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K. Tate Chambers, Office of the U.S. Atty., Peoria, IL, Linda L. Mullen (argued), Office of the U.S. Atty., Rock Island, IL, for Plaintiff-Appellee.
David B. Mote (argued), Office of the Fed. Pub. Def., Springfield, IL, Andrew J. McGowan, Office of the Fed. Pub. Def., Peoria, IL, for Defendant-Appellant.
Before FLAUM, Chief Judge, and CUDAHY, POSNER, COFFEY, EASTERBROOK, RIPPLE, MANION, KANNE, ROVNER, DIANE P. WOOD, EVANS, and WILLIAMS, Circuit Judges.
We took this case en banc to decide whether questioning during the course of lawful custody must be related to the reason for that custody. The panel stated that “inquiries falling outside the scope of the detention constitute unlawful seizure.” United States v. Childs, 256 F.3d 559, 564 (7th Cir.2001). The full court holds that, because questions are neither searches nor seizures, police need not demonstrate justification for each inquiry. Questions asked during detention may affect the reasonableness of that detention (which is a seizure) to the extent that they prolong custody, but questions that do not increase the length of detention (or that extend it by only a brief time) do not make the custody itself unreasonable or require suppression of evidence found as a result of the answers.
In response to a dispatch arising out of a hit-and-run accident, James Chiola, an officer of the Peoria Police Department, stopped a car driven by Tommie Childs. A check revealed that Childs was wanted on an outstanding warrant; his possession of marijuana added a drug offense to that preexisting charge. Officer Chiola did not bother to issue a citation for a third offense: the car’s windshield had a spider web of cracks that may have obstructed the driver’s vision, in violation of 625 ILCS § 5/12-503(e). Chiola told Childs to get the windshield fixed. Three days later officer Chiola saw the same car on the road, with the windshield still cracked. Again he stopped the car, this time on the traffic offense alone. Childs, who had been released on bail, was in the passenger’s seat. Chiola began to talk with him while his partner dealt with the car’s driver. Because he was only a passenger, Childs had not violated § 5/12-503(e) this time, but his failure to wear a seat belt violated § 5/12-603.1(a) — and, as a passenger in a car stopped for a traffic offense, Childs was at all events subject to the officers’ control and direction until their safety could be assured. See Maryland v. Wilson, 519 U.S. 408, 117 S.Ct. 882, 137 L.Ed.2d 41 (1997). While his partner was performing license and warrant checks on the driver, Chiola asked Childs a few questions: first why Childs had not fixed the windshield (Childs replied that it was not his car), second whether he was carrying any marijuana this time (Childs said no), and third whether he would consent to a search (Childs agreed). During the search Chiola found crack cocaine, which led to the current prosecution for possessing that drug with intent to distribute it, and to a sentence of 120 months’ imprisonment. The panel held that the second question effected an unconstitutional seizure of Childs, because the traffic stop was unrelated to drugs and Chiola lacked any reason to think that Childs was again carrying drugs. It remanded for an inquiry whether this unconstitutional seizure tainted the consent given in response to the third question.
Under the fourth amendment, every search or seizure must be “reasonable,” which normally entails some person-specific basis for suspicion. See Indianapolis v. Edmond, 531 U.S. 32, 121 S.Ct. 447, 148 L.Ed.2d 333 (2000). But the Supreme Court has held repeatedly that police may approach persons and ask questions or seek their permission to search, provided that the officers do not imply that answers or consent are obligatory. See, e.g., Florida v. Rodriguez, 469 U.S. 1, 5-6, 105 S.Ct. 308, 83 L.Ed.2d 165 (1984); INS v. Delgado, 466 U.S. 210, 104 S.Ct. 1758, 80 L.Ed.2d 247 (1984); Florida v. Royer, 460 U.S. 491, 501, 103 S.Ct. 1319, 75 L.Ed.2d 229 (1983) (plurality opinion); United States v. Mendenhall, 446 U.S. 544, 552-58, 100 S.Ct. 1870, 64 L.Ed.2d 497 (1980). These requests are proper without regard to the absence of reasonable suspicion, the Court made clear in Florida v. Bostick, 501 U.S. 429, 434, 111 S.Ct. 2382, 115 L.Ed.2d 389 (1991), because “mere police questioning does not constitute a seizure.” As a result, “law enforcement officers do not violate the Fourth Amendment by merely approaching an individual on the street or in another public place, by asking him if he is willing to answer some questions, [or] by putting questions to him if the person is willing to listen.” Ibid., quoting from Royer, 460 U.S. at 497, 103 S.Ct. 1319. See also California v. Hodari D., 499 U.S. 621, 624, 111 S.Ct. 1547, 113 L.Ed.2d 690 (1991) (defining “seizure” as “taking possession,” a category that does not comprise questioning); Graham v. Connor, 490 U.S. 386, 395 n. 10, 109 S.Ct. 1865, 104 L.Ed.2d 443 (1989) (“A `seizure’ triggering the Fourth Amendment’s protections occurs only when government actors have, `by means of physical force or show of authority, … in some way restrained the liberty of a citizen'”) (quoting from Terry v. Ohio, 392 U.S. 1, 19 n. 16, 88 S.Ct. 1868, 20 L.Ed.2d 889 (1968)).
Most of these decisions concern questions asked of persons not under arrest (though often as a practical matter not free to walk away, see Bostick and Delgado). Are things different when the suspect is in formal custody? It is difficult to see why custody should turn an inquiry into a “seizure.” Posing a question still does not meet the Supreme Court’s definition of a seizure. Officer Chiola did not restrain Childs’s liberty (or increase the severity of the existing restraint) by asking something that Childs could refuse to answer. Indeed, as a logical proposition, a view that custody transmutes questions into “seizures” is backward. Approaching a person on the street (or at work, or on a bus) to ask a question causes him to stop for at least the time needed to hear the question and answer (or refuse to answer); that delay could be called a “seizure,” though it has not been. But a question asked of someone already in custody causes no delay and thus can’t be a seizure. Given opinions such as Bostick, which dealt with questions asked of passengers on busses, there can be no doubt that an officer on an airplane in mid-air may strike up a conversation with a person in the next seat, even though that fellow passenger could not leave the plane. Similarly an officer may interrogate a person in prison on one offense about the possibility that the inmate committed another. This is normal and, as far as we can tell, of unquestioned propriety as far as the fourth amendment is concerned, whether or not the officer has probable cause to believe that the inmate committed any other crime. The prisoner has rights under the fifth amendment and perhaps the sixth. He can refuse to answer incriminating questions and may be entitled to counsel. See Texas v. Cobb, 532 U.S. 162, 121 S.Ct. 1335, 149 L.Ed.2d 321 (2001); Davis v. United States, 512 U.S. 452, 114 S.Ct. 2350, 129 L.Ed.2d 362 (1994); McNeil v. Wisconsin, 501 U.S. 171, 111 S.Ct. 2204, 115 L.Ed.2d 158 (1991); Michigan v. Mosley, 423 U.S. 96, 96 S.Ct. 321, 46 L.Ed.2d 313 (1975). But the idea that the police could violate a prisoner’s fourth amendment rights by asking questions in search of information about other offenses has no basis in the language of that amendment or the Supreme Court’s cases.
If the police may ask (without suspicion) questions of persons who are in no custody (e.g., walking down the street), people who are in practical but not legal custody (e.g., passengers on busses and airplanes), and people who are in formal custody pending trial or following conviction (e.g., prisoners such as Cobb, a pretrial detainee), then why would the police need probable cause or reasonable suspicion to direct questions to persons such as Childs who are in legal custody but likely to be released soon? To say that questions asked of free persons and questions asked of prisoners are not “seizures” but that questions asked of suspects under arrest are seizures would have neither the text of the Constitution behind it nor any logical basis under it. This is not to say that Childs cannot cite a case or two in his support. Both the eighth and the ninth circuits have held, as our panel did, that questions are seizures requiring either some relation to the basis for the custody or an independent source of reasonable suspicion. See United States v. Murillo, 255 F.3d 1169, 1174 (9th Cir. 2001); United States v. Ramos, 42 F.3d 1160 (8th Cir.1994). These courts reached this conclusion indirectly. Their background is revealing. Ramos traces the eighth circuit’s position to United States v. Cummins, 920 F.2d 498, 502 (8th Cir. 1990). The panel in Cummins observed that, because the questions were related to the purpose of the stop, the suspect had no claim. Later panels then read that statement as meaning that officers may ask questions only if they are related to the stop, a logical error. The proposition “X defeats the defendant’s constitutional contention” differs from “X is the only way to defeat the defendant’s constitutional contention.” Just the other day the Supreme Court branded as fallacious the view “that an opinion upholding the constitutionality of a particular search implicitly holds unconstitutional any search that is not like it”. United States v. Knights, 534 U.S. 112, ___, 122 S.Ct. 587, 590, 151 L.Ed.2d 497, ___ (2001).
Developments in our circuit parallel those in the eighth. United States v. Rivera, 906 F.2d 319 (7th Cir.1990), remarks that the questions asked of the suspect there were supported by reasonable suspicion, and the panel in Childs’s case took this as establishing the rule that questions must be so supported. That is both logically unsound, see Knights, and a poor reading of the decision — especially when many other decisions see no problem in questions asked without suspicion. See, e.g., United States v. Williams, 209 F.3d 940 (7th Cir.2000); United States v. Baker, 78 F.3d 1241 (7th Cir.1996). Neither the eighth nor the ninth circuit discussed the significance of Bostick and similar decisions of the Supreme Court. We thus prefer the analysis of United States v. Shabazz, 993 F.2d 431 (5th Cir.1993), which, though brief, found the right reference points in the Supreme Court’s oeuvre. Shabazz holds, and we agree, that questions asked of persons involved in traffic stops are not “seizures” and thus do not require probable cause or reasonable suspicion.
This does not end the analysis. Childs was placed in custody by the stop of the car in which he was a passenger. That custody’s nature and duration must be “reasonable” under the fourth amendment, so we must consider the possibility, not that each question is a “seizure,” but that questioning may render the physical detention unreasonable. The best case for such a possibility would be events similar to those in United States v. Holt, 264 F.3d 1215 (10th Cir.2001) (en banc): A car is stopped at a checkpoint for a routine license-and-registration inquiry, a sort of seizure proper under Michigan Department of State Police v. Sitz, 496 U.S. 444, 110 S.Ct. 2481, 110 L.Ed.2d 412 (1990), and the occupants are then detained for extra time while the police ask additional questions unrelated to the purpose of the stop. Questioning that prolongs the detention, yet cannot be justified by the purpose of such an investigatory stop, is unreasonable under the fourth amendment. See United States v. Sharpe, 470 U.S. 675, 685, 105 S.Ct. 1568, 84 L.Ed.2d 605 (1985). A majority in Holt thought that questions designed to ensure the officers’ safety while the license and registration checks occur are “reasonable” within the Constitution’s meaning; it is hard to disagree with that conclusion. See New York v. Quarles, 467 U.S. 649, 104 S.Ct. 2626, 81 L.Ed.2d 550 (1984). Cf. United States v. Davis, 270 F.3d 977 (D.C.Cir.2001). A different majority in Holt added that no other question may be asked during a traffic stop — even when the stop rests on probable cause to believe that the suspect has committed a crime. 264 F.3d at 1228-30. This was dictum, for Holt had not been stopped on probable cause or even reasonable suspicion. He had been stopped at a checkpoint without any person-specific suspicion. Our case, by contrast, does entail a stop based on probable cause to believe that an offense was ongoing, and after the car came to a halt the officers acquired probable cause to believe that Childs personally had committed an offense (failure to wear a seat belt).
Holt stated that all “routine auto stops” should be treated as Terry stops, which must be limited in time and scope. See Terry, 392 U.S. at 20, 88 S.Ct. 1868; United States v. Brignoni-Ponce, 422 U.S. 873, 881-82, 95 S.Ct. 2574, 45 L.Ed.2d 607 (1975) (same principle for a checkpoint stop not based on suspicion). Handling all traffic stops identically is at once too demanding and too lax. Treating checkpoint stops as if they were Terry stops supported by reasonable suspicion gives the officers too much discretion over drivers who arrive at roadblocks or security screening points. Treating arrests on probable cause as if they, too, were Terry stops gives the officers too little discretion. A person stopped on reasonable suspicion must be released as soon as the officers have assured themselves that no skullduggery is afoot. Probable cause, by contrast, justifies a custodial arrest and prosecution, and arrests are fundamentally different from Terry stops. Persons who are arrested may be taken to the station house for booking, even if the only penalty for the offense is a fine (as it is for failure to wear a seat belt). See Atwater v. Lago Vista, 532 U.S. 318, 121 S.Ct. 1536, 149 L.Ed.2d 549 (2001). In other words, arrested persons (unlike those stopped at checkpoints, or on reasonable suspicion) need not be released as quickly as possible. What is more, a person stopped on probable cause may be searched fully, while a person stopped on reasonable suspicion may be patted down but not searched. See United States v. Robinson, 414 U.S. 218, 94 S.Ct. 467, 38 L.Ed.2d 427 (1973); United States v. Edwards, 415 U.S. 800, 94 S.Ct. 1234, 39 L.Ed.2d 771 (1974).
The tenth circuit observed in Holt that “a typical traffic stop resembles in character the investigative stop governed by Terry more closely than it does a custodial arrest.” 264 F.3d at 1230. We grant this as a factual matter, but it does not follow that the Constitution requires all traffic stops to be treated as if they were unsupported by probable cause. What is “typical” often differs from the constitutional minimum. Atwater makes this clear. A person arrested for an offense punishable only by a fine typically is given a citation (a “ticket”) and released, but Atwater holds that the Constitution allows the police to place the person in custody and take him to be booked. Thus although traffic stops usually proceed like Terry stops, the Constitution does not require this equation. Probable cause makes all the difference — and as Whren v. United States, 517 U.S. 806, 116 S.Ct. 1769, 135 L.Ed.2d 89 (1996), shows, traffic stops supported by probable cause are arrests, with all the implications that follow from probable cause to believe that an offense has been committed. See also, e.g., Dunaway v. New York, 442 U.S. 200, 99 S.Ct. 2248, 60 L.Ed.2d 824 (1979); Beck v. Ohio, 379 U.S. 89, 96-97, 85 S.Ct. 223, 13 L.Ed.2d 142 (1964). A footnote in Berkemer v. McCarty, 468 U.S. 420, 439 n. 29, 104 S.Ct. 3138, 82 L.Ed.2d 317 (1984), anticipated this point: “We of course do not suggest that a traffic stop supported by probable cause may not exceed the bounds set by the Fourth Amendment on the scope of a Terry stop.” Holt declined to be guided by this language because it was not essential to the judgment in Berkemer 264 F.3d at 1230. But the footnote in Berkemer is hardly the last word, as Whren shows in equating traffic stops on probable cause to other arrests, and as Atwater shows in allowing extended custody for the purpose of booking and arraignment following an arrest for a fine-only offense. Cf. Riverside County v. McLaughlin, 500 U.S. 44, 111 S.Ct. 1661, 114 L.Ed.2d 49 (1991). The police had probable cause to believe that the car’s driver, and Childs himself, had committed traffic offenses. That justified arrests, which make it unnecessary for us to decide whether and if so how the “scope” limitation for Terry stops differs from the “duration” limitation.
Our point is not that, because Chiola could have taken Childs to a police station for booking, any less time-consuming steps are proper. The reasonableness of a seizure depends on what the police do, not on what they might have done. The point, rather, is that cases such as Atwater and McLaughlin show that the fourth amendment does not require the release of a person arrested on probable cause at the earliest moment that step can be accomplished. What the Constitution requires is that the entire process remain reasonable. Questions that hold potential for detecting crime, yet create little or no inconvenience, do not turn reasonable detention into unreasonable detention. They do not signal or facilitate oppressive police tactics that may burden the public — for all suspects (even the guilty ones) may protect themselves fully by declining to answer. Nor do the questions forcibly invade any privacy interest or extract information without the suspects’ consent.
Any doubt about this understanding of questions during traffic stops is dispelled by Ohio v. Robinette, 519 U.S. 33, 117 S.Ct. 417, 136 L.Ed.2d 347 (1996). A deputy sheriff stopped Robinette for speeding. After performing the necessary administrative steps and returning Robinette’s license, the deputy asked Robinette whether he was carrying any drugs. That question prolonged the custody, if only for a short time. The Supreme Court of Ohio held that the question was unconstitutional, and that matters unrelated to the purpose of a stop may not be raised until the officer had told the driver that he is free to go. But the Supreme Court reversed, holding that the fourth amendment does not require this advice. Robinette thus approves exactly what Childs says may not occur: Questions during a routine traffic stop that do not concern the purpose of the stop (and are not supported by any other suspicion), yet extend the stop’s duration. The Supreme Court of Ohio thought that the Constitution requires advice; Childs, by contrast, contends that the questions are absolutely forbidden, advice or no. By rejecting the position of the state court in Robinette, the Supreme Court of the United States necessarily rejected the broader contention that unrelated questions may not be asked at all.
CUDAHY, Circuit Judge, concurring in the judgment.
The majority has covered a wide variety of police questioning situations in which, for an assortment of reasons, the Fourth Amendment may not impose a limitation on the scope of those police investigations. Conspicuously, however, the majority has declined to follow the course of judicial restraint and to answer, or even pose, the question that would likely make the rest of its discussion superfluous. Did Officer Chiola have grounds for reasonable suspicion that Childs possessed marijuana? For, if Officer Chiola had such grounds, he could certainly ask questions about drugs, and there would be no need to search for a broader basis for justification. The majority refuses to ask or answer this simple question based on articulable suspicion of marijuana possession even though (or is it because?) the answer would reduce the rest of its speculations to dictum. Certainly, this is not the path of judicial restraint.
The original panel did ask the question about reasonable suspicion of marijuana possession, (which was clearly raised as an issue by the parties) and answered it in the negative — opening the floodgates for the major revision of Fourth Amendment law represented by the majority opinion. After hearing the case reargued en banc, I think that the panel opinion may have been incorrect about this issue. Only three days before the traffic stop under scrutiny here, Officer Chiola had apprehended Childs with marijuana, and the officer was struck by the palpable nervousness of Childs during the second stop as contrasted with his sangfroid on the earlier occasion. The panel treated these circumstances as presenting a “record” or criminal history of drug activity by Childs, which is ordinarily not sufficient grounds for articulable suspicion. And, no doubt, Officer Chiola’s recollection of what happened three days before is a sort of “record.” The question is a close one, but the circumstances may have given Officer Chiola a green light to ask about marijuana. After all, the only intrusion based on this arguably reasonable suspicion was the marijuana question. See United States v. Feliciano, 45 F.3d 1070, 1074 (7th Cir. 1995) (“[K]nowledge of … recent relevant criminal conduct while of doubtful evidentiary value in view of the strictures against proving guilt by association or by a predisposition based on past criminal acts, is a permissible component of the articulable suspicion required for a Terry stop.” (emphasis in original) (citations omitted)). In view of the very recent occurrence of the earlier stop, where marijuana was found, and the changed demeanor of the suspect, it would seem natural to the officer to ask the question and it may be arbitrary to deny him the authority to do so. Therefore, at least for purposes of this opinion, I will treat the question about marijuana as properly based on articulable suspicion aroused by the earlier stop. This would provide a perfectly adequate and more limited basis for affirming the district court than the course followed by the majority.
To find reasonable suspicion of marijuana possession here distinguishes these circumstances from questioning about bank robberies in the area or unsolved home invasions, as to which there would have been no articulable suspicion. There would be no basis for suspecting Childs of these crimes and they are clearly outside the scope of a detention for a cracked windshield, an unlatched seat belt, or marijuana possession. Simply on a commonsense basis, questions about bank robberies or home invasions would probably strike even a police officer as out of line in these circumstances. “Scope” is the key word here since both in Terry v. Ohio, 392 U.S. 1, 88 S.Ct. 1868, 20 L.Ed.2d 889 (1968), and in numerous cases since that decision, the Supreme Court has prescribed “scope” as a limitation on investigations conducted during a temporary detention. The restriction based on “scope” has also been applied by the courts of appeals in innumerable temporary detention cases since Terry — most recently in the Tenth Circuit’s authoritative en banc decision in United States v. Holt, 264 F.3d 1215 (10th Cir.2001). The majority’s effort to belittle the conclusions of Holt as dictum, is, with all respect, a little like the pot calling the kettle black, for the majority’s reliance on the broadest ground for the present decision, although not really productive of dictum, is no more essential to the result here than were the Tenth Circuit’s comments in Holt.
Holt concludes that both the length and the scope of a traffic stop provide Fourth Amendment limitations on the detention. Id. at 1230. In reaching this conclusion, the majority in Holt comprehensively analyzed the Fourth Amendment, Supreme Court precedent and Tenth Circuit precedent, as well as cases from other circuits. Holt makes a clear and compelling case for its conclusion, and I entirely agree with its reasoning and result.
Id. at 500, 103 S.Ct. 1319 (plurality) (internal quotations and citation omitted). That this discussion applies equally to seizures and to searches clearly follows since the Fourth Amendment applies with the same force to seizures as it does searches. See also United States v. Rivera, 906 F.2d 319, 322 (7th Cir.1990) (“Moreover, the constitution restricts the scope of the seizure to that which is necessary to fulfill the seizure’s purpose.”).
“[V]irtually, all thoughtful, civilized persons not overly steeped to the point of confusion in the mysteries of … Fourth Amendment jurisprudence,” Royer, 460 U.S. at 520, 103 S.Ct. 1319 (Rehnquist, J., dissenting), would agree that the scope of a search or seizure must be part of the reasonableness inquiry. For if a man were stopped for speeding in Utah, it would not be reasonable for a police officer to ask whether he were practicing polygamy. There would be nothing in the circumstances to suggest any basis for such an inquiry even if the duration of the stop was not lengthened. The question itself would be an invasion of privacy. This is a good illustration why the duration of a traffic stop cannot be the only dimension of reasonableness. The subject-matter (or scope) dimension provides limits that are just as binding as the time (or duration) dimension.
Drawing upon the common-sense notion that reasonableness includes both a scope and a duration dimension, this circuit had held that police officers may not ask questions unrelated to the purpose of a traffic stop, unless there is an independent source of reasonable suspicion. See, e.g., United States v. Finke, 85 F.3d 1275, 1280 (7th Cir.1996) (A police officer had sufficient reasonable and articulable suspicions of drug courier activity to justify a speedy, unintrusive criminal record inquiry after a traffic stop.); United States v. Rivera, 906 F.2d 319, 322 (7th Cir.1990) (Certain of the questions asked by a trooper of an individual during a traffic stop were casual banter or were justified by the trooper’s reasonable suspicion.). This circuit has not been alone in its interpretation of the Fourth Amendment. The Eighth, Ninth, and Tenth Circuits are wholly in agreement. See, e.g., Holt, 264 F.3d at 1230 (concluding that both the length and scope of a traffic stop are relevant factors in deciding whether the stop comports with the Fourth Amendment); United States v. Murillo, 255 F.3d 1169, 1174 (9th Cir.2001) (“During a traffic stop, a police officer is allowed to ask questions that are reasonably related in scope to the justification for his initiation of contact. In order to broaden the scope of questioning, he must articulate suspicious factors that are particularized and objective.” (internal citations omitted)); United States v. Ramos, 42 F.3d 1160, 1163 (8th Cir.1994) (holding that a police officer did not have reasonable suspicion to ask questions not reasonably related to the stop, but finding the subsequent consent nevertheless to be voluntary). Only the Fifth Circuit apparently has narrowed the scope requirement to coincide with the duration requirement. See United States v. Shabazz, 993 F.2d 431, 437 (5th Cir.1993).
The majority criticizes Ramos and Murillo for failing to address Florida v. Bostick, 501 U.S. 429, 111 S.Ct. 2382, 115 L.Ed.2d 389 (1991), and similar decisions by the Supreme Court. Opinion, at 951-52. In those decisions, the Supreme Court approved police questioning of citizens when no detention was involved. The majority quotes Bostick for the proposition that “mere police questioning is not a seizure.” Opinion, at 950. But that quotation was taken out of context to support the argument that questioning can never be a seizure. For in Bostick, a bus was making a regular stopover and the case merely held that police officers could question people on board the bus about drugs. In reaching this conclusion, the Supreme Court stated in dictum that “[s]ince Terry, we have repeatedly held that mere police questioning does not constitute a seizure.” See 501 U.S. at 434, 111 S.Ct. 2382. The Court discussed Florida v. Royer, 460 U.S. 491, 103 S.Ct. 1319, 75 L.Ed.2d 229 (1983), Florida v. Rodriguez, 469 U.S. 1, 105 S.Ct. 308, 83 L.Ed.2d 165 (1984), and INS v. Delgado, 466 U.S. 210, 104 S.Ct. 1758, 80 L.Ed.2d 247 (1984), as cases supporting this proposition. Royer involved police questioning of undetained people on the street or in other public places. Rodriguez concerned police questioning of an individual in an airport concourse. Delgado involved questioning of workers at a factory. Significantly, the Court found the police encounters in these cases to be “the sort of consensual encounter[s] that implicat[e] no Fourth Amendment interest.” Bostick, 501 U.S. at 434, 111 S.Ct. 2382 (internal quotations and citations omitted.). Neither Terry nor any of the cases relied upon by the Court in Bostick stands for the proposition that police questioning, when the person being questioned is being detained (and the encounter is thus nonconsensual), is not a seizure.
The majority also finds fault with the panel decision here as well as with Ramos for making the “logical error” of equating “X defeats the defendant’s constitutional claim” with “X is the only way to defeat the defendant’s constitutional claim.” Opinion, at 951. Thus, the majority argues that United States v. Cummins, 920 F.2d 498 (8th Cir.1990), merely held that the questions asked were authorized since they were related to the purpose of the stop, and Ramos extended Cummins to hold that questions could be asked only if they were related to the purpose of the stop. Similarly, Rivera held that the questions at issue were based on reasonable suspicion, and the panel here extended Rivera to hold that only questions that are based upon reasonable suspicion could be asked by an officer during a police stop.
But Ramos and the panel opinion are not as “illogical” as the majority suggests. First, both Ramos and the panel allowed questions to be asked that related to the purpose (or scope) of the stop or that were based upon reasonable suspicion arising independently. For example, if the officer making the traffic stop sees drugs in plain view or smells drugs, the officer can ask questions about drugs. Questions that are related to officer safety can also be asked. See Holt, 264 F.3d at 1222-23 (allowing officers to ask about firearms even if they had no reasonable suspicion of firearm possession). Second, the facts in Cummins and Rivera led to the limited holdings in those cases. In Cummins, the initial question was related to the purpose of the stop. 920 F.2d at 502. The driver’s inconsistent answer justified additional questioning. See id. In Rivera, the officer had reasonable suspicion, on which the questions were based. 906 F.2d at 322. There was no need in either case to reach the broader holding that questions could be asked only if related to the purpose of the stop or based upon articulable suspicion. Because the facts in Childs suggested that the question about drugs was not related to the purpose of the stop (which was for a cracked windshield) nor (as the panel initially concluded) justified by reasonable suspicion of drug possession, the panel had to reach a holding that was broader than the holding in Rivera. Finally, the majority commits its own logical error by, in effect, arguing that “scope” is merely a proxy for duration. At least the panel incorporated Rivera’s approach to analyzing what questions could be asked during a traffic stop, while the majority renders Rivera’s approach moot.
The majority further opines that the panel opinion conflicts with certain decisions in this circuit that ostensibly approve of questioning about subjects as to which there is no suspicion. See United States v. Williams, 209 F.3d 940 (7th Cir.2000); United States v. Baker, 78 F.3d 1241 (7th Cir.1996). However, in neither of those cases did this court address the issue of whether questioning outside the scope of a traffic stop is a Fourth Amendment violation. Further, even though the issue was not briefed, there appears to have been articulable suspicion to justify the questions. In Williams, the police officer asked the defendant if he had anything on him that he shouldn’t. 209 F.3d at 942. But the officer had been informed by a fellow officer that the passenger in the car had recently been the victim of a shooting and was known to carry weapons. Id. at 941. That information combined with the officer’s observations would probably have been sufficient to raise articulable suspicion of a weapons offense. Likewise, in Baker, the officer asked if there were any drugs or weapons in the car. 78 F.3d at 1244. This question was asked only after the officer received inconsistent and suspicious answers to permissible questions about where Baker was going that night. Id. at 1244. The suspicious and inconsistent answers together with the officer’s observations and knowledge about the area would likely support an articulable suspicion of drug activity.
The majority attempts unsuccessfully to deal with the eminently sensible observation in Holt that “a typical traffic stop resembles in character the investigative stop governed by Terry more closely than it does a custodial arrest.” 264 F.3d at 1230. Based on its belief that Officer Chiola had probable cause (as opposed to reasonable suspicion) to stop the car for a presumed cracked windshield or seat belt violation, the majority concludes that the restrictions of Terry no longer apply. (Of course as to marijuana possession, Officer Chiola had only, at best, reasonable suspicion.) One problem with the probable cause analysis is that Childs was not the driver, so it is highly dubious that he could be placed under custodial arrest for the condition of the windshield. Even with respect to the seat belt violation, although Officer Chiola might have constitutionally taken Childs to the station house for booking, he did not do so. What he did (and facts should be controlling here) in the language of Holt, “resemble[d] in character the investigative stop governed by Terry more closely than it [did] a custodial arrest.” What the majority seems to be saying is that, because Officer Chiola could have gone on to a custodial arrest, he may instead (and without subjecting Childs to custodial arrest) elect to inquire into crimes for which there is neither probable cause nor reasonable suspicion. Under the factual circumstances that actually exist here, the restrictions of Terry ought reasonably to apply even though in theory this might be changed by proceeding to a custodial arrest with its particular legal regime.
This conclusion is fortified by the fact that this circuit has applied the Terry standard to cases in which the officer had probable cause to arrest the defendant for a traffic violation. See, e.g., United States v. Brown, 188 F.3d 860, 864 (7th Cir.1999) (applying Terry where officer pulled vehicle over for following other cars too closely); Valance v. Wisel, 110 F.3d 1269, 1276 (7th Cir.1997) (applying Terry where officer pulled over vehicle for crossing center line twice); Finke, 85 F.3d at 1278-79 (applying Terry where officer pulled a vehicle over for speeding). Even the Fifth Circuit’s ruling in Shabazz, on which the majority relies, applied the Terry standard in reaching its conclusion that the duration of the stop is the only Fourth Amendment limitation on traffic stops. See 993 F.2d at 434-35.
The footnote in Berkemer v. McCarty, 468 U.S. 420, 439 n. 29, 104 S.Ct. 3138, 82 L.Ed.2d 317 (1984), besides being dictum, sheds little light on the present problem because the footnote appears in the context of a discussion whether Miranda warnings need to be administered to a detainee at a traffic stop. The Court concluded that Miranda warnings are not required because of the “nonthreatening” character of traffic stops. None of this suggests the possibility of interrogation on subjects other than the one for which the stop was made. In Berkemer, the defendant was stopped for suspicion of drunken driving and was asked questions about drinking alcohol and using marijuana (mentioned in response to earlier questions about intoxicants). In no way do these questions exceed the scope of the stop for driving while intoxicated. The appearance of the word “scope” in the footnote therefore has no reference to interrogations about crimes outside the purpose of the stop.
The majority’s reliance on Ohio v. Robinette, 519 U.S. 33, 117 S.Ct. 417, 136 L.Ed.2d 347 (1996), is also misplaced. In support of its elimination of the scope requirement from traffic stops, the majority says “[b]y rejecting the position of the state court in Robinette, the Supreme Court necessarily rejected the broader contention that unrelated questions may not be asked.” Opinion, at 954. This is not a logical, let alone a necessary, conclusion from Robinette. In Robinette, a police officer had stopped the defendant for speeding. 519 U.S. at 35, 117 S.Ct. 417. After issuing a verbal warning and returning Robinette’s license, the officer asked Robinette whether he was “carrying any illegal contraband” in his car. Id. at 35-36, 117 S.Ct. 417. Robinette answered no, but he consented to have his car searched. Id. Drugs were found, and Robinette was convicted for possession of a controlled substance. Id. The Supreme Court of Ohio overturned the conviction, and the United States Supreme Court reversed. Id. The Supreme Court of Ohio held that the police questioning was unconstitutional because it concerned matters unrelated to the purposes of the stop. However, in addition, the Supreme Court of Ohio established a bright-line rule for consensual interrogation under these circumstances. Id. It required the police officer to advise the driver that he was free to leave before such questions could be asked. Id. The United States Supreme Court reversed, holding that the police officer did not have to advise the driver of his freedom to leave in order for the encounter to become a consensual encounter. Id. at 421. However, both courts were proceeding on the assumption that the encounter was consensual once the traffic citation had been issued, but the Ohio court sought to formalize this transition by requiring the police officer to advise the driver that he was free to leave. By contrast, in the case before us, the encounter had not become consensual because the questions were asked during the processing of the traffic offense, not after the ticket had been issued. Robinette never addressed, let alone approved, questions asked during a routine traffic stop that do not concern the purpose of the stop or were not based upon reasonable suspicion. In Robinette, the stop had ended once the license was returned.
In attempting to equate questioning without detention with questioning in the course of detention, the majority conveniently ignores the fact that detention involves official coercion and therefore concerns quite a different relationship of the police officer to the person questioned. Anyone who has been pulled over for a traffic offense faces the police officer as one currently exercising authority over the motorist to keep him or her in place. This exercise of official coercion is the reason the Supreme Court has limited questioning to matters within the scope of the stop. The majority does not explain why exceeding the scope of the stop is somehow less burdensome to the detainee’s Fourth Amendment rights than exceeding a reasonable duration for the stop. To explore bank robberies or polygamy, as to which there is no reasonable suspicion, with Childs would be to abuse the rationale for the stop based on other matters and would be just as abusive as extending a ten-minute stop to an hour.
The majority comments blithely that the detainee can refuse to answer the questions posed by the police officer. How many times have you refused to answer questions asked by a police officer who has pulled your car over for a traffic offense? On the other hand, in a conversation between passengers seated on an airplane, where neither is exercising authority over the other, there would be nothing unusual about changing the subject if an embarrassing question were asked. There is simply all the difference in the world in the nature of the relationship between a police officer detaining someone for questioning and a police officer striking up a conversation on the bus. If the questions strayed far afield, one situation would present an invasion of privacy and the other would not.
The majority has sought to equate physical constraint (as of passengers in a bus or plane) with legal constraint (as of a passenger in an automobile stopped for a windshield violation). But the Fourth Amendment places limits only on the exercise of official authority which restrains movement or invades privacy. Physical obstacles to movement or escape, on the other hand implicate no constitutional right. As I have pointed out, however, an airline passenger can deal more lightheartedly with a seatmate than can a motorist pulled over for speeding. In any event, I should think we would want to avoid providing any incentives to the police to lure suspicious characters onto airplanes where they can perform acts of terrorism as well as be free to answer questions.
Based on the assumption that Officer Chiola had grounds for articulable suspicion of a marijuana violation by Childs because of their earlier encounter and Childs’s changed demeanor, the conviction may be affirmed. Officer Chiola could not ask any question that came to mind even though unsupported by reasonable suspicion. This broader rationale is not only incorrect but is unnecessary to the decision.
ILANA DIAMOND ROVNER, Circuit Judge, with whom DIANE P. WOOD and WILLIAMS, Circuit Judges, join, dissenting.
Like Judge Cudahy, I believe that the Fourth Amendment limits the scope as well as the duration of a traffic stop, so that it was improper for Officer Chiola to ask Childs whether he had any drugs on his person unless the officer had a reasonable, articulable basis for believing that he might. To that extent, I join Judge Cudahy’s concurrence.
Unlike my colleague, however, I do not believe that Officer Chiola had the requisite reasonable suspicion that would have enabled him to ask Childs about narcotics. Only three circumstances suggested to Chiola that Childs might be up to something illegal: (1) marijuana had been discovered in Childs’ possession three days earlier, when Chiola arrested him; (2) Childs appeared nervous to Chiola; and (3) during the prior encounter, Childs had not seemed nervous to Chiola. These facts certainly supported a hunch that Childs might again have marijuana in his possession, and as it turned out, Chiola’s intuition was dead-on accurate. But even an inspired hunch will not justify an investigatory detention — or here, expanding the scope of a traffic stop beyond its original purpose. See United States v. Feliciano, 45 F.3d 1070, 1072 (7th Cir.), cert. denied, 516 U.S. 853, 116 S.Ct. 153, 133 L.Ed.2d 97 (1995). Rather, the articulable facts must support an objectively reasonable suspicion that the individual whom the officer wishes to question has just committed, is committing, or is about to commit a crime. See Terry v. Ohio, 392 U.S. 1, 21-22, 88 S.Ct. 1868, 1879-80, 20 L.Ed.2d 889 (1968).
Although an individual’s prior criminal acts and nervous demeanor are certainly factors that may contribute to reasonable suspicion, they do not alone establish such suspicion. A history of committing a particular type of crime no doubt suggests a willingness and ability to commit that act and perhaps — for investigatory if not evidentiary purposes (see Fed.R.Evid. 404(b)) — a predisposition to do so again. Feliciano, 45 F.3d at 1074. But without additional facts suggesting that a crime actually has been, or is about to be committed, a criminal record alone cannot justify detaining an individual for questioning. United States v. Jerez, 108 F.3d 684, 693 (7th Cir.1997).
If the law were otherwise, any person with any sort of criminal record — or even worse, a person with arrests but no convictions — could be subjected to a Terry-type investigative stop by a law enforcement officer at any time without the need for any other justification at all. Any such rule would clearly run counter to the requirement of a reasonable suspicion, and of the need that such stops be justified in light of a balancing of the competing interests at stake….
United States v. Sandoval, 29 F.3d 537, 543 (10th Cir.1994) (emphasis in original). A nervous demeanor arguably is more telling than one’s criminal history of what he is up to at present. Cf. Illinois v. Wardlow, 528 U.S. 119, 124, 120 S.Ct. 673, 676, 145 L.Ed.2d 570 (2000). But because many law-abiding persons are anxious and fidgety when stopped by the police, see United States v. Salzano, 158 F.3d 1107, 1113 (10th Cir.1998), apparent nervousness likewise does not, by itself, give rise to a reasonable suspicion that a crime may be in progress. E.g., United States v. Brown, 188 F.3d 860, 865 (7th Cir.1999); see also United States v. Chavez-Valenzuela, 268 F.3d 719, 725-26 (9th Cir.2001). Together, these circumstances — a previous crime and a present nervousness — can color the interpretation of the other facts confronting an officer; but without more they do not reasonably suggest that someone is involved in criminal activity. Compare United States v. McRae, 81 F.3d 1528, 1535-36 (10th Cir.1996) (defendant’s criminal record and unusually intense demeanor while watching officer, coupled with answers to questions concerning the return of his rental car that were vague and inconsistent with rental agreement itself, supported reasonable suspicion), with United States v. Sprinkle, 106 F.3d 613, 617-18 (4th Cir.1997) (defendant’s criminal history and evasive behavior — raising his hand to hide his face as if to conceal identity from passing police officers and immediately driving away — did not give rise to reasonable suspicion, even when coupled with presence in neighborhood known for narcotics trafficking and officers’ observation of him huddled with another individual toward center console of car with their hands close together), and United States v. Davis, 94 F.3d 1465, 1469-70 (10th Cir.1996) (defendant’s criminal history and evasive attitude — walking away from police, dropping eye contact, and keeping hands in pockets — did not, even when coupled with presence in high-crime neighborhood, give rise to reasonable suspicion).
Like Officer Chiola, Judge Cudahy finds it noteworthy that in contrast to Childs’ calm demeanor on the occasion of his prior arrest, he was visibly nervous when confronted by Chiola for the second time. Some of the cases addressing nervousness note that unless an officer knows how an individual normally acts when confronted by the police, his anxiety on a given occasion is not particularly probative because, as already noted, it would not be unusual for a law-abiding citizen to display anxiety when stopped and questioned by a law enforcement official. See Chavez-Valenzuela, 268 F.3d at 725, quoting Salzano, 158 F.3d at 1113; United States v. Bloom, 975 F.2d 1447, 1458 (10th Cir.1992), overruled in part on other grounds by United States v. Little, 18 F.3d 1499 (10th Cir. 1994) (en banc). Thus the significance of Childs’ change in demeanor: having been cool as a cucumber during his first encounter with Chiola, the thinking goes, Childs would not have been nervous on the subsequent encounter unless he had something to hide.
But I think it is overstating the relevance of Childs’ newfound apprehension to say that it was enough to make the difference between a mere hunch and a reasonable suspicion that Childs might have drugs on his person. Chiola’s previous encounter with Childs had, after all, culminated in an arrest. It does not strike me at all unusual or suspicious that an individual arrested by a policeman only three days earlier would be demonstrably uncomfortable when again stopped and questioned by that officer. The arrest alone — irrespective of the reason for it or what transpired during that arrest — arguably would account for one’s nervousness when confronted on a later occasion by the same officer.
Other than the prior discovery of marijuana in Childs’ possession and the dissipation of his sangfroid, Chiola was confronted with no other circumstance that pointed to criminal activity. No furtive gestures had been observed; he had not been seen transacting business with a known drug dealer; his appearance did not suggest recent drug use. See Sprinkle, 106 F.3d at 617; Davis, 94 F.3d at 1470. Such facts, coupled with his previous arrest and his nervous demeanor, might have supplied an objective basis on which to believe that he was carrying drugs once again. As it was, Officer Chiola had nothing more than a hunch that Childs might be hiding drugs; and that was not enough to permit him to expand the scope of the traffic stop by asking Childs whether he had any drugs in his possession.
To say that these very limited circumstances permitted Officer Chiola to expand the scope of the traffic stop and to question him about narcotics activity would, I fear, accord lesser Fourth Amendment protection to those with criminal records. See Sandoval, 29 F.3d at 543. Many people who have been arrested and/or who have spent time in jail will naturally be skittish when stopped and questioned by the police on subsequent occasions, even if they are doing nothing wrong. The Fourth Amendment demands that an investigatory detention be supported by facts that objectively point to current criminal activity. A recent arrest and a nervous demeanor fall well short of that showing.

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On Wednesday, April 12, Justice Ramos of the Commercial Division of the New York Supreme Court dismissed with prejudice four lawsuits filed by Royal Park Investments SA/NV (“Royal Park”). The lawsuits alleged fraud and negligent misrepresentation with respect to residential mortgage-backed securities (“RMBS”) sold to Fortis NV/SA (“Fortis”) – formerly an independent Belgian bank that was sold off to BNP Paribas during the financial crisis – between 2005 and 2007. The claims sought damages totaling $3.7 billion from four of the world’s largest banks: Morgan Stanley, Credit Suisse, Deutsche Bank, and UBS.
In 2009, Fortis and its affiliates transferred “all right, title and interest in and to” their RMBS holdings to Royal Park through the use of a portfolio transfer agreement (“PTA”), which did not expressly address the right to assert legal causes of action. The four defendant banks moved to dismiss the complaints, contending that the representations made in the RMBS transaction documents were only made to the original purchaser (Fortis) and, under both New York and Belgian law, no transfer of the rights to sue for breaches of such representations had been made in the PTA, as the transfer of such rights must be explicit.
Justice Ramos agreed and – after determining New York law should be applied to the dispute – found that the only rights that had been explicitly transferred under the PTA were contractual rights unrelated to the right to assert legal causes of action, with no express assignment of the right to bring the common law misrepresentation claims.
The cases are Royal Park Investments SA/NV v. Morgan Stanley et al., index number 653695/2013, Royal Park Investments SA/NV v. Deutsche Bank AG et al., index number 652732/2013, Royal Park Investments SA/NV v. Credit Suisse AG et al., index number 653335/2013, and Royal Park Investments SA/NV v. UBS AG et al., index number 653901/2013, in the Supreme Court of the State of New York, County of New York.
Investment advisor TCW Asset Management Company (“TCW”) scored a major victory last week when an appellate court dismissed a $128 million RMBS fraud suit that was filed against it by two Australian-based Cayman Island hedge funds: Basis Pac-Rim Opportunity Fund (Master) and Basis Yield Alpha Fund (Master) (together, “Basis”). Basis sued TCW for alleged fraud in selecting RMBS assets for, and recommending an investment in, a $400 million investment vehicle called Dutch Hill II.
On March 2, a five-judge panel of the First Department Appellate Division in New York reversed Justice Kornreich’s October 19, 2015, denial of TCW’s motion for summary judgment. The panel found that Basis failed to present evidence of loss causation, i.e., that TCW’s alleged fraud caused Basis’ loss. Once TCW made a showing that Basis’ loss was not due to any misrepresentations or omissions by TCW and that Dutch Hill II would have collapsed regardless as a result of the market crash, the burden shifted back to Basis to raise an issue of fact on loss causation. The appellate panel’s decision turned on Basis’ “complete failure” to show that its loss was caused directly by TCW’s alleged fraud, and not by intervening economic forces such as the housing market crash.
RMBS fraud plaintiffs should heed the warning of the appeals court: in the event of a market collapse coincident with loss, investors must demonstrate loss causation by showing that misstatements rather than macroeconomic forces ultimately caused the loss.
The case is Basis Pac-Rim Opportunity Fund (Master) v. TCW Asset Management Co., docket number 654033/12, in the Supreme Court of the state of New York, Appellate Division, First Department.
Attorneys for Deutsche Bank National Trust Co. argued recently to a First Department panel that several of the RMBS putback claims that it was pursuing as trustee against Morgan Stanley should be revived after they were dismissed in April for being untimely. The claims were originally commenced when the Federal Housing Finance Agency filed summonses with notice on the final day before the expiration of the statute of limitations. However, Deutsche Bank, as trustee, subsequently filed the complaints for the claims. The trial court threw out the claims, finding that certificate holders lacked standing to sue and that the trustee could not benefit from tolling agreements entered into by Morgan Stanley and certain other certificate holders.
At the recent argument, Deutsche Bank’s attorney argued that the certificate holders were not barred from filing the summonses with notice and that the trustee could benefit from them, because they were filed derivatively. In addition, he argued that Deutsche Bank was a third-party beneficiary of the tolling agreements at issue because the agreements applied to representatives of the certificate holders and that Deutsche Bank, as trustee, was a representative. Morgan Stanley’s attorney argued that “merely purporting” to file derivatively did not allow the certificate holders to sidestep contractual provisions that deprived them of standing to sue. He also argued that Deutsche Bank’s reliance on the word “representative” in the tolling agreements was misplaced because, read in its entirety, the provision at issue did not apply to the trustee, and the trustee represents the whole group of certificate holders, not any individual one.
The panel did not render a decision at the hearing.
On December 7, New York Supreme Court Justice Eileen Bransten dismissed a $500 million lawsuit against UBS AG (“UBS”) brought by Ace Decade Holdings Limited (“Ace Decade”), a British Virgin Islands company, for lack of personal jurisdiction and forum non conveniens. Ace Decade alleged that UBS fraudulently induced it to invest in shares of a company publicly traded in Hong Kong through a UBS-affiliated intermediary in Hong Kong, an affiliation that UBS concealed. Ace Decade’s investment allegedly resulted in a loss of more than $500 million.
In its motion to dismiss, UBS argued that under Daimler AG v. Bauman, 134 S. Ct. 746, 754 (2014), UBS is not subject to general jurisdiction in New York because UBS is incorporated in and has its principal place of business in Switzerland. Furthermore, UBS argued that New York lacked specific jurisdiction because the transactions giving rise to Ace Decade’s claims occurred in Hong Kong, not New York. Lastly, UBS argued that New York was not a convenient forum for several reasons, including the fact that trying the case in New York would impose undue hardship on UBS because almost all relevant witnesses and documents were abroad.
Justice Bransten agreed with UBS and held that the Court lacked personal jurisdiction. She stated that “the record makes clear that the ‘original critical events’ associated with the [i]nvestment occurred in Hong Kong.” The fact that Ace Decade moved to New York after entering into all relevant agreements and committing to make an investment was not a sufficient basis for jurisdiction. The Court also concluded that even if it could properly exercise jurisdiction, the action would be dismissed based on forum non conveniens because all relevant documents and witnesses are located in Hong Kong.
On November 29, a five-judge panel of New York’s Appellate Division affirmed the dismissal of CIFG Assurance North America, Inc.’s (“CIFG”) claims against Bear Stearns & Co. (now known as J.P. Morgan Securities LLC (“J.P. Morgan”)) based on alleged material misrepresentations in connection with an insurance contract. However, the panel found that CIFG’s claims should not have been dismissed with prejudice because CIFG should have been given an opportunity to replead.
The complaint alleged that Bear Stearns & Co. (“Bear Stearns”) made material misrepresentations that induced CIFG to provide financial guaranty insurance in connection with two collateralized debt obligations (“CDOs”). According to CIFG, Bear Stearns created the CDOs to rid itself of toxic, high-risk residential mortgage-backed securities (“RMBS”) that it was carrying on its books. CIFG alleged that Bear Stearns needed a third party to insure the CDOs’ senior tranches to make them marketable to investors. Bear Stearns approached CIFG to provide financial guaranty insurance on certain senior notes issued by the CDOs and made material misrepresentations to induce CIFG to do so. Specifically, Bear Stearns allegedly represented to CIFG that the CDOs’ assets would be selected by independent and reputable collateral managers when, in reality, Bear Stearns allegedly paid off the managers to allow itself to choose the collateral and load the CDOs with the toxic RMBS from its own books. CIFG also claimed that Bear Stearns held a number of short positions against the CDOs’ portfolios and profited substantially therefrom. Due to the large volume of toxic RMBS in the portfolios, both CDOs collapsed within a year of closing, which forced CIFG to pay over $100 million to discharge its liabilities under the insurance. CIFG alleges that it would have never issued the insurance had it known that the collateral managers would be taking direction from Bear Stearns.
In affirming the dismissal, the Appellate Division found that the “complaint contains insufficient information about the insurance policies CIFG was allegedly fraudulently induced to issue, and the circumstances under which those policies were issued.” Furthermore, the Appellate Division found that the complaint failed to include any detail as to how Bear Stearns “solicited” the insurance from CIFG and was void of any information about the underlying CDO transaction. Lastly, the panel noted that “the complaint merely states that CIFG paid over $100 million to discharge its liabilities under the insurance, but does not identify to whom those payments were made, or the events that triggered the payments.” Based on all of these deficiencies, the panel held that CIFG’s misrepresentation claim did “not clearly inform defendant as to the complained-of incidents, and it was properly dismissed.” Nonetheless, the Appellate Division held that CIFG should be given an opportunity to replead and rejected J.P. Morgan’s argument to dismiss the claim as time-barred.
The case is captioned CIFG Assurance North America Inc. v. J.P. Morgan Securities LLC, index number 654074/2012, in the New York Supreme Court, Appellate Division, First Department.
Earlier last month, the Appellate Division, First Department, reversed a trial court’s dismissal of investment fund Phoenix Light’s $700 million residential mortgage-backed securities (RMBS) fraud suits against Credit Suisse and Morgan Stanley. In a brief opinion, the appellate court held that Phoenix Light’s allegations that it relied on defendants’ misrepresentations and omissions in their respective RMBS offering materials were sufficient to state a fraud claim.
Justice Ramos of the Supreme Court of the State of New York, Commercial Division, had previously granted the defendants’ motions to dismiss Phoenix Light’s common law fraud, fraudulent inducement, and aiding and abetting fraud claims. In so holding, Justice Ramos relied on the fact that Phoenix Light never alleged that it requested mortgage loan files or due diligence reports from the defendants to conduct independent analysis of the loans underlying the RMBS. Phoenix Light argued that such requests to the defendants would have been futile, but the trial court held that a sophisticated investor should have done so.
The Appellate Division disagreed, relying on its prior decision in IKB International S.A. v. Morgan Stanley, 142 A.D.3d 447 (1st Dept. 2016), among other authority. In IKB’s case against Morgan Stanley, the First Department concluded that even if the plaintiff bank had demanded loan files from Morgan Stanley, the defendant would not have provided said files. Thus, IKB’s allegations of justifiable reliance were sufficient as pleaded. Further, in the Phoenix Light opinion, the court noted that RMBS plaintiffs are not required to plead that they received representations and warranties made directly by defendants concerning the underlying loans, merely that such representations and warranties were made to the defendants by third parties with the relevant information. As such, Phoenix Light’s pleaded reliance on the defendants’ offering materials was sufficient.
The cases are captioned Phoenix Light SF Ltd. et al. v. Credit Suisse AG et al., index number 653123/2013, and Phoenix Light SF Ltd. et al. v. Morgan Stanley et al., index number 652986/2013.
The investigation, launched by the Securities and Exchange Commission (“SEC”) in 2013, probed whether JPMorgan violated the FCPA by giving jobs and internships to the friends and relatives of clients and government officials in the Asia-Pacific region, particularly in China, to win lucrative business deals. The investigation found that, between 2006 and 2013, JPMorgan hired hundreds of (typically unqualified) interns and employees at the behest of government officials and clients in Asia, and generated $100 million in revenues.
The $264 million settlement will be split among three U.S. government regulatory agencies: $130 million to the SEC; $72 million to the Department of Justice (“DOJ”); and $61.9 million to the Federal Reserve. By cooperating with the investigation, JPMorgan avoided criminal prosecution by the DOJ and entered into a three-year “non-prosecution” agreement requiring the bank to implement enhanced internal compliance programs. After the investigation, JPMorgan fired six employees who engaged in misconduct or failed to identify the problem. It also disciplined 23 additional employees who failed to detect the prohibited practices or acted at the direction of supervisors. The bank also penalized current and former employees $18.3 million for their actions.
In addition to investigating JPMorgan, government regulators reportedly contacted other big banks, including HSBC, Goldman Sachs, Deutsche Bank, Citigroup, and Morgan Stanley. The global banking community was put on edge by the investigation, as hiring well-connected people for financial jobs has been common in China.
On November 4, the New York State Department of Financial Services (“DFS”) and the Agricultural Bank of China agreed to a Consent Order requiring the bank to pay a $215 million penalty and to install an independent monitor to review the bank’s program for compliance with anti-money laundering laws (“AML”), including the Bank Secrecy Act (“BSA”).
The Agricultural Bank of China’s New York Branch (the “Branch”) conducts U.S. dollar clearing in large volumes through foreign correspondent accounts. Since U.S. dollar clearing – a process by which U.S. dollar-denominated transactions are settled between counterparties through a U.S. bank – is a high-risk business line that creates an opportunity for bad actors to launder money or facilitate terrorist transactions, transaction monitoring systems are particularly important for entities that engage in this type of activity.
According to the Consent Order, despite warnings by DFS in 2014 that the Branch’s transaction monitoring systems were inadequate for a greater volume of clearing activity, the Branch substantially increased its clearing activity without implementing stronger monitoring systems. Furthermore, when the Chief Compliance Officer (“CCO”) raised concerns in 2014 about potentially suspicious activity, Branch management failed to properly address these concerns and curtailed the CCO’s independence and ability to carry out vital compliance responsibilities.
The Consent Order states that during its 2015 investigation, DFS discovered an “‘unmanageable’ backlog of nearly 700 alerts of potential suspicious transactions” at the Branch that had not yet been investigated. Additionally, DFS uncovered several alarming transaction patterns, including unusually large round-dollar transfers between Chinese and Russian companies and potentially suspicious dollar-denominated payments from trading companies located in the Middle East.
With all the news surrounding the SEC’s headline-grabbing prosecution of Lynn Tilton and her firm, Patriarch Partners LLC, it is easy to miss the insurance coverage element of the case. It is no secret that in recent years, and particularly following the enactment of the Dodd-Frank Act in 2010, the SEC has dedicated more resources to investigating and targeting, among others, private equity firms, hedge funds, and mutual funds. Responding to an SEC subpoena or investigation can be extremely expensive and disruptive. Importantly, in some instances, these costs may be covered by a company’s liability insurance policies.
Patriarch Partners is seeking coverage from AXIS Insurance (“AXIS”) for an SEC subpoena and subsequent enforcement action. Patriarch Partners LLC v. AXIS Insurance Company, No. 1:16-cv-02277-VEC (S.D.N.Y. filed March 29, 2016). AXIS has denied coverage and is seeking a court ruling that there is no coverage because (1) Patriarch allegedly did not disclose in a warranty for the AXIS policy that it had received an informal request for documents from the SEC; (2) the claim was barred by a prior acts exclusion; and (3) the SEC claims at issue constituted a “claim” made prior to the policy period.
In short, AXIS is arguing that, because the SEC allegedly requested certain documents from Patriarch and started an inquiry prior to the policy period, no coverage is available for the SEC’s subsequent claims. Notably, although AXIS is contesting its coverage obligation, the primary insurer and the lower-layer excess carriers agreed to fund Patriarch’s defense and already have exhausted their limits.
Be careful in completing applications and executing warranties. In purchasing insurance, policyholders are often required to complete applications or execute warranties. Insureds, of course, must be honest in these applications and warranties because, as the Patriarch case demonstrates, insurance companies may attempt to avoid their coverage obligation based on purported misrepresentations. But, as the Patriarch case also shows, responding to insurance applications is often easier said than done. For example, to challenge coverage, AXIS is relying on a warranty by Patriarch stating that it was not “aware of any facts or circumstances that would reasonably be expected to result in a Claim” covered by the AXIS policy. At the time Patriarch executed its warranty, however, its representation likely was accurate: it likely did not know that a limited investigation by the SEC would result in a claim leading to more than $20 million in fees. Nevertheless, Patriarch now faces an obstacle to coverage that could have been avoided.
How the term “Claim” is defined. Most management liability insurance policies are written on a claims-made basis, which means that they are triggered by claims made during the policy term. The definition of “Claim,” however, varies significantly from policy form to policy form. In virtually all policies, the definition of “Claim” will include civil lawsuits, but, as reflected in the Patriarch case, it may also include a subpoena, an order of investigation, or an SEC Form 1662. Policies also generally tie the definition of “Claim” to instances where there are allegations of “wrongful acts.” The definition of “Claim” can have broad consequences for coverage and will affect the policyholder’s notice obligations, which policy period(s) is triggered, and how exclusions are applied.
Understand the ramifications of prior acts and prior litigation exclusions. The vast majority of D&O policies contain prior acts or prior litigation exclusions that bar coverage for claims arising out of acts, or “related” lawsuits, that took place prior to the policy period. The language of these exclusions again differs from policy to policy. Where possible, seek a narrower and clearer exclusion, so that there is little doubt regarding what is excluded. For example, in the Patriarch case, the policy contains a somewhat expansive exclusion barring coverage for claims “based upon, arising out of or attributable to any demand, suit or other proceeding pending” against Patriarch on or prior to July 31, 2011, “or any fact, circumstance or situation underlying or alleged therein.” AXIS still will be required to show that this exclusion clearly and unambiguously bars coverage for the claim at issue, but this type of language gives insurers too much room to try to contest coverage.
There is no way to guarantee that all SEC claims will be covered, but by being proactive and anticipating key issues, you will put your firm in the best possible position to obtain coverage and manage this critical risk. We will be monitoring the Patriarch case as it develops.
* Joseph Saka is a member of Lowenstein Sandler’s Insurance Recovery Group. Zachary Rosenbaum, Chair of the Capital Markets Litigation Group, contributed to this post.
On October 21, the China Securities Regulatory Commission (“CSRC”) opened an investigation into six Chinese companies for alleged fraud relating to initial public offerings (“IPOs”). The six companies under investigation are (1) Longbao Ginseng & Antler Co. (“Longbao”), a biotechnology and pharmaceutical company; (2) Guangdong Guangzhou Daily Media Co., an advertising firm; (3) Ingenious Ene-Carbon New Materials Co., a graphite supplier; (4) Infotomic Co., a property developer; (5) P2P Financial Information Service Co., a real estate developer; and (6) Shenzhen Ecobeauty Co., a natural gas equipment manufacturer. One of the six companies, Longbao, is currently preparing an IPO, while the remaining five have already gone public.
These six cases mark the start of a relatively new campaign by the CSRC intended to detect and punish IPO fraud. The commission announced that it will be investigating all parties involved in the IPOs, including the lawyers, underwriters, and auditors. It also announced that penalties could include delisting the companies’ stocks, issuing financial penalties, and even imposing criminal charges and fines.
The alleged fraudulent acts for the six companies under investigation include false representations made in IPO prospectuses and inflation of company revenue and net income, designed to induce market speculation and artificially boost company stock prices following an IPO. While foreign investors are barred from being shareholders in domestic Chinese companies, IPO fraud is an enormous area of concern affecting Chinese investors, who stand to lose millions, with China only recently starting to seriously crack down on this type of market fraud.
This past June, China for the first time expelled a company for committing IPO fraud from one of its several stock markets, the Shenzhen Stock exchange, after an investigation revealed that Dandong Xintai Electric fabricated financial data in its IPO application. The underwriter of the IPO was also ordered to pay 550 million yuan ($82.2 million) to compensate investors and an additional penalty of 57.3 million yuan ($8.5 million).

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Synopsis: If an employee received a §8(e) loss of an arm award for a shoulder injury prior to the changes instituted by Will County Forest Preserve, an employer can claim that credit in any future settlements even if that prior injury would now be compensated as loss of the person as a whole.
Facts: Petitioner injured his left arm while lifting a manhole cover on February 8, 2010. He was diagnosed with a ruptured biceps tendon and required surgery near the elbow. Petitioner successfully treated and could return to his regular job within seven months.
Petitioner had a prior left shoulder injury which settled for 30% loss of the left arm under §8(e). This claim was prior to Will County Forest Preserve, which held shoulder injuries were to be compensated as losses to the person as a whole.
After the hearing on the 2010 injury, the Arbitrator awarded Petitioner 17% loss of use of the person as a whole under Section 8(d)2. The Arbitrator relied upon Will County Forest Preserve for the proposition injuries to the “shoulder, biceps, and elbow” were no longer considered injuries to the “arm” compensable under Section 8(e). Further, because Petitioner was being awarded benefits under §8(d)2, the Arbitrator rejected Employer’s claim for credit for the prior award.
On review, the Commission found the arbitrator had misconstrued the holding in Will County Forest Preserve, since nowhere in that decision had the court indicated the elbow was no longer part of the arm for purposes of compensation. The Commission awarded Petitioner 37.5% loss of the left arm under §8(e). The Commission further determined Employer was entitled to a credit for the prior left arm award because the settlement had been paid under §8(e). Subtracting the credit for the prior 30% loss of the same arm, Petitioner’s net award was 7.5% of the arm.
On appeal, the First District Appellate Court first rejected Petitioner’s argument that he had actually sustained a left shoulder injury. Next, turning to the issue of credit, the court noted credit for the prior scheduled losses listed in §8(e)17 is mandatory. The court then held Will County Forest Preserve did not retroactively change all prior shoulder awards from loss of an arm to person as a whole. Citing to Michelson v. Industrial Commission, 375 Ill. 462 (1941), the court reiterated that once approved, a settlement contract is a final award for all legal effects, including credits due in later awards; the fact that Petitioner would be compensated differently today for his prior injury does not change the fact that he was compensated under §8(e). Therefore, court held the Commission had properly concluded Employer was entitled to credit for that prior compensation.
Impact on Illinois Employers: Despite the changes instituted by Will County Forest Preserve, employers can still claim credit for prior shoulder awards compensated under §8(e). This ruling protects employers’ prior settlement contracts from changes in workers’ compensation legislation by confirming the applicability of prior award credits in future claims.

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Something old, something new, something borrowed, something blue. The traditional wedding rhyme inspired Retirement Director Ben Rizzuto to contemplate the relationship between a plan sponsor and its participants. Whether it’s a marriage or a retirement plan, it’s important that neither party takes the other for granted.
Like a marriage, the relationship between a plan sponsor and its participants has normative and legal obligations.
Excessive fees, investment policy statement violations, the use of “retail” or expensive shares classes and improper investments have provided the lowest hanging fruit for lawyers representing participants.
When it comes to investment selection, process, documentation and consistent monitoring should be a key focus.
Ben Rizzuto: Hey there, everyone, this is Ben Rizzuto and I’d like to welcome you to the Plan Talk podcast series from Janus Henderson Investors.
As you know, in this this series we discuss many of the key developments that we’re seeing in the Defined Contribution and Retirement Plan marketplace, and many of these ideas and issues come from our Defined Contribution in Review guide. So if you haven’t seen the latest edition of the Defined Contribution in Review Guide, be sure to check it out.
Like many of you my family and I have been on the wedding circuit over the past couple of months. These events are always great ways to visit family and friends, dress up and take part in an important milestone for a couple.
During a recent ceremony I was reminded of the traditional rhyme that details what a bride should wear for good luck: something old, something new, something borrowed, something blue. That’s usually where things stop but it actually turns out that the original rhyme’s final line is “and a silver sixpence in her shoe.” Now I have never heard that bit about a sixpence in her shoe before but the original rhyme came from Lancashire County in England and the sixpence in the shoe was a symbol of prosperity.
Anyway, in thinking about that old rhyme and the retirement plan industry I started to think that in a way the relationship between a plan sponsor and its participants is similar to a marriage. There is a partnership between the two, one that has normative and legal obligations, and the hope is that this partnership will lead to the long-term success of both parties.
What’s really interesting, especially when I think about retirement plans, are those legal obligations that plan sponsors have to their participants, especially when it comes to ERISA.
So today we’re going to explore that old rhyme: Something old, something new, something borrowed, something blue. And we’ll see how it can help use think about all of the legal wrangling, lawsuits and issues that have ensnared plan sponsors and their retirement plans over the past several years.
Let’s start with “something old” and to cover off on this bit of the rhyme let’s think about and review some of the major factors and ideas in the 100-plus lawsuits we have seen against plan sponsors.
So if we think about some of the older more noteworthy class action lawsuits in this space we can think about ABB v. Tussey, Tibble v. Edison, Beesley v. International Paper, and Spano v. Boeing. In a couple of these cases we saw settlements, $30 million in International Paper and $57 million in Boeing. In the Edison we actually saw a decision in favor of the plaintiffs, and the ABB case has bounced back and forth between different appeals courts over the years.
While we’ve seen different outcomes in these cases one of the constants is the fact that these are all huge retirement plans with billions of dollars within them.
Along with that there have been a few common complaints or themes that have shown up in these suits.
Those include excessive fees, investment policy statement violations, the use of “retail” or expensive share classes, and improper investments. Of course, there have been others, but these ideas have provided the lowest hanging fruit for the lawyers representing participants. Oh, and on that note, in the past it’s really been one main law firm out of St. Louis that brought most of these cases and really helped to spawn a cottage industry. Like Voldemort (Vol-deh-mort) in Harry Potter, they will in this podcast remain nameless.
But overall it’s been big plans, big settlements, based on a similar set of issues.
So if that was the old, let’s move on to “something new” and look at how these cases have changed over the past several years.
First, let’s start with the new, more novel issues that we have seen plan sponsors sued over. Now this is not to say that the common themes we just talked about aren’t still important. They, in fact, are still very important and we continue to see all of them in current cases. But let’s look at the new tricks lawyers have up their sleeves.
First, and this gets into the umbrella issue of imprudent investments, we’ve seen a few cases that have brought up the idea of stable Value vs. Money Market Funds in plan lineups. Two cases where we have seen this is in Ramsey v. Philips North America and the White v. Chevron case.
In the Ramsey v. Philips North America case which was just filed on May 10 of this year, in it, participants in the $3 billion plan claimed that the lack of a stable value fund cost plan participants $41 million.
More specifically the suit cited that the inclusion of a money market mutual fund was imprudent since stable value funds hold longer-duration instruments and generally outperform money market funds. In this case the plan’s money market fund was said to have provided “microscopically” low returns compared to a stable value fund which would have provided superior returns while preserving capital and liquidity without any greater increase in risk.
Less than a week after the complaint was filed, Philips settled for $17 million, in part saying they had breached their fiduciary duties by offering just the money market fund.
We again saw this issue in the 2016 White v. Chevron case. Here, it was claimed that Chevron failed to offer a stable value fund that would have provided participants “maximum current income” while preserving capital and liquidity without any greater increase in risk compared to money market investments. The complaint again noted that the money market’s returns were “microscopically small” but here we saw a judge dismiss the case saying that offering a money market fund “as one of an array of mainstream investment options along the risk/reward spectrum satisfies ERISA’s prudence requirement.
So what’s the answer when it comes to money market vs. stable value funds? Like many things it depends, but overall, when it comes to investment selection … process, documentation and consistent monitoring are the things plan sponsors need to be doing.
Along with that I’ve seen an advisor named in a suit based on the benchmark they used to evaluate funds in the plan lineup. More specifically the suit which is against the New York University 403(b) plan, said the weighted Morningstar benchmark the plan’s advisor selected wasn’t appropriate for a large plan since the benchmark included mostly retail share classes.
One final claim we’ve seen concerns plan assets, more specifically participant information being viewed as a plan asset which should be protected. In one specific instance, Vanderbilt University was sued in part because it allegedly failed to protect plan assets, those being participants’ contact information, their choices of investments, the asset size of their accounts, their employment status, age and proximity to retirement, from the record-keeper. The record-keeper thus had access to this “private and sensitive information” to then market proprietary products and wealth management services to the Plan’s participants.
So those are a few novel claims that we’ve seen. Unfortunately, as we’ve come to find, these lawsuits and the complaints brought against plan sponsors will continue to evolve.
Moving on to “something borrowed” I mentioned New York University and Vanderbilt University in the previous section and while a couple of the claims included in these cases are different, I think we can see lawyers have basically borrowed the playbook that was used in corporate cases and applied it to the 403(b) industry.
As you may know, over 20 universities have been sued by participants over the past couple of years. These cases involve schools that everyone has heard of, like Duke, Yale and MIT, and involve their billion dollar retirement plans. And the issues that are showing up include excessive fees, use of expensive or retail share classes and underperforming or imprudent investments. Along with those we do see allegations of too many investment options and multiple record-keepers, which are more specific to the 403(b) marketplace but overall it’s really quite amazing how similar the allegations are.
Another area where we see others employing the same playbook is in the small plan marketplace. I mentioned that a cottage industry has been created in the retirement plan litigation area, and that industry has now moved downstream, as plans with less than $10 million are being swept up in this current, by a new set of lawyers with little to no ERISA experience.
In fact, one of the local personal injury lawyers here in Denver has now brought three or four cases against retirement plans based alleged fiduciary breaches. So the point is: If the local personal injury lawyer is trying his hand at ERISA litigation, what’s to stop others from doing so as well.
Finally let’s talk about “something blue.” This one is a little tougher because if you follow tradition on your wedding day you wear or carry something that is blue in color, which is hard to do in a podcast. But if we look at the meaning of wearing something blue we find that it is meant to deflect the evil eye as the color blue stands for love, purity and fidelity – three qualities of a solid marriage.
So to signify this I thought we could look at a case that was recently dismissed, since I would submit that the dismissal of the case means that, at least in the eyes of the courts, plan sponsors were faithful, demonstrated by their loyalty and support to the plan and participants.
To do that let’s take a look at the Divane v. Northwestern University case. This case was originally filed in 2016 but was dismissed by the U.S. District Court for the Northern District of Illinois this past May.
Originally when it was filed, the suit argued that even though the university had “eliminated hundreds of mutual funds from its plan menu and selected a tiered structure comprised of a limited core set of 32 investment options” the university still contracted with two separate record-keepers for the retirement plan. Along with that it took issue with underperforming investment options that carried unreasonable fees, use of plan assets and excessive recordkeeping fees overall.
While the dismissal is a positive for plan sponsors, generally, I think it’s important to study what the judge said in his decision because these will become the precedents over which future cases will be argued and could help other plan sponsors escape costly settlements.
Finally, the judge’s decision looks at the idea of paternalism in retirement plans. And when you think about paternalism or the generosity of the plan sponsor, this really is an idea that is overarching for everything that we do or don’t do within a plan. Overall the plaintiffs in this case were saying that in many areas the university was not being as paternalistic as it should have been. To that point, Judge Alonso alluded to two Supreme Court cases that I think we may hear about more in the future. He noted that “nothing in ERISA requires employers to establish employee benefits plans. Nor does ERISA mandate what kinds of benefits employers must provide if they choose to have such a plan,” which comes from the 1996 case of Lockheed Corporation v. Spink.
Based on that I wonder if we’ll see more plan sponsors reference not only the Lockheed and Varity cases but also this Northwestern University case as precedents to why they are doing their fiduciary best and why participants should be content with what is being offered in the plan.
When you think about a marriage there is a certain amount of give and take that occurs. Both partners in a relationship need to make sure they do their parts and truly put in the work to ensure that the partnership works. Without this that partnership tends to fall apart.
The same goes for a retirement plan. It really is a partnership between a plan sponsor and its participants. And there is a give and take that occurs between both. Without it … things won’t work.
Whether it’s a marriage or a retirement plan, I think it’s important that neither party take the other for granted.
As we’ve seen today when that happens … arguments occur and those arguments typically end up in the court system.
But here’s the important thing, while these cases may incrementally help participants or plan sponsors I think we can all agree that increased litigation creates greater animosity and more noise when the goal we should be focused on is how we can improve the retirement plan industry overall. Whether it’s improving plan functioning and design, participant engagement or making sure the increasing amount of retirement plan litigation doesn’t swallow us up.
My hope is that by covering “something old, something new, something borrowed and something blue” we’ve helped you better understand how to think about the plans you work with to ensure that there is a solid marriage between process, fiduciary responsibility and practicality to make sure these issues don’t befall your plan and, who knows, maybe it will end up saving you a sixpence or two for your shoe!
Again remember that the information I covered today comes from our Defined Contribution in Review guide. Not only does it cover legal issues but also best practices, participant trends and regulatory updates.
We’ll be covering these and other issues in upcoming episodes, so be sure to subscribe.
Until next time, I’m Ben Rizzuto and this is Plan Talk.
Learn more about retirement strategies and solutions through our Defined Contribution program.
A retirement account should be considered a long-term investment. Retirement accounts generally have expenses and account fees, which may impact the value of the account. Non-qualified withdrawals may be subject to taxes and penalties. For more detailed information about taxes, consult a tax attorney or accountant for advice.
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