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Issue Resolved: Cy Pres Awards Are Not Unclaimed Property

Issue Resolved: Cy Pres Awards Are Not Unclaimed Property

photo credit: rcbodden via photopin cc

By Arthur Bryant
Chairman

The Supreme Court of Texas recently issued an important decision properly viewing – and preserving – a valuable tool for doing justice: cy pres awards in class actions. The Court got it right.

In many class actions, it is not possible to get money recovered from the company sued for breaking the law to the people whose rights it allegedly violated: they cannot all be identified or found, they could be dead, or the cost of getting the money to them (say, $5 each to 1 million people) could preclude distribution. In those circumstances, the law allows the money to be distributed via cy pres awards (from the Norman-French phrase, cy pres comme possible, for “as near as possible”) to appropriate others to indirectly benefit the class members and advance the goals of the underlying case. Properly used, cy pres awards ensure that justice is done.

Since at least 1997, however, the State of Texas has insisted that the Texas Unclaimed Property Act bars many cy pres awards – that the money has to be held for three years for class members to claim it and, if they don’t, it then has to go to the state. The Texas Court of Appeals agreed in 1997. The U.S. Court of Appeal s for the Fifth Circuit did so in 2011.

In Highland Homes, Ltd. v. The State of Texas, the Supreme Court of Texas held they were wrong.

Highland Homes is a class action against a homebuilder for allegedly deducting (and keeping) money from the paychecks of over 1,800 subcontractor, construction workers that was supposed to be used to buy them liability insurance. The case settled, the company agreed to refund the total amounts withheld, plus more, to all class members and checks were sent out. The $465,557 in uncashed checks was supposed to go as a cy pres award to The Nature Conservancy. But the State of Texas said – and the Court of Appeals held – that the Act barred the cy pres award. The Supreme Court of Texas reversed.

The Court held that money that cannot be distributed to class members in class actions does not constitute “abandoned” or “unclaimed” property because it has not been abandoned and has been claimed – by the class representatives on their behalf. The class representatives were appointed by the court to represent the class members, claimed the money and exercised ownership over it on their behalf, and sought to distribute it with court approval, consistent with the requirements of due process.

That made all of the difference: “The State’s argument assumes that absent class members have neither asserted claims nor exercised acts of ownership in the litigation. But they have – through the class representatives.” The fact that the settlement referred to the money as “unclaimed funds” did not matter; “the refunds were, in fact claimed.”

This decision is significant for three reasons. First, it puts to bed Texas’s argument that state unclaimed property laws block cy pres awards. They don’t. That’s why no other state has been advancing this argument. An aptly-titled law review article, The Pot of Gold at the End of the Class Action Lawsuit: Can States Claim It as Unclaimed Property?, sheds more light on this issue and why Texas’s position was dangerous and wrong.

Second, the decision properly explains that cy pres awards allow justice to be served when “direct distributions to class members are not possible,” usually go to a group (or groups) “that resembles, in either composition or purpose, the class members or their interests,” and take place in a procedural setting specifically designed to ensure that the class members’ interests are protected. These critical facts are often overlooked by those attacking cy pres awards.

Third, the decision highlights the need to make sure that cy pres awards go to proper recipients. The Court noted that the “appropriateness” of the cy pres recipient was not “at issue,” but it should have been. The case was about workers being cheated. Highland Homes said the Nature Conservancy was chosen because it shared the company’s “vision of green building and commitment to the environment.” The state pointed out “another connection – that Highland Homes’ president was on the Conservancy Texas’s volunteer board of trustees.” But the state did not challenge the “appropriateness” of the Conservancy. It just tried to get the money itself.

As the Supreme Court of Texas held, cy pres awards are not unclaimed property. They are a valuable tool for ensuring that justice is done. That’s how they need to be used.