Class Action Defense Cases–Cundiff v. Verizon: California State Court Reverses Order Returning Unclaimed Class Action Settlement Funds To Defendant

Nov 6, 2008 | By: Michael J. Hassen

California Legislature Intended Unclaimed Class Action Settlement Funds to be Used Charitably rather than Returned to Defendant California State Court Holds

Plaintiffs filed a class action against GTE California (now Verizon) alleging that it “engaged in unfair business practices by improperly billing residential customers for rented telephone equipment.” Cundiff v. Verizon California, Inc., 167 Cal.App.4th 718 (Cal.App. 2008) [Slip Opn., at 2]. The parties ultimately negotiated a settlement of the class action; under the terms of the settlement, which covered approximately 170,000 class members, Verizon agreed to reimburse three subclasses of customers various monetary amounts, to donate $1 million to certain designated charities, and to pay named plaintiffs $5000 each as an incentive award. Id., at 4. At the hearing for final approval of the class action settlement, plaintiffs’ counsel requested a percentage of the value of the common fund established by the settlement, which they estimated to be $88 million, id., at 5. Because there was “no way of knowing what the ultimate value of the settlement will be,” the trial court used the lodestar method and awarded $1.7 million in fees. Id., at 6. Later, the class action settlement administrator reported that more than $400,000 in settlement checks remained uncashed or had been returned as no longer valid, id. The parties could not agree on the disposition of the unclaimed funds: plaintiffs’ counsel sought to amend the judgment under California Code of Civil Procedure section 384 so as to direct the administrator to disburse the unclaimed funds pro rata to the designated charities; defense attorneys argued that Section 384 was inapplicable and the funds should revert to Verizon. Id., at 7. The trial court ordered the money returned to Verizon holding that Section 384 did not apply because “the parties simply failed to provide for the possibility of unclaimed funds in the settlement agreement.” Id. The Court of Appeals reversed.

Section 384(a) states that “the intent of the Legislature…[is] to ensure that the unpaid residuals in class action litigation are distributed, to the extent possible, in a manner designed either to further the purposes of the underlying causes of action, or to promote justice for all Californians.” Section 384(b) authorizes trial courts to “amend the judgment to direct the defendant to pay the sum of the unpaid residue…to nonprofit organizations or foundations to support projects that will benefit the class or similarly situated persons, or that promote the law consistent with the objectives and purposes of the underlying cause of action, to child advocacy programs, or to nonprofit organizations providing civil legal services to the indigent.” Based on its construction of the statute, the appellate court held that (1) the unclaimed funds constituted “residue” within the meaning of Section 384, Cundiff, at 9-11, and (2) Section 384 is not limited to cy près or “fluid recovery” settlements, id., at 11-13. The Court rejected Verizon’s argument that the settlement established a “claims-made” procedure that required the unclaimed funds revert to Verizon, see id., at 13-14. Accordingly, it reversed the trial court order and remanded for further proceedings. Id., at 15.

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