Due to what it called a “substantial history of district courts ignoring and resisting circuit court cy pres concerns and rulings in class action cases,” the Eighth Circuit recently clarified the legal principles surrounding cy pres distribution of class action settlement funds.  After plaintiffs filed securities class actions challenging the 1998 merger of NationsBank and BankAmerica, the district court approved a global settlement of the classes’ claims.  Despite two separate distributions of settlement funds, however, over $2 million remained in the NationsBank fund.  The district court granted defendants’ motion to distribute the remaining funds cy pres and ordered that the funds be distributed to the Legal Services of Eastern Missouri.

The Eight Circuit reversed, finding that the distribution was an error of law.  First, the court explained that cy pres distribution of class settlement funds is permissible only when further distribution to the class is not feasible, and, in this case, further distribution was “clearly feasible.”  Moreover, the inquiry of whether to order further distribution “must be based primarily on whether the amounts involved are too small to make individual distributions economically viable.”  Hence, the district court erred in precluding further distribution to the settlement class merely because it would be “costly and difficult.”  The court also found it irrelevant that a further distribution may not benefit the parties actually harmed and instead would benefit large institutional investors.  In so finding, the court explained that a district court does not gain the power to seize settlement funds simply because distribution may not “inure to the benefit of those actually harmed.”

Second, the court explained that a mere declaration from class counsel that class members had been “fully compensated” by payment of amounts allocated to their claims in the settlement where class members were receiving only a percentage of their claimed damages.  According to the court, the notion that the class members in the case were fully compensated was “speculative, at best.”

Third, the Eighth Circuit held, agreeing with the Ninth Circuit, that the court’s standards for cy pres distribution must be satisfied irrespective of the terms of the settlement agreement as to when and how funds can be distributed cy pres.

Fourth, the court held that, “unless the amount of funds to by distributed cy pres is de minimis,” the class should be publicly notified of the potential cy pres distribution and given the chance to object or provide suggestions for the cy pres recipient.

Finally, the court clarified that, if cy pres distribution is deemed appropriate, the distribution must be “for the next best use” and “for a purpose as near as possible to the legitimate objectives of the underlying lawsuit, the interest of class members, and the interest of those similarly situated.”  According to the court, under this standard, the district court erred in selecting Legal Services of Eastern Missouri merely because no next best recipient was “immediately apparent.”  Instead, the district court should have conducted a more thorough investigation for a cy pres recipient that more closely fit the classes’ interests and the objectives of the underlying litigation.

In re BankAmerica Corp. Secs. Litig., No. 13-2620 (8th Cir. Jan. 8, 2015).