WASHINGTON - Relief. That's what officials at a number of big banks, securities houses, and savings and loans must be feeling in the wake of the Supreme Court's decision last week in Plaut v. Spendthrift Farm Inc.
Justice Antonin Scalia, in the 7-2 decision, said Congress ran afoul of the Constitution when it tried to reinstate scores of securities fraud suits that the federal courts had dismissed.
Justice Scalia said lawmakers cannot require courts to reopen shut cases. Instead, Congress can only change the law to affect pending or future cases.
"Scalia draws a clear line," said David Roderer, a partner at Winston & Strawn. "The courts are here and Congress is there, and the two can't mix."
Bankers might wonder why they should care about the case, in which investors sued a horse-breeding farm, especially once they realize that Justice Scalia wrote a constitutional-law opinion that is likely to enthrall scholars for years to come.
But, Mr. Roderer said there are two reason bankers should take notice.
First, the case reaffirms the court's belief that investors must file securities fraud cases within a year of discovering the deceit or three years of the occurrence.
That ruling provides some protection for banks, which are increasingly finding themselves the target of securities fraud litigation.
Second, the decision finally resolves the fate of hundreds of securities fraud cases against savings and loans that were dismissed in 1991.
In those cases, investors had filed suits after losing money in S&Ls that failed. The suits claimed the S&Ls, the institutions' officers, and the investment houses that arranged the stock deals committed "fraud and deceit" by misrepresenting the risks involved in the stock sales, a violation of the Securities and Exchange Act.
The first question defendants raised, however, was how much time investors had to file suit. Judges couldn't agree. Many relied on state fraud laws for the statute of limitations, saying Congress failed to include its own time frame in the securities act.
Those state-created statutes of limitations varied widely, with some giving litigants up to five years to file a claim.
All that changed, however, when the Supreme Court ruled in June 1991 that investors had to file suits within the lesser of one year of discovering the fraud or three years after the fraud occurred.
"The Supreme Court said, enough of this nonsense, and imposed a national standard," Mr. Roderer said.
The court's ruling led trial judges around the country to dismiss much of the $4 billion in outstanding claims, because investors filed their suits too late.
Those dismissals outraged lawmakers, who were in the midst of trying to clean up the S&L mess. So Congress tried to fix the decision by adding a provision to the Federal Deposit Insurance Corp. Improvement Act of 1991.
The provision required the court to reopen all the cases affected by the 1991 decision. All new cases, however, would be governed by the one- year/three-year time limit.
That led to last week's ruling. Investors have tried to reinstate their suits, but the lower courts have refused, citing the separation of powers issue.
In the high court, investors tried to avoid the separation of powers conflict by claiming Congress wasn't directly ordering judges to reopen the cases. But Justice Scalia didn't buy that argument, saying the law would be pointless if Congress wasn't trying to reopen the cases.
Justice Scalia also wrote that this was the first time Congress attempted to interfere with the courts this way.
Not all the other justices agreed. Justice John Paul Stevens, with Justice Ruth Bader Ginsburg's support, wrote that Congress has passed previous laws allowing the courts to reopen final judgments. "The court has never invalidated such a law until today," Justice Ginsburg wrote.
She said the majority treated this case differently because the courts - and not Congress - created the private right to action under the securities act.
Justice Stephen G. Breyer, in a separate opinion, concurred with the majority.
