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Bench & Bar of Minnesota is the official publication of the Minnesota State Bar Association.

When the Cup Runs Over: Distributing Leftover Funds Via Cy Pres

Even when class-action lawsuits are resolved for the plaintiffs, not all class members may be found and compensated.  Whether and how the residual funds should be distributed is for the judge to decide, and arguments for and against cy pres distribution both draw on fundamental values.

Cy pres is the back-up field goal kicker of legal doctrine.  It is rarely employed and when it is, it is not the first choice in resolving a matter. Controversy surrounds its use, and it can make a tremendous difference in the outcome.

When funds are left after the distribution in a class-action suit the judge is faced with choices about how to handle the excess.  The money can revert back to the defendants or, in some cases, the government.  Class members who have already received funds can receive more, or the judge can choose to employ cy pres or another method of fluid class recovery to distribute the funds.

Cy pres is the legal doctrine that allows a judge to assign the residual funds in a class-action suit to be distributed to nonprofit agencies related to the original class.  Most of the time those funds are available either because members of the class could not be found or the administrative costs of finding and distributing to potential class members would outweigh the individual awards.

Origins

The term cy pres is derived from the French, “cy pres comme possible,” meaning, “as near as possible.” The foundation for the concept can be found as far back as 6th century Rome, and in English trust law.  The common theme in the development of cy pres was the inability to provide exact relief coupled with the need for a legal determination of the next best thing.  In England, the development of cy pres is found mostly in the area of trusts, where it was invoked when the deathbed wishes of a person could not be exactly carried out.  Priests were left to find solutions for the dissolution of an estate consistent with the wishes of the deceased.

While cy pres has been part of the American legal system only since the 1960s and the development of class-action law suits, it has quickly become a tool that is growing in use and interest in the legal community.  Forty-seven states and the District of Columbia have codified cy pres.  For example, California Code of Civil Procedure 384 requires that after the total class award has been determined any unpaid class funds are subject to cy pres distribution. California’s legal aid system benefited from a specific change to that statute enacted in 2001, when the nexus of legal services for the poor and class-action suits was specifically written into the code.  In Illinois, Senate Bill 468, passed in 2008, requires that 50 percent of cy pres awards be directed toward legal services for the poor.  Washington has a similar requirement.

Applying Cy Pres

According to Steve Hirsch, access to justice director at the MSBA and coauthor of the recently updated Minnesota Cy Pres Manual, the best application of cy pres is with large classes receiving small individual settlements.  In these cases, administrative costs may be high or the court may be unable to identify all the class members.  In the case that there are funds left after distribution, those funds typically revert back to the defendant.  Cy pres provides a legal avenue for all of the funds awarded in the case to be distributed.

In order for the doctrine to be applied there must be a nexus between the work of the designated nonprofit recipient and the underlying litigation. That connection can be specific or broad, so long as drawing the connection supports the efficient administration of justice. In Minnesota and across the country, legal aid organizations are often the recipients of cy pres funds.  Because legal aid serves a wide variety of needs and clients, legal aid often has the necessary nexus with the original action for distribution of the funds. Jerry Lane, executive director of Mid-Minnesota Legal Assistance and a coauthor of the recently updated Cy Pres Manual, notes that legal aid services in Minnesota cover the gamut from rural to urban, from healthcare to education, and almost any other area covered in class-action litigation.

In Fogie, et al v. Thorn Americas, Inc., 95 F.3d 645 (8th Cir. 1996), the 8th Circuit Court of Appeals affirmed Judge Michael Davis’s order granting summary judgment for the plaintiff class and permanently enjoining appellants from entering into usurious “rent-to-own” consumer credit sales contracts. In that case, nearly 23,000 consumers had brought a class action alleging that rent-to-own contracts in Minnesota violated Minnesota and federal law regarding usury and deceptive business practices.  After the award to the plaintiffs, checks to class members for just over $1.3 million were distributed and cashed.  However, nearly $150,000 remained unclaimed after efforts to contact class members and complete distribution were exhausted.  Accordingly, the United Stated District Court in Minnesota employed cy pres to distribute funds to legal aid.  Several organizations benefited from the cy pres distribution:  Mid-Minnesota Legal Assistance, the National Consumer Law Center, and the Minnesota Legal Aid Fund all received funds.  The nexus was found in the groups’ work providing free legal services to low-income clients, the same class that had brought the
original suit.

One of the largest contributions to the Minnesota Legal Aid Fund started out as a general discussion about cy pres.  While working at Mid-Minnesota Legal Assistance, Jerry Lane knew of the potential for cy pres and was scouring the legal press for class-action suits where cy pres might be a possibility when he learned of a suit against Microsoft.  “It was an education for me and I think for the lawyer,” Lane commented.  Even though he didn’t know the lawyer involved, he called to ask about the possibility of cy pres being employed in the case. The lawyer, Rick Hagstrom, senior partner at Zelle Hofmann Voelbel & Mason LLP, was interested in the doctrine and agreed to take it under advisement.  “Ultimately, when I settled we had a cy pres provision in it.  We got funds for legal aid and funds for the University of Minnesota,” said Hagstrom.  In the end, approximately $2.5 million would be contributed to the Minnesota Legal Aid Foundation Fund.  “It’s enormously satisfying,” Lane says of being involved in helping to find a source of income for legal aid that will outlive him.

This is one of the reasons that Lane invests effort to educate lawyers, judges and others in the legal profession about cy pres.   The funds provided by cy pres or through an endowment are not dependent on politics or what is happening at that moment in society.  It provides a reliable, permanent source of funding that Lane indicates is always in need.

Matters for Debate

The subject of class-action law suits is fraught with conflicting opinions and emotions, and the doctrine of cy pres seems to bring into focus many issues that are otherwise debated in generalities.  Among those issues is the proper role of class actions.  Both sides in the debate about cy pres agree on what it does, but they are deeply divided over whether or not it should.

As it applies in Minnesota, both in federal and states courts, the permissibility of cy pres is settled, according Hirsch.  He explains that the new manual takes the precedents established by the courts and uses them as a guideline in helping legal professionals know how to employ cy pres within the bounds that have been set.

However there are foundational problems with the doctrine according to Prof. Martin Redish at Northwestern University Law School.  For him it is a question of separation of powers. Redish admits that finding an appropriate method to dispose of unclaimed funds presents a challenging problem but he does not see cy pres as the way to resolve that problem.

Redish argues that by awarding the defendant’s money to a charity, cy pres introduces into the class adjudication a third party that does not belong in the class because they were not harmed.  While cy pres may be a “next best” solution, it is not close enough for Redish and other critics who see the doctrine as being too broadly applied.  This argument has its basis in the essential question of the role of the class-action lawsuit:  Is it to provide relief for the class or punishment for the defendant?  Further, Redish notes that, “Cy pres creates the illusion of class compensation.”  At the extreme, Redish and others argue that some class-action suits would not go forward at all without the doctrine of cy pres because the classes would not be identifiable enough to move forward.  Whether using cy pres to allow more class-action cases to go forward is regarded as a positive or negative development in the law is largely dependent on who is being asked the question.

Hagstrom, who has worked on cases involving cy pres awards in Minnesota and Iowa, sees cy pres as an essential tool to making the class-action process work.  “Absent the cy pres component it is more likely than not that the defendant is encouraged from a purely financial standpoint to engage in the conduct and that is what we want to avoid.”  Hagstrom notes that it is the nature of creating a class so that the action can move forward that makes cy pres such an important part of the process.

Redish’s thoughts on cy pres are often cited in legal scholarship and Fortune magazine covered the doctrine based on his work.  “It’s a cardboard cutout of a class action.  It looks superficially like the class, but it’s all for show.  It’s not a grouping of injured people,” he says. Redish makes the point that cy pres goes beyond what is authorized by Rule 23 of the Federal Rules of Civil Procedure.  He argues that there are no leftover funds in a class-action suit, reasoning that once it is conceded that class members aren’t getting compensated, the issue ends and it is no longer a matter for Rule 23.

For Hegstrom the argument that the class is not specifically compensated is not enough to contraindicate the use of cy pres, because without cy pres those funds could go back to the defendant.  “It points out that it is not a perfect system, so you are trying to create a reasonable proxy to distribute these funds.” According to Hegstrom, cy pres does that.

Brad Seligman, senior counsel with Impact Fund, is an advocate for the use of cy pres to fund legal services.  From his perspective, “To allow left-over funds to revert to a defendant in such situations would not only be a windfall but might create an incentive for the defendant to be less than totally cooperative in locating and distributing damages.”  Seligman, who has over 30 years as a civil rights attorney focused on class-action, founded the Impact Fund to provide financial and technical assistance in complex public-interest litigation, including training lawyers in how to best apply cy pres.

For Redish, this too points out a clear problem: “They are the plaintiffs, don’t they know who their clients are? … The key point is we are dealing with a federal rule of civil procedure.  Rule 23 is not some sweeping device that allows courts to do good,” he says.

Redish suggests legislative relief is the answer to clarifying the appropriate use of cy pres, but problems with transparency remain.  “We are adults; we know what is going on here.  No injured person is getting compensated.” Redish suggests that the concept should clearly say that the punishment for the activity would be that some of the funds would go to charity, but again he argues that there are no leftovers in class-action suits. “Cy pres changes the DNA of the law.  It turns [the distribution] into a kind of civil fine,” he says.

Other disagreements center on whether a nexus really exists between the class and nonprofit organizations benefiting from cy pres.  One of the largest single cy pres distributions was a $5.1 million gift to George Washington University School of Law as part of the decision in Diamond Chemical Co. Inc. v. Akzo Nobel Chemicals B.V., 2001 DDC 192 (DDC 2001).  The defendants in that case objected to the distribution, noting that one of the lead attorneys, Michael Hausfeld, was an alumnus of George Washington and there was not a clear connection with the class.  The class in the case was difficult to identify as the case concerned allegations of price fixing in the sale of specialty chemicals.   However, the judge disagreed and let the award stand because it was set to develop the Center for Competition Law at George Washington University School of Law.

Growing Interest & Need

Nonprofit interest in cy pres awards is growing.  According to a study by Redish, from 1974 through 2000 a total of 30 class-action cases in federal courts included explicit cy pres awards.  From 2001 to 2008, 65 cases included explicit cy pres awards.

In today’s tough economic environment, legal aid has found a potential funding source in cy pres at a time when it is desperately needed.  There are many cases where cy pres funds seem to make sense.  However, as this legal doctrine grows there will surely be more questions.

“I have no grief with one political side or the other.  I am agnostic on the normative merits of whether this relief should be given.  I care about the separation of powers and you just can’t do this with this form of relief,” Redish says.

Steve Hirsh makes an observation that all of the parties involved would likely agree on: “We want to put the concepts on people’s radar so they will think about it.”  With the growth of the application of cy pres and tremendous pressure on legal aid, the doctrine is an emerging issue.  Scholars and others will take on the issues of legality, while legislators take the policy issues under discussion in their bodies. Meanwhile, legal aid and other nonprofit organizations will look to see what happens to a growing source of funding in a time when they desperately need it.

Updated Cy Pres Manual Released

The Minnesota State Bar Association and the Minnesota Legal Services Coalition have recently updated the Minnesota Cy Pres Manual.  The architects of the update are Steve Hirsch, access to justice director at the MSBA, and Jerry Lane, executive director of Mid-Minnesota Legal Assistance.

The updated manual covers the doctrine of cy pres and how it can be applied in class-action cases.  Though the doctrine is rarely used, Hirsch explains that the effort to educate the legal community is worth it, “We want to get the concept on people’s radar so they will think about it.”  Lane adds, “At a time when low-income people are really hurting, our goal is to maximize the potential of these funds.”  Hirsch admits that the impact of cy pres to date is limited but argues, “It has the potential to be considerable.”

In Minnesota there is a unique tool that helps provide long-term income from cy pres funds rather than just unpredictable one-time infusions of money.  In 1998 the Minnesota Legal Aid Foundation Fund was established in partnership with the Minnesota Foundation and six legal aid agencies including Anishinabe Legal Services, Judicare of Anoka County, Legal Aid Service of Northeastern Minnesota, Legal Services of Northwest Minnesota, Mid-Minnesota Legal Assistance, and Southern Minnesota Regional Legal Services.  That fund was established largely with proceeds from Minnesota’s share of the Tobacco Master Settlement Agreement.  The legal team at Robins, Kaplan, Miller & Ciresi L.L.P. called Lane, trying to find a way to provide ongoing funds for legal aid using proceeds of the settlement.  That discussion got the fund started, and since then contributions to the fund have come from a variety of cases with contributions ranging from less than $10,000 to larger settlements of six figures or more.

“There is no funding source we can overlook,” says Hirsch.  He notes that legal aid is countercyclical, with demand for services going up as the economy goes down and fewer individuals can pay for service. Since supporting the efficient administration of justice is at the heart of the legal aid mission, he argues, a nexus between a class-action case and the purposes of legal aid often can readily be found. Hirsch would like lawyers to know that there is a vehicle for the law to use to put undistributed funds to work, rather than allowing them to revert back to the defendant.

The manual can be found on the Minnesota State Bar Association website at www.mnbar.org/committees/lad/CyPresManual/CyPres2010Update.pdf

Chato Hazelbaker is the University of St. Thomas director of graduate marketing.  In that role he is responsible for coordinating public relations and marketing communication.  Previously he served as marketing director at the University of St. Thomas School of Law, Crown College and Montana State University–Billings.  He can be contacted at chatohaze@yahoo.com.

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