by Charles W. Prueter
In the last installment of the Update, I wrote about then-Judge Brett Kavanaugh’s commitment to textualism and the separation of powers. Suffice to say, nobody has thought much about any legal doctrines or methods over the month since. Nevertheless, here we are in October at the start of the new term — “October Term 2018,” as it is known at the Supreme Court — with the new Justice Brett Kavanaugh. While the Court will continue to be referred to as the “Roberts Court,” after the Chief Justice, in many ways it is now the “Kavanaugh Court,” for the simple reason that he is the new variable. Just as Justice Neil Gorsuch and Justices Elena Kagan and Sonia Sotomayor before him brought new dynamics to the Court, Justice Kavanaugh will have a distinct voice, and the Court is now different with him on it. Some readers may find that notion to be revolting in light of the process that unfolded over the last month; some may be pleased with the ultimate confirmation vote; and some (most?) may be sick of Washington altogether. But all readers know that the Court will continue to hear and decide cases of national significance, including cases that will affect the banking and financial services industries. With that in mind, the Update looks at two key cases that will be decided by the “Kavanaugh Court” over the next six months or so.
The antifraud provisions of the Securities Act and the Exchange Act are at the core of most of the SEC’s enforcement actions against individuals and companies, both in federal courts and in administrative proceedings governed by the SEC itself. When the SEC discovers what it thinks is a violation of the securities laws, it uses enforcement actions to seek monetary penalties, industry bars, and other orders prohibiting conduct it deems unlawful. One such action recently made its way to the Supreme Court — Lorenzo v. Securities and Exchange Commission, No. 17-1077. This Court will hear oral argument in this case on December 3.
Mr. Lorenzo is an investment banker who sent two emails to potential investors, at the direction of his superior at his firm, that contained misleading information about a potential investment opportunity. The SEC targeted not only Mr. Lorenzo’s superior but also Mr. Lorenzo himself and handed him a lifetime ban from the securities industry.
Mr. Lorenzo argues that he cannot be held liable for securities fraud because he did not “make” the statements, and that much actually appears to be undisputed. Under federal law, in order to be responsible for “making” “false statements,” a person must have ultimate authority over the statement, including its content and whether and how to communicate it. A false statement can be the sole basis of liability, but the law strictly requires proof that the defendant was the “maker” of the statement. As a matter of undisputed fact, Mr. Lorenzo did not have such authority — only his superior did with respect to the two emails in question — and therefore was not the “maker” of the statement.
But Mr. Lorenzo faces the SEC’s catch-all argument, which is that, even if he did not “make” the “false statement,” he can be liable for engaging in “manipulative or fraudulent conduct.” This argument represents an improper attempt to circumvent the strict requirements placed on false statements cases, according to Mr. Lorenzo. Even assuming that the emails contained misrepresentations, Mr. Lorenzo says that, to prove a “manipulative or fraudulent conduct” case, the SEC must show more than a mere misrepresentation. In other words, Mr. Lorenzo urges the Court to hold that the SEC may not repackage a dud “false statement” case as a “manipulative or fraudulent conduct” case. On the ground, this case is about the fine details of highly sophisticated statutory and regulatory schemes. From 30,000 feet, however, this case about the authority of a federal agency to shape the law in a way that allows it to augment its own power and reach.
Interesting side note: Then-Judge Kavanaugh sided with Mr. Lorenzo in the decision below at the D.C. Circuit Court of Appeals, which means that Justice Kavanaugh may recuse himself from this case. Justice Kavanaugh’s views in that decision below are in line with the judicial philosophy discussed in last month’s Update.
In recent years, the Fair Debt Collection Practices Act has created a high volume of significant litigation for financial services firms engaged in debt buying, servicing, and collecting. As its title suggests, the FDCPA generally prohibits abusive, deceptive, and unfair debt collection practices, and the facts surrounding the particular practices at issue typically determine whether a debt collector will be liable under the statute. Certain methods of “debt collection” are categorically excluded as a matter of law, however. One such method is at issue in a case now before the Court — Obduskey v. McCarthy & Holthus, LLP, No. 17-1307.
In this case, the holder of a note on a home sought to move forward with a non-judicial foreclosure, which is a widely recognized remedy available to a lender when a debtor defaults on a loan secured by property. As the term itself indicates, the right to a non-judicial foreclosure means that a lender need not go to court to foreclose on and sell a home secured by a defaulted loan. Here, the homeowner accuses the law firm that handled the non-judicial foreclosure of violating the FDCPA, relying on a number of disclosure and validation requirements imposed on debt collectors.
But the question before the Court is whether pursuing non-judicial foreclosure falls under the FDCPA in the first place. Indeed, non-judicial foreclosure does not require the debtor to pay money, which is the essence of the debt collection activities that do fall under the FDCPA. Various lower federal courts are split — some have adopted this view and have held that non-judicial foreclosures are not governed by the FDCPA, but some have held that non-judicial foreclosures in fact are debt collection activities and therefore are subject to the disclosure and validation requirements imposed by the FDCPA.
The Court’s decision undoubtedly will have an impact on the way in which firms with interests in home mortgages, and other loans secured by property, decide to exercise non-judicial foreclosure rights. Argument in this case will be held after the New Year.
Charles W. Prueter is a trial and appellate lawyer at Waller Lansden Dortch & Davis, LLP, in Birmingham. He can be reached by email at charles.prueter@wallerlaw.com.
