In the
United States Court of Appeals
For the Seventh Circuit

Nos. 99-2364, 99-2707

Howard R. Montgomery, for himself and for
all others similarly situated,
for themselves and
for Aetna Plywood,
Inc. Profit Sharing Plan as
successor to Aetna Plywood, Inc.,
Employee Stock Ownership Plan,

Plaintiffs-Appellants,

v.

Aetna Plywood, Incorporated, et al.,

Defendants-Appellees.



Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 95 C 3193--William T. Hart, Judge.




No. 00-1033

Clinton A. Krislov and Krislov
& Associates, Ltd.,

Plaintiffs-Appellants,

v.

Aetna Plywood, Incorporated, et al.,

Defendants-Appellees.


Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 5531--William T. Hart, Judge.


Argued September 11, 2000--Decided October 26, 2000


  Before Bauer, Evans, and Williams, Circuit
Judges.

  Williams, Circuit Judge. This appeal
arises out of a class action suit brought
by Howard Montgomery on behalf of
participants in Aetna Plywood’s Employee
Stock Ownership Plan ("ESOP") against
Aetna Plywood and its directors, based on
an allegation that Aetna Plywood had not
adequately compensated the ESOP
participants when the directors caused
the ESOP to sell its shares back to the
company. Eventually, the parties reached
a pair of settlements. This appeal,
however, does not involve, directly at
least, the settlements or the underlying
class action suit. Rather, it involves
three ancillary matters the district
court decided: the legality of an
ownership restructuring plan Aetna
Plywood proposed, the amount of the
settlement fund that should be awarded to
class counsel and the lead plaintiff, and
the proper disposition of a subsequent
state law action brought by class counsel
to enforce a term in one of the parties’
settlement agreements. With one minor
exception, we affirm the district court’s
decisions on each of these matters.

I

  Just before Aetna Plywood purchased the
stock owned by its ESOP, the ESOP owned
95% of the company’s outstanding shares.
The remaining 5% was owned by Jeff Davis,
who served as Aetna Plywood’s chief
executive officer, the chairman of its
board of directors, and a member of the
committee that managed its ESOP. Sometime
in mid-1992, Davis, along with the other
three individuals who served on both
Aetna Plywood’s board of directors and
its ESOP committee, caused the ESOP to
sell its shares of Aetna Plywood stock to
the company. This transaction left Davis
as the sole stockholder in Aetna Plywood.

  Believing that Davis and Aetna Plywood’s
other directors had caused the ESOP to
sell its shares of Aetna Plywood stock
for too low a price, Howard Montgomery, a
former Aetna Plywood employee and ESOP
participant, filed, in May 1995, a class
action suit on behalf of ESOP
participants against Aetna Plywood and
the directors who had approved the stock
sale ("the Montgomery defendants"). The
class complaint alleged that, by causing
the ESOP to sell its shares at a below-
market-value price, Aetna Plywood’s
directors had breached fiduciary duties
placed on them by ERISA and Delaware
corporate law.
  The case eventually went to trial before
the district court in June 1998. On the
third day of the trial, two directors,
both of whom were outside directors,
entered into a settlement with the class.
They agreed to pay the class $800,000 in
exchange for a release from liability. At
the conclusion of the trial, the district
court found Aetna Plywood, Davis, and the
other remaining defendant-director, John
Francione ("the trial defendants"),
liable for causing the ESOP to sell its
interest in Aetna Plywood without
ensuring that the ESOP received adequate
consideration. The district court further
found that the defendants had under-
valued the ESOP’s stock by $70 a share.
After making adjustments for the
settlement with the outside directors and
prejudgment interest, the court arrived
at a damages figure of $7,243,820.17.

  Following the district court’s decision,
the trial defendants initiated
negotiations with the class, fearing that
the judgment entered against them would
bankrupt Aetna Plywood. These
negotiations proved fruitful and the
parties reached a comprehensive
settlement agreement. The trial
defendants agreed that Aetna Plywood
would pay the class $6.1 million cash,
give the class 20% of the company’s
stock, and, if Aetna Plywood were to be
sold within three years, turn over to the
class 25% of the sale proceeds in excess
of $6.1 million. Davis promised to
relinquish his Aetna Plywood stock and to
give up all control of and involvement in
the company. He also agreed to relinquish
his ownership interest in the company’s
headquarters, to forfeit any monies
realized from the sale of his shares, and
to forego any future remuneration from
the company. Moreover, both Davis and
Francione agreed to give up any recovery
they might be entitled to as ESOP
participants.

  In exchange for these promises, the
class agreed to release all claims
asserted and assertable against the trial
defendants and promised not to seek
further assets from Davis. In addition,
class counsel agreed to limit any
attorneys’ fee request to one-third of
the settlement recovery plus
reimbursements of costs and expenses not
exceeding $500,000, and the defendants
promised not to oppose a request within
those bounds. The parties also agreed
that Aetna Plywood would consult with
class counsel regarding any sale or
change of control transaction involving
the company and that Aetna Plywood could
submit any proposal in this regard, to
which class counsel objected, to the
court for approval. Finally, the parties
provided that the district court would
retain jurisdiction over the case to
enforce the terms of the settlement
agreement.

  After carefully reviewing the mid- and
post-trial settlements reached by the
parties, the district court, in March
1999, approved both settlement
agreements, finding each to be fair,
reasonable, and adequate. In the same
order, the district court took up class
counsel’s requests for attorneys’ fees,
costs, and an incentive award for the
lead plaintiff. Although none of the
Montgomery defendants challenged class
counsel’s requests, as the requests were
within the bounds established by the
settlement agreement, objections were
received from class members. Primarily,
these came from three Aetna Plywood
managers, Larry Rassin, Keith Weller, and
Jon Minnaert. The district court reviewed
carefully both class counsel’s requests
and the objections submitted, as well as
the numerous considerations relevant to
determining an appropriate attorneys’
fee, expense reimbursement, and incentive
award. Based on this review, and using
the percentage-of-recovery method for
awarding attorneys’ fees, the court
awarded class counsel 25% of the net
settlement recovery (amounting to
$1,655,177.71), 25% of any future class
recovery, and $279,289.15 in expense
reimbursements. The court declined to
award class counsel any portion of the
stock promised to the class and refused
to grant the lead plaintiff an incentive
award. A subsequent order granted class
counsel an additional $200,000 in expense
reimbursements, but reaffirmed the
district court’s refusal to grant a
reimbursement for computer-assisted legal
research costs.

  At the same time the district court was
considering the fairness of the two
settlements and the appropriateness of
class counsel’s requests for attorneys’
fees, costs, and an incentive award, the
parties also brought before the court an
ownership restructuring plan proposed by
Aetna Plywood. Pursuant to this plan,
which was submitted to the district court
in February 1999, Davis would relinquish
his stock to Aetna Plywood in exchange
for $1,000 and the company would give
that stock (as well as the $1,000) to the
class; then, Aetna Plywood would issue
new stock representing 80% of the total
number of outstanding shares; finally,
Aetna Plywood would turn 29% of the
company’s stock over to its attorneys to
pay for services rendered and would sell
the remaining 51% to a group of managers
(Rassin, Weller, Minnaert, and Scott
Halden) for $4,000. The class objected to
the plan on the ground that it did not
maximize the value Aetna Plywood could
have received for selling a controlling
interest in the company. After briefing
on the issues raised by the restructuring
plan, the district court, in April 1999,
gave its consent to the proposed
restructuring.

  Around this same time, class counsel
discovered that Aetna Plywood had funded
the objections Rassin, Weller, and
Minnaert filed opposing class counsel’s
request for attorneys’ fees. Believing
this violated the parties’ settlement
agreement, class counsel filed suit
against Aetna Plywood, Rassin, Weller,
Minnaert, and Halden ("the Krislov
defendants") in the Circuit Court of Cook
County, Illinois, asserting a breach of
contract claim. In response, the Krislov
defendants removed the case to federal
court and filed a motion to dismiss.
Class counsel then filed a motion to
remand the case to state court and, in
the alternative, asked for leave to file
an amended complaint. The district court
denied the motion to remand, but granted
class counsel leave to amend. Class
counsel then added claims of aiding and
abetting a breach of contract and
intentional interference with a
contractual relationship against the
individual Krislov defendants. Following
a second motion to dismiss, the district
court, in December 1999, concluded that
class counsel had failed to state a claim
against the Krislov defendants and
dismissed class counsel’s suit.

  In July 1999, the district court entered
final judgment in the Montgomery class
action suit, and in December 1999, did
the same in the Krislov suit. Timely
appeals were filed in both cases.

II
A. Legality of Ownership Restructuring
Plan

  The first issue raised in these appeals
concerns the district court’s decision to
allow Aetna Plywood to go forward with
its proposed ownership restructuring
plan. The class contends that the
restructuring plan violates Delaware
corporate law by giving away control of
the company for less than fair market
value. Specifically, the class alleges
that, in adopting the restructuring plan,
Aetna Plywood’s board of directors
breached its fiduciary duty to maximize
the value a corporation’s shareholders
receive in a corporate control
transaction./1 See Paramount
Communications Inc. v. QVC Network Inc.,
637 A.2d 34, 48 (Del. 1994). The district
court rejected the class’s objections on
the ground that the company’s stock
belonged to Davis and he could do with it
what he wanted. The district court’s
conclusion rests on a faulty premise,
however; Davis’s stock went to the class
(and even then only after being sold to
Aetna Plywood), while the stock given to
the company’s attorneys and sold to the
management group was newly-issued stock.
On appeal, the Montgomery defendants
attempt to defend the district court’s
decision on the grounds that (1) the
class lacks standing to challenge the
restructuring plan under Delaware law;
and (2) the proposed transaction did not
trigger any fiduciary duty toward the
class to maximize value received. We only
discuss the first of these contentions,
however, as it is dispositive.

  Delaware law requires that the plaintiff
in a derivative suit (the form that the
parties assume the class’s objections
take) be a stockholder of the corporation
at the time of the challenged
transaction. 8 Del. Code sec. 327. To
determine whether the class has standing
under this rule, we must determine who is
a "stockholder" and what is the "time of
the challenged transaction" for purposes
of 8 Del. Code sec. 327.

  Taking the second question first, a
review of Delaware law reveals that the
"time of the challenged transaction"
depends on precisely what about the
transaction is being challenged. Where
the plaintiff complains of the terms,
rather than the actual consummation, of a
transaction, the "time of the challenged
transaction" is when the terms of the
transaction are established. 7547
Partners v. Beck, 682 A.2d 160, 161-63
(Del. 1996). For instance, in 7547
Partners, the Delaware Supreme Court
considered a case involving a plaintiff
that bought stock in an initial public
offering at a price much higher than that
paid by certain corporate executives to
whom the corporation’s board of directors
had decided to sell stock in a private
placement accompanying the public
offering. Id. at 161. The court
determined that the plaintiff lacked
standing because the challenged
transaction was the decision to set the
price for the private placement, a
decision that took place before the
plaintiff bought its stock. Id. at 162-
63. The court reasoned that because the
plaintiff challenged only the terms of
the private placement, rather than the
technicality of its consummation, the
challenged transaction took place when
the terms of the private placement were
established. Id. at 163. Here, the class
complains only about one of the terms of
the restructuring plan--the price at
which the board of directors sold control
of Aetna Plywood--a term that was
announced (and therefore established) one
month prior to final approval of the
parties’ settlement agreement. Thus, the
challenged transaction took place before
the class came into actual possession of
the Aetna Plywood stock promised to it.

  This conclusion brings into focus the
question we have yet to answer--who, for
standing purposes, is a "stockholder." In
light of our conclusion about when the
transaction the class challenges took
place, the class will have standing only
if a prospective stockholder can be
considered a "stockholder" for standing
purposes. Unfortunately for the class,
Delaware law treats actual stockholders
and prospective stockholders quite
differently. Most significantly, prospec
tive stockholders are not owed fiduciary
duties. Anadarko Petroleum Corp. v.
Panhandle Eastern Corp., 545 A.2d 1171,
1174-77 (Del. 1988). Fiduciary duties
arise only after a stockholder comes into
actual possession of stock, regardless of
how certain the stockholder’s future
ownership was when the challenged
transaction took place. Id. For instance,
in Anadarko Petroleum, the Delaware
Supreme Court held that directors of a
wholly-owned corporate subsidiary about
to be spun off owed no fiduciary duties
to the post-spin-off stockholders even
though those stockholders had been
identified and those holders’ future
stock interests were being traded on the
New York Stock Exchange. Id. The court
reasoned that because the prospective
stockholders did not acquire legal or
equitable title over the stock of the
subsidiary until the day the stock was
distributed, they were not owed fiduciary
duties until that day. Id. at 1176. That
prospective stockholders are not owed
fiduciary duties under Delaware law leads
us to conclude that prospective
stockholders would not be considered
"stockholders" for standing purposes.
Accordingly, we hold that the class was
not a stockholder at the time of the
transaction it challenges.

  In an effort to avoid the necessary
implication of this conclusion--that it
lacks standing to challenge the
restructuring plan under Delaware law--
the class contends that ERISA and the
settlement agreement itself grant the
class standing. Certainly the settlement
agreement and perhaps ERISA as well grant
the class standing to challenge the
restructuring plan, but, so far as we can
tell, neither grants standing to raise a
challenge under Delaware law that
Delaware law itself would not permit.
And, the class has not cited any legal
authority to the contrary, nor has it
articulated a theory that suggests we
should rule otherwise. As the class only
challenges the restructuring plan under
Delaware law, it must satisfy the
standing requirements of 8 Del. Code sec.
327./2 Because it was not a stockholder
at the time of the challenged
transaction, the class can not do so.
Therefore, we must affirm the district
court’s rejection of the class’s
challenge to Aetna Plywood’s ownership
restructuring plan.

B. Attorneys’ Fees, Costs, and the
Incentive Award

  Class counsel challenges several aspects
of the district court’s decisions
regarding attorneys’ fees, costs, and the
requested incentive award for the lead
plaintiff. Specifically, counsel argues
that the district court should have: (1)
awarded it 33-1/3% of the gross
settlement recovery; (2) awarded it a
like percentage of the stock promised to
the class; (3) included computer-assisted
legal research costs in the expense
reimbursement; and (4) granted the lead
plaintiff an incentive award. We review
the district court’s decisions respecting
these matters for abuse of discretion,
except where counsel challenges the
methodology employed by the district
court, in which case our review becomes
plenary. Harman v. Lyphomed, Inc., 945
F.2d 969, 973 (7th Cir. 1991).

  Before getting to class counsel’s
specific challenges, we note that in
cases like the present one, where the
district court is asked to award
reasonable attorneys’ fees or reasonable
costs, the measure of what is reasonable
is what an attorney would receive from a
paying client in a similar case. Cook v.
Niedert, 142 F.3d 1004, 1012 (7th Cir.
1998); In re Continental Ill. Sec.
Litig., 962 F.2d 566, 568, 570, 573 (7th
Cir. 1992). This standard obviates, at
least to a certain extent, the need to
assign a value to an attorney’s work
based on nothing more than a subjective
judgment regarding that work. It gives a
court a background against which to work
by requiring courts to look to evidence
regarding the sorts of fees and costs
generated in analogous suits funded by
paying clients. To the extent possible,
then, our analysis in this case will be
guided by this methodology.

  We begin with class counsel’s contention
that its fee should be based on the gross
settlement recovery--the settlement
recovery before counsel’s cost award is
deducted--rather than the net recovery--
the recovery after the cost award is
deducted. Counsel cites no authority
standing for the proposition that gross
recovery is to be preferred over net
recovery as the basis for calculating a
fee under the percentage-of-recovery
method, nor has our review of the
relevant case law revealed any authority
to that effect. Moreover, counsel has not
come forward with evidence indicating
that private contingent fee agreements
typically employ one or the other basis,
nor has counsel suggested any logical
reason that gross recovery should be the
preferred basis. As such, it is
impossible to conclude that the district
court abused its discretion in using net
recovery as a basis for awarding
attorneys’ fees.

  We consider next class counsel’s
complaint that the district court should
have awarded counsel a greater percentage
of the settlement recovery, 33-1/3%
rather than 25%. Counsel contends that
the district court, in adopting what it
found to be the median percentage-of-
recovery figure used in securities cases,
failed to adequately appreciate the
riskiness of this case. The district
court concluded that the case was not
particularly risky because the fact
(although not the amount) of the
Montgomery defendants’ liability could
not be doubted. Although a reasonable
argument can be made that the case was
more risky than the district court
thought, the district court’s assessment
of the risk involved is not without
support. It is fairly obvious that at
least some of the Montgomery defendants
(most notably Jeff Davis) plainly were
not acting in the best interests of Aetna
Plywood’s shareholders or in the best
interest of the ESOP. Moreover, a lack of
risk was not the only reason the district
court gave for refusing to select a
percentage-of-recovery figure greater
than the median; the court also noted
that the large settlement recovery
counseled against a high figure. In fact,
the court undertook a careful analysis of
both the factors weighing in favor of a
greater-than-median percentage figure and
those weighing against such a figure.
Because it is impossible to say that the
district court’s balancing of these
factors was unreasonable, we cannot
conclude that the district court abused
its discretion in selecting 25% as the
appropriate percentage-of-recovery
figure.

  We come, then, to class counsel’s
challenge to the district court’s refusal
to award counsel a portion of the stock
the settlement agreement promised to the
class. Counsel contends that the stock
obtained for the class should be treated
just as the cash obtained for the class
is treated. The district court’s only
reason for not awarding counsel stock was
that counsel’s fee was already
substantial. We do not believe this is an
adequate reason for denying counsel
stock. Stock, like cash, is simply a form
of compensation secured on the class’s
behalf. There is no reason it should be
treated differently than cash. In fact,
treating it differently creates perverse
incentives for attorneys by encouraging
them to seek all cash recoveries even
when a cash and stock recovery would be
in their clients’ best interest or would
otherwise be more appropriate. If a court
believes a fee award would be too large
if stock is made part of the award, then
it should reduce the percentage-of-
recovery figure (something which, as
noted above, the district court here
essentially did). Although we have not
discovered any significant authority on
this matter, and the record does not
reveal how private contingent fee
arrangements in securities cases treat
awards of stock, we are convinced that
the district court’s refusal to award
class counsel any of the stock obtained
for the class is unreasonable. As such,
we conclude that the district court
abused its discretion in so ruling.

  We next turn to class counsel’s claim
that the district court erred in refusing
to include in the expense reimbursement
award computer-assisted legal research
costs. Counsel contends that the district
court should have included these costs in
the reimbursement award because the
private market compensates lawyers for
these costs and to do otherwise would
violate the ethical rules regarding the
payment of costs by attorneys. Counsel’s
arguments are misguided. Computer
research charges are considered a form of
attorneys’ fees. Haroco, Inc. v. American
Nat’l Bank & Trust Co. of Chicago, 38
F.3d 1429, 1440-41 (7th Cir. 1994);
Harman, 945 F.2d at 976. The idea is that
computer-assisted legal research
essentially raises an attorney’s average
hourly rate as it reduces (at least in
theory) the number of hours that must be
billed. Haroco, 38 F.3d at 1440-41;
Harman, 945 F.2d at 976. As a form of
attorneys’ fees, the charges associated
with such research are not separately
recoverable expenses. When a court uses
the percentage-of-recovery method of
calculating attorney’s fees, such charges
are simply subsumed in the award of
attorneys’ fees./3 Here, therefore,
counsel’s arguments regarding the
necessity of separately recoverable
computer research charges are not
persuasive because counsel has already
been compensated for the computer
research charges it incurred through the
attorneys’ fee awarded it. Thus, we
conclude that the district court did not
abuse its discretion or otherwise err in
excluding computer-assisted legal
research charges from the expenses
awarded class counsel.

  Finally, we take up class counsel’s
challenge to the district court’s
decision to deny the lead plaintiff an
incentive award for his participation in
this case. Incentive awards are
appropriate if compensation would be
necessary to induce an individual to
become a named plaintiff in the suit.
Cook, 142 F.3d at 1016; Continental Ill.
Sec. Litig., 962 F.2d at 571-72. Counsel
claims that the circumstances of the lead
plaintiff’s participation require that he
be awarded $30,000 out of the settlement
fund. Without directly addressing whether
the lead plaintiff’s participation
justified an incentive award, the
district court gave three reasons for
refusing to grant such an award: (1)
counsel’s failure to make any serious
argument in favor of granting such an
award (especially in the amount
requested); (2) counsel’s failure to
include in the most recent notice to the
class adequate information regarding
counsel’s plan to seek an incentive
award; and (3) the possibility that
counsel could pay an incentive award out
of the fees awarded it.

  Although the district court’s last
reason for its ruling is not a
particularly persuasive one, the other
two carry significant weight. Counsel’s
uncertain and less than vigorous efforts
to seek an incentive award in the
district court can reasonably be
interpreted as an abandonment of its
request for such an award. In any event,
the case for granting the lead plaintiff
in this case an incentive award is not so
overwhelming as to remove any doubt about
whether an award would be appropriate.
While the lead plaintiff was the only
named plaintiff, was subjected to a rough
deposition, and was portrayed by the
Montgomery defendants in an unfavorable
light during the litigation, it does not
appear that he had to devote an
inordinate amount of time to the case or
that, as a former employee, he suffered
or risked any retaliation by Aetna
Plywood. Accordingly, we conclude that
the district court did not abuse its
discretion in refusing to grant the lead
plaintiff an incentive award.

C.   State Law Action

  The final issue in this case is whether
the district court properly disposed of
class counsel’s lawsuit against Aetna
Plywood and the four managers who
purchased control of the company ("the
Krislov suit"). The district court
assumed jurisdiction over the suit, which
was filed originally in state court and
alleged a variety of state law causes of
action arising out of a purported breach
of the attorneys’ fees provision of the
settlement agreement, and dismissed the
suit for failure to state a claim. Class
counsel challenges both the district
court’s refusal to remand the lawsuit
back to state court and the district
court’s decision to dismiss the lawsuit
on its merits. We consider counsel’s
jurisdictional challenge first.

  1.   Assumption of Jurisdiction

  Class counsel contends that there was no
basis for removing the Krislov suit to
federal court and that, therefore, the
district court should have remanded the
case back to state court. Ordinarily, a
case filed in state court can be removed
to federal court only if the case falls
within the original jurisdiction of the
federal district courts. 28 U.S.C. sec.
1441. Because it is based entirely on
state law and involves non-diverse
parties, however, the Krislov suit does
not come within the original jurisdiction
of the federal district courts. The
district court nevertheless concluded
that removal was proper under the
doctrine of ancillary jurisdiction since
the lawsuit involved claims relating to
an alleged breach of the settlement
agreement resolving the Montgomery case
and the court had expressly retained
jurisdiction to enforce the terms of that
settlement agreement when it entered a
final judgment in the Montgomery case.

  Precedent in this circuit firmly
establishes that the doctrine of
ancillary jurisdiction confers federal
jurisdiction over a case otherwise
outside federal jurisdiction in which the
plaintiff seeks to enforce a settlement
agreement, as long as the district court
incorporated the agreement into its final
order or retained jurisdiction to enforce
the terms of the agreement. Ford v.
Neese, 119 F.3d 560, 562 (7th Cir. 1997);
In re VMS Sec. Litig., 103 F.3d 1317,
1321-22 (7th Cir. 1996); Lucille v. City
of Chicago, 31 F.3d 546, 548 (7th Cir.
1994); McCall-Bey v. Franzen, 777 F.2d
1178, 1188 (7th Cir. 1985); see also
Kokkonen v. Guardian Life Ins. Co. of
Am., 511 U.S. 375, 381-82 (1994). Thus,
where a party to a settlement agreement
approved by a federal court brings a new
suit in federal court alleging a breach
of the agreement, federal jurisdiction
exists over the suit, provided the
federal court incorporated the agreement
into its final order or reserved
jurisdiction to enforce the agreement.
See, e.g., Ford, 119 F.3d at 562; McCall-
Bey, 777 F.2d at 1188-90.

  What is less firmly established is when
a case filed in state court that
nevertheless comes within a federal
court’s ancillary jurisdiction may be
removed. Our court addressed this issue
in In re VMS Securities Litigation, 103
F.3d 1317 (7th Cir. 1996), which
considered whether a pair of district
courts had properly removed and enjoined
a state law class action alleging fraud
and misrepresentation relating to the
settlement of a pair of prior class
action lawsuits approved by those two
district courts. The court first
determined that the two district courts
possessed ancillary jurisdiction over the
state law actions at issue. Id. at 1321-
23. The court then turned to whether the
district courts had the authority to
remove the state law actions from state
court. Relying on authority from the
Second Circuit, specifically In re "Agent
Orange" Product Liability Litigation, 996
F.2d 1425, 1431-32 (2d Cir. 1993), the
court concluded that the All Writs Act,
28 U.S.C. sec. 1651, which provides that
federal courts may issue orders
"necessary or appropriate in aid of their
respective jurisdictions and agreeable to
the usages and principles of law,"
granted the district courts the necessary
authority. 103 F.3d at 1323-24. The court
explained, however, that the All Writs
Act does not permit removal in every
case. Id. at 1324. Again relying on the
Second Circuit’s decision in In re Agent
Orange, the court suggested that only the
presence of exceptional circumstances
threatening the integrity of a court’s
rulings in complex litigation would
justify removal under the All Writs
Act.\4 Id.

  Reading In re VMS Securities together
with this circuit’s law on ancillary
jurisdiction, two different standards for
exercising ancillary jurisdiction emerge.
In a suit otherwise outside federal
jurisdiction brought in federal court, a
district court may assume jurisdiction
over the suit if it satisfies the
ordinary requirements for ancillary
jurisdiction. In a suit otherwise outside
federal jurisdiction brought in state
court, a district court may assume
jurisdiction over the suit if it
satisfies the ordinary requirements for
ancillary jurisdiction and exceptional
circumstances threatening the integrity
of its prior rulings are present./5

  Strictly speaking, the Krislov suit does
not involve the sort of extraordinary
circumstances described in In re VMS
Securities. Any threat it presents to the
integrity of the district court’s rulings
in the Montgomery case is minimal,
involving ordinary collateral estoppel
and res judicata issues. Pacheco de Perez
v. AT&T Co., 139 F.3d 1368, 1380 (11th
Cir. 1998) (holding that such a threat
would not supply exceptional
circumstances); In re Agent Orange, 996
F.2d at 1431 (suggesting the same). And,
the Montgomery case was not particularly
complex litigation--it was a relatively
straight-forward class action.

  Still, the Krislov suit is not an
ordinary action to enforce a term of a
settlement agreement involving a dispute
regarding whether a party has reneged on
its post-judgment obligations through
some out-of-court action or failure to
act. Rather, the Krislov suit involves a
dispute over whether the Krislov
defendants reneged on their pre-judgment
obligations by obtaining a ruling (they
promised not to seek) from the district
court. The district court is uniquely
positioned to resolve this sort of
dispute. It involves events that occurred
before the court and revolves, in part,
around the impetus for one of the
district court’s rulings. Moreover, it
would be awkward, to say the least, for a
state court to pass on certain issues
raised by this case, such as what
prompted the district court to rule in
the way it did. In our view, the unusual
nature of the Krislov suit--involving the
alleged procurement of a court ruling
through a breach of a pre-judgment
settlement obligation--does present a set
of circumstances that make it appropriate
for a federal court to remove a case from
state court in aid of its jurisdiction.
Therefore, although it does not involve
the sort of extraordinary circumstances
described in In re VMS Securities, we
conclude that the Krislov suit does
involve a set of extraordinary
circumstances that justifies removal
under the All Writs Act. Accordingly, the
district court properly assumed
jurisdiction over the Krislov suit and
did not err in refusing to remand the
case to state court.


  2.   Merits

  Class counsel also contends that the
district court erred in dismissing the
Krislov suit on its merits. The suit
alleged a breach of contract claim
against Aetna Plywood and the four
managers who purchased control of the
company, as well as claims of aiding and
abetting a breach of contract and
intentional interference with a
contractual relationship against the
individual defendants, all arising out of
the defendants’ efforts to oppose class
counsel’s request for attorneys’ fees, in
violation of the settlement agreement
resolving the Montgomery case. In
dismissing the lawsuit, the district
court concluded that class counsel was
collaterally estopped from arguing that
the amount of attorneys’ fees the court
awarded was other than the proper amount
and that, consequently, counsel could not
establish that the alleged breach of
contract (or associated aiding and
abetting and intentional interference)
caused it any damages. On appeal, the
Krislov defendants advance this argument,
as well as several others, in support of
the district court’s decision. We need
not go through each argument they make,
however, as their argument that class
counsel cannot establish causation is
dispositive.
  The Krislov defendants argue that,
because the district court made an
independent determination as to the
appropriate attorneys’ fee (as it is
required to do, see Strong v. BellSouth
Telecomms. Inc., 137 F.3d 844, 849-50
(5th Cir. 1998)), class counsel cannot
establish that they caused counsel’s
alleged damages, an element of each of
the causes of action at issue, see Dallis
v. Don Cunningham & Assocs., 11 F.3d 713,
717 (7th Cir. 1993) (tortious/intentional
interference with contract); Gonzalzles
v. American Express Credit Corp., 733
N.E.2d 345, 351 (Ill. App. Ct. 2000)
(breach of contract); Restatement
(Second) of Torts sec. 876 (1979) (aiding
and abetting/6). We agree. It would
beimpossible for class counsel to prove
that the objections filed by Rassin,
Minnaert, and Weller, rather than the
district court’s efforts in fulfilling
its duty to independently evaluate
counsel’s attorneys’ fee request, were
the proximate cause of any alleged
diminution of counsel’s attorneys’ fee
award. The district court did cite the
objections filed by Rassin, Minnaert, and
Weller, but that only means that the
court read, and perhaps was persuaded by,
their objections, it says nothing about
whether the court would have reached a
different result in the absence of the
objections or whether the objections
caused the court to rule the way it did.
In fact, assuming (as we always do) that
the district court took its duty to
independently evaluate class counsel’s
request seriously, the only proximate
cause of the court’s ruling could be its
own determination that the amount of
attorneys’ fees awarded was an
appropriate amount. In short, it is
impossible, as a matter of law, to
establish the proximate cause for a
judicial ruling of the sort involved
here. Accordingly, the Krislov suit
deserved to be dismissed for failure to
state a claim.

III

  Because the class in the Montgomery case
lacks standing to challenge Aetna
Plywood’s ownership restructuring plan,
we affirm the district court’s rejection
of the class’s challenge to that plan. We
also affirm all of the district court’s
decisions regarding attorneys’ fees,
costs, and the requested incentive award,
except its decision to not award class
counsel any of the Aetna Plywood stock
obtained for the class, which we reverse.
Finally, we affirm the district court’s
decision to dismiss class counsel’s state
law action.

Affirmed in part, Reversed in part.




/1   In passing, the class suggests that
the reorganization plan also
represents a waste of corporate assets,
an independent breach of
fiduciary duty, see Sanders v. Wang,
No. 16640, 1999 WL 1044880, at *10
(Del. Ch. Nov. 8, 1999), but it
does not pursue this theory with any
vigor. In any event, the analysis that
follows would apply equally to
any claim based on such a theory.

/2   We note, nevertheless, that Delaware
appears to have a doctrine of
equitable standing that allows for
standing in certain circumstances
when 8 Del. Code sec. 327 would otherwise
deny standing to a plaintiff.
See Shaev v. Wyly, No. 15559-NC,
1998 WL 13858 (Del. Ch. Jan. 6, 1998),
reargument denied, 1998 WL 118200 (Del.
Ch. Mar. 6, 1998). But, the
class does not invoke this doctrine and
it is far from obvious that the
doctrine would grant the class standing.
As such, we decline to explore
the possibility that the class may
qualify for equitable standing.

/3   When a court uses the lodestar
method of calculating attorney’s fees,
computer research charges are separately
recoverable, but (and this is
the important point) only as a type
of attorneys’ fee, not as an
expense. Haroco, 38 F.3d at 1440-41.

/4   The court’s ruling regarding removal
under the All Writs Act is in
accord with the weight of the authority
from the other courts of
appeals that have considered the issue.
See Bylinski v. City of Allen
Park, 169 F.3d 1001, 1002-03 (6th Cir.
1999); NAACP, Minneapolis Branch
v. Metropolitan Council, 125 F.3d 1171,
1173-74 (8th Cir. 1997),
reinstated after remand, 144 F.3d 1168,
1171-72 (8th Cir. 1998); Davis
v. Glanton, 107 F.3d 1044, 1047 n.4
(3d Cir. 1997); In re Agent Orange,
996 F.2d at 1431-32. But see Pacheco
de Perez v. AT&T Co., 139 F.3d
1368, 1378-80 (11th Cir. 1998) (declining
to take a position, but
holding that removal was improper
even if the All Writs Act might
authorize removal in some cases);
Hillman v. Webley, 115 F.3d 1461,
1467-69 (10th Cir. 1997) (rejecting
the All Writs Act as a basis for
removal). The only authority to the
contrary, the Tenth Circuit’s
Hillman decision, which rests on
circuit precedent holding that the All
Writs Act does not independently
confer federal jurisdiction, overlooks
one of the key points underlying
In re VMS Securities and the similar
cases from other circuits. In those
cases federal jurisdiction exists
by virtue of the ancillary jurisdiction
doctrine (though the other
circuits do not use the term
"ancillary jurisdiction"), not by virtue
of the All Writs Act. The All Writs
Act is simply the source of
authority for removal.

/5   While the lack of symmetry between
the treatment of cases filed in
state court and federal court may
appear to be incongruous, it is
justified by the necessity of remaining
faithful to the important
limitations on the use of the
All Writs Act. Moreover, a standard for
removing a case from state court
that is more demanding than the
standard for assuming jurisdiction
over a case filed in federal court
pays heed to the legitimate comity
concerns raised by the removal of
a state law action that does not fall
under any of the established
heads of federal jurisdiction.

/6   Class counsel cites, and we have
discovered, no Illinois case
recognizing a cause of action for
aiding and abetting a breach of
contract, but counsel does point
to sec. 876 of the Restatement
(Second) of Torts, which sets out
a cause of action for, among other
things, providing substantial
assistance or encouragement to another’s
tortious acts. Because a breach of
contract is not a tortious act, sec.
876 does not support class counsel’s
aiding and abetting claim, see
Reuben H. Donnelley Corp. v. Brauer,
655 N.E.2d 1162, 1169-71 (Ill.
App. Ct. 1995), but even if it did,
causation is an element of the
cause of action. Restatement (Second)
of Torts sec. 876 cmt. d (1979)
(noting that ordinary principles
of tort causation apply).
