Transamerica Mortgage Advisors, Inc. v. Lewis
444 U.S. 11 (1979)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
The Investment Advisers Act of 1940 creates a limited, implied private right of action to seek equitable relief, such as rescission of an investment advisory contract and restitution of fees paid, under § 215, but it does not create an implied private right of action for damages for fraudulent practices under § 206.
Facts:
- Mortgage Trust of America (Trust), a real estate investment trust, entered into an advisory contract with Transamerica Mortgage Advisors, Inc. (TAMA).
- Harry Lewis, a shareholder of the Trust, alleged that the advisory contract was unlawful because TAMA and its parent company, Transamerica Corp., were not registered under the Investment Advisers Act.
- Lewis also claimed the contract provided for grossly excessive compensation.
- Lewis further alleged that TAMA breached its fiduciary duty by causing the Trust to purchase securities of inferior quality from Land Capital, Inc., a corporation affiliated with TAMA.
- Finally, Lewis alleged that TAMA and its affiliates had misappropriated profitable investment opportunities that should have gone to the Trust for the benefit of other affiliated companies.
Procedural Posture:
- Harry Lewis filed a derivative and class action lawsuit in a Federal District Court against Transamerica Mortgage Advisors, Inc. (TAMA) and its affiliates.
- The District Court dismissed the complaint, ruling that the Investment Advisers Act of 1940 does not confer a private right of action.
- Lewis, as the appellant, appealed the dismissal to the U.S. Court of Appeals for the Ninth Circuit.
- The Court of Appeals reversed the trial court's decision, holding that the Act does create an implied private right of action for both injunctive relief and damages in favor of aggrieved parties.
- Transamerica Mortgage Advisors, Inc., as petitioner, sought and was granted a writ of certiorari by the U.S. Supreme Court.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does the Investment Advisers Act of 1940, which does not expressly provide for private lawsuits, create an implied private cause of action for equitable and legal relief for alleged violations of its provisions?
Opinions:
Majority - Mr. Justice Stewart
No and Yes. The Investment Advisers Act of 1940 does not create a general implied private cause of action for damages, but it does create a limited private remedy to void an investment adviser's contract. The central inquiry in determining whether a statute creates a private cause of action is whether Congress intended to create one. Section 215 of the Act declares contracts whose formation or performance violates the Act to be 'void.' This language implies that Congress intended for the customary legal consequences of voidness to follow, including the availability of a private suit for rescission, an injunction, and restitution of consideration paid. However, § 206, the Act's anti-fraud provision, merely proscribes certain conduct and does not create or alter civil liabilities. The Act expressly provides for other enforcement mechanisms—SEC injunctions, administrative sanctions, and criminal penalties. Where Congress has provided express remedies, courts must be hesitant to read others into the statute, especially when other securities laws of the same era explicitly created private damage remedies, demonstrating Congress knew how to do so when it wished.
Dissenting - Mr. Justice White
Yes. The Investment Advisers Act of 1940 creates an implied private right of action for damages. The majority improperly confuses the existence of a cause of action with the available relief. Once an implied right of action is found to exist, courts have wide discretion to fashion all necessary and appropriate remedies, including damages. The factors from Cort v. Ash strongly support implying a private right of action, as the Act was clearly passed for the 'especial benefit' of investment advisers' clients. Section 215, which voids illegal contracts, evidences a congressional intent to allow private enforcement of the Act's substantive provisions, including the anti-fraud rules in § 206. Restricting private litigants to contract rescission is anomalous and frustrates the Act's purpose of preventing fraud, especially given the SEC's limited enforcement capabilities.
Concurring - Mr. Justice Powell
No and Yes. The author joined the majority opinion, noting that its reasoning is compatible with his previously expressed view that courts should take a stricter approach to implying private rights of action and should not create remedies that Congress has not explicitly provided.
Analysis:
This decision marked a significant turning point in the Court's approach to implied rights of action, moving away from the more liberal approach of J.I. Case Co. v. Borak. The Court elevated the 'congressional intent' inquiry from the Cort v. Ash test to be the dispositive factor, subordinating considerations of whether a private remedy would effectuate the statute's purpose. By focusing strictly on statutory text, structure, and legislative history, Transamerica made it substantially more difficult for plaintiffs to bring lawsuits under federal statutes that do not expressly authorize them. This case cemented a trend toward judicial restraint in creating private remedies, placing the burden squarely on Congress to specify them.
