Second Circuit Agrees with Ninth Circuit That Court Can Bypass Article III Standing Issue to Address Issue Preclusion As Alternative Basis for Dismissing Case

In Phoenix Light SF Ltd. v. Bank of N.Y. Mellon, No. 22-239 (2d Cir. Apr. 26, 2023), the Second Circuit holds that it does not need to reach a complex Article III standing issue when the case could be decided on a straightforward issue of issue preclusion. “[W]e join the Ninth Circuit in concluding that the district courts permissibly bypassed the question of Article III standing to address issue preclusion, which offered a threshold, non-merits basis for dismissal. See Snoqualmie Indian Tribe v. Washington, 8 F.4th 853 (9th Cir. 2021), cert. denied, 142 S. Ct. 2651 (2022).”

“Plaintiffs are issuers of CDOs [collateralized debt obligations], meaning that they issued notes secured by a portfolio of assets, including certificates in RMBS [residential-mortgage-backed securities] trusts. In 2014, seeking to recover losses from their RMBS investments in the wake of the 2008 collapse of the housing market, Plaintiffs brought various suits against RMBS trustees, including [defendant Bank of N.Y. Mellon] . . . . However, in 2015, the district court in the U.S. Bank Action granted the defendant’s motion to dismiss under Federal Rule of Civil Procedure 12(b)(1) . . . . In particular, the district court found that Plaintiffs lacked standing because, when they issued their CDO notes, they simultaneously conveyed all right, title, and interest in the RMBS certificates – including the full power to file actions regarding rights under the RMBS certificates – to other entities (the ‘CDO Trustees’).”

The CDO Trustees then assigned their “litigation rights associated with the RMBS certificates back to Plaintiffs across all five lawsuits,” who amended their complaints accordingly. “In 2020, after discovery was complete, the district court in the U.S. Bank Action granted summary judgment in favor of U.S. Bank, agreeing that the CDO Trustees’ assignments were champertous and, as a result, finding that Plaintiffs lacked both Article III and prudential standing . . . . “ The Second Circuit affirmed this order in a prior, unpublished order. On remand, the other district courts adjudicating these cases then “assume[d]” that Plaintiffs had Article III standing, . . . but found that Plaintiffs were precluded from relitigating the issue of prudential standing by the U.S. Bank Action.”

The Second Circuit again affirms. “As an initial matter, we reject Plaintiffs’ contention that the district courts were obliged to address whether Plaintiffs had Article III standing before determining that Plaintiffs lacked prudential standing.” While noting that the legal ground had shifted on whether courts had power to “assume” Article III standing (Lexmark International, Inc. v. Static Control Components, Inc., 572 U.S. 118 (2014)), it held that it was unnecessary to grapple with that issue here. “[E]ven if we assume that the prudential-standing question at issue here involved a merits determination that should not have been substantively considered before Article III standing, the district courts were (and we are) still permitted to bypass Article III standing to consider whether Plaintiffs were collaterally estopped from relitigating the issue of prudential standing.”

“Joining the Ninth Circuit, we hold that issue preclusion, or collateral estoppel, is another such non-merits threshold ground that is suitable for resolution before addressing a difficult or novel question of constitutional jurisdiction . . . . [Because] an issue-preclusion dismissal is not a judgment on the merits, courts are permitted to dismiss on the basis of issue preclusion without reaching harder Article III standing questions.”

“[H]ere, the district courts were faced with a thorny Article III standing question. We appreciate that ‘[i]n the mine run of cases, jurisdiction will involve no arduous inquiry.’ . . . . But this is not a mine-run case. To the contrary, the constitutional-standing inquiry presents a hotly debated question . . . . As a result, we conclude that the district courts were permitted to dismiss on the basis of issue preclusion without assessing the question of constitutional jurisdiction – and that we are permitted to affirm on that ground, as we do now.”