United States: New York’s Highest Court Holds That Common Law Causes Of Action Are Not Preempted By The Martin Act

On Tuesday, December 20, 2011, New York's Court of Appeals issued a groundbreaking decision¹ holding that a plaintiff's common-law claims for breach of fiduciary duty and gross negligence against a securities firm were not preempted by the Martin Act—New York's "blue sky" law.² Previously, lower courts in New York had dismissed similar suits, holding that they were preempted by the Martin Act because that Act purportedly vested New York's Attorney General with sole investigatory and enforcement powers for non-fraud securities claims.  

In this case, plaintiff sued J.P. Morgan Investment Management Inc. ("J.P. Morgan") for alleged mismanagement of the investment portfolio of an entity -- Orkney Re II PLC -- whose obligations plaintiff guaranteed.  J.P. Morgan moved to dismiss the complaint on the grounds of Martin Act preemption.  The Supreme Court granted the motion holding that the fiduciary duty and gross negligence claims fell "within the purview of the Martin Act and their prosecution by plaintiff would be inconsistent with the Attorney General's exclusive enforcement powers under the Act." 

The Appellate Division, First Division reversed the decision below.  It held "there is nothing in the plain language of the Martin Act, its legislative history or appellate level decisions in this state that supports defendant's argument that the Act preempts otherwise validly pleaded common law causes of action."³  Leave was given to J.P. Morgan to appeal to the Court of Appeals.

Relying primarily on legislative intent, the Court of Appeals upheld the Appellate Division's decision, concluding that the plaintiff's breach of fiduciary duty and gross negligence claims are not barred by the Martin Act.  The Court explained that the plain language of the Martin Act grants the Attorney General investigatory and enforcement powers, but does not "expressly mention or otherwise contemplate the elimination of common-law claims."  Importantly, the Court held that the Martin Act did not create a private right of action to enforce its provisions; however, nothing in the legislative history clearly and specifically demonstrates the legislature's intent to eliminate preexisting common law claims.  The Court determined that allowing private litigants to bring common law claims for securities violations would not impair the purpose of the Martin Act since causes of action brought by both the Attorney General and private litigants further the same goal.  To hold otherwise, the Court said, would leave plaintiffs less protected than they were prior to the passage of the Martin Act. 

Footnotes

1. Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc., 2011 NY Slip Op 09162 (Ct. of App., Dec. 20, 2011).

2. The Martin Act, N.Y.GEN. BUS. LAW, Art. 23-A, § 352 et seq. (McKinney 1996), was enacted in 1921.

3. 80 A.D.3d 293 (1st Dep't 2010).

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