A federal district judge abused her discretion in awarding a nonprofit money left over from a $490 million securities class-action settlement concerning the 1998 merger of BankAmerica and NationsBank that created Bank of America Corp, a divided federal appeals court ruled on Thursday.
Adopting standards governing cy pres distributions from the American Law Institute, the 8th U.S. Circuit Court of Appeals in St. Louis overturned the $2.44 million distribution to Legal Services of Eastern Missouri Inc (LSEM).
It also voided a $98,114 award to Green Jacobson, the law firm that represented former NationsBank shareholders.
That firm had recommended that the $2.44 million go to LSEM and two other charities, only to have U.S. District Judge Carol Jackson in St. Louis instead award the whole amount to LSEM. The case was returned to Jackson for further proceedings.
Thursday's 2-1 decision was a victory for David Oetting, who had also opposed the $490 million settlement on the ground it allocated too little to former NationsBank shareholders like himself and too much to former BankAmerica shareholders. He is pursuing separate malpractice litigation against Green Jacobson.
Ted Frank, the founder of the Center for Class Action Fairness, and Hilton Tomlinson represented Oetting. Joe Jacobson argued before the 8th Circuit on behalf of his law firm. He did not immediately respond to a request for comment.
The cy pres doctrine is derived from the French expression "cy pres comme possible," meaning "as near as possible." Federal courts often invoke cy pres to allow unclaimed funds from class action settlements to be put to other uses. Critics and several courts have tried to rein in perceived abuses.
Oetting said the $2.44 million award to LSEM was improper because further payouts to NationsBank shareholders were feasible, and because the office had nothing to do with the litigation and was not the "next best" recipient.
Writing for the 8th Circuit majority, Circuit Judge James Loken agreed, saying it remained feasible in this case to pay class members without giving them windfalls, and that cy pres distributions were acceptable only when this was not so.
Loken said Jackson wrongly declared that cy pres was proper because "all class members submitting claims have been paid in full," when this meant they recouped only sums contemplated in settlement papers, rather than all they lost.
The judge also said Jackson made an error of law in finding that LSEM was the "next-best" recipient of unclaimed funds.
"There are non-profit organizations devoted to preventing and aiding the victims of securities fraud, such as the SEC Fair Funds," Loken said. "Those alternatives must be thoroughly explored before concluding that a totally unrelated charity such as LSEM is an acceptable 'next best' recipient."
Circuit Judge Diana Murphy dissented, saying the majority adopted new standards that had not been fully argued.
Oetting's lawyer Frank said class action attorneys have treated settlement money as their own personal piggy bank.
"They are much happier holding a big ceremony where they can deliver checks to their local charities, which actually happened here, rather than look out for their clients," he said in an interview.
Last March, Jackson dismissed Oetting's malpractice lawsuit against Green Jacobson because he lacked standing. Oetting is appealing that decision before the 8th Circuit.
The case is Oetting v. Green Jacobson PC, 8th U.S. Circuit Court of Appeals, No. 13-2620.
For Oetting: Ted Frank of the Center for Class Action Fairness; Frank Hilton Tomlinson of Tomlinson Law
For Green Jacobson: Joe Jacobson of Green Jacobson