Court Opinion

ID: 3098342
Source: CourtListenerOpinion
Date Created: 2015-10-16 04:50:22.975884+00
Date Added: 2024-06-11T11:51:29.003097
License: Public Domain

COURT OF
APPEALS
                                                   EIGHTH DISTRICT OF
TEXAS
                                                              EL
PASO, TEXAS
 

 
THE STATE OF TEXAS,
 
                                   
  Appellant,
 
v.
 
HIGHLAND HOMES, LTD.,
 
                                    Appellee.
  
 

 
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                  No. 08-10-00215-CV
 
                         Appeal from
 
 166th District Court
 
of Bexar County,
  Texas
 
(TC #
  2006-CI-18132)

 

 

 

                                                                  O
P I N I O N
 
            After the trial court approved a
class action settlement agreement between Benny & Benny Construction Co.
and Highland Homes, Ltd., the State intervened complaining that the distribution
of funds violated the unclaimed property provision of the Texas Property
Code.  For the reasons that follow, we
reverse and remand.  
FACTUAL SUMMARY
The
Underlying Lawsuit
            The underlying lawsuit arose from a
dispute over general liability insurance coverage between a general contractor,
Highland Homes, Ltd., and its subcontractor, Benny & Benny Construction Co.  In 2002, as a result of increased insurance
premiums, Highland changed its policy regarding the general liability insurance
requirements for subcontractors.  In
November 2002, Highland sent a memorandum to its subcontractors explaining that
because of the higher insurance premiums it faced, it would implement a new
policy effective as of January 1, 2003, by which subcontractors would be
required to provide proof of general liability insurance in specified
amounts.  If a subcontractor did not have
the specified insurance or provide proof, Highland would deduct a specified
amount from the subcontractor’s paycheck. 

            Benny & Benny interpreted the
memo to mean that if a subcontractor could not provide Highland with sufficient
proof of liability insurance coverage, then Highland would obtain coverage on its
behalf and make a corresponding deduction from its pay check.  Highland interpreted the memo to mean that a
subcontractor that chose not to obtain general liability insurance coverage
could still subcontract for Highland, but Highland would deduct money from its
paycheck to cover Highland’s additional premium expenses.  
            In 2006, Benny & Benny requested
coverage information from Highland after one of its employees sued for personal
injuries sustained on the job.  Highland responded
that it had not purchased insurance but had taken deductions to cover its
increased exposure.  This lawsuit
followed deductions and the representations Highland made regarding those
deductions.  
Certification
of the Class
            In 2008, Benny & Benny amended the
suit seeking a class action, with the class comprised of those subcontractors
from whom Highland made payroll deductions pursuant to the 2002 memo.  On behalf of the class, Benny & Benny
alleged breach of contract, fraud, negligent misrepresentation, unjust
enrichment, and violations of the Texas Deceptive Trade Practices Act, Texas
Insurance Code, and Texas Theft Liability Act. 

On June 23, 2009, the trial court signed an order granting class
certification and setting forth its trial plan. 
Highland appealed, but before oral argument the parties announced
progress toward settlement and the appeal was abated to allow them to finalize
an agreement. 
The
Settlement Agreement
            On January 15, 2010, the trial court
signed an order preliminarily approving the settlement agreement and directing
notice to potential class members. After notices issued, eight people sought to
be excluded from the class.  On April 29,
2010, after notice to the class, the trial court held a hearing on the
settlement agreement.  The parties
explained that they had identified 1,864 subcontractors from whom Highland had
withheld approximately $3.1 million.  The
settlement agreement allocated $3,672,000 to the class, resulting in each class
member receiving approximately 115 percent of the amount deducted from payroll
checks.
            Highland hired Rust Consulting as
the claims administrator to implement the settlement agreement and administer
the funds.  It prepared a list of
subcontractors affected as well as an amount owed to each, and created a
settlement fund to pay the class members. 
The subcontractors currently working with Highland received distribution
of settlement funds through their paychecks. 
Checks were mailed to former subcontractors at their last known address.
 
            By its express terms, the settlement
agreement mandated that a settlement check expired ninety days after issuance.  
If the class
member cannot be located and verified pursuant to the Claims Administration
Process described in paragraphs 28(b) and (c), or if a settlement check is not
negotiated within ninety (90) days of its issuance, the funds owed to that
class member shall be considered ‘unclaimed funds.’  All settlement checks will expire and be of
no value upon the expiration of ninety (90) days from issuance.  
 
It also provided that any unclaimed
funds would be distributed via a cy pres distribution plan to the Nature
Conservancy, a non-profit, charitable organization operating in Texas.  The amount of the cy pres distribution was
the amount of unclaimed funds remaining after:  (1) Highland was reimbursed for fees it paid
to the claims administrator in excess of $30,000; and (2) Benny & Benny was
paid $28,000.  We have been advised that
Highland has since waived any claim to the residuals.  It has already paid the $28,000 to Benny
& Benny and will not seek reimbursement of the administration
expenses.  According to the State’s
brief, as of October 25, 2010, the claims administrator held $465,557 in
unclaimed funds.
            At the settlement hearing, counsel
for Highland advised the court that the Attorney General would likely oppose
the settlement provisions governing the disposition of unclaimed property and
wish to intervene.  The court agreed to
postpone ruling on the specific issue of unclaimed funds, but otherwise
approved the settlement.  After receiving
notice of the settlement, the State intervened as expected.  It filed a motion for partial new trial and a
motion to modify the judgment, complaining that the agreement’s unclaimed
property provisions violated Texas law.  The
trial court denied the motions and this appeal follows.  
VALIDITY OF CY PRES AGREEMENT
            The issue presented is whether the
trial court erred in approving a settlement agreement which provides that the
checks mailed to class members expire after ninety days, and mandates
distribution of the unclaimed amounts to a charitable organization.  
Standard
of Review
            In a class action, the trial court
is the guardian of the class interest and as such is charged with the responsibility
of determining whether a settlement is fair, adequate, and reasonable.  General
Motors Corp. v. Bloyed, 916 S.W.2d 949, 954 (Tex. 1996); see Tex.R.Civ.P. 42(e).  The
determination of whether a settlement is “fair, adequate, and reasonable” is
within the sound discretion of the trial court, and the trial court’s decision should
not be reversed absent an abuse of that discretion.  Bloyed,
916 S.W.2d at 955; see also Northrup v. Southwestern
Bell Telephone Co., 72 S.W.3d 16, 22 (Tex.App.--Corpus Christi 2002, pet.
denied)(“[W]e cannot say the trial court abused its discretion in holding that
the cy pres distribution was fair.”).

            To determine whether the trial court
abused its discretion, we must first determine whether the challenged
provisions of the settlement agreement violate Texas law.  We review questions of law de novo. 
See City of El Paso v. Maddox,
276 S.W.3d 66, 70 (Tex.App.--El Paso 2008, pet. denied)(questions of law
reviewed de novo); State v. Snell,
950 S.W.2d 108, 112-13 (Tex.App.--El Paso 1997, no writ).
Texas
Unclaimed Property Law 
            Chapters 72 through 76 of the Texas
Property Code set forth the State’s unclaimed property law.  Snell,
950 S.W.2d at 112.  The Act “prescribes a
mandatory procedure whereby persons or entities holding property rightfully
belonging to another, but which has been deemed abandoned property (due
ordinarily to some form of inactivity on the part of the rightful owner), must
turn that abandoned property over to the State of Texas for safekeeping.”  Snell,
950 S.W.2d at 112.  The purpose and
effect of the Act is to protect absent owners, or owners who fail to timely
claim their property, by placing the State in perpetual custody of the
unclaimed property and providing a means for absent owners to reclaim their
property.  Melton v. State, 993 S.W.2d 95, 97 (Tex. 1999); see also Snell, 950 S.W. 2d at 113.  
            The Act applies to both tangible and
intangible personal property for which “the last known address of the apparent owner, as shown on the records of the holder,” is located in Texas.  [Emphasis added].  Tex.Prop.Code
Ann. § 72.001(a)(1)(West 2007).  For
most types of property, the presumption of abandonment is provided for by Section
72.101(a) which states that property is “presumed abandoned” if, for more than
three years:  
(1)
the existence and location of the owner of the property is unknown to the
holder of the property; and 
 
(2)
according to the knowledge and records of the holder of the property, a claim
to the property has not been asserted or an act of ownership of the property
has not been exercised.  
 
Tex.Prop.Code Ann. § 72.101(a)(1)(2)(West
Supp. 2011).  Under Chapter 72 of the
Act, a holder is defined as “a person, wherever organized or domiciled, who is:
 (1) in possession of property that
belongs to another; (2) a trustee; or (3) indebted to another on an obligation.”[1]  Tex.Prop.Code
Ann. § 72.001(e).
            However, property held by financial
institutions is specifically governed by Chapter 73 of the Act.  See Tex.Prop.Code Ann. § 73.001-§ 73.104.  By its own terms, Chapter 73 supplements the
other chapters but also states that “each chapter shall be followed to the
extent applicable.”  Tex.Prop.Code Ann. § 73.001(b).  Under Chapter 73, there is a specific
provision applicable to the presumption for abandonment of checks and therefore
is applicable here.  See id. at § 73.102. 
Specifically, a check is presumed abandoned on the latest of:
(1) the third
anniversary of the date the check was payable;
 
(2) the third
anniversary of the date the issuer or payor of the check last received
documented communication from the payee of the check; or
 
(3) the third
anniversary of the date the check was issued if, according to the knowledge and
records of the issuer or payor of the check, during that period, a claim to the
check has not been asserted or an act of ownership by the payee has not been
exercised.
 
Id. at § 73.102.  A “check” under Chapter 73 “includes a draft,
cashier’s check, certified check, registered check, or similar instrument.”  Id.
at § 73.001(a)(5).  Additionally, Section
73.001 specifies that a holder “means a depository.”  Id.  § 73.001(a)(4).  Finally, Section 73.001(d) specifically
provides that, “[a] holder of . . . checks . . . presumed abandoned under this
chapter is subject to the procedures of Chapter 74.”  Id.
at § 73.001(d).
            Under Chapter 74, a holder of
property which is presumed abandoned in Texas is required to report the
abandoned property to, and to deliver the abandoned property to, the Texas
Comptroller.  Tex.Prop.Code Ann. §§ 74.101 (property report); 74.301(a)(delivery);
74.302 (statement of delivered property). 
Once the property is turned over to the State, the Comptroller assumes
responsibility for it and essentially steps into the shoes of the absent owner.
 See
Melton, 993 S.W.2d at 102.  If the abandoned
property is worth $100 or more, the Comptroller must publish notice in the
county where the assumed owner resides, listing the owner’s name and city of
last-known address.  Tex.Prop.Code Ann. § 74.201.  The Comptroller is also required to compile an
alphabetized list of all owners of abandoned property, annually, and make the
list available to the public.  Id. § 74.307.
            The Act requires the Comptroller to invest
unclaimed money in approved investments. 
She is authorized to sell unclaimed securities and use the proceeds to
reinvest in other securities.  Tex.Prop.Code Ann. § 74.601(d),(e).  The income from these investments (as well as
the proceeds from auctioned tangible personal property items) must be deposited
in the State’s general revenue fund.  Id. § 74.601(b).  These regulations give the State a financial
interest in the investment income generated by the funds until the principal is
claimed by the owners.  See In re Lease Oil Antitrust Litigation,
570 F.3d 244, 251 (5th Cir. 2009)(“Lease
Oil I”).  Owners or
their heirs may reclaim property by filing a claim with the Comptroller, and
there is no time limit on filing a claim.  Tex.Prop.Code
Ann. § 74.501(b); Snell, 950
S.W. 2d at 112.  However, the owner may
claim only the property itself; he or she is not entitled to any interest that
may have accrued in the interim.  See Clark v. Strayhorn, 184 S.W.3d 906

(Tex.App.--Austin 2006, pet. denied). 
The Cy
Pres Agreement
            The relevant portions of the settlement
agreement are located in paragraphs 28(g) and 32, and provide as follows:
[28(g)]. If the
class member cannot be located and verified pursuant to the Claims
Administration Process described in paragraphs 28(b) and (c), or if a
settlement check is not negotiated within ninety (90) days of its issuance, the
funds owed to that class member shall be considered ‘unclaimed funds.’  All settlement checks will expire and be of no
value upon the expiration of ninety (90) days from issuance.
 
32. The parties
agree to a cy pres distribution of
unclaimed funds owed to class members that cannot be located or who fail to
negotiate the settlement check within ninety (90) days of its issuance.  The amount of these unclaimed funds will not
be paid to individual Class Members.  Such
cy pres distribution shall be made to
the Nature Conservancy, a non-profit, charitable organization operating in
Texas.  The amount of the cy pres distribution will be the sum of
the undeliverable, unclaimed, unnegotiated and/or returned checks to the class
members less (i) the amount of fees paid by Highland Homes to the Claims
Administrator pursuant to paragraph 48 that exceeds $30,000 and (ii) the
$28,000 payment to Benny & Benny described in Section E above.
 
            Unlike in class action suits where
parties are mailed some form of a claim coupon, the class members here were
issued checks.  Each class member was
identified by name and last known address and mailed a check. Therefore, the
holder of the funds had a fixed, certain obligation to each class member.  
            After the settlement checks were
issued, the class member--as a condition of payment--had a ninety-day window
within which the check must be presented. 
Otherwise, the check would become null and void.  Effectively, the holder will be entitled to
retain any amounts represented by the uncashed checks.  But Texas has adopted a statute specifically
providing that the expiration of a period of limitation on the owner’s right to
receive or recover property, whether specified by contract, statute, or court
order, does not prevent the property from being presumed abandoned or affect a
duty to file a report or to pay or deliver the property to the State.  Tex.Prop.Code
Ann. § 74.308.  
Even if Texas had not specifically adopted this anti-limitation
provision, the State argues it is still entitled to custody of the expired
checks under Section 74.309 of the Act which prevents private escheat
agreements.  Tex.Prop.Code Ann. § 74.309. 
In three heavily cited federal cases, courts have found that where
similar provisions exist, the State is entitled to the expired checks because the
expiration date is an unenforceable private escheat mechanism that violates
public policy.  See State v. Jefferson Lake Sulphur Co., 178 A.2d 329 (N.J. 1962); Screen Actors Guild, Inc. v. Cory, 154
Cal. Rptr. 77 (Cal.App. 1979); People ex
rel. Callahan v. Marshall Field & Co., 404 N.E.2d 368 (Ill.App.Ct.
1980)(“Marshall Field”).  
            In Jefferson Lake, the question was whether New Jersey’s unclaimed
property law applied to dividends issued by Jefferson Lake Sulphur Company, a
New Jersey corporation.  Jefferson Lake, 178 A.2d at 329.  New Jersey’s unclaimed property law generally
permitted New Jersey to take custody of any dividends that remained unclaimed
after five years from the date of payment. 
Id.  A few months after New Jersey enacted the
law, Jefferson Lake’s Board of Directors voted to amend the company’s
certificate of incorporation to provide that any dividends that remained
unclaimed for a period of three years would revert back to Jefferson Lake.  Id.
 The Board of Directors mailed a notice
to each of the stockholders of the company (and its predecessor) to explain the
change. Id.  In the notice, the Board acknowledged that
the change was being made to circumvent the New Jersey unclaimed property
statute.  Id.  The Supreme Court of New
Jersey held that “[e]scheat of unclaimed dividends serves the important public
need of providing revenue to be utilized for the common good.”  Id.
at 336.  The court also concluded that a
company that incorporates in New Jersey becomes subject to this public policy,
and thus the “[a]lteration of a charter for the avowed purpose of defeating a
relevant aspect of the sovereign’s declared public policy cannot achieve
judicial approval.”  Id.  Because Jefferson Lake’s
charter was amended for the express purpose of avoiding the escheat laws, the
court held that the amendment was invalid.  Id.
at 339.
            Screen
Actors Guild involved a situation where SAG received residuals on behalf of
its members (actors, stuntmen, and other performers) and then forwarded those
residuals to the member entitled to them. 
Screen Actors Guild, 154 Cal.
Rptr. at 77.  Under SAG’s bylaws, if a residual
was unclaimed for at least six years, then it reverted to SAG for the benefit
of all of its members.  Id. at 78-79.  The court noted that in practice SAG did not
enforce its policy and held that the bylaw was contrary to public policy
because it “would deny to the state the benefit of the use of most of the
unclaimed residuals.”  Id. at 80.  The court also found that the bylaw provision
was “obviously designed to frustrate operation of the [unclaimed property
laws],” and held that the bylaws, as a mere private agreement, could not be
used to circumvent a public law.  Id. at 80.
            And in Marshall Field, the Illinois Appellate Court was faced with the
issue of whether Illinois had the right under its unclaimed property laws to
take custody of unredeemed, expired gift certificates issued by Marshall Field
& Co. Until 1975, Illinois’ period of presumed abandonment was fifteen
years, but the gift certificates issued by Marshall Field expired after ten
years.  In 1975, Illinois changed its
abandonment period to seven years; a year later, Marshall Field modified its
gift certificates to expire after only five years.  The court, relying on Jefferson Lake and Screen
Actors Guild, held that “where a private agreement between the parties is
in fundamental conflict with public policy as established by the legislature,
the private agreement must fall.”  Id. at 373.  The court also noted that, were it to reach a
different result, then Marshall Field and the State might enter into an “unseemly”
race as to which could come up with the shortest period.  Id. at 374. 
            In addition to the anti-limitations
provision, Texas law also prohibits private escheat agreements.  
§ 74.309.  Private Escheat Agreements Prohibited.
 
An individual,
corporation, business association, or other organization may not act through
amendment of articles of incorporation, amendment of bylaws, private agreement,
or any other means to take or divert funds or personal property into income,
divide funds or personal property among locatable patrons or stockholders, or
divert funds or personal property by any other method for the purpose of
circumventing the unclaimed property process.
 
Tex.Prop.Code Ann. §§ 74.308; 74.309.  In State
v. Snell, 950 S.W.2d 108 (Tex.App.--El Paso 1987, no writ), this court
examined the scope of Section 74.309.  Snell, 950 S.W.2d at 112.  The trial court approved a class action
settlement plan that specified “settlement distribution checks or amount[s]
which might be unclaimed by Appellees/plaintiff class members and which would ‘otherwise
escheat to the State of Texas’ would instead be paid to the charity designated
by the trial judge.”  In applying Section
74.309, we held that that the court order violated the Act based on the
provision that unclaimed class action settlement distributions would be paid to
a charity designated by the trial judge rather than be escheated to the State.[2]
 Id.
at 112.  As part of the opinion, we
stated:
The disposition
of unclaimed property in the State of Texas is not left to the whim of the
private citizens or the courts, and rightfully so. The Texas Legislature has
imposed a specific and detailed procedure for identifying, reporting, and
tendering, and has further provided for governmental custody and distribution
of unclaimed property.
 
Id. at 112.  
            It is true that this type of public
policy exception should apply only where it is clearly established that the
motive of the holder was avoidance of unclaimed property laws and in most class
action settlements, this would not be the case. 
But here the class members were identified by name, special software was
used in an attempt to locate current addresses, an address was identified for
each class member, and a check was actually issued to each class member.  Some of the checks were undelivered or
uncashed.  Here, in addition to violating
the anti-limitation provision in the Act, the purpose of the challenged
provisions, while possibly not the only purpose, is to avoid application of
Texas unclaimed property law to the unclaimed settlement funds.  As such, these provisions violate the Act.  Tex.Prop.Code
Ann. § 74.309.  We sustain Issue
One.
The Cy
Pres Provision 
            In its second point of error, the
State argues that the unclaimed property provisions contained in the settlement
agreement cannot be justified as a cy pres provision.  
            The cy pres, or next best use,
doctrine is an equitable doctrine adopted from the context of charitable trusts
and allows the court to distribute funds which cannot be economically
distributed to individual class members, or when a balance remains after
individual distribution, for the next best use which is for indirect class
benefit.  4 A. Conte & H. Newberg, Newberg on Class Actions § 11:20
at 28, (4th ed. 2002)(hereinafter “Newberg”),
citing Six (6) Mexican Workers v. Arizona
Citrus Growers, 904 F.2d 1301, 107 A.L.R. Fed. 779 (9th Cir. 1990)(“In a
settlement context, when an aggregate class recovery cannot economically be
distributed to individual class members, or when a balance of the recovery fund
remains after individual distribution, the parties, subject to court approval,
may agree that the undistributed funds will be distributed or disposed of for
the indirect benefit of the class.”).  Cy
pres distributions are common in the federal context where the proof of
individual claims would be burdensome or the distribution of damages would be
too costly.  Newberg § 11:20 n.1.  “Experience
to date indicates that fluid class and cy pres settlement distributions are
important tools that should not be overlooked by the plaintiff or defense
counsel in considering settlement possibilities for a large class with small individual claims.”  [Emphasis added].  Newberg
§ 11:20 at 31.  
            In a recent decision, the Fifth Circuit
held that a trial court’s discretion to distribute unclaimed funds through the
application of cy pres does not authorize the court to disregard State property
laws.  All Plaintiffs v. All Defendants, 645 F.3d 329, 269 Ed. Law Rep.
455, 79 Fed. R. Serv. 3d 1149 (5th Cir. 2011). 
We agree.  Thus, to the extent
that the distribution violates the Act, the trial court abused its discretion
and the settlement agreement provisions are void.  We sustain Issue Two.
What
is the Remedy?
            Finally, the State argues that the
proper remedy is for us to reform the settlement agreement by striking the
unclaimed property provisions.  The
general rule is that reviewing courts cannot delete or modify select provisions
of a class-action settlement, because allowing piecemeal appellate review could
disturb the equilibrium struck by the parties in their settlement.  Here, at the request of the parties, the
trial court approved the bulk of the settlement but deferred ruling on the
unclaimed-property provisions until after the Attorney General was notified of
the settlement, at which point the Attorney General intervened to challenge
those provisions.  Id. Accordingly, the State argues that because settlement checks
were mailed and the unclaimed checks are identified by the payee’s name and
last-known address, we should strike the challenged provisions and order them remitted
to the custody of the Comptroller.
            While the State’s argument is persuasive,
as a practical matter, the unclaimed funds technically haven’t been abandoned
under the Property Code because they were issued less than three years ago.  We thus reverse and remand with instructions
that the trial court strike Section 28(g) and Section 32 of the settlement
agreement and order the claims administrator to hold the unclaimed checks for
the benefit of the Comptroller until such funds are presumed abandoned.  Thereafter, in compliance with Chapter 74 of
the Texas Property Code, the funds shall be remitted to the custody of the
Comptroller.
 
June 13, 2012                                      ________________________________________________
ANN CRAWFORD
McCLURE, Chief Justice
 
Before McClure, C.J., Rivera, and Antcliff, JJ.
 

[1]  Benny & Benny argue that the State failed
to show “holder” status as to the residue of the settlement case.  We agree with the following analysis in All Plaintiffs v. All Defendants, 645
F.3d 329, 269 Ed.LawRep. 455, 79 Fed. R. Serv. 3d 1149 (5th Cir. 2011):
 
The Appellees
seemingly concede that the settlement administrator fits the statutory
definition provided for the holder of unclaimed funds, but argue that, because
the settlement administrator is merely carrying out the orders of the district
court, we should proceed as if the district court is the holder. The Appellees
then argue that a federal district court cannot be a holder under the Act, and
therefore the Act does not apply.
 
The Appellees’
argument is without merit.  The
settlement administrator is plainly a holder, as that term is defined under the
Act, because the settlement administrator is ‘in possession of property that
belongs to another.’  Id. 
The Appellees have, moreover, identified no exception on the face of the
Act that is applicable to the settlement administrator.  We will not engage in far-ranging discussion
regarding the applicability of the Act to funds held directly by a district
court, based merely on the speculation that the district court could, in the
words of the Appellees, ‘order[ ] the funds to be deposited into the registry
of the court tomorrow.’  Appellees’ Br.
at 41.  The funds are in the possession
of the settlement administrator, and the settlement administrator fits the
Act’s definition of ‘holder.’  The Act
applies.
 
All Plaintiffs, 645 F.3d at 331-32. 
Similarly, we conclude that the claims administrator here is clearly the
holder of the  funds.  

[2]  This court also noted that, although Section
74.309 does not specifically proscribe a court from circumventing the unclaimed
property process, an “individual” is specifically prevented from circumventing
such process.  Id. at 112.  Thus, the court
order violated Section 74.309 “by ordering an individual, the escrow agent, to
transfer the funds upon the decision of the trial court of his or her
appropriate charity.”  Id.