January 8, 2015
Link to Court of Appeals for the 8th Circuit Opinion
In re Bankamerica Corporation Securities Litigation (Bankamerica Corporation) clarifies the Eight Circuit Court of Appeals’ position on cy pres distributions of surplus settlement funds in class action law suits. Specifically, this case illustrates the Eighth Circuit’s reliance on Section 3.07 of the American Legal Institute’s (ALI’s) Principles of Aggregate Litigation in drafting a far stricter set of guidelines for district courts seeking to make cy pres distributions. Thus, Bankamerica Corporation clearly represents an effort on the part of the court to cabin what it views as judicial overreach by the district courts. The effectiveness of this effort remains to be seen.
I. Facts and Holding
The underlying settlement in this case, on which the cy pres distribution was predicated, stemmed from multiple class actions filed across the country following the merger of NationsBank and BankAmerica to form Bank of America Corporation.[i] These cases were eventually transferred by the Judicial Panel on Multidistrict Litigation to the Eastern District of Missouri, where that court certified four plaintiff classes, two classes of NationsBank shareholders, and two classes of BankAmerica shareholders.[ii] The cases were resolved when the court approved a $490 million global settlement. However, after over ten years, a substantial fraud on the settlement fund perpetrated by a former employee of the claims administrator, and several attempts at distributing the settlement proceeds in their entirety, there were still settlement funds left undistributed.
Following these events, Green Jacobson, P.C. (Green Jacobson), class counsel for the NationsBank Classes, moved to (1) terminate the case with respect to the NationsBank Classes, (2) award class counsel $98,114.34 in attorneys’ fees for work done after the overwhelming majority of the settlement award was distributed in December of 2004, and (3) distribute cy pres the remainder of the ‘surplus settlement funds’ to three St. Louis area charities.[iii] However, the NationsBank class representative, David P. Oetting (Oetting), objected to this disposition of the remaining settlement funds on the grounds that his class had received a disproportionately low percentage of the settlement award when the merit of their claims was compared to the merit possessed by the claims of the BankAmerica Classes.[iv] Although the district court overruled Oetting’s objections in finding for Green Jacobson, on appeal Oetting argued that (1) as to the cy pres distribution “the district court abused its discretion in ordering a cy pres distribution because a further distribution to the classes [was] feasible, and in any event LSEM [Legal Services of Eastern Missouri] [was] unrelated to the classes or litigation and [was] therefore an inappropriate ‘next best’ cy pres recipient,” and (2) that the attorney fee award was inappropriate.[v]
On appeal, the Eight Circuit Court of Appeals found in favor of Oetting on the grounds that the district court had abused its discretion in ordering a cy pres distribution.[vi] Specifically, the Eighth Circuit held that the district court ignored relevant precedential guidance from both the federal circuits and the ALI in reaching its decision. The Court remanded the case and vacated the award of additional attorney fees as premature.[vii]
A. Majority Opinion
The Court of Appeals relied on five main arguments in holding that the district court had abused its discretion in authorizing the cy pres distribution.
First, agreeing with the Fifth Circuit’s reasoning in Klier v. Elf Atochem North America Incorporated, the Court held that:
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.[viii]
Thus, (1) while class counsel and the district court both maintained that their jointly held belief that “‘further identification of members for additional distribution would be difficult and costly, considering the time that [had] passed since the initial distribution”[ix] was dispositive as to the question of the viability of a cy pres distribution in this case, the Court disagreed with that conclusion on the basis that “that inquiry must be based primarily on whether ‘the amounts involved are too small to make individual distributions economically viable.’”[x] Further, (2) the Court dismissed as an implicit call for “judicially impermissible misappropriation of monies gathered to settle complex disputes among private parties” class counsel’s assertion that “further distribution to the class [was] inappropriate because it would primarily benefit large institutional investors, who are less worthy than charities such as LSEM [Legal Services of Eastern Missouri].”[xi] Finally, (3) contrary to class counsel’s argument that the proposed distribution might not inure to the benefit of those actually harmed due to the shifting nature of the ownership of publicly held shares, the Court held that “The possibility that distributing a private settlement to class members long after the events that gave rise to their claims may not ‘inure to the benefit of those actually harmed’ does not give the court presiding over class action litigation power to confiscate the settlement proceeds.”[xii]
Second, the Court was at pains to point out that “a cy pres distribution is not authorized by declaring, as class counsel and the district court did in this case, that ‘all class members submitting claims have been satisfied in full.’”[xiii] Once again looking to the Klier court, the Court specifically noted that “It is not true that class members with unliquidated damage claims in the underlying litigation are ‘fully compensated,’ by payment of the amounts allocated to their claims in the settlement,” given the conciliatory nature of a settlement.[xiv] Thus, the Court held that just because the claimants got all of what they were entitled to per the terms of the settlement, it did not follow that they received 100 percent of what they would have been entitled to had the case proceeded to trial, and therefore satisfaction of their claims was an insufficient rationale for authorizing a cy pres distribution.
Third, the Court fundamentally disagreed with Green Jacobson’ assertion that the cy pres distribution “must be affirmed because the district court and this court are bound by language in the settlement agreement stating that the balance in the settlement fund shall be contributed to non-profit organizations determined by the court in its sole discretion.”[xv] First, highlighting Eight Circuit precedent in Airline Tickets I and Airline Tickets II, the Court pointed out that it had previously found that “‘Distribution of funds at the discretion of the court is not a traditional Article III function,’”[xvi] and thus the clause contained in the settlement agreement was void ab initio. Secondly, and “more importantly,” the Court reiterated and adopted the Ninth Circuit’s holding in Nachshin v. AOL, L.L.C. that “a proposed cy pres distribution must meet our standards governing cy pres awards regardless of whether the award was fashioned by the settling parties or the trial court.”[xvii]
Fourth, the Court agreed with Oetting’s argument that the award was improper due to Green Jacobson’s failure to notify the class of Green Jacobson’s motion for a cy pres distribution.[xviii] Here, the Court held that before the district court may select a cy pres recipient, unless “the amount of funds to be distributed cy pres is de minimis,” the court is obliged to make a cy pres proposal “publicly available and allow class members to object or suggest alternative recipients.”[xix] The Court reasoned that this action on the part of a district court prevented the appearance of judicial overreach and allowed the class members “a voice in choosing a ‘next best’ third party.”[xx]
Fifth, the Court found that the interests of the cy pres recipient, LSEM, chosen by the district court were not sufficiently tailored to those of the class members to make it an appropriate cy pres recipient in this case.[xxi] Looking to the Fifth Circuit’s opinion in re Katrina Canal Breaches Litigation, the court announced that in order for a cy pres distribution to be appropriate “such a 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.’”[xxii] Further, reiterating its holding in Airline Tickets II, the court held 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,” and that “the [district] court must look for a recipient that ‘relates directly to the injury alleged in [the] lawsuit and settled by the parties.’”[xxiii] Here, the Court determined that the district court’s findings that (1) there was “‘no immediately apparent organization that [would] indirectly benefit NationsBank and BankAmerica class members,’”[xxiv] and (2) “LSEM sufficiently approximated the interests of the class because it [served] victims of fraud,” were insufficient to establish LSEM as a legitimate cy pres recipient in this case.[xxv] The Court held that given the underlying considerations of the case, including its geographic scope, a more appropriate cy pres distributee was almost certainly available. The district court’s determination that LSEM was the “‘next best’” recipient was simply found to be insufficient in the face of the court’s stringent cy pres standard and its determination that LSEM was a “totally unrelated charity.”[xxvi]
Finally, as to the award of supplemental attorneys’ fees, the Court vacated this award on the basis that it was premature given the Court’s underlying cy pres ruling. Although the Court held that “[i]n general, post-settlement monitoring is a compensable activity for which counsel is entitled to a reasonable fee,” given the unsettled nature of the distribution determination the Court found that it was far too early to award attorney’s fees for work that was yet to be done.[xxvii]
In drafting her dissent, Judge Murphy took the majority to task for its alleged post hoc imposition of a new rule in this case.[xxviii] Specifically, she alleged that in overturning the district court’s cy pres distribution the majority had misapplied Eighth Circuit precedent, Section 3.07 of the ALI’s Principles of Aggregate Litigation, as well as the application by other circuits of the ALI’s rubric. In fact, Judge Murphy noted that section 3.7 of the ALI had not even been adopted by the Eighth Circuit at the time of the district court’s decision.[xxix]
At the outset, Judge Murphy described the lengthy and complicated nature of the two separate attempts at settlement distribution in the case, a process the district court described as “inundated with inefficiency,” and pointed to the then current Eighth Circuit precedent in noting her approval of the district court’s decision.[xxx] Specifically, looking to the Eighth Circuit’s holding in Airline Tickets I and Powell v. Georgia-Pacific Corporation,[xxxi] Judge Murphy observed that at the time of the district court’s decision “[w]e [had] explained that cy pres awards [were] appropriate ‘where class members are difficult to identify or where they change constantly, or where there are unclaimed funds.’”[xxxii] Here, Judge Murphy believed that the lengthy and convoluted nature of the distribution attempts, the difficulties which had been encountered in reaching existing shareholders, and the fact that the claimants had been adequately compensated under the terms of the settlement, meant that the district court’s cy pres distribution had satisfied the Eighth Circuit’s cy pres distribution requirements. Further, responding directly to the majority’s criticisms of the selection of LSEM as the cy pres distributee, Judge Murphy argued that the district court had appropriately “‘tailored the cy pres distribution to the nature of the underlying lawsuit,’” given that “ [a]ll parties were given an opportunity for comment and the district court provided adequate reasons for selecting LSEM as the cy pres recipient based on the nature of its work as well as its situs in the areas where many class members were located when their losses occurred.”[xxxiii]
II. Legal Background
As a threshold issue, the term ‘cy pres’ finds It origins in the Norman French expression cy pres comme possible, meaning “‘as near as possible.’”[xxxiv] At common law, the legal doctrine developed as a rule of construction employed to save a testamentary charitable gift that would otherwise fail, by permitting “‘the next best use of the funds to satisfy the testator’s intent as near as possible.’”[xxxv] However, in more recent times, federal district courts have increasingly looked to the doctrine to dispose of unclaimed class action settlement funds.[xxxvi]
The practice of employing cy pres distributions has been heavily “criticized and severely restricted” throughout the circuits, as it has been viewed as posing a substantial danger of judicial overreach.[xxxvii] In fact, Chief Justice John Roberts of the United States Supreme Court expressed, as recently as 2013, “’fundamental concerns surrounding the use of such remedies in class action litigation.’”[xxxviii] However, their use in the Eighth Circuit was expressly approved by the Eighth Circuit Court of Appeals in its 1997 Powell v. Georgia-Pacific Corporation decision and its 2001 In re Airline Ticket Commissioner Antitrust Litigation (Airline I) and 2002 In re Airline Ticket Commissioner Antitrust Litigation (Airline II) decisions, although the Court has recognized that the restrictions announced in these decisions closely mirror those promulgated by the American Law Institute’s (ALI’s) 2010 Principles of the Law of Aggregate Litigation.[xxxix] Given the Bankamerica Corporation court’s reliance on the restrictive cy pres principles established by the ALI, they bear repeating here:
A court may approve a settlement that proposes a cy pres remedy. The court must apply the following criteria in determining whether a cy pres award is appropriate:
(a) If 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 to individual class members.
(b) If the settlement involves individual distributions to class members and funds remain after distributions (because some class members could not be identified or chose not to participate), the settlement should presumptively provide for further distributions to participating class members unless the amounts involved are too small to make individual distributions economically viable or other specific reasons exist that would make such further distributions impossible or unfair.
(c) If the court finds that individual distributions are not viable based upon the criteria set forth in subsection (a) and (b), the settlement may utilize a cy pres approach. The court, when feasible, should require the parties to identify a recipient whose interests reasonably approximate those being pursued by the class. If, and only if, no recipient whose interest reasonably approximate those being pursued by the class can be identified after thorough investigation and analysis, a court may approve a recipient that does not reasonably approximate the interests being pursued by the class.[xl]
Noting that district courts within the Eight Circuit had become increasingly liberal in their use of cy pres distributions, the Eight Circuit Court of Appeals decided in its 2015 Bankamerica Corporation decision that a more clearly defined set of standards were required to reign in the relatively unchecked discretion employed by the district courts up to that point.[xli] Relying on the standards enunciated by the ALI, as well as those promulgated by other circuit courts, in its Bankamerica Corporation decision the Court announced what appear to be a more concrete, and more restrictive, set of concerns to be addressed by district courts in using cy pres distributions. Interestingly, the requirements announced by the Bankamerica Corporation court appear to be even more restrictive than those set out by the ALI. However, it remains to be seen whether or not Bankamerica Corporation will have the intended cabining effect.
The underlying division here is one between pragmatism and policy. On the one hand, awards should not be meted out to parties who were not actually involved in litigation. Period. On the other, policy objectives strongly support this form of cy pres distribution where the settlement parties have already received a satisfactory distribution, the distribution of any remaining funds to the existing beneficial owners of the shares would be too far attenuated from the original harm, and there is an existing entity that could make far better use of the funds. However, it is not the place of the judiciary to redistribute wealth in such a manner, and thus this form of cy pres distribution sits on the far edge of acceptable judicial behavior. Here, the Eighth Circuit found that the district court overstepped this boundary.
- David Ferguson
[i] 775 F.3d 1060, 1062 (8th Cir. 2015).
[vii] Id. at 1063.
[viii] Id. at 1064 (quoting Klier v. Elf Atochem N. Am., Inc., 658 F.3d 468, 475 (5th Cir. 2011) (quoting Am Law Inst. Principles of the Law of Aggregate Litigation § 3.07 cmt. b (2010))) (emphasis in the original).
[ix] In re BankAmerica Corp. Sec. Litig., 775 F.3d 1060, 1064 (8th Cir. 2015) (quoting In re Bank of Am. Corp. Sec. Litig., No. 4:99-MD-1264 CEJ, 2013 WL 3212514, at *2 (E.D. Mo.. June 24, 2013) vacated and remanded sub no. In re BankAmerica Corp. Sec. Litig., 775 F.3d 1060 (8th Cir. 2015)) (emphasis added).
[x]BankAmerica Corp., 775 F.3d at 1065 (quoting Am Law Inst. Principles of the Law of Aggregate Litigation § 3.07 cmt. b (2010)) (emphasis in the original).
[xi] BankAmerica Corp., 775 F.3d at 1065.
[xiii] Id. (quoting In re Bank of Am. Corp. Sec. Litig., No. 4:99-MD-1264 CEJ, 2013 WL 3212514, at *3 (E.D. Mo.. June 24, 2013) vacated and remanded sub no. In re BankAmerica Corp. Sec. Litig., 775 F.3d 1060 (8th Cir. 2015)).
[xiv] BankAmerica Corp., 775 F.3d at 1065 (quoting Klier v. Elf Atochem N. Am., Inc., 658 F.3d 468, 479 (5th Cir. 2011)).
[xv] BankAmerica Corp., 775 F.3d at 1066 (quotation marks omitted).
[xvi] Id. (quoting In re Lupron Mktg. and Sales Practices Litig., 677 F.3d 21, 38 (1st Cir. 2012)); See In re Airline Ticket Comm’n Antitrust Litig., 268 F.3d 619 (8th Cir. 2001) (Airlines Tickets I); In re Airline Ticket Comm’n Antitrust Litig., 307 F.3d 679 (8th Cir. 2002) (Airlines Tickets II).
[xvii] BankAmerica Corp., 775 F.3d at 1066 (quoting Nachshin v. AOL, LLC, 663 F.3d 1034, 1040 (9th Cir. 2011)).
[xx] Id. (citing In re Baby Prods., 708 F.3d 163, 180 (3d Cir. 2013); Am Law Inst. Principles of the Law of Aggregate Litigation § 3.07(c) cmt. b (2010)).
[xxi] BankAmerica Corp., 775 F.3d at 1067.
[xxii] Id. (quoting Katrina Canal Breaches, Litig., 628 F.3d 185, 196 (5th Cir. 2010)).
[xxiii]BankAmerica Corp., 775 F.3d at 1067 (quoting In re Airline Ticket Comm’n Antitrust Litig., 307 F.3d 679, 682 (8th Cir. 2002) (Airlines Tickets II)).
[xxiv]BankAmerica Corp., 775 F.3d at 1067 (quoting In re Bank of Am. Corp. Sec. Litig., No. 4:99-MD-1264 CEJ, 2013 WL 3212514, at *4-5 (E.D. Mo.. June 24, 2013) vacated and remanded sub no. In re BankAmerica Corp. Sec. Litig., 775 F.3d 1060 (8th Cir. 2015)).
[xxv] BankAmerica Corp., 775 F.3d at 1067.
[xxvii] Id. at 1068 (8th Cir. 2015) (citing Powell v. Ga.-Pac. Corp., 119 F.3d 703, 707 (8th Cir. 1997)).
[xxviii] BankAmerica Corp., 775 F.3d at 1068 (Murphy, J., dissenting).
[xxx] Id. at 1069.
[xxxi] See Airline Ticket Comm’n Antitrust Litig., 268 F.3d 619 (8th Cir. 2001) (Airline Tickets I); Powell v. Ga.-Pac. Corp., 119 F.3d 703 (8th Cir. 1997).
[xxxii] BankAmerica Corp., 775 F.3d at 1070 (Murphy, J., dissenting) (citing In re Airline Ticket Comm’n Antitrust Litig., 268 F.3d 619, 625 (8th Cir. 2001) (Airline Tickets I)).
[xxxiii]BankAmerica Corp., 775 F.3d at 1071 (Murphy, J., dissenting) (quoting quoting In re Airline Ticket Comm’n Antitrust Litig., 307 F.3d 679, 683 (8th Cir. 2002) (Airlines Tickets II)).
[xxxiv] BankAmerica Corp., 775 F.3d at 1063 n.2 (8th Cir. 2015) (quoting In re Airline Ticket Comm’n Antitrust Litig., 268 F.3d 619, 625 (8th Cir. 2001) (Airline Tickets I)).
[xxxv] BankAmerica Corp., 775 F.3d at 1063 n.2 (8th Cir. 2015) (quoting In re Airline Ticket Comm’n Antitrust Litig., 268 F.3d 619, 625 (8th Cir. 2001) (Airline Tickets I)).
[xxxvi] BankAmerica Corp., 775 F.3d at 1063.
[xxxvii] Id.; see In re BankAmerica Corp. Sec. Litig., 775 F.3d 1060, 1063 (8th Cir. 2015) (highlighting decisions from the 7th, 3d, 5th, and 2d Circuits restricting the use of cy pres distributions).
[xxxviii] BankAmerica Corp., 775 F.3d at 1063 (quoting Marek v. Lane, 134 S.Ct. 8, 9 (2013)).
[xxxix] BankAmerica Corp., 775 F.3d at 1064.
[xl] Id. at 1063-1064 (quoting Am Law Inst. Principles of the Law of Aggregate Litigation § 3.07 (2010)).
[xli] BankAmerica Corp., 775 F.3d at 1064.