Never settle for second best? Cy pres distributions in securities class action settlements.

Author:Hills, Brianna S.
Position::NOTE
 
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Oetting v. Jacobson (In re BankAmerica Corp. Securities Litigation), 775 F.3d 1060 (8th Cir. 2015), reh'g and reh'g en banc denied (Mar. 18, 2015)

  1. INTRODUCTION

    There is an old adage that one should "never settle for second best." While this advice is arguably well taken in most areas of life, it is less useful in settlement discussions. In 2015, more federal securities class actions were filed than during the height of the financial crisis in 2008, with more of those cases settling than in any year since 2011. (1) Consumer class action funds often go largely unclaimed, leaving settlement funds intended to compensate injured plaintiffs unused and undistributed.

    Courts have attempted to remedy this issue by using cy pres, the practice of distributing unclaimed settlement funds to a "next best" plaintiff, often a charitable organization. (2) While the practice has theoretical advantages, in practice, it can leave class counsel and a tenuously related charity with a windfall of funds and the actual victims with nothing. The Eighth Circuit spoke on the issue in In re BankAmerica Corp. Securities Litigation. (3) In that case, the Eighth Circuit fashioned the cy pres reward in a way that would avoid its two major pitfalls: poor selection of a next best plaintiff and lack of compensation for the actual victims. There are, however, additional steps that courts can and should take to perfect cy pres distributions, including requiring the selection of a recipient for residual class funds at the settlement agreement stage, monitoring notice to class members, and facilitating the input of class members when choosing an appropriate recipient.

  2. FACTS AND HOLDING

    In 1998, NationsBank merged with BankAmerica Corporation to form Bank of America Corporation. (4) As a result of the merger, shareholders filed numerous class action lawsuits, claiming the new bank violated various federal and state securities regulations, including securities fraud provisions. (5) The cases were consolidated in the U.S. District Court for the Eastern District of Missouri after they were transferred from the Judicial Panel on Multidistrict Litigation in February of 1999. (6) The district court certified four classes--two comprised of NationsBank shareholders and two of BankAmerica shareholders--and eventually approved a $490 million global settlement against the objections of David Oetting, the NationsBank class representative. (7) Oetting argued that the $332.2 million awarded to the two NationsBank classes was inadequate given the strength of their claims compared to the two BankAmerica classes. (8)

    The first distribution from the NationsBank settlement fund was made in December 2004, after which approximately $6.9 million remained. (9) The court suggested at least part of the reason for the remaining funds was checks that were returned for wrong addresses and checks that were never cashed or deposited. (10) The fund slowly dwindled. (11) In April 2009, the district court ordered a $4.75 million distribution to additional claimants, leaving $2,440,108.53 in the settlement fund. (12) For over three years, the fund remained untouched. (13) In September 2012, class counsel for NationsBank moved to terminate the case and award class counsel an additional $98,114.34 in attorneys' fees for work performed since the initial December 2004 distribution. (14) Class counsel had already received 18% of the NationsBank fund, roughly $59 million. (15) Class counsel moved for the district court to distribute the remainder of the settlement funds cy pres to three St. Louis area charities: Legal Services of Eastern Missouri ("LSEM"), the Mathews Dickey Boys' and Girls' Club of St. Louis, and The Backstoppers. (16)

    In deciding how to rule on the motion, the district court first discussed whether cy pres distribution would be appropriate, opining that cy pres distribution "is permissible 'in cases in which class members are difficult to identify or where they change constantly' or in cases where there are unclaimed funds." (17) The court agreed with class counsel that "cy pres distribution of the remaining funds is appropriate" because (1) "[a]ll class members submitting claims have been satisfied in full," (2) "identification of members for additional distribution would be difficult and costly," (3) "ownership of Bank of America shares changes constantly," and (4) "further distribution... would not benefit the individuals who actually suffered harm." (18) The court also looked to the terms of the settlement agreement, reasoning that "defendant acknowledged that any surplus would not be returned to it," and the court that approved the December 2004 distribution "specified that any surplus... would be distributed to non-profit organizations to be determined by the court." (19)

    Next, the district court attempted to determine the appropriate recipient of the surplus funds, relying on the principle that "the unclaimed funds should be distributed for a purpose as near as possible to the legitimate objectives underlying the lawsuit, the interests of class members, and the interests of those similarly situated." (20) Under this rule, the court must tailor the distribution to the geographic scope and purpose of the original litigation, which "preserves the legal fiction that class members themselves are receiving an indirect benefit from the cy pres distribution." (21) The court reasoned that LSEM (22) would be a more appropriate recipient than the other two charities suggested by class counsel because legal aid organizations such as LSEM specifically help victims of fraud. (23)

    Oetting objected a second time to both the cy pres distribution and the potential recipients suggested by class counsel but was again overruled. (24) The district court granted class counsel's motion and ordered the funds be distributed to LSEM. (25)

    Oetting then brought this appeal, arguing the district court erred in ordering the cy pres distribution. (26) Oetting reasoned that the district court abused its discretion in ordering the distribution to LSEM because "further distribution to the classes [was] feasible" and the choice of LSEM was inappropriate because "LSEM is unrelated to the classes or the litigation," making it ineligible to be the "'next best' cy pres recipient." (27)

    On appeal, the Eighth Circuit agreed with Oetting and reversed the district court on both grounds, holding first that the cy pres distribution was premature because an additional distribution is feasible and second that LSEM is not an appropriate "next best" recipient of the surplus funds. (28) The Eighth Circuit was clear that "[g]iven the substantial history of district courts ignoring and resisting circuit court cy pres concerns and rulings in class action cases, we conclude it is time to clarify the legal principles that underlay our [past cy pres decisions]." (29)

  3. LEGAL BACKGROUND

    The cy pres doctrine was born as a rule of construction employed by courts aiming to save testamentary charitable gifts that would otherwise fail by attempting to ascertain and give effect to the original intent of the testator. (30) The term comes from the Norman French expression cy pres comme possible, meaning "as near as possible." (31) In the trust context, the practice was used as an equitable doctrine that rests on the assumption "that the settlor would have preferred a modest alteration in the terms of the trust to having the corpus revert to his residuary legatees." (32) In its modern manifestation, courts utilize cy pres in the class action context as a way to distribute unclaimed funds from settlements "guided by the parties' original purpose." (33) Unlike in the trust context, however, the "settlor," or defendant, strongly prefers the funds be reverted to it. This leads to a strained analogy that courts have largely ignored. (34)

    Many circuits have criticized and severely restricted the use of cy pres in the class action context. (35) However, most of the circuits to consider the practice agree that there are some situations in which cy pres is appropriate. (36) While the Supreme Court has not rendered a decision on the issue directly, Chief Justice Roberts noted that cy pres is "a growing feature of class action settlements" and, because of the "fundamental concerns surrounding the use of such remedies in class action litigation," "this Court may need to clarify the limits" on their use. (37)

    As a threshold matter, the Eighth Circuit relied on principles set forth by the American Law Institute ("ALI") in its analysis. (38) The provision relied on by the Eighth Circuit was ALI [section] 3.07, which outlines when cy pres relief is appropriate. (39) Other circuits have also deferred to this section in fashioning cy pres relief. (40)

    Application of the doctrine varies, but typically, the court must first determine cy pres distribution is appropriate, and, once that determination has been made, find an appropriate "next best" recipient for the surplus funds. The Eighth Circuit, after outlining its framework, addressed each of these issues in turn.

    1. Appropriateness of Cy Pres Distribution

      In its opinion, the Eighth Circuit announced a new take on cy pres distributions, noting that "[w]e have approved cy pres distribution of unused or unclaimed class action settlement funds in two cases. In both, the distributions met each of the criteria in ALI [section] 3.07, even though our decisions antedated the ALI's work." (41) This section of the ALI starts by noting that "[i]f individual class members can be identified through reasonable effort, and the distributions are sufficiently large to make individual distributions economically viable, settlement proceeds should be distributed directly to individual class members." (42) Thus, the touchstone of the appropriateness analysis is whether it is "feasible to make further distributions to class members." (43) Looking again to the ALI provision, the court held the feasibility "inquiry must be based...

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