author: GENE CARTER, District Judge.

text:
    DORAN-MAINE, INC., Plaintiff, v. AMERICAN ENGINEERING & TESTING, INC., Defendant.
    Civ. No. 81-0158-P.
    United States District Court, D. Maine.
    May 14, 1985.

      George S. Isaacson, Alfred C. Frawley, Brann & Isaacson, Lewiston, Me., for plaintiff.
    Joseph Lenkowski, Sanford, Me., for defendant.
   FINDINGS OF FACT, CONCLUSIONS OF LAW AND OPINION

GENE CARTER, District Judge.

Plaintiff Doran-Maine, Inc. (Doran) is a manufacturer and distributor of concrete pipe in Maine and throughout New England. Defendant American Engineering & Testing, Inc. (AET) is a materials testing and consulting firm organized and existing under Massachusetts law. Doran was awarded a contract by Lisbon Contractors, Inc., the general contractor for the City of Concord, New Hampshire, to supply concrete pipe to be used in a storm and sewer construction project. AET was engaged by the supervising engineer on the project, Camp Dresser & McKee (CDM), to analyze tests and approve materials to be used on the project, including the concrete pipe supplied by Doran. AET performed tests on Doran’s pipe, and subsequently advised CDM that the tested pipe did not meet the absorption standards set forth in the contract specifications for the project. AET further advised CDM that any concrete pipe fabricated on the same machine as the tested pipe would not meet contract specifications. Lisbon Contractors subsequently terminated its contract with Doran for all pipe 24 inches in diameter and smaller.

Under two different theories, Doran alleged that AET was legally responsible for damages it suffered as a result of the contract termination. First, Doran alleged that AET negligently conducted the absorption tests and negligently failed to investigate Doran’s claims of inaccuracy, and that AET’s negligence caused Lisbon Contractors to terminate its contract with Do-ran. Second, Doran alleged that AET intentionally interfered with its contractual relations with Lisbon Contractors. The parties agree that Massachusetts law is to be applied. The case was tried to the Court without jury on March 4 and 5, 1985. The parties have submitted post-trial briefs in support of their respective positions.

I. Findings of Fact

Lisbon Contractors was the general contractor for a sewer construction project which commenced in Concord, New Hampshire in 1980. Lisbon entered into a contract with Doran on June 24, 1980, under which Plaintiff engaged to supply concrete pipe for the project varying in diameter from 12 inches to 36 inches. Doran began fabricating 18 inch Class IV pipe and 36 inch and 30 inch pipe for the project in the summer of 1980.

Camp Dresser & McKee, Inc. (CDM) was engaged by the City of Concord to be the supervising engineer for the project. CDM’s responsibilities included the duty to ensure that all project specifications were followed. In accordance with this duty, CDM entered into a contract with AET under which AET undertook to inspect and test reinforced concrete pipe and precast manholes to ensure conformance with CDM’s specifications. The agreement between CDM and AET was made on July 18, 1980. Paragraph 3.5 of the contract provided that CDM shall “[cjonsult with Consultant [AET] regarding the qualification of any contractor or subcontractor proposed for this Part of the Project.” The agreement provided that AET would be paid sixty-nine cents ($.69) per linear foot of pipe produced for its testing and consulting services. The contract provided that this payment would include all travel costs, tests and other items required by pertinent project specifications. Therefore, the compensation AET was to receive under the contract would not vary with the amount of testing it performed; it was determined by the amount of pipe produced by Doran.

Representatives of AET visited Doran’s plant prior to the time that production of the pipe began and periodically after construction began. Doran has two machines for the vertical fabrication of concrete pipe. The smaller machine is capable of fabricating pipe from 6 inches in diameter to 36 inches in diameter. The larger machine is generally used for pipe from 21 inches in diameter to 72 inches in diameter. It was understood by both Doran and AET that Doran intended to use the smaller machine for producing pipe for the Concord project of 24 inches in diameter and smaller, and that the larger machine was to be used to fabricate all larger pipe.

AET was to perform several different tests on the concrete pipe, but only the test for absorption is at issue in this ease. The purpose of the absorption test is to determine how much water a piece of concrete pipe will absorb. The concern is that if pipe absorbs too much water, the water will eventually weaken the steel reinforcement embedded in the pipe and abbreviate the useful life of the pipe.

The parties agree that the acceptable method of testing concrete pipe is set forth by the American Society of Testing Materials (ASTM) in Standard C 497. The absorption test is fairly straightforward. It includes two alternative procedures. Method A is the standard test and requires three to six days to complete. Method B is intended as an accelerated test that requires about one and a half days to complete. AET used Method A to test Doran’s pipe.

Under Method A, the laboratory technician first dries a sample core from the wall of the pipe in an oven at a temperature of 221 to 239 degrees Fahrenheit for a minimum of forty-eight hours. The sample then must be weighed at intervals of not less than six hours until the increment of weight loss during an interval falls to .1% or lower. Then the dry weight of the sample is recorded. Then the sample is placed in water, which is heated to a boil, and the boil is continued for five hours. The technician then turns off the heat and permits the sample to cool in the water for not less than fourteen hours nor more than twenty-four hours. The technician then removes the sample from the water, places it on the drain rack and allows it to drain for one minute. Excess water is removed from the sample by quickly blotting with an absorbent cloth, and the technician is to weigh the sample immediately following the blotting. To calculate the absorption percentage, the technician subtracts the dry weight of the sample from the wet weight and divides that figure by the dry weight.

The job specifications call for an average absorption percentage not in excess of 5.5%, with no result to be above 6%. AET obtained its first set of absorption test results on August 1, 1980. These results reflected tests performed on samples taken by Doran at AET’s request and delivered to AET via parcel post. AET president, William Montgomery, had instructed Richard Davies, vice president of Doran, to take one core sample of 2 inches in diameter and one sample of 4 inches in diameter from each size and class of pipe for each day of production. He gave no instructions as to the location on a specific piece from which the samples should be taken. Tests' of samples of 18 inch pipe fabricated on July 17, 21 and 23 were completed by AET technician Henry Walter on August 1, 1980. Several of the absorption percentages were found to exceed the 6% maximum set forth in the specifications, and the average absorption percentage to significantly exceed the 5.5% average contained in the specifications. Montgomery immediately informed CDM and Doran of the test results.

If samples fail to meet specifications in the initial absorption test, the specifications require that two samples from pipe produced on each day be tested. Accordingly, Montgomery again requested Doran to take and to send him two samples of 18 inch pipe for each of the production days of July 17, 21 and 23 for retesting. Again, Montgomery gave no instructions as to the location on a piece of pipe from which the sample should be taken. The average result of the retest, obtained on August 8, 1980, was higher than the average of the initial tests on the 18 inch pipe.

Doran then sent two more samples of 18 inch pipe from each of the production dates, plus 18 inch pipe produced on July 25, 29 and 31, 1980, to AET for another retest. The results of the tests completed on August 14, 1980, were still higher than those reported on August 8, 1980.

Montgomery prepared a report summarizing test results through August 14, 1980, for a Mr. Charles Loveridge of CDM. The report was dated August 18, 1980. The report was based on work sheets provided by laboratory technician Henry Walter. The report contains one clear inaccuracy. It includes test results obtained August 1, 1980, for pipe produced on July 25 and 29. These results could not possibly have been obtained on August 1, 1980, since AET did not have samples from pipe produced on July 25 or July 29 when the first series of tests was done. Samples from those dates did not become available until after the August 8, 1980, test results were obtained. Montgomery was unable to explain the insertion of these figures. It clearly was not a transcription or typographical error. There is no evidence that the error was in any sense intentional, but it does call into question the care with which AET prepared the report of tests upon which it knew CDM would rely.

In addition to reporting the test results, Montgomery stated:

It is apparent, from the tests as conducted to date, that absorption criteria as specified cannot be obtained on samples representing 18" diameter production through 7/31/80.
Such results are also indiative [sic], at this time, that all pipe diameters as might be produced on the smaller machine without re-densification would not meet the specified absorption criteria.

Soon after obtaining the results of Montgomery’s August 18th report, Doran president Donald Williams requested that AET perform a retest. He said that he had been surprised by the test results because they indicated that absorption percentages generally increased over time. This tendency was contrary to his experience, which was that absorption decreased as pipe grew older. In addition, Williams was “mortified” by Montgomery’s prediction that all pipe produced on the smaller machine would not meet absorption specifications, even though AET had tested only 18 inch pipe produced on the smaller machine. Doran also had intended to produce pipe diameters of 24 inches, 21 inches, 15 inches, and 12 inches on the smaller machine.

Montgomery picked up further sample cores of 18 inch pipe produced on the dates for which pipe had previously been tested, as well as a core from pipe produced on August 8, 1980, from the Doran plant on August 25, 1980. AET completed its retest on August 29, 1980, and reported the results directly to Doran in a letter dated August 29, 1980, which was received by Doran on September 4, 1980. The absorption percentages reported were even higher than those reported for the previous tests completed on August 14, 1980.

Meanwhile, Doran provided sample cores to the independent materials testing firm of Jordan Gorrill Associates for comparison absorption tests. Tests completed by Jordan Gorrill on September 4, 1980, produced markedly lower absorption percentages than had any of the tests performed by AET. Jordan Gorrill tested two samples of 18 inch pipe for each of the production dates from which AET had drawn its samples for its August 29 tests. The average absorption percentage for all pipe tested by Jordan Gorrill was approximately 5.7. In contrast, the average absorption percentage of all pipe tested by AET on August 29, 1980, was approximately 7.1.

On September 5, 1980, Doran vice president Richard Davies wrote to Montgomery to request that a meeting be arranged with Lisbon Construction, CDM, and AET. Davies indicated that he and Montgomery had discussed extensively the test results obtained by AET. He noted that Doran and its predecessor had been manufacturing reinforced concrete pipe at Doran’s current location, using similar materials and manufacturing facilities, for many years. He stated that the tests obtained by AET were inconsistent with the results obtained from testing agencies in the past. He attached results of previous tests that had been performed on 18 inch Class IV pipe that had been manufactured by Doran’s predecessor in 1974 and 1975. He also included the results of the tests performed by Jordan Gorrill. He made it clear that Lisbon Contractors was refusing to accept Doran pipe for the project because of the absorption test results obtained by AET.

On or about September 12, 1980, a meeting was held at which Williams, Davies, Montgomery and a representative of CDM were present. At the time of that meeting, Williams understood that Lisbon intended to terminate at least a portion of its contract with Doran for the production of concrete pipe for the project. At the meeting, the parties discussed Doran’s objections to AET’s tests. Williams attempted to persuade CDM to accept the Jordan Gorrill test results in place of AET’s test results. CDM refused to do so, and indicated that it would rely upon AET’s tests in determining whether Doran’s pipe met project specifications. Williams also requested AET to perform another test upon the 18 inch pipe that had already been tested by AET. Montgomery refused to do so, but offered to permit Jordan Gorrill or any other testing agency selected by Doran to monitor AET’s tests of pipe to be manufactured by Doran in the future. Williams rejected this offer because his objective was to persuade CDM to accept the pipe that had already been manufactured and tested by AET and because a contract termination by Lisbon, which would deprive Doran of the opportunity to produce other pipe under the contract, was imminent.

Despite Doran’s protestations and the discrepancy between AET’s test results and those of Jordan Gorrill, AET did not conduct any further testing of the 18 inch Class IV pipe which AET had already tested. Nor is there any evidence that AET retracted its conclusion in its report of August 18, 1980, that none of the pipe manufactured on the smaller machine would meet project specifications. AET never, in fact, tested pipe of 24 inches in diameter or smaller except for the 18 inch Class IV pipe.

Montgomery was aware that CDM directly relied upon AET’s test results in determining whether Doran’s pipe would be accepted for the project. Moreover, Montgomery was aware that CDM had the final say as to whether Doran’s pipe would be used on the project. Finally, Montgomery was aware that his conclusion with respect to the acceptability of all pipe manufactured on the small machine was likely to be accepted and was likely to result in the cancellation of that portion of Doran’s contract with the general contractor.

In a letter dated September 22, 1980, Lisbon Contractors informed Doran that it was terminating its contract with Doran for concrete pipe in sizes of 24 inches and less. It is clear from this letter that the reason Lisbon cancelled was that CDM refused to approve the pipe because of AET’s report of its test results. Despite the cancellation, Doran continued to pursue the matter.

The discrepancy in the various test results remains unexplained. Decatur Cousins, who was director of material services for Jordan Gorrill at the time of its tests on Doran’s pipe, testified as an expert for Doran. He testified that the absorption test procedure is a simple one with which very little could go wrong. Henry Walter, the laboratory technician for AET who performed the tests on Doran’s pipe, testified that he always follows ASTM procedures, but he did not specifically recall performing the tests in question. Nor did Montgomery recall observing any tests performed on Doran’s pipe. Thus, there is no direct evidence as to the care with which AET performed the tests.

With respect to AET’s conclusion that the pipe produced by Doran on the small machine other than that tested would not meet project specifications, Cousins testified that he had never “extrapolated” from one pipe size to another. He had never heard of any testing agency doing so, and he believed that AET did not act responsibly by reporting this conclusion to CDM.

AET president Montgomery was also qualified as an expert with respect to the fabrication and testing of concrete pipe. He testified that absorption test results on vertically fabricated pipe can vary from one end of a single piece of pipe to the other because the bottom of the pipe is more dense than the top. Montgomery disagreed with the testimony of Cousins and Williams with respect to the tendency of absorption tests to decrease with the age of the pipe. He did not actually controvert their testimony, but stated that because samples from a single piece of pipe can vary in absorption by as much as one percent one way or the other, it is not possible to discern a consistent trend in absorption percentages as a function of the age of the pipe. If that is so in this case, it is only because he consistently failed to give adequate instruction as to the place of selecting the samples.

In all his dealings with Doran, Montgomery never instructed Doran to take samples from one end of a piece of pipe or another, nor did he ever inquire as to whether particular samples had come from the bottom, middle or top of a section of pipe. Because of this, Montgomery had no way of knowing whether disparities in the test results on the pipe produced by Doran bore any particular relationship to the location from which the samples were taken.

Doran has not proved by a preponderance of the evidence that AET incorrectly performed, as a matter of methodology, any of the tests on Doran’s pipe. However, AET had information regarding test results which conflicted with its own, which indicated that the trend of its test results conflicted with normal experience, and evidence that its test results were inconsistent with historical tests upon Doran’s pipe. Montgomery had not observed the tests performed on Doran’s pipe, and could not base any conclusions as to their accuracy upon personal knowledge. He reported two results for tests that never actually took place, which is significant evidence that he did not act with due care in the reporting of the test results. In light of all these facts, the Court finds that AET did not act reasonably or with due care when it persisted in standing by the conclusions contained in its report of August 18, 1980 despite the fact that Doran repeatedly requested that AET retest or reconsider its conclusions.

The Court further finds that the primary cause of Lisbon Contractors’ decision to terminate Doran’s contract with respect to pipe of 24 inches and smaller was AET’s unreasonable refusal to reconsider the conclusions in its August 18 report. That result, AET knew or clearly should have known, would be precipitated by its adamant refusal to confront the substantial question raised as to the accuracy of its test results.

Doran lost gross sales totaling $206,-802.62 as a result of Lisbon’s cancellation. The lost profit on the sales, after deducting all variable operating expenses and direct costs that would have been incurred as a result of the sale, is $48,722.70. After the contract was canceled, Doran purchased substitute pipe from a competitor and sold it to the general contractor at the contract price. Doran suffered a loss of $3,119.60 on these transactions. Additionally, Doran incurred expenses for the fees of Jordan Gorrill in the amount of $313.43, fees for Keegan Technology in the amount of $105.00, and carrying charges on unsold 18 inch Class IV inventory in the amount of $3,203.12.

II. Opinion and Conclusions of Law

A. Negligence

Doran’s position at trial was that AET owed Doran a duty to exercise due care in the performance of its tests and the reporting of the results, that AET breached its duty, and that this breach was the proximate cause of Lisbon’s termination of a portion of its contract with Doran. AET’s position is that Doran failed to meet its burden of proving each of these elements of its negligence claim.

AET argues that its duty to exercise due care extended only to CDM, with whom it contracted to provide the testing services. This is a claim for negligence, however, not for breach of contract. Clearly, under the applicable Massachusetts law, liability in tort is not limited to those with whom an actor is in contractual privity. Craig v. Everett M. Brooks Co., 351 Mass. 497, 501, 222 N.E.2d 752 (1967); see Page v. Frazier, 388 Mass. 55, 64, 445 N.E.2d 148 (1983). If an actor “should have realized that his conduct might cause harm to another in substantially the manner in which it is brought about, the harm is universally regarded as the legal consequence of the actor’s negligence.” Restatement (Second) of Torts, Section 435, Comment b (1965). This principle is recognized by the Massachusetts Supreme Judicial Court. See Rae v. Air-Speed, Inc., 386 Mass. 187, 193, 435 N.E.2d 628 (1982). If the Plaintiff’s harm was the foreseeable result of Defendant’s negligence, Plaintiff has established a cause of action in negligence. Id.; see also Craig v. Everett M. Brooks Co., 351 Mass. 497, 222 N.E.2d 752 (1967). In the Craig case, the property owner entered a contract with the defendant, a surveyor, to produce plans for a development. The plaintiff was a general contractor who had no contractual relationship with the defendant, but had to rely upon certain aspects of the defendant’s work in the performance of its own work. The Court held that the defendant could be held liable to the general contractor for its negligent performance of the work contracted for by the property owner.

In this case, the Court has found that Montgomery was aware that CDM was relying on AET’s test results in order to determine whether Doran’s pipe met specifications. The Court has also found that Montgomery was aware that his conclusions with respect to the acceptability of all pipe manufactured on the small machine was likely to result in the cancellation of a portion of Doran’s contract. Therefore, the injury suffered by Doran was not only foreseeable, but was likely to occur as a result of AET’s report of its test results.

It now must be determined whether AET acted negligently in the performance of its tests or in the reporting of its conclusions to CDM. The Court has found that Plaintiff has failed to prove by a preponderance of the evidence that AET negligently performed the tests. The Court has also found, however, that AET acted unreasonably when it stood by its test results despite being presented with substantially lower test results respecting the same pipe from another testing firm, historical test results inconsistent with its own, and the suggestion that the upward trend of its absorption test results over time was contrary to common experience. AET also acted unreasonably when it advised CDM that all pipe produced on Doran’s smaller machine, including pipe in several sizes that had not been fabricated or tested, would fail to meet project specifications. In both these respects — refusing to reconsider its test results and refusing to retract its prediction as to untested pipe — AET was negligent.

AET’s negligence was a proximate cause of the termination by Lisbon of a part of its contract with Doran. AET argues that CDM’s persistence in relying on AET’s conclusion and refusal to adopt alternative tests was an intervening cause of Doran’s injury that should insulate AET from liability. Even assuming that CDM’s conduct was one proximate cause of Do-ran’s injury, it is clear that AET’s negligence was also a proximate cause of the harm. See Zezuski v. Jenny Manufacturing Co., 363 Mass. 324, 328-29, 293 N.E.2d 875 (1973). Once put on notice that its test results and conclusions had been called into question, AET had the authority to retract its conclusions pending further investigation and thereby forestall CDM’s decision to reject the pipe. AET’s failure to take such action was a proximate cause of the contract termination.

Doran has established the elements of its negligence claim by a preponderance of the evidence. There being no difference in the damages claimed for alleged intentional interference with contractual relations, it is unnecessary for the Court to consider that claim.

B. Damages

Recovery of lost profits is a recognized element of damages in business tort cases. Ricky Smith Pontiac, Inc. v. Subaru of New England, Inc., 440 N.E.2d 29, 48, 14 Mass.App. 396 (1982). Plaintiff is entitled to recover damages in the form of net profits which would put him in as good a position as if the tort had not occurred. Id. The Court in Ricky Smith Pontiac further stated:

The prevailing rule is that damages for such profits must be reduced by any direct expenses that would have been incurred in making the lost sales, but fixed overhead expenses need not be deducted unless they were, or would have been, changed by the receipt of the lost business.

Id.; see also Roblin Hope Industries, Inc. v. J.A. Sullivan Corp., 413 N.E.2d 1134, 1136, 11 Mass.App. 76 (1980). Doran is entitled to recover the amount it would have received under the contract, less any direct costs it would have been obliged to incur in performing the contract. Roblin Hope Industries, 413 N.E.2d at 1136. The amount should not be reduced, however, by fixed overhead items which would not have been altered by Doran’s performance of the subcontract. Id.

The Court has found that Doran’s profit on the sale of pipe attributable to the cancellation of its contract with Lisbon was $48,722.70, after deducting all direct costs of the sales and variable operating expenses. Other damages proximately caused by the contract cancellation were $313.43 for Jordan Gorrill’s testing fees and $3,203.12 for carrying charges on unsold 18-inch Class IV inventory. Doran has also claimed $3,119.60 for substitute pipe supplied to Lisbon after Lisbon cancelled the contract. Doran produced no evidence that it had any legal obligation to supply the substitute pipe and incur the resulting cost. Rather, Doran voluntarily offered to supply the pipe. Accordingly, the Court will not award Doran damages to compensate for this expense. Doran is entitled to recover damages in the amount of $52,-239.25.

Accordingly, it is ORDERED and ADJUDGED that JUDGMENT in favor of Plaintiff Doran-Maine, Inc. shall be entered in the amount of Fifty-Two Thousand, Two Hundred Thirty-Nine Dollars and Twenty-Five Cents ($52,239.25).

So ORDERED.

      . Doran continued to correspond with CDM and, in fact, obtained a second series of independent absorption test results from Keegan Technology and Testing Associates, Inc. of New Jersey on December 16, 1980. These results indicated that the pipe produced on the same dates that had been tested by AET were well within project specifications. Although these test results corroborate Doran’s contention that the pipe met project specifications, the evidence does not demonstrate that AET knew of these test results early enough to take them into account when deciding whether to undertake further testing.


source: Caselaw Access Project

author: WHITMAN KNAPP, District Judge.

license: Public Domain

text:
    Russell J. MOKHIBER, on behalf of the FORD MOTOR COMPANY, Plaintiff, v. Roy M. COHN, Saxe Bacon & Bolan, P.C., Allan M. Pollack, Orenstein, Snitow, Sutak & Pollack, P.C. and Ford Motor Company, Inc., Defendants.
    No. 81 Civ. 6672 (WK).
    United States District Court, S.D. New York.
    May 15, 1985.

      Public Citizen Litigation Group by Alan Morrison, Washington, D.C., Sive, Paget & Riesel, P.C. by David Paget, New York City, for plaintiff.
    Saxe, Bacon & Bolán by Louis Biancone, New York City, for defendants Roy M. Cohn and Saxe, Bacon & Bolan.
    Cole & Deitz by Robert E. Kushner, New York City, for defendants Allan M. Pollack and Orenstein, Snitow, Sutak & Pollack.
    Hughes, Hubbard & Reed by George A. Davidson, New York City, for defendant Ford Motor Co.
   MEMORANDUM & ORDER

WHITMAN KNAPP, District Judge.

In this diversity action plaintiff (hereinafter the “instant plaintiff”), a shareholder of the Ford Motor Company (the “Company”), a Delaware corporation with its headquarters in Michigan, seeks to require certain attorneys to repay to the Company the sum of $230,000 (plus pre-judgment interest) claimed to have been improperly received by them in an allegedly unauthorized settlement of a previous derivative suit.

The attorneys involved in the previous litigation are two firms, Saxe, Bacon & Bolán, P.C. (the “Cohn firm”), principally represented by Roy M. Cohn, Esq., and Orenstein, Snitow, Sutak & Pollack (the “Pollack firm”), principally represented by Allan Pollack, Esq. These attorneys are hereinafter collectively referred to as the “defendant lawyers.” In 1978, the defendant lawyers were retained by a partnership known as Bader and Bader, and two other Company stockholders, to institute a derivative action (the “Bader action”) on behalf of the Company and all its stockholders. After approximately 18 months of litigation before the New York courts, that action was conditionally dismissed on grounds of forum non conveniens, and Michigan was designated the appropriate forum. No suit was ever filed in Michigan, but about four months after the New York dismissal the dispute was settled. The only obligation assumed by any defendant was the Company’s agreement to pay $230,000 to the plaintiffs’ attorneys. It is that sum which the instant plaintiff seeks to recover on the Company’s behalf.

THE BADER ACTION

The defendant lawyers claim to have relied upon two sources of information in drawing their complaint in the Bader action. The first source was a high company official (whose identity has, for obvious reasons, been kept confidential, and who will hereinafter be referred to as the “informant”) who was extensively interviewed by James J. Crisona, Esq., a member of the Pollack firm and a former Justice of the New York Supreme Court. The informant, through Mr. Crisona, is said to have convinced the defendant lawyers that they had a valid claim based on various revelations of misconduct by Henry Ford II, the then Chairman of the Company’s Board of Directors. The second source of information was an announcement by the United States Department of Justice that it was conducting an investigation into widespread rumors that the Company had made illicit payments to officials of the Indonesian Government. Although announcement of the Justice Department’s investigation preceded the Bader action, the original complaint relied exclusively on the first of the above sources, while subsequent amended complaints relied on both.

The allegations of the third amended (and ultimate) complaint may conveniently be divided into two categories: those counts (1, 2, 3, 4, 6, 7, 9 and 10) apparently relying upon the informant’s revelations; and those counts (5 and 8) apparently relying upon the Justice Department’s announcement. The “informant” counts allege that Mr. Ford, with the acquiescence of several Directors, engaged in a wide variety of self-dealing, waste and mismanagement: expenditures in excess of $1,000,-000 per year for an apartment in the Carlyle Hotel in New York City for the exclusive use of Mr. Ford and his family; the purchase of two residences in London for his personal use; obtaining kickbacks amounting to $750,000 in connection with contracts granted to a co-defendant and a corporation affiliated with the latter; causing the Company to enter into various overpriced contracts, on condition that the contractors provide furnishings for Mr. Ford’s personal residences; accepting, as Chairman of the Board, excessive annual remuneration in the amount of $992,000 for which he performed “little, if any, services”; receiving payments for providing advance information of the Company’s real estate investments; and causing the Company to invest over $50,000,000 in a Philippines project in exchange for a $2,000,000 cash payment made to an otherwise unidentified “defendant.”

The Justice Department counts alleged that Mr. Ford caused the Company to pay a $1,000,000 bribe to an official of the Indonesian government in exchange for favorable action on a contract for which the Company was bidding; that he tried to cover up the payment by forging, altering and back-dating contracts, books and records; and that the Company’s accounting firm concealed and destroyed corporate financial records pertaining to the alleged bribe.

These allegations were supplemented by the Bader plaintiffs’ answers to interrogatories which, so far as are here particularly relevant, charged Mr. Ford with personally having misused several million dollars of company assets. The relevant interrogatory answer was organized under several headings: “Transportation”; “Personal Luxuries for Henry Ford II”; “Personnel and Nepotism”; and “Miscellaneous Unauthorized and Illegal Corporate Enterprises.” It charged that Mr. Ford had used corporate funds and aircraft to transport furnishings across the ocean for use at his residences and the residences of his close friends, specifically, an ornate fireplace, pet dogs and cats whenever their owner (“his close and personal friend”) “felt her pets were in need of a change in climate.” It alleged that Mr. Ford used Company aircraft for his personal transportation and the transportation of his family and friends; and that he maintained six to nine corporate limousines and drivers in New York for his personal use and the personal use of other directors, family and friends. In addition to causing the Company to maintain a private apartment at the Carlyle Hotel, as alleged in the complaint, the Interrogatory answer asserted that the Company kept for Mr. Ford’s use in Dearborn, Michigan a sauna bath, private gym and full-time masseur, private dining room staffed by Company personnel (“It is estimated that each lunch Mr. Ford eats costs the shareholders approximately $200.00 per person ...”) and that the Company was preparing a similar “personal setup” in Detroit with furnishings said to cost several million dollars. Mr. Ford was said to have staffed the home of his “close and personal” friend with Company personnel, and to have caused the Company to hire her family and former employees when they were not the most qualified applicants for their jobs. The Interrogatory answer further claimed that the Company “[pjicked up the tab for bird hunting in Scotland, for Mr. Ford and his friends,” and paid for a large private party he threw in 1977. Finally, the Interrogatory answer charged Mr. Ford and his family with misusing the Company’s telephone credit card.

The merits of the foregoing accusations were never addressed in the New York litigation. Indeed, the defendants in the Bader action never interposed an answer, the litigation being exclusively addressed to an omnibus defense motion demanding: dismissal of the third amended complaint for plaintiffs’ failure to make a proper demand upon the Board of Directors; dismissal on grounds of forum non conveniens; or, in the alternative, disqualification of the Cohn firm, and posting by plaintiffs of a bond for costs. Justice Fraiman of the New York County Supreme Court ordered the Bader plaintiffs to post a $250,000 bond, but denied all other relief. The Company appealed to the Appellate Division. That court, leaving all other questions undecided, reversed on the issue of forum non conveniens and directed that the complaint be dismissed on the condition that all the defendants agree to accept service of process in the State of Michigan and to waive any jurisdictional or statute of limitations defenses should any of the causes of action in the final Bader complaint be there refiled. Bader & Bader v. Henry Ford II, et al. (1st Dep’t 1979) 66 A.D.2d 642, 414 N.Y.S.2d 132. The Bader plaintiffs appealed to the New York Court of Appeals, which, on September 18, 1979, dismissed the appeal. 48 N.Y.2d 649, 421 N.Y.S.2d 199, 396 N.E.2d 481.

ACTIVITIES WITHIN THE COMPANY DURING THE PENDENCY OF THE BADER ACTION

Although none of the allegations of the Bader complaint were litigated, they were not wholly without impact on the Company. When the Attorney General of the United States had announced his investigation into the Indonesian allegations, the Company’s Board of Directors had established a special audit committee of its members to conduct its own investigation into those allegations. When the Bader complaint was filed the Board expanded the authority of that special committee, instructing it to investigate the Bader allegations as well. The special committee was provided with copies of the several Bader complaints and with the above-described answers to Interrogatories. By the time the Bader complaint was conditionally dismissed by the Appellate Division, the special committee’s labors had produced at least two results which are here claimed to be relevant: (1) Mr. Ford had been billed for and had paid the sum of $34,585 with respect to unauthorized expenditures for which the special committee had found him to be responsible; and (2) other personnel had been billed for and paid $11,215.40 for other unauthorized expenditures. Shortly thereafter, the special committee caused the Company to circulate four directives which restated, clarified or modified regulations concerning use of Company aircraft in the United States, use of Company car and driver service, provision of persona] services by the Company, and “use of Shoreham West apartment.” These directives were re-circulated in May of 1980.

According to statements attributed to Mr. Ford, his repayments were with respect to persona] use of the suite in the Carlyle Hotel which had been mentioned in the Bader complaint and in the Bader plaintiffs’ answers to interrogatories. The repayment of $11,215.40 by other Company personnel appears to have been unrelated to anything referred to in the Bader litigation. The four directives seem related to the allegations of the Bader complaint.

According to the Company, these directives, as well as the Audit Committee’s investigation of the Bader allegations, “resulted in increased attention among [the Company’s] Board of Directors, officers and employees to the policies and procedures of the Company, including the continuing requirement to maintain complete and accurate records of the use of corporate facilities and assets.” However, it is not contended that they had any identifiable impact on the rate of the Company’s expenditures, or that any monetary savings from such increased attention have been identified. Moreover, although the new directives had been in place for approximately four years when discovery in the instant action was closed, there is no indication in the record that the actual conduct of any officer or employee was influenced by the directives, or that they had significant effect upon the Company’s total expenditures for any accounting period.

NEGOTIATIONS FOR SETTLEMENT

When the Appellate Division conditionally dismissed the Bader action, the defendant lawyers and the Company found it in their respective interests to enter into settlement negotiations rather than pursue the litigation. Although the defendant lawyers remained convinced that the informant had provided them with an adequate basis to institute a lawsuit, they had by this time realized that he was incapable of leading them to any evidence of legally cognizable wrongdoing by Mr. Ford or any other officer, director or employee of the Company. Similarly, their reliance on the Justice Department had been vitiated by the investigation’s failure to produce results. Moreover, their canvass of the Michigan Bar had revealed that no competent attorney was available to represent them at an affordable fee, and they themselves were of the professional opinion that it would be difficult successfully to litigate against the Company in its home state. And, finally, their clients, unwilling to provide further financing for the litigation or to make the necessary trips to Michigan in order to pursue it, had given them peremptory instructions to drop it.

The Company, on the other hand, was convinced that the law suit was wholly without merit and that its continuation by the defendant lawyers would prove futile. It was nonetheless apprehensive that its mere existence would produce unfavorable publicity hurtful to the Company, would divert the energies of important officials from the pursuit of the Company’s business, and would involve undeterminable — if not uncontrollable — expenditures in legal fees and other disbursements.

TERMS OF THE SETTLEMENT

A settlement between the defendant lawyers, all but one of the Bader plaintiffs, and the Company was consummated in January of 1980. It was a primary condition of that settlement that the defendant lawyers, join in a Stipulation and Agreement (the “Stipulation”) and a Joint Statement for Public Release (the “Joint Statement”). The Stipulation provided that neither plaintiffs nor their counsel, nor any member of counsels’ firms would “recommence the Derivative Action or commence or participate in, as party or counsel, any derivative action in which there is asserted any claim which is the same as, similar to, or based upon the facts or subject matter of, any claim asserted in the Derivative Action.” In addition, it required “Plaintiffs and Plaintiffs’ Counsel [to] provide to Ford’s Audit Committee any information in their possession that they would believe would support any of the charges made in the Derivative Action, except information which in their sole opinion is privileged or is a disclosure of the identity of a source.” Finally, it provided that the Company would pay each law firm “an attorneys’ fee in the amount of $100,000 and disbursements of the two law firms up to a total of $30,000.” Although nowhere explicitly stated in the terms of settlement, the Company asserts that the compromise was without prejudice to the rights of other shareholders to assert the allegations of the Bader complaint, as to which the Company and its directors had waived jurisdictional and time limitation defenses should such action be filed in Michigan.

The Joint Statement, dated January 11, 1980, reported the discontinuance of the Bader action, and stated that the “Company and the defendants named in that suit have denied and continue to deny” the charges contained therein. It further asserted that “Mr. Cohn and Mr. Pollack said it now appears that there was no wrongdoing by Henry Ford II or the others who were involved in the suit, although a reading of the complaint demonstrates plaintiffs’ disagreement with various Company policies.” The opinion of the Company’s legal counsel was also included, which was to the effect that “the agreement was in the best interests of the Company and its shareholders and would avoid the legal expense and management distraction that would result from further litigation with plaintiffs, which would not confer any benefit on the Company.”

The settlement was approved by unanimous vote of the Board of Directors (thirteen of whom were named in the Bader complaint), with the exception of Mr. Ford who did not participate. The Company paid each law firm the sum of $115,000.00.

THE INSTANT LAWSUIT

The instant law suit was initiated on October 29,1981. One of the theories upon which it is predicated is that the Bader settlement and the consequent payments to the defendant lawyers were specifically prohibited by New York’s Business Corporation Law, § 626(d) of which provides that a derivative action “shall not be discontinued, compromised or settled, without approval of the court having jurisdiction of the action ...”, and § 626(e) of which provides for court approval of awards of attorneys fees in derivative actions.

On April 27, 1982, the instant plaintiff moved for summary judgment on the ground, among others, that the aforementioned sections of the New York Business Corporation Law were dispositive. The Company, joined by the defendant lawyers, cross-moved for summary judgment, taking the position that the facts conclusively established that the decision of the Company’s Board of Directors to settle the law suit was an appropriate exercise of its business judgment. We denied both motions. With respect to the plaintiff’s motion, we ruled that since the Appellate Division had dismissed the Bader action there was, at the time of the settlement, no suit pending in the New York courts, that there therefore existed no “court having jurisdiction of the action” and, accordingly, that the cited sections of the New York Business Corporation Law were inapplicable. With respect to the cross-motions we ruled that it was a question of fact whether or not the settlement was justified by the exercise of the Directors’ business judgment.

There followed more than a year of discovery, at the conclusion of which all parties renewed their motions for summary judgment. On this occasion all parties stipulated that the Court could treat the totality of their affidavits as a complete record from which any appropriate inferences might be drawn, and that the Court might render such judgment as justice required. The Company and the defendant lawyers now urge that discovery established the propriety of the Company’s action in settling the case and that the lawyer defendants had — by inducing the special committee to take its above-described actions— conferred benefits on the Company for which they were properly compensated. The instant plaintiff, on the other hand, asserts that the Company’s conduct was improvident; and that little, if any, cognizable benefit to the Company has been estáblished. It is in that posture that the case is now before us.

DISCUSSION

I

We may say at the outset that if we should adhere to our ruling that the cited sections of the New York Business Corporation Law are inapplicable, and should further rule that the Board of Directors was entitled to exercise its business judgment in settling this stockholders’ action just as it might in settling a law suit brought by a stranger, the instant plaintiff could not prevail and judgment for the defendants would be appropriate. Discovery having been completed and the parties having authorized us to draw factual inferences, we find that the Directors, acting upon information then available, were justified in thinking they were paying a reasonably modest price for ridding the Company of a potentially expensive headache. We have concluded, however, that we erred in our ruling that the cited sections of the Business Corporation Law were inapplicable, and now hold that they specifically rendered unlawful both the settlement with the defendant lawyers and the payment of the monies in question.

Two subdivisions of the cited section (§ 626) are here relevant:

(d) [a derivative] action shall not be discontinued, compromised or settled, without the approval of the court having jurisdiction of the action. If the court shall determine that the interests of the shareholders or any class or classes thereof will be substantially affected by such discontinuance, compromise, or settlement, the court, in its discretion, may direct that notice, by publication or otherwise, shall be given to the shareholders or class or classes thereof whose interests it determines will be so affected; * *
(e) If the action on behalf of the corporation was successful, in whole or in part, or if anything was received by the plaintiff or plaintiffs or a claimant or claimants as the result of a judgment, compromise or settlement of an action or claim, the court may award the plaintiff or plaintiffs, claimant or claimants, reasonable expenses, including reasonable attorney’s fees, and shall direct him or them to account to the corporation for the remainder of the proceeds so received by him or them. * * * (Italics supplied.)

In ruling that the foregoing provisions were inapplicable because there was “no action pending,” we misread the statutory language. The relevant provision of subdivision (d) (italicized in the quotation) says nothing about the “pendency” of an action, but prohibits payment “without the approval of the court having jurisdiction of the action.” As all parties now concede, the New York Supreme Court — either through its Special Term or its Appellate Division— never lost its jurisdiction. It was always open to the defendant lawyers to make application at the foot of the judgment for precisely the relief they now seek. Accordingly, there existed a “court having jurisdiction of the action” and it was unlawful for the parties to compromise their dispute without its approval.

The authorities and arguments advanced by the defendants are either irrelevant or unpersuasive. One of the cases principally relied upon is Wolf v. Barkes (2d Cir.) 348 F.2d 994, cert. denied (1965) 382 U.S. 941, 86 S.Ct. 395, 15 L.Ed.2d 351. There, the Court, speaking through then Chief Judge Friendly, rejected a contention — which it found “interesting and by no means without force” (id. at 994-995) — that Rule 23.1 of the Federal Rules of Civil Procedure could be invoked not only to require court approval for the settlement of a derivative action but to require such approval before the corporation could settle a third party dispute which happened to be one of the subjects of the derivative action. Judge Friendly pointed to three obstacles to this contention:

1. It was doubtful whether the accomplishment of such a substantive result came within judicial authority to adopt procedural rules (id. at 996, 997);

2. The conduct complained of did not violate the express language of the rule (id. at 996); and

3. The proposed settlement did not constitute the evil the rule was intended to prevent (id. at 996).

None of these obstacles is here present.

1. We are dealing not with a judicial rule but with a state statute. Although §§ 626(d) and (e) are modelled on Fed.R. Civ.Proc. 23, they are part of the state statutory scheme which sets the terms on which the state authorizes litigation of a fiduciary nature. See Business Corporation Law §§ 626, 627, 722. There can be no question of the state’s power to enact a statute prohibiting the instant settlement. As the Supreme Court, speaking through Justice Jackson in Cohen v. Beneficial Indus. Loan Corp. (1949) 337 U.S. 541, 550, 69 S.Ct. 1221, 1227, 93 L.Ed. 1528 observed: “the state has plenary power over this type of litigation.”

2. There could be no clearer violation of the precise words of the statute than what was done in the Bader case.

3. The Bader settlement accomplished precisely the evil the statute was designed to prevent. As Judge Friendly noted in Wolf (supra, 348 F.2d at 996), “[t]he prime ‘mischief and defect’ ” the requirement of court approval is intended to prevent is “ ‘private settlements under which the plaintiff stockholder and his attorney got the sum paid in settlement, and the corporation got nothing.’ ”

Neither of the other cases cited by the defendants, Blau v. Rayette-Faberge, Inc. (2d Cir.1968) 389 F.2d 469, or Weight Watchers of Philadelphia, Inc. v. Weight Watchers International, Inc. (2d Cir.1972) 455 F.2d 770, supports their position. Blau dealt with an alleged violation of federal securities law, and the Court ruled that federal policy to employ private litigation to enforce those laws required judges to “ ‘not be too niggardly’ ” in awarding fees in connection with such litigation. (389 F.2d at 472.) The case has nothing whatever to do with the interpretation of state statutes which — as Justice Jackson observed in Beneficial, 337 U.S. at 548-550, 69 S.Ct. at 1226-1227 — were enacted for precisely the opposite purpose. In Weight Watchers, a class action, the court, speaking through Judge Friendly, observed that F.R.Civ.P. 23 did not prohibit a defendant from settling with individual members of a class. Assuming that a similar rule should apply to derivative actions, that observation is inapplicable to the situation at bar. JEere, the entire lawsuit pending against the directors was settled solely on the basis of the Company’s payment of cash to the plaintiffs’ attorneys. As we have observed, that is precisely the evil which the Business Corporation Law was designed to prevent.

Nor is there any merit in the Company’s contention that the statute is inapplicable because the settlement was without prejudice to the rights of other stockholders and therefore there was no occasion to give them notice. A quick look at subdivision (d) of the statute (see supra at 623-624) discloses that it has two provisions here applicable. The first, italicized in the above quotation, absolutely prohibits settlements without court approval, and the second gives the court discretion to require notice to other stockholders. The “without prejudice” aspect of the settlement might well result in a court’s decision not to require notice, but has nothing to do with the unqualified prohibition against unapproved settlements.

Nor is it material that most or all the settlement activities may have taken place in Michigan. The parties were settling a lawsuit initiated in the New York Supreme Court, and all of the activity for which the defendant lawyers now claim compensation took place in connection with that lawsuit. To paraphrase Justice Jackson’s observation in Beneficial, 337 U.S. at 554, 69 S.Ct. at 1229, the defendant lawyers cannot avail themselves of the New York forum and at the same time escape the terms on which it was made available. The defendants place great reliance on this Circuit’s decision in Certain-Teed Products Corp. v. Topping (2d Cir.1948) 171 F.2d 241. In that case the Court held that where an attorney had failed to comply with the requirements of F.R.Civ.P. 23, he would not forfeit all claim for legal fees but would be entitled to retain such fees as a subsequent court might find appropriate. We do not believe the Court of Appeals would apply that ruling to the instant situa-8 tion.

Although there are distinct similarities between the facts there involved and the instant case, the decisive distinction is that Certain-Teed dealt with services claimed to have been performed in a federal lawsuit (District of Rhode Island) covered by the federal rules, while the instant action deals with such services in a state lawsuit governed by a state statute. As Judge Friendly observed in Wolf, the federal judiciary has only limited power in establishing procedural rules (349 F.2d at 996). A state legislature on the other hand “has plenary power over [derivative] litigation” (Beneficial, 357 U.S. at 550, 69 S.Ct. at 1227). We do not believe that the Court of Appeals would sanction circumvention of New York’s explicit statutory command that a derivative action “shall not be settled" without approval of the court in which it was brought.

II

However, in the interest of judicial economy, we shall proceed on the assumption that defendants may look to some other tribunal to establish their entitlement to fees. In such other tribunal, the first problem that would confront the defendant lawyers arises from the stark fact that they have been unable to establish wrongdoing by any of the Company’s directors. (See supra at 620 and fn. 6.) This presents the policy question of whether or not a stockholder should be entitled to have his attorney compensated for making helpful suggestions to a board of directors which has not been shown to have been guilty of any wrongdoing. The courts of Delaware — to which a New York court would look for guidance on this policy question (cf. Galef v. Alexander [2d Cir.1980] 615 F.2d 51, 58) — have emphatically answered that question in the negative.

In Chrysler Corporation v. Dann (1966) 43 Del.Ch. 252, 223 A.2d 384, the Delaware Supreme Court carefully considered this issue. After outlining policy considerations — including the importance of discouraging derivative law suits brought “for the purpose of obtaining counsel fees” (223 A.2d at 387) — the court established the rule that no such fees could be awarded without establishing that the action instituted by the plaintiff had been “meritorious.” (Ibid). The term “meritorious” was defined as including the requirement that “the plaintiff possesses knowledge of provable facts which hold out some reasonable likelihood of ultimate success.” (Ibid; italics supplied). The Court reconsidered the question and adhered to the above ruling in McDonnell Douglas Corp. v. Palley (1973) 310 A.2d 635, 637 and Allied Artists Pictures Corporation v. Baron (1980) 413 A.2d 876, 879. We therefore conclude that a New York court would disallow any claim by the defendant lawyers for lack of standing to assert it.

III

Assuming, arguendo, that the defendant lawyers do have standing to ask us to determine their just compensation, we proceed to an analysis of what fee would be appropriate.

Two considerations are relevant to such analysis:

1) What cognizable benefit have the defendant lawyers conferred upon the Company? (City of Detroit v. Grinnell (2d Cir.1974) 495 F.2d 448, 469, 470; see Mills v. Electric Auto-Lite (1970) 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593); and

2) What portion of their work can be deemed a competent producing cause of such benefit? (Wechsler v. Southeastern Properties, Inc. (2d Cir.1974) 506 F.2d 631, 635.)

With respect to the $34,595 the Company recovered from Mr. Ford, we find that the defendant lawyers’ activities can be considered a competent producing cause. Mr. Ford, after all, was not only the Chairman of the Board but the grandson and namesake of the Company’s founder and its leading personality. It is therefore arguable that but for the furor aroused by the Bader action, Company auditors might have been less attentive to small details in the justification of his personal expenses. The same, however, cannot be said for the $11,215.40 received from unidentified officers and employees. There is nothing in the record to suggest that those irregularities would not have been uncovered by audits routinely made by the Company’s accountants.

As for the new guidelines and the “heightened sensitivity” the investigation is said to have produced, we conclude that they, too, could be said to have resulted from the defendant lawyers’ activities. However, there is, as above noted (supra at 619-620 and fn. 5), not a scintilla of evidence there was tangible benefit to the Company. We do not believe that equity should authorize compensating a stockholder or his attorney for bringing about such purely “cosmetic” and ephemeral changes. Our conclusion in this regard is fortified by contrasting these changes with the type of tangible non-monetary benefits for which stockholders’ attorneys have previously been compensated. Compare Mills v. Electric Auto-Lite (1970) 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (invalidating merger which had been accomplished through use of misleading proxies); Sprague v. Ticonic Bank (1939) 307 U.S. 161, 59 S.Ct. 777, 83 L.Ed. 1184 (establishing a lien on bank funds which, through principle of stare decisis, created like rights for other depositors not parties to the suit); Koppel v. Wien (2d Cir.1984) 743 F.2d 129 (causing withdrawal of proposed amendment to a participation agreement which would have reduced value of participation rights); Kopet v. Esquire Realty Co. (2d Cir.1975) 523 F.2d 1005 (identifying securities law violation, giving limited partners right to rescind purchases, uncovering certified financial statements which might facilitate partnership’s further recovery); Lewis v. Anderson (9th Cir.1982) 692 F.2d 1267 (causing stock option plan to be submitted to shareholders for approval); Altman v. Central of Georgia Ry. Co. (D.C.Cir.1978) 580 F.2d 659 (causing the corporation to declare dividends); Milstein v. Werner (S.D.N.Y.1973) 58 F.R.D. 544 (causing alteration of stock purchase plan, which would probably result in substantial financial savings to the corporation); Whittemore v. Sun Oil Co. (S.D.N.Y.1973) 58 F.R.D. 624 (making it possible for stockholders to receive dividends and to exercise conversion rights); Globus, Inc. v. Jaroff (S.D.N.Y.1968) 279 F.Supp. 807, 809 (cancellation of option agreement relieved corporation of obligation to issue stock at below-market price and was “an actual, practical benefit in the business sense”).

With respect to correlating the defendant lawyers’ efforts with achievement of the identified $34,585 benefit, we find this an impossible task on the record before us. It is plain, however, that most of the defendant lawyers’ work could not be so correlated. The Company, for example, could not have benefitted by the defendant lawyers’ activities seeking to compel it to litigate in an inappropriate forum. Nor is it discernable how the Company could have benefitted by litigation designed to establish that one law firm — rather than two— was entitled to participate in a suit against its directors. So far as we can see, the only part of the defendant lawyers’ time that could have benefitted the Company was that spent interviewing the informant and drafting the several complaints and answers to interrogatories which are claimed to have alerted the Company to Mr. Ford’s unauthorized expenditures at the Carlyle Hotel. However, if the case were remanded to us we would not — unless otherwise directed — pursue the question of proper allocation of the defendant lawyers’ time. The amount of money involved would not justify the expense of such an inquiry. We would arbitrarily allow the defendant lawyers to retain one-third of the payments received from Mr. Ford, or $11,-528.33, plus any disbursements they could relate to the activities we have found to be relevant.

CONCLUSION

In summary, plaintiff’s motion for summary judgment is granted. Let the Clerk enter judgment against the defendant lawyers jointly and severally in the sum of $230,000 with pre-judgment interest from January 11,1980. Such judgment will specify that an application to this Court for attorneys fees and expenses may be made by the instant plaintiff and his counsel within 30 days after any appeal from this Order shall have been finally adjudicated, or within 30 days after the time for appeal shall have lapsed without an appeal having been perfected.

SO ORDERED.

      . On October 11, 1984 we granted a motion to substitute Russell J. Mokhiber as plaintiff due to the decease of the original plaintiff, Ida M. Cohen. Both will be interchangeably referred to as the “instant plaintiff.”

      . The action was initially brought by one John F. Lang as trustee for the benefit of several children of a Cohn firm partner. Mr. Lang was joined in subsequent amended complaints by other Company stockholders and eventually dropped out of the litigation, apparently in response to the Company’s motion to disqualify the Cohn firm. (See infra at 619.) The plaintiffs named in the final complaint are those mentioned in the text.

      . Other members of the Board were also involved in the informant’s revelations, but for the most part they were simply accused of acquiescing in Mr. Ford’s alleged wrongdoings.

      . The Company’s Answer to Interrogatory 4(d) dated April 18, 1983. One of these directives, however, contained exceptions which had the effect, as a practical matter, of making it inapplicable to Mr. Ford. The directive concerning use of car and driver service provided (for reasons of security) for full-time car service to the Chairman of the Board, President and President of the Executive Committee and their passengers, regardless of whether there existed a business purpose for such usage.

      . This circumstance is important because of a peculiarity in the instant litigation. The Company’s attorneys, apparently feeling obligated to support a settlement arrived at by their client, have fully cooperated with the defendant lawyers in trying to establish that some modicum of benefit accrued to the Company as a result of the Bader action.

      . Several considerations — apart from the fact that extraordinarily able counsel were willing to settle a multi-million dollar lawsuit for a pittance — compel the conclusion that the defendant lawyers knew they had no case:
      1) The affidavits submitted by the defendant lawyers in the instant action (Pollack Affidavit dated August 31, 1982; Cohn Affidavit dated August 3, 1982) cite no evidence of wrongdoing. They concentrate primarily upon establishing the defendant lawyers' good faith in bringing and settling the litigation.
      2) One of the instant plaintiffs Interrogatories demanded that defendant lawyers:
      State whether there was any "wrongdoing" by any defendant in the Bader action ... and if so, describe it in detail, including each specific act of wrongdoing and the individual[s] responsible for it.
      The Cohn firm’s rambling answer to this, after mentioning repayments by Mr. Ford and others, concluded with the following disclaimer:
      "However, the fact of the repayments do (sic) not imply that there were any deliberate acts of wrongdoing.”
      3) As part of the Joint Statement (infra at 622), the defendant lawyers allowed themselves to be quoted as follows:
      Mr. Cohn and Mr. Pollack said it now appears that there was no wrongdoing by Henry Ford II or the others who were involved in the suit, although a reading of the complaint demonstrates plaintiffs’ disagreement with various company policies. (Italics supplied.)
      Although this statement, because it was part of a settlement (see the Court’s comments at oral argument on September 24, 1982 at 9-10; Federal Rule of Evidence 408; Advisory Committee Note to Rule 408 (1972) 56 F.R.D. 183, 227), might not be admissible at trial, it is difficult, as a practical matter, not to conclude that it represented the defendant lawyers’ true opinion. In negotiating the settlement they were not acting solely for their nominal clients, but "as representative[s] of a class comprising all” Company stockholders. See Cohen v. Beneficial Indus. Loan Corp. (1949) 337 U.S. 541, 549, 69 S.Ct. 1221, 1227, 93 L.Ed. 1528. An obvious effect of the quoted statement was to discourage other stockholders from instituting similar litigation. If one were to assume the statement were not true, one would have further to assume that the defendant lawyers — in consideration of cash payment — intended to deceive their own clients. We decline to indulge the assumption that any of them could be guilty of such duplicity. We reject as frivolous the suggestion that the quoted statement could be interpreted as having meaning precisely opposite to the words used, i.e., that the words “there was no wrongdoing,” should be deemed to have meant that there was a great deal of wrongdoing which had been corrected. See Cohn Affidavit dated August 30, 1982, ¶ 15.
      We also note that, apparently in response to the allegations of the Bader litigation, the Securities and Exchange Commission in the summer of 1978 launched a formal, full-scale investigation. This was terminated without action in March, 1982. It could be argued that if the S.E.C.— with all its resources and expertise — could find no evidence of wrongdoing, it should be assumed that there was none. Whatever the merit of this argument, we do not deem it necessary to our decision.

      . By the time the settlement was arrived at, the investigation had published no indication of success. About a month thereafter, the Department of Justice formally notified the Company that it had terminated its probe, and had decided not to institute any proceedings.

      . Pollack Affidavit dated August 31, 1982, ¶ 6; Affidavit of I. Walton Bader dated August 30, 1982, ¶¶ 9, 10.

      . The Company’s position in this respect is set forth in the following portion of a letter dated October 9, 1980, from Arjay Miller, then Chairman of its Audit Committee, to the instant plaintiff:
      (1) It was clear that there was no possibility that a renewed action would confer any benefit on the Company. Messrs. Cohn and Pollack conceded that there had been "no wrongdoing.” Moreover, the Audit Committee was continuing its investigation and was confident its own investigation would identify, if the investigations of the Justice Department or the Securities and Exchange Commission did not, any claims the Company should have pursued;
      (2) The settlement eliminated a highly visible source of persistent negative publicity relating to the Company;

        (3) There was some chance the settlement might end pursuit of the charges entirely;
      (4) Settlement would avoid management disruption at a time when the Company was in the process of implementing a complete restructuring of its business and product lines; and
      (5) The cost of the settlement was relatively modest, clearly less than the cost to the Company of litigating any renewed action initiated by Messrs. Cohn and Pollack or their law firms on the merits through trial.

      . The defendant lawyers turned nothing over to the Company pursuant to this provision.

      . See Transcript of Oral Argument of October 5, 1984, at 2-3. To guard against the possibility that any party’s discovery might have been curtailed because of mistaken reliance on the denial of plaintiffs motion for summary judgment, the Court announced by letter dated October 9, 1984, that it would entertain motions to re-open the record. The defendant lawyers did make such a motion, but it was denied. The decision not earlier to profer the evidence presented by that motion could not have resulted from reliance upon the denial of summary judgment and the movants did not suggest any other reason why the proferred evidence could not have been submitted before discovery had been formally closed.

      . It is, of course, now easy to see that the $230,000 payment was unnecessary, because defendant lawyers were in no position to continue the litigation. However, corporate decisions are judged by information available at the time, and not by 20-20 hindsight. The Company, without the benefit of information developed by the instant litigation, had no way of knowing that the defendant lawyers had become disenchanted with their lawsuit, had been unable to find affordable Michigan counsel willing to pursue it, and had been instructed by their clients to abandon it.

      . The rules existing in Delaware, where the Company is incorporated, and in Michigan, the potential new site of the lawsuit, are substantially to the same effect. Rule 23.1 of the Delaware Chancery Court Rules provides:
      [A derivative action] shall not be dismissed or compromised without the approval of the Court, and notice by mail, publication or otherwise of the proposed dismissal or compromise shall be given to shareholders or members in such manner as the Court directs; except that if the dismissal is to be without prejudice or with prejudice to the plaintiff only, then such dismissal shall be ordered without notice thereof if there is a showing that no compensation in any form has passed directly or indirectly from any of the defendants to the plaintiff or plaintiff’s attorney and that no promise to give any such compensation has been made. (Italics supplied.)
      Sections 450.1492 and 450.1493 of 24A Michigan Corp.Laws Ann. (1979) provide:
      £ 450.1492

      [A derivative] action authorized by section 491 shall not be discontinued, compromised or settled without approval by the court having jurisdiction of the action.
      5 450.1493

      (1) If an action brought in the right of the corporation is successful, in whole or in part, or if anything is received by the plaintiff or a claimant as a result of a judgment, compromise or settlement of an action or claim, the court may award the plaintiff or claimant reasonable expenses, including reasonable attorney’s fees, and shall direct him to account to the corporation for the remainder of the proceeds so received by him.

      . See Transcript of Oral Argument of January 25, 1985 at 13, 20, 24.

      . We note that under Delaware procedures, the cash payment would have required notice regardless of the lack of prejudice to other shareholders. See italicized portion of Delaware Chancery Court Rule 23.1, supra at fn. 13.

      . We note that we may have been in error in our suggestion at the October 5, 1984 oral argument that — regardless of the restrictions of §§ 626(d), (e) of the Business Corporation Law — a New York court would not have jurisdiction to entertain the defendant lawyers’ claim unless it were in the form of an application for fees in an ongoing action. The only New York case cited by the parties on this issue (and our research has disclosed no other) is Schreiber v. United Whelan Corp., N.Y.L.J. Sept. 14, 1965, p. 16 col. 6(f) (Sup.Ct.N.Y.Cty.1965). The court there considered and specifically rejected our suggested position that any claim for fees must be confined to an ancillary application in the derivative action itself. However, in that case the court which had dismissed the derivative suit did so with the express provision that dismissal was without prejudice to a fee application in a plenary action. By thus providing for a plenary action, the court "having jurisdiction” gave its approval to the procedure adopted. See also Levine v. Bradlee (3d Cir.1967) 378 F.2d 620 (plaintiff expressly reserved issue of attorney’s fees upon dismissal of derivative action as moot).

      . Moreover, even if Delaware law were not found to be controlling, a similar result would seem to follow were we to consider "‘the strength of the case for plaintiffs balanced against the amount offered in settlement.’ ” City of Detroit v. Grinnell Corp. (2d Cir.1974) 495 F.2d 448, 455 (citation omitted). Since the defendant lawyers have not shown that their case had any strength at all, there is nothing to balance against the amount paid.
      So far as counsels’ research (and our own) has revealed, there has never — with one possible exception — been an instance in which a shareholder’s attorney has been awarded fees in the absence of a showing of merit. The cases can conveniently be divided into two categories: those in which some determination of merit was made and those in which merit could be inferred from the defendants’ rectification of the specific wrong alleged in the complaint. In the first category fall Kopet v. Esquire Realty Co. (2d Cir.1975) 523 F.2d 1005 (defendants admitted liability): Lewis v. Anderson (9th Cir.1982) 692 F.2d 1267 (complaint withstood motion for summary judgment, trial court found plaintiff likely to succeed on merits, and defendants did not dispute this finding on appeal); and Abrams v. Textile Realty Corp. (N.Y.Cty.1949) 97 N.Y.S.2d 492 (corporation enjoined from entering into ultra vires mortgage). The second category of cases include Altman v. Central of Georgia Ry. Co. (D.C.Cir.1978) 580 F.2d 659 (suit to compel payment of dividends caused company to declare same during pendency of suit); Milstein v. Werner (S.D.N.Y.1973) 58 F.R.D. 544 (action charging excessive and improper officer compensation caused company significantly to alter executive stock purchase plan); Ripley v. International Railways of Central America (1st Dep't) 16 A.D.2d 260, 227 N.Y.S.2d 64, aff’d (1962) 12 N.Y.2d 814, 236 N.Y.S.2d 64, 187 N.E.2d 131 (suit challenging transportation rates caused company to revamp same); Martin Foundation v. Phillip-Jones Corp. (Kings Cty. 1953) 204 Misc. 120, 123 N.Y.S.2d 222, modified (2d Dep’t) 283 A.D. 729, 127 N.Y.S.2d 649, aff’d 306 N.Y. 972, 120 N.E.2d 230 (suit charging illegality of proposed contracts caused corporation to cancel same); Chrysler Corp. v. Dann, supra (action challenged wasteful compensation plan which was overhauled by corporation pursuant to settlement); McDonnell Douglas Corp. v. Palley, supra (attempt to rescind certain preferred stock succeeded when corporation merged with parent); and Allied Artists Pictures Corp. v. Baron, supra (suit charged improper election of directors who were removed when corporation merged with another), as well as those in which the attorney fee applicant had brought to the corporation’s attention claims of short-swing profits by a particular officer, which improper gains the corporation then recovered without litigation. Blau v. Rayette-Faberge, supra; Gilson v. Chock Full O'Nuts (2d Cir.1964) 331 F.2d 107; Smolowe v. Delendo (2d Cir.1943) 136 F.2d 231, cert. denied, 320 U.S. 751, 64 S.Ct. 56, 88 L.Ed. 446; Dottenheim v. Emerson Electronic Mfg. Co. (E.D.N.Y.1947) 7 F.R.D. 195. In the instant case, there was of course no judicial finding of merit. As to possible rectification of wrongdoing, the only identifiable benefit resulting from multi-million dollar charges of fraud and chicanery was the repayment by Mr. Ford of $34,585. This repayment — as the defendant lawyers have specifically conceded (supra at fn. 6) — is not evidence of wrongdoing. The possible exception to which we have referred is United Operating Company v. Karnes (S.D.N.Y.1980) 482 F.Supp. 1029, which seems to sanction settling a frivolous derivative action by payment to plaintiffs attorneys. Although the pragmatic argument advanced in Karnes is appealing, we believe the rule promulgated by the Supreme Court of Delaware to constitute a more salutory doctrine of corporate governance.

      . Such a procedure would obviously fail to adhere to the guidelines laid down in Grinnell v. City of Detroit (2d Cir.1974) 495 F.2d 448, and its progeny. But we believe the procedure to be dictated by common sense. If our analysis is otherwise correct, we would not in our discretion allow a fee in excess of one-third of the Company's recovery. No paring down of that amount (even if wholly to eliminate it) could compensate the Company for the time and aggravation involved in its achievement. In light of this disposition, we need not inquire whether or to what extent the Cohn firm may be excused for its failure to follow the contemporaneous time record rules suggested in In Re Hudson & Manhattan R.R. Co. (2d Cir.1964) 339 F.2d 114, 115. The firm would not, of course, have been bound by the prospective mandatory rule announced in New York Ass’n for Retarded Children v. Carey (2d Cir.1983) 711 F.2d 1136, 1147.