The U.S. Court of Appeals for the Eighth Circuit recently reversed a district court’s cy pres distribution of surplus settlement funds to a non-party legal services organization in a securities fraud class action arising from the merger of two banks.
In so ruling, the Eighth Circuit held that “a district court must carefully weigh all considerations, including the geographic scope of the underlying litigation, and make a ‘thorough investigation’ to determine whether a recipient can be found that most closely approximates the interests of the class.”
A copy of the opinion is available at: Link to Opinion
Following the merger of two banks, shareholders filed multiple class actions, which were consolidated and transferred to the Eastern District of Missouri. The trial judge certified four plaintiff classes, two for each bank. The case settled and after two distributions of settlement funds, class counsel for one of the bank’s classes moved to terminate the case as to his classes, for attorney’s fees, and to distribute any surplus funds cy pres.
As you may recall, the cy pres doctrine originated as a rule of construction to save a testamentary charitable gift from failing, allowing the court to determine the next best use of the funds to comply with the testator’s intent “as near as possible,” which is what “cy pres” means in Norman French. However, courts have also used the doctrine as the basis for distributing unclaimed class action settlement funds.
The district court granted the motion over the objection of one of the class representatives, awarded class counsel fees, and ordered the balance of any settlement funds be distributed to a legal services organization suggested by movant’s counsel.
The class representative that had objected appealed the award of fees and the cy pres distribution, arguing that the district court abused its discretion in making a cy pres distribution because an additional distribution to class members was feasible and, because the recipient legal services organization was not a party or otherwise related to the litigation, it was not an appropriate party to receive the funds.
The Eighth Circuit agreed and reversed, also vacating the award of attorney’s fees as premature, holding that the case was not over until all funds were distributed.
In reaching its decision, the Appellate Court first pointed out the controversial nature of cy pres distributions in class actions, and the fact that several of its sister courts had restricted the practice. It then went on to clarify the legal principles governing cy pres distributions in the Eighth Circuit.
The Eighth Circuit agreed with its sister court, the Fifth Circuit, that a cy pres distribution of unclaimed funds to a third party is appropriate only when it is not feasible to make further distributions to class members, unless an additional distribution would provide a windfall to class members whose liquidated damages claims were fully satisfied.
The Appellate Court found that a further distribution was clearly feasible under the circumstances, given that $2.4 million would be distributed to class members for a cost of approximately $27,000. In addition, the Appellate Court found that class members’ claims were not fully satisfied.
Given these facts, the Eighth Circuit held that the district court erred as a matter of law when it found that class members’ claims were paid in full, and further distributions would be too costly and difficult, and the amounts involved were too small to make individual distributions economically viable.
Finally, the Appellate Court disagreed with the district court’s conclusion that the third party legal services organization was the next best use for the indirect benefit of class members consistent with the nature of the litigation.
Although the Eighth Circuit noted the legal services organization was a worthy charity, the legal services organization was not tailored closely enough to the interests of the nationwide class of shareholders and the purposes of the underlying litigation. The Appellate Court held that “a district court must carefully weigh all considerations, including the geographic scope of the underlying litigation, and make a ‘thorough investigation’ to determine whether a recipient can be found that most closely approximates the interests of the class.”
Accordingly, on remand, the district court was directed to conduct a more rigorous analysis both as to whether a cy pres distribution is appropriate, and if so determine a cy pres recipient “more closely tailored to the interests of the class and the purposes of the underlying litigation.”
Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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