LAW PRACTICE  •  Oct. 06, 2008
Bailout Includes Provision for Judicial Review
The $700 Billion Bill Limits the Type of Remedy Plaintiffs Are Able to Pursue

By Robert Iafolla

Daily Journal Staff Writer

WASHINGTON - Congress passed a controversial economic rescue plan Friday that, unlike the original Bush administration proposal, does not insulate the treasury secretary's actions from court review.

Although the bill preserves judicial review of the decisions Treasury Secretary Henry Paulson and his successors might make while doling out up to $700 billion across the troubled financial sector, it does limit the type of remedy litigants can seek. Specifically, the judicial review clause - primarily modeled on review under the Administrative Procedures Act - guards against delaying any actions at the heart of the treasury secretary's new responsibilities, but allows people to sue for damages.

"We heard repeatedly from the administration that they were concerned that rogue judges would award injunctions and thwart the emergency actions needed for the secretary to calm the financial crisis," Senate Judiciary Chairman Patrick J. Leahy, D-Vt., explained in a statement.

Leahy, who had introduced broader judicial review language into an earlier bailout proposal, said that by "agreeing to the administration's request on injunctions we intend for damages actions to be the avenue of relief for any misconduct, should it occur, on the part of the secretary."

The bailout bill, which will have the government buy up toxic debt to melt frozen credit markets, was met with a muted response after its passage, even from its supporters. In statements Friday, Senate Majority Leader Harry Reid, D-Nev., called it "not a perfect bill by any means;" House Minority Leader John Boehner, R-Ohio, deemed it "flawed but necessary;" and the U.S. Chamber of Commerce "hailed" it as a "necessary step to stop the bleeding" in the financial markets.

The bill took an accelerated, yet winding, path since Paulson unveiled his initial three-page plan two weeks ago - a plan that would have granted him extremely broad authority, including immunity from almost any judicial review. Calls for oversight and taxpayer protections helped shape a 110-page bill that provided some checks on the treasury secretary's power, but the House scuttled that version of the legislation in a tight vote last Monday.

Congressional leaders modified the package again, adding more than 350 pages of tax cuts and other legislation but leaving its fundamentals alone. The Senate overwhelmingly passed the bill Wednesday. The House, after rejecting the earlier version on a 205 to 228 vote, passed it 263 to 171 Friday morning.

President Bush called the package "essential to helping America's economy weather the financial crisis" and signed it into law hours after the House vote Friday.

The judicial review section in the final bill did not change from the first version rejected by the House. By restricting injunctions and making damages the means of legal relief, the review section gives the treasury secretary a relatively free hand and leaves it to the courts to sort things afterwards, legal experts said.

Aside from the treasury secretary's actions that are "arbitrary, capricious, an abuse of discretion, or not in accordance with law," the section lacks specifics with respect to what types of claims are reviewable, who would have standing to sue and what the venue might be.

"This plan was thrown together very quickly and without many hearings, so I'd expect a lot of things to be unclear," said Rex J. Heinke, a Los Angeles-based appellate partner with Akin Gump Strauss Hauer & Feld who has been tracking the legislation. "In retrospect, some people might look at it and say, 'What did we agree to?'"

Heinke predicted that the bailout legislation, after Paulson starts acting on it, will generate a "substantial amount of litigation" precisely because it is so vague.

Leahy, who authored the judicial review section, did single out certain types of litigants - homeowners and shareholders - with their own clauses. In a statement detailing the section's legislative history, he said the homeowner and savings clauses are intended to preserve the rights of people injured by misconduct to file or continue lawsuits against financial institutions and that the bailout legislation should not impair their claims.

Plaintiffs attorney Paul R. Kiesel of Kiesel, Boucher & Larson, which acted as liaison counsel in the $660 million settlement of the Los Angeles Archdiocese abuse cases, said he teamed with several other attorneys and the National Consumer Law Center to lobby Congress for those protections on homeowner claims. Kiesel Boucher and a consortium of firms have more than 50 class actions pending in California federal courts that were filed on behalf of California homeowners who say lenders violated the Truth in Lending Act when selling subprime mortgages. Kiesel said he was concerned the treasury secretary would get the power to dismiss those claims if the government under the bailout plan buys mortgages originated by the financial institutions he sued.

The section on judicial review had little impact on the bill's initial failure in the House last week.

But the proposed provision empowering bankruptcy judges to rework trouble mortgages, which was ultimately left out of the bailout package, did affect the vote. Several California Democrats, including Reps. Linda T. Sanchez of Cerritos and Xavier Becerra of Los Angeles, named that provision's absence as a decisive factor in their opposition to the bill. Democratic leadership "tried mightily to make the bill an economic recovery package," but "encountered extreme resistance," Becerra said in an interview following the first vote.

The provision empowering bankruptcy judges was opposed by the financial services industry and business groups, which claimed it would destabilize the markets by changing the value of mortgage loans, increase the risk premium for borrowers and flood the bankruptcy courts unprepared for hundreds of thousands of new petitioners.

Even though it was the critical factor for some lawmakers, the provision was not added to the reworked bailout package. Both Becerra and Sanchez opposed the bill on its second go round.

Maureen Thompson, legislative director for the National Association of Consumer Bankruptcy Attorneys, said the effort to have mortgages included in bankruptcies is dead for now, but is expected to be taken up again after a new Congress and administration are sworn in next year.

Many other provisions were added to the final bill, however, including an increase in bank deposit insurance and a $150 billion package of personal and business tax cuts - sweeteners designed to lure enough votes in the House to get the bailout bill passed.

"The sausage factory is never pretty," Bruce Josten, executive vice president of government affairs for the U.S. Chamber of Commerce, said of the legislative process. "But what defines success to politicians and leadership is not what it takes to cross the finish line."