Oral Arguments in FS Credit Opportunities Corp. v. Saba Capital Reveal Close Questions on ICA Rescission Claims

The oral argument in FS Credit Opportunities Corp. v. Saba Capital Master Fund, a case that could reshape private rights of action under the Investment Company Act of 1940 (“ICA”), revealed a divided Court, with Justice Kavanaugh calling the case “extremely close.”

At issue is whether Section 47(b) of the ICA creates a private right of action for rescission when a contract violates the Act, specifically whether an individual has the right to go to federal court to rescind such a contract under this investor-protection statute.

Throughout the argument, the Justices invoked several different tools of statutory interpretation:

• Justice Kagan focused on the similarity of Section 47(b)’s language to a companion statute and questioned why “you would really have us . . . look at these two companion pieces of legislation passed at the same time and say that the exact same language has one result in one statute and the other result in another statute.”
• Justice Gorsuch noted prior changes to the statutory text—especially the removal of key language in response to a prior decision—and asked whether that change was intended to eliminate any implied right.
• Justice Sotomayor emphasized legislative history and the presence of House and Senate reports accompanying amendments to the ICA, both of which stated an intent to preserve an implied right of action.

In addition, the Court expressed concerns about the practical implications of not recognizing a private right of action. Because state law often provides an equitable cause of action for rescission of illegal contracts, a ruling that there is no private right of action under the ICA could result in a scenario where a federal right could only be enforced in state court, which Justice Kavanaugh characterized as “bizarre.”

While the outcome remains uncertain, the Court’s decision in this case will significantly impact enforcement actions against investment companies. If the Court does not recognize a private right of action, enforcement will primarily reside with the Securities and Exchange Commission (SEC) and potentially state court proceedings. If the Court does recognize a private right of action, shareholders and activist investors will gain additional tools to exert leverage.