Over the last several years, federal courts of appeals have been closely scrutinizing cy pres distributions to charitable organizations in class action settlements. This includes opinions by the First Circuit, Third Circuit and Ninth Circuit. The general thrust of these decisions is that cy pres should be used sparingly, and the charitable organization should be closely tied to the objective of the lawsuit. The Eighth Circuit recently weighed in and largely joined its sister circuits, with one judge dissenting.

In re BankAmerica Corporation Securities Litigation, No. 13-2620, 2015 U.S. App. LEXIS 306 (8th Cir. Jan. 8, 2015) involved a $490 million securities class action settlement . After two distributions to class members, $2.4 million remained. The district court ordered a cy pres distribution to the Legal Services of Eastern Missouri, Inc., and also awarded a supplemental attorneys’ fee of approximately $98,000 for work done after the initial distribution. An objecting class representative represented by Ted Frank of the Center for Class Action Fairness appealed, and the Eighth Circuit vacated the order and remanded.

 Key points made in the opinion include:

  • “Because the settlement funds are the property of the class, a cy pres distribution to a third party of unclaimed settlement funds is permissible ‘only when it is not feasible to make further distributions to class members’ . . . . except where an additional distribution would provide a windfall to class members with liquidated-damages claims that were 100 percent satisfied by the initial distribution.” Id. at *7 (citation omitted).
  • Simply because class members submitting claims have received the amounts they are due under the terms of the settlement does not mean they have been “fully compensated,” and thus does not necessarily justify a cy pres award. Id. at *11.
  • A settlement agreement and settlement approval order providing for a cy pres distribution of unclaimed funds is not binding on the court with respect to disposing of unclaimed funds. Id. at *12-13.
  • “[U]nless the amount of funds to be distributed cy pres is de minimus, the district court should makea cy pres proposal publicly available and allow class members to object or suggest alternative recipients before the court selects a cy pres recipient.” Id. at *14.
  • A cy pres “distribution must be ‘for the next best use . . for indirect class benefit,’ and ‘for uses consistent with the nature of the underlying action and with the judicial function.” Id. at *15 (citation omitted). In this case, the Missouri nonprofit, which served victims of fraud, was likely not appropriate for a nationwide securities class action. The court suggested that perhaps the SEC Fair Funds would be appropriate.

Judge Murphy dissented, concluding that the district court did not abuse its discretion because the settlement agreement provided for the cy pres distribution, a further distribution was unlikely to be feasible (particularly where many shareholders held shares through a mutual fund and many would have sold those shares over the years), and the Missouri organization was sufficiently tied to the nature of the suit.

Based on the recent appellate decisions, cy pres distributions are likely to be used less frequently, but there is still a place for them. In some cases, for example, the transaction cost of making a supplemental distribution to class members will make such a distribution not practical. Where cy pres is used, giving some type of notice to the class (although individual notice might be cost prohibitive) and selecting an appropriate recipient are important. Another potential way to avoid this problem entirely is to do a “claims made” settlement where only those class members making claims receive payment, although that structure can raise other concerns.   

 

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Photo of Wystan Ackerman Wystan Ackerman

Wystan Ackerman is a partner in Robinson+Cole’s Insurance + Reinsurance Group and handles a diverse range of property insurance litigation, including large business interruption cases, class actions, other complex litigation, and appeals. He also has substantial experience representing insurance companies in putative class…

Wystan Ackerman is a partner in Robinson+Cole’s Insurance + Reinsurance Group and handles a diverse range of property insurance litigation, including large business interruption cases, class actions, other complex litigation, and appeals. He also has substantial experience representing insurance companies in putative class actions involving homeowners’ insurance coverage and market conduct/claim-handling practices. He has been prominently involved in high-profile property insurance litigation concerning the September 11th catastrophe and Hurricane Katrina, and Chinese-made drywall. Based in the insurance capital of Hartford, Connecticut, Wystan writes the blog Insurance Class Actions Insider, which was selected by Lexis Nexis as a top insurance blog for 2011.

Wystan grew up in Deep River, Connecticut, a small town on the west side of the Connecticut River in the south central part of the state. He always had strong interests in history, politics and baseball and his heroes growing up were Abraham Lincoln and Wade Boggs (at that time the third baseman for the Boston Red Sox). Wystan says it was his early fascination with Lincoln that drove him to practice law. As a high school senior, he was one of Connecticut’s two delegates to the U.S. Senate Youth Program, which further solidified his interest in law and government. He went on to Bowdoin College, where he wrote for the Bowdoin Orient and majored in government. After Bowdoin, he went on to Columbia Law School. He also interned in the chambers of then-Judge Sonia Sotomayor on the Second Circuit. Wystan graduated from Columbia in 2001, then worked at Skadden Arps in Boston before returning to Connecticut and joining Robinson+Cole.

When Wystan’s not at his desk, flying around the country trying to save insurance companies from the plaintiffs’ bar, or attending a conference on class actions or insurance litigation he often can be found watching “Dora the Explorer” or reading or playing whiffleball with his young daughter, helping his wife with her business, Option Realty, reading a book about history or politics, or watching the Boston Red Sox.

Read Wystan’s rc.com bio.