Indiana’s New Class Action Rule Helps Low Income Hoosiers

In late September 2010 the Indiana Supreme Court announced an amendment to Indiana Trial Rule 23, concerning class actions, which goes into effect on January 1, 2011. This amendment added a new subsection (F) concerning the disposition of residual funds from the class action award or settlement, and the most interesting thing about it is that it mandates that a minimum of 25% of those funds go towards funding for pro bono legal assistance for low income Hoosiers.

Residual funds can be quite common in class actions, especially consumer class actions, with large classes of people, each of whom has suffered only a small amount of damages. In such situations when class members do not submit claims, cannot be found, or do not cash their settlement checks money is left after all other expenses and distributions are made. Residual funds are defined in this new rule as “funds that remain after the payment of all approved class member claims, expenses, litigation costs, attorneys’ fees, and other court approved disbursements.”

In the past when there were residual funds from a class action settlement or award the courts, with input and argument from counsel for the parties in the class action, were left to decide what to do with that money still sitting there. The options available included returning the money to the residual funds to the defendants, having it escheat (return) to the government, pro rata distribution among the remaining class members, or cy pres distribution.

The adoption of this rule makes clear that in Indiana all residual funds must be distributed under the principles of cy pres distribution. The term “cy pres,” which is loosely defined as “as near as possible,” has its origin in trust law, and is an equitable doctrine. Basically, the idea behind it is to as nearly as possible distribute the funds in a manner which the class action members would want it to go, which has typically been to a charity somewhat related to the objectives of the underlying litigation.

The interesting thing about Indiana’s new rule regarding the residual funds is that instead of giving the court wide discretion over the entirety of the funds, it makes a presumption that at least 25% of the funds will automatically be disbursed to the Indiana Bar Foundation, which supports the Indiana Pro Bono Commission and the 14 pro bono districts serving low income Hoosiers.2 The additional balance not distributed to the Indiana Bar Foundation may go to “any other entity for purposes that have a direct or indirect relationship to the objectives of the underlying litigation or otherwise promote the substantive or procedural interests of members of the certified class.”

All in all Indiana appears to have provided Indiana judges and class action counsel with needed guidance in distributing these residual funds, and also created a cleverly funded source of income for a typically under funded, but critically needed issue in Indiana, pro bono representation of low income Hoosiers. Hopefully this new rule will help alleviate some of the financial stress the Indiana Pro Bono Commission, and the 14 pro bono districts within the state of Indiana have been working under because of budget slashing and shrinking in recent years so that more Hoosiers can get the legal representation they need.