1LPE: Mullane, Financialization, and Procedural Pliability

Emily Villano —

Few cases were as difficult for me to initially grasp as Mullane v. Central Hanover Bank & Trust Co. (1950), a common case in first-year civil procedure courses. The appellant was a guardian ad litem, the opinion parsed the differences between jurisdiction in personam and in rem, and I woefully had never taken Latin.

My confusion also stemmed from the case’s many reversals of expectations. Mullane can be thought of as a proto-class-action lawsuit: it involved the aggregation and binding of multiple claimants to the judgment of a court—despite the fact that not everyone actively participated in (or even had awareness of) the lawsuit. Today, class actions are paradigmatic tools for making power accountable to people: such as when consumers band together to sue corporations, or prisoners seek reform of prison conditions.

Yet in Mullane, the original plaintiff was a bank. And rather than resisting the aggregation of claims, the bank sought the Court’s blessing for a procedural mechanism to bind absent parties. Herein lies Mullane’s special fascination: the Supreme Court first relaxed constitutional due process requirements in order to aggregate claims—bending central concepts like “notice” and the “opportunity to be heard”—to feed New York’s growing mid-century financial sector.

The story behind Mullane reveals a great deal about civil procedure: such as its role in shaping our political and economic landscape and its chameleon-like capacity for good and ill. Mullane, therefore, particularly lends itself to an LPE approach.

A little background (much aided by Jonathan Leubsdorf’s detailed history of Mullane): In the 1920s and ‘30s, trust funds were too small to diversify and had few high-return investment opportunities. So banks devised an instrument better to provide “profits that [would] delight their executives, directors, and stockholders”: a common trust fund, in which individual trusts were pooled together to enable bigger, and riskier, investments.

The banks wanted to avoid facing litigation from angry beneficiaries (as they had after the 1929 crash) in case markets once again failed and trustees were accused of mismanaging funds. They lobbied to ensure that the New York statute authorizing common trust funds contained a mechanism for precluding such lawsuits: a judicial settlement of accounts. At regular intervals, the trust company would submit an accounting of the common fund to a state court. If approved, the court would issue a declaratory judgment that would be binding on all beneficiaries—no one could challenge the bank’s investment decisions.

Mullane involved a challenge to just such a settling of accounts. The case presented two questions. First, not all of the common trust fund beneficiaries resided in New York. How could a New York state court exercise jurisdiction over their legal claims? Second, the bank had published in a newspaper publication to provide beneficiaries with notice as to the account settlement. Did this provide beneficiaries with enough of an “opportunity to be heard,” such that the court could bind them to its judgment?

The first question was tricky. Some trust beneficiaries did not live in New York, so at the time, New York state court jurisdiction could not exactly be exercised in personam without their consent. But because the settlement involved the beneficiaries’ rights to exercise legal claims (and not affecting title over tangible property), neither could jurisdiction be asserted in rem. Ultimately, the Court skated over these distinctions, sanctioning the state court’s power to exercise jurisdiction over all the trust beneficiaries. Given the state’s interest in administering trusts, the Court decided, it was entitled to “determine the interests of all claimants”—so long as its procedures afforded “full opportunity to hear and be heard.”

This leads in to the second question: what procedures for notice would be constitutionally adequate? The Court in Mullane ruled that the bank had not provided sufficient notice. But it stopped short of requiring personalized notice for each beneficiary. For some, those whose names and residence were known to the bank, individualized notice by mail was required. But for others, those whose names and locations were unknown and for whom it would be burdensome for the banks to identify, newspaper publication alone sufficed, “[h]owever great the odds that publication will never reach the eyes of such [] parties.”

This marked a radical shift. In effect, Mullane permitted the court to exercise jurisdiction over and bind the interests of parties who, in all likelihood, would have no knowledge of the proceedings at play.

The Court justified this departure from tradition in language we have come to recognize in a very different context today. “The individual interest does not stand alone but is identical with that of a class,” the Court reasoned. Hence, those assured of notice could be trusted to act on behalf of absent, but similarly situated, beneficiaries. The Court’s relaxation of notice requirements in Mullane paved the way for the modern, Rule 23 class-action lawsuit—a procedural mechanism that would come to bedevil banks, corporations, and a host of other power brokers in the future.

What makes Mullane and its history important from the perspective of LPE?

First, the context surrounding Mullane demonstrates how legal rules structure political-economic fields. By relaxing “notice” requirements associated with the common trust fund pool, the Court insulated banks from litigation, and thus facilitated the expansion of the U.S. financial sector. Leubsdorf reports that when Mullane was decided in 1950, common trust funds pooled assets amounting to $ 425 million. In the decade or so following the decision, this grew to $ 3.5 billion.

But more than that, Mullane encoded into civil procedure the shift from an industrial economy based on trade in goods to a financialized economy in which value became increasingly immaterialized. In permitting New York state courts to exercise jurisdiction over the legal claims of trust beneficiaries—despite the fact that many of them resided outside of New York—the Court made space for the “rise in economic importance of incorporeal or intangible forms of property.”

Mullane also used “reasonable” notice to smooth over the gap between ownership and control that would come to characterize shareholder society in the latter half of the twentieth century. Here, a judicial settlement of accounts provided cover for investment decisions made by the managers of common trust funds on behalf of a diffuse set of absent beneficiaries. Adequate “notice” was the procedural mechanism that helped justify this concentration of Wall Street’s managerial power.

Second, Mullane suggests that students of LPE should approach abstract, purportedly trans-substantive procedural notions like “notice” with both caution and creativity. As Danny Wilf-Townsend pointed out in his earlier post, the pliability of abstract procedural concepts presents “perils and opportunities” alike.

On the one hand, Mullane and the subsequent history of the class-action lawsuit demonstrate that procedural norms developed in one context can be developed and put to progressive use in another.

On the other hand, it also shows that procedural abstractions can expand or contract based on a case’s political and economic stakes. Mullane calibrated notice requirements to ensure that it would not render a nascent investment vehicle unprofitable (or in the words of the Court, “dissipate its advantages”). By contrast, the Court has not blinked twice in imposing onerous notice requirements on class-action litigants seeking to hold financial institutions accountable for malfeasance using the modern Rule 23 procedures—indeed, to the point of precluding the little guy from bringing meritorious claims (see Eisen v. Carlisle & Jacquelin).

Perhaps last, Mullane demonstrates how our understanding of civil procedure can deepen when approached with an LPE lens. The tools of LPE—demystification, political and economic contextualization, and imaginative reconstruction—enliven seemingly dry rules and doctrine to reveal how civil procedure profoundly structures our society, and how it might be put to good use.

 

Emily Villano is a student at Yale Law School, set to graduate in 2019.

One response

  1. Pingback: 1LPE Round-up « Law and Political Economy

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