Resolution Regarding Codification of the Judicial Cy Pres Doctrine

Summary

 This resolution responds to efforts by the plaintiffs’ bar, represented by the American Association for Justice and its state level affiliates, to encourage courts to adopt or legislatures to enact state laws requiring that any residual funds at the end of a class action (after either a settlement or a verdict) be distributed to charities and non-profit groups approved by the court.  Such distributions are referred to as “cy pres” awards.

The cy pres doctrine was developed at common law to redefine the purpose of a charitable trust fund if the original purpose of the trust ceased to exist when the trust itself provided no alternative.  For example, a trust created solely for the purpose of providing medical care for veterans of the Civil War would have ceased to have a purpose upon the demise of the last such veteran.  In that circumstance, a court would look to the purpose of the trust and seek to find an analogous charitable use, e.g., have the trust provide funds to VA hospitals instead.  Otherwise the trust would lapse without anyone to whom to distribute its funds.

This common law doctrine has been misapplied and abused by some courts in recent years as a justification for class treatment of claims that would not otherwise be subject to class certification, to distribute damage awards or settlement funds to persons who were not members of the class, to thwart the will of settling parties, to increase the amount of attorney fees claimed by class counsel, to spawn additional litigation, and as political fodder for some plaintiffs’ counsel and judges through favoritism for certain charities.

Historically, parties in civil litigation have been free to contract for the disposition of any unclaimed class settlement funds, such funds generally being retained by or remitted to the settling defendant.  Alternatively, settling parties may provide for disposition to a charity or institution representative of the claimants’ interests.  Whether in the context of a settlement or judgment, class counsel’s attorney fees often are expressed as percentage of funds actually disbursed.  Class counsel has a strong incentive to identify, locate and assure disbursements to the actual class members that the attorney is serving. Utilizing cy pres disbursements may serve to reduce class counsel’s dedication to class members, particularly if attorneys’ fees are calculated as a percentage of the lump sum awarded as opposed to the funds actually disbursed to class members.

ALEC is concerned that such misapplication of cy pres in the class action context, particularly by courts acting without transparent, consistent, objective standards and safeguards, could:  discourage plaintiffs’ counsel from ensuring that money recovered in class actions be provided to the allegedly injured class members on whose behalf the actions were brought; undermine the ability of parties to contract for any other form of disposition of unclaimed funds; create potential conflicts of interest; encourage collusive settlements; encourage filing specious class cases in which many or most class members cannot be identified or located; improperly place judges in the position of ranking the worthiness of charities; reduce state economic development; and reduce state tax revenue.

While ALEC would prefer that cy pres not be employed in a class action context at all, ALEC resolves to offer some guidance for courts that insist on utilizing the doctrine.

PURPOSE

Educating state legislators regarding the dangers of judicial misapplication of the cy pres doctrine in the context of class action litigation, encouraging them to resist efforts to mandate use of cy pres in class action cases, and to provide them with the tools to protect the interests of all parties to class litigation from abuse of the doctrine.

WHEREAS, parties to a class action settlement have the right to contract, subject to ultimate court approval, to dispose of any unclaimed settlement funds as they see fit, with the funds often being retained by or remitted to the settling defendant.  Class counsel’s attorney fee often is expressed as a percentage of settlement funds actually claimed, giving class counsel incentive to assure that as many class members as possible are identified, located, and paid;

 WHEREAS, the cy pres doctrine, having been developed to redefine the purpose of charitable trust funds if the original purpose of the trust ceased to exist, was neither designed nor purposed to distribute excess funds from class actions;

 WHEREAS, cy pres is a legal doctrine under which courts, in limited circumstances, may distribute funds originally intended for one purpose or entity to another similar purpose or entity;

WHEREAS, legislation that would reduce abuses associated with judicial misapplication of cy pres in a class action context may be beneficial, but should not be intended to condone or encourage any use of the doctrine in a class action, nor to undermine or negate litigation parties’ freedom of contract;

 WHEREAS, to the extent class counsel’s attorney fees are based on the total sum distributed, if funds go to nonparty charities rather than to class members, cy pres may undermine class counsel’s duty to zealously identify and locate class members;

 WHEREAS, utilization of cy pres as a justification for class certification or the distribution of class damages incentivizes class counsel:  (a) to divert funds from injured class members and to  uninjured charitable organizations; and (b) to then use those charitable donations to publicly promote themselves, it could create a conflict of interest between plaintiffs’ counsel and their clients;

 WHEREAS, utilization of cy pres to distribute class damage awards could encourage juries to render larger verdicts in class actions in the hope of benefiting charitable endeavors;

WHEREAS, application of the cy pres doctrine as a justification for class certification when some class members cannot be identified or when individual class members’ damages cannot be ascertained encourages the filing of doubtful or meritless class actions, as well as the filing of class claims that would not otherwise meet the rubrics and procedural protections prerequisite to class certification;

 WHEREAS, to the extent cy pres mandates distribution of class damages to non-class member third parties, it would create an incentive to defendants to make smaller settlement offers, since there would be no prospect that any unused portion of a settlement fund would be returned to the defendant;

 WHEREAS, to the extent legislation mandates unclaimed judgment amounts be distributed using cy pres as opposed to returned to the party paying them, it would discourage class counsel from accepting pre-trial settlements, thereby driving up the cost of litigation and deterring economic development;

 WHEREAS, application of  cy pres to class action settlements or judgments would essentially result in a civil fine for defendants in cases where class counsel do not locate all eligible class members or class members do not collect all the proceeds of a settlement fund;

 WHEREAS, the cy pres doctrine in a class action context has the perverse effect of promoting litigation by potentially funding litigation-related charities, foundations, or advocacy groups (such as those funded through Act 95 in Illinois, which takes all unclaimed class action funds and dedicates at least 50 percent  to organizations like the bar association and legal aid organizations that “ha[ve] a principal purpose of promoting or providing services that would be eligible for funding under the Illinois Equal Justice Act.[1]);

WHEREAS, absent stringent safeguards, application of cy pres would improperly empower elected state court judges to divert class action awards from the intended recipients to charities, potentially advancing the judges’ political interests and creating conflicts of interest;

WHEREAS, to the extent the charity selection process is not fully transparent and does not explicitly forbid favoritism or the possible perception of self-serving conduct, cy pres threatens to undermine the integrity of the judiciary;

WHEREAS, cy pres in a class action context would prevent funds not claimed by actual class members from being returned to the defendant, which could decrease funds available for defendant businesses to create jobs, promote economic development and give tax revenue to the state;

THEREFORE, BE IT RESOLVED, that the American Legislative Exchange Council opposes legislation that would mandate application of the cy pres doctrine to class action judgments or settlements, particularly without the legislative safeguards outlined below;

BE IT FURTHER RESOLVED, that the American Legislative Exchange Council opposes use of the cy pres doctrine in a class action context as any form of justification for certification of a class action, or that would in any fashion limit or undermine the procedural rules or due process requirements that must be met for class certification or identification of class members;

BE IT FURTHER RESOLVED, that the American Legislative Exchange Council endorses limiting class counsels’ fees to a percentage of funds actually paid to class members;

BE IT FURTHER RESOLVED, that the American Legislative Exchange Council, to the extent  that a state chooses to recognize utilization of the cy pres doctrine to distribute unclaimed class action settlement and judgment amounts that the parties have not otherwise provided for, determines the following procedural protections should be adhered to:

  • A.     In a case tried to a jury, the jury shall not be informed that cy pres will or may be utilized to pay any portion of a settlement or judgment to a third party who is not a class member;
  • B.     Cy pres shall not be utilized in any manner as a justification for maintenance of a class action, as any basis for certification of a class, or as in any manner to waive, diminish or limit any procedural and due process requirements for certification or maintenance of a class action;
  • C.    Cy pres shall not be regarded as the default, preferred, endorsed or primary means of disposing of unclaimed settlement or judgment amounts, the preferred methodology being the negotiated agreement of the parties for the disposition of such funds;
  • D.    Cy pres shall not in any manner relieve class counsel of the duty of due diligence and zealous efforts in the identification of class members;
  • E.     Cy pres shall not in any manner interfere with or adversely affect the legal right of the parties to negotiate and agree on the disposition of any unclaimed settlement or judgment funds including the release or return to the paying defendant(s) of any such unclaimed funds;
  • F.     Attorney fees awarded to class counsel shall be based on amounts actually distributed to class members, and shall not be based on or include in the calculation of attorney fees any amount awarded to non-class members under cy pres,
  • G.    In determining the charity or charities that will be the beneficiaries of a cy pres  award, the court shall

1. Solicit recommendations from counsel for all parties to the class settlement or judgment;

2. Hold a hearing in open court at which counsel for the parties to the settlement or judgment shall have an opportunity to be heard;

3. Seek to make the awards to such charities as would be the best alternatives to class members who cannot be identified, contacted, or who fail to submit an eligible claim;

4. Not make an award to a charity in which the judge, counsel for any party, or anyone related to any of them within the second degree, holds any office, is employed by, is trustee for, holds a financial interest in, or is a beneficiary of;

5. Issue a written order with findings and conclusions as to why and how the charity was chosen, and any limitations, reporting or restrictions on the award otherwise proper and necessary.

Approved by ALEC Board of Directors January 11, 2011.

  



[1] See 735 ILCS 5/2-807

Keyword Tags: Cy Pres

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