In FS Credit Opportunities Corp. v. Saba Capital Master Fund, LTD, No. 24–345 (June 11, 2026), the U.S. Supreme Court cited Restatement of the Law, Contracts § 598 in holding that § 47(b) of the Investment Company Act did not impliedly empower private parties to sue for rescission of any contract that allegedly violated the Act.
This case arose from a dispute between managers of open-end mutual funds and closed-end mutual funds, in which the open-end funds engaged in activist investing through which they identified low-performing closed-end funds and purchased a large enough stake to alter the funds’ investment strategies to make a short-term profit or to convert them into open-end funds. The closed-end funds, which were incorporated under Maryland law, adopted resolutions that limited the voting rights for shareholders holding disproportionate numbers of shares to avoid activist-investor takeovers. The open-end funds, as shareholders impacted by the resolutions, sued the closed-end funds, alleging that the resolutions violated the Act’s requirements that every share of stock had to be a voting stock with equal voting rights, invoking § 47(b) of the Act to sue for rescission. The U.S. District Court for the Southern District of New York granted the open-end funds’ motion for summary judgment, finding that § 47(b) of the Act created an implied private right of action to sue for contract rescission. The U.S. Court of Appeals for the Second Circuit affirmed.
Justice Barrett, delivering the Court’s majority opinion to resolve a Circuit split, reversed and remanded, holding that § 47(b) of the Act did not create a private right to sue for contract rescission. The Court explained that, ordinarily, under Restatement of the Law, Contracts § 598, a contract formed in violation of a statute that was “fully executed on the part of the plaintiff” could not be subject to rescission “to recover back the property conveyed or money paid under the contract.” The Court observed that § 47(b) of the Act overrode this common-law default and “unlock[ed] remedies that would otherwise be unavailable” but did not create a cause of action. Emphasizing that contract law treated rescission as a remedy and not a cause of action, the Court pointed out that § 47(b) of the Act was a “mandate directed to . . . courts,” rather than a provision that “confer[red] a right on a specified class of persons,” with the key actor being a court, not an individual. Thus, the Court concluded that the wording of § 47(b) of the Act “presuppose[d] that parties [were] already before the court,” and directed the court’s use of its remedial authority, while saying nothing about individual rights.
Read the full opinion here.