Appeal from a judgment of the District Court for the Southern District of New York (Kevin T. Duffy, Judge) denying an award of attorney's fees to plaintiffs who sued to block proposed adverse modification of real estate participation agreement; cross-appeal from denial of an award of defendants' attorney's fees. 575 F. Supp. 960.
Oakes and Newman, Circuit Judges, and Mishler, District Judge.*fn*
JON O. NEWMAN, Circuit Judge:
The principal issue on this appeal is whether a lawsuit to prevent a proposed adverse modification of an agreement defining rights of participants in a real estate venture may entitle the plaintiffs to recover their attorney's fees for having conferred a benefit on the participants. The issue arises on an appeal from a judgment of the District Court for the Southern District of New York (Kevin T. Duffy, Judge). Koppel v. Wien, 575 F. Supp. 960 (S.D.N.Y. 1983). That judgment, entered in two consolidated lawsuits brought by plaintiffs-appellants Jay H. Koppel and Mary Greenbaum, dismissed a second amended complaint and confirmed an earlier order denying plaintiffs an award of attorney's fees. The suit was brought against defendants-appellees Lawrence A. Wien and Alvin S. Lane and their law firm, Wien, Lane & Malkin. Defendants cross-appeal, asserting their entitlement to an award of defendants' attorney's fees for their successful motion to dismiss the second amended complaint. On the cross-appeal we affirm the ruling denying defendants' claim for attorney's fees; on the main appeal we hold that a substantial benefit sufficient to support an award of plaintiffs' attorney's fees was conferred upon the participants in the partnership and remand for an evidentiary hearing to determine whether that benefit was caused by the litigation.
In August 1961, defendant-appellee Lawrence A. Wien and Harold L. Strudler, the predecessor in interest of defendant-appellee Alvin S. Lane, formed a general partnership, the St. Moritz Hotel Associates ("SMHA"), for the purpose of acquiring the St. Moritz Hotel, a prestigious hotel located on Central Park South in New York City, and a long-term ground lease for the land on which the hotel is located (jointly referred to as "the property"). Wien and Strudler, the general partners of SMHA, raised most*fn1 of the $4.8 million necessary to acquire the property through the sale to the general public, including plaintiffs, of participation interests in their respective 50% partnership interest in SMHA.
Under the terms of the participation agreement, all participants, including the current general partners, Wien and Lane, are to share ratably in the earnings and liquidation of the Property. Paragraph 3 of the agreement specifically stipulates that:
All profits and losses arising from the ownership of The Property shall be shared by the Participants in proportion to their respective fractional interests.
The agreement does not provide for profit participation by the general partners' law firm, Wien, Lane & Malkin ("WLM"). Since the formation of SMHA, however, WLM has received an annual fee as specified under a contract agreed to by all participants as compensation for WLM's managerial and legal services. Under this contract, WLM was to receive $32,000 in 1981 plus 10% of the annual distribution in excess of $672,000.
In 1981, Wien began to explore the possibility of selling the property and liquidating the partnership. Since Wien and Lane would not share in the proceeds of such a sale beyond a pro rata distribution based on their equity investment, Wien proposed to the participants, on November 6, 1981, a modification of the participation agreement that would give WLM, upon the sale of the property, one-third of the amount realized in excess of $14.4 million (three times the original cost of the Property). The letter warned that, as provided in the participation agreement, in the event that 80% of the participants ratified the proposed amendment, dissenting participants would be forcibly bought out at the lesser of the appraised value of the participation unit or the much lower book value, $2,068 per $10,000 participation unit.
Two weeks later, on November 19, 1981, Koppel, a participant in SMHA, filed suit to block the proposed amendment. Plaintiff moved for a temporary restraining order ("TRO") and a preliminary injunction to enjoin defendants from continuing their solicitation. The complaint alleged that the solicitation was impermissibly coercive, that its buy-out proposal was contrary to the partnership agreement, and that it contained various other misstatements and omissions, in violation of the federal securities laws, sections 10(b) and 14(a) of the 1934 Act, 15 U.S.C. §§ 78j(b), 78n(a) (1982), and of state law fiduciary obligations. As relief Koppel sought to have defendants enjoined from further defective solicitations and from acting upon consents obtained to buy out non-consenting participants, and to have a receiver appointed in place of defendants.
One week later, on November 25, WLM sent non-consenting participants a second letter advising them that 60% of the participants had agreed to the proposed modification and cautioning that non-consenting participants would be bought out if 80% approved the change. This second solicitation did not mention that plaintiff had commenced this action to block the proposed amendment. And, although defendants filed the first solicitation with the Securities and Exchange Commission ("SEC"), they did not submit the second letter to the Commission.
On December 3, Judge Duffy held an initial hearing on plaintiff's request for a TRO. Judge Duffy declined to enter a TRO only after eliciting defendants' representation that they would maintain the status quo at least until December 16, the date the Court set for the preliminary injunction hearing. More specifically, defendants represented that no action would be taken on the consents obtained -- that "nobody will be bought out."
At the preliminary injunction hearing, defendants requested an adjournment in order to allow time to prepare "curative" disclosures and "corrective" solicitations and to obtain SEC clearances. Based on defendants' continued representation that they would "not act ...