US Attorney General's Department of Justice policy on Cypres doctrine in Federal Courts of the United States

Academic Paper , 2018 , 26 Pages

Law - Comparative Legal Systems, Comparative Law

The paper addresses the US Attorney-General's Department of Justice policy on the application of Cy Pres doctrine in the federal courts of the United States of America.

The primary objective of this study is to establish the frequency with which Cy Pres occurs at the state level. Within the framework of the primary objective, this research seeks:
(a) to identify and analyze the statutes, regulations, or policies in each state that provide for or prohibit Cy Pres; and
(b) to identify and discuss the significant case law dealing with Cy Pres, that exists in
each state.

1. PRELUDE

1.1 Background

The essence of the memo issued on June 05, 2017 by the US Attorney-General Jeff Sessions on “Prohibition on Settlement Payments to Third Parties”^[1] is the outright immediate prohibition (with three limited exceptions),^[2] at federal level, of the practice whereby agreements in settlement of federal claims or charges direct or provide for a payment or loan to any non-governmental person or entity that is not a party to the dispute.^[3]

The three limited exceptions to the prohibition by the US Attorney-General are (a) lawful payment or loan that provides restitution to a victim or that otherwise directly remedies the harm that is sought to be redressed, including for example harm to the environment or from official corruption, (b) payments for legal or professional services rendered in connection with the case, and (c) payments expressly authorized by statute, including restitution and forfeiture.

1.2 Research Objectives

1.2.1 Primary Question:

The primary objective of this study is to establish the frequency with which Cy Pres occurs at the state level.

1.2.3 Secondary questions:

Within the framework of the primary objective, stated in the preceding paragraph, this research seeks:

(a) to identify and analyze the statutes, regulations, or policies in each state that provide for or prohibit Cy Pres; and
(b) to identify and discuss the significant case law dealing with Cy Pres, that exists in each state.

1.3 Introductory remarks

The literature of the law has been slow to develop and present the complex legal themes that emerge from the Department of Justice policy declaration by the US Attorney General Jeff Sessions, on June 5, 2017, about Cy Pres settlement agreement residual payments.^[4] The glaring dearth of jurisprudence, at state level, on this recent development, is accentuated by scanty state legislation, regulations and policies that tend to address, in the most discordant fashion, the Cy Pres class-action residual payment.^[5] This engenders further research. Against this backdrop, this paper now proceeds to analyze the existing state law, regulations and practice on this legal point - namely residual funds under the Cy Pres doctrine.

2. THE CY PRES AND SETTLEMENT ON UNCLAIMED RESIDUE FUNDS

Cy Pres emanates basically from a French term which literally means “as near as possible.”^[6] A Cy Pres award is, in essence, a distribution of unclaimed residual class action settlement funds to a charitable organization, as authorized by the court. It follows that the court can apply a gift to a charitable cause which is as close as possible to the original purpose.

Funds reserved to settle class-action litigation often remain unclaimed owing to failure to identify or notify absent class members, or because the paperwork required is too onerous.^[7] Rather than allow the unclaimed funds to escheat to the state or revert to the defendant, courts has tended to adopt Cy Pres distribution. This paper is largely concerned with class action settlements in this context.

The concern of this paper revolved basically around leftover or unclaimed funds, in a class action, as a result of a settlement agreement between the litigants and also involving non litigant thirty-party non-governmental persons or entities.^[8] The unclaimed funds in class actions, at state level, have continued to be target of Cy Pres distribution to charitable organizations, and this has attracted considerable interest across the board.

Over the years, several states have passed laws either requiring or allowing residual funds from class action settlements or judgments (or both) to go to charities, legal aid providers, or other non-profit organizations.^[9] In the ensuing section, the paper examines the existing state statutes and regulations that govern the disbursements of residual funds arising from class action.

3. STATE STATUTES, REGULATIONS AND POLICIES ON CY PRES

3.1 Introduction

As at the time of this research paper, not less than 23 states (almost half of the total states in the US) have adopted Cy Pres residual distribution provisions.^[10] The legislature or Supreme Court in those 23 states has enacted a statute or rule providing for appropriate recipient of Cy Pres funds, and the legitimacy of legal aid, for instance, as a Cy Pres recipient in state court cases is established and not subject to question.^[11]

States of all sizes and political persuasions have enacted appropriate rules or statutes. There is an expanding body of case law supporting the use of Cy Pres awards to advance access to justice, a growing number of states have adopted statutes or court rules at the state level codifying the principle that organizations which promote legal aid and access to justice are always an appropriate use for residual funds in class action cases.^[12]

As more states enact rules or statutes, the argument that legal aid and access to justice are distinct from other charitable uses of Cy Pres awards becomes stronger, even in jurisdictions that have not explicitly spoken on the issue. It should be noted that in some states, the Cy Pres doctrine is the default, while in others it is either merely indicated as suggested or it is mandatory.

In August 2016, the American Bar Association (ABA) adopted a resolution,^[13] underscoring that these policies are the embodiment of the well-established authority that legal aid and access to justice are appropriate recipients of Cy Pres and residual fund awards in any class-action case. The ABA House of Delegates resolution “urges state, local, territorial and tribal jurisdictions to adopt court rules or legislation authorizing the award of class action residual funds to non-profit organizations that improve access to civil justice for persons living in poverty.”^[14] It would appear that, at the state level, the trend has been to continue to heed the call of the ABA, which endorsed the concept of Cy Pres residuals funding civil legal services.^[15]

It is instructive to note that hundreds of Cy Pres and residual fund awards have been directed to legal aid and access to justice programs around the country in recent years. While the total amount of these awards varies on an annual basis, these awards now collectively on average provide more than $10 million in support for the cause each year.^[16]

Invariably, all state statutes and regulations that deal with the disbursements of residual class-action funds under Cy Pres contain an express provision that Cy Pres does not apply to a judgment against a public agency or public employee.^[17]

Another prominent feature of virtually all state statutes and regulations on Cy Pres is that they permit the settling parties to allow for reversion of unclaimed class-action funds to the defendant.^[18] It should be noted that a majority of these states appear to direct at least a portion of any residue of the settlement funds to legal services organizations that advocate and champion causes for the benefit of the indigent members of the class or the community.^[19]

Notwithstanding, this apparent trend, at the state level, towards the adoption of Cy Pres provisions, there has been considerable concerns over the application of the doctrine. Some court rulings have even questioned the legitimacy of certain Cy Pres awards. Of course, as already observed in retrospect, the US Attorney General has issued outright ban of the practice, at federal level.

The major concerns have not been really whether the cause are worthy charities, but essentially the objections have tended to revolve basically around the relevance, connection, or nexus to the class action. This is exemplified by a federal case, Oetting v. Green Jacobson ^[20] in which the court reversed a Cy Pres award on several grounds, one of which was that the award was deemed to be insufficiently connected to the underlying case. There are instances in which the courts have overturned Cy Pres awards on the ground that the distribution did not take into account the wider geographical character of the class.^[21]

In a nationwide class settlement in Cook County, Illinois, plaintiffs’ attorneys received about $1 million, while 1.5 million-member class redeemed claims at under a 0.1% rate for a total of $2,402.^[22] It is argued that such settlements benefit defendants in the short run by permitting them to pay off class action attorneys cheaply, but hurt defendants in the long run by creating a mechanism by which class action attorneys can profitably bring weak cases.

It has been argued that the Class Action Fairness Act (CAFA) of 2005 does not provide the sufficient scrutiny to Cy Pres settlements, as it does on coupon settlements, and trial lawyers are maximizing return from weak cases.

In the ensuing section, the paper discusses the most significant statutory and jurisprudential developments in states that currently have Cy Pres class-action statutes or regulations on their books.

3.2 California

In California, the residual settlement funds are disbursed in accordance with the Cy Pres doctrine. Indeed, the settlement funds begin to attract interest from the date of judgment. The funds must be disbursed towards four principal recipients, namely (a) a legal services organization for the benefit of the indigent; (b) an organization that “promote[s] the law consistent with the objectives and purposes of the underlying cause of action”; (c) a charity that supports projects that benefit either the class or “similarly situated persons”; and (d) a program that advocates for the rights of the child.^[23]

However, it is critical to observe that the California statutes do not make provisions suggesting that the parties may recommend, or that the court may approve, a settlement or judgment that would include a reversion to the defendant(s) of any unpaid funds.^[24]

It is important to note that where the class action instituted under laws of California is a multistate or national action, the residual funds must be distributed with the aim to “provide substantial or commensurate benefit to California consumers.”^[25]

The California Code of Civil Procedure, section 384(a) provides that “[I]t is the intent of the Legislature in enacting this section to ensure that the unpaid residuals in class action litigation are distributed, to the extent possible, in a manner designed either to further the purpose of the underlying causes of action, or to promote justice for all Californians. The Legislature finds that the use of funds collected by the State Bar pursuant to this section for these purposes is in the public interest, is a proper use of funds, and is consistent with essential public and government purposes.”^[26]

The California Legislature amended section 384 of the California Code of Civil Procedure to state that 25 per cent of class action residuals shall go to the Equal Access Fund for distribution to legal aid programs; 25 per cent shall go to grants to trial courts for new or expanded collaborative courts or grants for Shriver Civil Counsel; and the 50 per cent balance shall go “to nonprofit organizations or foundations to support projects that will benefit the class or similarly situated persons, further the objectives and purposes of the underlying class action or cause of action … to child advocacy programs, or to nonprofit organizations providing civil legal services to the indigent.”

The effective date of original legislation that permitted class action residuals to go to legal aid, was January 1, 1994. However, the statute was amended, effective June 27, 2017, to provide the percentages apportioned in the preceding paragraph.

The California Supreme Court has issued a number of important rulings that have altered the state’s class action landscape,^[27] and consequently, in so doing, the Court developed its own class action jurisprudence, incorporating principles of federal class action law in some cases and departing markedly from federal practice in other respects.^[28]

The position in the California jurisprudence can be gleaned in a leading authority, namely the case of In re Microsoft.^[29] In this case, the settlement agreement specified that one-third of any unclaimed remainder was to be retained by the defendant, with the remaining two-thirds to be issued as vouchers enabling low-income schools to obtain Microsoft products. Although the Cy Pres distribution to the schools did not fall within the strict confines of California Code of Civil Procedure s 384(b), the California Court of appeals found that the provision was legal because the Cy Pres statute’s purpose is “to prevent a subsequent reversion of residue to a defendant when that reversion was not a part of the settlement terms that were previously scrutinized during the approval process.”^[30]

The preceding analysis reveals that, in California, in a case where the settlement agreement expressly provides for an option for reversion, and then subsequently approved by a court, such a provision must not conflict with the statute.

A further instructive case authority on Cy Pres in California is Cundiff v. Verizon California.^[31] In this California class-action case the appeal court examined the application of section 384 of the California Civil Procedure Code. The court referred to the observation in In re Microsoft I-V^[32] that “unless there is a court approved settlement which provides for reversion of remaining funds to the defendant … the general rule is that defendants do not have a … right to recover the funds once they have deposited the funds into an escrow account.”^[33]

The other distinguishing feature of the California Cy Pres remedy is its willingness to embrace a general charitable option as an alternative to - not necessarily a next step after - distribution of funds to the class.^[34] For example, in In re Vitamin Cases,^[35] the court in one case found that the statute's reference to the "residue" in a class action does not preclude a settlement between the parties that allocates even the full amount of damages to charitable recipients, with no distribution at all to the class. In settling allegations of price-fixing and unfair competition in the vitamin market, the defendant companies agreed to pay $38 million to several health- and nutrition-related entities. The court approved the settlement.

3.3 Washington

In Washington, Cy Pres is the default position. However, the law on Cy Pres distinguishes between judgments and settlements.^[36] Notwithstanding that Cy Pres is the default, the parties settling claim may nonetheless contract around Cy Pres distributions.

The bottom line is that if the class wins a judgment award, residual funds must be distributed in accordance with the statute. In the event of the distribution as stated out in the preceding point, the original position was that at least 25 per cent must be disbursed to the Legal Foundation of Washington, for purposes of benefiting programs aimed at supporting access-to-justice for the indigent clients. After the 25 per cent disbursement, the residue may be distributed “to any other entity for purposes that have a direct or indirect relationship to the objectives of the underlying litigation or otherwise promote the substantive or procedural interests of members of the certified class.”^[37]

However, it should be noted that the Washington Supreme Court later adopted new language for Rule 23 which reads, in part thus: “Any order entering a judgment or approving a proposed compromise of a class action certified under this rule that establishes a process for identifying and compensating members of the class shall provide for the disbursement of any residual funds. In matters where the claims process has been exhausted and residual funds remain, not less than fifty percent (50%) of the residual funds shall be disbursed to the Legal Foundation of Washington to support activities and programs that promote access to the civil justice system for low income residents of Washington State. The court may disburse the balance of any residual funds beyond the minimum percentage to the Legal Foundation of Washington or to any other entity for purposes that have a direct or indirect relationship to the objectives of the underlying litigation or otherwise promote the substantive or procedural interests of the members of the certified class.” The effective date for this rule was January 3, 2006.

3.4 North Carolina

The Cy Pres statutes of North Carolina apply both judgments and class-action settlements. In this respect these statutes are similar to the statutes of California. These statutes contain a statement of legislative intent, which seeks to ensure that unpaid class funds are used “to further the purposes of the underlying causes of action, or to promote justice for all [citizens of the state]. The statutes maintain that the use of residual funds in this manner “is in the public interest, is a proper use of the funds, and is consistent with essential public and governmental purposes.”

The state courts must determine the amount payable to all class members if all are actually paid what they are entitled to under the settlement of judgment, and they must set a date by which the parties are to report how much was actually paid.

In North Carolina, the court must direct the defendant(s) to divide any residual balance between the “Indigent Person’s Attorney Fund” and the North Carolina Bar “for the provision of civil legal services for indigents.”

It should be noted that the North Carolina Legislature amended Subchapter VIII of Chapter 1 of the General Statutes to add new Article 26B, which provides, in part, thus: “Prior to entry of any judgment or order approving settlement in a class action established pursuant to Rule 23 of the Rules of Civil procedure, the court shall determine the total amount that will be payable to all class members, if all class members are paid the amount to which they are entitled pursuant to the judgment or settlement. The court shall also set a date when the parties shall report to the court the total amount that was actually paid to the class members. After the report is received, the court, unless it orders otherwise consistent with its obligations under Rule 23 of the Rules of Civil procedure, shall direct the defendant to pay the sum of unpaid residue, to be divided and credited equally, to the Indigent Person's Attorney Fund and to the North Carolina State Bar for provision of civil legal services for indigents.” The effective date for this rule is October 1, 2005.

3.5 Illinois

The Cy Pres statute in Illinois is mandatory, just like in California and North Carolina. However, a striking difference rests with the ultimate use to which the funds are applied. Under Illinois law, if money remains in a common fund after judgment for the class, the money must be distributed to a non-profit that “has a principal purpose of promoting or providing services that would be eligible for funding under the Illinois Equal Justice Act.”^[38]

It follows that if money remains in a settlement fund, the court has discretion to distribute for “good cause” up to half the money to another charity that serves the public good.

In 2008 a new law was passed by the Illinois legislature came into effect, adding 735 ILCS 5/2-807 to the Code of Civil Procedure, and thereby providing guidelines for the distribution of residual funds in common funds created by class action settlements and judgments.^[39] The effect of the amended section 5 of the Code was to establish a presumption that residual funds in class actions will go towards organizations that improve access to justice for low-income Illinois residents. This new law applies to all class actions commenced on or after July 1, 2008. However, the statute does not apply to class actions against the State of Illinois or its political subdivisions.^[40]

In terms of the Illinois statute, when the court approves a class action settlement that creates a common fund, it must also detail the claims administration process, and must provide for distribution of any “residue funds” to certain “eligible organizations.”^[41]

The statute permits distribution of up to 50 percent of any residual funds to other organizations that “serve the public good” if the court finds good cause to include such distribution in the settlement.^[42] Courts have the discretion to award up to 50% of the funds to other organizations that serve the public good as part of a settlement if the court finds good cause to do so, but at least 50% of these funds must go to support legal aid.

It follows that in the case of a class action settlement, the parties have the ability to allocate a portion of the settlement funds to public interest organizations, even if those organizations do not meet the statute’s specific requirements for “eligible organizations.”^[43]

In the context of class action judgments, the statute requires that the distribution of residual funds go to “eligible organizations.” However, it should be noted that with respect to class action judgments (unlike class action settlements), the statute does not provide for potential distribution of residual funds to other organizations that “serve the public good.”^[44]

Some courts have, however, criticized the application of Cy Pres distributions in the context of class action judgments,^[45] on the basis that Cy Pres distributions can misallocate benefits. For instance, that a Cy Pres distribution can result in a windfall to nonmembers of the class and to class members who have already recovered on individual claims, and consequently the court disallowed fluid cash recovery.^[46]

The further criticism that has been levelled is that sometimes a Cy Pres distribution will not benefit any member of the class at all.^[47] Where no class member benefits, Cy Pres distribution might serve no purpose but punishment of the defendant.^[48] Cy Pres distributions can raise other issues in the settlement context, for instance court-ordered Cy Pres could bind a defendant and plaintiff class with settlement results that differ from those intended.^[49]

The courts have also criticized Cy Pres distribution on the ground that it can result in double recovery and create an intra-class conflict that favors poor class notice.^[50] The basic principle here is that in the case of class action settlements, the parties should be able to negotiate the disposition of unclaimed settlement funds.^[51]

In conclusion, it is observed that the 2008 Illinois statute explicitly authorizes parties to allocate the distribution of settlement funds and even residual funds to other recipients that may include the designation of the distribution of unclaimed funds to charitable organizations that may or may not have a connection to the underlying dispute. In the absence of such designation, the statute designates not-for-profit legal service providers as the Cy Pres recipients of all other unclaimed funds. In this way, the statute supports the interest of the private litigants, as well as simultaneously promoting the public interest.

3.6 Massachusetts

The Cy Pres law in Massachusetts govern class-action judgments and settlements.^[52] The state court “may provide for the disbursement of residual funds.” It is expressly provided that judgments and settlements are not required to provide for residual funds.

Cy Pres distributions are discretionary in Massachusetts. However, any residuals must be directed either to a charity or foundation “which support[s] projects that will benefit the class or similarly situated persons consistent with the objectives and purposes of the underlying causes of action on which relief was based” or to the state’s IOLTA Committee for the indigent representation.”^[53] The original rule was effective January 1, 2009.

However, it is critical to note that a new language in Rule 23 of the Massachusetts Rules of Civil Procedure was adopted by the Supreme Judicial Court of Massachusetts on July 1, 2015. The revised Rule provides, in part, thus: “In matters where the claims process has been exhausted and residual funds remain, residual funds remain, the residual funds shall be disbursed to one or more nonprofit organizations or foundations (which may include nonprofit organizations that provide legal services to low income persons consistent with the objectives and purposes of the underlying causes of action on which relief was based, or to the Massachusetts IOLTA Committee to support activities and programs that promote access to the civil justice system for low income residents of the Commonwealth of Massachusetts.”

The effect of the 2015 revision of the Rule was to require in cases with residual funds that the plaintiff provide notice to IOLTA for the purpose of allowing IOLTA to be heard on whether it ought to be a recipient of any or all residual funds.

3.7 Tennessee

The class-action settlements and judgments in Tennessee are governed by its Cy Pres law.^[54] The courts may provide for the disbursement of residual funds, but judgments and settlements are not required to provide for residual funds.

The Tennessee statute provides that “[A] distribution of residual funds to a program or fund which serves the pro bono legal needs of Tennesseans including, but not limited to, the Tennessee Voluntary Fund for Indigent Civil Representation is permissible but not required.” The effective date for the original rule was September 1, 2006. In Tennessee, even after a judgment is entered or a settlement approved, either party may move, or the court may act sua sponte, to arrange for residual funds.

Worth noting is the fact that the Tennessee Legislature amended the Tennessee Code Annotated, Title 16, Chapter 3, Part 8, to create the Tennessee Voluntary Fund for Indigent Representation and authorize it to receive contributions from several sources, including: “The unpaid residuals from settlements or awards in class action litigation in both state and federal courts, provided any such action has been certified as a class action under Rule 23 of the Tennessee Rules of Civil Procedure or Rule 23 of the federal Rules of Civil Procedure.”

Rule 23.08 was amended, in 2009, to clarify that judges and parties to class actions may enter into settlement decrees providing for unclaimed class action funds to be paid to the Tennessee Voluntary Fund for Indigent Civil Representation.

3.8 South Dakota

The only state where Cy Pres distribution applies solely to class-action settlements is South Dakota.^[55]

In 2008, the South Dakota Legislature approved Section 16-2-57 of its codified laws on the settlement of class action lawsuits to provide that “Any order settling a class action lawsuit that results in the creation of a common fund for the benefit of the class shall provide for the distribution of any residential funds to the Commission on Equal Access to Our Courts...”

The South Dakota courts, upon finding “good cause” to do so, may designate up to 50 percent of any residual amount to one or more other nonprofit charitable organizations that serve the public good. Pending court approval, the settling parties, can, however, agree that any unclaimed funds revert to the defendant.

3.9 Pennsylvania

The class-action provisions of the Pennsylvania Rules of Civil Procedure (Pa. R.C.P) are embodied in the amendments to Rules 1701 and 1714, leading to the promulgation of new Rule 1716 (former Rule 1716 was renumbered as Rule 1717).^[56] The effective date was July 1, 2012. Before the amendment, the Pa. R.C.P did not address the disposition of the “leftovers” funds.^[57] It should further be noted that the rules apply only to class actions filed in state courts.

The Supreme Court of Pennsylvania revised Chapter 1700. The new Pa. R.C.P. 1701(a) defines residual funds as “funds that remain after the payment of all approved class member claims, expenses, litigation costs, attorney fees, and all other court approved disbursements to implement relief granted [in the class action].^[58] The said provision further states that: (a) “[A]ny order entering a judgment or approving a proposed compromise or settlement of a class that establishes a process for the identification and compensation of members of the class shall provide for the disbursement of residual funds.”^[59] The application of this rule is mandatory. In other words, any order entering a judgment or approving a proposed compromise or settlement of a class action that establishes a process for identification and compensation of members of the class must provide for the disbursement of residual funds. The mere possibility that residual funds exist, necessitates that the court should address it. In the unlikely event that the court does not, litigants must obtain an amendment to the order (whether judgment or approving a settlement) that results in distribution of the residual funds as provided by Pa.R.C.P 1716(b).

Pa.R.C.P (b) provides that [N]ot less than fifty per cent (50%) of residual funds in a given class action shall be disbursed to the Pennsylvania Interest on lawyers Trust account Board to support activities and programs which promote the delivery of civil legal assistance to the indigent in Pennsylvania by non-profit corporations described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. The order may provide for disbursement of the balance of any residual funds in excess of those payable to the Pennsylvania Interest on Lawyers Trust Account Board, or to another entity for purposes that have a direct or indirect relationship to the objectives of the underlying class action, or which otherwise promote the substantive or procedural interest of the member of the class.”

3.10 South Carolina

The Supreme Court of South Carolina amended the Rules of Civil Procedure to provide that “In matters where the claims process has been exhausted and residual funds remain, not less than fifty percent of the residuals must be distributed to the South Carolina Bar Foundation to support activities and programs that promote access to the civil justice system for low income residents of South Caroline.”

The balance of the residue may be distributed to any other entities for purposes that have a direct or indirect relationship to the objectives of the underlying litigation or otherwise promote the substantive and procedural interest of the members of the class.

The effective date of the new rule is April 27, 2016.

3.11 Colorado

In 2016, the Supreme Court of Colorado amended Section 23(g) of the Colorado Rules of Procedure to provide that “…. In matters where the claims process has been exhausted and residual funds remain, not less than 50 percent of the residual funds shall be disbursed to the Colorado Lawyer Trust Account Foundation (COLTAF) to support activities and programs that promote access to the civil justice system for low income residents of Colorado. The court may disburse the balance of any residual funds beyond the minimum percentage to COLTAF or to any other entity for purposes that have a direct or indirect relationship to the objectives of the underlying litigation or otherwise promote the substantive or procedural interests of the members of the certified class.”

The effective date of this amendment is July 1, 2016.

3.12 Connecticut

In 2014, the Supreme Court of Connecticut amended Section 9-9 of the Connecticut Superior Court Rules to state that “… Any order, judgment or approved settlement in a class that establishes a process for identifying and compensating members of the class may designate the recipients of any such residual funds that may remain after the claims payment process has been completed. In the absence of such designation, the residual funds shall be disbursed to the organization administering the program for the use of interest on lawyers’ client funds pursuant to General Statutes 51-81c for the purpose of funding those organizations that provide legal services for the poor in Connecticut.”

The effective date of this amendment is January 1, 2015.

It is worth noting that the Connecticut Bar Foundation (the IOLTA program) receives periodic awards from state class action cases.

3.13 Hawaii

Rule 23 of Rules of Civil Procedure of Hawaii was amended by the Hawaii Supreme Court, in January 2011. The amendment provided that “… it shall be within the discretion of the court to approve the timing and method of distribution of residual funds and to approve the recipient(s) of residual funds, as agreed to by the parties, including nonprofit tax exempt organizations eligible to receive assistance from the indigent legal assistance fund under HRS section 607-5.7 (or any successor provision) or the Hawaii Justice Foundation, for distribution of residual funds to legal aid organizations or to the Hawaii Justice Foundation to disburse to one or more of such organizations.”

This amendment came into effect on July 1, 2011.

3.14 Indiana

On January 1, 2011, a new language in Rule 23 of the Indiana Rules of Civil Procedure. This was adopted by the Indiana Supreme Court and reads, in part, thus: “In matters where the claims process has been exhausted and residual funds remain, not less than twenty-five percent (25%) of the residual funds shall be disbursed to the Indiana Bar Foundation to support the activities and programs of Indiana Pro Bono Commission and its pro bono districts. The court may disburse the balance of any residual funds beyond the minimum percentage to the Indiana Bar Foundation or to any other entity for purposes that have a direct or indirect relationship to the objectives of the underlying litigation or otherwise promote the substantive or procedural interests of members of the certified class.”

3.15 Kentucky

The Kentucky Supreme Court amended Civil Rule 23:05 thereby adding subsection (6), which provided, in part, that “In matters where the claims process has been exhausted and residual funds remain, not less than 25% of the residual funds shall be disbursed to the Civil Rule 23 Account maintained by the Kentucky IOLTA Fund Board of Trustees pursuant to Supreme Court Rule 3.830(20).”

The new rule came into effect on January 1, 2014.

3.16 Louisiana

The Louisiana Supreme Court enacted Rule XLIII, which provided, in part, thus: “In matters where the claims process has been exhausted and Cy Pres Funds remain, such funds may be disbursed by the trial court to one or more non-profit or governmental entities which support projects that will benefit the class or similarly situated persons consistent with the objectives and purposes of the underlying causes of action on which relief was based, including the Louisiana Bar Foundation for use in its mission to support activities and programs that promote direct access to the justice system.”

This enactment became effective on September 24, 2012.

3.17 Maine

The Maine Supreme Judicial Court amended the Maine Civil Rule 23(f)(2) to provide, in part, thus: “The parties may agree that residual funds be paid to an entity whose interests reasonably approximate those being pursued by the class. When it is not clear that there is such a recipient, unless otherwise required by governing law, the settlement agreement should provide that residual fees, if any, be paid to the Maine Bar Foundation to be distributed in the same manner as funds received from interest on lawyers trust accounts…”

This amendment became effective March 1, 2013.

3.18 Montana

The Montana Supreme Court amended Rule 23 of the Montana Rules of Civil Procedure to read: “In matters where the claims process has been exhausted and residue funds remain, not less than fifty percent (50%) of the residual funds shall be disbursed to an Access to Justice organization to support activities and programs that promote access to the Montana civil justice system. The court may disburse the balance of any residual funds beyond the minimum percentage to an Access to Justice Organization or to another non-profit entity for purposes that have a direct or indirect relationship to the objectives of the underlying litigation or otherwise promote the substantive or procedural interests of members of the certified class.”

The effective date of the amendment is January 1, 2015.

3.19 Nebraska

The Nebraska Legislature amended section 30-3839 of the Revised Statutes Cumulative supplement, 2012, to provide that: “Prior to the entry of any judgment or order approving settlement in a class action described in section 25-319, the court shall determine the total amount that will be payable to all class members if all class members are paid the amount to which they are entitled pursuant to the judgment or settlement. The court shall also set a date when the parties shall report to the court the total amount that was actually paid to the class members. After the report is received, the court, unless it orders otherwise to further the purposes of the underlying cause of action, shall direct the defendant to pay the sum of unpaid residue to the Legal Aid and Services Fund.”

The effective date of the amendment is April 2014.

3.20 New Mexico

The New Mexico Supreme Court adopted new language in Rule 23 of the New Mexico Rules of Civil Procedure, to provide that residual class funds may be distributed to non-profit organizations that provide legal services to low income persons, the IOLTA program, the entity administering the pro hac vice rule and/or educational entities that provide training, teaching and legal services that further the goals of the underlying causes of action on which relief was based.

The new language also provides that funds may go to other non-profit organizations that support projects that benefit the class or similarly situated persons consistent with the goals of the underlying causes of action on which relief was based.

The new rule became effective May 11, 2011.

3.21 Oregon

The Oregon Legislature amended section 23 of the Oregon Code of Civil Procedure to add a new section O, which provided, in part, that, in class action cases where residual funds exist, at least 50 percent of the amount not paid to class members be paid to the Oregon State Bar for funding of legal services. The remainder will be paid to any entity for purposes that the court determines are directly related to the class action or directly beneficial to the interests of the class members.

This amendment was effective March 4, 2015.

3.22 West Virginia

The West Virginia Supreme Court amended Rule 23 of the West Virginia Rules of Civil Procedure to provide that: “When the claims process has been exhausted and residual funds remain, the 50% of the amount of residual funds shall be disbursed to Legal Aid of West Virginia. The court may, after notice to counsel of record and a hearing, distribute the remaining 50% to one or more West Virginia nonprofit organizations, schools within West Virginia, universities or colleges, or foundations, which support programs that will benefit the class consistent with the objectives and purposes of the underlying causes of action upon which relief was based.”

The effective date of this amendment is March 8, 2017.

3.23 Wisconsin

The Wisconsin Supreme Court amended Wisconsin Statute 803.08 to provide that: “In class actions in which residual funds remain, not less than fifty percent of the residual funds shall be disbursed to the Wisconsin Trust Account Foundation to support direct delivery of legal services to persons of limited means in non-criminal matters. The circuit court may disburse the balance of any residual funds beyond the minimum percentage to WisTAF for purposes that have a direct or indirect relationship to the objectives of the underlying litigation or otherwise promote the substantive or procedural interests of members of the certified class.”

The amendment came into effect on January 1, 2017.

3.24 New York

The practice of Cy Pres is established in New York. In New York often class actions yield funds that cannot be distributed to class members for a variety of reasons.^[60] In settlement of class litigation, the counsel and the court can agree to distribute such residual funds as Cy Pres awards to nonprofit entities.^[61]

Courts in New York have broad discretion in determining the next best use of class litigation residual funds.^[62] In New York courts have applied the Cy Pres doctrine with increasing liberality.^[63] It is worth noting the treatment of the concept of Cy Pres in the decision in Fears v. Wilhelmina Model Agency.^[64] 2005 WL 1041134 (S.D.N.Y., May 5, 2005).

The New York Attorney General and other state attorneys once brought a case against Nine West, in which a settlement was entered, upon recommendation of the state Attorney General for Cy Pres distribution of $2 million to New York programs for women.^[65]

3.25 States prohibiting the Cy Pres doctrine

It is noted that apart from the states discussed above, the rest of the states invariably prohibit the Cy Pres practice as being a violation of the appropriation rules and laws of such states.

Texas Supreme Court, has held by a majority, that there is nothing for Texas to escheat under its unclaimed property statute when a class-action settlement provides that uncashed checks go to charity.^[66]

4. CONCLUSION

As a result of the prohibition by the US Attorney-General, of the Cy Pres settlements at federal level, it is submitted that there may be an increase in litigants resorting to state Cy Pres rules or statutes governing the distribution of unclaimed class-action funds in settling their claims.

While some states, like Washington and California, provide for Cy Pres awards by statute or rule, the federal circuits have differed on their use in class-action settlements.

The findings of this research paper underscore the impetus for further research, and provides a template to inspire and provoke thought, introspective analysis of the legal theme of residual distribution in the realm of Cy Pres doctrine.

^[1] See generally Office of Attorney General, Memorandum for all components heads and United States Attorneys “Prohibition on Settlement Payments to Third Parties” available at https://www.justice.gov/opa/press-release/file/971826/download (last accessed February 02, 2018). The agreements included are those in settlement of civil litigation, accepting plea, and deferring or declining prosecution in criminal matter.

^[2] Ibid at para 4.

^[3] Ibid at para 3.

^[4] Supra note 1.

^[5] At the federal level, see generally the dissenting opinion of Brown J in Keepseagle v. Perdue, No. 16-5189 (D.C. Cir. May 16, 2017)

^[6] See generally Geronime LJ “The Cy Pres Doctrine in Wisconsin” 49 Marquette Law Review 387 (1965) available at: https://scholarship.law.marquette.edu/mulr/vol49/iss2/4. See further Chester CR “Cy Pres: A Promise Unfulfilled” Indiana Law Journal 54 Iss. 3, Article 3 (1979) available at: http://www.repository.law.indiana.edu/ilj/vol54/iss3/3.

^[7] Wasserman R “Cy Pres in Class Action Settlements” 88 Southern California Law Review (2014) 97.

^[8] See generally Baker EC and Barron LM “Cy Pres … say what? State laws governing disbursement of residual class-action funds” available at: https://www.lexology.com/library/detail.aspx?g=5e9df377-7ba9-4fa4-a872-1876198bad25.

^[9] Ibid at 33. See also Yospe S “Cy Pres distributions in class action settlements” Columbia Business Law Review (2009) 1014. See further Redish MH et al “Cy Pres relief and the pathologies of the modern class action: A normative and empirical analysis” 62 Florida Law Review (2010) 618-665.

^[10] California, Colorado, Connecticut, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Maine, Massachusetts, Minnesota, Montana, Nebraska, New Mexico, North Carolina, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Washington, West Virginia and Wisconsin.

^[11] See generally Glaves B and McBurney M “Cy Pres Awards, Legal Aid and Access to Justice: Key Issues in 2017 and Beyond” Management Information Exchange Journal, Vol. 20 No. 2 Spring 2017, available at https://www.americanbar.org/publications/dialogue/volume/20/spring-2017/cy-pres-awards--legal-aid-and-access-to-justice.html (last accessed February 7, 2018).

^[12] Ibid.

^[13] See generally American Bar Association (ABA), Report adopted by ABA House of Delegates (August 8-9, 2017) through Resolution 104, August 2017, available at https://www.americanbar.org/content/dam/aba/administrative/legal_aid_indigent_defendants/ATJReports/ls_atj_cypres.authcheckdam.pdf

^[14] See ABA Resource Center for Access to Justice Initiatives, “Legislation and Court Rules Providing for Legal Aid to Receive Class Action Residuals” available at https://www.americanbar.org/content/dam/aba/administrative/legal_aid_indigent_defendants/ls_sclaid_atj_cypres.authcheckdam.pdf (last accessed February 7, 2018).

^[15] See generally Minnesota State Bar Association (MSBA) Memo dated November 28, 2017, available at https://www.mnbar.org/docs/default-source/default-document-library/msba-comments-on-mrcp-amendments-plus-exhibits-11-28-17db35abb2830d435abe7ca885491121ef.pdf?sfvrsn=0 (accessed February 6, 2018).

^[16] See supra note 10.

^[17] See Baker EC and Barron LM at 34, supra note 7.

^[18] Ibid.

^[19] See generally Jerold S. Solovy et al, Moore’s Federal Practice – Civil 23.171 (2011). See further Six Mexican Workers v. Arizona Citrus Growers 904 F.2d 1301, 1309 (9th Cir. 1990).

^[20] P.C., No. 13-2620 (8th Cir. 2015).

^[21] See Glaves B, et al, supra note 10.

^[22] See generally Ted Frank "Moody v Sears: Lawyers, $1M. Class, $2,402," Overlawyered weblog, available at http://www.overlawyered.com/2007/05/moody_v_sears_lawyers_1m_class.html. (May 5, 2007) (accessed on February 7, 2018).

^[23] See California Code Civ. Procedure s 16-2-57 (2006).

^[24] Ibid.

^[25] Ibid.

^[26] California Code of Civil Procedure 384(a).

^[27] See Larkin J.D “Litigating on the fault line: Class action law in California” Impact Fund, available at https://www.impactfund.org/class-action-law-california-litigation-on-a-fault-line/ (accessed February 7, 2018).

^[28] Ibid.

^[29] See In re Microsoft I-V Cases, 135 Cal. App. 4th 706 (2006).

^[30] Ibid. at 721.

^[31] 167 Cal. App. 4th 718 (2008).

^[32] Supra note 16 at p.720.

^[33] Ibid. See also 7-Eleven Owners for Fair Franchising v. South Corp. (2000) 85 Cal. App. 4th at 1135, 1146 [102 Cal. Rptr. 2d 777]. See further Dunk v. Ford Motor Co., 48 Cal. App. 4th at pp. 1800-1802).

^[34] See generally Tsai R and Harlow R “Cy Pres: The Next Best Thing – or Not” Daily Journal October 2013, available at https://legacy.dailyjournal.com/mcle.cfm?ref=article&eid=931308&evid=1&qVersionID=429&qTypeID=7&qSPCtypeID=17&qcatid=59 (accessed February 7, 2018).

^[35] 107 Cal. App. 4th 820 (2003).

^[36] See Washington Civil R. 23(f).

^[37] Ibid.

^[38] See The Illinois Equal Justice Act, 30 III. Comp. Stat. 765/1.

^[39] Lastimosa CK “What to do with leftovers? Residual Funds in class action common funds under 735 ILCS 5/2-807” available at https://c.ymcdn.com/sites/www.iadtc.org/resource/resmgr/imported/18.1.4.pdf (last accessed February 5, 2018). The Public Act 95-0479 was signed into law on August 27, 2007, which had the effect of adding

^[40] Ibid.at p.1.

^[41] Ibid.

^[42] Ibid.

^[43] The statute defines an “eligible organization” as a not-for-profit organization that has existed for at least three years as a section 501(c) tax exempt organization, that complies with the registration and filing requirements of the Charitable Trust Act, 760 ILCS 55/1-55/19, and Solicitation for Charity Act, 225 ILCS 460/0.01-460/23, and that is eligible for funding under the Illinois Equal Justice Act, 30 ILCS 765/1-765/50.

^[44] Supra Note 20. See Lastimosa CK at p. 1.

^[45] Supra Note 7 at 3.

^[46] See generally Van Gemert v. Boeing Co., 553 F.2d 812, 816 (2d Cir. 1977).

^[47] See Six Mexican Workers. Supra note 11.

^[48] See Eisen v. Carlisle & Jacqueline, 479 F.2d 1005, 1013 (2d Cir. 1973).

^[49] See In re Folding Carton Antitrust Litig. 744 F.2d at 1254-55.

^[50] See Van Gemert, Supra note 29.

^[51] See Houck, 881 F.2d at 502.

^[52] Mass. Civ. Proc. 23(e).

^[53] Supra Note 7 at 1.

^[54] Tenn. Code Ann. S23.08.

^[55] S.D. Codified Laws S16-2-57 (2008).

^[56] The Supreme Court of Pennsylvania entered an Order enacting a number of changes to the Pennsylvania Rules of Civil Procedure, effective July 1, 2012.

^[57] See generally “ Expanding Access to Justice through class action residual funds Pennsylvania Rules of Civil Procedure 1701, 1714 and 1716” available at https://www.paiolta.org/wp-content/uploads/2014/04/Class-Action-Residuals-Toolkit.pdf (last accessed on February 5, 2018).

^[58] See S1701(a) Pa.R.C.P.

^[59] Ibid.

^[60] New York State Bar Association, “Cy Pres for civil legal services: A Report and Recommendations to the New York State Bar Association House of Delegate from the Special Committee on funding for civil legal services”, April 1, 2006 at p.1, available at https://www.nysba.org/WorkArea/DownloadAsset.aspx?id=26860 (accessed February 6, 2018).

^[61] See generally Raiter SM and Swanson KA “Unsettled funds and Cy Pres distribution” available at http://www.larsonking.com/files/Unclaimed%20Settlement%20Funds%20and%20Cy%20Pres%20Distributions.pdf . (accessed February 6, 2018).

^[62] Ibid.

^[63] See St. John’s Law Review (2013) “Cy Pres in New York,” St. John’s Law Review: vol. 31:Iss.2, Article 10. Available at http://scholarship.law.stjohns.edu/lawreview/vol31/iss2/10 (accessed February 6, 2018).

^[64] 2005 WL 1041134 (S.D.N.Y. May 5, 2005). See also Schwab v. Phillip Morris USA, 2005 WL 3032556 (E.D.N.Y. Nov. 14, 2005).

^[65] See http://www.oag.state.ny.us/press/2001/oct/oct26a_01.html (accessed February 6, 2018).

^[66] See Highland Homes Ltd. V. The State of Texas, No. 12-0604 (August 29, 2014).

• Author: Dr. Milton Owuor (Author)
• Publication Year: 2018
• Pages: 26
• Catalog Number: V424743
• ISBN (eBook): 9783668720480
• ISBN (Book): 9783668720497
• Language: English
• Tags: attorney, general, department, justice, cypres, federal, courts, united, states, US Attorney General, cypres doctrine, federal court, department of justice, policy, New York