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formalities matter – sometimes December 5, 2008

Posted by Bradley in : Uncategorized , trackback

W R Huff Asset Management, which has been acting as a vulture with respect to Adelphia, has run up against a standing problem. The Second Circuit held in W.R. Huff Asset v. Deloitte & Touche that an investment advisor with discretionary authority to make investment decisions for its clients, and a power of attorney to file suit on its clients’ behalf (and no ownership of or title to the claim) has no constitutional standing to bring a securities action in a representative capacity on behalf of its clients. Following Sprint v APCC the court said that it would have made a difference if the clients had assigned their claims to the firm, even if Huff were obligated to hand over any damages to the clients (i.e. an assignment in form rather than in substance). The decision in Sprint rested on a longstanding practice of courts to accept that assignees of claims for collection had standing.

The Second Circuit also followed its own earlier decision in Advanced Magnetics v Bayfront Partners (noting that it was decided before the Sprint decision) which distinguished between a power of attorney (standing alone) and an assignment of ownership.

The Sprint court characterized the right of the assignee as a property right, whereas the right of the holder of a power of attorney is not a property right. The Second Circuit states that Huff “does not have an ownership stake in any claims its clients might pursue against defendants” and that “Huff’s only interest in this litigation as an attorney-in-fact is the recovery of its legal fees, which are a “byproduct of the suit itself”….” But the property recognized by the Supreme Court as sufficient for standing in Sprint wasn’t really an ownership stake (although the court noted that it would be available for the assignee’s creditors).

The effect of applying this distinction in Huff v Deloitte is to distinguish between the sort of agency relationship constructed by an assignment of a claim combined with a duty to remit any proceeds from the litigation and the sort of agency relationship constructed by a power of attorney. According to the Second Circuit, whereas the first creates standing, the second does not. The economic substance of the relationship would be pretty much the same in both cases. Acts of an agent within the agent’s authority are typically attributed to the principal for the purposes of attributing liability to the principal. But in relation to standing the principal and agent are treated as separate entities even where it would be necessary to look to the behavior of the combination of the principal and agent to establish liability – for example where the agent and not the principal had read and relied on material misstatements. Where the economic interests of the principal and agent are intertwined as they are in this case requiring an assignment seems to be excessively formalistic.

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