Securities Regulation Daily Wrap Up, INVESTMENT COMPANIES—U.S.: Justices in activist ICA case said they are concerned about federalism interests, (Dec 10, 2025)

By Mark S. Nelson, J.D.

Although the case is about statutory text and structure and the Court’s drift away from implied private actions, it may be federal-state law worries that ultimately motivate a majority opinion.

Former Supreme Court Justice Anthony Kennedy is often quoted as having described his federal courts class in law school as “darkness at noon,” likely because federal courts caselaw often results in inconsistent, seemingly impenetrable, and occasionally one-off Supreme Court opinions that defy explanation, and which offer little predictability for future cases. Something akin to that observation unfolded at today’s oral argument in a case that pits a closed end fund against an activist investor. The question presented is whether Section 47(b) of the Investment Company Act (ICA) creates a private right of action for rescission of contracts that violate the ICA. The answer may depend less on the justice’s drift away from judicially implied private actions and the newer focus on text and structure statutes, and more on how federal and state courts would interact if such private action were allowed (FS Credit Corp. v. Saba Capital Master Fund, Ltd., No. 24-345 (Dec. 10, 2025)).

What is at stake. The crux of the case focuses on changes that Congress made to the ICA in the 1980s. Before Congress reconsidered the ICA, both the Investment Advisers Act (IAA) and the ICA allowed private actions for recission when a contract was “void.” The 1980s-era amendments to the ICA deleted “void” from the relevant statute provision and replaced that word with “unenforceable.”

FS Credit argued that the replacement of “void” with “unenforceable,” among other changes, indicated Congressional intent to deny a private action for rescission. The fund’s theory is that “void” carries with it a common law history that permits offensive and defensive actions. By contrast, “unenforceable,” again in combination with other statutory elements, does not refer back to those same common law principles and, thus, suggests only the use of rescission as a defensive response to a lawsuit brought under some other statutory provision. The Solicitor General largely agreed with FS Credit’s theory of the case.

Saba Capital argued that use of the word “unenforceable” by itself did not change the ICA’s creation of an express private action for rescission that carries forward from when the IAA and the ICA contained the same key word—“void.” Specifically, Saba Capital pointed to language in the ICA that provides this remedy to “any party,” which the firm argued means plaintiffs and defendants, and offensive or defensive uses of rescission. Saba Capital argued further than the SEC’s amicus brief filed in a case many years ago after the Supreme Court had altered how it handles “implied” rights of action correctly asserted that the ICA still created an express private action for rescission.

For additional information about the statutory arguments, see the Securities Regulation Daily feature story, Mark S. Nelson, “Supreme Court preview: will closed-end funds case derail SEC’s expected move to expand retail investors’ access to private markets?”

Will federalism decide the case? The briefs make the various arguments about the statutory language just as well as oral argument did. The underlying issues there tend to focus on separation of powers, a sub-branch of cases on the spending power, and whether rights-creating language or explicit Congressional language on creating private actions as described in prior opinions is unique to the Section 1983 context. But perhaps the most interesting exchanges occurred when the justices asked about the interplay between federal and state courts, a question not directly presented to the justices but one that several of them felt they needed answers about to dispose of the case.

The federalism questions began when Justice Kavanaugh observed that “I think this case is extremely close.” Justice Kavanaugh later asked: “You want it to go to state court? Can they bring the suit, the rescission -- suit for rescission in state court, and the state court then does what? And why be in state court?”

Shay Dvoretzky, Skadden, Arps, Slate, Meagher & Flom LLP, who argued on behalf of FS Credit Corp., had argued up to that point that ICA Section 47 contains court-focused language, akin to a rule of decision for courts. He also noted that hornbook treatises on contracts say that “unenforceability,” which is melded with the rescission remedy in the ICA, suggests a defensive posture in contrast to the ICA’s prior language which used “void.” He suggested that void confers an offensive capability or affirmative ability to go to court.

But according to Justice Kavanaugh, “It strikes me as very bizarre...to figure out how this would play out in state court and why.”

Dvoretzky said there was no need to decide that issue. When pressed, however, Dvoretzky, said: “So I think that if Saba tried to do in state court what it tried to do here in federal court, first, I'm not aware of any state cause of action anywhere that would actually let them go in as a matter of state law and seek rescission in this way. So, I don't know that it could ever even, practically speaking, come up in state court.” Dvoretzky later agreed that the issue could arise as a defensive state court proceeding with a federal rule of decision.

Justice Barrett then asked “[c]ould there be a declaratory judgment for breach of contract relying on that state law cause of action?” Dvoretzky replied that “I don't think there could be. I think for much the same reason that Congress intended this to be a uniform scheme that would preempt state law, it would also displace the ability to bring a declaratory judgment action.”

Justice Kavanaugh would return to the federalism issue when questioning Max E. Schulman, Assistant to the Solicitor General, representing the U.S. as amicus curiae in support of FS Credit. Justice Kavanaugh asked “[w]hat can happen in state court now under your view?” According to Schulman, “…I think all parties agree, and we do too, that it can at least be raised defensively.”

Justice Sotomayor would later pick up Justice Kavanaugh’s line of questioning on the topic. “I agree, but what you're suggesting to Justice Kavanaugh is that Petitioner -- Respondents are barred from going to state law for a declaratory judgment rule. They could go to state law and say this permissible bylaw under this state's rules violates federal law, and federal law trumps.”

Soon after, Justice Sotomayor would sharpen her question: “State law should be where they should first turn. So, they go to state law and say declare this bylaw invalid under federal law. Can they do that, or can't they?” According to Schuman, “[s]o I'll just say Respondents here are asking for a rescission. I don't think that that could be provided in a declaratory judgment action. So that's all you need to decide this case.”

Paul D. Clement, Clement & Murphy, PLLC, arguing for Saba Capital Master Fund, Ltd., attempted to sum up the federalism issue in his opening statement: “The last thing I was going to say is this is a weird case, because all three parties agree that this language does more than just create a statutory right enforceable only by the SEC.”

Clement added: “The only question is whether it weirdly or anomalously, to use the Footnote 8 term, is only enforceable by -- in state court or whether you can bring it directly in federal court.”

Justice Thomas, who in earlier questioning was focused on a key precedent interpreting the IAA, shifted gears and asked Clement what a state court action would look like.

“We all agree that you could at least raise it as a defense in a breach of contract action,” said Clement. “But keep in mind, that'd be a very weird thing for Congress to go to all the trouble of saying that in this context we care enough about compliance with the Investment Company Act that we're going to expressly use the words ‘rescission by any party,’ but the only time you can bring it is as a defense to a breach of contract action, which in this context would mean an action where the fund managers actually go to the trouble of suing their own shareholders for breach of contract.” *** “Now, as far as we can tell, that essentially never happens.”

In rebuttal, Dvoretzky returned to Justice Kavanaugh’s concerns about state court cases. Said Dvoretzky: “Justice Kavanaugh, with respect to what happens in state court, just to clarify the point about preemption, again, I don't think you need to decide this here, but I think what would be preempted is an affirmative cause of action under state law to seek rescission.”

The case is No. 24-345.

Attorneys: Shay Dvoretzky (Skadden, Arps, Slate, Meagher & Flom LLP) for FS Credit Corp. Max E. Schulman, Assistant to the Solicitor General, for the U.S. as amicus curiae in support of FS Credit. Paul D. Clement (Clement & Murphy, PLLC) for Saba Capital Master Fund, Ltd.

Companies: FS Credit Corp.; Saba Capital Master Fund, Ltd.

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