Academic journal article Missouri Law Review

Never Settle for Second Best? Cy Pres Distributions in Securities Class Action Settlements

Academic journal article Missouri Law Review

Never Settle for Second Best? Cy Pres Distributions in Securities Class Action Settlements

Article excerpt

Oetting v. Jacobson (In re BankAmerica Corp. Securities Litigation), 775 F.3d 1060 (8th Cir. 2015), reh'g and reh'g en banc denied (Mar. 18, 2015)


There is an old adage that one should "never settle for second best." While this advice is arguably well taken in most areas of life, it is less useful in settlement discussions. In 2015, more federal securities class actions were filed than during the height of the financial crisis in 2008, with more of those cases settling than in any year since 2011. (1) Consumer class action funds often go largely unclaimed, leaving settlement funds intended to compensate injured plaintiffs unused and undistributed.

Courts have attempted to remedy this issue by using cy pres, the practice of distributing unclaimed settlement funds to a "next best" plaintiff, often a charitable organization. (2) While the practice has theoretical advantages, in practice, it can leave class counsel and a tenuously related charity with a windfall of funds and the actual victims with nothing. The Eighth Circuit spoke on the issue in In re BankAmerica Corp. Securities Litigation. (3) In that case, the Eighth Circuit fashioned the cy pres reward in a way that would avoid its two major pitfalls: poor selection of a next best plaintiff and lack of compensation for the actual victims. There are, however, additional steps that courts can and should take to perfect cy pres distributions, including requiring the selection of a recipient for residual class funds at the settlement agreement stage, monitoring notice to class members, and facilitating the input of class members when choosing an appropriate recipient.


In 1998, NationsBank merged with BankAmerica Corporation to form Bank of America Corporation. (4) As a result of the merger, shareholders filed numerous class action lawsuits, claiming the new bank violated various federal and state securities regulations, including securities fraud provisions. (5) The cases were consolidated in the U.S. District Court for the Eastern District of Missouri after they were transferred from the Judicial Panel on Multidistrict Litigation in February of 1999. (6) The district court certified four classes--two comprised of NationsBank shareholders and two of BankAmerica shareholders--and eventually approved a $490 million global settlement against the objections of David Oetting, the NationsBank class representative. (7) Oetting argued that the $332.2 million awarded to the two NationsBank classes was inadequate given the strength of their claims compared to the two BankAmerica classes. (8)

The first distribution from the NationsBank settlement fund was made in December 2004, after which approximately $6.9 million remained. (9) The court suggested at least part of the reason for the remaining funds was checks that were returned for wrong addresses and checks that were never cashed or deposited. (10) The fund slowly dwindled. (11) In April 2009, the district court ordered a $4.75 million distribution to additional claimants, leaving $2,440,108.53 in the settlement fund. (12) For over three years, the fund remained untouched. (13) In September 2012, class counsel for NationsBank moved to terminate the case and award class counsel an additional $98,114.34 in attorneys' fees for work performed since the initial December 2004 distribution. (14) Class counsel had already received 18% of the NationsBank fund, roughly $59 million. (15) Class counsel moved for the district court to distribute the remainder of the settlement funds cy pres to three St. Louis area charities: Legal Services of Eastern Missouri ("LSEM"), the Mathews Dickey Boys' and Girls' Club of St. Louis, and The Backstoppers. (16)

In deciding how to rule on the motion, the district court first discussed whether cy pres distribution would be appropriate, opining that cy pres distribution "is permissible 'in cases in which class members are difficult to identify or where they change constantly' or in cases where there are unclaimed funds. …

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