U.S. Chamber warns SCOTUS of litigation funding peril

General view of the U.S. Supreme Court building in Washington
A general view of the U.S. Supreme Court building in Washington, D.C., U.S. June 25, 2021. REUTERS/Ken Cedeno

(Reuters) - A case asking the U.S. Supreme Court to resolve a split among the federal circuits on an arcane civil procedure question has given the U.S. Chamber of Commerce an opportunity to indulge in one of its favorite pastimes: predicting that undisclosed litigation funding agreements imperil the American justice system.

In a new amicus brief in Bank of America Corp v. Fund Liquidation Holdings LLC, the Chamber’s lawyers from Latham & Watkins told the Supreme Court that the 2nd U.S. Circuit Court of Appeals opened the door to abusive tactics by litigation funders when it allowed Fund Liquidation Holdings to swap in as plaintiff in a benchmark rate-manipulation class action against a bevy of international banks.

The Chamber’s assertion requires some explaining. The class action addressed in the 2nd Circuit decision was initially filed by two dissolved Cayman Island hedge funds that had assigned their litigation rights to Fund Liquidation Holdings. Their initial class action complaint did not disclose that they had already signed away their rights – nor that they actually no longer existed.

Only in their second amended complaint, after some intense briefing and an initial ruling on the banks’ dismissal motions, did the Cayman funds reveal their dissolution. And only in briefing on a defense motion to dismiss the amended complaint did the banks learn that Fund Liquidation Holdings was the true party in interest – and that it had been steering the litigation from the beginning.

The trial judge, U.S. District Judge Alvin Hellerstein of Manhattan, ultimately ruled that the Cayman funds that had brought the suit did not have Article III standing because they had dissolved. Hellerstein refused to allow Fund Liquidation Holdings to swap in as a replacement plaintiff under Rule 17 of the Federal Rules of Civil Procedure, holding that the entire class action was a nullity because it had been filed by plaintiffs with no standing to sue.

Fund Liquidation Holdings, which by then was out of time to file a new complaint in its own name, appealed. In March 2021, 2nd Circuit Judges Richard Sullivan, Michael Park and William Nardini concluded that the initial filing on behalf of plaintiffs without Article III standing was not a death knell for the entire case because Fund Liquidation Holding had a constitutional claim at the time the case was filed and had surfaced in time to assert that claim. As a matter of practicality, the appeals court said, it didn't make sense to force claimants to spend time and money on a new complaint merely to correct a “technical error” in the initial filing.

“We hold today that Article III is satisfied so long as a party with standing to prosecute the specific claim in question exists at the time the pleading is filed,” Sullivan wrote in the panel opinion. “If that party (the real party in interest) is not named in the complaint, then it must ratify, join, or be substituted into the action within a reasonable time. Only if the real party in interest either fails to materialize or lacks standing itself should the case be dismissed for want of subject-matter jurisdiction.”

In the banks’ petition for Supreme Court review, their counsel of record from Akin Gump Strauss Hauer & Feld focused on the 2nd Circuit’s acknowledged split from the 6th Circuit’s 2002 decision in Zurich Insurance Co v. Logitrans Inc. In that case, the 6th Circuit ruled that Zurich, which had mistakenly filed a subrogation suit to recover money paid to a policyholder after a warehouse fire, could not swap in the insurer that in fact owned the subrogation claim because Zurich’s original filing was a nullity.

Even the 2nd Circuit, the banks argued, admitted that its reasoning “is not a view adopted by many courts.” The banks told the Supreme Court that the D.C., 4th and 5th Circuits have all held that if the plaintiff that initially filed a suit does not have standing (typically because the plaintiff is deceased), Rule 17 does not allow a new plaintiff simply to take over the old case.

I’m betting that Fund Liquidation Holdings’ appellate lawyers at Goldstein & Russell, who declined to provide a statement to me, will argue in their opposition brief that the circuit split is narrower and more technical than the banks’ depiction. That brief is due on Dec. 10.

The Chamber's amicus brief, meanwhile, wants the justices to think about the implications of the 2nd Circuit’s countenance of Fund Liquidation Holdings’ behind-the-scenes control of litigation filed in the name of non-existent plaintiffs.

“For four years, the only party pulling the strings in this case was not subject to scrutiny by the defendants or the court,” the amicus brief said. The 2nd Circuit’s rule would allow funders to evade statutes of limitation by filing placeholder suits while they search for viable plaintiffs. Funders could also secretly advance political or personal interests, the Chamber said, by hiding behind sham plaintiffs without fear of the consequences.

“Under the 2nd Circuit’s rule, a party can opt to remain anonymous and shielded from scrutiny while controlling every aspect of a litigation because no actual plaintiff exists,” the brief said. “Indeed, that is precisely what happened below.”

The 2nd Circuit explicitly said in its opinion that its approach would “not result in unchecked abusive practices” because trial judges retained discretion to toss suits if they believed replacement plaintiffs had misnamed the parties in the original pleadings for “nefarious reasons.” The Chamber said that’s clearly not an adequate check on potential abuses, since the appeals court itself had “rewarded” Fund Liquidation Holdings for hiding behind nonexistent plaintiffs.

The Chamber’s bête noire, as always, is the secrecy that often shrouds litigation funders’ involvement in cases. Its multifront campaign to force disclosures scored a big win in June, when New Jersey federal courts adopted a sweeping litigation funding disclosure rule. If nothing else, the latest Supreme Court brief has given the Chamber a new audience for an old argument.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.