On April 26, 2023, the United States Court of Appeals for the
Second Circuit affirmed the dismissal of two actions brought by
issuers of collateralized debt obligations ("CDOs")
against the trustee and master servicer of certain residential
mortgage-backed securities ("RMBS") that served as
collateral for the CDOs. Phoenix Light SF Ltd. v. Bank of New
York Mellon, —F.4th—, 2023 WL 3082212 (2d Cir.
2023). The Second Circuit affirmed the district courts' holding
that, even assuming plaintiffs had Article III standing, they were
precluded from relitigating prudential standing because plaintiffs
were previously found to lack prudential standing in a case they
had brought against one of the same defendants.
Plaintiffs originally brought multiple suits against RMBS trustees
in 2014. Id. at *1. One of these proceedings was dismissed
in 2015 based on the district court's determination that
plaintiffs lacked standing because, in issuing the CDO notes, they
had conveyed all right, title, and interest in the RMBS
certificates to the CDO trustees. Id. After that
dismissal, the CDO trustees attempted to assign litigation rights
back to plaintiffs, and plaintiffs amended their complaint
accordingly. Id. The district court, however, granted
summary judgment in favor of defendant, holding that the
assignments were champertous and that plaintiffs lacked both
Article III standing (i.e., "a concrete and particularized
injury in fact, fairly traceable to the challenged actions of
[defendant] and likely redressable by a favorable decision")
and prudential standing (i.e., they had not "asserted their
own legal rights and interests"). Id. at *2. On
appeal, the Second Circuit, without deciding the Article III
standing issue, affirmed the district court's grant of summary
judgment on the ground that the assignments were champertous and
that plaintiffs therefore lacked prudential standing. Id.
Following the Second Circuit's decision, the district courts
dismissed for lack of prudential standing two similar actions
brought by the same plaintiffs, holding that plaintiffs were barred
from relitigating the same issue and, in the alternative, that
plaintiffs lacked prudential standing "under a fresh
analysis." Id.
The Second Circuit first rejected plaintiffs' argument that the
district courts were obligated to address whether plaintiffs had
Article III standing before addressing whether they had prudential
standing. Id. at *2. The Court explained that, while
constitutional jurisdiction ordinarily is addressed first, courts
have "leeway" to dismiss actions based on
"non-jurisdictional, non-merits grounds, particularly where
the constitutional-jurisdiction question is 'difficult to
determine.'" Id. at *3. Moreover, the Second
Circuit held for the first time, agreeing with the Ninth Circuit,
that issue preclusion (also referred to as collateral estoppel) is
a "non-merits threshold ground that is suitable for resolution
before addressing a difficult or novel question of constitutional
jurisdiction." Id. Because the Court concluded that
the district courts here were faced with a "thorny Article III
standing question" that was "hotly debated" by the
parties, the Court concluded that the district courts were
permitted to dismiss based on preclusion without addressing
constitutional standing. Id.
In addition, the Court affirmed the district courts'
application of issue preclusion. Specifically, the Court explained
that it was undisputed that "materially identical transactions
with the CDO Trustees were at issue in all the actions," and
the Court did not find that the district courts "erred in
determining that [p]laintiffs had a full and fair opportunity to
litigate the champerty-based prudential-standing issue" in the
prior action. Id. at *4. In reaching this determination,
the Court rejected plaintiffs' argument that prudential
standing was a "pure legal question" and therefore could
not be the subject of issue preclusion; to the contrary, the Court
noted that the district courts' evaluation of the champerty
issue included a factual determination of "the purpose behind
the plaintiffs' acquisition of rights." Id. The
Court also rejected plaintiffs' arguments based on equitable
considerations, concluding that (1) plaintiffs made no argument
that they were unfairly treated in the prior action; (2)
plaintiffs' argument that one defendant had unclean hands
because it was a party to one of the assignments was irrelevant
because plaintiffs themselves had "orchestrated the
assignments"; and (3) even though defendant in one action had
allegedly not included champerty as an affirmative defense in its
answer, the district court was permitted to consider issue
preclusion "in accordance with the 'strong public policy
in economizing the use of judicial resources by avoiding
relitigation." Id.
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