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Creating a Consumer Trust Fund

Consumer trust funds are created in a number of different ways and from a variety of situations. However, one the most common sources of consumer trust funds are lawsuits and regulatory proceedings.

The legal theory which allows settlement funds to be used for purposes other than direct compensation to injured consumers is called fluid recovery, derived from the charitable trust doctrine of cy pres come possible ("as near as possible"). In trust law, cy pres is used to prevent the failure of a trust when fulfillment of the original purpose is impossible, impracticable or illegal.

According to the California Supreme Court, in State of California v. Levi Strauss & Co., both the settlement fund and any remainder may be subject to fluid recovery, commonly called a cy pres action. In addition, Section 384 of the California Civil Code of Procedure permits the court to distribute consumer class action cy pres funds to benefit the class or similarly situated consumers or to promote the law consistent with the underlying case.

Because cy pres actions in a lawsuit rarely involve voluntary or charitable contributions, there are fewer legal restrictions on the use of consumer trust funds, such as limits on lobbying. On the other hand, there is a higher public trust obligation since the lawsuit and settlement funds were intended to benefit an entire class of consumers, most who are not present to protect their own interests or to advocate for how the settlement funds should be spent.

While some attorneys seek to direct cy pres funds to organizations themselves when they file a cy pres petition to the court, it can be a time-consuming and occasionally controversial exercise, which other attorneys or the court may wish to avoid. Moreover, in 2000, the State legislature amended C.C.P. Section 384 to make it more difficult for the courts to approve general charitable contributions with cy pres funds. This will require the courts to not only identify qualified recipients, but to also scrutinize what they will do with the money. Thus, it is often more efficient and effective for courts or regulatory agencies to utilize the resources of an established foundation, rather than engaging in their own search for grantees (often without professional expertise, selection criteria, application procedures, or administrative infrastructure).

Creating a trust with the Foundation is perhaps the simplest and most cost-effective way to distribute consumer trust funds while insuring that the selection process is open to all qualified applicants, managed by competent professionals, and accountable to both the court and the larger public. The Foundation also publicizes the availability of funds, hence awareness of the underlying case and legal issues, statewide. As a 501(c)(4), we also have more expertise and discretion in funding advocacy projects than traditional 501(c)(3) foundations.

In legal or regulatory actions, the parties only need to secure an order or decision which stipulates:

  1. the Foundation as the recipient,
  2. a purpose or funding priorities consistent with the underlying case and/or benefiting the class,
  3. the duration of trust,
  4. Foundation administrative fees, and
  5. any reporting requirements to the court or the parties. As trustee, the Foundation is bound by the terms of the trust.

Foundation staff are always available to help develop or review the terms and conditions of trust prior to court submission, to insure that they are not only agreeable, but capable of fulfillment. When necessary, we are also able to refer cases to other appropriate foundations. For more information or assistance, please call the FoundationExecutive Director at (323) 857-0526.