Emergency Business Litigation : Chicago Business Crisis Lawyer & Attorney : Tom Patterson Law Firm : IL Emergency Business Litigation, Temporary Restraining Orders

In a prior post, I discussed the Supreme Court case Merck v. Reynolds, in which the application of the discovery rule in securities fraud cases was at issue. To recap, the Supreme Court granted cert to decide if the two-year statute of limitations ran from the first possible evidence of fraud as argued by Merck or the discovery of scienter as argued by the plaintiffs. 

On April 27, 2010, the Supreme Court handed down its decision and it is a victory for shareholder class actions! The Supreme Court held that the statute of limitations does not run until a plaintiff discovers all of the elements of a claim. The six-judge majority decision, written by Justice Breyer, and a concurrence, written by Justice Scalia, disagree on whether the statute provides for constructive discovery – oddly putting Justice Scalia on the side of allowing more time to file a suit as he reads the statute as requiring actual discovery of scienter. 

A factor in the Court’s reasoning requiring evidence of scienter and not possible evidence of scienter is the heightened pleading standard in securities fraud claims. Under federal securities law, a plaintiff needs to plead specific facts regarding intent to defraud. The limitations statute states that the period begins on the discovery of a violation. As a violation does not occur without the requisite intent to defraud, discovery (or constructive discovery) of scienter, not possible scienter, is necessary for the limitations period to start.  The five-year statute of repose countered Merck’s argument that the discovery requirement will subject defendants to defend litigation after the facts were stale. 

Alas, the opinion likely does not extend beyond the statute in which it arose. It is, however, an opinion that goes against the pro-business leanings of the Court as of late and is especially noteworthy for its unanimity in allowing the suit to proceed.

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A few days after the Court granted the Bank of America’s motion for an ex parte TRO, the Federal Deposit Insurance Corporation (“FDIC”), in its capacity as receiver for Colonial Bank, was substituted as the real party in the case, and moved the court to dissolve the TRO. The FDIC argued that, pursuant to 12 U.S.C. § 1821 (j), the Court lacked subject matter jurisdiction to restrain the FDIC in exercising its powers and functions as a receiver. Because the Court determined that the sale proceeds and loan agreements, which the Bank seeks the return of, are outside the receivership estate, it denied the FDIC’s jurisdiction argument.

Of interest to me today, however, is the fact that the FDIC admitted, in its motion to dissolve the TRO, that the Court properly issued the injunction. While declining to torture the FDIC with this admission, the Court noted that there may have been “public interest considerations contemplated by the injunctive-relief analysis,” in light of Colonial Bank’s collapse and subsequent involvement of the FDIC, but the FDIC’s failed to raise the issue. The FDIC could have strengthen its motion if it demonstrated how the four factor test weighed against the issuance of an injunction, emphasizing the public interest in supporting the FDIC in its role as receiver.

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Bank of America, N.A. v. Federal Deposit Insurance Corp. (Receiver for Colonial Bank), Case No. 09-22384-CIV-JORDON, currently before U.S. District Court Judge Adalberto Jordan of the Southern District of Florida, has garnered some media attention in the Atlanta Business Chronicle and The New Times, but is of interest to us in today’s post because the court granted an emergency motion for an ex parte TRO in a billion dollar case.

Facts

Bank of America (“the Bank”) filed a lawsuit on August 12, 2009 against Colonial Bank (Colonial) to obtain the return of loan agreements, mortgages and sale proceeds valued in excess of a billion dollars. The Bank had sent Colonial a demand for all sale proceeds and loan agreements held by Colonial Bank. Colonial refused to return the loans, and the Bank filed suit for breach of trust and other agreements.

Motion for an Emergency ex parte TRO

Along with the complaint, Colonial filed a motion for an emergency temporary restraining order (TRO), which sought to enjoin Colonial from liquidating, transferring or otherwise encumbering the assets. The motion recited the familiar four-factor test, but is of interest to me today for these three reasons:

1. The Bank didn’t rest solely on its motion; as new developments occurred, it filed supplemental papers. This is important because TROs are decided on the papers alone, so if new information develops after you have filed your motion, be sure to update the court with new information. Used appropriately, it builds momentum: “yesterday these terrible events took place; today it got worse; Judge please stop them!”
2. The Bank used newspaper stories effectively. Under Fed. R. Evid. 902(6), newspaper stories are admissible. The Bank intelligently used this Rule.
3. The Bank used supplemental sources of law. Rather than relying solely on its agreements (which should have and probably would have been sufficient), the Bank also asserted Fla. Stat. § 812.035(6), which relaxes the traditional “irreparable harm” requirement in cases involving civil theft, and instead only requires the movant to make “a showing of immediate danger of significant loss[.]” It is a good practice to always search for supplemental sources of law that may assist you in stating a claim.

Our next post will discuss a few other interesting aspects of this case.

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