On February 26, the Supreme Court held that the Securities Litigation Uniform Standards Act of 1998 (Securities Litigation Act) does not preclude four state-law based class actions against firms and individuals who allegedly helped Allen Stanford conceal a multi-billion dollar Ponzi scheme because Stanford’s alleged misrepresentations were not material to the plaintiffs’ decisions to buy or sell a covered security and thus were not made “in connection with” the purchase or sale of a covered security. Chadbourne & Parke LLP v. Troice, No. 12-79, 2014 WL 714697 (2014). The Court explained that the Securities Litigation Act specifically forbids plaintiffs from bringing state-law based class actions if the plaintiffs allege “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.” In this case, the plaintiffs were investors who purchased uncovered securities (certificates of deposit in Stanford International Bank) with the expectation that Stanford would use the proceeds to purchase covered securities (securities traded on a national exchange). Stanford instead used the proceeds to finance his Ponzi scheme and invest in speculative real estate ventures. The Court, by a 7-2 margin, concluded that Stanford’s misrepresentations were not made “in connection with” the purchase or sale of a covered security because the misrepresentations did not lead anyone to buy, sell, or maintain positions in covered securities. Rather, Stanford’s misrepresentations induced the plaintiffs to take positions in uncovered securities (the certificates of deposit). The court reasoned that the “in connection with” phrase suggests a connection that matters, and a connection only matters “where the misrepresentation makes a significant difference to someone’s decision to purchase or to sell a covered security, not to purchase or sell an uncovered security.” Thus, the Court determined that the Securities Litigation Act’s prohibition on state law-based class actions did not apply to the plaintiffs in this case, and affirmed the Fifth Circuit’s order reversing the district court’s dismissal of the plaintiffs’ claims.
On March 31, the U.S. Supreme Court denied a petition for a writ of certiorari in an Eleventh Circuit case that raises the issue of whether, under section 506(d) of the Bankruptcy Code, a chapter 7 debtor can “strip off” a junior-lien mortgage when the outstanding debt owed to a senior lienholder exceeds the current value of the collateral. Bank of America v. Sinkfield, 13-700, 2014 WL 1271326 (U.S. Mar. 31, 2014). Here, the debtor’s property was subject to two mortgage liens, with the outstanding amount of the first-priority mortgage exceeding the fair market value of the property. In the bankruptcy court, the debtor filed a motion to strip off the junior lien under section 506(d). Controlling Eleventh Circuit precedent allowed the junior-lien mortgage to be stripped off or voided because it was wholly unsupported by the collateral. The parties stipulated to the facts and the applicability of the precedent, but the holder of the junior lien disputed the correctness of the Eleventh Circuit precedent and reserved the right to appeal its continued viability. In its eventual petition to the Supreme Court, the holder of the junior lien argued that the Eleventh Circuit’s precedent is out of step with every other federal appeals court that has addressed the issue. The junior lien holder explained that, relying on a prior Supreme Court holding that section 506(d) does not permit a chapter 7 debtor to “strip down” a mortgage lien to the current value of the collateral, the Fourth, Sixth, and Seventh Circuits held that section 506(d) similarly does not permit a “strip off.” The Court declined to address the apparent circuit split.
On January 14, the U.S. Supreme Court unanimously held that an action filed by a state attorney general seeking restitution on behalf of hundreds of the state’s citizens who are not themselves parties to the action is not a “mass action” within the meaning of the Class Action Fairness Act (CAFA), and that such a suit cannot be removed to or filed in federal court under that Act. Mississippi ex rel. Hood v. AU Optronics Corp., No. 12-1036, 2014 WL 113485 (Jan. 14, 2013). In this case, defendants in a civil suit brought by the Mississippi Attorney General on behalf of allegedly harmed state citizens sought to invoke CAFA’s provision allowing the removal of “mass actions,” those “in which monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact.” The district court and Fifth Circuit looked to the “real parties in interest”—the more than 100 allegedly harmed state citizens—and determined that the case qualified as a mass action. The Court disagreed and held that under a plain reading of CAFA, “100 or more persons” refers to named plaintiffs, not unnamed parties in interest. The Court explained that (i) CAFA uses “persons” and “plaintiffs” the same way they are used in Federal Rule of Civil Procedure 20, i.e. as individuals who are proposing to join as “plaintiffs” in a single action; and (ii) “claims of 100 or more” unnamed individuals cannot be “proposed to be tried jointly on the ground that the. . . claims” of some completely different group of named plaintiffs “involve common questions of law or fact.” Further, the Court determined that (i) the CAFA provision that a “mass action” removed to federal court may not be transferred unless a majority of plaintiffs so request would be unworkable if “plaintiffs” included unnamed real parties in interest; and (ii) Congress did not intend that courts conduct an inquiry into the real parties in interest. The Court declined to reach the issue of whether other state attorney general cases could be deemed class actions under different facts. In the rulings below, both the district and appeals courts rejected defendants’ argument that the suit was a class action. The Court also did not reach the issue present in the underlying decisions of whether the suit fell within the “general public” exemption to CAFA mass actions.
On November 15, the U.S. Supreme Court agreed to hear a challenge to the long-standing “fraud-on-the-market” theory, on which securities class actions often are based. Halliburton v. Erica P. John Fund Inc., No. 13-317, 2013 WL 4858670 (Nov. 15, 2013). Halliburton petitioned the Court after an appeals court relied on the theory to affirm class certification in a securities suit against the company, even after the appeals court acknowledged that no company misrepresentation affected its stock process. As explained in the petition, the theory at issue derives from the Court’s holding in Basic Inc. v. Levinson, 485 U.S. 224 (1988) that a putative class of investors should not be required to prove that they actually relied in common on a misrepresentation in order to obtain class certification and prevail on the merits. The petitioner argues that Basic instead allows putative class members to invoke a classwide presumption of reliance based on the concept that all investors relied on the misrepresentations when they purchased stock at a price distorted by those misrepresentations. Halliburton has asked the Court to determine (i) whether the Court should overrule or substantially modify the holding of Basic, to the extent that it recognizes a presumption of classwide reliance derived from the fraud-on-the-market theory; and (ii) whether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.
Special Alert: Settlement In Key Fair Housing Case Moves Forward, Supreme Court Unlikely To Hear Appeal
Last night, the Mount Holly, New Jersey Township Council voted to approve a settlement agreement that will resolve the underlying claims at issue in a closely watched Fair Housing Act (FHA) appeal pending before the U.S. Supreme Court, Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc., No. 11-1507. The agreement is subject to approval by the U.S. District Court for the District of New Jersey, after which we expect that the Supreme Court appeal will be withdrawn.
The Court had agreed to address one of two disparate impact-related questions presented in the appeal—specifically, the threshold question of whether disparate impact claims are cognizable under the FHA. Under current interpretation by several agencies and some Circuit Courts of Appeal, disparate impact theory allows government and private plaintiffs to establish “discrimination” based solely on the results of a neutral policy without having to show any intent to discriminate (or even in the demonstrated absence of intent to discriminate). Though not a lending case, the appeal could have offered the Supreme Court its first opportunity to rule on the issue of whether the FHA permits plaintiffs to bring claims under a disparate impact theory.
Instead, for the second time in two years, it appears likely that opportunity has been eliminated by a settlement entered shortly before the Court could decide the matter. Last year, the parties in Gallagher v. Magner, 619 F.3d 823 (8th Cir. 2010) similarly settled and withdrew their Supreme Court appeal before the Court had an opportunity to decide the case. The Magner parties’ decision to settle and withdrawal the appeal was followed by numerous congressional inquiries into whether federal authorities intervened to assist the parties in reaching a settlement in order to avoid Supreme Court review of a prized legal theory. One member of Congress has already initiated a similar inquiry with regard to the resolution of Mt. Holly. Read more…
On November 6, the Philadelphia Inquirer reported that a final settlement to resolve the underlying claims at issue in Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc., No. 11-1507—an appeal currently pending before the U.S. Supreme Court that could provide the Court an opportunity to rule on whether a disparate impact theory of liability is cognizable under the Fair Housing Act—has been delayed. Last week, the parties reportedly reached a tentative agreement, with the terms of such agreement subject to review and approval by the Mount Holly Township Council. The Council decided to table consideration of the settlement as the parties reportedly work to finalize the agreement.
On October 30, the CFPB filed an amicus brief in Edwards v. First American, a long-running case concerning the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA) that is currently pending in the U.S. Court of Appeals for the Ninth Circuit. The case revolves around allegations that the defendant-title insurer purchased interests in title insurance agencies in order to secure referrals of insurance business from those agencies. The consumer-plaintiffs alleged that these arrangements constituted illegal kickback agreements under Section 8 of RESPA, even though they did not suffer any actual damages. Read more…
On October 31, the Philadelphia Inquirer and national media outlets reported that a tentative agreement has been reached to resolve the underlying claims at issue in Township of Mount Holly, New Jersey, et al. v. Mt. Holly Gardens Citizens in Action, Inc., et al., No. 11-1507, an appeal currently pending before the U.S. Supreme Court that could provide the Court an opportunity to rule on whether a disparate impact theory of liability is cognizable under the Fair Housing Act. Briefing before the Supreme Court has been ongoing—over the past week respondents filed their brief, as did numerous supporting parties, including a group of state attorneys general—and argument is scheduled for December 4. If the settlement holds, this will be the second time in recent years that a case involving these issues pending before the Court has settled before the Court had an opportunity to hear the case. Attention likely now will turn to litigation pending in the U.S. District Court for the District of Columbia over a HUD rule finalized earlier this year. That rule specifically authorized disparate impact or “effects test” claims under the Fair Housing Act. The case has been stayed by agreement of the parties pending the outcome in Mt. Holly.
On July 15, the U.S. Court of Appeals for the Ninth Circuit held that the Federal Arbitration Act (FAA) preempts Montana’s public policy invalidating adhesive agreements running contrary to the reasonable expectations of a party. Mortensen v. Bresnan Comms. LLC, No. 11-35823, 2013 WL 3491415 (9th Cir. Jul. 15, 2013). In this case, the plaintiffs filed a putative class action against an internet service provider (ISP) that participated in a trial program in which the ISP’s customer’s personal information allegedly was passed on to an advertising company in violation of the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, and state privacy and property laws. The ISP moved to compel arbitration, arguing that the welcome kit’s its service technicians delivered included mandatory arbitration provisions that required application of New York law to any disputes. The court vacated a trial court’s order declining to enforce arbitration, holding that AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), requires that the FAA preempt Montana’s reasonable expectations/fundamental rights rule, despite the state’s interest in protecting its consumers from unfair agreements, because that rule has a disproportionate impact on arbitration agreements. As a result, the court also held that the district court erred in not applying New York law because a state’s preempted public policy was an impermissible basis on which to reject the parties’ choice-of-law selection. The court vacated the district court’s order declining to enforce the arbitration clause and choice-of-law clause and remanded with instructions to apply New York law to the arbitration agreement.
This evening, the U.S. Senate voted 66 to 34 to confirm Richard Cordray as CFPB Director, for a five year term. As is well known, Mr. Corday had been serving in that position as a recess appointee and his recess appointment was set to expire at the end of this year. Moreover, his recess appointment has been the subject of a litigation challenge, and the issue of the validity of recess appointments such as his may have been resolved by the U.S. Supreme Court in the next term. The Senate vote on Mr. Cordray’s nomination came after several days of Senate debate over the Senate’s confirmation process and filibuster rules that resulted in a path forward on up or down votes on several presidential nominations. It ended a two-year stalemate between Republicans and Democrats over the Mr. Cordray’s nomination, based on a fundamental disagreement regarding the structure and oversight of the CFPB. For example, Republican members of both the Senate and the House have called for the CFPB’s director-led structure to be replaced by a commission, and for the CFPB’s budget to be subject to the annual congressional appropriations process.
There may be movement on one potential change to oversight of the CFPB. Concurrent with the agreement to vote on Mr. Cordray’s nomination, Senator Portman (R-OH) announced a bill that would establish an office of inspector general for the CFPB. Currently the Bureau shares an inspector general with the Federal Reserve Board. Also, following the confirmation vote, the Chairman of the House Financial Services Committee immediately dropped his objection to Mr. Cordray testifying before that committee and stated that the committee will call him to testify on the CFPB’s annual report as soon as practicable.
The confirmation of Mr. Cordray, and the expected confirmation of new presidential nominees to the National Labor Relations Board, may impact the Supreme Court’s pending review of presidential recess appointment power, a case we have written about on several other occasions, including most recently when the Supreme Court agreed to hear the case.
Other nominations of interest remain pending. For example, the President has nominated Representative Mel Watt (D-NC) to serve as FHFA Director. The Senate Banking Committee was set to vote on that nomination this morning, but postponed the vote until Thursday.
This morning, the U.S. Supreme Court agreed to hear the federal government’s challenge to a January 2013 decision by the Court of Appeals for the D.C. Circuit that appointments to the National Labor Relations Board (NLRB) made by President Obama in January 2012 during a purported Senate recess were unconstitutional. NLRB V. Noel Canning, No. 12-1281. Last month, the Third Circuit similarly invalidated a different NLRB recess appointment made by President Obama.
CFPB Director Richard Cordray was appointed in the same manner and on the same day as the NLRB members, and his appointment is the subject of a lawsuit currently pending in the U.S. District Court for the District of Columbia. Mr. Cordray, whose recess appointment is due to expire at the end of this year, was re-nominated by President Obama this year to serve a full term as director, but his confirmation is being held up in the Senate. All but two Senate Republicans have pledged to oppose Mr. Cordray for the position unless oversight of the CFPB is altered, including by changing its governance structure to a commission structure. Read more…
On June 20, the U.S. Supreme Court held that the Federal Arbitration Act (FAA) does not permit courts to invalidate a class arbitration waiver “on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery.” American Express Co. v. Italian Colors Restaurant, 570 U.S. ___ (2013). The Court reversed a Second Circuit decision that held that because the costs for the individual plaintiff to arbitrate its claims would be prohibitive, the class action waiver was unenforceable and arbitration could not proceed. The Court explained that the Second Circuit’s “effective vindication” doctrine is a judge-made exception to the FAA that “finds its origin in the desire to prevent ‘prospective waiver of a party’s right to pursue statutory remedies,’. . . [b]ut the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” The Court added that there is no congressional command to reject the waiver of class arbitration, and that congressional approval of Rule 23 does not establish an entitlement to class proceedings for the vindication of statutory rights.
Special Alert: SCOTUS Grants Cert. Petition Regarding Use of Disparate Impact Analysis Under the FHA
This morning, the U.S. Supreme Court granted certiorari in Township of Mount Holly, New Jersey, et al. v. Mt. Holly Gardens Citizens in Action, Inc., et al. (No. 11-1507). The case has been watched closely by financial institutions because it raised questions about the viability of disparate impact claims under the Fair Housing Act (“FHA”). Disparate impact theory allows government and private plaintiffs to establish “discrimination” based solely on the results of a neutral policy, without having to show any intent to discriminate – or even in the absence of an intent to discriminate.
The Court has agreed to address one of two disparate impact questions presented in a petition from the Township of Mount Holly, New Jersey (and other appellants) – specifically the threshold question of whether disparate impact claims are cognizable under the FHA. Though not a lending case, the case could offer the Supreme Court its first opportunity to rule on the issue of whether the FHA permits plaintiffs to bring claims under a disparate impact theory. Last year, the parties in another fair housing case brought before the Court, Gallagher v. Magner, 619 F.3d 823 (8th Cir. 2010), withdrew the case before the Court had an opportunity to decide the issue. Read more…
Massachusetts Supreme Court Holds That Courts May Invalidate Certain Arbitration Agreements With Class Action Waivers
On June 12, the Massachusetts Supreme Judicial Court (SJC) held that courts may invalidate an arbitration agreement that includes a class action waiver where the plaintiff demonstrates that his or her claim effectively cannot be pursued in individual arbitration. Feeney v. Dell, Inc., No. SJC-11133, 2013 WL 2479603 (Mass. Jun. 12, 2013). In this case, the court determined that the plaintiffs could not effectively pursue their statutory claim under the individual claim arbitration process given the complexity of their claims and the small amounts of individual damages. The SJC therefore affirmed the trial court’s order invalidating the agreement. According to the SJC, the Supreme Court’s holding in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), left open the possibility that an arbitration agreement may be invalidated if the agreement effectively prevents the claimant from vindicating his or her statutory cause of action. Still, the SJC’s decision arguably conflicts with several decisions in the federal courts of appeal that question that the continuing vitality of the “vindication of rights” doctrine following Concepcion. The decision also addresses an issue currently before the Supreme Court in American Express Co. v. Italian Colors Restaurant, No. 12-133 (S. Ct. argument heard Feb. 27, 2013).
On June 10, the U.S. Supreme Court held that the Federal Arbitration Act (FAA) does not permit a court to vacate an arbitrator’s decision to allow class arbitration where the parties authorized the arbitrator to decide the issue. Oxford Health Plans LLC v. Sutter, No. 12-135, 569 U.S. ___ (2013). In this case, a health insurance company sought to overturn an arbitrator’s holding that the contract between the company and a doctor claiming the insurer failed to fully pay him and similarly situated doctors authorized class arbitration of the claims. The parties agreed that the arbitrator should decide the issue, but in seeking to overturn the decision, the insurer argued that the arbitrator exceeded his authority under the FAA. Citing the narrow standard of judicial review under the relevant FAA provision and the “heavy burden” a party bears under that provision, the Court held that the parties’ agreement to allow the arbitrator to decide the issue of class arbitration of the claims is sufficient to show that he did not exceed his powers. The insurer argued that the Court’s holding in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010) that an arbitration panel exceeded its powers when it ordered a party to submit to class arbitration should apply here. The Court rejected that argument, explaining that in Stolt-Nielsen the Court overturned the arbitral decision because it lacked any contractual basis for requiring class procedures, whereas in this case, the arbitrator construed the parties’ contract at their request.