On February 13, 2017, McKeage v. TMBC, LLC, the US Court of Appeals for the Eighth Circuit held that, when a district court awards attorneys' fees to class counsel, the existence of a common fund does not automatically preclude fee payment under a contract's fee-shifting provision. Because there is no relevant statutory scheme for contractual fee-shifting, a district court must use its discretion and apply equitable principles to determine how to pay the plaintiffs' attorneys ( (8th Cir. Feb. 13, 2017)).

The McKeages brought this nationwide class action against TMBC, LLC, a Missouri corporation that sells boats and trailers through dealerships across the country. The McKeages purchased a boat from TMBC in 2008 and signed a purchase agreement that, among other things, contained a fee-shifting provision, whereby the prevailing party in any action arising from the agreement could recover reasonable attorneys' fees from the other party.

In an attempt to rescind the sale, the McKeages retained counsel and learned that TMBC had charged them a $75 document fee for preparation of the contract and some related documents. The McKeages alleged that the fee constituted unauthorized law business in violation of Missouri state law and sued in state court. The Missouri courts certified a nationwide class, TMBC removed the action to federal court, and the parties filed cross motions for summary judgment. The US District Court for the Western District of Missouri ultimately granted the McKeages' motion, awarding the plaintiff class over $21 million. As the prevailing party, the McKeages filed a motion for attorneys' fees.

The district court determined that, despite the fee-shifting provision, the attorneys' fees should come from the common fund of damages awarded. TMBC appealed class certification and the decision on the merits. The McKeages cross-appealed the attorneys' fee award, arguing that the district court should have enforced the fee-shifting provision in the agreement rather than awarding attorneys' fees out of the common fund.

The Eight Circuit affirmed on the appeal but reversed the district court on the cross-appeal. It held that the bare creation of a common fund is insufficient to establish that the attorneys' fee award must come from the common fund. Rather, a court must balance equitable principles underlying the creation of the common fund against the language of the fee-shifting provision in the parties' contract.

The court separately examined two situations, where:

At the heart of the common fund doctrine are two equitable principles. First, class counsel should receive a fee comparable to what he would have received if he had a retainer agreement with each class member. Second, no class member should be unjustly enriched by obtaining the benefit of a successful lawsuit without contributing to the cost of the suit.

In this case, the court held that requiring the entire fee award to be paid out of the common fund is inequitable because it nullifies the prevailing class's contractual right to recover all litigation expenses from its opponent. On the other hand, honoring the fee-shifting provision accords with equitable principles by:

The circuit court remanded to the district court for further proceedings, including a determination about whether class counsel is entitled to any fees from the common fund in addition to fees recoverable under the contract.

Counsel in the Eighth Circuit should bear in mind that the existence of a common fund will not by itself preclude enforcement of a fee-shifting provision against the losing party. In the absence of an applicable statute, a court has wide discretion to use equitable principles to determine from where an award of attorneys' fees should come.