On Aug. 27, 2007, the Illinois legislature passed Public Act No. 95-0479, which amends the Illinois class action statute effective July 1, 2008. The Act adds an entirely new Section 2-807 to the Illinois Code of Civil Procedure entitled, “Residual funds in a common fund created in a class action,” which restricts the types of charitable organizations that can receive “residual funds” from a class action judgment or settlement.

The new Section 2-807 of the Illinois class action statute provides that all “residual funds” from a class action judgment for the plaintiff, and at least 50 percent of “residual funds” from a class action settlement, must be distributed to “one or more eligible organizations” that meet the four following requirements:

  • Has been in existence for no less than three years
  • Has been tax exempt for no less than three years from the payment of federal taxes under Section 501(c)(3) of the Internal Revenue Code
  • Is in compliance with registration and filing requirements under Illinois’ Charitable Trust Act and Solicitation for Charity Act
  • Has a principal purpose of promoting or providing services that would be eligible for funding under the Illinois Equal Justice Act

Such “eligible organizations” generally will be those that provide legal services to low-income residents. In the class settlement context, the statute allows the remaining 50 percent (or some lesser percentage) of “residual funds” to be distributed to “one or more other nonprofit charitable organizations or other organizations that serve the public good” upon a finding of “good cause” by the court.

Perhaps the most significant aspect of this new statute for corporate defendants, however, is that the definition of “residual funds” recognizes the appropriateness of an agreement to allow unclaimed class funds to revert to the defendant:

“Residual funds” means all unclaimed funds, including uncashed checks or other unclaimed payments, that remain in a common fund created in a class action after court-approved payments are made for the following:

Class member claims

Attorney’s fees and costs

Any reversions to a defendant agreed upon by the parties

735 ILCS 5/2-807 (emphasis added).

The Illinois legislature thus appears to have expressly acknowledged the practice by which a named class representative and defendant can agree in the class settlement context that all or a portion of the unclaimed settlement funds will revert to the defendant before distributing such funds to charitable organizations as a cy pres award. This reversion to the defendant can be an extremely important element of a class settlement where the proof-of-claim rate is not expected to be high, and substantial funds may remain unclaimed by class members. While some federal courts and trial courts in Illinois had approved of this agreed reversion practice, no Illinois appellate court precedent exists on this point. Thus, the new Section 2-807 confirms the availability of the reversion concept in Illinois, allowing corporate defendants a potentially attractive option when settling class action cases in this forum.

The Act formally takes effect July 1, 2008, and will apply to all Illinois actions pending on that date “for which no court order has been entered preliminarily approving a proposed settlement for a class of plaintiffs.”