Wait for the Ruling

Originally published by Barry Barnett.

The right to amend

Thirty years ago, when I showed a busy plaintiffs’ lawyer a new Fifth Circuit decision, he groaned. The court of appeals’ decision took way too much space — more than a page — to explain a very basic idea, he groaned.

Those judges need to make better use of their time, he asseverated.

The opinion that provoked the mini-tirade, Auster Oil & Gas, Inc. v. Stream, 764 F.2d 381 (5th Cir. 1985), adapted the names of novels by William Faulkner to describe a lawsuit that alleged a Keystone Cops-like scheme to detect theft of oil from a field in Calcasieu Parish, Louisiana. My judge authored the opinion. I’ve always liked it.

Auster came back to mind last week. The prompting event came in the form of a new decision by the Second Circuit. Both the old and the new cases dealt with whether a district court must give plaintiffs a second chance to plead a viable claim. But the new one, although favorable to plaintiffs, would probably have driven the lawyer who disliked Auster into apoplexy.

Collateralized debt obligations

In Loreley Financing (Jersey) No. 3 Ltd. v. Wells Fargo Securities, LLC, No. 13-1476-cv (2d Cir. July 24, 2015), the court vacated the district court’s dismissal of a complaint alleging fraud against Wells Fargo, Wachovia, and others for their roles in the sale of complex financial instruments (collateralized debt obligations) for many millions of dollars.

The 3-0 opinion — a sparkler by the former dean of the Yale Law School, Guido Calabresi — elucidates nuances of New York law on scienter, loss causation, and other matters on the way to reversing dismissal of the CDO purchasers’ complaint.

But the last section, which ran four and a half pages, focused on the district court’s abuse of discretion in refusing to permit the plaintiffs to amend the complaint. Judge Calabresi wrote as follows:

[The district court erred when] it presented Plaintiffs with a Hobson’s choice: agree to cure [pleading] deficiencies not yet fully briefed and decided or forfeit the opportunity to replead. Without the benefit of a ruling, many a plaintiff will not see the necessity of amendment or be in a position to weigh the practicality and possible means of curing specific deficiencies.

Loreley Financing, slip op. at 53-54. Judge Calabresi continued:

The present case combines a complex commercial reality with a long, multiprong complaint. In such situations, pleading defects may not only be latent, and easily missed or misperceived without full briefing and judicial resolution; they may also be borderline, and hence subject to reasonable dispute. As discussed in Part I, supra, dismissal was partly based on the district court’s determination that Plaintiffs’ fraud allegations raised neither plausible inferences of material misrepresentations nor strong inferences of scienter. Id. at *10-15. These determinations entail judgment calls on which reasonable minds can differ in a not insignificant number of cases. Cf. [Ashcroft v.] Iqbal, 556 U.S. [662,] 679 [(2009)] (“Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.”). The district court’s rejection of Plaintiffs’ position that the strength-of-inference requirements had been met by the facts set forth in the original complaint was, without more, insufficient reason to bar Plaintiffs from repleading. Indeed, that our opinion today partially vindicates Plaintiffs’ position is, we think, some measure of the potential for reasonable disagreement here.

Id. at 55-56.

The bright side

In 1985, a judicial trend — towards making cases procedurally more difficult for plaintiffs to maneuver — had already begun. The lawyer, who railed against a three-paragraph explanation of why plaintiffs should get a second chance to pleading a viable case, sensed the shift and did not like it.

The tide has gone out further since then. Twombly and Iqbal have toughened the test for pleading in all kinds of cases. Little wonder then that courts have shown little disinclination when dismissing complaints also to deny leave to amend them.

Loreley Financing provides a welcome reminder that Rule 15 mandates an opportunity to repair a complaint in light of the district court’s actual ruling on the sufficiency of the original allegations. Plaintiffs counsel should therefore resist asking for leave to amend until after the court issues its ruling. You will then have the benefit of the court’s reasoning.

Acting sooner may make you feel smart and on top of things. But Auster and Loreley Financing counsel that you can, and should, wait.

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

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