Limiting the Common-Fund Doctrine: Vermont Supreme Court Declines Expansion Beyond Insurance-Subrogation Context

1. Introduction

In WWSAF Special Partners Group, LLC (Series D) v. Costello, Valente & Gentry, P.C., the Vermont Supreme Court was asked to decide whether the equitable common-fund doctrine—previously applied in Vermont only to insurance-subrogation cases—could be extended to force one law firm to share its contingency-fee recovery with another, where the firms represented adverse clients in separate but related lawsuits.

The plaintiffs (collectively “Gravel & Shea”), counsel for the injured employee’s employer, argued that their litigation success in a separate coverage lawsuit against a broker (Cornerstone) and its insurer (Lloyd’s) indirectly created the conditions under which the employee, represented by defendant law firm (CVG), obtained a favorable settlement with Lloyd’s. Invoking unjust enrichment and the common-fund doctrine, Gravel & Shea sought a portion of CVG’s contingency fee. The trial court agreed, granting summary judgment on liability and eventually awarding damages after a bench trial.

On appeal, the Supreme Court reversed, holding that no “common fund” existed between the two adversary clients or their counsel, and that expanding the doctrine beyond its insurance-subrogation roots would be inequitable and unwarranted. The Court ordered judgment for the defendant law firm, rendering moot the cross-appeal on damages.

2. Summary of the Judgment

• The Court unanimously (5-0) reversed the trial court’s grant of summary judgment to Gravel & Shea and remanded for entry of summary judgment in favor of CVG.
• Key Holding: The common-fund doctrine does not apply where the party seeking fees did not create or preserve a fund in which it and the opposing party share a common interest. The doctrine remains confined, at least in Vermont, to insurance-subrogation and analogous “true common fund” scenarios (e.g., class actions).
• Result: Gravel & Shea cannot recover any portion of CVG’s contingency fee under unjust-enrichment principles; CVG keeps its entire fee.

3. Analysis

3.1 Precedents Cited and Their Influence

1. Guiel v. Allstate Insurance Co., 170 Vt. 464 (2000)
   • First—and until now only—Vermont decision applying the common-fund doctrine.
   • Held that an insurer asserting a subrogation lien must contribute proportionally to the insured’s attorney’s fees because the insured’s lawsuit created a fund satisfying both parties’ interests.
   • Used by trial court as analog, but Supreme Court distinguished it sharply: insurer–insured relationship is cooperative, not adversarial, and both truly share the recovery.
2. Robes v. Town of Hartford, 161 Vt. 187 (1993)
   • Denied fees where no common fund was created; cited to reinforce the threshold “existence of fund” requirement.
3. Restatement (Third) of Restitution & Unjust Enrichment §29
   • Provided definitional structure: a common fund exists where two or more persons share “common or parallel interests” in an identified res.
   • Court adopted Restatement commentaries to emphasize limiting principles and guard against “overextension.”
4. Out-of-state authorities
   • Boeing Co. v. Van Gemert, 444 U.S. 472 (1980) – classic federal common-fund case (class action).
   • Morris B. Chapman & Assocs. v. Kitzman, 739 N.E.2d 1263 (Ill. 2000) – example of genuine shared fund among heirs.
   • Travelers Ins. Co. v. Williams, 541 S.W.2d 587 (Tenn. 1976) – insurer becomes real party in interest after paying claim.

3.2 The Court’s Legal Reasoning

1. Nature of the Relationship Matters
   Unlike Guiel, the parties here were adversaries in the underlying tort action (employee v. employer). An equitable doctrine designed to prevent “free-riding” among co-beneficiaries could not be stretched to adversary counsel who owe exclusive fiduciary duties to their respective clients.
2. No True Common Fund
   The settlement between the employee and Lloyd’s benefited the employee alone; the employer (Gravel & Shea’s client) received nothing from that fund, nor did Gravel & Shea obtain any direct entitlement. Because Gravel & Shea never acquired an interest in the employee’s settlement funds, the doctrinal prerequisite of shared ownership failed.
3. Incidental vs. Direct Benefit
   Even if Gravel & Shea’s successful motion practice against Cornerstone made Lloyd’s more willing to settle with the employee, that advantage was only an incidental benefit. Equity disfavors restitution for incidental benefits absent mistake, fraud, or compulsion—none alleged here.
4. Protection of the American Rule
   Fee-shifting remains the exception. The Court reiterated that deviations—whether statutory, contractual, or equitable—must be “exceptional.” Extending the common-fund doctrine would erode the American Rule’s baseline that each party bears its own fees.
5. Policy Concerns
   Allowing counsel for an adverse party to claim a slice of the opposing lawyer’s fee would create conflicts of interest, chill zealous advocacy, and encourage satellite litigation over fee apportionment.

3.3 Potential Impact of the Judgment

• Confines Common-Fund Doctrine
  Vermont practitioners must now appreciate that the doctrine is strictly limited to “true common ownership” scenarios—primarily insurance subrogation and class/derivative actions—unless the Legislature intervenes.
• Guidance on Unjust Enrichment Claims
  The decision signals that courts will scrutinize whether a benefit is incidental or shared before allowing restitutionary recovery.
• Litigation Strategy
  Firms collaborating informally across related cases can no longer assume fee contribution absent express agreement; they should contract for fee-sharing or joint-venture arrangements.
• Risk Allocation
  Employers, insurers, and their counsel may structure settlements differently, knowing cross-fee claims are unlikely to succeed.
• Legislative Prompt
  If broader fee-spreading is desired (e.g., in multidistrict or coordinated litigation), statutory reform would be needed.

4. Complex Concepts Simplified

American Rule

A default principle in U.S. law under which each party to litigation pays its own attorney’s fees, unless a statute, contract, or special equitable doctrine provides otherwise.

Common-Fund Doctrine

An equitable exception to the American Rule allowing a litigant who creates, preserves, or increases a fund for the benefit of others to recover reasonable attorney’s fees from that fund or directly from the beneficiaries, preventing free-riding.

Insurance Subrogation

When an insurer pays its insured for a loss, it steps into the insured’s shoes to pursue recovery from the party responsible for the loss. If the insured litigates and recovers, part of the insurer’s share may be used to pay the insured’s attorney’s fees under the common-fund doctrine.

Incidental Benefit

A benefit that accrues as a side effect of actions taken for another purpose. Equity usually does not compel payment for incidental benefits because the recipient did not request or expect the service.

5. Conclusion

WWSAF Special Partners Group v. Costello, Valente & Gentry stands as a clear boundary-setting decision: the Vermont Supreme Court reaffirmed the narrow contours of the common-fund doctrine and the primacy of the American Rule on attorney’s fees. By refusing to treat an adversary’s fee recovery as a “common fund,” the Court protected litigants from unexpected fee claims, preserved counsel’s duty of undivided loyalty, and avoided introducing systemic uncertainty into contingent-fee practice. Unless and until the Legislature broadens equitable fee-shifting, Vermont lawyers must rely on explicit agreements—not after-the-fact equitable arguments—when they hope to share in another party’s recovery.