## IN THE SUPREME COURT O F TEX AS

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### H IG H L A N D 

### H O M E S 

### L T D 

### . , P E T IT IO N E R 

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v . 

### T H E 

### S T A T E O F 

### T E X A S 

### , R E S P O N D E N T

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O N P E T I T I O N F O R R E V I E W F R O M T H E C O U R T O F A P P E A L S F O R T H E E I G H T H D I S T R I C T O F T E X A S

4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 J U S T I C E D E V I N E , joined by J U S T I C E J O H N S O N , J U S T I C E W I L L E T T , and J U S T I C E B O Y D , dissenting. T h e U nclaimed Property Act (UPA) protec ts the proper ty rig hts of identifiable owner s whose proper ty cannot be delivere d or returne d beca use the owner cannot be found. Melton v. State , 993 S.W .2d 95, 97-98 (Tex. 1999). Gene rally , when those circ umstances persis t fo r t h re e y ear s, the proper ty in the possession of another is presumed abandone d by its owner and must be turned over to the S tate for safe keep i n g u n d er the UP A. T E X . P R O P . C O D E § 72.101. The S tate then assumes responsibility

for holding the prope rty

until the rightful owne r ca n be loca ted. Id . § 74.304. Texas Rule of Civil Procedur e 42, on the other hand, “is a proce dural device intended to advance judicial economy by try ing claims toge ther that lend t hemselves to collective treatment.” Sw. Refining Co. v. Bernal , 22 S.W .3d 425, 437 (Tex. 2000). As a mere proce dural device , the classaction rule is not intended “to enlar g e or diminis h any substantive rig hts or obliga tions of any parties
to a civil action” but to fac ilitate the eff icient adjudication of such rig hts and obliga tions. Id

. Her e, howeve r, the Court uses our class-a ction ru l e to diminis h the substantive proper ty rig hts of themissing p ro p er t y owner s and in so doing also marg inalizes the UPA’s public policy conce rns.

Be cause the Court’s application of Rule 42 conflicts with the UPA’s expli cit lang uag e, I respe ctfully dissent. A s th e Co u

r t a c k n o wledg es, the UPA prohibits private limit ation and esche at ag ree ments that seek to evade the proce ss for re p orting and delivering abandone d proper ty to the State. See

___ S.W .3d at ___ (quoting T E X . P R O P . C O D E §§ 74.308-.309). Section 74.308 states that a contra ctual limit ation period cannot be used to defe at the abandone d-prope rty presumption and thus circ umvent the UPA: The expiration [] of any

period spec ified by

contra ct, statute, or c ourt order , during which an action or proce eding may be i n i t i at ed or enforce d to obtain pay ment of a claim for money or rec overy of proper ty , does not preve nt the money or proper ty from being presumed abandone d proper ty and does not aff

ect any duty to file a repor

t require d by this chapte r or to pay or deliver abandone d proper ty to the comptroller. T E X . P R O P . C O D E § 74.308. Section 74.309 prohibits private esche at ag ree ments that seek to divide funds among locatable interest holders, while disenfra nchising owner s who cannot be fo u n d , and g ener ally prohibits the circ umvention of the unclaimed proper ty proce ss throug h the diversion of funds by any method: An individual, corpora

tion, business association, or ot her org anization may not act throug h am en d m ent of article s of incorpora tion, amendment of by laws, private agre ement, or any other means to take or divert funds or persona l proper ty int o income, divide funds or persona l proper ty among locatable patrons or stockholders, or divert funds or persona l proper ty by any other method for the purpose of circ umventing the unclaimed pr operty proce ss. Id. § 74.309. Hig hland and the class repr esenta tive neg otiated a settlement of the class claims that included the following cy pres provision for the dispositi on of any class members unclaimed share of the settlement f

und:

2The parties ag ree to a cy pres distribution of unclaimed funds owed to class members

that cannot be located or who fail to neg otiate the settlement chec k within ninety (90) day s of its issuance. The amount of these unclaimed funds will not be paid to individual Class Members. Su ch cy pres distribution shall be made to the Nature Conservanc y , a non-pr ofit, char itable org anization operatingin Texas. I n my vi ew , the above provision includes both a limit ation period and private esche at ag ree ment prohibited under the UPA. The Court a

ppare ntly ag ree s that the UPA would invalidate the settlement ag ree ment’s 90- day limit ation period and private esche at provision , i f i t applied to the ag ree ment. The Court conclude s, howeve r, that Hig hland is no longe r a “holder ” of any identified class member’ s proper ty and that the settlement ag ree ment does not conce rn abandone d proper ty , and thus, the UPA does not apply

. The Court rea sons that unclaimed settlement funds have not been ab an d o n ed beca use the class repr esenta tive has exercised owner ship over the proper ty on the class members’ b eh al f by
enter ing into the ag ree ment with Hig hland. Such rea s o ning rende rs the statutory prohibitions ag ainst private esche at ag ree ments and contr ac t u al time limit s meaning less. Section 74.308 expressly prohibits prospec tively setting contra ctual time limit s on when proper ty can be claimed, and section 74.309 expressly prohibits private ag ree ments that divert prospec tive proper ty interests to someone other than the true owne r. Whil e I ag ree that the class repr esenta tive exercised authority over the class claims and was authorized to s et t l e, i t s authority did not extend to the subsequent dispositi on of the settlement chec ks, which are the i n d i v idual class members’ proper ty rig hts cre ated under the settlement ag ree ment. Quite simply , the class repr esenta tive lacke d authority to claim, spend, or g ive awa y any other clas s m em ber’ s settlement chec k. The Court mistakenly confla tes the repr esenta tive’s authority over the class claims with the settlement proce eds it neg otiated on behalf of the individual

3class m em b er s. Be cause the class repr esenta tive could not asser t any missing class member’ s

owner ship i n t er es t in the fund or cash their individual chec ks, in my view, it did not exercise

owner ship over such p ro p erty

. When the proper ty went unclaimed, it was abandone d within the UPA’s meaning , notwithstanding the cy pres provision. Remarka bly , the Court’s explanation is that the “‘unc laimed funds’

. . . wer e, in fac t, claimed,” ___ S.W .3d at ___, even t h o u gh the class repr esenta tive lacke d authority to endorse the chec ks or otherwise claim the funds belong ing to another class member

. T he P roper

ty Code provides that proper ty is presumed abandone d (and thus sub j ec t t o t h e UPA) if “for longe r than three y ear s,” no claim has been asser ted or act of owner ship exercised. T E X . P R O P . C O D E § 72.101(a)

. Be cause the proper ty interest here is repr esente d by a chec k, the question is when does the three -y ear period beg in to run on a chec k. For purposes of the UPA and the three

y ear period, at least, a chec k repr esents a proper ty rig ht that is distinct from the underly ing obliga tion

or transac tion it repr esents. Property Code section 73.102 specific ally addre sses the commence ment question, stating that the period beg ins running on t h e d at e (1) “the chec k was pay able,” (2) “the issuer or pay or of the chec k last rec eived documented communication from the pay ee,” or (3) “the chec k was issued.” At the ear liest then, t h e three -y ear period commence d when the chec ks wer e issued. Now the Court arg ues that Chapter 73 o f t h e Property Code does not apply in this case beca use it applies only to “holder s” that are “depositories,” such as a bank, cre dit union or the like,

see ___ S.W .3d at ___ n.21, but Chapter 73 does not say that. Although par t s of Chapter 73 specific ally addre ss depositories as holders, section 73.102 does not. I t discusses chec ks—and the abandonme nt of chec ks—in te rms of the conduct and knowledg e of the “issuer” or “pay or,” rathe r

4than the conduct or knowledg e of the depository on which the chec ks are draw n. That only makes

sense, of course , beca

use for purposes of unclaimed proper t y , t h e bank has no way of knowing whether a customer has wr itten a check and if so, to whom, until the pay ee presents the chec k for pay ment. Section 73.102 can only apply to (and there fore define the three -y ear period for) scena rios in which the issuer/pa

y or is the “holder ,” not the depository

. The Court ultimately conclude s that the unclaimed chec ks are not abandone d proper ty beca use the class repr esenta tive has asser ted a claim or exercised a rig ht of owner ship over the class members’ claims by neg otiating the class settlement. See ___ S.W .3d at ___ (noting that “the class repr esenta tives asser

ted claims for ref

unds in the litigation, controlled the prosec ution of those claims as owne rs, negotiated the terms for settling the claims, asser ted claims for pay

ments under the settlement ag ree ment, and then rele ased all claims”). But that all occur red befor e the three -y ear period for deter

mining abandonment of the checks even commence d. The assertio n o f a claim or the exercise of an act of owner ship occur ri n g b ef o r e the three -y ear period beg ins is, I submit, meaning less. Be cause the class repr esenta tive asser t ed a cl aim or exercised owner ship, if at all, befor e the chec ks wer e issued, and beca use the class repr esenta tive cannot asser t a claim or exercise

owner ship over the c hecks after they wer e is sued, t he checks must be presumed abandoned under section 72.101(a ), if not ca shed within three y ear s. The UPA preve nt s i n d i v i duals or entities that hold proper ty belong ing to others from prospec tively contra cting for the dispositi on of such pr operty , if unclaimed by the rig htful owner . Thus, for example, landlords, banks, utilit ies, and insurance companies cannot contra ct for the future dispositi on of unclaimed funds o we d t o their respe ctive tenants, customers, or policy holders in circ umvention of the UPA. The Court here , howeve r, imbues the class repr esenta tive in class-a ction

5litigation with spe cial power to make such dispositi on. The UPA does not pe rmit this exceptional

trea tment. The Act clea

rly prohibits parties from ma k ing an ag ree ment that preve nts “money or proper ty from being presumed abandone d.” T E X . P R O P . C O D E § 74.308. But the Court rea sons that this case does not conce rn abandone d proper ty and thus does not implicate the UPA beca use the parties have previously ag ree d t o t h e d ispositi on of unclaimed proper ty

. The UPA’s prohibitions ag ainst
contra ctual time limit s and private esche at ag ree men t s ar e m eaningless, howeve r, if they can be manipulated so easily

. I t makes no s en s e to hold that the UPA, which prohibits contra ctual limit ations on unclaim ed property and the presumption of abandonment, does not apply when the parties have ag ree d to the future dispositi on of unclaimed proper ty

. Contrary to the Court’s analy sis, such an ag ree ment is not an exercise of owner ship over the unclaimed proper ty and does not preve nt a pre sumption of abandonment. No other court has taken such a fanc iful approa ch to private esche at ag ree ments. See Conn. Mut. Life Ins. Co. v. Moore , 333 U.S. 541, 546 (1948) (re jecting forf

eiture of life insurance proce eds in favor of New York’s unclaimed proper ty law); People ex rel. Callahan v. Marshall , 404 N.E.2d 368, 373 (I ll. App. Ct. 1980) (re jecting contra ctual time limit ations on g ift car ds and cre dit memoranda

in favor of I llinois ’ unclaimed proper ty law); Div. of Unclaimed Prop. v. Mc Kay Dee Credit Un i o n , 9 58 P.2d 234, 240 (Utah 1998) (finding that Utah’s unclaimed proper ty law takes p re ce d en ce over statute allowing businesses to purg e debt rec ords). For example, a Californ i a appellate court struck down a provisi o n in a contract between a health ins urer and it s subscriber s, requiring the s u b s cr i b er s t o cash their claim chec ks within six months or forf eit their rig ht to the funds. Blue Cross of

N. Cal. v. Cory , 120 Cal. App. 3d 723, 739-40 (Cal. Ct. App. 1981). The court

6rea soned that “[California’s UPA], as a law established for a public rea son, cannot be contra vened

by a private ag ree ment.” Id. at 740. Simi larly , the court rea soned that a union repr esenta tive, acting

on behalf of union members, could not ag ree to divert the value of individu al m embers’ roy alty chec ks into an acc ount for th e u n i o n ’s gen eral benef it, if the chec ks wer e not cashe d within a desig nated time. Scree n Actors Guild, Inc. v. Cory , 91 Cal. App.3d 111, 115-1 6 (C al

. C t. App. 1979). And despite the approva l of a majority of share holders, the New J erse y Supreme Court struck down an amendment to a corpor ation’s char ter that allowed the corpor ation to reta in stock dividends if t hey went unclaimed for three y ear s. State by Furman v. Jefferson Lake Sulphur Co. 178 A.2d 329, 338-39 (N.J. 1962), cert. denied , 370 U.S. 158 (1962). The court rea soned that even with the assent of share holders, the amendment violated New J erse y ’s UP A, because a corpor ation cannot alter its c harte r to g ive itself power s that are “obnoxious to a ny applicable g ener al law or to public policy .” Id. at 335-36. The Court attempts to distinguish these case s by sug g esting that the class members’ proper ty interests here wer e conditional and thus subject to forf eiture under the settlement ag ree ment, unlike the share holder’s rig ht to a dividend chec k, the union member’ s rig ht to the roy alty chec k, or the insured’s rig ht to a benef

its chec k. ___ S.W .3d at ___ & n.27. I fail to see how the class members’ proper ty interests here are any differ ent or why they are entitled to any less protec tion under our UPA. Hig hland acknow ledg ed i n the settlement ag ree ment that it “owe d” the identified class members the funds repr esente d by the chec ks and that, if a chec k wer e “not neg otiated within ninety (90) day s of its issuance, the funds owed to that class member [would] be consi d er ed ‘uncla imed funds.’” The ag ree ment provid ed further for “a cy pres distribution of unclaimed funds owed to class members that cannot be located or who fail to neg otiate within ninety (90) day s of [t he chec k’s]

7issuance.” The ag ree ment thus acknow ledg es the members’ proper ty interests and seeks to redire ct those interests under the cy pres provision. Although parties g ener ally have the rig ht to contra ct as they see fit, they do not ha ve the rig ht to make ag ree ments that violate the law or public policy

. In re Prudential Ins. Co. of A m., 148 S.W .3d 124, 129 & n. 11 (Tex. 2004)

. This a g ree ment violates the law beca

use the parties have substantively ag ree d t o t h e redisposition of future, unclaimed proper ty —a priva te esc heat a g ree ment prohibited by the UPA. Finally , the Court arg

ues that the UPA should not apply beca use it intr u d es o n t h e class repr esenta tive’s authority to act for class members under Rule 42.

_ _ _ S

. W

. 3d at ___. Ag ain, I disag ree . As alre ady discussed, the class repr esenta tive’s authority extends to the settlement of the class claims but not to the dispositi on or forf eiture of the individual class member’ s vested proper ty rig hts. The class action rule may authorize the repr esenta tive to settle the class member’ s claim, but it does not authorize the represe ntative t o take away the m ember ’s s hare of that settlement once it has vested. I q u es t i o n whether the Court would be so favor ably disposed to the class repr esenta tive’s power to redistribute u n claimed settlement proce eds if such proce eds wer e pay able to the repr esenta tive rathe r than a char ity

. I suspect that the Court’s analy sis is influence d more by wher e the unclaimed funds end up than by how they g ot there

. Why should money esche at to the State, if

a char ity can b en efit from unclaimed settlement proce eds? The problem, as I see it, is two fold. First, and fore most, under the terms of this settlement ag ree ment, the money belong s to the missing class members, not to Hig hland or the class repr esenta tive. The missing parties’ proper ty rig hts can only be prese rved if the State is permitted to act as their custodian under the UPA. Second, even if this wer e an appropr iate case for a cy pres distribution (and I do not believe i t i s ), the cy pres

8distribution here is contra ry to exi sting lawon the subject. As to this latter point, the Court acknow ledg es the State’s war ning that cy pres awa

rds “ca n be

. . . nothing more than a judicial g iveawa y of private proper

ty ” but sug g ests that the State either lacke d standing to challeng e the appropr iateness of the awa rd in this case or waived the complaint.

___ S.W .3d at ___. Ag ain, I disag ree . The State ha s standing to, a nd did in fact, c halleng e the cy pres distribution t o The Na ture Conserva ncy in both the court of appea ls and thi s Court. See In re Lease Oil Antitrust Liti

g. 570 F.3d 244, 250-51 (5th Cir. 2009) (dete rmining that State of Texas had “dire ct, substantial, leg ally protec table interest” to challeng e cy pres distribution in class action suit);

see also Br ief for Respondent at 40 (“The requisite nex u s b et we en the mission of the cy pres

rec ipient and the purpose of the c lass action is absent he re.” ). Cy pres distributions in class actions are appropr iate when there is money rema ining in a settlement fund afte r identifiable class members have been compensa ted. Klier v. Elf Atochem N. Am. , I nc., 658 F.3d 468, 474-75 (5th Cir. 2011). Ty pically , this might occur when a defe ndant does
not have sufficie nt information or resour ces to deter mine the prec ise siz e of the class or the identity of i ts members and thus relies on a claims-form process to qualify membership. I n that sit u at ion, any unallocate d surplus in the s ettlement fund might appropriately be dis posed of u n d er a cy pres provision. See, e.g., W

ilson v. Sw. Airlines, Inc ., 880 F.2d 807, 813 (5t h Cir. 1989) (alloca ting

rema inder of settlement fund wher e 500 potential class members wer e notified, but only 228 proved their rig ht to the fund by filling out a claim form and all 228 wer e fully compensa ted). I n this case , howeve r, all of the ide ntifiable cla ss members we re not c ompensated. H ig h la n d u sed its business rec ords to prec isely tailor the siz e of the settlement fund, rese rving the rig ht to reduc e the fund by the amounts attributable to class members who opted-out. Hig hland

9then used these same rec ords to issue chec ks to eac h settling class member, who under the settlement

ag ree ment wer e desig nated as the owner s of their particula r share of the fund and wer e issued chec ks repr esenting that share

. The cy pres provision then subsequently forf eited that prope rty

interest if the class member did not cash the issued chec k within 90 day s. Hig hland did not require , nor need, the class members to prove their rig ht to the fund as Hig hland possessed all the rele vant information in its own business records. I t theref ore a llocated the e ntire fund to identifiable cla ss members by issuing each of them a check for t he specific amount owed. There acc ording ly was no unclaimed surplus to which an a

ppropriate cy pre

s distribution could attach. Even had there been a surplus, the cy pres provision in this ag ree ment was clea rly inappropria te for y et another rea son. I n class actions, the doctrine of cy pres is supposed to distribute funds “for a purpose as near as possible to the leg itimate objectiv es u n derly ing the lawsuit, the interests of class members, and the interests of those simil arly situated.” Klier, 658 F.3d at 474. At the ver y le a s t, th e c

y p r es distribution should “re asonably approximate” the class members’ interests. In re Lupron Mktg. & Sales Practices Liti g. 677 F3d 21, 33 (1st Cir. 2012). Whether the cy pres distribution rea sonably approximates the class members’ interests is deter mined by analy z i n g a number of fac tors such as the purposes of the underly ing statutes violated, the natu re o f t h e cl ass members’ injury , the class members’ char acte ristics and interests, the g eog raphi cal scope of the class, the rea sons why the settlement funds have y et to be claimed, and the rela tionship of the cy pres

rec ipient to the class. Id. at 33. The Court a cknowledg es that The Nature Conservanc y was chosen as the cy pres rec ipient beca use it “shar e[s] Hig h la

n d H o me s ’ v is io n o f g r e e n b u il d in g a n d commitment to the environment.”

___ S.W .3d at ___ (alter ation in orig inal). But Hig hland’s vision or pref ere nces ar e i rre levant

10beca

use t he settl ement fund does not belong to Hig hland. I t b el o n gs t o the class members whose claims cre ated the fund. See Kli er, 658 F.3d at 474 (“The settlement-fund proce ed s , h av i n g been g ener ated by

the value of t he class members' claims, belong solely to the class member s.”) ( citing Principles of the Law of

Aggregate Liti

gation , 2010 A.L .I

. § 3.07 cmt. b). As much as I respe ct and admire the mission of The Nature Conservanc y , I fail to see its connec tion to the subcontrac tors’ suit, which alleg ed that Hig hland misrepre sented that liability insurance would be provided for uninsured subcontrac tors throug h pay roll deductions. The UPA provides that proper ty is presumed abandone d if owner ship is not exercised for a period of three y ear s. I t require s that such property be turned over to the S tate. Th e UP A fu rt h er prohibits contra cts that seek to limit the presumptive period or otherwise dispos e o f unclaimed proper ty throug h private esche at a g r e e me n ts. I n this reg ard, the Act prohibits ag ree ments that “diver t funds” or “divide funds

. . . among locatable ” persons or use “any other method for the purpose of circ umventing the unclaimed proper ty proce ss.” T E X . P R O P . C O D E § 74.309. Hig hland and the class repr esenta tive ag ree d “to a cy p re s d i stribution of unclaimed funds owed to class members” who, althoug h known, could not be found to cash their settlement chec ks within 90 day s of i ssuance . I ag ree with the court of appea ls that this cy pres provision is essentially a private esche at ag ree ment prohibited by the UPA. 417 S.W .3d 478, 486-87 (Te x . App.–El Paso 2012). I acc ording ly would aff irm the court of

appea ls’ judgme nt. Be cause the Court does not, Irespe ctfully dissent.

___________________________ J ohn P. Devine J ustice

Opinion Delivere d: Aug ust 29, 2014

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