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]
II. Dissent
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.
III. Comment
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).
[ii] Id.
[iii] Id.
[iv] Id.
[v] Id.
[vi] Id.
[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.
[xii] Id.
[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)).
[xviii]
Id.
[xix] Id.
[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.
[xxvi]
Id.
[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).
[xxix]
Id.
[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.
