MUST THE FEN PHEN PLAINTIFFS RETURN THE $23 MILLION DOLLARS NOW THAT THE COURT OF APPEALS HAVE SET ASIDE THE SUMMARY JUDGMENT IN THE CIVIL CASE?
By LawReader Senior Editor Stan Billingsley March 24, 2011
In February the Kentucky Court of Appeals reversed the summary judgment in the Boone County Fen Phen case. Previously Special Judge Wehr had awarded a summary judgment in favor of the Fen Phen class action plaintiffs. The amount of the award was $42 million dollars.
Judge Wehr ordered seizure of the assets for the Charitable Trust set up with “excess funds” of the Fen Phen settlement. Wehr held that the funds should be awarded to the plaintiffs, but the Court of Appeals held that a fact issue existed and the Summary Judgment was improper and suggested that the issue of who got the charitable trust funds was yet to be decided..
Judge Wehr had ordered that the $23 million dollars in the charitable trust could be seized and held in a “constructive trust” pending final outcome of the appeal.
If on retrial of the Fen Phen case it is held that the funds belong to the plaintiffs, then a formula for distribution will have to be ruled on. Some 200 Plaintiffs had no injuries from taking the diet drug, others may have died from taking the drug.
Special Judge Roger Crittenden succeeded Judge Wehr after his retirement. Crittenden ordered in 2007 that since no supercedes bond had been posted that the funds Wehr had ordered to be held in “constructive trust” could be distributed.
LawReader has received numerous reports that the $23 million dollars taken from the charitable trust have been distributed to the Fen Phen plaintiffs and their attorney Angela Ford..
The question has been raised, “What is the status of this $23 million dollars?” Should it be paid back to the original Fen Phen lawyers, Bill Gallion and Shirley Cunningham, or should it be again held in a court ordered “constructive trust” pending conclusion of the remand trial and any subsequent appeals, or should it be left in the hands of the plaintiffs and their attorney assuming the funds have actually been distributed.
If the funds have been actually distributed to Angela Ford and her clients, what will happen if they are ordered to repay those funds? Have any plaintiffs who received a share of the $23 million dollars be able to pay it back if they lose at the upcoming civil trial? What effect does the criminal case restitution order have on these funds? The criminal conviction of Gallion and Cunningham are pending in the Sixth Circuit Court of Appeals.
The following Memorandum of Law regarding “Recoupment of Assets Collected by Plaintiffs in Civil Suit was sent to LawReader. We make no conclusion about these issues. Our limited research suggests that this issue is relative novel. We would predict a great deal of litigation will follow.
One comment we received raised the question of how had the responsibility to look after these funds in light of the reversal by the Court of Appeals. Judge Crittenden has been replaced by another retired Circuit Judge, and it is not yet known who may actually be assigned to do the retrial. But the question remains, who is entitled to possession of at least $23 million dollars which was seized by court order and apparently distributed to the parties and their attorney, and now there is no judgment upholding that distribution or their entitlement to the funds.
LawReader invites any comments or research on this interesting topic. What will happen if the plaintiffs and Angela Ford are ordered to return this $23 million dollars to the court? Have they held on to the money or have they spent it? What was the formula under which the funds were distributed?
We do not presume to know the answer to these complex questions. But we see the possibility that like the original Fen Phen case the issue of who is entitled to possession of these funds is far from a resolution.
LawReader will be glad to publish any legal arguments and research tendered by any credible source on these interesting topics.
The following research was submitted to LawReader. We have added emphasis throughout.
MEMORANDUM OF LAW
RE: Recoupment of Assets Collected by Plaintiffs in Civil Suit
** ** ** ** **
FACTS: In the civil suit against Bill Gallion and others (“Gallion“), the trial court entered summary judgment in favor of the plaintiffs and awarded damages of $42 million. Gallion appealed. Gallion did not stay enforcement of the judgment by giving a supersedeas bond under CR 62.03 and 73.04. The plaintiffs collected money and other assets from Gallion to satisfy the judgment. The Court of Appeals reversed the summary judgment and remanded for trial. Gallion anticipates further appellate efforts by the plaintiffs.
ISSUE: May Gallion recoup from the plaintiffs the assets collected by the plaintiff, without waiting for the case to be final after all appellate efforts are exhausted?
CONCLUSION: Yes, Gallion is entitled to restitution of assets collected by the plaintiffs without waiting for the end of the litigation. It is possible that the amount of restitution may be less than full restitution if the court believes equity justifies a reduction. Gallion may also be entitled to interest, depending on how the court views the equities of the situation. Gallion is entitled to specific restitution of any real estate seized (along with the value of the use of the property in the interval, less expenses for protecting the property), only if the real estate was not sold to someone who is an outsider to the litigation. Restitution (or recoupment) is not damages; although Gallion is entitled to restitution, Gallion is not entitled to damages for the plaintiff’s actions in collecting on the judgment because there was no supersedeas bond (this statement is made in passing in the cases I read; presumably an action for damages is not precluded if the plaintiffs did something outside legal procedures in their collection efforts).
A judgment that has been reversed is a nullity:
It has long been the law in Kentucky that the complete reversal of a judgment nullifies it and returns the parties to the positions they occupied before it was rendered. “A judgment which has been reversed is as though it had never been, and the court should not allow the party who procured it to retain an advantage gained by reason of it.” Knight’s Admr. v. Illinois Central Railroad Co., 143 Ky. 418, 136 S.W. 874, 875 (1911); Drury v. Franke, 247 Ky. 758, 57 S.W.2d 969 (1933) (same); Baker’s Heirs v. Duff, 238 S.W.2d 841 (Ky. 1951) (no rights can be derived from a reversed judgment).”
Marshall v. Goodwine, No. 2009-SC~000495-MR, Supreme Court of Kentucky, August 26, 2010 (to be published; not final).
A party who proceeds to enforce an unsuperseded judgment during an appeal proceeds at its own risk; the fact that the party incurs costs in enforcing the judgment is merely “unfortunate” if the judgment is later reversed. Id.
In Alexander Hamilton Life Insurance Company of America v. Lewis, 550 S.W.2d 558 (Ky. 1977), the Supreme Court of Kentucky held that parents who obtained a judgment awarding them life insurance when their long-missing daughter was presumed dead must return the money after the daughter was found alive, strongly reaffirming the principle, which goes back at least 150 years, that when money is paid to satisfy a judgment, and the judgment is then reversed, the money must be returned. “It is an accepted principle that money paid in obedience to a judgment that is later set aside must be repaid. Fitch v. Kentucky-Tennessee Light & Power Co., 308 Ky. 652, 215 S.W.2d 91, 92 (1948); Turner v. Ewald, 295 Ky. 764, 174 S.W.2d 431, 438 (1943); Drury v. Franke, 247 Ky. 758, 57 S.W.2d 969, 972, 88 A.L.R. 917 (1933); Morgan v. Hart, 48 Ky. (9 B.Mon.) 79, 80 (1848).” Alexander Hamilton Life Ins. Co. of America v. Lewis, 550 S.W.2d 558, 559 (Ky. 1977).
“A person who has conferred a benefit upon another in compliance with a judgment is entitled to restitution if the judgment is reversed or set aside, unless restitution would be inequitable. . . .’ (Emphasis added.) Restatement, Restitution, § 74.” Alexander Hamilton Life Ins. Co., 550 S.W.2d at 559.
The Lewises (the parents) argued that they should not have to return all the money because they had spent some of it and “restitution would be inequitable,” relying on the Restatement provision quoted in the preceding paragraph. The trial court took evidence on what they had done with the money and their financial condition and ordered them to return only half the money (after previously denying the life insurance company any relief, an order that was overturned by the appellate court in a previous appeal). The Supreme Court did not accept that argument:
The theory of restitution as a basis for recovery is about as old as the law itself. Though often assumed to be purely an equitable remedy, some of the earliest proceedings both at common law and in equity were founded upon it and were amplified in the course of time. Restatement, Restitution, Chapter 1, Introductory Note. The obvious justification for it is that one should not be unjustly enriched at the expense of another. Id., § 1.
In Bridges v. McAlister, 106 Ky. 791, 51 S.W. 603, 21 KLR 428, 45 LRA 80, 90 Am.St.Rep. 267 (1899), the accountability of a party for actions taken under authority of a judgment later set aside was discussed at some length. Among other things the court concluded as follows: “When a judgment is reversed, restitution must be made of all that has been received under it, but no further liability should in any case be imposed.” Id., 51 S.W. at p. 605. Our attention has not been directed to any precedent in this jurisdiction for relieving a party of the duty to restore all of the money paid to him under a judgment subsequently vacated. Understandably, of course, the receipt and disbursement of money by someone in a fiduciary capacity could very well present a different case, but when the party who received the money by authority of the judgment has spent some or all of it at his own volition and for his own ends, we find it difficult to accept the proposition that equity diminishes his accountability.”
Alexander Hamilton Life Ins. Co., 550 S.W.2d at 559.
According to § 142(1) of the Restatement, Restitution, “The right of a person to restitution from another because of a benefit received is terminated or diminished if, after the receipt of the benefit, circumstances have so changed that it would be inequitable to require the other to make full restitution.” The Comment following that section explains that there is no such change in circumstances “where the money is used for the payment of living expenses, or even used to make gifts, unless such expenses were incurred or gifts made because of the receipt of the money and the amount of such payment was of such size that considering the financial condition of the payee it would be inequitable to require payment.” (Emphasis added.)
The illustrations following that commentary do not reveal to our satisfaction a workable criterion for determining what is “inequitable.” “Equity” is a broad term, allowing for as many different definitions as there are people who are familiar with it. Often overlooked, however, is the simple fact that both equity and equality are derived from the same word and have much more in common than a similar sound. We think of equity as an implement of sympathy and compassion, but its real meaning is more akin to equality. What is fair for one must be fair for the other. In this case, is it fair that the stockholders of the insurance company lose $7200 because the Lewises have spent the money? We do not think so. It was not the insurance company, but the Lewises, who claimed their daughter was dead, and it is not at all unjust to hold that when they took the money they had to do so at the risk of having to repay it if their claim proved to be unfounded, as it did. We perceive nothing in this record to raise an equitable defense in mitigation of the demand for restitution.
Alexander Hamilton Life Ins. Co., 550 S.W.2d at 559-60.
The Court then discussed the life insurance company’s entitlement to recover interest from the Lewises:
On the question of interest, there can be no doubt that the insurance company’s claim for restitution, though quasi-contractual in nature, was “liquidated” and that interest ordinarily is recoverable as a matter of right on a liquidated claim. Shanklin v. Townsend, Ky., 434 S.W.2d 655, 656 (1968). Interest may be allowed also on the basis of an implied contract, or quasi-contract, and probably should be if the money or property has been used for profit-making. Curtis v. Campbell, Ky., 336 S.W.2d 355, 361 (1960); Henderson Cotton Mfg. Co. v. Lowell Machine-Shops, 86 Ky. 668, 7 S.W. 142, 145 (1888).
In Jackson County v. United States, 308 U.S. 343, 60 S.Ct. 285, 84 L.Ed. 313 (1939), the United States, in behalf of an Indian to whom land had been patented, sued Jackson County, Kansas, to recover taxes paid under a fee-simple patent that had been later cancelled. In holding that interest was not recoverable, the court had this to say with respect to actions based on quasi-contractual obligations:
“The cases teach that interest is not recovered according to a rigid theory of compensation for money withheld, but is given in response to considerations of fairness. It is denied when its exaction would be inequitable.”
The dispositive equitable circumstance favoring the county in that case was that during the time it was collecting the taxes it had no reason to know that a subsequent event would result in their having been unauthorized. “The true ground upon which to put the allowance of interest is the fault of the party who is to pay the debt. If he has made default of payment, then, ex aequo et bono, he should reimburse the creditor for keeping him out of the use of his money. He should render an equivalent for the use of what is not his own.” Henderson Cotton Mfg. Co. v. Lowell Machine-Shops, supra, at 7 S.W. 145.
When an innocent party uses the money or property of another in reliance upon a final unappealed judgment that says it is his, it can hardly be said that he is at fault unless and until he is put on notice of circumstances that justify or call for setting the judgment aside. In this case the Lewises learned on July 25, 1971, that their daughter was still alive. A private investigator employed by the insurance company discovered it on August 25, 1971. On the basis of these facts we are of the opinion that interest on the amount recoverable by the insurance company should run from July 25, 1971.
In 2008, the Supreme Court f Kentucky again ordered that interest be paid on money that had to be returned because it was collected under a judgment that was reversed, relying on Alexander Hamilton Life Insurance, in Cheyenne Resources, Inc. v. Elk Horn Coal Corp., 265 S.W.3d 184 (Ky. 2008). Cheyenne was awarded a large judgment against Elk Horn and a 10% penalty was added to the judgment; the 10% penalty part of the judgment was later reversed as being based on an unconstitutional statutory provision. The Court wrote:
Restatement (First) of Restitution, § 74 (1937) provides:
A person who has conferred a benefit upon another in compliance with a judgment, or whose property has been taken thereunder, is entitled to restitution if the judgment is reversed or set aside, unless restitution would be inequitable or the parties contract of payment is to be final.
Comment d to the Restatement further provides:
If payment has been made to the judgment creditor or to his agent, or to an officer who has paid the judgment creditor, upon reversal of the judgment the payor is entitled to receive from the creditor the amount thus paid with interest. (Emphasis supplied.)
Restatement (First) of Restitution, § 74, Comment d (1937).
Although Cheyenne argues Elk Horn should not be entitled to pre-judgment interest from March 16, 2001, because the tortious conduct of Elk Horn resulted in the underlying judgment which ultimately triggered the 10% penalty payment, we reject that argument in this case. Elk Horn paid for its conduct in satisfying a judgment that included both pre-judgment and post-judgment interest so that its payment amounted to some $14,000,000.00. Elk Horn should not be penalized in this instance by virtue of an unconstitutional statute.
Restitution requires making the paying party whole. As put by Professor Dobbs, “As we have seen, restitution is not damages; restitution is a restoration to prevent unjust enrichment.” Dobbs, Law of Remedies § 4.1(1), at 556 (2d ed.1993). Here, Cheyenne Resources unquestionably had the use of the $950,000.00 from the date that it was paid, i.e., March 16, 2001, until that $950,000.00 was repaid on August 15, 2005. Likewise, Elk Horn was deprived of the use of that money during that time period. As pointed out by Elk Horn in citing this Court’s predecessor in City of Louisville v. Henderson’s Tr., 11 KY. L. Rptr. 796, 13 S.W. 111, 112 (1890):
If, in such a case, a creditor, after the lapse of years of litigation, is not entitled to interest, then he will, in effect, lose a part of his debt. He would be kept out of the use of his money; the debtor, in the mean time, getting the benefit of it. The latter would, in effect, pay but a part of his debt.
Restitution restores the party who has satisfied a judgment that was erroneously entered to the position which the party would have occupied but for the entry of the erroneous judgment. As this Court said in Alexander Hamilton Life Ins. Co. of Am. v. Lewis, supra at 559, in describing the justification for restitution, “The obvious justification for restitution is that one should not be unjustly enriched at the expense of another.”
Cheyenne Resources, Inc. v. Elk Horn Coal Corp., 265 S.W.3d 184, 186-87 (Ky. 2008). The Court concluded, “Here, Cheyenne had the unfettered use of $950,000.00 from March 16, 2001, until August 15, 2005. The amount was liquidated. There is nothing in the record that would suggest there is any equitable reason to require anything other than a full restitution. Full restitution means just that. To make Elk Horn Coal Corporation whole, Cheyenne must pay the interest on the $950,000.00 from the date that it first had use of that money.” Id. at 187 (footnote omitted).
One of the cases cited by Alexander Hamilton Life, Drury v. Franke, 57 S.W.2d 969 (Ky. 1933), makes it clear not only that the right to restitution of money paid under a judgment that has been reversed exists, but also that the party claiming restitution does not have to wait for its money until the final termination of the litigation:
The court is of the opinion that in the event of a reversal the right of the defendant to demand restitution exists, and that the trial court has ample authority to require the money collected under the judgments to be repaid. The rule requiring restitution in such cases is recognized by all the authorities. “When a judgment is reversed, restitution must be made of all that has been received under it.” Bridges, etc., v. McAlister, 106 Ky. 791, 51 S.W. 603, 605, 21 Ky. Law Rep. 428, 45 L.R.A. 800, 90 Am.St.Rep. 267. In Gregory v. Litsey, 9 B. Mon. 43, 48 Am.Dec. 415, Gregory had obtained a judgment against Litsey for $485.42, which the latter had paid and then appealed. The judgment was reversed. When the mandate was filed in the circuit court, a rule was granted against Gregory requiring him to show cause why he should not be compelled to refund the amount paid him by Litsey. The rule was made absolute and Gregory ordered to refund the money. On the appeal from this order it was affirmed. The case of Ex parte Walter Brothers, an Alabama case, reported in 89 Ala. 237, 7 So. 400, 401, 18 Am.St.Rep. 103, is perhaps the leading case on this question. In that case after a judgment had been paid, and reversed on an appeal, application was made for a writ of mandamus, directed to the chancellor of the court to require him to make an order of restitution in the case which was still pending in his court, requiring the plaintiff in the original suit to repay to the defendant the sum of money which he had paid under the judgment which was afterward reversed. The chancellor refused to make an order of restitution and the defendant, Brothers, appealed from that action. The appellate court in reversing the lower court, said in part: “We can conceive of no case in which a party, who pays money on a decree which is subsequently reversed, is not entitled to have restitution of what he has paid, and to be thus reinstated in the position, and to all the rights he had prior to the rendition of the erroneous decree. It is not material what those rights were, or would probably, or even certainly and necessarily, be determined to be in the further progress of the litigation. He is entitled to have his final equities adjudicated while he yet occupies whatever vantage ground was his in the inception of the contest and from that standpoint to invoke the judgment of the law on the issues he presents.”
Another excerpt from that opinion reads as follows: “He had no right to the money involved in the litigation, in contemplation of law, until there should be a correct determination of the matters in dispute, however clear his rights may have been in point of fact. He, therefore, proceeds with the cause, having an undue advantage of his adversary, and is in fact in the attitude of having gained what he claimed before his right to it had or could have been determined. We entertain no doubt, therefore, of the absolute right to have restitution made on the one hand, and the absolute correlative duty to make restitution on the other, wholly regardless of considerations looking to the final equities of the parties.”
In the concluding paragraph of the opinion this statement is found: “That the chancellor before whom the cause is pending has the power to make an order for restitution in such case is not controverted. The parties are before him and in and about, and in the conduct of that cause they are subject to his control. The facts which constitute the only predicate for such an order–a decree, payment under it, and its reversal–are a part of the cause itself. There can be no dispute or mistake about them. On them the order for restitution goes as a matter of course.”
We are unable to see that the situation here, if the judgments are reversed, is any different from the situation that would have existed had the defendant paid the judgments and then prosecuted an appeal and secured a reversal. The same rule with reference to restitution should apply to both situations. Nashville, C. & St. L. Rwy. Co. v. Bean’s Ex’r, 128 Ky. 758, 109 S.W. 323, 33 Ky. Law Rep. 114, 129 Am.St.Rep. 333.
“A judgment which has been reversed is as though it had never been.” Knight’s Adm’r v. Ill. Central R. Co., 143 Ky. 418, 136 S.W. 874, 875.
The questions of restitution and how to accomplish it are questions which, in the event of a reversal, will address themselves to the trial court.
Drury v. Franke, 57 S.W.2d 969, 972-73 (Ky. 1933) (emphasis added).
Peoples Building & Loan Ass’n v. Wagner, 180 S.W.2d 295 (Ky. 1944), also makes it clear that restitution is required right away when a judgment is reversed, not at the end of all litigation:
A party who has been deprived of property under a void judgment is entitled to restitution although the reversal or the setting aside of the judgment does not terminate the litigation. Except under certain circumstances which are not present here, he is entitled to be restored to the position he occupied when the judgment was rendered. It is no answer to his motion to have the property restored to him to say that on a final hearing of the cause it will again be adjudged that he surrender that of which he now seeks restitution. To so hold would be to prejudge the case. 3 Am.Jur., Appeal and Error, § 1243; Carroll v. Draughon, 173 Ala. 327, 56 So. 207; Id., 173 Ala. 338, 56 So. 209. Cf. Drury v. Franke, 247 Ky. 758, 57 S.W.2d 969, 88 A.L.R. 917.
Peoples Building & Loan Ass’n, 180 S.W.2d at 297.
In Massie v. Paul, 92 S.W.2d 11 (Ky. 1936), the Court explained that the effect of Paul failing to supersede a judgment was that she was deprived of any claim for damages for acts done by the other party pursuant to the judgment, but she was not deprived of her right to restitution of amounts she paid under the judgment. Massie v. Paul, 92 S.W.2d 11, 15-16 (Ky. 1936).
With respect to real property, when a court has jurisdiction of the parties and the subject matter of the suit and has statutory authority to decree a sale, then a subsequent reversal of the judgment decreeing the sale is a “mere declaration that the judgment is erroneous, but it is not void,” so the purchaser of the property at the sale keeps title to the real estate when the judgment was unsuperseded. Sedley v. Louisville Trust Co., 419 S.W.2d 531 (Ky. 1967); Rose v. Cox, 179 S.W.2d 871 (Ky. 1944). On the other hand, if the land is not sold but only conveyed from one party in the litigation to another party in the litigation pursuant to a judgment, and the judgment is subsequently reversed, title to the land must be restored to the original owner even if the judgment was unsuperseded. Rose, 179 S.W.2d at 874. If there is a sale and the judgment creditor is the purchaser at the sale, the judgment debtor is entitled to specific restitution upon reversal of the judgment. Peoples Building & Loan Ass’n, 180 S.W.2d at 297 (quoting Restatement of the Law of Restitution, section 74, Comment e). The judgment debtor is also entitled to the value of the property’s use in the interval less expenses necessarily incurred in the protection of the property and the payment of taxes and liens, but not including the expenses of improvements. Id.
The law regarding restitution of money paid as child support after a judgment awarding it is reversed is different than the general rule; those cases, of which there are several, are easily distinguishable. See, e.g., Clay v. Clay, 707 S.W.2d 352 (Ky. App. 1986).