Texas Supreme Court Upholds Class Representative’s Authority to Dispose of Unclaimed Settlement Proceeds

A sharply divided Texas Supreme Court recently held that unclaimed class action settlement funds may be disposed of in the manner selected by the parties and are not subject to the state’s Unclaimed Property Act. In Highland Homes Ltd. v. The State of Texas, the court considered a settlement between a prominent Texas home builder and a class of subcontractors arising from a dispute over deductions in pay made by the homebuilder to cover the cost of providing adequate liability insurance coverage. The settlement required the defendant to establish a fund to pay claims. Recognizing that some class members might remain unlocated or fail to file a timely claim, the settlement provided that any settlement checks not negotiated within 90 days would be void and that these and any other unclaimed funds would be given to the Nature Conservancy. This type of cy pres settlement procedure has proven controversial recently and some court and commentators have criticized such arrangements. Nevertheless the trial court approved the settlement..

The state of Texas intervened in the case, asserting that the disposition of unclaimed settlement funds violated the Texas Unclaimed Property Act. Under the Act property not claimed within three years is presumed abandoned and is placed in the custody of the Comptroller to hold for the owner. The state argued that regardless of the terms of the settlement, any unclaimed settlement funds must be disposed of according to the statute. The court of appeals agreed with the state and ordered that the undistributed funds be held by the claims administrator for three years and then remitted to the Comptroller.

The Supreme Court reversed. In an opinion authored by Chief Justice Hecht, the five-justice majority reasoned that the Unclaimed Property Act did not apply because the funds were not really unclaimed. The class members had asserted claims and exercised ownership of the funds through the class representative. Once the class was certified the representative has the authority to dispose of any claims including the ability to direct the disposition of funds that could not be paid directly to the class members. 

Justice Devine penned a dissent on behalf of four justices. In their view the class certification rules were trumped by the Unclaimed Property Act because a procedural rule cannot enlarge or diminish any substantive rights. Once the settlement was funded, the dissent reasoned, the proceeds became the property of the individual class members and because subject to the Act.

The Highland Homes opinion upholds the ability of class representatives and defendants to strike class action settlements. If state unclaimed property statutes necessarily apply to all unclaimed settlement proceeds, parties to class litigation will have lost a considerable degree of flexibility in crafting settlements. Cy pres provisions would be difficult or impossible to enforce, as would provisions where the defendant obtains a reversion of the unclaimed funds. While fund-and-claim class action settlement arrangements are subject to some legitimate criticism, especially where the claims process is made unduly burdensome, the inability to use such an arrangement would deprive litigants of what is often a reasonable means of resolving disputes, especially in cases where the scope of actual loss by the class members is in dispute or cannot be readily ascertained.