Lorillard Tobacco Co v. Chester Willcox ( 2008 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 08a0401p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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Plaintiffs-Appellees, -
LORILLARD TOBACCO COMPANY, et al.,
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No. 07-3589
v.
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CHESTER, WILLCOX & SAXBE, LLP, et al., -
Defendants-Appellants. -
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Appeal from the United States District Court
for the Southern District of Ohio at Columbus.
No. 04-00715—Edmund A. Sargus, Jr., District Judge.
Argued: September 17, 2008
Decided and Filed: November 13, 2008
Before: CLAY and COOK, Circuit Judges; OLIVER, District Judge.*
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COUNSEL
ARGUED: John A. DeVault III, BEDELL, DITTMAR, DeVAULT, PILLANS & COXE,
Jacksonville, Florida, for Appellants. Thomas W. Hill, KEGLER, BROWN, HILL & RITTER,
Columbus, Ohio, for Appellees. ON BRIEF: John A. DeVault III, Patrick P. Coll, BEDELL,
DITTMAR, DeVAULT, PILLANS & COXE, Jacksonville, Florida, William James Pohlman,
VORYS, SATER, SEYMOUR & PEASE, Columbus, Ohio, for Appellants. Thomas W. Hill,
Christopher J. Weber, KEGLER, BROWN, HILL & RITTER, Columbus, Ohio, Dale C.
Christensen, Jr., John J. Galban, SEWARD & KISSEL, New York, New York, for Appellees.
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OPINION
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CLAY, Circuit Judge. Plaintiffs, Lorillard Tobacco Company, Phillip Morris USA Inc., and
R.J. Reynolds Company, brought this interpleader action against a number of attorneys, including
*
The Honorable Solomon Oliver, Jr., United States District Judge for the Northern District of Ohio, sitting by
designation.
1
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Chester, Willcox, and Saxbe, et al.
the five Defendants-Appellants (“Florida Counsel”),1 to determine the proper recipients of four
annual $125 million payments that Plaintiffs agreed to pay as part of an attorneys’ fee agreement
related to the 1998 tobacco settlement. Florida Counsel, five law firms that represented the State
of Florida in the tobacco litigation, appeal the district court’s order overruling their objections to
claims to the proceeds of the settlement of the interpleader action by five limited liability companies
and Deutsche Bank Trust Company of America (“Deutsche Bank”). For the reasons that follow, we
REVERSE the district court’s ruling and REMAND for further proceedings.
BACKGROUND
I. The Fee Payment Agreements
In the 1990s, a number of states filed lawsuits against tobacco companies, seeking damages
for the states’ treatment of smoking-related illnesses. In 1997 and 1998, Plaintiffs entered settlement
agreements with the states, many of which were represented by private counsel. Mississippi, Texas
and Florida were the first states to initiate the suits and the first states to settle, and as part of these
first three settlements, Plaintiffs entered fee payment agreements with the private counsel
representing the three states (“MTF Counsel”). In September 1998, Florida’s outside counsel
entered a Florida Fee Payment Agreement (“Florida FPA”) with Plaintiffs. Like the fee payment
agreements entered by counsel for Mississippi and Texas, the Florida FPA called for a panel of
arbitrators to determine the fee award for Florida’s outside attorneys. Pursuant to the three fee
payment agreements, in December 1998, a panel of arbitrators awarded a total of approximately
$8.17 billion to MTF Counsel, including a fee award for Florida’s outside counsel of approximately
$3.43 billion. The three fee payment agreements anticipated that private counsel from other states
would have to be paid once those states settled; the agreements therefore required Plaintiffs to make
quarterly payments of $125 million until the fees of all states’ private counsel were paid, including
the $8.17 billion owed to MTF Counsel. Each counsel would receive a pro rata share of each
quarterly payment, based on the outstanding balance owed to the counsel as a percentage of the total
outstanding balance of fees owed to all private counsel.
In November 1998, Plaintiffs entered a Master Settlement Agreement (“MSA”) with forty-
six states and territories to settle the remaining tobacco lawsuits. Pursuant to the MSA, Plaintiffs
entered a Model Fee Payment Agreement (“Model FPA”) with the states to structure the payment
of attorneys’ fees to outside counsel for the forty-six jurisdictions. Under the terms of the Model
FPA, each jurisdiction’s private counsel could either receive a negotiated payment from Plaintiffs
up front (a “liquidated fee”), or elect to arbitrate and be paid an arbitration award by receiving a pro
rata share of the $125 million quarterly payments which Plaintiffs had already committed to paying.
The Model FPA required Plaintiffs to set aside $1.25 billion for the private counsel who negotiated
liquidated fees, and to pay in full all liquidated fees by the end of 2003.
Plaintiffs negotiated liquidated fees with counsel from approximately twenty-one
jurisdictions, while counsel from the remaining jurisdictions opted for arbitration and a pro rata
share of the quarterly payments. Counsel from the states and territories that opted for arbitration
received a total award of approximately $6.08 billion; including the fee awards to MTF Counsel,
Plaintiffs’ total arbitration fee payments totaled approximately $14.25 billion. Plaintiffs’ liquidated
fees to the twenty-one jurisdictions that negotiated such fees totaled approximately $625 million.
1
The five Defendants appealing the district court’s order include Terrell Hogan Ellis Yegelwel, P.A.; Fonvielle
Hinkle & Lewis, P.A.; Law Office of W.C. Gentry, P.A.; Maher, Guiley & Maher, P.A.; and Nance, Cacciatore,
Hamilton, Barger, Nance & Cacciatore. Although there were a total of eleven outside counsel representing Florida, the
other six outside counsel are not relevant to this appeal. The five Florida counsel appealing the district court’s order are
collectively referred to as “Florida Counsel.”
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Pursuant to the Model FPA, Plaintiffs were required to use the remaining $625 million of the $1.25
billion that it had earmarked for liquidated fees as “supplemental payments” to the arbitration fee
award recipients, in addition to the $125 million quarterly payments. Plaintiffs were to make the
supplemental payments in five annual installments of $125 million in the fourth quarter of every
calendar year beginning in 2004. All of Plaintiffs’ payments were to be made without interest and
were unsecured.
In 2001, rather than accept periodic, unsecured, non-interest bearing payments, Florida
Counsel sold their interest in the fee award for a lump sum at a discounted price. As part of this
transaction, each Florida Counsel formed a limited liability company (“LLC”) and assigned its
interest in the fee award to the LLC. The LLCs then issued and sold secured notes to public
investors, with the proceeds going to Florida Counsel in exchange for their interest in the attorneys’
fees. Additionally, the LLCs pledged their interest in the fee payments to Deutsche Bank, the
indenture trustee, as collateral to secure payment of the principal and interest on the notes. Upon
forming the LLCs, each Florida Counsel sold its interest in its LLC to an outside investor.
II. The Interpleader Action
In 2004, a dispute arose concerning the supplemental payments that Plaintiffs were required
to make to arbitration fee award recipients in the fourth quarters of 2004 through 2008. To resolve
the dispute, Plaintiffs filed a class action suit for interpleader relief on August 5, 2004. The
complaint alleged that MTF Counsel claimed a right to the supplemental payments, even though the
fee payment agreements with Mississippi, Texas and Florida did not mention the supplemental
payments. The complaint further alleged that the non-MTF Counsel who had entered the Model
FPA and received fee awards in arbitration claimed that MTF Counsel were not entitled to the
supplemental payments. The complaint named, as the two classes of defendants, MTF Counsel and
the non-MTF Counsel who were entitled to arbitration fee awards. Upon filing their complaint,
Plaintiffs deposited approximately $66.34 million–the amount of the 2004 supplemental payment
claimed by MTF Counsel as their pro rata share–into the district court’s registry.
On September 10, 2004, Florida Counsel filed an answer in which they argued that
[f]or the protection of the Plaintiffs and for the benefit of all “Private Counsel”
retained by states and territories in connection with any “Tobacco Case” (defined as
any tobacco and health case), the Mississippi, Texas and Florida Fee Payment
Agreements set forth a national single payment schedule with quarterly aggregate
national caps and the allocation of such proportionally between all Private Counsel
having unpaid fees. In essence, the combination of provisions treats all Private
Counsel equally and, therefore, operates as a “Most Favored Nations” clause for the
benefit of all Private Counsel.
(Joint Appendix (“J.A.”) at 271-72) (emphasis supplied). Citing the Model FPA, Florida Counsel
noted that “any portion of the $1.25 billion that was not used to ‘liquidate fees’ was expressly
designated to be paid into the arbitrated fee fund for payment of fees of ‘each Private Counsel’ who
elected for arbitration.” (J.A. at 256) Florida Counsel contended that because “Private Counsel”
is defined in the Model FPA as “all private counsel for all plaintiffs in a Tobacco Case (including
State outside counsel)” (J.A. at 274), Florida Counsel were entitled to a share of the supplemental
payments, based on the combined structure of the Florida FPA, the MSA and the Model FPA.
In the alternative, Florida Counsel asserted a counterclaim against Plaintiffs, alleging that
if the district court found that Florida Counsel were not entitled to share in the supplemental
payments, “then Plaintiffs have breached their express agreement as well as their implied covenant
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Chester, Willcox, and Saxbe, et al.
of good faith and fair dealing with Florida Counsel” in promising that Florida Counsel would share
equally in all future attorneys’ fee payments. (J.A. at 257)
In December 2004, the parties reached a settlement in the interpleader action (the
“Settlement”). MTF Counsel agreed to be paid half of the $66.34 million that they claimed from
the 2004 supplemental payment and half of their pro rata share of the next four supplemental
payments, with the remainder paid to the other states’ private counsel who took arbitration awards.
The district court granted Plaintiffs’ motion for certification of the two classes of Defendants and
Plaintiffs’ motion for preliminary approval of the Settlement. On January 10, 2005, following a
fairness hearing, the district court granted final approval of the Settlement. Pursuant to the
Settlement, all parties claiming a share of the Settlement then filed acknowledgment forms with the
district court.
Deutsche Bank and the LLCs, contending to be the assignees of the entirety of Florida
Counsel’s fee award, filed acknowledgment forms. Florida Counsel objected, contending that
Deutsche Bank and the LLCs were not entitled to the supplemental payments because the
supplemental payments did not arise specifically from the Florida FPA. The district court overruled
the objection on the ground that Florida Counsel were judicially estopped from denying that the
LLCs and Deutsche Bank were entitled to the supplemental payments under the Florida FPA. The
district court noted that in their answer to Plaintiffs’ complaint,
Florida counsel argued that the “Most Favored Nation” clause contained in the
Florida Fee Payment Agreement anticipated that counsel for the State of Florida
would obtain treatment at least as favorable as that of other counsel, i.e., MSA
counsel, in their settlement with the Tobacco Companies. Florida counsel also
asserted a counterclaim against [the] Tobacco [Companies] for breach of the Florida
Fee Payment Agreement and the implied covenant of good faith and fair dealing
under that same agreement “to the extent the Court determines that only MSA
counsel are entitled to share in the ‘Supplement’ . . . .” Now Florida counsel
literally have taken the opposite position, asserting that the Supplement and Future
Supplements have no relation to the Florida Fee Payment Agreement and are entirely
a product of the MSA. The stark contrast in the earlier position of Florida counsel
with the present position is significant.
(J.A. at 2122) The district court therefore accepted the acknowledgment forms filed by the LLCs
and Deutsche Bank. Florida Counsel now timely appeal.
DISCUSSION
I. Judicial Estoppel
This Court reviews a district court’s application of judicial estoppel under a de novo standard
of review. Eubanks v. CBSK Fin. Group, Inc., 385 F.3d 894, 897 (6th Cir. 2004); Browning v. Levy,
283 F.3d 761, 775 (6th Cir. 2002). Appellees urge this Court to adopt the abuse of discretion
standard based on the Supreme Court’s statement in New Hampshire v. Maine, 532 U.S. 742, 750
(2001) (quotations and citation omitted), that judicial estoppel is “an equitable doctrine invoked by
the court at its discretion.” However, the Supreme Court did not instruct that an abuse of discretion
standard is appropriate, and this Court has continued to adhere to the de novo standard after New
Hampshire. See Eubanks, 385 F.3d at 897; Browning, 283 F.3d at 775. Without a more definitive
statement from the Supreme Court, this Court is bound by its own precedent and will therefore apply
the de novo standard to the district court’s order.
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“[W]here a party assumes a certain position in a legal proceeding, and succeeds in
maintaining that position, he may not thereafter, simply because his interests have changed, assume
a contrary position, especially if it be to the prejudice of the party who has acquiesced in the position
formerly taken by him.” New Hampshire, 532 U.S. at 749 (quotations and citation omitted).
“Judicial estoppel is an equitable doctrine that preserves the integrity of the courts by preventing a
party from abusing the judicial process through cynical gamesmanship, achieving success on one
position, then arguing the opposite to suit an exigency of the moment.” Teledyne Indus., Inc. v.
Nat’l Labor Relations Board, 911 F.2d 1214, 1217-18 (6th Cir. 1990). “The doctrine of judicial
estoppel bars a party from (1) asserting a position that is contrary to one that the party has asserted
under oath in a prior proceeding, where (2) the prior court adopted the contrary position ‘either as
a preliminary matter or as part of a final disposition.’” Browning, 283 F.3d at 775 (quoting
Teledyne, 911 F.2d at 1218). A court should also consider whether the party has gained an unfair
advantage from the court’s adoption of its earlier inconsistent statement. New Hampshire, 532 U.S.
at 751. Although there is “no set formula for assessing when judicial estoppel should apply,” In re
Commonwealth Institutional Sec., 394 F.3d 401, 406 (6th Cir. 2005), it is well-established that at
a minimum, “a party’s later position must be ‘clearly inconsistent’ with its earlier position[]” for
judicial estoppel to apply, New Hampshire, 532 U.S. at 750 (citation omitted). Moreover, the
doctrine of judicial estoppel “is applied with caution to avoid impinging on the truth-seeking
function of the court because the doctrine precludes a contradictory position without examining the
truth of either statement.” Teledyne, 911 F.2d at 1218.
In their answer to the interpleader complaint, Florida Counsel argued that the Florida FPA,
along with the Mississippi and Texas fee payment agreements, set quarterly aggregate national caps
on Plaintiffs’ payments of arbitration awards, and included a “Most Favored Nations” clause
requiring that those payments be allocated proportionally among all private counsel who went to
arbitration, including MTF Counsel. Based on this argument, the district court found that Florida
Counsel initially premised their claim to the supplemental payments on the Florida FPA. Later,
when Florida Counsel opposed the acknowledgment forms submitted by Deutsche Bank and the
LLCs–on the ground that the supplemental payments were not based on the Florida FPA, but rather
the Model FPA and the MSA–the district court found that Florida Counsel took clearly inconsistent
positions and were judicially estopped from doing so.
However, Florida Counsel’s argument is not that their rights to the supplemental payments
arose solely from the Florida FPA, but rather that their right to equal treatment with all of the other
private counsel who received an arbitration award arose from the Florida FPA. Florida Counsel
further contend that while their right to equal treatment arose from the Florida FPA, the
supplemental payment did not become due under the Florida FPA, but rather under the Model FPA.
Florida Counsel maintain that they only pledged to Deutsche Bank and assigned to the LLCs their
right to payments that became due under the Florida FPA, and therefore, the supplemental payments
were not included. Regardless of the merits of this argument, there is no inconsistency, and certainly
no clear inconsistency, with respect to Florida Counsel’s initial position and their basis for later
opposing the acknowledgments filed by the LLCs and Deutsche Bank. See Griffith v. Wal-Mart
Stores, Inc., 135 F.3d 376, 382 (6th Cir. 1998) (rejecting the application of judicial estoppel where
litigant’s assertions were “not necessarily inconsistent” and “open to interpretation”).
The district court also found that Florida Counsel’s counterclaim in the alternative against
Plaintiffs for breach of the Florida FPA was clearly inconsistent with their claims that the
supplemental payments were due under the Model FPA and not the Florida FPA. “A party may set
out [two] or more statements of a claim or defense alternatively or hypothetically,” and “may state
as many separate claims or defenses as it has, regardless of inconsistency.” Fed. R. Civ. P.
8(d)(2),(3). Florida Counsel’s counterclaim alleged that if the court found that the MSA and the
Model FPA did not provide for Florida Counsel to share in the supplement payments, then Plaintiffs
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would have breached Florida Counsel’s right to equal treatment arising from the Florida FPA by
making the supplemental payments to non-MTF Counsel only. Deutsche Bank argues that this
demand for equal treatment is equivalent to Florida Counsel claiming an independent right to the
supplemental payments from the Florida FPA, but Florida Counsel’s counterclaim based on the
Florida FPA did not specifically seek payment of the supplemental payments. Rather, the
counterclaim sought damages arising from Plaintiffs’ failure to fulfill its promise that it would treat
all fee award recipients equally. While that distinction may be subtle and may be ultimately without
merit, it is not “clearly inconsistent” with any other position taken by Florida Counsel in this
litigation. See New Hampshire, 532 U.S. at 750.
Because Florida Counsel’s objections to the acknowledgment forms were not clearly
inconsistent with their claim that the Florida FPA mandates their equal treatment with non-MTF
Counsel, this Court need not reach the question of whether the district court “adopted” Florida
Counsel’s earlier statement. See Browning, 283 F.3d at 776-77 (“Because the [contrary earlier
position] requirement for the application of judicial estoppel has not been met, we need not reach
the second requirement[.]”). Florida Counsel are not judicially estopped from objecting to the
acknowledgments.
II. Merits of Florida Counsel’s Objections
Deutsche Bank and the LLCs argue that even if the district court erroneously applied judicial
estoppel in denying Florida Counsel’s objections, this Court may still affirm the district court’s order
on the merits of the objections. “The prevailing party may, of course, assert in a reviewing court
any ground in support of his judgment, whether or not that ground was relied upon or even
considered by the trial court.” Dandridge v. Williams, 397 U.S. 471, 476 n.6 (1970). In such cases,
this Court “may properly review any reason advanced by [appellee] in support of the district court’s
[order] that was presented to the district court.” United Food & Commercial Workers Union, Local
1099 v. Southwest Ohio Reg’l Transit Auth., 163 F.3d 341, 349 n.3 (6th Cir. 1998).
However, given the complexity and the number of contracts involved in this case–the three
fee payment agreements with MTF Counsel, the MSA, the Model FPA, and the agreements
establishing the LLCs and Florida Counsel’s transfer of payment rights–this Court would benefit
from the district court’s interpretation of these agreements. The district court’s greater familiarity
with the details and background of the case is further reason to allow it to rule on the issues
presented. Moreover, because the district court found that judicial estoppel applied to the
objections, discovery did not proceed, and Florida Counsel argues that discovery would show that
both Florida Counsel and the LLCs understood the assignments to exclude the supplemental
payments. Therefore, although a resolution of this matter may be possible based on a review of the
applicable agreements, prudence dictates that this Court ought not do so here, but remand the case
for further development of the record in the district court.
CONCLUSION
For the reasons stated herein, this Court REVERSES the district court’s order overruling
Florida Counsel’s objections and REMANDS to the district court for further proceedings consistent
with this opinion.