A Puerto Rico federal judge denied an investment firm's bid for $5.8 million in attorney fees after the firm brought successful countersuit claims against investors, finding that the commonwealth's corporations law, which governs the case, prohibits legal fees absent a finding of obstinacy.
U.S. District Judge Gina R. Méndez-Miró issued an opinion and order on Friday, ruling on Ocean Capital LLC's July attorney fees motion.
The plaintiffs, which represent nine closed-end mutual funds, sued Ocean Capital in 2022, alleging the firm and several individuals misled shareholders by failing to make and issue complete and accurate disclosures and proxy materials, according to the order.
The funds filed suit while refusing to recognize new directors that Ocean Capital had begun nominating to the funds' boards, as well as several proposals that stockholders had overwhelmingly passed, the order states.
Ocean Capital then countersued, and in 2024, it secured judgment in its favor, with the court ordering the funds to seat the board director nominees. The funds appealed the decision to the First Circuit, according to the order, but the appeals court affirmed the dismissal of the funds' claims and the injunction ordering the seating of the board director nominees.
The order said that, in July, Ocean Capital moved for $5 million in attorney fees on its counterclaims under the so-called Delaware corporate benefit doctrine, which allows for the recovery of attorney fees when a suit results in a nonmonetary benefit to a company.
Ocean Capital argued that, without its efforts throughout the course of the three-year litigation, the board director nominees would not have been seated, and the passed stockholder proposals would not have been implemented.
"According to [Ocean Capital], this litigation achieved major benefits for stockholders, including that it forced the funds and their incumbent directors to honor the results of at least 12 different stockholder elections … [and] they were able to implement proposals 'which reduce the quorum requirement at the funds, and empower fund stockholders alone to determine whether to adjourn stockholder meetings, further [vindicating] the corporate franchise,'" the order states.
The investment firm further urged the court to adopt the corporate benefit doctrine under Puerto Rican law "since Puerto Rico often 'looks to Delaware law for guidance' because the 'Puerto Rico law of corporations is modeled after the Delaware law of corporations,'" the order said.
However, on Friday, Judge Méndez-Miró said Ocean Capital has failed to establish its entitlement to attorney fees and that, under Puerto Rican law, legal fees "are not meant to compensate a litigant for the total costs incurred in litigation."
The judge said that, since Ocean Capital's bid for attorney fees is based on its counterclaims, Puerto Rican law governs, and nothing in the Puerto Rico general corporations law allows fee shifting without a finding of obstinacy.
"In the absence of a statutory fee-shifting provision and absent a finding of obstinacy, Puerto Rico law does not authorize an award of attorneys' fees," the order states.
According to the order, Ocean Capital also tried to characterize its attorney fee bid as a request for a "partial reimbursement." However, Judge Méndez-Miró said the "distinction does not alter the analysis."
"Under Puerto Rico law, any court-ordered transfer of litigation expenses from one party to another constitutes an award of attorneys' fees. The label attached to the request cannot circumvent the substantive limitations imposed by Puerto Rico law," the judge said.
Judge Méndez-Miró added that, even if Ocean Capital was entitled to attorney fees under Puerto Rican law, the investment firm had failed to provide billing records or other documentation to establish the reasonableness of its request.
Representatives for the parties did not immediately respond to requests for comment on Monday.
Ocean Capital is represented by Frank Olander of Schulte Roth & Zabel LLP and José Sánchez-Castro of Sánchez/LRV.
The funds are represented by Arturo Diaz-Angueira of Diaz & Vazquez Law Firm PSC, Maraliz Vazquez-Marrero of Vazquez & Vilanova Law Firm, Alex J. Kaplan and Charlotte K. Newell of Sidley Austin LLP, and Pedro I. Torres-Crespi of Ferraiuoli LLC.
The case is Tax-Free Fixed Income Fund for Puerto Rico Residents Inc. et al. v. Ocean Capital LLC et al., case number 3:22-cv-01101, in the U.S. District Court for the District of Puerto Rico.
Feb 23
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