Supreme Court Holds That Section 47(b) of the Investment Company Act Does Not Authorize Lawsuits by Private Parties to Rescind Contracts That Allegedly Violate the Act
FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd., No. 24-345
Introduction: Today, the Supreme Court held in a 6-3 decision that Section 47(b) of the Investment Company Act does not create a cause of action allowing private parties to sue for rescission of contracts that allegedly violate the Act.
Background: The Investment Company Act (ICA) comprehensively regulates investment companies, with the Securities and Exchange Commission (SEC) serving as its primary enforcer.
Petitioners are two investment companies that manage “closed-end mutual funds”—funds that contain a fixed number of shares issued at one time, with the price of each share determined by open-market trading. Respondents Saba entities are “activist investors” that seek to identify low-performing closed-end funds and purchase a large enough stake to alter those funds’ investment strategies. Petitioners are incorporated in Maryland, which has a state law authorizing funds to limit voting rights for shareholders holding a disproportionate number of shares (such as activist investors) unless other shareholders approve. They adopted resolutions opting into that law.
Saba brought suit in federal court, alleging that the Funds’ resolutions violate the ICA’s requirement that every share of stock shall be a voting stock with equal voting rights. Saba based its right to sue in federal court on Section 47(b) of the ICA, which provides that “a court may not deny rescission” of contracts that violate the ICA “at the instance of any party” unless the court finds that doing so would be consistent with equity and the ICA’s goals. 15 U.S.C. § 80a–46(b)(2).
The district court held that Section 47(b) creates a private right of action to sue for contract rescission and granted summary judgment to Saba. The Second Circuit summarily affirmed. The Supreme Court granted certiorari to resolve a circuit split over whether Section 47(b) creates a private right of action.
Issue: Whether Section 47(b) of the Investment Company Act empowers private parties to sue for rescission of any contract that allegedly violates the Act.
Court’s Holding: In an opinion authored by Justice Barrett and joined by Chief Justice Roberts and Justices Thomas, Alito, Gorsuch, and Kavanaugh, the Supreme Court held that Section 47(b) of the ICA does not give private parties a right to sue for rescission of contracts that allegedly violate the Act.
The Court began by reaffirming that “Congress determines who may sue to enforce federal law” and that “[w]hen Congress creates a private right of action, it usually does so expressly.” To create a private right of action, the Court stated, “a statute must use ‘rights-creating language’ aimed at ‘protecting a particular class of persons.’” Even then, “language establishing an express ‘remedial schem[e]’ elsewhere in the statute” may foreclose a private right of action.
“At one point in time,” the Court stated, its practice had been to recognize private actions without congressional authorization. Now, however, “[i]f a statute does not spell out a right of action, we examine the statute’s text and structure to determine whether it implicitly provides one.”
Next, the Court applied those principles to Section 47(b). It explained that Section 47(a), 15 U.S.C. § 80a–46(a), provides that a contract provision waiving compliance with the ICA’s requirements “shall be void.” Section 47(b) says that if such a contract “has been performed, a court may not deny rescission at the instance of any party unless such court finds that under the circumstances the denial of rescission would produce a more equitable result” and would not be inconsistent with the ICA’s purposes. 15 U.S.C. § 80a–46(b)(2).
The key question, the Court stated, was “whether the phrase ‘recission at the instance of any party’ implies that private parties may sue.” The Court held that “[i]t does not” because that phrase “is a ‘mandate directed to . . . courts,’ rather than a provision that ‘confer[s] a right on a specified class of persons.’” The “key actor” is “a court” and the provision instructs a court that it “may not deny” the recission remedy. “Section 47(b)’s wording thus presupposes that parties are already before the court and directs the court’s use of its remedial authority. It says not a word about individual rights.”
The Court observed that contract law typically treats rescission as a remedy, not as a cause of action entitling a private party to bring suit. Consistent with that approach, the Court held that Section 47(b) unlocks otherwise-unavailable remedies for courts to employ in lawsuits authorized by other bodies of law, but does not itself create a cause of action to be invoked by private parties.
Turning to the statutory structure, the Court explained that the ICA gives primary responsibility to the SEC for ensuring compliance with the Act. The Court reasoned that Congress’s decision to create a comprehensive agency enforcement scheme supports the conclusion that there is no implied private right of action to enforce Section 47(b). And it further observed that the ICA elsewhere expressly creates two private rights of action—allowing security holders to sue investment advisers for breaches of fiduciary duty and incorporating a right of action from the Securities Exchange Act to allow security issuers to recover some short-term profits realized by a regulated individual. 15 U.S.C. §§ 80a–29(h), 80a–35(b). Congress’s express creation of those private rights of action, the Court said, shows that Congress knew how to provide a private remedy in the ICA when it wanted to—and it did not use that cause of action-creating language in Section 47(b).
The Court also rejected Saba’s reliance on Transamerica Mortgage Advisors, Inc. v. Lewis (TAMA), 411 U.S. 11 (1979), which inferred a private right of action to enforce a provision in another statute, the Investment Advisers Act (IAA). The Court said that although the IAA provision addressed in TAMA mirrored an earlier version of Section 47(b), Congress amended and reworked Section 47(b) in 1980 to make “significant” changes, including by removing language that the contracts “shall be void.” As a result, TAMA does not support “a sweeping right” to private enforcement under the ICA.
Finally, the Court rejected the principal dissent’s resort to legislative history to infer that Congress intended to create a private right of action to enforce Section 47(b). The Court said that the dissent’s treatment of the legislative history here—highlighting congressional committee reports referring to a private right of action, but ignoring parts of those reports unfavorable to its interpretation and “tak[ing] creative license” with others—“illustrates why statutory interpretation must focus on the text.” More fundamentally, the Court stated that legislative history may not be used to “divin[e] how Congress would have wanted courts to resolve the question presented in this case” because such a theory “depends on the fictional premise that hundreds of legislators (not to mention the President) shared a unified private view of how the statute should apply in a contested circumstance.”
Justice Kagan dissented, briefly noting her views that the text of Section 47(b) clearly authorizes a private right of action and that resorting to legislative history should be limited to situations where the text is “stubbornly ambiguous.”
Justice Jackson also dissented, joined in full by Justice Sotomayor and in all but the discussion of legislative history by Justice Kagan. Among other things, she viewed the breadth of language used in Section 47(b)—including its reference to “any party”—and the internal structure of the Act as sufficient to support a private right of action. She also defended her use of legislative history to clarify Congress’s intent, arguing that discarding it inappropriately elevates the Judiciary’s views over Congress’s.
Today’s decision shuts the door on private-party attempts to argue that Section 47(b) provides a cause of action to sue for contract recission based on claimed violations of the ICA. It also casts significant doubt on inferring a private right of action to enforce any other provision of the ICA (i.e., other than the two express private rights of actions provided in that statute, 15 U.S.C. §§ 80a–29(h), 80a–35(b)). And more generally, the Court added to its growing list of cases taking a skeptical view of inferring private rights of action and resorting to legislative history to infer congressional intent.
Read the opinion here.