21-2905 Litovich v. Bank of America Corp., et al.

United States Court of Appeals For the Second Circuit

August Term 2022

Argued: February 9, 2023 Decided: July 2, 2024

No. 21-2905

ISABEL LITOVICH, ON BEHALF OF HERSELF AND ALL OTHERS SIMILARLY SITUATED, UNITED FOOD AND COMMERCIAL WORKERS UNION AND PARTICIPATING FOOD INDUSTRY EMPLOYERS TRI-STATE PENSION FUND, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, HOLDCRAFT MARITAL TRUST, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, MICHAEL V. COTTRELL, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, FRANK HIRSCH, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED,

Plaintiffs-Appellants,

v.

BANK OF AMERICA CORPORATION, MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED, BOFA SECURITIES, INC., BARCLAYS CAPITAL INC., CITIGROUP INC., CITIGROUP GLOBAL MARKETS INC., CREDIT SUISSE SECURITIES (USA) LLC, DEUTSCHE BANK SECURITIES INC., THE GOLDMAN SACHS GROUP, INC., GOLDMAN SACHS & CO. LLC, JPMORGAN CHASE & CO., J.P. MORGAN SECURITIES LLC, MORGAN STANLEY, MORGAN STANLEY & CO. LLC, MORGAN STANLEY SMITH BARNEY LLC, NATWEST MARKETS SECURITIES INC., WELLS FARGO & CO., WELLS FARGO SECURITIES, LLC, WELLS FARGO CLEARING SERVICES, LLC,

Defendants-Appellees.

Appeal from the United States District Court for the Southern District of New York No. 20-cv-03154, Lewis J. Liman, Judge.

Before: LEE AND NATHAN, Circuit Judges, AND RAKOFF, District Judge. *

Plaintiffs-Appellants, bond investors who bought and sold certain types of corporate bonds from and to Defendants-Appellees, who are investment bank dealers of those bonds, appeal from the district court’s judgment granting Defendants-Appellees’ motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). Several months after the district court’s order, the parties learned that the district court judge had presided over part of the case while his wife owned stock in one of the Defendants, although she had divested that stock before the district court judge issued his decision.

In light of these circumstances, we are tasked with deciding whether, pursuant to

, vacatur is warranted because the district court judge was required to disqualify himself before issuing his decision. Under § 455(a), a federal judge “shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned,” including, under § 455(b)(4), when “he knows

*The Honorable Jed S. Rakoff, of the United States District Court for the Southern District of New York, sitting by designation.

2 that . . . his spouse . . . has a financial interest . . . in a party to the proceeding.”

(a), (b)(4). Here, while there was no outright conflict when the district court judge ruled on the merits of this action, we nonetheless conclude that because § 455(a) and our related precedents required pre-judgment disqualification, vacatur is warranted.

As a result, we VACATE the judgment, and REMAND the case to the district court for further proceedings, consistent with this opinion.

DAVID C. FREDERICK, (Gregory Rapawy, Eliana Margo Pfeffer, on the brief), Kellogg, Hansen, Todd, Figel & Frederick, P.L.L.C., Washington, DC, for Plaintiffs-Appellants.

Christopher M. Burke, Scott+Scott Attorneys at Law LLP, New York, NY, for Plaintiffs- Appellants.

Walter W. Noss, Kate Lv, Scott+Scott Attorneys at Law LLP, San Diego, CA, for Plaintiffs-Appellants.

George A. Zelcs, Chad E. Bell, Ryan Z. Cortazar, Korein Tillery LLC, Chicago, IL, for Plaintiffs-Appellants.

Glen E. Summers, Karma M. Giulianelli, Bartlit Beck LLP, Denver, CO, for Plaintiffs- Appellants.

RICHARD C. PEPPERMAN II, (Matthew J. Porpora, Jonathan S. Carter, on the brief), Sullivan & Cromwell LLP, New York, NY, for Defendants-Appellees The Goldman Sachs Group, Inc. and Goldman Sachs & Co. LLC.

Adam S. Hakki, Richard F. Schwed,

3 Shearman & Sterling LLP, New York, NY, for Defendants-Appellees Bank of America Corporation, BofA Securities, Inc., and Merrill Lynch, Pierce, Fenner & Smith Incorporated.

Barry G. Sher, Kevin P. Broughel, Paul Hastings LLP, New York, NY, for Defendant- Appellee Barclays Capital, Inc.

Herbert S. Washer, Sheila C. Ramesh, Adam S. Mintz, Cahill Gordon & Reindel LLP, New York, NY, for Defendant-Appellee Credit Suisse Securities (USA) LLC.

Robert D. Wick, John S. Playforth, Covington & Burling LLP, Washington, DC, for Defendants-Appellees JPMorgan Chase & Co. and J.P. Morgan Securities LLC.

Paul S. Mishkin, Adam G. Mehes, Davis Polk & Wardwell LLP, New York, NY, for Defendant-Appellee NatWest Markets Securities Inc.

Jay Kasner, Karen M. Lent, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Defendants-Appellees Citigroup Inc. and Citigroup Global Markets Inc.

John F. Terzaken, Adrienne V. Baxley, Simpson Thacher & Bartlett LLP, Washington, DC, for Defendant-Appellant Deutsche Bank Securities Inc.

Richard A. Rosen, Brad S. Karp, Susanna M. Buergel, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, Kannon K.

4 Shanmugam, Jane B. O’Brien, Paul, Weiss, Rifkind, Wharton & Garrison LLP, Washington, DC, for Defendants-Appellees Morgan Stanley, Morgan Stanley & Co. LLC, and Morgan Stanley Smith Barney LLC.

Jayant W. Tambe, Laura W. Sawyer, Amanda L. Dollinger, Jones Day, New York, NY, for Defendants-Appellees Wells Fargo & Co., Wells Fargo Securities, LLC, and Wells Fargo Clearing Services, LLC.

PER CURIAM:

Plaintiffs-Appellants (“Plaintiffs”), bond investors who bought and sold

certain types of corporate bonds from and to Defendants-Appellees

(“Defendants”), who are investment bank dealers of those bonds, appeal from the

district court’s judgment granting Defendants’ motion to dismiss pursuant to

Federal Rule of Civil Procedure 12(b)(6). Several months after the district court’s

order, the parties learned that the district court judge had presided over part of

the case while his wife owned stock in one of the Defendants, although she had

divested that stock before the district court judge issued his decision. Accordingly,

not only are Plaintiffs appealing the merits of the district court’s decision, but they

also contend that the district court judge should have disqualified himself in light

of this prior financial interest of his wife.

Thus, we are tasked with deciding whether, pursuant to

,

5 vacatur is warranted because the district court judge was required to disqualify

himself before issuing his decision. Under § 455(a), a federal judge “shall

disqualify himself in any proceeding in which his impartiality might reasonably

be questioned,” including, under § 455(b)(4), when “[h]e knows that . . . his spouse

. . . has a financial interest . . . in a party to the proceeding.”

(a),

(b)(4). Here, while there was no direct conflict of interest when the district court

judge ruled on the merits of this action, we nonetheless conclude that because

§ 455(a) and our related precedents required pre-judgment disqualification,

vacatur is warranted.

As a result, we VACATE the judgment, and REMAND the case to the

district court for further proceedings, consistent with this opinion.

I. BACKGROUND

Plaintiffs are bond investors who bought and sold certain types of corporate

bonds from and to Defendants, who are financial institutions and major dealers in

the corporate bond market, including Bank of America Corporation. Plaintiffs

brought an antitrust action against Defendants, principally alleging that

Defendants violated § 1 of the Sherman Act by “engag[ing] in a pattern of parallel

conduct and anticompetitive collusion” to restrict forms of competition that would

6 have “improve[d] odd-lot pricing for bond investors.” App’x at 86. As a result of

the purported conspiracy, Defendants allegedly “accrue[d] supracompetitive

profits” at the expense of individual and smaller investors, including Plaintiffs.

App’x at 104.

Plaintiffs filed the initial complaint on April 21, 2020, and the case was

assigned to the Honorable Lewis J. Liman, District Judge for the Southern District

of New York. Following Plaintiffs’ submission of the operative amended

Complaint on October 29, 2020, Defendants filed a joint motion to dismiss on

December 15, 2020, in which they argued that Plaintiffs failed to state a claim

pursuant to Federal Rule of Civil Procedure 12(b)(6), and Plaintiffs filed their

response on January 28, 2021. Oral argument regarding the motion occurred in

the district court on September 9, 2021. On October 25, 2021, the district court

granted Defendants’ motion to dismiss in its entirety, finding that Plaintiffs did

not plead a plausible anticompetitive conspiracy, and dismissing the Complaint

with prejudice.

On February 25, 2022, four months after the Complaint was dismissed, the

Clerk of Court of the Southern District of New York sent a letter to the parties

stating that it had been brought to Judge Liman’s attention that “while he presided

7 over the [Litovich] case his wife owned stock in Bank of America Corporation.”

Suppl. App’x at 263. The letter continued:

His wife’s stock ownership is imputed to Judge Liman. That ownership of stock neither affected nor impacted his decisions in this case. However, that stock ownership would have required recusal under the Code of Conduct for United States Judges, and thus, Judge Liman directed that [the Clerk of Court] notify the parties of the potential conflict.

Id. The letter did not indicate when Judge Liman learned of the conflict.

A few days later, on March 1, 2022, The Wall Street Journal published an

article discussing the high number of recusal violations apparent among the

federal judiciary. James V. Grimaldi et al., Fallout From Judges’ Financial Conflicts

Spreads to Appeals Courts, Wall St. J. (Mar. 1, 2022),

https://www.wsj.com/articles/fallout-from-judges-financial-conflicts-spreads-to-

appeals-courts-11646155384?st=1o4zhc5b0gqnzj2 [https://perma.cc/7J6Q-FMVW].

The article discussed Judge Liman’s failure to recuse himself in this case as an

example. Id. It stated that “[t]he [Litovich] case is one of 13 lawsuits in which the

judge, after an inquiry last month from the Journal, asked a clerk to file notices to

parties in those cases saying he should have disqualified himself.” Id.

One week after the clerk’s notification to the parties, and one day after The

Wall Street Journal article was published, the case was reassigned to the Honorable

8 Valerie E. Caproni on March 2, 2022. On March 14, 2022, the Clerk of Court sent a

second letter to the parties, specifying that “the stock holding referenced in [the]

February 25 letter was fully divested in July 2021, before the final Opinion and

Order . . . terminating this case was issued in October 2021.” Suppl. App’x at 265.

Plaintiffs timely appealed.

II. DISCUSSION

We must decide whether the district court judge’s failure to recuse himself

sua sponte prior to issuing a decision on the merits of this case—even though a

direct conflict did not exist at the time the decision was published—disqualified

him under

(a), and if so, whether that disqualification warrants

vacatur of the decision. On the record before us and for reasons explained below,

in particular, guarding against even the appearance of partiality, we answer yes to

both inquiries.

A. Statutory Disqualification

Title

(a) states, in relevant part, that a judge “shall disqualify

himself in any proceeding in which his impartiality might reasonably be

questioned.” Section 455(a) has been described as a “catchall recusal provision,”

In re Aguinda,

, 200 (2d Cir. 2001) (quoting Liteky v. United States,

(1994) (internal quotation marks omitted)), that “governs

9 circumstances that constitute an appearance of partiality, even though actual

partiality has not been shown,” Chase Manhattan Bank v. Affiliated FM Ins. Co.,

(2d Cir. 2003). A judge need not have actual knowledge of the

disqualifying circumstance for § 455(a) to apply. Liljeberg v. Health Servs.

Acquisition Corp.,

(1988). That is because the purpose of § 455(a)

is “to promote public confidence in the integrity of the judicial process,” which

“does not depend upon whether or not the judge actually knew of facts creating

an appearance of impropriety, so long as the public might reasonably believe that

he or she knew.” Id. at 860. Accordingly, the test for whether an appearance of

partiality exists “is an objective one based on what a reasonable person knowing

all the facts would conclude.” Chase Manhattan Bank,

; see Aguinda,

241 at 201 (“Where a case, by contrast, involves remote, contingent, indirect or

speculative interests, disqualification is not required.” (quoting United States v.

Lovaglia,

(2d Cir. 1992))).

Among the circumstances requiring disqualification, § 455(b)(4) provides,

in relevant part, that a judge “shall also disqualify himself” when “[h]e knows that

. . . his spouse . . . has a financial interest in the subject matter in controversy or in

a party to the proceeding, or any other interest that could be substantially affected

10 by the outcome of the proceeding.”

(b)(4). Section 455(c) imposes

the additional duty that a federal judge “should inform himself about his personal

and fiduciary financial interests, and make a reasonable effort to inform himself

about the personal financial interests of his spouse.” As relevant to the current

proceedings, § 455(d)(4) defines “financial interest” as an “ownership of a legal or

equitable interest, however small.”

Unlike § 455(a), which covers even the appearance of partiality, § 455(b)(4)’s

requirement of disqualification applies only when the judge actually knows about

the disqualifying circumstance. Liljeberg,

. Even then, however, the

existence of a financial interest on the part of a judge’s spouse is not always

grounds for automatic disqualification, as a judge may avoid disqualification if he

“discloses and divests [the] financial interest.” Chase Manhattan Bank,

. Specifically, Section 455(f) provides, in relevant part, that

if any . . . judge . . . to whom a matter has been assigned would be disqualified, after substantial judicial time has been devoted to the matter, because of the appearance or discovery, after the matter was assigned to him or her, that . . . his or her spouse . . . has a financial interest in a party (other than an interest that could be substantially affected by the outcome), disqualification is not required if the . . . spouse . . . divests himself or herself of the interest that provides the grounds for the disqualification.

(f) (emphasis added). See Kidder, Peabody & Co. v. Maxus Energy

11 Corp.,

(2d Cir. 1991) (holding that the § 455(f) exception applied

where we found it unlikely that a district judge “knew of his interest simply

because one or two passing references were made about [it],” and the parties did

not file corporate disclosure statements at the commencement of the action).

B. Analysis

In the present case, Plaintiffs argue that vacatur is necessary because Judge

Liman’s wife owned Bank of America Corporation stock for at least part of the

time that Judge Liman presided over this case. Plaintiffs assert that while the

record does not reflect precisely when Judge Liman learned of the conflict, recusal

was mandatory under § 455(b)(4) if he learned of the conflict before his ruling in

October 2021. Alternatively, they argue that even if Judge Liman learned of the

conflict after his ruling, disqualification is still warranted because he failed to

fulfill his duty under § 455(c) to inform himself of any potential conflict. Plaintiffs

likewise maintain that recusal under § 455(a) was “mandatory” because Judge

Liman’s impartiality could reasonably be questioned, and as such posed a risk of

general harm to the parties, other proceedings, and public confidence in the

judicial process. Appellant’s Br. at 60.

Defendants disagree. They argue that there are no grounds for vacating the

judgment under § 455 because Judge Liman’s wife fully divested her stockholding

12 in Bank of America Corporation in July 2021, which was approximately two

months before oral argument occurred and three months before Judge Liman

granted Defendants’ motion to dismiss. Defendants also assert that there is no

§ 455(b)(4) violation because “[t]he chronology suggests that Judge Liman first

became aware of his wife’s stockholdings in February 2022, when The Wall Street

Journal inquired about his wife’s investments,” which was approximately four

months after his October 2021 decision. Id. at 58. 1 They similarly maintain that

Plaintiffs’ interpretation of § 455(c) would create a “per se rule” that would require

“‘mandatory’ vacatur if a judge fails to discover a potential conflict.” Id. at 59.

Finally, Defendants argue in the alternative that even assuming a § 455(a) violation

based on the appearance of partiality, this Court’s de novo review of the district

court’s decision to grant the motion to dismiss “ensures that no injustice will occur

. . . and renders any recusal failure harmless.” Id. at 58.

Based on this Court’s precedent, we agree with Plaintiffs that vacatur is

required under § 455(a) because of the uncured financial conflict. We thus do not

1 See Grimaldi, supra page 8 (“The 2020 suit against 10 banks seeks to recover damages that plaintiffs say exceed $10 billion for overcharging them on bond purchases. Judge Liman didn’t disclose that a family member owned as much as $15,000 in Bank of America, a defendant. Last year, Judge Liman granted the motion of defendants including Bank of America to dismiss in the case with prejudice.”).

13 reach the merits of the case.

“Section 455(a) applies when a reasonable person would conclude that a

judge was violating Section 455(b)(4)” due to a conflict of financial interest. Chase

Manhattan Bank,

. We focus our attention on § 455(a), rather than

§ 455(b)(4) itself, because the record lacks clarity on precisely when the district

judge learned of the conflict. For our purposes, we assume that Judge Liman had

no knowledge of the conflict until after it was reported by The Wall Street Journal,

which occurred after Judge Liman issued his decision granting the motion to

dismiss. In the absence of actual knowledge by the district judge that “his spouse

. . . has a financial interest . . . in a party,” § 455(b)(4) does not mandate recusal.

“Even where the facts do not suffice for recusal under § 455(b), however, those

same facts may be examined as part of an inquiry into whether recusal is mandated

under § 455(a).” In re Certain Underwriter,

(2d Cir. 2002). Here,

the record indicates that Judge Liman presided over this matter during the time

that his spouse held an ownership interest in a party to the litigation. This conflict-

creating ownership and financial interest existed until some time after the briefing

on the instant motion to dismiss was fully submitted. Looking at these facts “fully

from the perspective of an ‘objective, disinterested observer,’”

(quoting

14 Aguinda, 241 F.3d at 201), we conclude that it is reasonable to question the

partiality of a judge presiding over a case in which his spouse holds an ownership

interest in a party. We therefore hold that the district court violated § 455(a). See

also ExxonMobil Oil Corp. v. TIG Insurance Co.,

, 171–73 (2d Cir. 2022)

(assuming a violation of § 455(a) where the district court judge owned stock in one

of the parties, even where no facts suggested the judge had knowledge of his

financial interest before issuing the judgment); Brock v. Zuckerberg,

, at *3 (2d Cir. Apr. 27, 2022) (summary order) (assuming a violation of

§ 455(a) where the district court judge’s spouse owned stock in a company led by

one of the parties, even where no facts suggested the judge had knowledge of his

spouse’s financial interest before issuing the judgment).

“[I]n determining how best to address a violation of § 455(a),” this Court

considers three factors: “(i) the risk of injustice to the parties in the particular case;

(ii) the risk that the denial of relief will produce injustice in other cases, and (iii)

the risk of undermining the public’s confidence in the judicial process.” United

States v. Amico,

(2d Cir. 2007). We find that this case implicates

each of these factors, and hold that vacatur of the district court’s judgment is

warranted.

15 As to the first factor, “the risk of injustice to the parties in the particular

case,”

there is a plausible risk of injustice to Plaintiffs because it is conceivable,

albeit highly unlikely, that the district judge’s conflict of interest impacted the

outcome of this case. To be clear, we do not question the district judge’s reasoned

judgment nor mean to suggest that he treated the parties unfairly. Indeed, the

Clerk of Court’s letter explicitly states that the “ownership of stock neither affected

nor impacted” the district judge’s decision, Suppl. App’x at 263, and we fully

credit that representation. However, the focus of § 455(a) is on avoiding the

appearance of partiality, even absent an explicit showing of it. See Chase Manhattan

Bank,

; see also Liljeberg, 486 U.S. at 867–68 (noting that even

where district court judge did not know of his fiduciary interest in the litigation,

he should have known, which was “precisely the kind of appearance of

impropriety § 455(a) was intended to prevent”). Because the district judge’s

impartiality towards the parties may reasonably be questioned based on this

appearance, we therefore find that the first factor militates in favor of vacatur.

As to the second factor for assessing a violation of § 455(a), “the risk that the

denial of relief will produce injustice in other cases,” Amico,

, we

find that the type of conflict of interest presented here risks injustice in other cases.

16 That injustice, as highlighted by the press coverage of this and other cases

regarding disqualification, is that federal judges will fail to recuse themselves in

future cases, which—as Plaintiffs correctly argue—may “increas[e] the likelihood

that conflicts [] go unnoticed and unremedied.” Appellants’ Reply Br. at 30. As

we have stated before, “judges have an obligation to exercise reasonable effort in

avoiding cases in which they are disqualified,” and accordingly bear the burden

of complying with the strictures of § 455(a). Chase Manhattan Bank,

.

Thus, by enforcing it here, we hope to “prevent a substantive injustice in some

future case” by urging our peers “to more carefully examine possible grounds for

disqualification and to promptly disclose them when discovered.” Liljeberg,

.

Third, we find that there is a legitimate risk that these kinds of violations

will “undermin[e] the public’s confidence in the judicial process.” Amico,

. As mentioned, there has been media coverage of this § 455 violation, as

well as others, and it is an issue the federal judiciary knows it needs to remedy, as

recognized by Chief Justice Roberts. See Hon. John G. Roberts, Jr., 2021 Year-End

Report on the Federal Judiciary, 9 (Dec. 31, 2021),

https://www.supremecourt.gov/publicinfo/year-end/2021year-endreport.pdf

17 [https://perma.cc/HG7H-UH3T] (“We are duty-bound to strive for 100%

compliance [with

] because public trust is essential, not incidental,

to our function.”). With that said, an appearance of partiality “must have an

objective basis beyond the fact that claims of partiality have been well publicized,”

Aguinda, 241 F.3d at 201 (emphasis added), because a “resort to appearances” risks

a “potential slippery slope resulting from the fact that appearances are often in the

eye of the beholder” and “can be manufactured by inspiring publicity of repeated

claims of bias,” Chase Manhattan Bank,

. “Judicial inquiry may not

therefore be defined by what appears in the press.” In re Drexel Burnham Lambert

Inc.,

, 1309 (2d Cir. 1988). However, we nevertheless agree that

recurrent controversies legitimately risk undermining public confidence in the

federal judiciary and its function: the fair adjudication of the law. Because we find

that this conflict presents an appearance of impropriety, we therefore conclude

that vacating the judgment both complies with our statutory mandate and is the

best means of dispelling any potential loss of faith in the judiciary.

Finally, we find that while Judge Liman’s wife divested her stock

approximately two months before oral argument on the motion occurred, and

three months before Judge Liman granted Defendants’ motion to dismiss, vacatur

18 is still warranted. We have held both that “[w]here a case . . . involves remote,

contingent, indirect or speculative interests, disqualification is not required,”

Lovaglia,

, and that divestiture under § 455(f) can cure conflicts of

interest, see Kidder,

. But while “[j]udges may preside over cases in

which they appear disqualified,” they can “do so only in a very technical sense,”

such as when a district judge issues “routine, standard scheduling orders in a large

number of newly filed cases, missing a disqualifying party in a case with several

parties.” Chase Manhattan Bank,

. That was not the case here.

Although divestiture occurred three months before the district court’s decision,

the parties already had filed their motions and the case was well past the

“technical” stage. See

(“While Section 455(f) allows a judge to divest a

newly-discovered disqualifying interest and continue to preside over a case, that

divestiture cannot cure circumstances in which recusal was required years before

and important decisions have been rendered in the interim.”). Permitting curative

§ 455(f) divestiture once a litigation has advanced to substantive disputes may

implicate the risks to the present parties, other proceedings, and public confidence

already discussed, and is a determination that must be analyzed on a case-by-case

basis. Similarly, de novo review of the merits of the underlying claim by a Court of

19 Appeals does not solve this problem because the root issue—repeated violations

of § 455—goes unaddressed if the burden of ameliorating it is shifted to reviewing

courts. Here, due to the length of time that Judge Liman presided over this case

with a conflict—albeit almost certainly unknowingly—and the substantive

motions that came before him in that period, we find that his wife’s July 2021

divestiture of Bank of America stock was not sufficiently curative. Accordingly,

recusal under § 455(a) was required, and we therefore vacate the decision of the

district court granting Defendants’ motion to dismiss.

III. CONCLUSION

For the foregoing reasons, we VACATE the judgment, and REMAND the

case to the district court for further proceedings before Judge Caproni, consistent

with this opinion.

20