The opinion of the court was delivered by: WALKER
The plaintiffs in this case, a class of securities purchasers, brought this action against Wells Fargo for securities fraud, and the parties subsequently entered into a court-approved settlement agreement. Pursuant to the terms of that settlement, class counsel made distributions from the settlement fund to those members of the class who submitted forms identifying a recognized loss. All of the 2,619 claimants have now cashed their settlement checks.
Despite these distributions, the settlement fund still contains a residue of $ 35,583.12. This money came from two sources: (1) interest accrued during the period after the distribution checks were issued but before the claimants cashed them and (2) unanticipated savings realized in the administration of the fund. Most of the residue is attributable to the first source.
Currently pending before the court is a motion by class counsel urging the court to invoke its equitable power of cy pres to distribute the settlement fund residue to an alternate recipient. Class counsel claims that use of the cy pres power is appropriate because the administrative and postal expenses of allocating and distributing this residue to the class members would "chew up" a substantial portion of the remaining funds. See Mot re Donating Residue at 2. Class counsel (with the consent of counsel for Wells Fargo) instead urges this court to authorize the distribution of the residue to the Bar Association of San Francisco (BASF). For the following reasons, this motion will be granted in part and denied in part.
In some instances, a court may employ its power under the equitable doctrine of cy pres to distribute the residue of a class settlement fund to an alternate recipient (usually a charitable organization). See Herbert Newberg and Alba Conte, Newberg on Class Actions §§ 10.15-10.17 (3d ed 1992). This power, however, is subject to two important limitations.
The first limitation concerns the equitable interests that other parties, most notably class members, may have in the residue. Under this restriction, a court may only utilize its cy pres power to distribute such residue to an alternate recipient if either (1) no parties have equitable interests in the residue or (2) distribution to such parties would be impractical. See Wilson v Southwest Airlines, Inc 880 F.2d 807, 813 (5th Cir 1989); In re Folding Carton Antitrust Litigation 557 F. Supp. 1091, 1110 (ND Ill 1983), rev'd on other grounds, 744 F.2d 1252, 1254 (7th Cir 1984).
The second limitation on the cy pres power is the related purpose requirement. The doctrine of cy pres originated in the law of wills and trusts. In that context, courts may use this equitable power to redirect money from trusts and testamentary gifts that would otherwise fail for legal reasons. This power does not, however, enable courts to redirect this money to any alternate source that may represent a worthwhile endeavor. Instead, courts must redirect the funds in a manner that best serves the original intent of the settlor or testator. Indeed, the very term cy pres suggests this limitation on the principle; cy pres is Norman French for "as near" and signifies that the donor's intent must be followed "as nearly as possible." See Wilber v Owens, 2 N.J. 167, 177, 65 A.2d 843 (1949); Town of Cody v Buffalo Bill Memorial Assn, 64 Wyo. 468, 493, 196 P.2d 369 (1948). When courts employ their cy pres power, they must redirect the gift to an alternate donee that pursues a purpose similar to that of the original donee. See, for example, Board of Education of City of Rockford v City of Rockford, 372 Ill. 442, 24 N.E.2d 366 (1939) (holding that cy pres could not be used to divert the proceeds of an educational trust to a civic association, even though that association's activities were undoubtedly "laudable").
The related purpose requirement also applies to the distribution of settlement fund residue. See Newberg and Conte § 10.17. In this context, a court must be careful to direct the residue to an entity that will indirectly serve the interests of class members or "others similarly situated, e.g. future class members who engage in future transactions of the type involved in the class litigation * * *" Id (emphasis original). For example, in Houck v Folding Carton Admin, 881 F.2d 494, 502-3 (7th Cir 1989), the court approved the use of cy pres to distribute the residue of a settlement fund. Because the underlying suit involved allegations of nationwide antitrust violations, however, the court insisted that the residue be used in a manner that would help remedy problems of a similar nature and scale. Id.
In sum, before a court invokes its cy pres power to distribute the residue of a class settlement fund to an alternate recipient, it must ask three questions: (1) to whom does the residue belong, (2) would it be practicable to distribute the residue to its owners and (3) if not, who is an appropriate alternate recipient? The court will address each of these questions in turn.
The answer to the first question in this case is that the class owns the residue. The residue consists almost entirely of the interest that accrued after distributions were made but before class members actually cashed their checks. Class members were the equitable owners of these funds from the moment the court-approved distributions were made, not merely from the moment the checks were cashed. They are thus entitled to the time value of this money from the point of distribution forward (i.e., the interest that accrued after the checks were mailed).
Of course, it could be said that certain class members may have greater claims to the residue than others. For example, if one class member cashed his distribution check immediately while another waited for several months to do so, the interest that accrued in the residue would appear to belong to the person who waited. Nonetheless, it would be unduly expensive and burdensome for class counsel to determine (1) which class members waited to cash their checks, (2) how long they waited and (3) how much of the residue therefore truly belongs to them. Furthermore, applying a variation of the old saw, "you snooze, you lose," it would seem unwise to expend large portions of the residue to ascertain the exact interests of claimants whose apparent apathy, at least in part, caused the need for such a calculation in the first place. The court will therefore ignore this point and conclude that the residue belongs to the class members according to their pro rata interests in the settlement. (Consistent with the earlier distributions, each claimant's pro rata share depends on the amount of shares purchased and thus the amount of injury suffered.)