Distribution of Unclaimed Class Action Settlement Funds to Non-Profit Organization Unconnected to Harm Suffered by Class Members Inappropriate Massachusetts Federal Court Holds
Plaintiff filed a putative class action against American Tower Corp. alleging violations of federal securities laws and purported to be brought on behalf of “members of the public who were harmed by the securities fraud.” In re American Tower Corp. Securities Litig., 648 F.Supp.2d 223, 224-25 (D.Mass. 2010). Eventually, the parties negotiated a settlement of the class action which provided for the distribution of unclaimed funds through a cy pres fund. Id., at 224. Lead Plaintiff moved the district court for authorization to distribute the cy pres funds “to The Peggy Browning Fund, a private, nonsectarian, not-for-profit organization with 501(c)(3) tax-deductible status.” Id. The federal court denied the motion because plaintiff sought “to disburse settlement funds to a non-profit organization with little connection to the harms class members suffered,” id. Because the author has received numerous inquiries from defense and plaintiff counsel concerning the proper scope of a cy pres fund, we include this article on the district court’s ruling.
The district court noted that the proper inquiry was to “determine whether the Peggy Browning Fund is an appropriate recipient of any residual settlement funds” of the class action settlement. In re American Tower Corp., at 224. The court explained that the purpose of the use of a cy pres fund is effect a distribution of class action settlement funds “to a ‘next-best’ recipient” when it is impractical to distribute the settlement funds to the class members. Id., at 224-25 (citing In re Airline Ticket Commission Antitrust Litig., 268 F.3d 619, 626 (8th Cir.2001)). “‘In such cases, the court, guided by the parties’ original purpose, directs that the unclaimed funds be distributed for the prospective benefit of the class.’” Id. (citation omitted). The federal court easily concluded, then, that the Peggy Browning Fund was “an inappropriate recipient of any unclaimed class funds.” Id. “Disbursement of unclaimed funds must have some relationship to the harm suffered by class members…. However, the Peggy Browning Fund focuses on labor issues…. Therefore, it does not appear that funds donated to the Peggy Browning Fund would benefit the class or address the harms suffered by class members.” Id. (italics added). The district court therefore denied the motion, without prejudice to Lead Plaintiff renewing the request and noting that Lead Plaintiff “should, if possible, propose a national organization whose work relates to the harm suffered by class members in this case.” Id.
NOTE: The author notes that trial courts are far too willing to authorize the distribution of cy pres funds to practically any organization. In such cases, the courts appear to be more interested in punishing the defendant than in effecting a distribution of funds to the “next-best” recipient.