Enforcement activities of cybersecurity and privacy laws in both Canada and the United States are on the rise. Canada has one federal statute governing commercial privacy matters across the country, except in three provinces where “substantially similar” legislation governs, and by specific requirements for particular industries (i.e., banking and health). This approach differs from the United States, where there are multiple federal laws and a growing number of state statutes and regulations that govern privacy and cyber security. For businesses engaged in Canada-U.S. cross-border transactions understanding the laws and regulations on both sides of the border and having an appropriate cybersecurity compliance program in place are imperative to assuring that personal and proprietary information are protected and to minimizing the legal, financial, and operational risks to businesses that may occur through noncompliance with laws.
In the United States, no single federal law regulates the privacy and security of personal information and confidential business data. Instead, a complex combination of federal and state laws and regulations overlap and sometimes contradict one another. Data breach disclosure obligations have expanded significantly as data breaches continue to dominate the news. In addition, government agencies and industry groups have developed guidelines and self-regulatory frameworks that create what amounts to privacy and security best practices. These new laws, coupled with the tremendous increase in data collection and processing, result in a greater risk of privacy and security law violations and create significant compliance challenges.
The U.S. Federal Trade Commission Act, The Health Information Portability and Accountability Act (HIPPA), the Graham-Leach-Bliley Act (GLBA), The Electronic Communications Privacy Act (ECPA), and the Children’s Online Privacy Protection Act (COPPA) are several, but not all, U.S. federal laws that govern certain actions or set out procedures that must be followed to protect certain kinds of personal information. The California Consumer Privacy Act (CCPA) and the Massachusetts Data Security Regulation are two state statutes that include greater data protection provisions than those found in the federal laws. The CCPA creates the most stringent data privacy regime and will force most companies doing business in the U.S. to change their models of data collection and processing. Legislative proposals regarding data privacy are currently under consideration in several other states and in the U.S. Congress.
The Canadian legal framework for the private sector is generally built around the federal Personal Information Protection and Electronic Documents Act (PIPEDA), except for the provinces with “substantially similar” legislation. The three provinces with “substantially similar” legislation are Alberta, British Columbia, and Québec, which operate mostly independently from PIPEDA. PIPEDA, and the provincial laws, apply regardless of a business’ physical residency within the country.
There are some differences between PIPEDA and the provincial laws. For example, British Columbia’s law is more comprehensive, covering unincorporated associations, trade unions, trusts, political parties, and not-for-profits, in addition to commercial organizations. Some provinces also have separate laws that govern how health- and employment-related personal information must be handled. Canada also has federal and provincial laws that govern privacy for public bodies. Of particular note is British Columbia’s law that restricts the storage and access of personal information to inside Canada.
If a commercial organization operates within Canada, PIPEDA or the provincial law applies. Some important organizational obligations under PIPEDA include the designation of one or more individuals responsible for compliance with the law, notification of data breaches to individuals and the privacy commissioner if the breach causes a real risk of significant harm, and a duty to maintain certain standards of security safeguards commiserate with the sensitivity of the data. Commercial organizations must also develop policies that reflect the principles underlying PIPEDA. These principles are included in the law itself. Development of a compliance program to implement those policies will be a significant step to further assuring that a business is compliant with PIPEDA and other applicable laws.
The Canadian Anti-Spam Legislation (CASL), another federal statute, addresses the way electronic communications of a commercial nature to consumers are to be handled. Concepts of consent and a requirement to identify the party sending notices are part of CASL. CASL requires that communications must include an unsubscribe feature, and it applies even to messages sent from outside of Canada to Canadian recipients.
Canadian privacy laws include accountability as a key concept. The Canadian Privacy Commissioner has stated: “Accountability in relation to privacy is the acceptance of responsibility for personal information protection. An accountable organization must have in place appropriate policies and procedures that promote good practices which, taken as a whole, constitute a privacy management program.”
Development of an effective compliance program, whether in Canada or in the United States, requires the commitment of business leaders and the dedication of resources. All businesses should designate a person or team responsible for managing cybersecurity and privacy compliance programs. In a large business, a separate organization focused on compliance may be appropriate. The compliance person, team, or organization should have significant authority and status, either as part of or with direct access to senior management, and should have direct access to the board of directors. Leadership must embrace the concept that cyber security is an enterprise risk—not just the responsibility of the IT or security departments.
The first steps toward developing an effective cybersecurity compliance program are to:
map the personal data held by the organization in terms of its location, lifecycle and sensitivity;
conduct a risk assessment;
develop processes and implementation plans to assure that existing security gaps are closed;
establish a plan for ongoing assessments to provide monitoring and possible warnings of new gaps or risks;
develop and implement training programs to educate management and employees about risks, security processes, and compliance expectations; and
adopt an audit program to assure that monitoring, training, and compliance are occurring.
Failure to develop and implement an appropriate program for compliance with privacy and cybersecurity requirements subjects a business to significant risks. Not only are there legal risks of failing to comply with laws, including possible fines and third-party lawsuits, but there are also risks to a business’ reputation, potential financial losses, harm to its network, and potential loss of intellectual property and strategic information.
“Cooperation Revolution” Shifts Focus to Executives and Managers
In 1999, then-U.S. Attorney General Eric Holder issued an internal Justice Department memo entitled: Bringing Criminal Charges Against Corporations. It laid the groundwork for policies that allowed more leeway in bringing criminal charges against large firms.
By 2002, the Enron and WorldCom failures had occurred, and Arthur Andersen had imploded after it was indicted. The firm was ultimately acquitted of criminal misconduct, but innocent partners, employees, and others suffered severe losses as a result of Andersen’s demise.
Congress acted promptly. The Sarbanes-Oxley Act (SOX) became law in 2002, with the express goal of improving the quality of public company financial reporting. SOX imposed on senior executives enhanced disclosure and certification obligations, eliminated accountants’ potential conflicts of interest, and established a new federal regulatory body, the PCAOB, to police the quality of public company audits. The ABA created a task force to consider the impact of SOX on executives. That task force later became the Director’s and Officer’s Liability Committee of the Business Law Section.
At the same time, the Internal Revenue Service had begun investigating the involvement of major accounting firms, law firms, the investment arms of banks, and securities firms in promoting allegedly abusive tax shelters. The tax shelters under investigation had operated to shield from taxes billions of dollars of taxpayer income generated in the years leading up to the dot.com crash of 2000. The IRS referred the matters to the Department of Justice (DOJ). The DOJ brought or threatened criminal proceedings against both taxpayers and major accounting firms as well as other participants in the tax-shelter industry. The criminal cases were plowing new legal ground in that they sought for the first time to criminalize conduct that had been exclusively the province of highly disputed areas of civil tax law. With only four major accounting firms left, the Andersen experience gave rise to an acute need to balance the interests of law enforcement and erosion of federal revenue against a desire to avoid the severely negative damage to innocent bystanders that followed Andersen’s collapse.
In 2003, the DOJ issued a second memo that superseded the 1999 Holder Memo. This memo, known as the “Thompson Memo” after its author Deputy Attorney General Larry Thompson, was entitled Federal Prosecution of Business Organizations. The memo specifically held out the possibility that large organizations could escape criminal charges completely by “cooperating” with law enforcement. The Thompson Memo listed nine specific factors for DOJ lawyers to consider before filing criminal charges against business entities. It indicated that to avoid prosecution, entities must turn over to the government materials they obtain as a result of an internal investigation of the alleged misconduct, waive attorney-client privilege, and refrain from providing company-paid lawyers to executives targeted for individual prosecution.
The U.S. Chamber of Commerce, the ABA, and others immediately lodged vociferous objections to the Thompson Memo with Congress. The objectors focused on what they characterized as a wholesale assault by the DOJ on the sanctity of the attorney-client privilege. The DOJ responded by issuing the 2006 McNulty Memo. That memo, entitled Principles of Federal Prosecution of Business Organizations, restrained the ability of line prosecutors to demand the turnover of privileged materials. It also scaled back the importance of an entity’s advancement of attorney’s fees to its executives as a factor militating in favor of the filing of criminal charges against an entity.
The DOJ’s Filip Memo of 2008 bore the same title as the Thompson Memo. It clarified that the quality of an entity’s cooperation would be measured by the extent to which it discloses facts, as opposed to waives privileges, and that the DOJ would no longer consider advancement of attorney’s fees or the existence of joint defense agreements between a company and its executives as factors demonstrating a lack of cooperation. The same year, in US v. Stein, the U.S. Court of Appeals Second Circuit affirmed a ruling of the U.S. District Court for the Southern District of New York that held unconstitutional the efforts by the DOJ to pressure KPMG to cut off defense funding of its tax partners on the eve of their 2005 criminal trial for promoting allegedly abusive tax shelters.
This chain of developments set the stage for the last major DOJ memo in the sequence significant to our subject, the Yates Memo of 2015.[1] By this time, the DOJ had announced that it would no longer consider an entity’s advancement of defense costs to its executives as a factor favoring criminal indictment of a company; it had relinquished much of its ability to force wholesale waivers of privilege; and it had announced that it would no longer view negatively the existence of joint defense agreements between companies and potentially targeted individuals. By this time, large commercial entities were accustomed to cooperating with the government to obtain deferred prosecution agreements to avoid their own prosecution. Entities typically would agree to pay a substantial fine or make restitution, institute internal reforms, finance internal investigations of potential misconduct by individual executives and employees, and turn the results of their investigations over to the government. The establishment of a “culture of compliance” in large business entities was well underway. What was required was a clear means of meeting the public need for retribution and deterrence. The Yates Memo made clear that those objectives were to be met by prosecuting individual executives.
Indeed, the Yates Memo’s very title emphasized this objective: Individual Accountability for Corporate Wrongdoing. It outlined six steps designed to enhance the DOJ’s “pursuit of corporate wrongdoing”: (1) to be deemed cooperative an entity must designate the individuals involved; (2) DOJ prosecutors should target individuals from the outset; (3) DOJ civil and criminal staff should share information; (4) there were to be no tradeoffs between a larger fine for the entity in exchange for a release of individual responsibility; (5) there were to be no entity settlements without a “clear plan” for individual responsibility; and (6) civil staff should pursue individuals with civil charges regardless of the individuals’ ability to pay.
Today, the concept of entity cooperation is established and has gone global. Scarcely a day goes by without a major entity telling the press in respect to some scandal or charge that it is “cooperating” with the government. An industry of former prosecutors in private practice has sprung up to cover the demand for internal investigations. Through this “cooperation revolution,” the burden of the criminal law is now placed squarely on individual executives. The higher profile they are, the more they are exposed. Indeed, heavily footnoted law review articles going back years—one written by an insightful observer who later became a major prosecutor himself—argue that massive unfairness to innocent executives is highly likely given the enormity of the government’s leverage in persuading business entities to cooperate. Anecdotal evidence suggests that this unfairness can even extend to entities’ selective disclosure of facts to prosecutors that conceal potentially exculpatory Brady and Jencks Act evidence. To the extent this exists, central elements of the U.S. criminal justice system are being compromised.
The enormity of the government’s leverage in these negotiations derives from two factors: (1) U.S. Supreme Court precedent from the early 20th century imposes vicarious liability for criminal conduct on entities for the smallest infractions of low-level agents who may be acting only in part for the benefit of the entity; and (2) the “egg shell” status of large entities that cannot—a la Arthur Andersen—even risk a criminal charge. As a result, the onus of the criminal law now falls primarily on individuals. Indeed, a recent ABA panel listed 12 “Best Practices Take-Aways” for internal investigations. Number six is: “Throw the guilty under the bus.”[2]
Application to Business Lawyers
The application of these developments to business lawyers is plain. As a result of the cooperation revolution, the interests of entities and the executives who serve them can now become adverse once a potential violation of criminal law becomes subject to internal investigation. This potential adversity of interest has direct application to business lawyers who are charged with responsibility for the creation or renewal of any component of an executive protection program. The fact that the lawyer’s real client—the corporation or alternative entity—asks him or her to draft a plan that protects nonclients—individual board members and officers—raises pointed questions of legal ethics.
From the Commencement of an Investigation, the Individual Executive Is Placed under Extreme Duress
Before addressing the ethical conflicts in detail, we point out an experiential reality. Individuals undergoing investigation for criminal charges (which often involve gray areas of fact and/or law) are subject to intense stress, regardless of their ultimate guilt or innocence. Most executives believe when they accept a management position (often without investigating their rights to litigation protection) that their company will stand behind them in any case of legal doubt or inquiry.
However, the cooperation revolution described above proceeds on the exact opposite assumption. It assumes that under governmental pressure to cooperate, otherwise presumptively innocent executives will be identified by the entity they serve as candidates for potential criminal prosecution. Once so identified, investigated or charged executives frequently lose the ability to sleep or to concentrate. Their health and family relationships deteriorate. They feel shunned by their colleagues. If they insist on legal protections like Fifth Amendment privileges when interviewed by company investigators, they are typically fired. Any professional designations or licenses they hold are placed in jeopardy. They lose their incomes and employment benefits. They may need to sell their home(s). They sometimes lose their health coverage or other critical benefits for their dependents. Many white collar practitioners, when commencing their representation, direct their clients to seek immediate psychological counseling, another major cost item, precisely because the stress is so severe. Of course, this stress pales in significance to that of a catastrophic legal outcome. An adverse legal outcome is far more likely if their executive protection program fails to afford them enforceable advancement rights to hire competent counsel to defend their individual interests.
Business Lawyer Conflict at the Drafting Stage
Faced with the above realities, what ethical rules apply to the business lawyer tasked with the creation or renewal of an executive protection program? An executive protection program refers to the documents that corporations and alternative entities adopt for the protection of their directors, officers, and other managers that, in combination, cover four legally distinct subjects: (1) exculpation of corporate directors from liability in damages for breach of the fiduciary duty of due care; (2) advancement, i.e., the financing of a covered executive’s defense costs while an underlying criminal or civil case or investigation is proceeding against him or her; (3) indemnification, i.e., reimbursement for all defense costs not advanced and the forgiveness of any duty to repay previously advanced defense costs after the underlying proceeding is concluded; and (4) director and officer liability insurance that backstops and supplements the above benefits in the event that they are defectively drafted or incomplete, or in the event that the entity is unable or unwilling to provide them due to perceived government pressure or otherwise.
These documents are put into place on the“clear day,” i.e., before any civil claim or criminal charge or investigation is in the offing, but they are designed to cover what happens on the “stormy day,” i.e., after a claim or charge is made or investigation commenced. THUS, ALL THE CONFLICTS BETWEEN THE ENTITY AND THE EXECUTIVE THAT MAY ARISE ON THE STORMY DAY SHOULD BE ANTICIPATED AND DRAFTED FOR ON THE CLEAR DAY.
The complexities of the law in this area are intense. At least four substantive legal specialties are implicated: the law of advancement and indemnification with and without a corporate law overlay; the law of preliminary injunctions to the extent necessary to enforce advancement rights; the complex law of D&O liability insurance; and the law and practice of white collar criminal defense and Fifth Amendment privilege protection. The task of drafting is not for amateurs or legal tourists.
The Applicable Ethical Rules and Law of Professional Liability to Nonclients
So our in-house or outside business lawyer is asked by the board of a corporation or managing body of an alternative entity to review and evaluate, or even just comment on, the firm’s executive protection program. Alternatively, for example, one or more directors ask for the lawyer’s opinion on the scope or adequacy of its coverage of them personally, or to consider revising a bylaw provision, to review and comment on some provision of a firm’s insurance policy incident to its initial negotiation or renewal, to explain an existing set of articles/bylaws/policies to a new director, or to put together new bylaws or a new operating agreement for a recently formed alternative entity that is about to receive outside financing from a venture capital firm. The list goes on and on.
On each occasion, the lawyer is being asked to create, evaluate, draft, or counsel as to the renewal of an executive protection program. By definition, these requests implicate Model Rules 1.1 and 1.3, the rules mandating competency and diligence. Demonstrating competency is no small matter, given that the subject matter transcends existing legal silos. Complicating the matter is the fact that the lawyer’s exclusive de jure client is the entity, but either the entity or one of its most senior constituents is asking him or her for advice on protecting nonclients—the directors and other potentially covered executives in their individual capacities—from personal, potentially catastrophic loss. In such a case, additional rules of ethics come to bear. They are:
Model Rule 1.13 (Organization as Client). The lawyer represents the organization acting through its authorized “constituents”—its board or equivalent. Assuming the lawyer knows that the organization’s interests are adverse to the interests of any of the individuals, Rule 1.13 requires the lawyer to point out that he or she represents the organization, not the individuals who are the very people whom the executive protection program is supposed to benefit. Once the stormy-day conflicts are brought forward to the clear day on which the program is drafted, the drafting conflicts are intense and numerous.[3] The lawyer has no conflict because he or she represents only the entity. The law permits the board to resolve the conflict even though the individual directors are beneficiaries of the program personally because the board acts collectively as the embodiment of the corporation. The rules of ethics require the lawyer to be careful how he or she deals with the board’s members individually, however, because they are entity “constituents” whom the rules single out for special treatment.
Model Rule 2.1 (Counselor). In rendering candid advice to the board, the lawyer may refer not only to the law and practice of cooperation as we did above, but also to the moral, social, and economic factors relevant to the drafting of the program. The latter may well favor vigorous protection of directors and officers. Most states’ laws recognize that without adequate protection from litigation, including advancement of legal fees and expenses, most entities will have difficulty in attracting and retaining executives. It is easy to see why that is so upon consideration of the experiential factors listed above. Most states’ laws also recognize that executives who defeat meritless litigation against them arising from their service to an entity should be indemnified by the entity for the costs they incur in the effort. Most boards opt to select in principle a grant of both advancement and indemnification “to the fullest extent permitted by law” once they are told that in the event of a change in control, any of them, or all of them, and their insurers to boot, may be in the sights of new, sometimes hostile, managers. However, rarely do they (and shareholders) feel so magnanimous after a real threat arises when they are in charge. The devil, then, is seen as lurking in the drafting details, and blame is frequently laid on the drafting lawyer for facilitating what is viewed as the unjust protection of a miscreant.
Model Rule 2.3 (Evaluation for Use by Third Persons). This rule may be implicated when the board, the personification of the entity, asks the lawyer to evaluate the corporation’s existing or new executive protection program for personal consideration by directors and other covered executives. The rule permits a lawyer at the request of the corporate client to make the evaluation for the benefit of individual nonclients if the lawyer reasonably believes the evaluation is “compatible” with his or her relationship with the client. Given that an entity’s clear-day agreement to protect executives from some of the adverse consequences of the cooperation revolution furthers the entity’s ability to attract and retain talented management, “compatibility” of interest to that extent is self-evident. On the other hand, at a later time, some of the protections adopted for executives may be perceived as hampering the corporation’s ability to later throw a perceived miscreant director or officer “under the bus.” On the stormy day, shareholders may criticize the board for excessive liberality, and the board may criticize drafting counsel. Permitting perceived miscreants to “lawyer up” at company expense may be seen as both a waste of corporate assets and as hampering the entity’s ability to achieve appropriate “cooperation credit” to avoid a catastrophic indictment. To that extent, the interests of the client and the nonclient may be distinctly adverse even on the clear day. As a result, the client’s “informed consent” may be required. See articles cited in footnote 3 for ideas about how to do that.
Model Rule 4.1 (Truthfulness in Statements to Others). Lawyers are charged ethically with a duty to speak truthfully and to refrain from assisting a client in a criminal or fraudulent act by remaining silent and thereby failing to disclose a material fact. An entity lawyer’s failure to disclose the risks inherent in serving as a business executive in the era of the cooperation revolution to a group of directors voting on a protection program is akin to remaining silent when a corporate HR representative in the lawyer’s presence extolls a health insurance program to a group of employees while failing to reveal that it contains a cancer exclusion.
Model Rule 4.3 (Dealing with Unrepresented Person). In the executive protection context, this rule supplements Rule 1.13. Given that the directors are (usually) not personally represented in the drafting of the protection program, the lawyer must disclose the lawyer’s obligations to the entity client; thus, the lawyer ordinarily should not give the individual beneficiaries legal advice (other than to retain personal counsel), and must do what is necessary to “correct” any “misunderstanding” of the lawyer’s role by the individuals. We believe that a misunderstanding of the business lawyer’s role in this area is extremely difficult to avoid, particularly if the lawyer deals with any entity constituent one-on-one. We thus suggest that to minimize liability risks to counsel, (1) the lawyer should always remind constituents that he or she represents the entity, not the individual officer or director; and (2) entities should retain separate representation for beneficiaries of the executive protection program as a group to address any questions. We believe strongly that business lawyers may not avoid this issue by deferring to an entity’s risk manager where the lawyer is involved in any way in the drafting of advancement or indemnification provisions or the review or negotiating of liability insurance protection.
Sections 51(2) and (3) (Duty of Care to Certain Nonclients) of the Restatement (Third) of the Law Governing Lawyers. These sections supplement and support Rule 2.3 and raise the consequences for an ethical breach to the level of possible civil liability. Subsection (4) of section 51 creates a similar duty of care to a nonclient who is the beneficiary of a client’s fiduciary duty. Ordinarily, entities are not fiduciaries for their own directors and managers personally, but is that true when the entity undertakes to obtain D&O liability insurance for the personal benefit of constituents where the beneficiaries have no control or influence over the process? There is anecdotal evidence of entities refusing to produce D&O insurance policies to covered executives on the stormy day or denying them access to important coverage and claims information. Can a lawyer ethically assist such conduct under subsection (4)?
Section 95 (An Evaluation Undertaken for a Third Person) of the Restatement. This section supports Rules 2.3 and 4.1 and makes clear that a duty of care exists in the event of their violation.
In sum, after the cooperation revolution, the evaluation and drafting of the component documents of an executive protection program require specialized knowledge and skill overlapping four discrete areas of legal practice. The ethical duty of competency plainly comes into play. Further, by definition, drafting for the cooperation revolution is required whenever a lawyer is asked by an entity client to prepare, comment on, or oversee the renewal of a protection program for the benefit of constituents who may well rely, however inappropriately, on the entity lawyer. This situation is governed by discrete ethics rules and principles of law governing lawyers’ responsibilities to nonclients.
The cooperation revolution can yield catastrophic consequences for today’s presumptively innocent executives. It cannot safely be ignored by legal practitioners.
[1] We do not view the November 2018 remarks of Deputy Attorney General Ron Rosenstein as signaling a major retreat from the Yates Memo. The DOJ’s emphasis on individual responsibility remains applicable to highly visible senior executives who are typically the particular objects of executive protection programs. The question of the degree to which the DOJ can direct or influence internal investigations without rendering them state action for Constitutional purposes was recently addressed in U.S. v. Connolly, one of the Libor cases before the U.S. District Court for the Southern District of New York. The issue is likely to be appealed to the Second Circuit.
[3] Wing, J. and Oringer, A., “Discipline Involving Multiple Disciplines — Protecting Innocent Executives in the Age of “Cooperation,” ABA The Business Lawyer, Vol 70, Issue 4, Fall 2015, pp 1123-1138. James Wing, Training for Tomorrow: 2013 Checklist for Corporate Counsel Supervising the Creation or Renewal of an Executive Protection Program,Business Law Today (2013). https://www.americanbar.org/content/dam/aba/publications/blt/2013/09/full-issue-201309.pdf
Businesses often operate with their legal departments as an afterthought. This obviously isn’t ideal in that legal issues can cost businesses thousands of dollars, but there are much cheaper ways businesses can protect themselves on the front end, especially when it comes to the legality of online marketplaces.
Many companies produce a lot of content and save time by using a content management system (CMS). These systems allow businesses to easily update content from blogs to landing pages, but they aren’t great for everything—specifically, hosting any type of legal content.
Most CMS tools benefit the marketing and sales teams within a company, but the impact of using them for legal content can affect the entire organization. Although the legal team usually does not provide input in purchasing new tools or software, especially those primarily used by marketing and sales, it matters at the end of the day. If a legal issue arises and you end up in court, a judge or a lawyer will not care that your company’s legal team wasn’t involved in purchasing a system or a tool like a CMS.
“Legal content” is a broad term, but some common areas where it appears on a website are terms of use, disclaimers, privacy, and refund policies—all of those boxes you probably click without reading. These may seem like a nuisance for consumers, but they are necessary for businesses to protect themselves from unnecessary risk. The protections they provide, however, are only as good as the format and presentation. These are some major reasons why a CMS is not the ideal platform to host legal content and terms:
It is difficult to keep a record. A CMS will track changes made to a website over a certain period of time, but changes made to legal content often fall outside of what is tracked because it typically is kept in text files. It is difficult to keep track of records that are not there, and staying up to date on all changes made to legal content is crucial to protect yourself if you end up in a courtroom. Fortunately, there is software that allows businesses to better track the changes made to hosted legal content.
It is difficult for consumers to find your legal terms. All legal content must be disclosed to every customer. Although a CMS can certainly present the legal content, the design and placement usually make it difficult to find, let alone navigate. A hard-to-find tab might lead to another window that displays a link to “Website Terms,” or the legal content might end up buried in the footer of the website in a color that matches the website background, making it virtually impossible to read. This is important to note because burying your browsewrap or clickthrough might leave them unenforceable, which could land you in some pretty hot water. Lack of constructive notice that the use of a website is subject to legal terms can be disastrous for your company.
It is difficult to show proof. Should the unfortunate need arise for a company to enforce its legal terms, the company will be expected to provide evidence that a user accepted its legal agreements. A CMS will not be able to produce a listing of who signed the legal agreements, which can end up being a nightmare. Even if a CMS does a decent job of hosting legal content, it certainly is not going to create any type of self-contained, durable record of consent. Businesses need a solution that will store and allow easy access to the signed legal agreements so they can defend themselves if needed.
It is difficult to stay updated. The best place to present legal content and have it accepted by a user is during a clickthrough process (think: registration forms, opt-ins, check-out flows). A CMS is of little help when integrating legal content into this type of clickthrough process, and there is no fast or efficient way to make regular updates to legal content, which must be a priority. The legal team can save time, money, and resources by finding a better host that allows it to easily update the content of the legal agreements without having to involve developers.
CMS tools are undoubtedly useful for most businesses, but they just are not the best option for hosting legal content. It can lead to a world of trouble for a legal team and ultimately puts your business at risk—something to avoid at all costs.
Utilize solutions designed with the legal team in mind and built specifically to manage and track website legal content. These tools will implement best practices for design, assist in publishing legal content, and store information from clickthrough agreements, allowing businesses to obtain the contract acceptance they need.
Lawyers and modern technology are a fascinating—and complicated—combination. On one side is a unique business model that is owned and led by partners and provides professional services. On the other side is an ever-changing industry that sells products and services aimed at disrupting the way things are done. And stuck in the middle? Lawyers.
The crux of the problem is that many law firms just are not making the investments in modern technology fast enough to remain competitive and deliver success for their clients. The fact that you are reading this article likely means you are in this situation yourself or acutely aware of it.
Further complicating things is the fact that running a law firm is uniquely challenging. There is the firm partnership structure, which is much different than the typical corporate model where a small group at the top consisting of board members, a C-team, and senior executives run things. The complex, nonlinear relationships that law firms have differ greatly from the top-down, linear structure that most corporations employ. There is also a fee-based revenue model for firms, as opposed to straight product and service (e.g., SaaS) revenue, and let’s not even get into all the regulations and conflicts that must be addressed!
Hundreds of lawyers in the United States and the United Kingdom—many of them partners with ownership stakes in their respective firms—weighed in on their attitudes toward technology in a survey recently conducted by Intapp in partnership with YouGov. The survey polled 258 lawyers at firms with 50+ employees: 133 in the United States and 125 in the United Kingdom.
The survey shows that lawyers recognize the importance of using software that is purpose-built for their needs and those of their clients as opposed to generic solutions. Yet, despite the growing awareness of the need for modern technology solutions that help deliver a level of service that delights clients (in the hopes of doing more work to help them solve complicated issues), the survey reveals that law firm use of technology designed specifically for legal applications is lagging.
Here are some of the key findings from U.S. lawyers:
Lawyers are not happy with the tech they have.
Forty percent said little to none of the software they use regularly has been designed with a law firm in mind.
There is great hope for artificial intelligence (AI).
Thirty percent said that AI could help draft legal documents.
Another 30 percent said AI could help track billable time.
Others said AI’s value lies in conflicts clearance (25 percent), compliance with client billing requirements (20 percent), and estimating fees of an engagement (19 percent).
The tech must change.
Forty-one percent indicate that user interface is a problem, followed by a need for software more tailored to the business of law (29 percent) and more intuitive operation of the software (29 percent).
What U.S. lawyers say their clients want.
Thirty-five percent reported that clients are demanding faster service, whereas 24 percent say their clients want more transparency about the status of matters.
Regarding fees, 25 percent identified lower fees as a client demand.
Unsurprisingly, the opinions on lower fees vary between large and other-sized firms, with large law firms valuing lower fees at 33 percent versus 15 percent for other-sized firms.
The survey results map closely to what I hear from clients, colleagues, and industry thought leaders every day. They also align with the larger business trend of organizations recognizing the need to shift to industry-vertical technology solutions and away from the one-size-fits-all model. Given their unique structures, law firms require more collaboration among those who run and own the firms and the professionals who staff the functional areas like IT, HR, business development, marketing, and practice management. Thus, the technology they use must reflect this business model.
The legal game has changed. One of the biggest catalysts is the ongoing upheaval in the way legal services are delivered. The competition from other law firms, the Big Four consulting firms, online legal service providers, and in-house attorneys is too fierce to not take advantage of modern, purpose-built technology.
Based on the survey results and my own deep experience in the legal tech space, I can say with confidence that the “modern” law firm is one that integrates people, processes, and data. Doing so fosters collaboration, fuels growth, and delivers client success.
The good news is that the technology is available for firms to modernize their tech stacks. There are purpose-built solutions that span the entire client lifecycle, from business development to client service and internal processes. Do your homework and go into the search and procurement process with an open mind. Your ideal modern tech stack is out there waiting for you, but you must move quickly or your firm will be left behind.
Since President Gerald Ford signed it into law on December 22, 1974, the Real Estate Settlement Procedures Act (RESPA)[2] has been amended to cover many diverse yet related “real estate” subjects. In its present iteration, only sections 2605(g) and 2609 deal with mortgage escrow accounts, with much of RESPA’s escrow-themed jurisprudence centering on the former.[3] Despite its sparsity,[4] this precedent’s perusal reveals the popularity of a peculiar interpretation of section 2605(g) within the federal judiciary[5]—namely, “[]though . . . [it] does not explicitly set this out as a pleading standard,” section 2605(f) impliedly requires a showing of pecuniary damages in order to state a claim under section 2605’s every subpart, including its escrow-centric section 2605(g).[6] As a result of this extrapolation’s increasing sway, another weapon for use by the many subject to RESPA’s positive commands and plain prohibitions has been forged, one too often unexploited by defendants and forgotten by plaintiffs.
Organized under the laws of the state of Maryland in 1995, New Century Financial Corporation (New Century) sited its headquarters in Irvine, California. In 2004, New Century converted itself into a real estate investment trust; in 2006, it ranked second only to HSBC Finance Corporation in the issuance of subprime mortgages. By the spring of 2006, this phoenix’s death spiral had commenced, culminating in its filing of Chapter 11 bankruptcy on April 2, 2007. Among one portfolio of assets subsequently sold by New Century’s bankruptcy trustee sat an outstanding mortgage owed by Demonfort and Leandra Carter (Carters, collectively).
In the months after this interest’s acquisition, this mortgage’s new owner unwittingly repeated its predecessors’ blunders. Most notably, it too neglected to supply the Carters with notice of all changes in the identities of the loan’s servicers or of the trustees authorized to commence a nonjudicial foreclosure. In so doing, as the Carters alleged, their debt’s most recent possessor had clearly violated section 2605(b). Soon after a court so concluded, however, a singular realization upended proceedings: for all their efforts, the Carters would never be able to adduce proof of a single computable injury or monetizable harm.
B. Misplaced Letters
A decade later, due to a married couple’s erratic payment history, another mortgagee exercised its right under a duly executed deed of trust (DOT) to mandate the creation and upkeep of a mortgage escrow account. At the same time, this entity promised the mortgagors that it would make timely disbursements from this regularly replenished account for the payment of their mortgage insurance. Pursuant to these representations, first the DOT’s two holders and then the obligation’s servicer diligently sent the necessary sums to a small insurance company headquartered in the Virginian swamplands, month after month and year after year. As the servicer likely knew, section 2605(g) required no less.
This process broke down in the course of one muggy, three-month stretch. Beginning in June of 2016, the property’s longtime insurer sent renewal notices to the servicer warning of the policy’s imminent expiration in August. Inexplicably, these missives failed to induce a response, whether an acknowledgement of receipt or an application for the policy’s renewal, from the servicer’s appointed staff. Hence, once the deadline passed without receipt of a wired or mailed payment, the mortgagors’ insurance automatically lapsed.
Soon thereafter, a hurricane besieged the mortgagors’ ramshackle home, prompting the servicer first to discover the policy’s termination and then to respond in two conspicuous ways. Within days, it force-placed coverage, backdated to the former policy’s date of expiration, on the now-battered home; within weeks, it ordered its chosen adjustor to utilize the formula for reimbursement set out in the expired policy. Maybe inevitably, once this expert submitted his valuation, the mortgagors proffered their own, and the parties began feuding over manifold objects’ appropriate valuation. As these disagreements’ intractability spiked, the mortgagors, at their new lawyer’s behest, pondered the potential of a section 2605(g) claim.
III. Statutory Scheme
A. RESPA’s Origins and Objectives
In the 1950s, an increase in the settlement costs incurred by home purchasers first garnered a modicum of Congress’s attention.[8] Nevertheless, it took until 1969 for the rash of consumer complaints over these fees to prod a congressional subcommittee to more than perfunctorily wade into this fraught area of law and finance.[9] In the aftermath of the extensive public hearings that followed, Congress empowered the Secretary of the U.S. Department of Housing and Urban Development and the Administrator of Veterans Affairs to conduct an official study of settlement costs on certain government-insured loans[10] in section 701 of the Emergency Home Finance Act of 1970.[11] From the written peroration produced by these agencies came RESPA.[12]
Since its effective date of June 20, 1975,[13] RESPA has regulated the conduct of the varied participants in “the settlement process for residential real estate,”[14] governing this “narrow field of financial transactions” but affecting “a broad group of financial institutions.”[15] In relevant part, RESPA then defined, and still does, a real estate “settlement service” as “any service provided in connection with a real estate settlement, including, but not limited to” title searches, title insurance, attorney services, document preparation, credit reports, appraisals, property surveys, loan processing and underwriting, and the like,[16] relating to “a[ny] federally related mortgage loan,” itself an expressly delineated term.[17] From 1975 through today, RESPA has obligated the entities offering such services and dealing with such loans to deliver “greater and more timely information on the nature and costs of the settlement process” to consumers and to forsake the “abusive practices” blamed for “unnecessarily high settlement charges.”[18] A certain belief underlay, and still accounts for, these sections: “that those who pay settlement costs rarely understand them and have little ability to affect their imposition through consumer choice.”[19]
A similar view has always animated section 2609, one of RESPA’s original parts.[20] As its legislative record amply confirms, Congress crafted section 2609 to “attack[]” and “outlaw[]” some lenders’ practice of “maintaining an overlarge ‘cushion’ of borrowers’ tax and insurance premiums [in mortgage escrow accounts] to profit from the interest gained by investing it.”[21] Whatever their original defensibility, these accounts had “developed into a lucrative source of interest-bearing capital for mortgage lenders” in the decades since their emergence in the 1930s, a transformation little noticed, for good or ill, until the late 1960s.[22] At that point, and for years afterward, borrowers brought hundreds of suits to recoup their lost interest income or recover the profits that they believed lenders had so illicitly accumulated.[23] “[T]he consumer movement” had recently “singled out the escrow account for particular attention,” one knowledgeable observer reflected in 1972, “the probable result of a sense of frustration on the part of the average borrower and the deep-seated feeling that he[, she, or them] is being gypped and the industry is taking advantage of him [her, or them].”[24] Due to a surfeit of such unequivocally telling evidence, section 2609’s impetus and mark—“[t]he common practice of profiting by overcharging and investing escrow funds”—have never been in doubt.[25]
In 1991, Congress extended RESPA to the “servicing” of “federally related mortgage loans” with the enactment of section 2605.[26] It did so in response to a major study of mortgage loan servicing practices, conducted by the U.S. General Accounting Office, that collected a substantial number of consumer grievances regarding abusive practices by certain servicers.[27] In pained and thorough detail, testimonial after testimonial documented perpetual “mistakes in calculating escrow account payments, unresponsiveness to inquiries”, and failures “to make timely property tax and hazard insurance premium payments” as well as “to provide adequate notice of a mortgage loan servicing transfer.”[28] Other protests “pointed out that these errors . . . [could] potentially result in the imposition of late payment charges and payments to the wrong parties.”[29] These writers’ excoriations naturally fixated upon servicers of residential loans or mortgages, the typical point of contact for the average borrower.[30] To address these apprehensions, Congress opted to expansively define “servicing” for purposes of section 2605 as “receiving any scheduled periodic payments from a borrower pursuant to the terms of any loan, including amounts for escrow accounts described in section [2609] . . . , and making the payments of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the loan.”[31] As the practice of loan servicing by parties other than the original lender has become more commonplace, and as servicers’ ability to initiate foreclosures has been more firmly established,[32] section 2605’s prominence has mushroomed.
Cognizant of this history, courts tag RESPA in toto as a remedial consumer protection statute[33] and correspondingly construe its provisions.[34] Thus, because “[t]he express terms of RESPA clearly indicate that it is . . . a consumer protection statute,”[35] its every clause must be “read remedially . . . to further its goals of providing more information for consumers and preventing abusive practices by servicers.”[36] To these jurists, this view can (and often does) warrant capacious explications of RESPA’s scope and duties.[37] RESPA’s evolution into a “comprehensive law that covers virtually every loan secured by residential real property” by 1993[38] has only reinforced this interpretive predilection.
B. RESPA’s Escrow Provisions: Sections 2605 and 2609
RESPA imposes disparate duties on lenders and servicers with respect to mortgage escrow accounts. As to the former, it (1) limits the amount that lenders can require current or prospective borrowers to deposit into them, but (2) forces loan servicers (a) to deliver borrowers with account statements and notifications of shortage, and (b) to make timely payments from the escrow account for taxes, insurance premiums, and other charges in certain situations.[39] Applicable far beyond the date of the closing, the RESPA escrow provisions binding upon servicers appear in sections 2609 and 2605(g).[40]
Strictly tailored, section 2609 polices “when, what, and how much a servicer may collect from a borrower for deposit in an escrow account.”[41] In particular, it (1) prohibits the imposition of certain requirements on “the borrower or prospective borrower”;[42] (2) compels a servicer to “notify the borrower not less than annually of any shortage in the escrow account”;[43] and (3) enumerates a multitude of specifications as to escrow accounts’ initial and annual statements[44] whenever a lender forces a borrower to make advance deposits in a mortgage escrow account. By targeting these practices, section 2609 attempts to “relieve[] the home buyer of the burden of making advance deposits covering long periods of time, while [still] assuring lenders that these charges will be paid.”[45] As commonly parsed, however, this escrow provision awards no private cause of action, a conclusion[46] that has arguably limited its utility.[47]
In contrast, section 2605, which broadly focuses upon the servicing of mortgages, has long been held to provide exactly such a prerogative.[48] Among its various paragraphs, section 2605(g) alone “governs when a servicer is required to pay taxes and insurance premiums on a mortgaged property where there has been no escrow waiver.”[49] In accordance with this subsection, a servicer must “make payments from the escrow account for such taxes, insurance premiums, and other charges in a timely manner as such payments become due” so long as “the mortgage loan terms require the borrower to make payments to the servicer for deposit into an escrow account to assure payment of taxes, insurance premiums, and other charges with respect to the property.”[50] As the Consumer Financial Protection Bureau has advised, a servicer must make the payment required by section 2605(g) “on or before the deadline to avoid a penalty” and thereby escape liability for its trespass.[51]
C. RESPA’s Implicit Requirement: Section 2605(g)’s Causal Prerequisite
Bereft of any direction from RESPA itself, court after court has done the same, precisely as logic and practice compel: it has imported a causal prerequisite into section 2605’s every subparagraph, including section 2605(g). Textually, however, section 2605(f) expresses no such thing,[52] and neither section 2605(b) nor section 2605(g) speak as to causation.[53] Still, assuming section 2605’s three-year statute of limitations has not yet run,[54] a defendant can only be liable for “any actual damages to the borrower as a result of the failure” to comply with “any provision” of section 2605 per section 2605(f)(1)(A).[55] Having construed this text to render damages into “an essential element in pleading a RESPA claim,”[56] much precedent now expects a plaintiff to initially allege and later prove two verities when suing for a violation of section 2605:[57] (1) “pecuniary damages” (2) traceable to the defendant’s purported noncompliance with one of section 2605’s sundry provisions.[58]
With impressive rapidity, this dualistic construction led to the derivation of a newfangled pleading requirement for section 2605(g) claims. Simply put, an actual connecting link between quantifiable damages and that subsection’s breach must first be plausibly alleged and then competently evidenced for such a claim’s dismissal to be avoided under Federal Rules of Civil Procedure 12(b) and 56.[59] A plaintiff’s failure to specify a section 2605(g) violation and some measurable harm that directly flowed from that transgression will, in turn, ensure a section 2605(g) claim’s defeat,[61] as will reliance on “general allegations of harm”[62] or “conclusory statement[s] of law.”[63]
IV. Some Real-World Guidance for Defendants and Plaintiffs
Putting aside questions as to its objective cogency, section 2605(g)’s implied causal requirement presents defendants and plaintiffs with both peril and possibility.
For a defendant, its existence affords new means for beating back any claim founded on its purported contravention. The want of plausible allegations as to causation or to a distinct harm attributable to section 2605(g)’s breach, as determined by the standard set out in Bell Atlantic Corp. v. Twombly[64] and Ashcroft v. Iqbal,[65] demands the dismissal of any such cause of action even at the pleading stage, thus justifying an early motion to dismiss or for judgment on the pleadings—or notice of that probability before a suit’s commencement. After discovery’s end, the dearth of much more than a scintilla of competent evidence of either should lead to the same result if articulated in a short motion for summary judgment. Finally, purely as a practical matter, any RESPA-covered entity that promptly corrects any section 2605(g) violation and tenders the nonbreaching plaintiff with the same kind of insurance coverage as under the lapsed policy, and actually possesses and successfully introduces evidence of such pre-suit efforts into a case’s record before or during trial,[66] will find itself well-positioned to sidestep liability under section 2605(g). The reason is simple: if a defendant can prove that it thusly acted, its breach of section 2605(g) cannot have precipitated any cognizable harm. Based on section 2605’s prevailing interpretation, such a finding abrogates any claim under section 2605(g) as a matter of law.
Meanwhile, a plaintiff must prepare to rebuff such rejoinders from first light. At a minimum, he, she, or they must not scrimp on the fashioning and propounding of allegations that, taken as a whole, depict a plausible connection between section 2605(g)’s defiance and some ultimately measurable harm in framing every pleading. Obviously, if the breaching entity quickly recovered and arranged for coverage consistent with that previously furnished, likely doom would dog any such claim; after all, the nonexistence of a true injury is not something that can be pled away, only artfully obscured for a spell. Depending on the facts, a prescient plaintiff—one who anticipates this risk—can endeavor to minimize it by (1) credibly avowing their intent to obtain potentially more generous coverage than formerly imposed pre-suit, or by demonstrating that the servicer, whether directly or indirectly, had failed (2) either to obtain at least comparable coverage prior to the initiation of any lawsuit or the threat of litigation, or (3) to utilize the more beneficial matrix or algorithm set forth in the expired policy, as it may have promised.[67] For these plaintiffs, discovery must be dedicated to the gathering of evidence so substantiating from the mortgagors, breaching party, insurer, and, if necessary, an expert or two—more than a modicum necessary to dodge a section 2605(g) claim’s dismissal on the eve of trial. To summarize, in accordance with the federal judiciary’s preferred construction of section 2605, any plaintiff should be ready first to allege and subsequently to show how a breach of section 2605(g) engendered an actual injury, one preferably reducible to paper dollars and jingling cents, before docketing a single page. The judicial penchant for “interpret[ing] this [causal] requirement liberally” will surely ease this burden,[68] but cannot fully negate it.
Aside from making the aforementioned arrangements, a plaintiff’s only option is to dispute the propriety of this causal prerequisite’s imputation into section 2605’s silent text. Such a contention arguably accords with today’s “well-established principles of statutory construction,”[69] which decidedly bar any tinkering with a statute’s enacted language.[70] Yet, considering section 2605(f)’s highly redolent language and the judiciary’s longstanding rejection of this argument, its odds of success at trial or on appeal are vanishingly small.
V. Conclusion
In its current form, section 2605(g) lacks either a palpable ambiguity or a maddening ornateness. Rather, this subsection lays out duties, the disregard of which can trigger liability in relatively transparent prose.[71] No reference to causation graces its text, and no such clear demand appears in the overall statute of which it constitutes but a part. Perhaps made uncomfortable by the omission of this common statutory element, countless courts have nonetheless implanted it within section 2605 in general and section 2605(g) in particular. Notwithstanding this decision’s soundness, its present-day ascendency is an established fact, and until courts or Congress act, its propagation invites defendants to argue for the imputation of such a condition into RESPA’s as-yet-untouched sections—and perhaps other, still unaffected consumer protection statutes.
*Amir Shachmurove is an associate at Troutman Sanders LLP and is always reachable at [email protected]. As usual, the views expressed and the mistakes made herein are his alone and should be attributed to neither friend nor employer, past or present. Lastly, this article is for general information purposes and is not intended to be, and should not be taken as, legal advice.
[1] In this article, any reference to “section []” or “§ []” is to a provision of RESPA, as codified in 12 U.S.C. §§ 2601–2617.
[2] As typically defined, an “escrow account” is “a bank account, generally held in the name of the depositor and an escrow agent, that is returnable to the depositor or paid to a third person on the fulfillment of specified conditions.” Black’s Law Dictionary 22 (10th ed. 2014). In the RESPA context, and as used in this article, the term “escrow account” is synonymous with “impound account,” defined as “[a]n account of accumulated funds held by a lender for payment of taxes, insurance, or other periodic debts against real property.” Id.
[3] The judicial consensus that section 2609 does not allow for a private cause of action likely explains this distribution. See infra note 46 and accompanying text.
[4]Cf. Hyderi v. Wash. Mut. Bank, FA, 235 F.R.D. 390, 400 (N.D. Ill. 2006) (describing section 2605(g) as “a seldom-invoked provision of RESPA”).
[5] In this article, any reference to “court” or “courts” is to one or more federal trial and appellate courts, whether operating pursuant to Article I or Article III of the U.S. Constitution, unless otherwise noted.
[6] Allen v. United Fin. Mortg. Corp., 660 F. Supp. 2d 1089, 1097 (N.D. Cal. 2009).
[7] The tales précised in this section come from publicly available sources. Some facts have nonetheless been altered for the sake of confidentiality and readability.
[8] George S. Mahaffey Jr., A Product of Compromise: Or Why Non-Pecuniary Damages Should Not Be Recoverable under Section 2605 of the Real Estate Settlement Procedures Act, 28 U. Dayton L. Rev. 1, 6 (2002).
[9] Diana Stoppello, Federal Regulation of Home Mortgage Settlement Costs: RESPA and Its Alternatives, 63 Minn. L. Rev. 368, 374 n.20 (1979).
[10] Mahaffey, supra note 8, at 7. The U.S. Department of Housing and Urban Development today bears much of the responsibility for RESPA’s implementation and enforcement. 12 U.S.C. § 2617. In addition, RESPA is effectuated by regulations, collectively known as Regulation X, promulgated by the Consumer Financial Protection Bureau. 12 C.F.R. §§ 1024.1 et seq.
[11] Pub. L. No. 91-351, 84 Stat. 450 (1970); P. Barron, Federal Regulation of Real Estate: The Real Estate Settlement Procedures Act 11 (1975).
[12] Michael Darrow, The Real Estate Settlement Procedures Act of 1974, as Amended in 1975, 5 U. Balt. L. Rev. 383, 383–86 (1976). With RESPA’s passage, “[h]omeownership” had finally become an “American dream” worthy of federal succor. Predatory Mortgage Lending: The Problem, Impact, and Response: Hearings Before the U.S. S. Comm. on Banking, Housing, and Urban Affairs, 107th Cong. 1 (2001) (statement of Sen. Paul S. Sarbanes, Chairman, S. Comm. on Banking, Housing, and Urban Affairs).
[16] 12 U.S.C. § 2602(3); 12 C.F.R. § 1024.2(b); H.R. Rep. No. 102-760, at 158 (1992). Somewhat helpfully, section 2602(3) includes a nonexhaustive list of “settlement services.” 12 U.S.C. § 2602(3); Bloom v. Martin, 77 F.3d 318, 321 (9th Cir. 1996).
[17] 12 U.S.C. § 2602(1); Wilson v. Bank of Am., N.A., 48 F. Supp. 3d 787, 796 (E.D. Pa. 2014); Moses v. Citicorp Mortg., 982 F. Supp. 897, 900 n.3 (E.D.N.Y. 1997). As applied, this term’s definition has two prongs. Knowles v. Bayview Loan Servicing, LLC (In re Knowles), 442 B.R. 150, 158 (B.A.P. 1st Cir. 2011).
[18] 12 U.S.C. § 2602(3); see also Sosa v. Chase Manhattan Mortg. Corp., 348 F.3d 979, 981 (11th Cir. 2003) (explicating RESPA’s purpose); United States v. Graham Mortg. Corp., 740 F.2d 414, 419-20 (6th Cir. 1984) (same).
[19] Charles Szypszak, Real Estate Records, the Captive Public, and Opportunities for the Public Good, 43 Gonz. L. Rev. 5, 19 (2007–08); see also, e.g., Wanger v. EMC Mortg. Corp., 127 Cal. Rptr. 2d 685, 689, 693 (Cal. Ct. App. 2002); see also, e.g., Cortez v. Keystone Bank, No. 98-2457, 2000 U.S. Dist. LEXIS 5705, at *30, 2000 WL 536666, at *10 (E.D. Pa. May 2, 2000) (“The principal purpose of RESPA is to protect home buyers from material nondisclosures in settlement statements and abusive practices in the settlement process.”).
[20] Seth M. Mott, Note, Tacking the Perplexing Sound of Statutory Silence: Why Courts Should Imply a Private Right of Action Under Section 10(a) of RESPA, 64 Wash. & Lee L. Rev. 1159, 1165 (2007).
[21] Iver Peterson, Padding in the Escrow Cushion, N.Y. Times, Feb. 24, 1991, at 1.
[22] Christopher L. Sagers, Note, An Implied Cause of Action under the Real Estate Settlement Procedures Act, 95 Mich. L. Rev. 1381, 1382 (1997); Thomas H. Broad, Comment, The Attack Upon the Tax and Insurance Escrow Accounts in Mortgages, 47 Temp. L.Q. 353, 352 (1974).
[23] Charles A. Pillsbury, Note, Lender Accountability and the Problem of Noninterest-Bearing Mortgage Escrow Account, 54 B.U. L. Rev. 516, 517 (1974).
[24] Robert E. Ulbricht, Impound Accounts and After, 28 Bus. Law. 203 (Nov. 1972).
[26] Cranston-Gonzalez National Affordable Housing Act of 1990, Pub. L. No. 101-625, § 941, 104 Stat. 4079, 4405; 12 U.S.C. § 2602(1); see also Cortez, 2000 U.S. Dist. LEXIS 5705, at *31–32, 2000 WL 536666, at *10 (“By its terms, however, RESPA applies not only to the actual settlement process but also to the ‘servicing’ of any ‘federally related mortgage loan.’”).
[28] John Jin Lee & John H. Mancuso, Housing Finance: Major Developments in 1989, 45 Bus. Law. 1863, 1870 (1990); see alsoWanger, 127 Cal. Rptr. 2d at 689 (quoting article).
[30] Sutton v. CitiMortgage, Inc., 228 F. Supp. 3d 254, 261 (S.D.N.Y. 2017). As time would show, investors had their own reasons to fret. Cf. Adam J. Levitin, Andrey D. Pavlov & Susan M. Wachter, The Dodd-Frank Act and Housing Finance: Can It Restore Private Risk Capital to the Securitization Market?, 29 Yale J. on Reg. 155, 156–57 (2012) (“Investors have discovered that loss severities on defaulted loans are heavily dependent on servicer behavior regarding loan modifications and foreclosures[,]” but that they “have little ability to monitor servicer conduct or discipline wayward servicers.”).
[31] 12 U.S.C. § 2605(i)(3) (emphasis added); see also, e.g., Christenson v. Citimortgage, Inc., No. 12-cv-02600-CMA-KLM, 2013 U.S. Dist. LEXIS 13344, at *17–19, 2013 WL 5291947, at *6 (D. Colo. Sept. 18, 2013) (explaining why servicing under section 2605(i)(3) cannot be read to “encompass acceleration or foreclosure issues”).
[32] Arielle L. Katzman, Note, A Round Peg for a Square Hole: The Mismatch between Subprime Borrowers and Federal Mortgage Remedies, 31 Cardozo L. Rev. 497, 518 (2009); Christopher L. Peterson, Predatory Structured Finance, 28 Cardozo L. Rev. 2185, 2210–12 (2007).
[33] Ploog v. HomeSide Lending, Inc., 209 F. Supp. 2d 863, 870 (N.D. Ill. 2002).
[34] McLean v. GMAC Mortg. Corp., 398 F. App’x 467, 471 (11th Cir. 2010) (“RESPA is a consumer protection statute”; “[c]onsequently, RESPA is to be ‘construed liberally in order to best serve Congress’ intent.’” (quoting Ellis v. Gen. Motors Acceptance Corp., 160 F.3d 703, 707 (11th Cir. 1998) (addressing the remedial nature of the Truth in Lending Act))); cf. Clemmer v. Key Bank N.A., 539 F.3d 349, 353 (6th Cir. 2008) (stating that several consumer protection statutes must be “accorded ‘a broad, liberal construction in favor of the consumer’” (quoting Begala v. PNC Bank, Ohio, Nat’l Ass’n, 163 F.3d 948, 950 (6th Cir. 1998))).
[35] Johnstone v. Bank of Am., N.A., 173 F. Supp. 2d 809, 816 (N.D. Ill. 2001).
[36] Weisheit v. Rosenberg & Assocs., LLC, JKB-17-0823, 2017 U.S. Dist. LEXIS 188605, at *8–9, 2017 WL 5478355, at *3 (D. Md. Nov. 15, 2017); see also Flagg v. Yonkers S&L Ass’n, 307 F. Supp. 2d 565, 580 (S.D.N.Y. 2004) (similarly construing RESPA).
[37]See, e.g., Rawlings v. Dovenmuehle Mortg., Inc., 64 F. Supp. 2d 1156, 1166 n.7 (M.D. Ala. 1999) (broadly construing section 2605, “clearly a remedial, consumer-protection statute,” and disagreeing with Katz, 992 F. Supp. at 254–56); Dujanovic v. MortgageAmerica, Inc., 185 F.R.D. 660, 669 (N.D. Ala. 1999) (observing that Congress enacted RESPA “to protect borrowers from brokers” and that “Congress clearly stated that RESPA was designed to protect consumers”).
[38] Mary S. Robertson, The “New and Improved” Real Estate Settlement Procedures Act and Regulation X, 47 Consumer Fin. LQ. Rep. 272, 273 (1993).
[39]Flagg, 307 F. Supp. 2d at 578–81. RESPA does so in some of the same sections applicable to servicers. E.g., 12 U.S.C. §§ 2605, 2607, 2609(a).
[40] Bryce v. Lawrence (In re Bryce), 491 B.R. 157, 179 (Bankr. W.D. Wash. 2013); MorEquity, Inc. v. Naeem, 118 F. Supp. 2d 885, 900 (N.D. III. 2000).
[41] Kevelighan v. Trott & Trott, P.C., 771 F. Supp. 2d 763, 770 (E.D. Mich. 2010).
[43] 12 U.S.C. § 2609(b); Dolan v. Fairbanks Capital Corp., 930 F. Supp. 2d 396, 417 (E.D.N.Y. 2013).
[44] 12 U.S.C. § 2609(c); Hardy v. Regions Mortg., Inc., 449 F.3d 1357, 1359–60 (11th Cir. 2006).
[45] Michael S. Glassman, Note, Real Estate Settlement and Procedures Act of 1974 and Amendments of 1975: The Congressional Response to High Settlement Costs, 45 U. Cin. L. Rev. 448, 456 (1976).
[46] This construction has been chiefly based on the absence of the requisite legislative intent. E.g., Hardy, 449 F.3d at 1360; Louisiana v. Litton Mortg. Co., 50 F.3d 1298, 1304 (5th Cir. 1995); Allison v. Liberty Sav., 695 F.2d 1086, 1087 (7th Cir. 1982); McCray v. Bank of Am. Corp., No. ELH-14-2446, 2017 U.S. Dist. LEXIS 54388, at *35, 2017 WL 1315509, at *15 (D. Md. Apr. 10, 2017); Burkett v. Bank of Am., N.A., No. 1:10CV68-HSO-JMR, 2011 U.S. Dist. LEXIS 112719, at *7–8, 2011 WL 4565881, at *3 (S.D. Miss. Sept. 29, 2011); Sarsfield v. Citimortgage, Inc., 667 F. Supp. 2d 461, 467 (M.D. Pa. 2009); Birkholm v. Wash. Mut. Bank, F.A., 447 F. Supp. 2d 1158, 1163 (W.D. Wash. 2006); McAnaney v. Astoria Fin. Corp., 357 F. Supp. 2d 578, 591 (E.D.N.Y. 2005); Campbell v. Machias Sav. Bank, 865 F. Supp. 26, 31 (D. Me. 1994); Bergkamp v. N.Y. Guardian Mortgagee Corp., 667 F. Supp. 719, 723 (D. Mont. 1987). Courts tend to give two reasons for this conclusion about congressional intent. First, RESPA explicitly sets forth statutes of limitations for claims brought pursuant to sections 2605, 2607, and 2608 in section 2614. 12 U.S.C. § 2614. “Had Congress intended to create a private right of action under § 2609, that section also would have been included in the statute of limitations section.” McAnaney, 357 F. Supp. 2d at 591; accord Allison, 695 F.2d at 1089; McWilliams v. Chase Home Fin., LLC, No. 4:09CV609 RWS, 2010 U.S. Dist. LEXIS 43549, at *9–12, 2010 WL 1817783, at *3–4 (E.D. Mo. May 4, 2010). Second, Congress did amend section 2609 after several circuit courts had so decided, but only added an administrative remedy to section 2609(c). McAnaney, 357 F. Supp. 2d at 591. It therefore implicitly endorsed this construction. Litton, 50 F.3d at 1301; see also Tex. Dep’t of Hous. & Cmty. Affairs v. Inclusive Cmtys. Project, Inc., 135 S. Ct. 2507, 2520 (2015) (“Congress’ decision in 1988 to amend the . . . [Fair Housing Act (FHA)] while still adhering to the operative language in §§ 804(a) and 805(a) is convincing support for the conclusion that Congress accepted and ratified the unanimous holdings of the Courts of Appeals finding disparate-impact liability.”); cf. Midlantic Nat’l Bank v. New Jersey Dep’t of Envtl. Prot., 474 U.S. 494, 501 (1986) (“The normal rule of statutory construction is that if Congress intends for legislation to change the interpretation of a judicially created concept, it makes that intent specific.”).
[47]See Mott, supra note 20, at 1191–1202 (disputing this construction for this and other reasons). This reading, of course, has not limited section 2609’s usefulness to public plaintiffs.
[48]E.g., Collins, 105 F.3d at 1367; Au v. Republic State Mortg. Co., 948 F. Supp. 2d 1086, 1101 (D. Haw. 2013); Martin v. Citimortgage, Inc., No. 1:09-cv-03410-JOF, 2010 U.S. Dist. LEXIS 43525, at *7 n.3, 2010 WL 1780076, at *3 n.3 (N.D. Ga. May 4, 2010). Per the weight of the relevant jurisprudence, there are only three private causes of action under RESPA: “actions pursuant to Sections 2605, 2607, and 2608.” Arroyo v. PHH Mortg. Corp., No. 13-CV-2335(JS) (AKT), 2014 U.S. Dist. LEXIS 68534, at *37, 2014 WL 2048384, at *13 (E.D.N.Y. May 19, 2014). Section 2607 prohibits kickbacks and unearned fees, and section 2608 bars sellers from “requir[ing] directly or indirectly, as a condition to selling a covered property, that title insurance covering the property be purchased by the buyer from any particular title company.” 12 U.S.C. §§ 2607–08.
[50] 12 U.S.C. § 2605(g); Jacques v. U.S. Bank N.A. (In re Jacques), 416 B.R. 63, 70 (Bankr. E.D.N.Y. 2009); Kevelighan, 771 F. Supp. 2d at 770; see also, e.g., Burkett, 2011 U.S. Dist. LEXIS 112719, at *5, 2011 WL 4565881, at *2 (“Section 2605(g) governs the administration of escrow accounts[.]”); Girgis v. Countrywide Home Loans, Inc., 733 F. Supp. 2d 835, 848 (N.D. Ohio 2010) (same). So worded, section 2605(g) does not govern the timeliness of an initial deposit to an escrow account or when the servicer can collect funds from the borrower for such payments. Staats v. Bank of Am., N.A., No. 3:10-CV-68 (BAILEY), 2011 U.S. Dist. LEXIS 158376, at *17–18, 2011 WL 12451607, at *6 (N.D. W. Va. Aug. 23, 2011); Kevelighan, 771 F. Supp. 2d at 770.
[51] 12 C.F.R. § 1024.17(k)(1); Althaus v. Cenlar Agency, Inc., No. 17-445 (JRT/DTS), 2017 U.S. Dist. LEXIS 167475, at *2, 2017 WL 4536074, at *1 (D. Minn. Oct. 10, 2017).
[52] 12 U.S.C. § 2605(f); Christiana Tr. v. Riddle, 911 F.3d 799, 804 (5th Cir. 2018). Compounding this problem, RESPA neither denotes nor tenders an example of the term “actual damages.” Tauss v. Midland States Bank, No. 5:16-cv-00168-RLV-DSC, 2017 U.S. Dist. LEXIS 139364, at *20, 2017 WL 3741980, at *7 (W.D.N.C. Aug. 30, 2017). Formally and colloquially, this phrase means the “amount awarded to a complainant [either] to compensate for a proven injury or loss” or to “repay actual losses.” Black’s, supra note 2, at 471.
[53] Lane v. Vitek Real Estate Indus. Grp., 713 F. Supp. 2d 1092, 1101 (E.D. Cal. 2010); Allen, 660 F. Supp. 2d at 1097.
[54] 12 U.S.C. § 2614; Girgis, 733 F. Supp. 2d at 847.
[55] 12 U.S.C. § 2605(f)(1)(A) (emphasis added); see Hutchinson v. Delaware Sav. Bank, FSB, 410 F. Supp. 2d 374, 382 (D.N.J. 2006) (construing section 2605(f)(1)(A)); see also Jones v. Select Portfolio Serv., Inc., No. 08-972, 2008 U.S. Dist. LEXIS 33284, at *27, 2008 WL 1820935, at *9–10 (E.D. Pa. Apr. 22, 2008) (finding complaint to have failed to properly plead causation and specific damages to support the RESPA claim); Katz v. Dime Sav. Bank, FSB, 992 F. Supp. 250, 255–57 (W.D.N.Y. 1997) (granting summary judgment for a plaintiff’s failure to show actual pecuniary harm).
[56] Renfroe v. Nationstar Mortg., LLC, 822 F.3d 1241, 1246 (11th Cir. 2016) (citing, among others, Toone v. Wells Fargo Bank, N.A., 716 F.3d 516, 523 (10th Cir. 2013) and Hintz v. JPMorgan Chase Bank, N.A., 686 F.3d 505, 510-11 (8th Cir. 2012)); accord, e.g., Hagan v. Credit Union of Am., No. 11-1131-JTM, 2012 U.S. Dist. LEXIS 56100, at *12–13, 2012 WL 1405734, at *5 (D. Kan. Apr. 23, 2012).
[57]McLean, 398 F. App’x at 471 (as to section 2605(e)); accord, e.g., Stevens v. Citigroup, Inc., No. 00-3815, 2000 U.S. Dist. LEXIS 18201, at *11, 2000 WL 1848593, at *3–4 (E.D. Pa. Dec. 15, 2000); see also, e.g., Quinlan v. Carrington Mortg. Servs., LLC, 2014 U.S. Dist. LEXIS 95448, at *14–15, 2014 WL 3495838, at *5 (D.S.C. July 14, 2014) (applying principle); Champion v. Bank of Am., N.A., No. 5:13-CV-00272-BR, 2014 U.S. Dist. LEXIS 78, at *7–9, 2014 WL 25582, at *3–4 (E.D.N.C. Jan. 2, 2014) (collecting cases so holding).
[58]SeeAllen, 660 F. Supp. 2d at 1097 (as to section 2605 generally); see also, e.g., Frazile v. EMC Mortg. Corp., 382 F. App’x 833, 836 (11th Cir. 2010) (affirming dismissal of a claim for “fail[ing] to allege facts relevant to the necessary element of damages caused by assignment [of loan servicing]” under section 2605(f)); Bishop v. Quicken Loans, Inc., No. 2:09-01076, 2010 U.S. Dist. LEXIS 93692, at *19–20, 2010 WL 3522128, at *6 (S.D. W. Va. Sept. 8, 2010) (dismissing RESPA claim due to plaintiff’s failure to allege how servicer’s noncompliance with § 2605(f) caused them harm); Singh v. Wash. Mut. Bank, No. 09-2771, 2009 U.S. Dist. LEXIS 73315, at *16, 2009 WL 2588885, at *5 (N.D. Cal. Aug. 19, 2009) (dismissing RESPA claim because, “[i]n particular, plaintiffs have failed to allege any facts in support of their conclusory allegation that as a result of defendants’ failure to respond, defendants are liable for actual damages, costs, and attorney fees”) (quotation marks and citation omitted); cf. Davis v. Bowens, No. 1:11CV691, 2012 U.S. Dist. LEXIS 101402, at *18, 2012 WL 2999766, at *5 (M.D.N.C. July 23, 2012) (dismissing claim due to complaint’s general allegations of harm from the combined actions of all defendants). When there is no allegation that a defendant engaged in “a pattern or practice of noncompliance with the requirements” of section 2605, its statutory damages provision is inapplicable. 12 U.S.C. § 2605(f)(1)(B) (emphasis added).
[59]Frazile, 382 F. App’x at 836; see also, e.g., Stefanowicz v. SunTrust Mortg., No. 3:16-CV-368, 2018 U.S. Dist. LEXIS 24274, at *18–19, 2018 WL 1385976, at *6–7 (M.D. Pa. Feb. 13, 2018) (collecting cases so holding); Yuhre v. JPMorgan Chase Bank, No. 09-CV-02369 (GEB) (JFM), 2010 U.S. Dist. LEXIS 44948, at *16, 2010 WL 1404609, at *6 (E.D. Cal. Apr. 6, 2010) (holding that any alleged loss “must be related to the RESPA violation itself”). A recent appellate opinion underscores the continuing viability of this approach. See Moore v. Wells Fargo Bank, 908 F.3d 1050, 1059 (7th Cir. 2018) (so ruling as to a claim under section 2605(e)(2)).
[61]McLean, 398 F. App’x at 471; see also, e.g., Giordano v. MGC Mortg., Inc., 160 F. Supp. 3d 778, 781 (D.N.J. 2016) (quoting Straker v. Deutsche Bank Nat’l Tr., No. 3:09-CV-338, 2012 U.S. Dist. LEXIS 187379, at *31, 2012 WL 7829989, at *11 (M.D. Pa. Apr. 26, 2012)); Gorbaty v. Wells Fargo Bank, N.A., No. 10-CV-3291 NGG SMG, 2012 U.S. Dist. LEXIS 55284, at *16, 2012 WL 1372260, at *5 (E.D.N.Y. Apr. 18, 2012); Rubio v. U.S. Bank N.A., No. C 13-05752 LB, 2014 U.S. Dist. LEXIS 45677, at *45–46, 2014 WL 1318631, at *15 (N.D. Cal. Apr. 1, 2014) (citing, for support, Lal v. Am. Home Servicing, Inc., 680 F. Supp. 2d 1218, 1223 (E.D. Cal. 2010) and Allen, 660 F. Supp. 2d at 1097).
[62] Davis v. Bowens, No. 1:11CV691, 2012 U.S. Dist. LEXIS 101402, at *18, 2012 WL 2999766, at *5 (M.D.N.C. July 23, 2012).
[63]See Garcia v. Wachovia Mortg. Corp., 676 F. Supp. 2d 895, 909 (C.D. Cal. 2009) (likewise describing a statement alleging that a RESPA violation “subjects defendant[] to actual damages”).
[66] The federal courts’ relatively generous doctrine of judicial notice and rules for the admission of business records will probably abet any such effort. See Fed. R. Evid. 201 (setting the standard and procedures for judicial notice of adjudicative facts in federal court), 803(6) (codifying the hearsay exception for records of a regularly conducted business activity); Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007) (construing Federal Rule of Evidence 201); Philips v. Pitt Cty. Mem’l Hosp., 572 F.3d 176, 180 (4th Cir. 2009) (same).
[67] Depending on the precise relationship among the insurer, servicer, and adjustor, the servicer may not have actually been responsible for the relevant oversight, but so long as one (or both) took place, the plain language of section 2605(g) renders it legally liable.
[68] Yulaeva v. Greenpoint Mortg. Funding, Inc., No. 09-1504, 2009 U.S. Dist. LEXIS 79094, at *44, 2009 WL 2880393, at *15 (E.D. Cal. Sept. 9, 2009) (citing, as examples, Hutchinson, 410 F. Supp. 2d at 382, and Cortez, 2000 U.S. Dist. LEXIS 5705, at *38–40, 2000 WL 536666, at *10–13); cf., e.g., Moon v. Countrywide Home Loans, Inc., No. 3:09-cv-00298, 2010 U.S. Dist. LEXIS 11281, at *13, 2010 WL 522753, at *5 (D. Nev. Feb. 9, 2010) (“Even if . . . [the defendant] was the servicer of [p]laintiff’s loan and failed to respond to a qualified written request [as required under section 2605(e)], such failure alone does not substantiate a RESPA claim.”).
[69] RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 649 (2012).
[70]See Amir Shachmurove, Eligibility for Attorneys’ Fees under the Post-2007 Freedom of Information Act: A Onetime Test’s Restoration and an Overlooked Touchstone’s Adoption, 85 Tenn. L. Rev. 571, 634–36 (2018) (describing this standard); cf. Amir Shachmurove, Sovereign Speech in Troubled Times: Prosecutorial Statements as Extrajudicial Admissions, 86 Tenn. L Rev. 401, 462–67 (2019) (same, but as to Federal Rules of Evidence); Amir Shachmurove, The Consequences of a Relic’s Codification: The Dubious Case for Bad Faith Dismissals of Involuntary Bankruptcy Petitions, 26 Am. Bankr. Inst. L. Rev. 115, 151–57 (2018) (same, but also advocating specific modifications in cases arising under title 11 of the U.S. Code).
[71]Cf. Mahaffey, supra note 8, at 11 (describing section 2605(f)’s “language” as “rather uncomplicated”).
The U.S. Supreme Court declined to review the decision of the Ninth Circuit Court of Appeals in Lusnak v. Bank of Am., N.A., 833 F.3d 1185 (9th Cir. 2018), which effectively overturned a national bank regulation preempting state mortgage escrow laws. At issue was California Civil Code Section 2954.8(a), which requires financial institutions to pay two-percent interest per year on funds held in mortgage loan escrow accounts. The Ninth Circuit found a way around a 2004 preemption determination by the Office of the Comptroller of the Currency, the division of the U.S. Treasury which regulates national banks, set forth in 12 C.F.R. § 34.4(a)(6), which states, “[a] national bank may make real estate loans . . . without regard to state law limitations concerning . . . [e]scrow accounts, impound accounts, and similar accounts.”
Although state laws are preempted if they prevent or significantly interfere with a national bank’s exercise of its powers, the Ninth Circuit determined “no legal authority establishes that state escrow interest laws prevent or significantly interfere with the exercise of national bank powers, and Congress itself, in enacting Dodd-Frank, has indicated they do not.” The Dodd-Frank Reform Act added section 1639(g)(3) to the Truth in Lending Act (TILA). The Dodd-Frank TILA amendment applies to only higher-priced mortgages and only requires creditors to pay interest to consumers on amounts held in any escrow account if prescribed by applicable law. Nonetheless, the Ninth Circuit applied section 1639(g)(3) to the entire Lusnak class.
In November 2018, the Supreme Court denied certiorari despite the OCC’s amicus brief urging that the case be heard. The OCC asserted that the Ninth Circuit’s decision erred in a matter of fundamental importance to the national banking system and pointed to the Supreme Court’s own decision giving the OCC authority to make preemption determinations in Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996). Bank of Am., N.A. v. Lusnak, 139 S. Ct. 567 (2018).
The immediate result of the Supreme Court’s refusal to review the case is that national banks must pay at least two-percent annual interest on escrow accounts in California. Whether the Ninth Circuit’s constrained view of preemption will be applied to other state-law requirements (for example, maximum late charges under Civil Code Section 2954.5), or be adopted by other circuits, remains to be seen.
There has been much recent media attention around the Equality Act, especially after it passed in the U.S. House of Representatives on May 17, 2019. The act has been heralded as a first-of-its-kind bill and comes at a time when, according to the New York Times, “departments across the Trump administration have dismantled policies friendly to gay, bisexual and transgender individuals, like barring transgender recruits from serving in the military or formally rejecting complaints filed by transgender students who are barred from restrooms that match their gender identity.” Recently, the Department of Justice filed an amicus briefopposing protections for LGBTQ individuals in the trio of cases now before the U.S. Supreme Court that will decide whether Title VII already prohibits sexual orientation and gender identity discrimination.
Background
Despite significant progress both legislatively and judicially, lesbian, gay, bisexual, transgender, and queer (LGBTQ) Americans still lack the most basic of legal protections in states across the country and at the federal level. This deficit in legal protection means that it is still lawful for an employer to fire or refuse to hire gay, lesbian, and bisexual people. In addition, despite federal judicial decisions that have recognized that Title VII prohibits discrimination against transgender and gender nonconforming individuals, there is no national standard, and many state laws remain hostile to transgender status.
The patchwork nature of federal and state laws providing various degrees of protection—or none at all—leaves millions of people subject to uncertainty and potential discrimination that adversely impacts their livelihoods. A common illustration of the unconscionable unfairness of the legal status quo is a gay, lesbian, or bisexual person that can legally be fired on Monday simply for lawfully marrying the person she or he loves on Sunday.
Our nation’s civil rights laws prohibit and provide remedies for discrimination in areas such as employment, public accommodations, housing, and education on the basis of certain protected classes, such as race, color, national origin, sex, disability, and religion. However, as explained above, federal law does not provide consistent nondiscrimination protections based on sexual orientation or gender identity. The need for these protections is clear, especially in light of the current political climate that has been hostile to LGBTQ rights; in fact, nearly two-thirds of LGBTQ Americans report having experienced discrimination in their personal lives. Alarmingly high percentages of that cohort report that such discrimination has adversely impacted their work environment as well as their physical, psychological, and spiritual well-being.
According to the Human Rights Campaign, the leading LGBTQ rights advocacy group in the United States, “[d]ecades of civil rights history show that civil rights laws are effective in decreasing discrimination because they provide strong federal remedies targeted to specific vulnerable groups.” Explicitly including sexual orientation and gender identity in these fundamental laws would afford LGBTQ people the exact same protections that already exist under federal law. In other words, the aim is not to seek a special class of rights for LGBTQ persons, but to guarantee that they enjoy the same protections others already have.
Further, research shows broad public support for legislation that would ensure equal protection for LGBTQ persons, including a groundswell of support in the business community.[1]
What Is the Equality Act?
If enacted, the Equality Act (H.R. 5, S. 788, 116th Congress) would provide consistent and explicit nondiscrimination protections for LGBTQ people across key areas of life, including employment, housing, credit, education, public spaces and services, federally funded programs, and jury service.
The Equality Act would amend existing civil rights law—including the Civil Rights Act of 1964, the Fair Housing Act, the Equal Credit Opportunity Act, the Jury Selection and Services Act, and several other laws regarding employment with the federal government—to explicitly include sexual orientation and gender identity as protected characteristics. The legislation also amends the Civil Rights Act of 1964 to prohibit discrimination in public spaces and services and federally funded programs on the basis of sex.
Additionally, the Equality Act would update the public spaces and services covered in current law to include retail stores, services such as banks and legal services, and transportation services. These important updates would strengthen existing protections for everyone.
Legislative History of the Act
The bipartisan Equality Act was introduced in the House of Representatives by Reps. David Cicilline (D-RI) and Brian Fitzpatrick (R-PA), and in the Senate by Sens. Jeff Merkley (D-OR), Susan Collins (R-ME), Tammy Baldwin (D-WI), and Cory Booker (D-NJ), on March 13, 2019. The bill was introduced with 287 original cosponsors—the most congressional support that any piece of pro-LGBTQ legislation has received upon introduction.
Made a legislative priority by Speaker Nancy Pelosi, the act passed the House on May 17, 2019, by a vote of 236-173. All Democratic members and eight Republicans voted for it. Its passage marked the first time legislation of its kind—that includes broad protections and remedies for LGBTQ people without religious exemptions—has ever passed in either chamber of Congress.
Why Now and Why Not?
Whether Title VII, as it is currently written, prohibits discrimination on the basis of sexual orientation and/or gender identity will soon be answered by the U.S. Supreme Court as it takes up three cases in its 2019–2020 term. Predicting what the Court will do, especially before oral argument, may be a fool’s errand, but the current conservative bent of the Court means that a broad interpretation of Title VII is unlikely. The stakes are high, however. If a majority of justices narrowly read Title VII’s prohibition against discrimination on the basis of sex, their decision would reverse two federal courts of appeal sitting en banc that have managed to find majorities across an ideological spectrum to hold that Title VII protects workers from discrimination on the basis of sexual orientation.[2] Further, one might reasonably predict that such a narrow reading of Title VII would reverse the Court’s own decision in Price Waterhouse v. Hopkins, a case decided in 1989 that broadly read Title VII’s prohibition against sex discrimination to include sex discrimination claims based on gender stereotyping.[3] A narrow decision might also upset the Court’s unanimous 1998 decision in Oncale v. Hopkins that made same-sex sexual harassment claims actionable.[4]Hopkins, Oncale, and their progeny have contributed to progress in workplace gender equality over the last few decades.[5]
A simple and unambiguous legislative solution is waiting in the wings with the Equality Act. It would appease textual conservatives who do not oppose LGBTQ rights but who chafe at the thought of judicial overreach in interpreting statutory language. It would appease progressives who are nervous at the thought that a single Supreme Court decision could turn back decades of progress in the direction of gender equality in the workplace. Finally, the business community supports it. Corporate America has led the way with inclusive nondiscrimination policies; the law must catch up.
The question is not why, but when? The answer is now. Congress must finish the task it started.
[1] The nonpartisan Public Religion Research Institute (PRRI) found that, nationally, support for a bill like the Equality Act topped 70 percent, which includes a majority of Democrats, Republicans, and Independents. In addition, the Equality Act has been endorsed by the Business Coalition for the Equality Act, a group of more than 200 major companies with operations in all 50 states, headquarters spanning 27 states, and a collective revenue of $3.8 trillion. In total, these companies employ more than 10.9 million people across the United States. See Human Rights Campaign, Business Coalition for the Equality Act.
[2]See Davis & Litchfield, 1 LGBTQ Employment Law Practice Guide §§ 1.03 (Matthew Bender 2018).
[3] Price Waterhouse v. Hopkins, 490 U.S. 228, 109 S. Ct. 1775 (1989).
[4]See Davis & Litchfield, supra note 2, at §§ 1.02.
This article is adapted from The Shield of Silence by Lauren Stiller Rikleen, published in May 2019.
The backlash to #MeToo has significant potential to further diminish opportunities for women at work, as some men claim to be fearful of engaging in mentoring and other relationships important to career advancement. In but one example, a survey reported that “65% of men say it’s now ‘less safe’ to mentor and coach members of the opposite sex.” Some survey respondents expressed concern that the work environment has become too sterile and that women are not being held accountable for their work because managers fear being accused of gender bias.
Days after the Harvey Weinstein story broke, a New York Times article identified a “heightened caution” experienced by men who fear their own careers could be ended as a result of “one accusation or misunderstood comment.” The article also noted the potential negative career impacts on women who lose valuable mentors and sponsors when men take steps to protect themselves from hypothetical accusations: “But their actions affect women’s careers, too—potentially depriving them of the kind of relationships that lead to promotions or investments.” Further to those career impacts, the article identified one survey in which 64 percent of senior men and 50 percent of junior women indicated that they avoided interactions that could give rise to the risk of rumors.
This analysis by the New York Times of industry sectors where men reported their fears and avoided interaction with professional women provided a sweeping—and worrisome—indication that women are at risk of losing career-critical relationships. In identifying where the potential impact on women was greater, the article reported a wide range of workplace settings: “People were warier in jobs that emphasized appearance, as with certain restaurants or TV networks; in male-dominated industries like finance; and in jobs that involve stark power imbalances, like doctors or investors.”
Business sectors are expressing fears that, ironically, will result in further disadvantaging women in the workplace. An article about the potential backlash in the legal profession noted: “The fallout is that some male lawyers are so fearful of being tainted with sexual harassment charges that they’re running for the hills, dodging close working relationships with women.” Similarly, in an article about backlash in the financial services field, the author wrote: “I’ve heard men say that they’re less likely to hire or associate with women as a result of the intensity of MeToo. . . . I have heard directly from male executives at two prominent Wall Street firms that they are moving their female direct reports to female bosses.”
The sad fact is that these fears are countered by significant research demonstrating the infrequency with which actual victims report sexual harassment. The notion that the #MeToo movement has put men at greater risk is contrary to the actual consequences women have faced from reporting, the continued power dynamics in the workplace that disfavor women, the greater likelihood that silence governs behaviors, and even the complicity of the courts in protecting the accused.
As discussed previously, research demonstrates that the court system has failed to adequately protect workers, erecting procedural, evidentiary, and other barriers for employees bringing discrimination, harassment, and retaliation claims. As documented in the book Unequal: How America’s Courts Undermine Discrimination Law, there are a variety of reasons that the law has evolved to favor employer over employee rights.
One such reason is the argument, adopted in a Supreme Court decision, that narrow rulings are warranted to protect employers from false claims. Yet research has shown this argument is not grounded in actual facts. For example, in 2013, there were 39 percent fewer cases involving civil rights employment claims than were brought ten years earlier in 2003. As the authors documented:
The number of federal civil rights claims is also not significant when compared to the total number of people in the workforce. In the twelve-month period ending in March 2013, only 12,665 cases were filed in comparison to 143,929,000 people employed in the civilian workforce. In other words, only a tiny fraction of the workforce files a discrimination suit in any given year. . . .
Available social science evidence does not support any significant faker problem. Instead, it actually shows that employees are reluctant to believe that their employers discriminated against them. In circumstances when they believe discrimination has occurred, they are reluctant to complain to their employer, the EEOC, or a state agency. People can be reticent to make discrimination claims because they may fear retaliation.
In Heather Mac Donald’s 2018 Hillsdale College speech. Mac Donald feeds the narrative that the #MeToo movement is bad for the workplace—indeed, bad for the economy—yet she seems unencumbered by the extensive research that undermines her arguments. She expresses concern that the #MeToo movement will lead to greater calls for diversity and gender equity, which will negatively impact decisions made on merit. For example, she referred to a public radio show’s series on gender and racial inequities in classical music as “irresponsible,” noting that, throughout history, “the greatest composers have been male. . . . We should simply be grateful—profoundly grateful—for the music these men created.”
But what about the music we have never been able to hear because female composers lacked the opportunities and networks to help their music reach the public? To Mac Donald, it is simply because the male composers had greater merit. Then how does she explain the transformation in the gender composition of most major orchestras in the decades since auditions have been conducted behind a screen, the candidate’s gender unknown to those responsible for hiring?
Mac Donald also pushed back on concerns about the lack of women in STEM fields:
Despite the billions of dollars that governments, companies, and foundations have poured into increasing the number of females in STEM, the gender proportions of the hard sciences have not changed much over the years. This is not surprising, given mounting evidence of the differences in interests and aptitudes between the sexes. . . . Females on average tend to choose fields that are perceived to make the world a better place, according to the common understanding of that phrase.
Her data point for this sweeping assertion? Mac Donald referenced a preschool teacher who was profiled in an article and who, notwithstanding a bachelor’s degree in neuroscience, chose not to go to medical school so she could work with poor and minority children. Mac Donald concluded her speech by acknowledging the abuses of power revealed by #MeToo, even as she again attacked any underlying effort for greater equality:
The #MeToo movement has uncovered real abuses of power. But the solution to those abuses is not to replace valid measures of achievement with irrelevancies like gender and race.
Mac Donald’s speech sets forth a comprehensive attack on #MeToo as a rationale for resisting gender equality, a pairing that seems to be a particularly pernicious form of backlash. The dismissal of gender and race as irrelevant to the way in which achievement has been measured ignores decades of research demonstrating otherwise. Those who sow the seeds of a #MeToo backlash only serve to exacerbate the silence.
Functus Officio is a Latin term meaning that once the purpose of the task at hand is completed, there is no further force or authority to undertake any further measures. When applied to arbitrations, the term means that once a final arbitration award has issued, there is no further authority for the arbitration panel to modify the award for any reason or to clarify the same. The rationale behind the rule is a belief that it is necessary to prevent a reexamination of issues by a nonjudicial officer where there might have been further outside communication or undue influence post-hearing. However, in a recent decision, General Re Life Corporation v. Lincoln National Life Insurance Company, 2018 U.S. App. Lexis 33340 (2d Cir. 2018), the Second Circuit joined the Third, Fifth, Sixth, Seventh, and Ninth Circuits in holding that an exception to this doctrine exists.
The governing arbitration panel had rendered a final arbitration award in 2015 resolving a dispute between the parties concerning the ability of General Re to increase premiums under a YRT Reinsurance Agreement with Lincoln. The panel found that General Re was entitled to increase the premiums under the governing contract and went on to address the recapture rights held by Lincoln. The panel determined that the award would be effective as of April 1, 2014; however, the panel did not address the parties’ rights with respect to transactions and recapture rights arising prior to that date. Thereafter, a dispute between the parties arose concerning the pre-April 2014 time period. Lincoln then sought a clarification from the panel, and General Re opposed, citing the doctrine of Functus Officio as precluding the panel from issuing a clarification; the panel rejected this argument and issued a clarification. General Re then moved to confirm the award without the clarification, and Lincoln cross-moved to confirm the award with the clarification issued by the panel. The district court confirmed the award as clarified, and an appeal was taken to the Second Circuit by General Re.
In affirming the decision, the Second Circuit recognized an exception exists “where an arbitral award ‘fails to address a contingency that later arises or when the award is susceptible to more than one interpretation’” (citation omitted). In the instant case, the court noted that both parties had advanced a different interpretation of the language in question, and the panel in its clarification had concluded something completely different; as a result, the court determined there was ambiguity in the award. The court specifically noted that adopting this exception furthers the general rule that when a court is asked to confirm an ambiguous award, the court should instead remand to the arbitrators for clarification. Based upon this, the Second Circuit noted that if the court can remand an ambiguous award back to a panel, it certainly means a panel can clarify an ambiguous award on direct request. However, the court did note that a panel can issue a clarification only where three specific conditions exist: “(1) the final award is ambiguous; (2) the clarification merely clarifies the award rather than substantively modifying it; (3) the clarification comports with the parties’ intent set forth in the agreement that gave rise to the arbitration.” Thus, at present, counsel should be mindful of the existing split in the circuits when considering the impact and application of this doctrine.
In the recent decision David Xiaoying Gao v. China Biologic Holdings, Inc. (Dec. 10, 2018), the Grand Court of the Cayman Islands considered the following issues:
the propriety of issuing new shares to dilute the voting power of existing shareholders;
the extent to which it is possible for a beneficial owner of shares (i.e., not the registered shareholder) to enforce rights attaching to those shares;
whether a registered shareholder is able to assert an equitable claim in respect of impropriety which occurred before he or she became a registered shareholder; and
whether the right to pursue a claim relating to shares is assignable independently of the shares themselves.
This decision is wide-ranging. It touches and concerns many of the issues that regularly come before the courts of the Cayman Islands, given the international nature of the disputes that the Grand Court faces. It provides valuable, clear jurisprudence to litigators and clients alike.
Background
On August 24, 2018, the defendant, a biopharmaceutical company in the People’s Republic of China, allotted and issued shares to four groups of investors under share purchase agreements (the SPAs) and a board resolution of the same date. The plaintiff, a shareholder, hastily responded by filing a Writ of Summons in the Cayman Islands on August 27, 2018, and Statement of Claim on September 10, 2018. Responding to challenges made by the defendant on the plaintiff’s locus standi to bring a claim, an Amended Statement of Claims was filed on September 20, 2018, and a Reamended Statement of Claim (RASC) on October 31, 2018. Prior to the court granting leave for the plaintiff to advance the third iteration of the Statement of Claim. The defendant, by way of a summons dated October 4, 2018 (which was later amended and filed on October 31, 2018), sought the court’s directions on various questions of law, including whether:
the defendant owed any fiduciary, equitable, contractual, and/or other duty to the plaintiff in respect of its directors’ power to allot/issue shares pursuant to the SPAs dated August 24, 2018 (Relevant Date) in circumstances where the plaintiff was not a registered shareholder of the defendant at the Relevant Date;
the plaintiff had taken any valid assignment from Cede and Co. (the registered owner of a portion of shares and the assignor of all rights and remedies to the plaintiff on October 22, 2018) of a right of action against the defendant; and
the plaintiff had a cause of action against the defendant under the circumstances and, therefore, standing to bring these proceedings.
The defendant applied, in the alternative, to strike out the plaintiff’s claim pursuant to the Grand Court rules and the inherent jurisdiction of the court on the grounds that it did not disclose a reasonable cause of action and/or that it was an abuse of the process of the court.
The Reamended Statement of Claim
The plaintiff alleged in his RASC that he was a director of the defendant since October 2011, chairman from March 2012, and CEO from May 2012. These facts were not controversial. The plaintiff was removed as chairman and CEO on July 1, 2018, and July 12, 2018, respectively. The legality of those removals was not challenged by the plaintiff, although they were characterized by him as a “board coup” in the RASC. The court noted that this “coup” was likely to have been humiliating, and so his urgent reactive response was not surprising.
Other background facts not at issue were that the defendant had received an acquisition proposal from CITIC Capital Holdings Limited (CITIC) to acquire all of its shares not already owned by CITIC. The offer was publicized by the defendant on June 19, 2018. On August 17, 2018, a consortium, of which the plaintiff was a part, submitted an offer to acquire all of the other shares in the defendant. On August 24, 2018, the board of the defendant announced that CITIC’s proposal had been withdrawn and that the bid of the plaintiff’s consortium had been rejected. Instead, the board had decided to issue and allot 5,850,000 shares.
The plaintiff alleged that the share allotment had been made for an improper purpose—namely, to seek to alter the balance of power between the incumbent management consortium and that of the plaintiff, thereby thwarting the offer of the plaintiff’s consortium. He further claimed that the board of the defendant had breached its fiduciary duty to the plaintiff in entering into the SPAs and allotting the shares to the incumbent management consortium.
The plaintiff sought, inter alia, a declaration that the SPAs and the board decision of August 24, 2018, were invalid and unenforceable, together with an order requiring the defendant to rescind the SPAs and to rectify the register of the company accordingly.
The Court’s Approach
Of particular note was the court’s findings in respect of the four questions posed above:
Does a registered shareholder possess legal standing to assert a personal claim for breach of fiduciary duty in respect of a board decision to allot and issue shares for an improper purpose?
The defendant argued that fiduciary duties owed by company directors to act bona fide in the best interests of the company are not owed to individual shareholders,[1] but to the company, and that a “special factual relationship” would have to be established in order to create a right of action in favor of an individual shareholder against a company for breach of duty. Principally, the court was invited to follow the decision of the English Court of Appeal in Bamford v. Bamford,[2] where two minority shareholders sought a declaration that an allotment had been made to block a takeover bid. The issue of whether the shareholders could ratify the allotment was determined as a preliminary issue on the assumption that the allotment had been approved by the directors for an improper purpose. In Bamford, the court at first instance held that the shareholders could ratify the directors’ invalid decision. Dismissing the appeal against this decision, the court held:
It is trite law, I had thought, that if directors do acts, as they do every day . . . because they are actuated by improper motives . . . can, by making full and frank disclosure and calling together the general body of shareholders, obtain absolution and forgiveness of their sins and provided the acts are not ultra vires the company as a whole, everything will go on as if it had been right from the beginning . . . .
The only question is whether the allotment, having been made, as one must assume, in bad faith, is voidable and can avoided at the instance of the company . . . because the wrong, if wrong it be, is a wrong done to the company. . . .
Citing an Australian appellate decision,[3] the plaintiff submitted that there was clear authority in support of the proposition that shareholders could pursue personal claims for breaches of fiduciary duty with a view to invalidating an improperly motivated allotment of new shares which diluted the power of existing shareholders. In the Australian case, the court at first instance held that the plaintiffs (minority shareholders) lacked standing because they did not fall within the exceptions to the rule in Foss v. Harbottle (that subject to certain exceptions, shareholders have no separate cause of action for wrongs committed against the company). The appeal court unanimously rejected the finding:
Diminution of voting power stands on a fundamentally different footing from other detriments resulting from abuse of power by directors. . . . The rule in Foss v Harbottle has no application where individual membership rights as opposed to corporate rights are involved. . . .
In answering this question, the Cayman court in China Biologic held that individual minority shareholders ordinarily have no legal standing to sue for breach of fiduciary duty in relation to a complaint that their voting power has been diluted by a share allotment approved by directors for an improper use. The court considered the comments in Argentine Holding accurately, albeit obiter, to state the law. The court further found:
Shareholders ordinarily acquire their shares on the explicit basis that their only means of controlling the management is by successfully passing resolutions at general meetings. It would be inconsistent with what is essentially a functional rule, and potentially expose companies to limitless litigation, if shareholders were permitted to enforce duties which are not owed to them.[4]
The court rejected the view that the dilution of voting rights constitutes a free-standing exception to the rule in Foss v. Harbottle. Instead, the court found that the general position of a minority shareholder facing a dilution of his or her voting power through an improperly motivated share allotment does not constitute special circumstances giving rise to a fiduciary duty on the directors’ part owed to the shareholders.
Does the beneficial owner of shares possess legal standing to assert a personal claim for breach of fiduciary duty in respect of a board decision to allot and issue shares for an improper purpose?
Citing section 38 of the Cayman Islands Companies Law (2018 Revision), the court found that a “member” is by statutory definition a registered member and quoted with approval the submission of the defendant’s counsel, which relied on the following statement of the court in JKX Oil and Gas v. Eclairs Group:[5]
Companies are, in general, both entitled and obliged to deal with those who are registered as having the legal ownership of their shares. Companies are, in general, entitled to decline to deal with mere beneficial owners . . . .
That principle having been confirmed by the Cayman Islands Court of Appeal in Schultz v. Reynolds[6] (albeit that case was not actually decided on the standing issue) and Svanstrom v. Jonasson,[7] the China Biologic court considered itself bound by those decisions. Notwithstanding that the relevant standing rule is not an absolute one, the plaintiff was unable to make out a case based on special circumstances in this instance.
Does a shareholder who acquires legal title to his or her shares after the impugned board approval of a share allotment have standing to assert a personal claim to set it aside?
The court considered the above question upon the hypothetical premise that it had incorrectly found that the plaintiff had no standing to assert a shareholder claim at all, but was correct in a secondary finding that a beneficial owner cannot assert a personal shareholder claim. This was an altogether more vexing question. The court found that a shareholder does have standing to pursue an equitable claim to impugn an allotment of shares authorized by the directors prior to him or her becoming a registered shareholder. The court posed the question: if prior wrongdoing can be complained of in the absence of statutory language, why, then, should there be a general bar to shareholders complaining of conduct before they became shareholders at all?
In order to answer that question, the court accepted the submission of the defendant’s counsel that an assessment would be necessary as to whether an equitable claim passed with legal title to the shares. The court cited Guest on the Law of Assignment:[8]
A “mere equity,” for example a right to rescind or rectify a contract, is probably not a chose in an action. It is not assignable unless it is transferred as an incident of property conveyed or a chose in action assigned and is not sought to be assigned separately from the property or chose in action to which it is incident.
The court preferred the view that there could be no general prohibition on a new shareholder complaining about a continued wrong that first occurred before he or she became a shareholder. This victory was, in light of the finding, a Pyrrhic one for the plaintiff.
Does the plaintiff have standing to pursue a personal claim based on the Cede & Co assignment?
The court’s consideration of this question revolved around whether Cede & Co had validly assigned the equitable right to sue, which they held as at August 24 (they purportedly assigned all rights and remedies to the plaintiff on October 22, 2018) in respect of shares they continued to hold as the plaintiff’s nominee. The question was a free-standing one, which referenced the document assigning the shares. The assignment was characterized by the court as a “rush job” in order to appease an impatient and aggrieved litigant. The defendant submitted that the document, by virtue of its incoherence and ambiguity, had not assigned any right to pursue proceedings. It was held that the plaintiff’s skeleton argument concluded with a “lifeboat submission”[9]—namely, an application that Cede & Co be joined to the proceedings as co-plaintiff. Unsurprisingly, given the tenor of the court’s remarks, it was held that the assignment did not transfer effectively from Cede & Co to the plaintiff the right to pursue an equitable breach of fiduciary duty claim. The court found the speech of Lord Hoffmann in Investors Compensation Scheme Ltd v. West Bromwich Building Society[10] irresistible:
[W]hat is assigned is the chose, the thing, the debt or damages to which the assignor is entitled. The existence of a remedy or remedies is an essential condition for the existence of the chose in action but that does not mean the remedies themselves are property in themselves, capable of assignment separately from the chose.
Conclusion
The claim was struck out. It is worth noting the fact that the court remarked[11] that the plaintiff had a derivative claim and pointed to it being, potentially, a more appropriate remedy—something for litigants and practitioners to bear in mind when considering their strategy. These proceedings evidence a clear statement of the law in the Cayman Islands—namely, that the dilution of share voting rights does not constitute a free-standing exception to the rule in Foss v. Harbottle.
[1] Citing Smellie, J. (as he then was) in Argentine Holding Ltd v. Buenos Aires et. al [1997] CILR 90 at 104.
