It Adds Up

Class Action Residual Funds Support Pro Bono Efforts

In addition to more traditional methods of supporting pro bono programs, you can support Tennessee pro bono programs by directing residual funds from class action settlements or class action judgments to the Tennessee Voluntary Fund for Indigent Civil Representation (the "Cy Pres Fund" or the "Fund"). In 2006, the General Assembly established the Cy Pres Fund[1] to act as a central repository for donations for pro bono programs across the state. The fund is designed to support pro bono programs with distributions from interest once the fund reaches a base of at least $1 million. While the General Assembly had the vision and wisdom to create the fund, resources to seed the fund with the initial investment were unavailable. Thus, the fund has not yet reached the level required by statute to begin issuing interest checks to our state's established pro bono programs. That is where we can make a difference.

Residual Class Action Funds

One possible source of monetary support for the Cy Pres Fund is residual funds set aside in a class action settlement or judgment. Class actions are often settled by setting aside a pool of money to be distributed to class members based on criteria the parties agree upon and the court approves. In some of those cases, not all class members come forward and make a claim or all class members come forward but their claims do not exhaust the pool of funds set aside. These funds exist after the approved attorneys' fees have been paid and the costs of the class have been paid. They are truly residual dollars that can be repurposed for a worthwhile cause: support for pro bono activities.

The General Assembly authorized the Cy Pres Fund to receive donations from:

The unpaid residuals from settlements or awards in class action litigation in both state and federal courts, providing any such action has been certified as a class action under Rule 23 of the Tennessee Rules of Civil Procedure or the Federal Rules of Civil Procedure.[2]

It logically follows that the General Assembly must have believed that Tennessee courts have the authority to grant such cy pres awards and indeed Tennessee Courts do have such authority.

Tennessee Courts Have the Inherent Authority to Approve and Supervise Cy Pres Awards

All class action settlements must be approved by Tennessee Courts.[3] In this process of approving class action settlements, Tennessee courts must assure themselves of the basic fairness of the settlement.[4] Because Tennessee courts must approve the settlements, it necessarily follows that they have the inherent authority to issue such orders regarding the settlement as are necessary to effectuate the court's role in assessing basic fairness including orders regarding the disposition of residual funds left over after all class members who have come forward or who have been located have been paid and the costs of the class have been paid.

The inherent authority of trial courts to issue orders disbursing residual class funds is supported by the decisions of numerous federal courts under the nearly identical Rule 23(e) of the Federal Rules of Civil Procedure. The Tennessee Supreme Court has found that federal court decisions regarding Rule 23 are persuasive because the Tennessee and federal rules are so similar.[5]

Federal courts have broad discretion to distribute unclaimed class action settlement funds in an equitable manner.[6] This authority stems from Rule 23 of the Federal Rules of Civil Procedure, which allows the courts to determine if a proposed settlement is "fair, adequate, and reasonable."[7] Generally, the federal courts will distribute unclaimed funds in a class action settlement by: 1) cy pres distribution, 2) escheat to the government, 3) reversion to the defendants, or 4) pro rata distribution.[8] To determine which distribution scheme to apply, the courts exercise their discretion to award the unclaimed funds in a manner that best complies with the fairness standard of Rule 23.[9]

Generally, the courts prefer cy pres awards over pro rata distribution and reversion because neither identified members of a class nor defendants have equitable rights in the excess funds.[10] Further, many courts prefer this distribution scheme because cy pres awards more closely parallel the intended use of unclaimed settlement funds.[11] The interests of the silent class members, therefore, guide the district courts' choice among distribution options.[12]

Federal courts have held that cy pres awards are appropriate when they provide the most equitable means of distribution.[13] The Eighth Circuit, for example, in Powell v. Georgia Pacific Corporation,[14] affirmed the Arkansas district court's cy pres distribution of unclaimed funds to a charitable organization because alternative means of distribution would have been inequitable. In its analysis, the court ruled that pro rata distribution to identified class members would over-compensate those individuals because each had already collected their respective damages.[15] Further, the circuit held that reversion back to the defendant was inappropriate because reversion would reimburse the defendant for the initial settlement payment.[16] Because neither the defendant nor the identified class members had any equitable rights in the unclaimed funds, the Eighth Circuit treated the disposition of funds as a discretionary function of the lower court, and affirmed its application of the cy pres doctrine pursuant to Rule 23(e).[17]

The federal courts have generally held that legal service programs that provide legal aid to low income clients are appropriate cy pres recipients because these organizations combat harms similar to the ones of the unidentified members of the aggrieved class.[18] Legal aid programs indirectly serve the interests of the silent class members because the mission of legal aid programs is consistent with the purpose of class action lawsuits and Rule 23.[19] Rule 23 was adopted to protect the legal rights of those who would otherwise be unrepresented. Similarly, legal aid programs were designed to facilitate the legal representation of low-income clients.[20] Distributing excess funds to these programs, therefore, is an appropriate distribution scheme because the legal aid programs are designed to protect individuals in similar financial situations as those of the silent class members.

Several federal courts have awarded unclaimed class action settlement funds to legal aid programs because, like class action lawsuits, the programs provide a means to legal representation. In In re Motorsports Merchandise Antitrust Litigation,[21] the Northern District of Georgia awarded unclaimed class action settlement funds to the Atlanta Legal Aid Society and the Georgia Legal Services Program because these programs provided aid for the "next best" class that could receive the funds. In its analysis, the court awarded the excess funds to the legal centers because this distribution indirectly benefited all of the class members.[22] Similarly, the Eastern District of Michigan, in Lessard v. City of Allen Park,[23] awarded residual funds to a legal aid fund because the program facilitated legal services to individuals who could not otherwise afford or obtain representation in legal matters. In its analysis, the court acknowledged the recent national trend in awarding unclaimed funds in class action settlements, and held that legal aid programs were an appropriate recipient of such funds.[24] In both cases, therefore, the courts found that cy pres distributions to legal aid programs were appropriate because they provided an equitable means of distribution.

These federal decisions strongly support the inherent authority of Tennessee courts to award and supervise cy pres awards.

Proposed Rule 23.08

To further clarify the authority of Tennessee courts to supervise cy pres awards from residual class action settlement funds, the Tennessee Bar Association and the Tennessee Association for Justice jointly petitioned to the Tennessee Rules Commission to amend Tennessee's Rule 23 to include a new Rule 23.08 that reads as follows:

Disposition of Residual Funds.
Any order entering a judgment or approving a proposed compromise of a class action certified under this rule may provide for the disbursement of residual funds. Residual funds are funds that remain after the payment of all approved: class member claims, expenses, litigation costs, attorneys' fees, and other court-approved disbursements to implement the relief granted. Nothing in this rule is intended to limit the parties to a class action from suggesting, or the trial court from approving, a settlement or order entering a judgment that does not create residual funds.

It shall be 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. It is expressly recognized 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.

Upon motion of any party to a settlement or judgment of a class action certified under this rule or upon the court's own initiative, orders may be entered after an approved settlement or judgment to address the disposition and disbursement of residual funds in a manner consistent with this Rule.

The Rules Commission unanimously approved the proposed amendment. At the time this article was written, Proposed Rule 23.08 was before the Tennessee Supreme Court awaiting its approval and transmittal to the General Assembly for passage into law in 2009.

Next Steps

Now that you are aware of Cy Pres Fund and the authority of Tennessee courts to award residual class action funds to the Cy Pres Fund, we ask that you take the following steps:

1. Include in any class action settlement agreement, class action settlement order or class action judgment, a provision which directs that residual class action funds be paid to the Cy Pres Fund.

2. Let the Tennessee Bar Association or the Tennessee Association for Justice know about class action cases that will go to trial in the next year. We intend to create a database of cases that are voluntarily reported to us and follow up to encourage all parties and the courts to include residual class action payment provisions.

3. Let us know if you would like assistance with language directing residual funds to the Cy Pres Fund. Please let us know how we can help you.

Together we can make a difference and help fund pro bono programs in Tennessee. Let's not miss the opportunity to put residual class action settlement funds to good use helping the poor and working poor of our state.

Notes

1. Tenn. Code Ann.  § 16-3-821.
2. Tenn. Code Ann.  § 16-3-821(c)(1).
3. See Tenn. R. Civ. Pro. 23.05 (West 2008).
4. Id.
5. See Bayberry Associates v. Jones, 783 S.W.2d 553, 557 (Tenn. 1990).
6. See Six Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301, 1307 (9th Cir. 1990).
7. Fed. R. Civ. P. 23(e); Van Gemert v. Boeing Co., 739 F.2d 730, 737 (2d. Cir. 1984); In re Lease Oil Antitrust Litigation, MDL No. 1206, 2007 WL 4377835, at *1, 14 (S.D. Tex. Dec. 12, 2007).
8. Mexican Workers, 904 F.2d at1307.
9. Oil Antitrust Litigation, 2007 WL 4377835 at 14.
10. Wells Fargo, 991 F.Supp. at 1194.
11. Id.
12. Mexican Workers, 904 F.2d at 1307.
13. See Powell v. Ga. Pacific Corp., 119 F.3d 703, 707 (8th Cir. 1997); Wilson v. Southwest Airlines Inc., 880 F.2d 807. 816 (5th Cir. 1989).
14. 119 F.3d 703, 707 (8th Cir. 1997)
15. Id. at 706.
16. Id.
17. Id.
18. In re Motorsports Merchandise Antitrust Litigation, 160 F.Supp.2d 1392, 1394 (N.D. Ga. 2001).
19. Linda Zazove, The Cy Pres Doctrine and Legal Services for the Poor: Using Undistributed Class Action Funds to Improve Access to Justice, American Bar Association Standing Committee for Continuing Legal Education, (Oct. 19, 2001).
20. Id. at 8.
21. 160 F.Supp.2d 1392, 1394 (N.D. Ga. 2001).
22. Id.
23. 470 F.Supp.2d 781, 783 (E.D. Mich. 2007).
24. Id.


DANNY VAN HORN DANNY VAN HORN is a member of Butler Snow O'Mara Stevens & Cannada and practices in all parts of Tennessee, Arkansas and Mississippi in the areas of business torts, commercial litigation and products liability. He is a graduate of Vanderbilt University School of Law and the University of Tennessee. Danny is a member of the TBA Board of Governors, chair of the CLE Committee and chair of the TBA’s CY Pres pro bono initiative.

 

 

 

 

DANIEL L. CLAYTON DANIEL L. CLAYTON is a partner in the law firm of Kinnard Clayton & Beveridge. He is the president of the Tennessee Association for Justice. He is certified as a Civil Trial and Medical Malpractice Specialist.