United States: Lit Alerts—March 2019

Choice of Law: Texas District Court Applies New York Law to Dismiss Securities Fraud and Negligence Case

The US District Court for the Northern District of Texas dismissed claims against Jefferies, LLC (Jefferies) last month for alleged violations of the Texas Securities Act (TSA), negligent misrepresentation, and negligence after choosing to apply New York law to the plaintiffs' claims. The lawsuit arose from the bankruptcy of a Texas company for which Jefferies had written equity offering materials. The plaintiffs alleged they had relied on Jefferies' offering materials when purchasing shares of the now-bankrupt company. The plaintiffs never purchased securities from Jefferies or interacted with Jefferies in any manner.

Jefferies argued the plaintiffs could not rely on the TSA or Texas common law because Jefferies' conduct had not occurred in Texas. Jefferies prepared the offering materials in New York, where it is headquartered, and the bankrupt company, not Jefferies, distributed Jefferies' materials to the plaintiffs, a majority of whom lived in Texas. The District Court agreed that Jefferies' actions had the greatest connection to New York, and applied New York securities and negligence laws to the plaintiffs' claims. Unlike the TSA, New York securities laws do not allow a private right of action for securities fraud, and so the District Court dismissed the plaintiffs' securities fraud claims. New York negligent misrepresentation laws require privity of contract between the parties, and because there was no such contract between Jefferies and the plaintiffs, the District Court dismissed those claims. Finally, the court dismissed the other negligence claims because the plaintiffs could not show that a duty of care existed between them and Jefferies under New York law.

Insurance Contracts: Fifth Circuit Affirms Dismissal of Attempt to Interpret Subcontractor's Liability Policy to Cover Actions by Different Subcontractor

The Fifth Circuit Court of Appeals affirmed a lower court's dismissal of a claim for indemnity brought by the organizer of an undersea sonar survey operation. The organizer sought coverage from its subcontractor's insurers as an additional insured.

To complete the survey operation, the organizer engaged two subcontractors, each owning its own separate ship. One subcontractor towed a sonar array while the other followed to capture the data. During the survey, the subcontractor towing the sonar array damaged a vessel belonging to an unrelated entity. The damaged vessel's owner successfully sued the organizer and the subcontractor that towed the array for negligence. The organizer then filed a second lawsuit against the insurers of the subcontractor not involved in the accident, after those insurance carriers refused to cover the incident.

The suit turned on interpretation of the insurance contract between the defendants and their insured, as well as the insurance provisions of the contract between the organizer and the subcontractor insured by the defendants. The insurance contract provided blanket coverage to third parties as additional insureds if the defendants' insured signed a contract obligating the defendants' insured to include that third party. The insurance contract also limited coverage to incidents arising from "work" performed by the defendants' insured. The contract between the organizer and the subcontractor insured by the defendants required the subcontractor to obtain insurance covering any incidents arising from the subcontractor's services.

The court ruled that the insurance contract did not cover the incident because the "work" the subcontractor performed was to provide the use of its ship, which was not involved in the collision, and neither contract contemplated that the subcontractor would be obligated to insure against an accident separately caused by another ship.

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