Reed Smith Client Alert

Authors: Sara A. Lima

The Texas Supreme Court heard oral argument November 7 in a case that raises far-reaching questions about the rights of private parties to contract, particularly in class action settlements. In State v. Highland Homes, Ltd., 2012 Tex. App. LEXIS 4673 (Tex. App.—El Paso 2012), the appellate court invalidated a court-approved settlement agreement providing that uncashed checks would revert to a charitable organization under the state’s cy-pres doctrine.

Texas Attorney General Greg Abbott challenged the agreement as invalid because it diverted funds "for the purpose of circumventing the unclaimed property process." Tex. Prop. Code Ann. § 74.309 ("Section 309"). The state argued that any uncashed checks should be remitted to the state as unclaimed property, and private parties may not agree that the unclaimed funds can go to a third party.

Under Texas law, unclaimed property includes any check not cashed after three years of issuance. Anyone holding unclaimed property is required to pay it over to the state. Pursuant to Section 309, entities are prohibited from privately contracting to "divert funds or personal property…for the purpose of circumventing the unclaimed property process."

In Highland Homes, the appeals court applied Section 309 and held that the award of uncashed class checks to the Nature Conservancy was motivated, at least in part, by an intent to avoid the state’s unclaimed property laws. Thus, the cy-pres provision was illegal. The decision became one in a line of cases limiting the ability of private parties to contract with respect to unclaimed amounts.1

The Texas Supreme Court heard oral argument in the case November 7, and an active bench appeared to recognize the impact that the attorney general’s position could have on private agreements. In particular, the justices inquired about when property rights attach to checks with agreed-upon expiration periods, and whether private parties may limit a payee’s property rights in a check by agreement. Chief Justice Nathan Hecht questioned under what circumstances, given the state’s interpretation of the Section 309, the state’s recognized cy-pres doctrine can be valid at all.

These questions remain unanswered until the court issues its decision in Highland Homes, of course, and the rights of private parties to contract therefore remain vague. One thing we do know for certain, however, is that the outcome of this case will greatly impact how we draft such agreements in the future.

  1. See, e.g., Connecticut Mut. Life Ins. Co. v. Moore, 333 U.S. 541 (1948); Screen Actors Guild, Inc. v. Cory, 91 Cal.App.3d 111 (App. 2nd, Div. 3 1979); Blue Cross of Northern California v. Cory, 120 Cal.App.3d 723 (App. 1st Dist. Div. 4 1981).



Client Alert 2013-292