013, the North Dakota Supreme Court was again asked to apply the Common Fund Doctrine, this time to a case in which a patient was seeking expenses and attorney’s fees from Medcenter One, Inc. and other medical providers for expenses and attorney’s fees incurred in securing payments from a patient’s medical insurance company for his medical expenses. Hayden v. Medcenter One, Inc., 2013 WL 1339615 (N.D. 2013). It got as close as it had ever gotten to apply the Doctrine, and even discussed the Doctrine in a subrogation setting, but stopped short of adopting the Doctrine in North Dakota.
On June 12, 2009, Hayden was employed by Nabors Industries, Inc. and covered under a group health plan administered by Blue Cross Blue Shield of Texas (“BCBSTX”). He sustained severe brain injuries in an ATV accident and received medical care from Medcenter and its affiliates. Hayden was billed more than $1 million for his medical care. BCBSTX initially paid some of the bills, but then later determined Hayden’s injuries were not covered. Hayden sued BCBSTX to force them to pay the benefits. While that case was pending, Hayden sued the health care providers requesting reimbursement for their expenses and attorney’s fees in pursuing the action against BCBSTX. Hayden contended recovery was available under theories of unjust enrichment, quantum meruit, equitable estoppel, and the Common Fund Doctrine. The trial court dismissed the suit against the health care providers as being “not viable” and Hayden appealed.
The Supreme Court held that unjust enrichment is a broad, equitable doctrine which rests upon quasi or constructive contracts implied by law to prevent a person from unjustly enriching himself at the expense of another and is applied in the absence of an express or implied contract. Zuger v. North Dakota Ins. Guar. Ass’n, 494 N.W.2d 135 (N.D. 1992). Unjust enrichment requires: (1) an enrichment; (2) an impoverishment; (3) a connection between the enrichment and the impoverishment; (4) absence of a justification for the enrichment and impoverishment; and (5) an absence of a remedy provided by law. Estate of Hill, 492 N.W.2d 288 (N.D. 1992).
The Haydens argued the medical providers were enriched through their receipt of health insurance payments from BCBSTX, and this enrichment was a direct result of the Haydens’ impoverishment through their expenses in maintaining insurance coverage and by incurring personal liability for attorney’s fees and costs associated with the federal court action.
The Haydens also argued quantum meruit – an equitable action in which the law implies a promise to pay for the reasonable value of services furnished. Schmidt v. First Nat. Bank & Trust Co., 453 N.W.2d 602 (N.D. 1990). To prevail on a claim based on quantum meruit, the claimant must establish the recipient accepted benefits under circumstances which would reasonably notify the recipient that the claimant had an expectation of payment for the services rendered. Compensability under quantum meruit requires that the services rendered be of such a nature that, under the circumstances of a particular case, fairness and justice compel the conclusion that they ought to be compensated on an implied-in-law contractual theory because the recipient ought to have been forewarned that those services “do not come cost-free.” Estate of Zent, 459 N.W.2d 795 (N.D. 1990). The Haydens argued that they should be allowed to recover under quantum meruit because “Billings Clinic and Medcenter One were expressly advised of Todd’s Parents’ efforts in pursuing a claim against BCBSTX to compel payment of insurance benefits relative to the care being provided to Todd by Billings Clinic and Medcenter One.” The Supreme Court ruled that quantum meruit did not apply because medical providers were informed that the Haydens would seek attorney’s fees from the providers if they received payment from BCBSTX.
Common Fund Doctrine
The Court in Hayden stated that a hospital is not required to pay its share of attorney’s fees incurred in creating a fund from which the hospital’s lien is paid. The Haydens relied on the Illinois case of Bishop v. Burgard, 764 N.E.2d 24 (Ill. 2002) in support of their common fund argument. In Bishop, a subrogation action, the plaintiff was injured in an automobile accident, retained counsel and filed a personal injury action, and the plaintiff’s employer’s ERISA Plan asserted a lien for the amount of medical expenses paid on behalf of the plaintiff. The ERISA Plan agreement’s subrogation provisions allowed the Plan to recover 100% of the benefits paid under a judgment or settlement, and the Plan had the right to sue on the plaintiff’s behalf. The plaintiff’s attorney obtained a settlement and the Court ruled the Common Fund Doctrine applied to the Plan’s subrogation lien requiring reduction of the lien by one-third to reflect its share of attorney’s fees. Id. The Hayden Court simply said that the facts in the case before it were not analogous to the Bishop case and didn’t discuss the Common Fund Doctrine or its application in North Dakota further.
If you should have any questions regarding this article or subrogation in general, please contact Gary Wickert at [email protected].