Academic journal article Journal of Corporation Law

Distribution of Funds in Class Actions-Claims Administration

Academic journal article Journal of Corporation Law

Distribution of Funds in Class Actions-Claims Administration

Article excerpt

I. INTRODUCTION

Most class action securities cases result in a settlement where the parties agree on a defined amount of money to be placed in a fund for distribution to eligible beneficiaries. Although the size of the fund and the losses suffered by eligible beneficiaries are defined, the number of potential beneficiaries who decide not to participate in the settlement by opting out and the number and value of losses eventually claimed by those eligible beneficiaries are not known until long after the settlement amount has been established. In any closed-end fund, like the securities class action settlements, there is the potential for a "Goldilocks" dilemma-the fund may be too large or too small for the claims being made, not "just right." The ensuing tensions created by this mismatch between funds available and claims on those funds can be one of the most significant problems in any settlement fund distribution. The ability of courts, special masters, and claims administrators to cope with this mismatch is critical to the success of the distribution process. Courts, lawyers, academics, and claims administrators have generally accepted the traditional approaches normally taken in securities class action distribution processes as appropriate under the circumstances. This Article presents several alternative approaches for coping with the mismatch dilemma that are worthy of consideration for incorporation in future distributions. The literature on distribution processes has given too little attention to the successes and failures in cases that have utilized non-traditional techniques, and it is likely that future distributions can benefit from these actual experiences. The following case studies in both securities and non-securities contexts illustrate the Goldilocks dilemmas that arise and discuss approaches that courts, lawyers, and claims administrators might take to ameliorate them in situations where there are too many opt-outs, too few claims, too many claims, too little money, or too much money.

II. TRADITIONAL APPROACHES

The traditional approaches for coping with the mismatch between available funds and funding needs are to use pro-ration when there is a shortage and cy pres when there is an excess.1 The general assumptions underlying these approaches are that the distribution process is a sunk cost and any additional distribution costs would be inefficient, counterproductive, or both.2 At the same time, it is possible to use pro-ration and cy-pres to reach an outcome that most viewers would consider satisfactory-the process of satisficing. The argument here is that there are changes both in the pre- and post-distribution processes that can ameliorate the degree of mismatch and should be considered in anticipation that a mismatch might occur. That is, the distribution process itself should incorporate techniques for coping with the mismatch rather than waiting until the precise mismatch is known. The distribution process should not assume that new techniques are inappropriate, even if they have not been approved by an appellate court and even if the claiming period has ended.

III. ALTERNATIVE APPROACHES

A. Surveys

It is often possible to gain a greater appreciation of the nature of mismatch problems by surveying a sample of the universe of participants who seem to be exacerbating the problem. If, for example, claimants have misunderstood the claiming process, they may be able to be recategorized into a more appropriate claiming status. Surveys can be implemented quickly to identify reasons for higher or lower than expected response rates. Survey results can then inform mid-course corrections in a distribution process. In one case, for example, survey results showed that the main reason for failure to file a claim was related to a misunderstanding of the potential compensation.3 Using this information the claims administrator could add the estimated losses to future outreach initiatives, thereby increasing response rates. …

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