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Supreme Court Directs Tenth Circuit To Reconsider RMBS Ruling
On June 16, the U.S. Supreme Court vacated a Tenth Circuit holding that RMBS claims filed by the NCUA were timely and instructed the circuit court to reconsider that holding in light of the Supreme Court’s recent decision in an environmental case. National Credit Union Admin. Bd. v. Nomura Home Equity Loan, Inc., No. 13-576, 2014 WL 2675836 (U.S. Jun. 16, 2014). On June 9, the Court delivered its opinion in CTS Corp. v. Waldburger, an environmental case that addressed the difference between statutes of limitations and statutes of repose, which are both used to limit the temporal extent or duration of tort liability. In Waldburger, the Supreme Court held that under the environmental statute at issue, Congress intended to preempt state statutes of limitations but not statutes of repose. In light of that decision, the Court asked the Tenth Circuit to reconsider its holding that the federal extender statute supplants all other limitations frameworks, including both the one-year statute of limitations and the three-year statute of repose, included in the limitations provision of the Securities Act of 1933 and the similar state laws at issue in the case.
Special Alert: Supreme Court To Hear TILA Rescission Case
On April 28, the U.S. Supreme Court granted certiorari in Jesinoski v. Countrywide Home Loans, Inc., No. 13-684, an appeal of the U.S. Court of Appeals for the Eighth Circuit’s September 2013 holding that a borrower seeking to rescind a loan transaction under TILA must file suit within three years of consummating the loan, and that written notice within the three-year rescission period is insufficient to preserve a borrower’s right of rescission.
TILA Section 1635 grants borrowers the right to rescind a transaction “by notifying the creditor” and provides that a borrower’s “right of rescission shall expire three years after the date of consummation of the transaction" even if the "disclosures required . . . have not been delivered.” In Jesinoski, the Eighth Circuit cited its July 2013 holding in Keiran v. Home Capital, Inc., 720 F.3d 721 (8th Cir. Jul. 12, 2013), in which the court reasoned that the text of the statute, as explicated by the Supreme Court in Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998), established a strict limit on the time for filing suits for rescission. The Eighth Circuit expressly rejected an argument presented in an amicus brief filed by the CFPB that the lender, rather than the obligor, should be required to file suit to prevent rescission. To adopt the CFPB’s position, the court explained, “would create a situation wherein rescission is complete, in effect, simply upon notice from the borrower, whether or not the borrower had a valid basis for such a remedy. Under this scenario, the bank’s security interest would be unilaterally impaired, casting a cloud on the property’s title, an approach envisioned and rejected by Beach.”
In holding in favor of the lender, the Eighth Circuit joined the majority of the circuit courts that have addressed the issue—the First, Sixth, Ninth, and Tenth Circuits all previously have held that a borrower must file suit within the three-year rescission period, while the Third, Fourth, and Eleventh Circuits have held that written notice is sufficient to preserve a borrower’s statutory right of rescission. BuckleySandler filed an amicus brief in Keiran on behalf of a group of industry trade groups, as it has done in three other circuit court cases on this issue.
The Supreme Court now may resolve this circuit split. Like the prior circuit court cases, the Supreme Court’s review of the issue likely will draw attention and briefs from lenders, the CFPB, and consumer groups.
SCOTUS Denies Certiorari In Lien Stripping Case
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.
SCOTUS Holds State-Law Securities Class Actions Not Precluded By Federal Law
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.
SCOTUS Holds State AG Action Not A Mass Action Subject to CAFA
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.
SCOTUS Agrees To Hear Challenge To Securities Class Actions "Fraud On The Market" Theory
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.
To date, eleven federal Circuits have upheld the cognizability of disparate impact claims under the FHA (Title VIII of the Civil Rights Act of 1968). They have done so based on their analysis of the Supreme Court’s then-current Title VII jurisprudence regarding employment discrimination – which the appellate courts interpreted as permitting disparate impact claims – and a conclusion that disparate impact claims are consistent with the purposes of the FHA. In the seminal employment disparate impact case Griggs v. Duke Power, 401 U.S. 424 (1971), the Court held that a power company’s neutral requirement that all employees have a high school education regardless of whether it was necessary for their job was discriminatory under Title VII because it had a disparate effect on African-Americans. However, the Court subsequently has issued a series of opinions, most significantly in Smith v. City of Jackson, 544 U.S. 228 (2005), that call prior appellate court precedent into question. In City of Jackson, the Court held that employment-related disparate impact claims are grounded in Title VII’s specific statutory text, not merely in the broader purpose of the legislation. Since City of Jackson, federal courts have offered almost no guidance as to whether the FHA’s statutory text permits disparate impact claims.
It is worth noting that in Mt. Holly, the Court could have bypassed certain, more nuanced issues relating to how such claims should be analyzed and the means by which statistical evidence should be evaluated in context of that analysis. These issues were raised in Mt. Holly in a multi-part second question on which cert. was not granted, which would have required argument on “burden shifting,” “balancing” and other tests that have been developed by various Circuits. Additionally, the question before the Court was whether disparate impact claims are cognizable under Section 804 of the FHA. Depending on the Court’s analysis, the question of whether Section 805 of the FHA—the section specifically applicable to mortgage financing—permits disparate impact claims may have remained an open issue. Still, the Supreme Court generally does seem willing to review at least some aspects of disparate impact analysis in the fair housing context.
With the settlement of the underlying Mt. Holly litigation, attention will likely shift to a matter that is pending in the U.S. District Court for the District of Columbia, but which is currently stayed pending the conclusion of the Supreme Court appeal in Mt. Holly. In that action, insurance trade associations challenge a rule issued by the Department of Housing and Urban Development on the use of disparate impact analysis under the FHA, which codified the three-step burden-shifting approach to determine liability related to a disparate impact claim.
Final Settlement In SCOTUS Fair Housing Case Delayed
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.
CFPB Files Brief In Long-Running RESPA Case
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.
At issue before the Ninth Circuit is whether a private plaintiff must specifically allege an overcharge in order to have standing under RESPA. The district court held that (i) to constitute a “thing of value” exchanged for a referral in violation of RESPA, the putative class must show that the defendant overpaid for the interests in the title insurance agencies in exchange for referrals of settlement service business, and (ii) all members of the class must prove not only that they were referred to the title company but also that the referral influenced their selections of a settlement service provider.
The Bureau disagrees that proof of an overpayment for the interests in the title companies is required to establish that the referrals violated RESPA. Instead, the CFPB’s brief argues that the “thing of value” exchanged includes the value of the transaction itself and that the plaintiffs need only show that the defendant-company purchased the ownership interests in order to ensure the referral of future settlement business, even if the price paid was fair. The CFPB also disputes the district court’s conclusion that violations require proof of referral and influence on a plaintiff-by-plaintiff basis, arguing that under the plain language of the statute, the level of influence on a consumer is irrelevant in cases of explicit referrals.
The CFPB filed an amicus brief in the same case in October 2011, when a separate standing issue was appealed to the U.S. Supreme Court. The Supreme Court heard the case but declined in June 2012 to issue an opinion, stating that certiorari was “improvidently granted.”
Tentative Settlement Reached In SCOTUS Disparate Impact Case
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.