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Smith v. Marzolf





APPEAL from the Circuit Court of La Salle County; the Hon. LEONARD HOFFMAN, Judge, presiding.


Plaintiff Harold Smith had been injured in a September 1974 accident at his truck stop. He subsequently filed suit against Joseph Marzolf, the driver of the auto which had injured him. Aetna Life and Casualty (hereinafter Aetna) was Harold Smith's insurer and, subsequent to the accident, paid to him $38,931.31 in benefits under their personal injury policy. When Smith's action, in which they were intervenors, resulted in a jury verdict in favor of plaintiffs in the amount of $130,000, Aetna asserted its subrogation rights under its policy with Smith and petitioned the court to adjudicate their subrogation lien. The parties, Smith and Aetna, agreed that $38,931.31 had been paid out by Aetna to Smith. Aetna sought recovery of that amount from the judgment award. The Smiths petitioned to have that amount reduced by a sum, payable to them, as reimbursement for Aetna's proportionate share of the attorney fees and litigation expenses which the Smiths had incurred in prosecuting their claim. They claimed that such benefit was not just the amount of moneys actually expended by Aetna, the $38,931, but rather they asserted the benefit to Aetna was in the amount of their total possible exposure under the policy, being $58,900. Plaintiffs sought recovery of one-third of that figure as attorney fees and expenses.

The trial court, after a hearing on the petitions, found that the Smiths were entitled to reimbursement from Aetna, under the fund doctrine (Baier v. State Farm Insurance Co. (1977), 66 Ill.2d 119, 361 N.E.2d 1100), based upon the benefit to Aetna, and it set that amount at $38,931. The court thus granted Aetna its subrogation claim, minus an equitable reimbursement to the Smiths for Aetna's proportionate share of fees and expenses incurred in the action.

Plaintiffs Harold and Grace Smith filed their appeal from the judgment, alleging that the court erred in not computing Aetna's share of the expenses and fees based upon the $58,900 figure. Aetna has filed a cross-appeal, arguing (1) that the court erred in applying the fund doctrine; (2) that equitable considerations ought to have prevented any recovery from Aetna by the Smiths and (3) that a proper calculation of fees, services and damages to Aetna would have resulted in no fee being awarded.

Prior to 1974, Aetna had insured Smith in a personal injury policy, in effect on September 30, 1974, when Smith was severely injured in an accident at his truck stop service station. His injuries resulted from the negligent driving of Joseph Marzolf. Aetna, Smith's insurer, began making payments under its insurance policy to cover Smith's medical expenses. Smith then filed his personal injury action against Marzolf, and Aetna was allowed to intervene for the purpose of protecting its subrogation rights under the policy. Without notice to Aetna by the insured Smith, the case was called for trial on April 2, 1976, and the parties negotiated a $75,000 settlement. Under the settlement agreement, plaintiff accepted $10,000 for his permanent injuries and agreed to dismiss his action. Also, as part of the agreement, the complaint was amended to show Grace Smith's claim for loss of consortium, which claim was then to be settled in return for a $65,000 payment to her. Stipulations were also entered whereby plaintiff agreed to furnish a release by Aetna and also agreed that if the amounts and releases were not exchanged within 30 days, the judgment and order of dismissal would be vacated. Thereafter, plaintiffs filed a motion for judgment, alleging defendant Marzolf's refusal to pay the $75,000 agreed to by the parties.

Aetna, learning of the negotiated settlement between Smith and Marzolf, filed objections to the settlement, claiming that its subrogation rights for past and future payments would be destroyed by the allocation of only $10,000 to plaintiff Smith, since it had already paid over to him $16,000 and future payments, up to the policy limit, were likely. The trial court set aside the settlement and vacated the dismissal, finding that the allocation of the settlement between Smith and Marzolf was for the sole purpose of defeating Aetna's rights and that it amounted to a fraud upon Aetna and a violation of Smith's fiduciary duties to Aetna under the policy. Thereafter, as we have noted, plaintiffs' case was tried before a jury and the jury returned a verdict of $130,000.

Defendant Marzolf appealed from that decision and contended that the court exceeded its authority in vacating the negotiated settlement. (Smith v. Marzolf (1978), 59 Ill. App.3d 635, 375 N.E.2d 995.) We affirmed. However, in pertinent part of our opinion in that case, we upheld the trial court's findings that the attempted settlement by Smith and his attorney was "absolutely ridiculous," in light of the facts and circumstances as to liability and damages, and that it was "clearly a fraud upon Aetna's rights." (59 Ill. App.3d 635, 638.) We noted therein the fiduciary duties established by the trust agreement portion of the contract between Smith and Aetna. (59 Ill. App.3d 635, 638.) Subsequently, in October 1978, Aetna filed a petition seeking to enforce its subrogation lien under the contract. The parties agreed that $38,931.31 was the sum Aetna had paid out to Smith, and Aetna sought recovery of that amount and any interest previously paid on that amount by the tortfeasor in satisfying the $130,000 judgment.

In response to Aetna's subrogation claim, plaintiff-insured Smith petitioned the court to order Aetna to reimburse Smith for Aetna's proportionate share of the attorney fees and expenses for which the insured had become indebted. Smith petitioned that the proportionate share be based upon the $58,900 figure (Aetna's potential exposure under the contract) and not on the $38,931 actually paid out. The circuit court granted Aetna its subrogation claim, but it also applied the fund doctrine to find that Smith was entitled to reimbursement from Aetna for its proportionate share of the fees and expenses incurred by Smith. The court set a reasonable and proper fee at one-third of the amount recovered, plus a proportionate share of expenses.

The circuit court rejected Aetna's argument that the fund doctrine should not apply because it had given considerable help to plaintiff in the final resolution of the case and had thus contributed to the creation of the fund. The court also rejected Aetna's invocation of the "unclean hands" doctrine against Smith and his attorney. The trial court concluded that Aetna was entitled to its subrogation lien in the amount of $38,931.31. It also granted plaintiff Smith reimbursement from that amount, for Aetna's proportionate share of the fees and expenses incurred by Smith in obtaining the judgment award. It set the reimbursement, under the fund doctrine, at one-third of the $38,931.31. It rejected Smith's contention that the recovery of a proportionate share be based upon Aetna's potential exposure and held that it should be based upon the moneys actually received by the insurer. Both parties have appealed from the circuit court's decisions and judgment.

We turn initially to the issues raised in the cross-appeal by Aetna, since Aetna questions the propriety of any recovery by Smith against Aetna based upon the fund doctrine. Later we shall address the issues raised with respect to the amount of the recovery. Aetna argues that the circuit court erred in applying the fund doctrine in this case.

• 1-3 The fund doctrine is an equitable doctrine which allows an attorney who performs services in creating a fund to be compensated out of the whole fund by all those who benefit from the creation of the fund. (Baier v. State Farm Insurance Co. (1977), 66 Ill.2d 119, 361 N.E.2d 1100; Maynard v. Parker (1977), 54 Ill. App.3d 141, 369 N.E.2d 352, aff'd (1979), 75 Ill.2d 73.) Baier permitted recovery, under this doctrine, by an attorney from his client's insurer-subrogee where the attorney's services to his client-subrogor created a fund out of which the subrogee received benefit. The same equitable considerations underlying the fund doctrine's application have been utilized by some courts> in extending the doctrine to a situation wherein the subrogor sues for a proportionate share of fees already expended by him. (Lemmer v. Karp (1977), 56 Ill. App.3d 190, 371 N.E.2d 655.) In that case the court stated:

"In Baier, the court's decision was based on the `fund doctrine,' where an attorney may recover for his services in the creation of a fund from all those who benefit from the fund. In our case, it is the plaintiff who has brought the action to recover the subrogee's proportionate share of attorneys' fees and expenses which plaintiff paid in full to his attorney for the creation of the fund and from which the subrogee received its subrogated share. Thus, plaintiff cannot assert the `fund doctrine' because his attorney has already been compensated in full for his services out of the whole fund. In addition, plaintiff is unable to rely upon the `fund doctrine' because its application in Illinois has been confined only to attorneys and not plaintiffs who have not been fully compensated for their services and expenses in creating the fund. Baier, 66 Ill.2d 119, 124.

This limited interpretation of the `fund doctrine' does not preclude this court from applying the same equitable considerations contained therein to eliminate inequitable constraints upon the rights of the plaintiff. In our opinion, it promotes legal nepotism to allow recovery for the attorney from the subrogee when he has not been paid in full for his legal services in the creation of the fund and yet deny recovery based on the same equitable approach to his client who has paid his attorney in full out of the proceeds of the whole fund and has not been reimbursed by the subrogee for its proportionate share of legal fees and expenses in the creation of the fund. Such a legal result, in our opinion, flies in the face of equity." (56 Ill. App.3d 190, 192-93.)

However termed, "fund doctrine" or "equitable apportionment," the circuit court in the instant case concluded that plaintiff Smith was entitled to have Aetna pay a proportionate share of the fees and expenses he incurred in litigating the claim against Marzolf. In order to recover under the doctrine it is necessary for a plaintiff seeking recovery from a subrogee to show (1) that the fund was created as a result of legal services performed by an attorney employed by him, (2) that the subrogee did not participate in the creation of the fund, and (3) that the subrogee benefited out of the fund that was created. (Baier v. State Farm Insurance Co. (1977), 66 Ill.2d 119, 124.) When these conditions are shown to exist, then equity will apportion the fees and expenses incurred in creating the fund among those who benefit from its creation. In the instant case, the circuit court correctly concluded that the conditions permitting an equitable apportionment had been satisfied. It was the attorney employed by plaintiff Smith who had prosecuted the personal injury action, and it was his efforts which had created the $130,000 judgment fund. We agree with the trial court that while Aetna was a party and did participate in the litigation, its sole participation throughout was limited to protecting its subrogation rights. In his opinion, the trial judge stated: "I do not agree that the energies expended by Aetna upon the controversy between Plaintiff and Aetna through this case actually contributed to create the fund involved. They were, at most, protective moves on Aetna's part to protect Aetna's lien. They did not aid in the creation of the fund." It is pertinent, as well, that this trial ...

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