Tag Archives: 10th Circuit

Gorsuch and the CFPB

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photo provided byUnited States Court of Appeals for the Tenth Circuit

Judge Gorsuch

Bankrate.com quoted me in Supreme Court Pick Could Spell Trouble for the CFPB. It opens,

President Donald Trump’s first Supreme Court pick has been identified as the “most natural successor” to the late Justice Antonin Scalia, whom he would replace.

Neil Gorsuch, 49, a judge on the 10th Circuit Court of Appeals in Denver, is said to share many of Scalia’s beliefs and his judicial philosophy. That could tip the high court back toward the 5-4 conservative split it held during controversial cases prior to Scalia’s death, although Justice Anthony Kennedy will remain a liberal swing vote on certain social issues before the court.

Gorsuch’s big judicial decisions have favored religious freedom over government regulation and state’s rights over the power of the federal government.

But how might that impact consumers or their wallets directly?

“I think with a judge like Gorsuch, you can see there probably will be a tendency in that direction to dissuade innovation,” says David Reiss, a law professor at Brooklyn Law School and the academic program director for the Center for Urban Business Entrepreneurship.

That could mean the Consumer Financial Protection Bureau, whose unique management structure a judge on the U.S. Court of Appeals for the D.C. Circuit last fall called unconstitutional, could face an obstacle on the bench should the legal fight over its construction ever reach the Supreme Court.

Judge Brett Kavanaugh, who wrote the majority opinion for the D.C. circuit panel, said because this independent agency is headed by a director whom the president cannot fire at will – and not, say, a set of commissioners like other agencies within the government – it is a threat to individual liberty.

“In short, when measured in terms of unilateral power, the director of the CFPB is the single most powerful official in the entire U.S. government, other than the president,” Kavanaugh wrote. “In essence, the director is the president of consumer finance.”

How Gorsuch May Rule

Supporters of the bureau are trying to get a hearing before the full U.S. Court of Appeals, but the issue could well wind up in front of the U.S. Supreme Court – that is if Congress doesn’t take action first.

Legal scholars say should Gorsuch win Senate confirmation he is unlikely to look favorably on the bureau’s structure.

Indeed, Gorsuch is likely to “echo the views of Judge Kavanaugh,” Melissa Malpass, senior legal editor for consumer regulatory finance at Thompson Reuters Practical Law, said in an email.

“Judge Gorsuch, through recent decisions, has expressed his disfavor with permitting government agencies to not only determine what the law is, but also to interpret and re-interpret the law as they see fit, often based on the political climate,” Malpass says.

If the Supreme Court were to uphold the Kavanaugh ruling, it “may, in effect, destroy the CFPB as we know it, and that will have an effect on consumers,” Reiss says.

Not everyone, though, thinks restructuring the CFPB as a commission-led agency like the Federal Communications Commission, for example, would be bad for consumers.

Gorsuch’s Path to the High Court

Democrats, still stung over the Senate’s refusal to consider Merrick Garland, then-President Barack Obama’s pick to succeed Scalia, could try to block Gorsuch’s nomination. Under current Senate rules, at least eight Democrats will need to cross the aisle to prevent a filibuster of the appointment.

Gorsuch, who was confirmed for his current post in 2006 by Senate voice vote, has won widespread acclaim in Republican circles. He also received a vote of confidence from a former Obama administration official.

“I think the Democrats are going to ask questions to determine if the nominee is outside what they call the political mainstream,” Reiss says. “We know this battle will be a brutal one, almost definitely because of the treatment of Merrick Garland’s nomination under the Obama administration.”

Smoldering FIRREA

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Jens Buurgaard Nielsen

American Banker quoted me in Banks Take Losses in MBS Case Appeals; Is Supreme Court Next? (behind a paywall) The story reads, in part,

Banks that sold faulty mortgage-backed securities right before the crisis have suffered a string of legal defeats over the timing of government lawsuits, but some experts believe the industry may still have a shot in the Supreme Court.

Since the crisis regulators have brought a slew of actions against big banks for assets they sold to acquirers that ultimately failed. But in some cases, the parties have tussled over whether the government missed the statutory deadline for bringing a claim.

Appeals courts lately have disagreed with banks that plaintiffs missed court filing deadlines imposed by state law and other regimes, which are stricter than deadlines in federal law. Most recently, the U.S. Court of Appeals for the 5th Circuit ruled in favor of the Federal Deposit Insurance Corp. in the agency’s case against RBS Securities and other issuers related to the 2009 failure of Guaranty Bank.

Still, other cases are pending and some say banks may be emboldened after the Supreme Court last year favored state-mandated timelines in an environmental case.

“I would expect that [banks] would continue to try to pursue the issue and get relief from the Supreme Court,” said Paul Rugani, a partner at Orrick, Herrington & Sutcliffe LLP based in Seattle.

The government has sought billions from MBS issuers that officials say misrepresented the quality of securities leading up to the crisis. The FDIC and National Credit Union Administration sued companies that had sold assets to institutions that ultimately failed, and the Federal Housing Finance Agency brought claims over securities sold to Fannie Mae and Freddie Mac.

But many banks have fought the agencies over whether they could bring the suits in the first place. Defendants seemed to gain ground in the lower courts and when the Supreme Court handed down its decision last year in a North Carolina environmental case.

*     *     *

“The Supreme Court generally does not take a case where there isn’t a split among different circuit appeals courts, and the 5th and 10th circuits are in agreement,” said an attorney familiar with the situation.

But other decisions are still pending. Rulings have yet to come from the 9th circuit as well as a separate case still to be decided in the 2nd circuit. Both involve the FDIC’s extender statute related to MBS losses at the failed Colonial Bank.

“I would think that the parties that lost the case would wait for the 2nd and 9th circuits to decide and then hope that either of them disagrees with the 5th circuit before deciding to take the case up to the Supreme Court,” said Sanford “Sandy” Brown, a partner at Bracewell & Giuliani LLP.

Others said the extender statute in the law at issue in the Supreme Court’s environmental decision – the Comprehensive Environmental Response, Compensation, and Liability Act – is different enough from the extender statute in FIRREA that the justices on the high court may want to weigh in.

The 5th circuit decision “is a well-reasoned opinion, but there is no question that such an interpretation could be challenged in an appeal to the Supreme Court,” said David Reiss, a professor at Brooklyn Law School. “While circuit courts have had a consistent interpretation of the FIRREA extender statute, there is enough interpretation going on that the Supreme Court could come up with a reasonable alternative to the courts of appeal that have ruled on this issue.”

Monday’s Adjudication Roundup

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  • Shareholders of Deutsche Bank petitioned for cert to the U.S. Supreme Court to clarify the standard for a claim for pleading a fraudulent claim under Section 11 of the Securities Act of 1933 following the Second Circuit tossing their suit in July 2014.
  • 10th Circuit revives National Credit Union Administration’s $550 million suit against Barclays for misrepresentation of the quality of over $555 million in RMBS.
  • First wave of Hurricane Sandy cases settle with FEMA and insurers over the improper cutting of the homeowners’ payouts following the storm.

Reiss on FIRREA Storm

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Law360 quoted me in Bold 10th Circ. Opinion Muddies FIRREA Challenges. The article opens,

The Tenth Circuit last week gave a strong argument as to why a recent U.S. Supreme Court decision has no bearing on one federal agency’s ability to sue over soured mortgage-backed securities, but that won’t stop big banks from trying to convince different courts otherwise, legal experts say.

The appeals court’s opinion said a June high court ruling did not alter its original ruling that the National Credit Union Administration Board’s suit against Nomura Home Equity Loan Inc. and a number of other MBS originators was not time-barred.

The Supreme Court had found that a lawsuit by North Carolina residents under the federal Comprehensive Environmental Response, Compensation and Liability Act was time-barred by the state’s statute of repose

But the regulator of federally chartered credit unions is bringing its claim under the Financial Institutions Reform, Recovery and Enforcement Act, and the appeals court said that law’s so-called extender statute was not subject to the same limitations the Supreme Court had found in the Superfund pollution cleanup law at the heart of CTS Corp. v. Waldburger.

Rather, the language of FIRREA and its legislative history made it clear Congress had intended the law to have its own statute of limitations and not be bound by other statutes of repose, the appeals panel wrote, responding to a Supreme Court order that it take a second look at its earlier decision.

Before the Tenth Circuit issued its decision, defense attorneys had looked to the Supreme Court’s remand as a chance to give banks some relief from the lingering hangover of government lawsuits, many of which have ended with banks coughing up hundreds of millions, if not billions, of dollars in damages.

And it’s clear banks will still fight for that relief. In a motion for summary judgment Friday, attorneys for RBS told a Connecticut district court judge he should toss an FHFA suit brought under the extender statute of the Housing and Economic Recovery Act, in light of the time bar established by the Supreme Court in Waldburger.

In doing so, the attorneys also urged the judge to disregard the Tenth Circuit’s opinion, arguing it was flawed.

“Nomura, of course, is not controlling in this circuit, and the opinion on remand fails to faithfully apply the analytical framework established in Waldburger, instead sidestepping Waldburger by focusing on superficial distinctions between the CERCLA and NCUA extender statutes,” the attorneys wrote.

Experts say such disputes will continue on.

“The debate is not over by any stretch of the imagination,” David Reiss, a professor at Brooklyn Law School, said. “There’s enough at stake for powerful and well-financed institutions that this will be played out to the fullest.”

While legal experts say they can’t predict how other jurisdictions will move on similar questions about timeliness under FIRREA, they say the Tenth Circuit approached the task of reaffirming its earlier opinion in a way that appeared designed to withstand high court scrutiny.

“It is a thorough opinion. I think that other courts will take this opinion very seriously,” Reiss said.

Offering Opinions About MBS Exposure

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The Tenth Circuit issued an opinion in MHC Mutual Conversion Fund, L.P. v. Sandler O’Neill & Partners, L.P. et al. (No. 13-1016 Aug. 1, 2014). The case concerns a 2009 stock offering by Bancorp. Bancorp was significantly exposed to mortgage-backed securities (MBS) and said as much in its securities filings. It also predicted that the market for MBS would rebound soon.

The highly readable opinion asks,

When does section 11 of the Securities Act of 1933 impose liability on issuers who offer opinions about future events? The statute prohibits companies from making statements that are false or misleading. Establishing that an opinion about the future failed to pan out in the end may go some way to meeting that standard but it doesn’t go all the way. After all, few of us would label a deeply studied, carefully expressed, and earnestly held opinion about the future as false or misleading at the time it’s made simply because later events proved it wrong. To establish liability for an opinion about the future more is required. But what? Answering that question is the challenge posed by this case.

The opinion provides a clear overview of what differentiates opinion from fact in securities offering statements. The Court does this by carefully walking through three theories of opinion liability under section 11:

  1. “no one should depend on the puffery of salesmen . . . especially when the salesman’s offering a guess about the future” (5-6)
  2. “an opinion can qualify as a factual claim by the speaker regarding his current state of mind.” (7)
  3. “some subset of opinions about future events contain within them an implicit factual warranty that they rest on an objectively reasonable basis” (13)

In this case, the Court found that the plaintiffs could not establish liability under any theory.

The opinion provides a nice, clean framework for understanding section 11 liability claims.  This framework should apply to offering statements for MBS that set forth opinions about future events as well as those for any other type of security that does the same.

Robo-Signing Complaints Must Sing A Different Toone

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The Court of Appeals for the 10th Circuit took a hard look at a complaint alleging robo-signing misbehavior relating to a promissory note and its various endorsements in Toone v. Wells Fargo Bank, N.A. et al., (Mar. 8, 2013, No. 11-4188).  The court noted that

Ordinarily, we accept the well-pleaded factual allegations of the complaint as true for purposes of resolving a motion under Rule 12(b)(6). But there are exceptions to this rule. Courts are permitted to review “documents referred to in the complaint if the documents are central to the plaintiff’s claim and the parties do not dispute the documents’ authenticity.” The Note falls squarely within this exception: We may consider it in evaluating the plausibility of the Toones’ claims because it is mentioned in the complaint, it is central to their claims, and its authenticity is not disputed. (7, citations omitted)

The Court found that

The face of the Note contradicts the Toones’ allegations. The first endorsement states that Accubanc is Premier’s “agent and attorney in fact,” Aplt. App., Vol. II at 209 (capitalization omitted), and the Toones present no argument why the endorsement would be invalid when signed by Premier’s agent. Likewise, the other endorsements look regular on their face. Of course, the endorsements may be forged or otherwise fraudulent. But the complaint alleges no facts from which one could infer such misconduct. It does not explain what “robo-signing” is or why it renders the endorsements fraudulent, let alone include factual content indicating that it occurred in this case.(8)

The 10th Circuit now joins many other courts in finding that “bald allegations of “robo-signing” do not suffice under the Rule 8(a)(2) standard set by Iqbal.” (8)