On January 8, 2015, the Eighth Circuit Court of Appeals established a five-factor test governing cy pres distributions in class action lawsuits.  In Re: BankAmerica Corp. Sec. Litig., No. 13-2620 (8th Cir. Jan. 8, 2015).  Following the 1998 merger of NationsBank and BankAmerica, shareholders filed multiple class action lawsuits alleging violations of federal and state securities laws.  Ultimately, the suits were resolved through a $490 million global settlement fund for class members.  After an initial distribution to class members, approximately $6.9 million remained in the settlement fund.  The District Court ordered a second distribution to class members, after which where was approximately $2.4 million left in the settlement fund.

In September 2012, class counsel filed a motion to distribute the remaining “surplus settlement funds” to a cy pres beneficiary—a third-party entity (typically a charity or non-profit) whose interests mirrors those of the class.  The District Court granted class counsel’s motion, distributing the remaining funds to Legal Services of Eastern Missouri (“LSEM”).  The class representative objected and appealed the District Court’s decision, arguing that further distribution to the class was feasible and that LSEM was not an appropriate cy pres beneficiary as it was unrelated to the class or the litigation.

On appeal, the Eighth Circuit noted that cy pres distributions have been controversial and have been restricted by some courts.  Despite such scrutiny by the Courts of Appeal, however, the Eighth Circuit noted that there is a “substantial history of district courts ignoring and resisting circuit court cy pres concerns and rulings in class action cases.”  To resolve this discrepancy in treatment, the Eight Circuit established a five factor test governing cy pres distributions:

1. A cy pres distribution “is permissible only when it is not feasible to make further distributions to class members. . . . except where an additional distribution would provide a windfall to class members with liquidated-damages claims that were 100 percent satisfied by the initial distribution.”  The Court held that feasibility must be based on whether the amounts involved are too small to make individual distributions economically viable, and is not impacted by whether further distribution would be costly or difficult.

2. A cy pres distribution is not permitted until class members have been paid the full amount due to them for their losses, and is not satisfied if class members receive only a percentage of their damages (even if less than one hundred percent recovery is provided for by the settlement agreement).

3. A cy pres distribution must meet all standards governing cy pres awards, regardless of whether the beneficiary is selected by the parties or the district court (and noting that provisions providing that the district court had the discretion to determine the beneficiary are void ab initio).

4. Unless the amount of the cy pres funds to be distributed are de minimis, the cy pres proposal should be publicly available and allow class members to object or suggest alternative recipients.

5. Assuming the foregoing standards are met, the proposed cy pres beneficiary must be for the next best use of the class and serve “a purpose as near as possible to the legitimate objectives underlying the lawsuit.” 

Applying these standards, the Eighth Circuit reversed the District Court’s order granting distribution of the remaining settlement funds to LSEM.  The Court noted that distributions to class members were still possible, and rejected the claim that it would be too costly to be viable given the remaining amount of the funds. 

The Court also noted that LSEM, while “unquestionable a worthy charity,” was not the “next best” recipient of unclaimed settlement funds, noting that the parties conceded at oral argument that there were other non-profit organizations devoted to preventing and aiding the victims of securities fraud.

A copy of the Eight Circuit’s decision is available here.