Opinion handed down January 8, 2015
A 1998 merger between NationsBank and BankAmerica prompted multiple class actions and resulted in a 490 million dollar global settlement.[1] After multiple distributions and a decade of litigation, 2.4 million dollars of the fund remained.[2] In September 2012, counsel for the NationsBank classes moved to terminate the case and make a cy pres distribution of these surplus settlement funds to Legal Services of Eastern Missouri (“LSEM”).[3] The district court upheld this motion.[4]
The Eighth Circuit Court of Appeals reversed, however, finding that members of the classes had not been fully compensated, members should have been allowed to object or suggest alternatives for the cy pres distribution, and the charity was not the “next best” recipient usually required under cy pres principles.[5]
I. Facts and Holding
In 1998, NationsBank and BankAmerica merged to form Bank of America Corporation.[6] Multiple class action suits ensued nationwide, alleging violations of federal and state securities laws.[7] The Judicial Panel on Multidistrict Litigation transferred each of these cases to the District Court for the Eastern District of Missouri.[8] That court then certified four classes of plaintiffs: “[T]wo classes of NationsBank shareholders and two classes of BankAmerica shareholders,”[9] The classes settled with Bank of American Corporation for $490 million.[10]
An initial December 2004 distribution left approximately $6.9 million in the NationsBank settlement fund.[11] After a second distribution of $4.75 million to NationsBank claimants in April 2009,, $2,440,108.53 remained.[12] Class counsel for the NationsBank classes moved to terminate the case with respect to the NationsBank classes, award class counsel $98,114.34 in attorneys’ fees, and “distribute cy pres the remainder of the ‘surplus settlement funds’ to three St. Louis area charities suggested by class counsel,’ including LSEM.[13] However, the NationsBank class representative, David P. Oetting, objected to this distribution.[14] Thedistrict court overruled his objections and granted the motion, , ordering a cy presdistribution of the remainder of the NationsBank settlement fund to LSEM and awarding attorneys’ fees..[15]
Oetting appealed both the cy pres distribution and attorneys’ fees award.[16] He argued that the district court abused its discretion in ordering a cy pres distribution for two reasons: (1) further distributions to the classes were feasible and (2) LSEM was “unrelated to the classes or the litigation and . . . therefore an inappropriate ‘next best’ cy pres recipient.[17] The Eighth Circuit agreed and reversed.[18] It vacated the attorneys’ fees award as “premature,” and to be resolved when the NationsBank settlement fund is terminated.[19]
II. Legal Background
Since at least the 1980s, federal district courts have used “cy pres” distributions to dispose of surplus class action settlement funds. “Cy pres” is a French term meaning “as near as possible,” allowing the “next best use of funds” to save a testator’s charitable gift that would otherwise fail.[20] But recently, this practice has been criticized and drastically restricted. [21]
The American Law Institute addressed the issue of Cy Pres Settlements in § 3.07 of its Principles of the Law of Aggregate Litigation.
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 directly 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 subsections (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.[22]
Other circuits have found the ALI’s recommendations persuasive. For example, the Fifth Circuit recently quoted this section in holding that “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.’ Where it is still logistically feasible and economically viable to make additional pro rata distributions to class members, the district court should do so . . . [.]”[23] The First Circuit has also evaluated cy presdistributions according to the ALI authority.[24] The Eighth Circuit, too, has followed similar principles. Even though the Eighth Circuit’s precedent in this area has preceded the ALI publication, it has been congruent with the ALI’s recommendations.[25]
III. Instant Decision
The Eighth Circuit first noted that “class counsel and the district court entirely ignored [the ALI publication].”[26] Its own subsequent analysis, like the Fifth and First Circuits’, relied heavily on the ALI’s recommendations.[27] It first determined that a further distribution to theNationsBank class was feasible from an administrative cost perspective because the Claims Administrator would have distributed the remaining settlement fund free of charge.[28]
The Eighth Circuit then held that the lower court’s ultimate conclusion– that it was appropriate to order a cy pres distribution to unrelated third party charities – was an error of law, because the inquiry for further distributions must be based primarily on whether “the amounts involved are too small to make individual distributions economically viable.”[29] Therefore, the lower court erred in finding that further distributions to class members would be “so costly and difficult” as to preclude the distribution.[30]
It was inadequate to authorize a cy pres distribution by merely declaring that “all class members submitting claims have been satisfied in full.”[31] The court echoed the Fifth circuit in noting that “the fact that the members of one subclass have received the payment authorized by the settlement agreement does not mean that they have been fully compensated.”[32]
The Eighth Circuit then added some clarifying requirements for cy pres distributions beyond those articulated by the ALI: “Unless the amount of funds to be distributed cy pres is de minimis, the district court should make a cy pres proposal publicly available and allow class members to object or suggest alternative recipients before the court selects a cy pres recipient. This gives class members a voice in choosing a “next best” third party and minimizes any appearance of judicial overreaching.”[33]
Finally, the court held that even when “the foregoing rigorous standards are met,” a district court may still only make a cy pres distribution “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.”[34] Put another way, and citing a 2002 Eighth Circuit Case, that purpose should be “as near as possible to the legitimate objectives underlying the lawsuit, the interests of class members, and the interests of those similarly situated.”[35]
In approving LSEM, the district court had found that “there is no immediately apparent organization that will indirectly benefit NationsBank and BankAmerica class members,” and that LSEM sufficiently approximated the interests of the class because it serves victims of fraud.”[36] However, the Eighth Circuit determined that LSEM was not the “next best” recipient of the unclaimed settlement funds because it was insufficient to find that no “next best” recipient is “immediately apparent.”[37] On remand, the district court “must select next best cy pres recipient(s) more closely tailored to the interests of the class and the purposes of the underlying litigation.”[38] Circuit Judge Murphy dissented, arguing that the majority imposed a new rule “post hoc” to the case and that the ALI had not been argued in the district court nor adopted by the Eighth Circuit.
IV. Comment
Given the substantial history of district courts ignoring and resisting circuit courts cy presconcerns and rulings in class actions, this case serves to clarify the legal principles that underpin cy pres distributions.
- Nick Griebel
[1] In re BankAmerica Corp. Sec. Litig., 775 F.3d 1060 (8th Cir. 2015). See also In re BankAmerica Corp. Sec. Litig., 210 F.R.D. 694, 704-05, 714 (E.D. Mo. 2002), and 227 F. Supp. 2d 1103 (E.D. Mo. 2002).
[2] In re BankAmerica, 775 F.3d at 1062.
[3] Id.
[4] Id.
[5] Id. at 1062-63.
[6] Id. at 1062.
[7] See In re BankAmerica Corp. Sec. Litig., 210 F.R.D. 694, 704-05, 714 (E.D. Mo. 2002), and 227 F. Supp. 2d 1103 (E.D. Mo. 2002).
[8] In re BankAmerica, 775 F.3d at 1062..
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Id.
[14] Id.
[15] In re Bank of America Corp. Sec. Litig., No. 4:99-MD-1264, 2013 WL 3212514, at *5-6 (E.D. Mo. June 24, 2013) (“Bank of America”).
[16] Id.
[17] Id.
[18] Id.
[19] Id.
[20] Id. at 1063 n.2.
[21] Id. (citing, e.g., Ira Holtzman, C.P.A. v.
Turza, 728 F.3d 682, 689-90 (7th Cir. 2013); Marek v. Lane, 134 S. Ct. 8, 9 (2013)).
[22] Am. Law Inst., Principles of the Law of Aggregate Litig. § 3.07 (2010).
[23] Klier v. Elf Atochem N. Am., Inc., 658 F.3d 468, 475 (5th Cir. 2011).
[24] In re Pharm. Indus. Avg. Wholesale Price Litig., 588 F.3d 24, 35 (1st Cir.2009).
[25] In re BankAmerica, 775 F.3d at 1064 (citing Powell v. Georgia-Pac. Corp., 119 F.3d 703, 706 (8th Cir. 1997); In re Airline Ticket Comm'n Antitrust Litig., 307 F.3d 679, 682–84 (8th Cir.2002)).
[26] In re BankAmerica, 775 F.3d at 1064.
[27] Id.
[28] Id.
[29] Id. at 1065 (citing Am. Law Inst., supra n. 22, at § 3.07. 6.
[30] In re BankAmerica, 775 F.3d at 1065.
[31] Id. (citing Bank of America, 2013 WL 3212514, at *3).
[32] In re BankAmerica, 775 F.3d at 1065 (citing Klier, 658 F.3d at 479).
[33] In re BankAmerica, 775 F.3d at 1066.
[34] Id. at 1067.
[35] Id. (citing Airline Tickets, 307 F.3d at 682),
[36] In re BankAmerica, 775 F.3d at 1067.
[37] Id.
[38] Id.
