Another Source of Legal Services Funding at Risk

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Recently, the House Judiciary Subcommittee on the Constitution conducted a hearing on “Class Actions Seven Years After the Class Action Fairness Act.”   At the hearing there was an appeal by two of the witnesses to get rid of cy pres awards in class actions.

 A cy pres award occurs when funds from a settlement or judgment that belong to the class are distributed instead to organizations for the benefit of the class. Getting rid of cy pres awards would have a devastating impact on NACA and other non-profit organizations, including legal aid groups, as they provide a critical source of funding. With the assistance of cy pres, NACA is able to support attorneys around the country who represent consumers victimized by fraudulent, abusive, and predatory business practices.  Cy pres distributions are also a major source of funding for legal aid groups who play a key role in ensuring access to justice for the country’s most disadvantaged citizens. Furthermore, as I’ve mentioned in previous blog posts  these groups are already facing cuts across the board at the federal, state and local level, as well as reductions in the proceeds from Interest on Lawyers Trust Accounts (“IOLTA”).

During the House Committee hearing, Martin Redish of Northwestern University School of Law argued that the awards create “faux” class actions.  John Beisner, a partner at Skadden, Arps, Slate, Meagher & Flom, testifying on behalf of the U.S. Chamber of Commerce, said cy pres awards in many cases are used merely to justify attorneys’ fees by inflating the size of the class award.  

We disagree.  We believe that distributing class funds directly to class members is the best use of these funds, but when this is not feasible or when there are additional funds available, a cy pres distribution to a non-profit organization is appropriate when they provide an indirect benefit to absent members of the class or to further the purposes of the statutes that formed the basis for the underlying litigation. For instance, a case that challenges predatory lending practices that result in houses being foreclosed upon could be appropriate for residual funds to be distributed to non-profit organizations that address foreclosure prevention work.  Unclaimed funds in class actions are certainly better served with non-profit groups than the defendants claiming these residual funds for themselves, the very people who admitted to misconduct or unlawful activity against the class action members.

While we know that legislation to amend CAFA to repeal cy pres awards is unlikely in this Congress, NACA is determined to protect the appropriate distribution of cy pres awards and will work hard to prevent any attempt to abolish this important source of non-profit funding.

 Written by Ellen Taverna of NACA's Legislative Team