Transamerica Mortgage Advisors, Inc. v. Lewis

Summary

Mortgage Trust of America was a real estate investment trust advised by Transamerica Mortgage Advisors, Inc., known as TAMA, a subsidiary of the Transamerica Corporation. A shareholder of the trust sued in federal court, both derivatively on the trust's behalf and for a class of shareholders, naming the trust, several trustees, TAMA, Transamerica and another affiliate, Land Capital, Inc. The complaint alleged that the advisory contract was unlawful because TAMA and Transamerica were not registered as investment advisers and because the fees were grossly excessive, that the defendants had caused the trust to buy inferior securities from Land Capital, and that profitable opportunities had been diverted to other Transamerica companies. The shareholder sought an injunction, rescission of the contract, restitution of fees, an accounting and damages, all under the Investment Advisers Act of 1940. The Act contains no express provision allowing private suits. The District Court therefore dismissed the complaint, but the Ninth Circuit reversed, holding that a private right to injunctive relief and damages was needed to achieve the goals of Congress. Before the Court, the shareholder and the Securities and Exchange Commission, as amicus curiae, argued that the Act was written to protect advisory clients, that every court of appeals to address the question had allowed damages. The defendants answered that Congress had carefully provided criminal penalties, Commission injunctions and administrative sanctions, and that courts should not add remedies Congress chose not to enact. On 13 November 1979 the Court divided 5–4. Justice Stewart framed the question as one of congressional intent, not judicial policy. Section 215 declares contracts made in violation of the Act void, and by its terms contemplates that voidness will be litigated somewhere; the customary consequences of a void contract include a suit for rescission and restitution of what was paid. The trust could therefore sue to rescind the advisory contract and recover fees. Section 206, by contrast, forbids fraudulent conduct but creates no civil liability. Where Congress has expressly provided particular remedies, courts must be chary of reading in others, and the Act's jurisdictional section, which omits actions at law, pointed the same way. The Court held that there is a limited private remedy to void an advisory contract and no other private cause of action. Justice Powell joined, noting that the opinion fit his recent dissent in Cannon v. University of Chicago. Justice White, for four dissenters, followed the four-factor approach of Cort v. Ash (1975). Section 206 plainly benefits advisory clients, nothing in its history shows an intent to deny them a remedy, and the Court confused the existence of a cause of action with the relief available in it, reaching what all parties agreed was an anomalous result. The library text gives the majority and Powell's concurrence in full and the first portion of White's dissent, without notes. Later decisions, including Alexander v. Sandoval (2001), continued the emphasis on statutory intent, and advisory clients seeking damages generally rely on state law or arbitration.

Top Lessons

• Rights without remedies?

  Everyone agreed that Section 206 imposes enforceable fiduciary duties on advisers. The disagreement was over who may enforce them. The majority held that Congress entrusted enforcement to the Commission and prosecutors, leaving clients only the power to undo the contract; the dissent saw a duty owed to clients as implying a remedy for clients.

• From purpose to intent

  In the 1960s the Court sometimes implied private suits to make statutes effective. By 1979 it had turned to asking what Congress actually intended. Transamerica is a clear example of that shift, and it shows how a change in interpretive method can change outcomes for an entire industry.

• The meaning of void

  Stewart found a private remedy in the single word void. A void contract can be challenged in court, and courts have long allowed a party to rescind it and recover what was paid. The reasoning shows how ordinary legal concepts carry their customary consequences into a statute.

• Cause of action and relief

  White's dissent turns on a distinction between whether a plaintiff may sue at all and what relief a court may grant. Once a right to sue exists, he argued, courts traditionally award complete relief. The majority's split between rescission and damages struck him as reviving an old divide between equity and law.

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Medical Lens

A dispute over remedies under the Investment Advisers Act; no medical, psychiatric or public-health matter is involved.