The plaintiffs in Phoenix Light SF Ltd. v. Bank of New York Mellon sought to recover losses from their residential-mortgage-backed securities (RMBS) investments after the 2008 housing market collapse. The plaintiffs were issuers of collateralized debt obligations (CDOs) secured by certificates in RMBS trusts. 66 F. 4th 365 (2nd Cir. 2023). The plaintiffs brought separate suits against The Bank of New York Mellon, Deutsche Bank National Trust Company and Deutsche Bank Trust Company Americas (The Banks).
The district courts dismissed the suits against the Banks based on issue preclusion, stating that the prudential-standing issue had been decisively addressed in Phoenix Light SF DAC v. U.S. Bank Nat'l Ass'n, No. 20-1312, 2021 WL 4515256 (2d Cir. Oct. 4, 2021) (the "U.S. Bank Action"). The district courts assumed plaintiffs had Article III standing but found they were precluded from relitigating the issue of prudential standing.
Plaintiffs appeal three separate judgments dismissing the actions brought against the Banks. Plaintiffs argue that the district courts should have addressed whether they had Article III standing before determining they lacked prudential standing. Plaintiffs also argue that the prudential standing issue decided in the U.S. Bank Action was a pure legal question, and thus, it could not have issue-preclusive effect under New York law.
Affirmed — In resolving an issue of first impression, the Second Circuit joins 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. The court rejected plaintiffs' argument that the district courts should have addressed Article III standing before determining prudential standing. The court ruled that issue preclusion could be used as a non-merits basis for dismissal before addressing constitutional jurisdiction questions. The prior determination of prudential standing in the U.S. Bank Action satisfied the prerequisites for issue preclusion under New York law, as the issue was identical and decisively decided, and plaintiffs had a full and fair opportunity to litigate it.
* * *
A. Bypassing Jurisdiction
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. The parties strenuously debate whether past cases holding that courts may assume Article III standing in order to dismiss on prudential-standing grounds, such as Kowalski v. Tesmer, 543 U.S. 125, 125 S.Ct. 564, 160 L.Ed.2d 519 (2004), and Hillside Metro Associates v. JPMorgan Chase Bank, 747 F.3d 44 (2d Cir. 2014), are still good law in light of more recent cases, such as Lexmark International, Inc. v. Static Control Components, Inc., 572 U.S. 118, 134 S.Ct. 1377, 188 L.Ed.2d 392 (2014), and SM Kids, LLC v. Google LLC, 963 F.3d 206 (2d Cir. 2020). But we need not answer that question today: even 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.
And here, 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." Sinochem, 549 U.S. at 436, 127 S.Ct. 1184 (internal quotation marks omitted). But this is not a mine-run case. To the contrary, the constitutional-standing inquiry presents a hotly debated question. Compare, e.g., Plaintiffs Br. at 26-31 (No. 22-239) (asserting that Article III jurisdiction is satisfied), with BNY Mellon Br. at 41-46 (No. 22-239) (asserting Article III jurisdiction is not satisfied), and Deutsche Bank Br. at 35-42 (No. 22-503) (same). 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. See Hoffman, 837 F.3d at 278 n.33.
B. Issue Preclusion
"Collateral estoppel, or issue preclusion, prevents parties or their privies from relitigating in a subsequent action an issue of fact or law that was fully and fairly litigated in a prior proceeding," M.O.C.H.A. Soc'y, Inc. v. City of Buffalo, 689 F.3d 263, 284 (2d Cir. 2012), including issues of standing, see Mrazek v. Suffolk Cnty. Bd. of Elections, 630 F.2d 890, 896 n.10 (2d Cir. 1980); see also Morabito v. New York, 803 F. App'x 463, 467 (2d Cir. 2020); Stengel v. Black, 486 F. App'x 181, 183 (2d Cir. 2012). The preclusive effect of a judgment rendered by a federal court sitting in diversity — as was the district court in the U.S. Bank Action — is determined by the law of the state in which the rendering court sat — here, New York. See Semtek Int'l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508, 121 S.Ct. 1021, 149 L.Ed.2d 32 (2001). "Under New York law, collateral estoppel bars relitigation of an issue when (1) the identical issue necessarily was decided in the prior action and is decisive of the present action, and (2) the party to be precluded from relitigating the issue had a full and fair opportunity to litigate the issue in the prior action." Plymouth Venture Partners, II, L.P. v. GTR Source, LLC, 988 F.3d 634, 642 (2d Cir. 2021) (internal quotation marks omitted); see also In re Howard v. Stature Elec., Inc., 20 N.Y.3d 522, 525, 964 N.Y.S.2d 77, 986 N.E.2d 911 (2013).
Applying this framework, we agree with the district courts that the prior determination of prudential standing in the U.S. Bank Action satisfied the prerequisites for issue preclusion. More specifically, the district courts correctly determined that the champerty-based prudential-standing issue in the BNY Mellon 2014, BNY Mellon 2018, and Deutsche Bank Actions was decisive and identical to the one decided in the U.S. Bank Action, because it was undisputed below and on appeal that materially identical transactions with the CDO Trustees were at issue in all the actions. Additionally, we cannot say that the district courts erred in determining that Plaintiffs had a full and fair opportunity to litigate the champerty-based prudential-standing issue in the U.S. Bank Action. Although a couple of the Plaintiffs did not participate in the U.S. Bank Action, the district courts found that the absent parties were sufficiently in privity with parties who did participate, see Buechel v. Bain, 97 N.Y.2d 295, 304-05, 740 N.Y.S.2d 252, 766 N.E.2d 914 (2001) (describing New York's privity standard in issue-preclusion context) — a finding that Plaintiffs do not challenge on appeal, see Norton v. Sam's Club, 145 F.3d 114, 117 (2d Cir. 1998) ("Issues not sufficiently argued in the [appellate] briefs are considered [forfeited] and normally will not be addressed on appeal.").
Plaintiffs' arguments to the contrary are unavailing. First, in all three appeals, Plaintiffs assert that the prudential-standing question decided in the U.S. Bank Action was a pure legal question and thus could not have issue-preclusive effect under New York law. See, e.g., Plymouth Venture, 988 F.3d at 642; Am. Home Assurance Co. v. Int'l Ins. Co., 90 N.Y.2d 433, 440, 661 N.Y.S.2d 584, 684 N.E.2d 14 (1997) (holding that because the plaintiff's arguments concerned "a pure question of law," "the doctrine of collateral estoppel does not preclude [the plaintiff] from litigating that issue again"). But, in fact, the champerty-based prudential-standing determination in the U.S. Bank Action was not a purely legal one. Under New York law, "the purpose behind the plaintiff's acquisition of rights is the critical issue in assessing whether such acquisition is champertous," Justinian Cap. SPC v. WestLB AG, 28 N.Y.3d 160, 166-67, 43 N.Y.S.3d 218, 65 N.E.3d 1253 (2016) (internal quotation marks omitted and alterations adopted), and "the question of intent and purpose of the purchaser or assignee of a claim is usually a factual one," Bluebird Partners, L.P. v. First Fid. Bank, N.A., 94 N.Y.2d 726, 738, 709 N.Y.S.2d 865, 731 N.E.2d 581 (2000) (internal quotation marks omitted); see also Tr. for Certificate Holders of Merrill Lynch Mortg. Invs., Inc. v. Love Funding Corp., 13 N.Y.3d 190, 195, 200, 890 N.Y.S.2d 377, 918 N.E.2d 889 (2009). Applying this case law, the district court in the U.S. Bank Action rested its champerty-based prudential-standing determination on factual findings regarding the intent and purpose behind the CDO Trustees' assignments, see Phx. Light, 612 F. Supp. 3d at 281-86, as did we when affirming, see Phx. Light, 2021 WL 4515256, at *1-2 ("Based on the factual findings of the [d]istrict [c]ourt, it is clear that the assignments made were indeed champertous[.]"). As such, New York's pure-legal-question exception to issue preclusion has no application here. See Am. Home Assurance, 90 N.Y.2d at 440 n.1, 661 N.Y.S.2d 584, 684 N.E.2d 14 (noting that "mixed question[s] of law and fact" are subject to issue preclusion).
Second, Plaintiffs assert that fairness and other equitable considerations should have barred the application of issue preclusion in the BNY Mellon 2018 Action and the Deutsche Bank Action. We disagree. For starters, Plaintiffs forfeited these arguments in the BNY Mellon 2018 Action by failing to raise them to the district court, and we decline to exercise our discretion to consider them now for the first time on appeal. See Doe v. Trump Corp., 6 F.4th 400, 409-11 (2d Cir. 2021).
As to the Deutsche Bank Action, we recognize that under New York law, "the question of fairness ... in the application of the doctrine [of issue preclusion] must be the crowning consideration." Read v. Sacco, 49 A.D.2d 471, 375 N.Y.S.2d 371, 375 (2d Dep't 1975). Indeed, as an extension of the requirement that the party to be precluded from relitigating had a full and fair opportunity to litigate the issue in the prior action, "each case must be examined to determine whether, under all the circumstances, the party said to be estopped was not unfairly or prejudicially treated in the litigation in which the judgment sought to be enforced was rendered." Id. But instead of offering ways in which Plaintiffs were unfairly treated in the U.S. Bank Action, Plaintiffs only suggest that it is generally unfair to invalidate their assignments, as they had pursued those assignments based on the reasonable assumption that ratification under Federal Rule of Civil Procedure 17(a)(3) was unavailable. To the extent this is even a cognizable complaint within New York's issue-preclusion rubric, Plaintiffs' strategic miscalculations do not generate unfairness; even prior to Fund Liquidation Holdings LLC v. Bank of America Corp., attempting ratification would not have been directly contrary to controlling precedent in this Circuit. See 991 F.3d 370, 387 (2d Cir. 2021) (recognizing the issue as "an open question"); FDIC v. Citibank N.A., No. 15-cv-6574 (ALC), 2017 U.S. Dist. LEXIS 108104, at *8-9 (S.D.N.Y. July 10, 2017) (allowing parties to ratify to cure standing defects prior to Fund Liquidation).
Relatedly, Plaintiffs suggest that Deutsche Bank should have been prevented from invoking the equitable doctrine of issue preclusion because it had unclean hands. See PenneCom B.V. v. Merrill Lynch & Co., 372 F.3d 488, 493 (2d Cir. 2004) ("New York courts have long applied the maxim that one 'who comes to equity must come with clean hands.'" (quoting Amarant v. D'Antonio, 197 A.D.2d 432, 602 N.Y.S.2d 837, 838 (1st Dep't 1993))). Granted, in its capacity as a CDO Trustee, Deutsche Bank Trust Company Americas was a party to one of the champertous assignments. This, however, does not render Deutsche Bank's hands unclean — or the application of issue preclusion unfair — as it is undisputed that Plaintiffs were the ones who orchestrated the assignments. See id. (explaining that "one who has acted fraudulently, or who by deceit or any unfair means has gained an advantage," cannot invoke preclusion (internal quotation marks omitted)).
Third, and finally, Plaintiffs assert that they should not have been precluded from relitigating prudential standing in the BNY Mellon 2014 Action because in that action BNY Mellon had neglected to plead, and thus waived, champerty as an affirmative defense. See J. App'x at 707-11 (No. 22-239) (district court recognizing the waiver). However, regardless of what BNY Mellon pleaded, the district court was permitted to consider the affirmative defense of issue preclusion — even issue preclusion of champerty-based prudential standing — in accordance with the "strong public policy in economizing the use of judicial resources by avoiding relitigation." Curry v. City of Syracuse, 316 F.3d 324, 330-31 (2d Cir. 2003) (internal quotation marks omitted) (holding that a court may, in its discretion, permit an issue-preclusion defense to be raised for the first time on summary judgment); see also Doe v. Pfrommer, 148 F.3d 73, 80 (2d Cir. 1998) ("Although the district court raised the issue of collateral estoppel sua sponte, this decision does not require reversal.").
The New York case law Plaintiffs cite is not to the contrary. Although New York courts have commented that "the dismissal of a complaint as against one party need not be given res judicata effect as against another ... when the dismissal was based upon a defense that was personal to that party," Raab v. Kaleida Health, 60 A.D.3d 1380, 875 N.Y.S.2d 411, 412 (4th Dep't 2009), the champerty-based prudential-standing defense was not personal to U.S. Bank. Rather, putting aside the pleading defect, the defense was equally available to BNY Mellon, given that Plaintiffs had executed virtually identical agreements with the relevant CDO Trustees in both the BNY Mellon 2014 and U.S. Bank Actions. Thus, the fact that BNY Mellon did not assert the champerty defense in its answer did not prevent the district court from exercising its discretion to consider the defense as part of its issue-preclusion and prudential-standing analysis, particularly since Plaintiffs had ample notice of BNY Mellon's issue-preclusion arguments and an opportunity to respond. See Curry, 316 F.3d at 331.
In short, we fully agree with the district courts that Plaintiffs were not entitled to a second bite at the prudential-standing apple after the U.S. Bank Action. The district courts therefore did not err in taking this straightforward, if not "textbook," path to dismissal. Sinochem, 549 U.S. at 435, 127 S.Ct. 1184.
THIS CASEBOOK contains a selection of U. S. Court of Appeals decisions that analyze and discuss issues surrounding the doctrine of res judicata. Volume 1 of the casebook covers the District of Columbia Circuit and the First through the Fifth Circuit Court of Appeals. Volume 2 of the casebook covers the Sixth through the Eleventh Circuit Court of Appeals.