WHY HAVE TWO ATTORNEY GENERALS NEGLECTED TO INTERVENE IN THE FEN PHEN SUIT RE: HANDLING OF $20,000,000 IN CHARITABLE TRUST FUNDS?
Article by LawReader Senior Editor Stan Billingsley - May 26, 2009
We are puzzled as to the inaction of two Kentucky Attorney General’s in failing to protect the public interest in asserting a claim for the $20 million dollars being held in a Charitable Trust in the Fen Phen case. Our reading of Kentucky Law indicates to us that the Attorney General is supposed to be involved in behalf of the public when Charitable Trusts are dissolved. On behalf of the public, the Attorney General should seek to enforce state law regarding the procedure for distribution of the assets of a charitable corporation when it is dissolved.
The Attorney General has a role in the dissolution of corporations such as the Healthy Living Trust created by William Gallion and Shirley Cunningham in the Fen Phen case.
See: KRS 273.323:
KRS 273.323 Notification to Attorney General.
The Secretary of State, on or before the last day of December of each year, may certify to the Attorney General the names of all corporations which have given cause for dissolution as provided in KRS 273.161 to 273.390, together with the facts pertinent
thereto. Whenever the Secretary of State shall certify the name of a corporation to the Attorney General as having given any cause for dissolution, the Secretary of State shall concurrently mail to the corporation at its registered office a notice that such certification
has been made. Upon the receipt of such certification, the Attorney General may file an action in the name of the state against such corporation for its dissolution. Every such certificate from the Secretary of State to the Attorney General pertaining to the failure of a corporation to file an annual report shall be taken and received in all courts as prima facie evidence of the facts therein stated. If, before action is filed, the corporation shall file its annual report, or shall appoint or maintain a registered agent as provided in KRS 273.161 to 273.390, or shall file with the Secretary of State the required statement of change of registered agent, such fact shall be forthwith certified by the Secretary of State to the Attorney General and he shall not file an action against such corporation for such cause. If, after action is filed, the corporation shall file its annual report, or shall appoint or maintain a registered agent as provided in KRS 273.161 to 273.390, or shall file with the Secretary of State the required statement of change of registered agent, and shall pay the costs of such action, the action for such cause shall abate.
Effective: January 1, 1989
History: Amended 1988 Ky. Acts ch. 23, sec. 208, effective January 1, 1989.
The action of the Boone Circuit Court to seize the assets of the Trust, must be read as a step to dissolve the charitable trust. The jurisdiction for a Circuit Court to order the dissolution of a corporation who is otherwise in good standing is stated in KRS 273.330:
KRS 273.330 Jurisdiction of court to liquidate assets and affairs of corporation.
(1) Courts of equity shall have full power to liquidate the assets and affairs of a corporation:
(d) When an action has been filed by the Attorney General to dissolve a corporation and it is established that liquidation of its affairs should precede the entry of a decree of dissolution.
(2) Proceedings under this section shall be brought in the Circuit Court in which the registered office or the principal office of the corporation is situated.
KRS 273.303 sets out a statutory requirement regarding the distribution of assets of a charitable corporation such as the Healthy Living Fund.
KRS 273.303 Distribution of assets.
The assets of a corporation in the process of dissolution shall be applied and distributed as follows:;
(3) Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, eleemosynary, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more domestic or foreign nonprofit corporations, societies, or organizations engaged in activities substantially similar to those of the dissolving corporation, pursuant to a plan of distribution adopted as provided in KRS 273.161 to 273.390;
Further Kentucky law (KRS 273.333) mandates that a court must distribute the assets of a dissolved charitable corporation as follows:
“(c) Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, eleemosynary, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution or liquidation, shall be transferred or conveyed to one (1) or more domestic or foreign corporations, societies or organizations engaged in activities substantially similar to those of the dissolving or liquidating corporation as the court may direct;”
The Healthy Living Fund trust set up by the Fen Phen lawyers, and approved by the original judge in the Boone Circuit Court, was given $20 million dollars to benefit health related issues in the Commonwealth of Kentucky. The Trustees awarded close to $2 million to various health related organizations before the funds were frozen by the Special Judge of the Boone Circuit Court that was assigned the case after the original Judges retirement.
The Fen Phen claimants are saying that they should get the $20 million from the Charitable Trust. Neither the Federal Court or the Boone Circuit Court have issued any order specifically saying who gets this $20 million.
We would suggest that the Attorney General should make an appearance in this debate and represent the interests of the public in seeking distribution of the assets of the trust to the public pursuant to KRS 273.303 and KRS 273.333.
We point out that the argument over the money in the charitable trust is different from the claim that the attorneys overpaid themselves. While the Federal criminal jury and the Boone Circuit Court in the civil action have both ordered restitution of improperly obtained legal fees the attorneys paid themselves, this does not mean that the funds in the charitable should likewise be paid over to the Fen Phen claimants.
The overall settlement of the Fen Phen class action claim was $200 million, and the charitable trust funds represent only 10% of the total settlement. When you deduct the charitable trust fund, and the $70 million already paid to the Fen Phen claimants, there was still $110 million left in disputed funds.
The jury in the Federal Criminal case awarded only $30 million to the Fen Phen claimants. Under rules governing disgorgement of legal fee claims, the offending attorney is entitled to keep all fees they legally earned, and are only required to disgorge the amount that exceeded their lawful attorney’s fee. The instructions in the Federal Criminal Action appear to have recognized this theory, and the jury only awarded $30 million out of a possible $130 million not previously paid to the Fen Phen claimants.
A dispute has been raised in Federal Court as to whether or not the $30 million dollar restitution award includes the $20 million being held by the Charitable Trust. Further it is not clear how the Federal Court order and the Boone Circuit Court orders affect each other.
The defendants argue that they should be able to apply the $20 million held in the charitable trust against the Federal Jury award of $30 million. The government argues that the $20 million held by the charitable trust is a different matter and should not be included in the jury verdict award. Motions are pending before the Federal Court to settle those issues. The defendants have stated that they intend to file an appeal of the criminal verdict.
Court records indicate that all 400 of the current Fen Phen litigants have had their individual claims evaluated by an arbitrator, and each has signed not one but two settlement agreements agreeing to accept what they have already received. Court records indicate that each of the current claimants further knew that some of the funds obtained in the Class Action settlement would be paid over to a charitable corporation, and no one objected to this until after the settlement was approved by the Class Action court. The $20,000,000 was paid over to the legally formed charitable corporation. The appeal time for any objections tolled before they asserted any clams to these funds. Therefore, the current litigants are seeking through a collateral attack on the original judgment, to retrieve these funds for their own benefit. An award of these funds to the Fen Phen claimants is questionable considering they were each evaluated, and everyone signed an agreement with the settlement. That would clearly appear to justify a Cy Pres distribution to the public of the left over funds.
Other courts who have been confronted by class action claimants seeking left over funds, have rejected similar petitions by the class action claimants and instead ordered a Cy Pres distribution.
“One possibility is to order the payment of undistributed funds to the already paid class members, as a supplemental payment. This approach has some obvious inequities and has been rejected by courts where it has been directly challenged. . See, e.g., In re Folding Carton Antitrust Litigation, 881 F.2d 494, 503 (7th Cir. 1989) (affirming the district court’s holding that the already compensated plaintiff class had no further claim to a $6 million reserve fund created to pay late claimants and administrative costs); Van Gemert v. Boeing Co., 739 F.2d 730, 736 (2d Cir. 1984) (rejecting class members’ argument that the unclaimed funds should be used to offset their costs of litigation); Wilson v. Southwest Airlines. Inc., 880 F.2d 807, 811-12 (5th Cir. 1989) (“[A]ll class members who presented their claims received the full payment due them, and those who did not present claims waived their legal right to do so.)”
The theory for placing these left over funds in the charitable trust, was that the claimants had already been compensated for their claimed injuries (many had no objective symptoms), and it was desirable to do something for the 49,600 Kentuckians who had used the Fen Phen prescription for weight loss purposes, but who had not joined in the class action, and had not been paid out of the $70,000,000 distributed to the current claimants.
The argument raised by the Fen Phen claimants to seek these charitable trust funds comes after they reportedly signed two settlement agreements. Testimony at the civil trial claimed that all Fen Phen claimants were aware of the creation of the charitable trust and the payment of funds from the settlement into that trust. The claimants now claim that they weren’t told of how much was actually going into the trust fund.
A very troubling aspect of the Fen Phen case is that the Fen Phen claimants never raised any objection to the fact they were not told of how much went into the charitable trust, but still accepted the settlement, took their $70 million, and then allowed their appeal time to run. No appeal could thereafter have been asserted, so the claimants filed a collateral action.
This collateral attack meant that their only avenue for relief came through the assertion that the original trial judge and the lawyers had somehow colluded to reduce their awards. Testimony at both trials indicated that the two attorneys had mislead the original trial judge. There is no testimony we are aware of that the Judge colluded in this matter. The facts show that he was lied to by the attorneys. That fact alone may be a real problem for the appellate courts in finding the grounds for upholding the collateral attack.
This collateral attack strategy was accompanied by a vigorous public relations campaign by the Fen Phen claimants which placed great pressure on the civil case. A gag order issued by the second judge in the civil case, was apparently ignored, and no sanction were ever imposed for its violation.
The judge was faced with a settlement agreement where 400 people had all presented signed settlement agreements stating they approved of their award. There is no Kentucky rule of procedure regarding class action proceedings which requires more of the judge. But smearing the trial judge was essential to their claim, and they did a good job of that. Little slack has been given to Judge Bamberger for having relied on the signed statements of the Fen Phen claimants.
The procedures followed so far in the civil action creates a precedent that may be cited in the future to ensnare other trial judges who approve settlements. The collateral attack procedure as interpreted in the civil case, places a target on the back of other judges.
If the plaintiffs are happy with a settlement, if the defendant is happy with the settlement, what is a judge supposed to do to protect himself when they later change their minds?
These issues are likely to be appealed in both state and federal courts.
The Federal Courts (and even the Kentucky court) have previously recognized that excess funds left over in Class Action settlements may be distributed for a charitable purpose under the Cy Pres doctrine.
The words “cy pres” are of French origin meaning, “as near,” or “as near as possible.” Roughly speaking the doctrine of cy pres is that equity will, when a charitable use becomes impossible or impracticable of fulfillment, substitute another charitable object which is believed to approach the original purpose as closely as possible. Bogert, Trusts and Trustees, Second Edition, Section 431. See: Bank of Maysville v. Calvert, 481 S.W.2d 24 (Ky.App. 05/12/1972)
The following American Bar Association article details the practice of excess Class Action funds being used for a charitable purpose. See: What Can a Court Do with Leftover Class Action Funds? By Kevin M. Forde The Judges’ Journal, vol. 35, no. 3 (Summer 1996) (Live link)
“In some cases, the undistributed funds may be substantial. For example, in West Virginia v. Chas. Pfizer & Co., 314 F. Supp. 710 (S.D.N.Y. 1970), aff’d, 440 F.2d 1079 (2d Cir.), cert. denied, 404 U.S. 871 (1971), $32 million remained undistributed (“unclaimed”) from a $100 million settlement.
And, in Van Gemert v. Boeing, 739 F.2d 730 (2d Cir. 1984), more than $2.5 million remained in the fund after all claims were satisfied.
If, in fashioning a decree or negotiating a settlement, the parties do not consider and anticipate this predicament, the responsibility falls on the court to resolve any ensuing dispute or to otherwise direct the distribution of these funds. The scope of a court’s discretion in disposing of nondistributable funds has been tested in recent cases. In ordering distribution, courts rely on their general equity power or on the cy pres doctrine.
The cy pres doctrine originated in the common law as a method of fairly distributing a trust fund, the original purpose of which failed in some respect. The term cy pres derived from the Norman French term “cy pres comme possible,” which means “as near as possible.”1 Under the cy pres doctrine, once a trust fund’s original purpose fails, the fund is to be distributed to the “next best” use. This remedy now extends to other areas, including the situation where funds remain after distribution in a class action.2 The cy pres approach in the class action situation puts the unclaimed portion of the fund to its “next best” compensation use, usually by giving it to a third party or agency to use for court-designated purposes.3 It should be emphasized that courts have claimed broad discretion in determining how to satisfy the “next best” use criteria. “
“The prospect of excess or undistributed funds raises the possibility that these funds should “escheat” to the state or federal government as unclaimed property. Even if not required, escheat to the state is a method of disposition within the discretion of the court. For example, a California state escheat statute allows a court to escheat unclaimed funds to the government, yet specifically provides that, “nothing in this section shall be construed to change the authority of a court or administrative agency to order equitable remedies.”6 Similarly, a New York court opined the class action concept has its origin in equity . . . and the courts still retain traditional equity power over the fund which is created until it is disbursed. . . . Although the application of abandoned property statutes to unclaimed class action funds is not required, we cannot say it was an abuse of discretion to dispose of the unclaimed funds in accordance with the scheme created by the Abandoned Property Law.7
On the other hand, numerous federal and state courts have distributed such funds to educational institutions or charities, apparently without regard to state or federal escheat statutes. In addition, some courts and commentators have concluded that escheat laws are inapplicable in analogous situations. For example, in Van Gemert v. Boeing Co.,8 the Second Circuit found that “a court of equity may dispose of funds fairly—without being compelled to utilize [the federal statutes].”
We also are anticipating the difficult ruling (of Boone Circuit Court by Judge #3,) facing Judge Roger Crittenden in ordering the distribution of any of the recovered funds to the Fen Phen claimants. Will they all get an equal amount? Some had no symptoms and apparently no injuries, while others had serious injuries from taking the diet drug.
The original and supplementary awards were supposedly based on the degree of injury of the individual claimant. Will Judge Crittenden rely on the previous evaluations of each claimant, or will he order new evaluations. And if he doesn’t come up with an award for each claimant that exactly matches the money available, what will he do with any excess funds left over? I see a serious case of Yogi Berra “Déjà vu – all over again”.
The bottom line of this article, is that the Federal jury has awarded $30 million in restitution to the Fen Phen claimants. That is their verdict and we have no argument with that award. But this doesn’t resolve the issue of what happens to the $20 million being held by the Boone Circuit Court in assets of the Healthy Living Fund Trust.
Those trust funds should be distributed to the state treasury under an escheat theory, or under KRS Chapter 273 should be awarded to some other charitable or public purpose to help fund relief in a medical or health issue. We note that our Medicaid program is deeply in the red this year, and the public would certainly benefit from these funds being applied to this state obligation.
The Attorney General has an opportunity to intervene in this issue. Former Attorney Greg Stumbo ignored the issue, and so far Attorney General Jack Conway has not shown up. Perhaps they plan to do so in the future. The clock is ticking.