Second Circuit Restricts Ability of SIPA Trustee to Bring Common Law Claims Against Third Parties

By Christian Sheehan

In its latest decision arising out of the Bernard Madoff Ponzi scheme, the Second Circuit recently held in In re Bernard L. Madoff Investment Securities LLC that the trustee responsible for liquidating Madoff’s investment firm (BLMIS) under the Securities Investor Protection Act was barred from asserting tort claims against financial institutions that allegedly aided and abetted Madoff’s scheme.  Affirming the decisions of two district court judges, the Second Circuit explained that the trustee could not bring claims on behalf of BLMIS itself, nor could he sue on behalf of the firm’s former customers.

The Court held that the claims asserted on behalf of BLMIS were barred by the doctrine of in pari delicto because the trustee stood in the shoes of the firm and therefore could not bring suit against third parties for participating in a fraud that BLMIS orchestrated.  The Court further held that the trustee lacked standing to assert claims on behalf of BLMIS’s customers, reasoning that like a bankruptcy trustee, a SIPA trustee may not sue on behalf of the estate’s creditors.

The Second Circuit’s decision will have a significant impact on future SIPA liquidations as it clarifies the scope of a SIPA trustee’s rights to bring tort claims against third parties, and makes clear that a SIPA trustee is governed by the same standing rules that have long-applied to bankruptcy trustees.

The U.S. Supreme Court Grants Cert to Decide Whether the Fair Housing Act Allows for Disparate Impact Claims in Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc.

Schnader Alert by Stephen A. Fogdall:

The U.S. Supreme Court has a granted review in a case that will decide whether “disparate impact” liability — liability based solely on a practice’s alleged discriminatory effect, though the actor had no intent to discriminate — can be imposed under the Fair Housing Act. The Court appears poised to reject disparate impact liability in this setting.

Please click here to read the full Alert.

When Will a Rule 68 Offer of Judgment Kill a Class Action?

By Monica Platt

According to the Sixth Circuit, a defendant may only moot a plaintiff’s claim through a Rule 68 offer of judgment if the offer satisfies all of plaintiff’s claims, not only those the defendant believes are viable. In Hrivnak v. NCO Portfolio Management, Inc., defendant NCO claimed that its offer of judgment mooted plaintiff’s individual claims (and therefore the putative class action) because the offer provided all relief the defendant believed would be available. Hrivnak had filed, on behalf of himself and a class of similarly situated individuals, claims under the Fair Debt Collections Practices Act and the Ohio consumer protection law seeking class relief and statutory, compensatory, and punitive damages exceeding $25,000, in addition to injunctive and declaratory relief. Defendant NCO offered $7,000, and argued that the only relief available under the FDCPA and Ohio law is a statutory damages award of $1,000 plus attorneys fees and costs.

NCO argued that because it offered Hrivnak all relief it believed he could possibly obtain, his claim was moot and therefore the uncertified class claim was moot as well. The Sixth Circuit, on the other hand, found that mootness only occurs if an offer of judgment provides all relief sought, explaining that the issue is a defendant’s willingness to meet the plaintiff on his terms, not the legitimacy of a plaintiff’s claims or reasonableness of defendant’s offer.

The court distinguished between the merits of a claim and the existence of a live controversy, and found that a bad theory of liability or damages does not undermine the court’s power to adjudicate a claim. Only when a plaintiff’s claim is so insubstantial that it fails to present a federal controversy would an offer of judgment failing to address the claim moot a case. Ultimately, the court found that while Hrivnak’s claims might be weak, such an argument goes to the merits of the claims, not jurisdiction.

An effective offer of judgment can have far reaching implications in some class and collective actions. Recently, the Supreme Court considered a case brought as a collective action under the Fair Labor Standards Act and found that because the defendants’ Rule 68 offer of judgment (that plaintiff did not accept) mooted plaintiff’s claims and no other claimants had opted in, the district court lacked subject matter jurisdiction over the case, noting that collective allegations in a complaint cannot save a suit from mootness once the individual claim is satisfied. See Genesis Healthcare Corp. v. Symczyk, 133 S Ct. 1523 (2013). Further, at least one district court has found that a pre-complaint offer of relief can moot a named plaintiff’s claims, and therefore a class action. See Datascope Analytics, LLC v. Comcast Cable Communications, Inc., No. 13-608, 2013 U.S. Dist. LEXIS 70215 (E.D. Pa. May 17, 2013). However, defendants must ensure that they do not confuse the relief possible with the relief sought when making such offers.

Sixth Circuit Holds That Arbitrator, Not the District Court, Must Decide if Plaintiff’s Class Claims are Barred by Waiver in Arbitration Agreements

By Christian Sheehan

On June 11, 2013, in Lowry v. JPMorgan Chase Bank, N.A., the Sixth Circuit held that an arbitrator, not the district court, must decide whether the plaintiff’s class claims were barred by a class-action waiver in the parties’ arbitration agreement. The Court explained that although questions of arbitrability are presumptively for a court to decide, the parties had clearly and unmistakably agreed that the arbitrator would resolve disputes about whether their claims were arbitrable. In addition, because the provision requiring an arbitrator to decide this threshold issue did not exclude class claims, the Court held that JPMorgan Chase’s argument that the plaintiff’s class claims were barred must be addressed in arbitration. The Court reached this conclusion despite the fact that it found the class-action waiver to be “unambiguous.” Lowry therefore is significant because it makes clear that even if an arbitration agreement contains a provision unambiguously barring class claims, if the parties agreed that the arbitrator would resolve disputes about arbitrability, the district court must submit all claims, including the seemingly barred class claims, to arbitration.

Lowry is noteworthy for the additional reason that it is the latest in a series of recent Circuit court decisions addressing the proper roles of courts and arbitrators in determining the effect of class-action waiver provisions in arbitration agreements. In In re American Express Merchants’ Litigation, 554 F.3d 300, 310-11 (2d Cir. 2009), vacated on other grounds by Am. Express Co. v. Italian Colors Rest., 130 S. Ct. 2401 (2010), and Puleo v. Chase Bank USA, N.A., 605 F.3d 172, 188 (3d Cir. 2010) (en banc), the Second and Third Circuits, respectively, held that challenges to the enforceability of such class-action waivers presented questions of arbitrability that should be resolved by a court, not an arbitrator. Lowry is not inconsistent with these decisions. Unlike in Lowry, the Third Circuit in Puleo held that the arbitration agreement did not clearly and unmistakably provide that the arbitrator would resolve questions of arbitrability. Thus, the default rule—that a court should decide arbitrability—applied. And, in American Express, neither party argued that the contract required questions of arbitrability to be decided by the arbitrator.

New Developments in the Presumption of Prudence Under ERISA: A Dramatic Increase in Liability Exposure Hangs on the Difference Between “Shall” and “May”

Schnader Alert by Stephen A. Fogdall:

Recent decisions out of the Second and Ninth Circuits have increased the liability exposure of plan fiduciaries under the Employee Retirement Income Security Act (ERISA) where the retirement plan gives employees an option to invest in the employer’s stock. If the plan permits, but does not require, that this investment option be available, plan fiduciaries can be held liable if they fail to withdraw the option once they become aware, or should be aware, that the value of the employer’s stock may be artificially inflated.

Please click here to read the full Alert.

Federal Court Dismisses Class Action Complaint Based on Pre-Complaint Offer of Settlement

Schnader Alert by John Gisleson and Monica Platt:

The Eastern District of Pennsylvania’s recent decision in Datascope Analytics, LLC v. Comcast Cable Communications, Inc. provides potential class action defendants one way to avoid class litigation if they can act early to settle claims after receiving a pre-complaint demand from an unhappy consumer.

Please click here to read the full Alert.

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