Class Actions for Subprime Meltdown—How Likely?

According to a recent article in Reuters, Many Mortgage Suits to Come, But Harder to Win, we can expect a number of class action lawsuits against those responsible for the subprime mortgage losses. Stanford Law School Professor Joseph Grundfest estimated that total investor losses resulting from the drop in stock prices and falling property values could be $5 trillion, dwarfing the investor losses from WorldCom, Adelphia and Enron. But the climate allowing class actions against these now bankruptcy companies has changed.
Recent pro-business Supreme Court decisions make it harder to bring class action lawsuits against companies not directly involved with fraud (Stoneridge Investment v. Scientific-Atlanta) and businesses that are in federally regulated industries (Riegel v. Medtronic). Likewise, it can be difficult for Plaintiffs in such suits to gain the information necessary to defend against early summary judgment motions due to decisions such as Bell Atlantic v. Twombly and Makor v. Tellabs.

The ability to bring national class actions in state courts has also been restricted. A 2005 federal law, the Class Action Fairness Act, gives federal courts jurisdiction to class actions where the amount in controversy exceeds $5 million, and where there is diversity of citizenship, unless at least two-thirds or more of the members of all proposed plaintiff classes and the primary defendants are citizens of the state in which the action was originally filed.

What will the result be? We’ll have to wait and see.