Supreme Court Update for Banking and Financial Services Professionals

by Charles W. Prueter

The Supreme Court has picked up its pace of late, including issuing three opinions in the last month or so in cases that were previewed on these pages. From financial consumer protection to securities enforcement to class arbitration, these cases cover a broad range of areas that will be of interest to banking and financial services professionals.

First, in late March, the justices decided Obduskey v. McCarthy & Holthus, LLP, the most recent in a series of cases at the Supreme Court involving the Fair Debt Collection Practices Act. As the Update noted in its preview of this case, the FDCPA has created a high volume of significant litigation for financial services firms engaged in debt buying, servicing, and collecting. The statute 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.

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.

The question before the Supreme Court was whether pursuing a non-judicial foreclosure falls under the FDCPA in the first place. In a unanimous opinion authored by Justice Stephen Breyer, the Court held that a firm engaged in a non-judicial foreclosure is not a “debt collector” for purposes of the core provision of the FDCPA, which covers “any person in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts.” The plaintiff argued that the defendant plainly is a “debt collector” because the purpose of the non-judicial foreclosure is to ultimately collect on a debt through the enforcement of the security interest. But the Court looked closely at the whole statute, which in a secondary provision not at issue in this case specifically provides that — for the purpose of that particular provision — the term “debt collector” “also includes any person in any business the principal purpose of which is the enforcement of security interests.” Thus, under basic principles of statutory construction, the Court concluded that the core provision did not cover non-judicial foreclosures because the secondary provision clearly includes those pursuing the “enforcement of security interests” in addition to the core provision’s definition of “debt collector.”

In other words, if the core provision covers X, and the secondary provision covers X + Y, where Y is the enforcement of security interests, then X must not include the enforcement of security interests. The statute says what it says, and the core provision logically does not cover non-judicial foreclosures.

Justice Breyer also responded to the plaintiff’s fears that this decision would open up a pathway for creditors and their agents to engage in a host of abusive practices forbidden by the FDCPA by relying on this exclusion of non-judicial foreclosures from the core provision of the statute. Justice Breyer is not unsympathetic to this concern, but he firmly concludes: “Regardless, for the reasons we have given, we believe that the statute exempts entities engaged in no more than the ‘enforcement of security interests’ from the lion’s share of its prohibitions. And we must enforce the statute that Congress enacted.”

Next, the Supreme Court decided a case that the Update has been tracking since the beginning of the Term — Lorenzo v. Securities & Exchange Commission, which broadly required the Court to consider the power of the SEC in bringing enforcement actions for false statements in connections with the purchase or sale of securities. Mr. Lorenzo is (or more accurately, now that the SEC has won this case, was) an investment banker who sent two emails to potential investors, at the direction of his superior at his firm, containing 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 based on the false statements 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 the SEC nevertheless says that it properly brought this enforcement action under a separate theory — i.e., that Mr. Lorenzo, by transmitting the misleading information, engaged in a “scheme to defraud” those investors. And the Court, through Justice Breyer again, endorsed this theory. Justice Breyer explained that, even though Mr. Lorenzo did not “make” the statements, and even though the statements themselves are the beginning and the end of the government’s case, Mr. Lorenzo engaged in a “scheme to defraud” by disseminating the statements. The lifetime ban thus apparently will stick for Mr. Lorenzo.

In dissent, Justice Clarence Thomas, joined by Justice Neil Gorsuch, took a stricter view of the government’s power to bring such a case based on false statements. Justice Thomas explained that a person does not “make” a false statement — and therefore is not primarily liable for the statement — if the person lacks ultimate authority of over the statement. He then criticized the majority for “eviscerat[ing]” this basic principle by holding that a person who has not “made” a false statement can nevertheless be primarily liable for it when the government transforms a false-statement case into a scheme-to-defraud case. Justice Thomas thus would have held that Mr. Lorenzo’s conduct “did not amount to a primary violation of the securities laws.” This dissent is consistent with the jurisprudential philosophy of Justices Thomas and Gorsuch, who are not inclined to permit the government to liberally enforce criminal and quasi-criminal statutes.

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Finally, just last week, the Court decided an arbitration-class action case that the Update previewed along with a more lengthy discussion of arbitration, Lamps Plus Inc. v. Varela. Here, the company-employer and its employee had entered into a relatively standard arbitration agreement, providing that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings.” The employee contended that he now has the right to spearhead a class arbitration, because a class action falls within the scope of “all lawsuits or other civil legal proceedings.” But the employer responded that a standard arbitration agreement like this one is an agreement to arbitrate to arbitrate on an individual basis — and only on an individual basis. The employer argued that class arbitration is permitted only where the arbitration agreement specifically has provided for class arbitration.

As expected, the Court agreed and held that, under federal law, only an agreement that explicitly provides for a right to class arbitration may serve as the basis for class arbitration. As a result, standard arbitration agreements will continue to require individual arbitration and concomitantly bar class arbitration, which takes away a potentially valuable weapon from a plaintiff’s arsenal.

Justices Ginsburg, Breyer, Sotomayor, and Kagan dissented, arguing that a standard arbitration agreement like the one at issue here should be interpreted under relevant state law principles of contract and, if those state law principles would allow for class arbitration, should be construed to allow class arbitration.

Charles W. Prueter is a trial and appellate lawyer at Waller Lansden Dortch & Davis, LLP, in Birmingham. He can be reached by email at