Two birds with one stone: Using class action residual funds to support access to justice

Issue June 2011 By Robert B. Foster

Problem one

Class action settlements, which have to be approved by the court, 1 usually include a monetary payment to the class of plaintiffs, along with a payment of attorneys' fees. The funds are typically distributed through each class member submitting a claim, which is reviewed to determine that it meets the conditions of the settlement, and the proper claimed amount is disbursed to the claimant.

After the claims have been administered, there is often a significant amount of money left in the settlement fund. The parties and the court then face the question of what to do with these residual funds. There are no more plaintiffs to whom the funds can be distributed; however, to leave the funds undistributed defeats the purposes of the class action and its settlement, namely to remedy a claimed wrong done to a large group of people.

Problem two

Access to justice is vital for low-income people. They cannot afford lawyers to vindicate their rights under housing, benefits, consumer and family law. Thus, it is critically important that there be legal services programs, staffed with full-time attorneys and paralegals, dedicated full time to serving the legal needs of low-income people.

These programs are funded by a combination of state appropriations, federal funding, grants, contributions and the Interest on Lawyers Trust Accounts, or IOLTA, program. As practicing attorneys know, funds from a closing or settlement are often held by attorneys for a very short time -- a day or two -- and then distributed. The accounts into which these funds are deposited do not pay any interest that can be credited to the clients or ultimate recipients of the funds -because of the short-term nature of the deposit, the administrative cost to the bank of calculating and allocating the interest outweighs the interest itself.

SJC established the IOLTA program to use these accounts as an additional funding source for legal services.2 IOLTA provides that these short-term funds be deposited into a single account, with the interest paid on the floating balance in that account to be distributed to support legal services. By rule, the interest from IOLTA accounts is conveyed to the IOLTA Committee. The IOLTA Committee distributes two-third of the funds to the Massachusetts Legal Assistance Corporation to be distributed to legal services programs, and one-third to the Massachusetts Bar Foundation and the Boston Bar Foundation.3

IOLTA funds depend on the amount of money in IOLTA accounts and the interest rates paid on those accounts. In 2008, when balances were high and interest rates strong, IOLTA received and distributed $24 million from IOLTA accounts. When the recession began, however, the real estate transactions that provided the bulk of the balances in IOLTA accounts decreased dramatically and interest rates fell. As a result, in 2009, IOLTA received $9 million - a one-year drop of 62 percent. 2010 was hardly better, as IOLTA accounts generated approximately $9.3 million.

The effect of this severe drop in IOLTA revenue on legal services programs has been nothing short of devastating. Many legal services programs have seen their funding reduced by 50 percent or more in the last two years, leading to layoffs of attorneys, paralegals and staff. The remaining staff cannot begin to serve the needs of a low-income client population that has only grown because of the same economic forces that have led to reduced funding.

Courts are flooded with litigants with no representation - such as low-income people facing eviction or seeking to obtain benefits they were wrongfully denied, or victims of domestic violence seeking protective orders. Simply put, without more funding for legal services programs, more and more low-income people are without legal recourse just at the time they need help the most.

A single solution

Can class action residuals be used to support civil legal services? Yes, through application of the doctrine of "cy pres." Cy pres, from the Norman French expression "cy pres comme possible," meaning "as close as possible," has long been used in charitable trusts when the settlor's wishes can no longer be carried out exactly. In such a situation, the court looks to find a use that is next best and most closely fits the intent of the trust.4

The cy pres doctrine can be used to distribute residual class action funds. Judges and counsel can recommend as part of a settlement that residual funds be put to their "next best" use for the aggregate, indirect or prospective benefit of the class members. The cy pres remedy can also be used for the entirety of a statutory damage award when the amount of damages to each class member is too small to warrant distribution.

The SJC has formally recognized that just such a next best use of residual funds is to benefit legal services and IOLTA. In January 2009, Rule 23 was amended to provide that payments of residual funds in class actions can be directed to either one or more nonprofit organizations (including legal services programs) that benefit the class, or to the IOLTA Committee.5 While there is no equivalent federal rule, federal courts have the same authority to direct residual class action funds.

Legal services programs are the next best use of unclaimed funds because of their ability to directly benefit the members of a class for whom funds have been set aside and then not distributed. Moreover, the underlying mission of these programs is consistent with the purpose of Rule 23, which recognizes the need to protect the legal rights of those who, because of their economic position, would otherwise be unrepresented.

Class action residuals thus can be used to fund operational costs for legal aid organizations, allowing them to provide desperately needed basic civil legal services in their communities, while serving the purposes of the class action settlement -- an elegant "two birds with one stone" solution to two separate problems.

Robert Foster is counsel with Rackemann, Sawyer & Brewster. He is a member of the Massachusetts IOLTA Committee and the SJC's Access to Justice Commission, and has served on the Board of the Massachusetts Legal Assistance Corp.

1Fed. R. Civ. P. 23(e); Mass. R. Civ. P. 23(c).

2Supreme Judicial Court R. 3:07; Rules of Prof. Conduct 1.15(g).

3Id. at 1.15(g)(5).

4Austin Wakeman Scott & William Franklin Fratcher, The Law of Trusts § 399 (4th ed. 1989).

5Mass. R. Civ. P. 23(e).