Introduction

In O'Brien v. Sagbolt LLC, 2025 NY Slip Op 05280 (App Div, 3d Dept, Oct. 2, 2025), the Appellate Division (Third Department) addressed two recurring friction points in New York class action settlements: (1) whether a settlement silent on unclaimed funds permits a court-ordered pro rata redistribution to class members rather than a reversion to the defendant, and (2) how to construe a settlement’s “Qualified Settlement Fund” (QSF) and related obligations when key terms are less than perfectly drafted.

Plaintiffs, hourly waitstaff at The Sagamore resort, brought a class action alleging Labor Law violations regarding unpaid tips dating back to 2012. After certification and four years of discovery, the parties settled for a “Gross Settlement Sum” (GSS) of $1.2 million, to cover attorney’s fees and costs, service awards, claims administration, and distributions to authorized class members. The trial court (Supreme Court, Warren County) preliminarily and finally approved the settlement under CPLR 908.

Post-approval, the parties clashed over two practical issues: (i) who was obligated to prepare and issue the checks; and (ii) what to do with unclaimed funds from uncashed class member checks. Plaintiffs moved to enforce the settlement, seeking to require defendants to fund a settlement account for the claims administrator and to redistribute residual funds to authorized class members. Defendants argued the agreement did not require creating a settlement fund, that their method of paying some distributions into an account and issuing class-member checks directly complied with the contract, and that unclaimed funds should revert to them because the agreement did not authorize redistribution.

The Supreme Court held that the agreement required a settlement fund, authorized redistribution of unclaimed funds to class members, and found defendants breached the agreement and the implied covenant of good faith and fair dealing. Defendants appealed.

Summary of the Opinion

The Third Department modified and largely affirmed. Its key rulings are:

• Contract Construction: Read as a whole, the settlement reflected the parties’ intent to create and use a claims administrator-controlled “Qualified Settlement Fund” (QSF) for distributions, even though the agreement contained undefined terms and drafting inconsistencies.
• Method of Disbursement: Defendants did not breach the settlement by providing pre-written settlement checks for class members while funding the claims administrator for other payments. The agreement permitted defendants the option to distribute funds to class members.
• Unclaimed Funds: Despite contractual silence on residuals, the court, exercising its supervisory and equitable powers under CPLR article 9, affirmed the trial court’s order directing pro rata redistribution of unclaimed funds to authorized class members rather than reversion to defendants. There was no reversion clause and redistribution aligned with the agreement’s pro rata design and the purposes of class litigation.
• Tax Arguments Rejected: The court rejected defendants’ claims that a QSF administered by a third party would impede W-2 issuance or require exceeding the $1.2 million GSS, noting federal authority allowing third-party agents to issue W-2s and that employer payroll taxes were expressly in addition to the GSS.
• Covenant of Good Faith: The court declined to find defendants acted in bad faith and reversed the trial court’s findings of breach of contract and breach of the implied covenant.

Disposition: The order was modified to remove the findings of breach; as modified, it was affirmed—leaving intact the recognition of a QSF and the redistribution of unclaimed funds to class members.

Analysis

Precedents Cited and Their Influence

The court framed the settlement as a contract and applied familiar New York contract principles:

• Marcella v Glowacki, 233 AD3d 1137 (3d Dept 2024); Ampower-US, LLC v WEG Transformers USA, LLC, 214 AD3d 1129 (3d Dept 2023): Class settlements and releases are contracts entitled to enforcement according to their plain terms, carrying a presumption that the written instrument reflects the parties’ intent.
• Kolbe v Tibbetts, 22 NY3d 344 (2013); Hogan v Bullock, 233 AD3d 1321 (3d Dept 2024); Ali-Hasan v St. Peter’s, 226 AD3d 1199 (3d Dept 2024): Read the document as a whole and give effect to all provisions; avoid interpretations that render terms superfluous.
• W.W.W. Assoc. v Giancontieri, 77 NY2d 157 (1990); Donohue v Cuomo, 38 NY3d 1 (2022): Absent ambiguity, extrinsic evidence is inadmissible; silence alone does not create ambiguity.

On the class action side, the court relied on New York’s adoption of Federal Rule 23 principles and its own equitable supervisory authority:

• Friar v Vanguard Holding Corp., 125 AD2d 444 (2d Dept 1986); Klein v Robert’s Am. Gourmet Food, Inc., 28 AD3d 63 (2d Dept 2006); Desrosiers v Perry Ellis Menswear, LLC, 30 NY3d 488 (2017); Matter of Colt Indus. Shareholder Litig., 155 AD2d 154 (1st Dept 1990), mod 77 NY2d 185 (1991); Avena v Ford Motor Co., 85 AD2d 149 (1st Dept 1982): New York courts act as fiduciaries for absent class members and possess broad authority (CPLR 907, 908–909) to supervise class settlements.
• Beecher v Able, 575 F2d 1010 (2d Cir 1978); Van Gemert v Boeing Co., 739 F2d 730 (2d Cir 1984); Six Mexican Workers v Arizona Citrus Growers, 904 F2d 1301 (9th Cir 1990); Klier v Elf Atochem N. Am., Inc., 658 F3d 468 (5th Cir 2011): Federal courts guide the administration of unclaimed funds, endorsing options like redistribution, cy pres, escheat, or reversion, with redistribution often favored where consistent with the settlement’s design.
• Masters v Wilhelmina Model Agency, Inc., 473 F3d 423 (2d Cir 2007); Gascho v Global Fitness Holdings, LLC, 822 F3d 269 (6th Cir 2016): Fee structures and common fund dynamics inform whether defendants should be disgorged of the agreed amount irrespective of claims uptake.
• Matter of TCR Sports Broadcasting Holding, LLP v WN Partner, LLC, 40 NY3d 71 (2023): Courts cannot rewrite contracts but may construe them in light of parties’ intent and equitable considerations inherent in the procedural context.

Legal Reasoning

1) The Settlement Required a Claims Administrator-Controlled Fund

The agreement used several interlocking terms—GSS ($1.2 million “maximum”), a “Net Settlement Sum” (NSS) for pro rata class distributions, and a “Qualified Settlement Fund” (QSF) to be controlled by the claims administrator to “retain and distribute the Final Settlement Amount.” Although “Final Settlement Amount” was undefined and the drafting inconsistent (different subsections alternately used “Settlement Fund” and “Qualified Settlement Fund”), the court concluded that:

• Because fee and service award reductions would “reduce the [QSF]” rather than the GSS, the parties contemplated a central fund distinct from the headline GSS—a place where judicially approved payments would be staged and distributed.
• Treating the QSF and GSS as identical would render provisions meaningless, violating basic contract principles requiring effect to be given to all terms.
• In a court-approved class settlement regime (CPLR 908, 904, 909), the amount ultimately payable is subject to judicial approval; the “Final Settlement Amount” is best read as the total obligation as adjusted by court approval, to be handled through the QSF.

Bottom line: Despite imperfect drafting, the “four corners” supported an intent to create a claims administrator-controlled fund through which court-approved payments would flow.

2) Defendants Did Not Breach by Issuing Class-Member Checks Themselves

The agreement also provided defendants the option to “distribute funds” directly to authorized class members. Defendants partially funded the administrator (for counsel and service awards) and sent pre-written checks for class distributions. The court found no provision prohibiting this hybrid approach, and rejected plaintiffs’ narrow reading of the clause as merely a representation. Construed sensibly, the clause authorized the method defendants used. Thus, the trial court erred in finding a breach of the settlement on that basis.

3) Unclaimed Funds: Pro Rata Redistribution Is Proper Absent a Reversion Clause

The settlement was silent on what to do with unclaimed funds. Exercising its “protector” role, the court upheld the trial court’s order to redistribute residual funds to authorized class members pro rata, holding:

• The agreement designated the only payees: class counsel, named plaintiffs, the administrator, and authorized class members. There was no provision returning funds to defendants.
• The structure—pro rata distribution of the NSS based on hours worked and service charges collected—signaled a common fund design aimed at disgorging $1.2 million from defendants, subject only to reductions in court-approved fees/service awards.
• Allowing reversion would grant defendants the benefit of their alleged wrongdoing, contravening class action equity (citing Friar; Klier).

The court carefully observed the limit on judicial power: it did not “rewrite” the settlement; rather, it selected a distribution method consistent with the instrument and the equitable purposes of class actions under CPLR article 9.

4) Tax Concerns: No Barrier to Administrator Disbursements; Employer Taxes Are Extra

The court rejected defendants’ two tax arguments:

• W-2 Issuance: Federal law permits third-party agents to pay wages and issue W-2s on an employer’s behalf (26 USC § 3504; 26 CFR 31.3504-1[a]). Defendants offered no authority to the contrary.
• Payroll Taxes: The settlement expressly made employer payroll taxes the defendants’ responsibility “in addition to” the GSS. Defense counsel conceded roughly $87,000 in additional employment taxes.

5) No Bad Faith; But the Supervisory Role Justified Redistributing Residuals

The Appellate Division saw no need to impugn defendants’ motives. It reversed the findings of breach and breach of the implied covenant of good faith and fair dealing. But that did not undercut the court’s supervisory authority to direct a redistribution solution aligned with the settlement and class action equity.

Impact

O’Brien v. Sagbolt LLC will resonate in New York class action practice:

• Drafting Settlements: Parties should expressly address unclaimed funds. Absent a reversion clause, New York courts (relying on Friar and federal guidance) may favor pro rata redistribution consistent with the settlement’s pro rata design and goals.
• Common Fund vs. Claims-Made: The court’s analysis—especially its view that fee awards were based on a percentage of total payment, not claims uptake—reads the settlement as a common fund, a posture that typically disfavors reversion and supports redistribution.
• QSF Architecture: Even with imperfect drafting, courts will harmonize QSF and GSS concepts if the text indicates centralized administration by a claims administrator. Drafters should define “Final Settlement Amount,” align terminology (avoid inconsistent use of “Settlement Fund” versus “Qualified Settlement Fund”), and specify funding mechanics and timing.
• Distribution Mechanics: If the settlement permits, defendants can directly issue class-member checks without breaching—useful for internal payroll and withholding logistics—provided the overall structure (including the administrator’s role) remains intact.
• Tax Compliance: Third-party administrators can issue W-2s as agents. Employer payroll taxes belong on top of the gross sum unless the agreement unambiguously provides otherwise. Parties should budget and document this explicitly.
• Judicial Oversight Endures Post-Approval: Courts retain “broad and flexible” powers under CPLR 907–909 to supervise the administration of settlements, including residual distributions, consistent with the agreement and equitable purposes of class actions.

Complex Concepts Simplified

• Gross Settlement Sum (GSS): The headline dollar amount the defendant commits to pay for the entire settlement package (fees, administration, service awards, and class distributions). Here, $1.2 million.
• Net Settlement Sum (NSS): What remains of the GSS after deducting court-approved fees, service awards, and administration costs; distributed pro rata to class members.
• Qualified Settlement Fund (QSF): As used in the agreement, the administrator-controlled account that receives the “Final Settlement Amount” and disburses settlement payments. Although “QSF” also has a technical tax meaning in other contexts, the court relied on the contract’s own definition to confirm centralized administration.
• Common Fund vs. Claims-Made: In a common fund settlement, the defendant pays a fixed amount regardless of claims uptake; residuals are often redistributed or otherwise allocated to benefit the class, not returned. In a claims-made settlement, the defendant pays only validated claims, with non-claimed amounts often not paid or, if paid into a fund, sometimes reverting if agreed. The court signaled this settlement functioned as a common fund.
• Residual/Unclaimed Funds Options: Courts typically choose among (i) reversion to defendant, (ii) pro rata redistribution to claiming class members, (iii) escheat to the state, or (iv) cy pres awards to charities aligned with the lawsuit’s purposes. The choice must align with the settlement’s terms and class equity.
• Reversion Clause: A clause expressly sending unclaimed money back to the defendant. O’Brien underscores that absent such a clause—and with a pro rata design—courts may direct redistribution to class members.
• Four Corners Rule & Ambiguity: Courts enforce the written agreement’s plain meaning and avoid extrinsic evidence unless a true ambiguity exists. Silence alone does not create ambiguity.
• Implied Covenant of Good Faith and Fair Dealing: Every contract in New York carries a duty not to destroy or injure the other party’s right to receive the contract’s benefits. Here, asserting positions on redistribution did not amount to bad faith.
• Employer Payroll Taxes: The employer’s FICA and related payroll obligations for wage components of the settlement are typically borne by the employer and, as here, can be “in addition to” the settlement sum.

Conclusion

O’Brien v. Sagbolt LLC clarifies that New York courts, acting in their supervisory capacity under CPLR article 9, may direct pro rata redistribution of unclaimed class settlement funds when the agreement is silent and structured as a common fund, particularly where no reversion clause exists and the settlement’s architecture prioritizes compensating class members. At the same time, the decision underscores fidelity to contract text: the parties’ intent to use a claims administrator-controlled fund will be honored even if drafting is imperfect, and defendants may directly issue checks when the contract permits.

For practitioners, three drafting imperatives emerge: explicitly address residuals, align and define fund-related terms (GSS, NSS, QSF, “Final Settlement Amount”), and specify tax and distribution mechanics. Absent explicit reversion language, O’Brien teaches that New York courts are likely to favor redistribution to class members to avoid rewarding wrongdoing and to effectuate the settlement’s pro rata remedial design.

Key Takeaways (At a Glance)

• Silence on residuals is not ambiguity, and does not preclude court-ordered redistribution consistent with the settlement’s structure.
• No reversion clause? Expect pro rata redistribution to class members in common fund-style settlements.
• QSF intent can be inferred from the instrument as a whole; inconsistent terminology will be harmonized where possible.
• Defendants may directly distribute checks if the settlement allows it; doing so is not a breach per se.
• Employer payroll taxes are on top of the settlement sum if the agreement so states; administrators can issue W-2s as agents.
• Court retains broad supervisory power under CPLR 907–909 after approval to ensure equitable administration for absent class members.