Banking Cases to Watch on the Supreme Court’s Fall Docket

By Dawn Causey

Fall brings autumnal colors, football and, for those of us following litigation, the fall term of the U.S. Supreme Court. While banking rarely has the headline cases, there are several ABA is watching, including one—Hawkins v. Community Bank of Raymore—argued on the Court’s opening day.

Hawkins v. Community Bank of Raymore presents the issue of whether spousal guarantors are applicants for purposes of the Equal Credit Opportunity Act. The case involves the spouses of two owners of a failed real estate company. The spouses claimed that the bank unlawfully required them to guarantee loans made by their husbands, arguing that the bank violated ECOA and an implementing Regulation B requirement that prohibits discrimination by a creditor against an “applicant” on the basis of marital status. Regulation B defines “applicant” to include guarantors.

The Eighth U.S. Circuit Court of Appeals ruled that guarantors are not applicants unless they are seeking credit themselves. The court concluded that the text of ECOA unambiguously explains that a guarantor is not an applicant, and gave the Regulation B definition no deference because it conflicted with the plain language of ECOA. Unfortunately, the Eighth Circuit decision directly conflicts with a Sixth Circuit ruling that reached the opposite conclusion. The clear split in the circuits is now ripe for resolution by the Supreme Court.

ABA, the Missouri Bankers Association and others filed a brief in support of the bank arguing that including guarantors as applicants under ECOA would expose banks to increased litigation costs and potentially encourage banks to avoid adding guarantors when making loans. Neither result is beneficial.

The two other cases on ABA’s watch list deal with access to the courts. Merrill Lynch v. Manning will examine whether claims filed under the Security and Exchange Commission’s regulation that governs “short sales,” Regulation SHO, should be filed in federal or state court. The district court held that Regulation SHO established federal jurisdiction. However, the Third Circuit disagreed, holding that the standards and duties required by Regulation SHO should be interpreted by state courts.

The Merrill Lynch plaintiffs countered that allowing state courts to rule on an SEC regulation flies in the face of nationwide application of the Securities Exchange Act of 1934. Again, several circuit courts of appeal have differed in their findings. The Fifth and Ninth held for federal jurisdiction; the Second and now the Third gave authority to the states. The answer awaits a Supreme Court ruling.

The last case, Spokeo v. Robins, focuses on “standing” and the definition of harm. Generally, a plaintiff must demonstrate harm to file a successful lawsuit. Robins sought damages from Spokeo, a company that operates a data aggregation website using public information about individuals. Robins’ class action alleged that information on Spokeo’s website was inaccurate and those errors caused actual harm to his employment prospects. The district court held in favor of Spokeo stating that the alleged harm was “speculative, attenuated and implausible” and that mere violation of the Fair Credit Reporting Act did not confer standing where no injury in fact was properly pled.

Unfortunately, a three-judge panel of the Ninth Circuit reversed, holding the allegation of violations without proof of harm was sufficient for the plaintiff to have standing and for the case to go forward. In July, ABA and other financial trades filed a brief with the Supreme Court urging reversal of the Ninth Circuit’s reasoning. The ABA brief argued that injury-in-fact requirements promote accountability and prevent spurious claims. And, as most cases involving class action lawsuits, the financial industry and others would be faced with countless claims based on simple allegations of statutory or regulatory violation.

As these cases illustrate, it will be yet another important term for banking before the Supreme Court.