On Friday, the Sixth Circuit issued a consolidated Opinion recommended for publication in several banking-related cases. In it, the Court affirmed all of the district court’s rulings in defendants’ favor and addressed an issue of first impression in the Sixth Circuit.
The related lawsuits arose out of a Ponzi scheme allegedly orchestrated by James P. Carpenter III in which he sold to the plaintiffs investments in three sham companies. The plaintiffs sued both drawee and depositary banks. The plaintiffs alleged the drawee banks violated the Uniform Commercial Code’s “properly payable rule” by issuing payment from their checking accounts for checks they wrote to Carpenter’s sham corporations. The plaintiffs claimed that the depository banks violated the UCC and committed fraud by depositing their checks into accounts maintained for some of the plaintiffs and processing the deposits. After dismissing some of the actions as time-barred, the plaintiffs argued on appeal that the limitations period should not have started running until they discovered the scheme. Although the plaintiffs argued that their UCC claims were actually conversion claims (and thus subject to the “discovery rule”), the Sixth Circuit rejected the argument, holding that the plaintiffs had not pleaded conversion claims. Besides, the statute for conversion bars such claims by issuers of checks, according to the Court.
Regarding certain fraud-based claims against some defendants, the Sixth Circuit rejected the plaintiffs’ argument that the District Court should not have applied the two-year limitations period in Ohio’s securities fraud statute (known as the “blue sky laws”). The Sixth Circuit reaffirmed a prior holding that the statute of limitation provided in the blue sky laws applied to claims predicated on the sale of securities, even if no actual blue sky law claim was alleged.
Significantly, one plaintiff also argued that after the district court declined to grant him class certification, it no longer had subject matter jurisdiction over his claims against one defendant that was not dismissed. For the Sixth Circuit, this raised a novel issue of first impression under the Class Action Fairness Act of 2005 (CAFA). The Court explained that the CAFA grants jurisdiction over class actions in which the parties are minimally diverse and the amount in controversy exceeds $5 million. A “class action” is defined as “any civil action filed under rule 23 of the Federal Rules of Civil Procedure or similar State statute or rule of judicial procedure authorizing an action to be brought by 1 or more representative persons as a class action.” Relying heavily on a decision from the Seventh Circuit Court of Appeals, the Sixth Circuit ruled that denial of class certification does not divest federal courts of jurisdiction -- even if the remaining claims/parties do not satisfy traditional diversity standards. In addition to looking at the plain language of CAFA, the Sixth Circuit stated that the "general rule is that 'if jurisdiction exists at the time an action is commenced, such jurisdiction may not be divested by subsequent events.'"