In Cortland Street Recovery Corp. v. Hellas Telecomm. et al, the Second Circuit affirmed the District Court’s opinion and held that plaintiffs, Cortlandt, were merely assignees with rights limited that of being of a power of attorney rather than having full ownership rights. Further, the Court held that the lower court did not abuse its discretion in denying Cortlandt to substitute the owners of the notes as plaintiffs pursuant to Fed. R. Civ. P. 17 (a)(3).
Cortlandt was assigned the rights by various Sub Note holders to collect €83.1 million as a result of the default by Hellas. The plaintiffs filed a complaint in the Southern District Court of New York contending that the defendants used the Sub Notes to defraud their creditors.
With respect to the standing issue, pursuant to Baker v. Carr, 369 U.S.186, “the plaintiff must have alleged such a personal stake in the outcome of the controversy as to warrant its invocation of federal court jurisdiction and to justify exercise of the court’s remedial powers on its behalf.” Furthermore pursuant to Lujan v. Defenders of Wildlife, 504 U.S. 555, the plaintiff must establish that he has suffered an injury in fact which is both (1) “concrete and particularized” and (2) “actual or imminent”. Here, Cortlandt did not suffer a direct injury as a result of the default, and the real issue between the parties was whether in the nature of the assignment, Cortlandt was assigned standing to sue for any claims.
The Court observed that Cortlandt failed to demonstrate any transfer or title or ownership of the claims. The Court followed the reasoning in its previous holding in Advanced Magnetics, Inc. v. Bayfront Partners, Inc., 106 F.3d 11 (2d Cir. 1997), which stated that in order “to assign a claim effectively, the claim’s owner “must manifest an intention to make the assignee the owner of the claim”. Thus, there must be an intention that established that the title or ownership must be transferred. Here, Cortlandt was assigned the “full rights under the assignments to collect principal and interest due and to pursue all remedies” and “collect on the Sub Notes on behalf of the holders” and therefore, since ownership or title had not been transferred pursuant to the assignment agreement, Cortlandt did not have Article III standing when it filed its claim.
Cortlandt further argued that even if it lacked Article III standing, it should at least be given the oportunity to cure the deficiency pursuant to Fed. R. Civ. P. 17 (a)(3). Rule 17 (a)(3) states that:
“The court may not dismiss an action for failure to prosecute in the name of the real party in interest until, after an objection, a reasonable time has been allowed for the real party in interest to ratify, join, or be substituted into the action. After ratification, joinder, or substitution, the action proceeds as if it had been originally commenced by the real party in interest.”
The Court distinguished Advanced Magnetics where it permitted the plaintiffs in that case to substitute the parties since inter alia the factual allegations remained the same after the parties were substituted. Further, an important distinction that was drawn was the fact that the named plaintiff had standing on some of the claims, whereas Cortlandt did not. The Court further reasoned that even if there could be no substitution at the commencement of the suit, there was no complete assignment of ownership and thus there was no one to substitute for in the first place.
The Court further noted that even if the district court granted the motion to substitute parties, this would result in dismissing the case on subject matter jurisdiction grounds since the note owners and the defendants are both foreign entities which would result in losing diversity.
Even though Cortlandt requested leave to obtain a new assignment, the Court concluded that this would not enable Cortlandt to alter its complaint in the district court. Since Cortlandt alleged in its first complaint had full rights under assignment to collect principal and interest The Court further reasoned that any change in the nature of the assignment would also change the factual allegations and thus would be impermissible. Furthermore, the Court appeared to be open to substituting the parties had there be no change in the factual or legal substance of the claim.
The Concurrence (ironically also written by Judge Sack who wrote the majority opinion) added that Zurich would not be adopted in the Second Circuit and had some issue with the substantive merits of the decision. Whereas the Sixth Circuit took a more rigid approach in in regards to the approach in which jurisdiction must be established at the outset of litigation. Unlike the Sixth Circuit which appeared to decline to amend a complaint to correct a defect, the Judge Sack appeared to take a more lenient approach in that he would allow plaintiffs to cure the defect provided it can be remedied and it would not affect the legal or factual allegation of the claim.
Ultimately, the conclusion is that when assignees are entrusted in enforcing claims of various noteholders, it is better to ensure that they also have title or ownership of the notes to ensure that there is no defect in standing.