In RGH Liquidating Trust v. Deloitte & Touche,
LLP, 2011 WL 2471542 (N.Y. June 23, 2011), the New
York Court of Appeals held that a liquidating trust established
pursuant to a bankruptcy reorganization plan was a single
"person" within the meaning of the "single-entity
exemption" in the Securities Litigation Uniform Standards Act of
1998 ("SLUSA"). SLUSA effectively vests federal
courts with exclusive jurisdiction over most securities fraud
actions involving more than fifty plaintiffs. It provides
further that for purposes of counting the number of plaintiffs,
"a corporation, investment company, pension plan, partnership,
or other entity, shall be treated as one person or prospective
class member, but only if the entity is not established for the
purpose of participating in the action." Here, the Court
of Appeals held that the bankruptcy liquidating trust fell within
that single-entity exemption because the primary purpose of the
trust was not to pursue the litigation. For this reason, the
action brought by the trust was not subject to preemption or
removal to federal court. With this decision, the Court
clarified the scope of state court jurisdiction over securities
fraud class actions.
SLUSA provides that no state or federal court may entertain a
"covered class action" brought by a private party and
based on state statutory or common law, which alleges fraud or
manipulation in connection with the purchase or sale of a
"covered security." SLUSA defines a "covered
class action" as a "single lawsuit" or "group
of lawsuits" in which "damages are sought on behalf of
more than 50 persons or prospective class members, and questions of
law or fact common to those persons or members . . .
predominate over any questions affecting only individual persons or
members." See 28 U.S.C. §§ 77p(f)(2)(A); 78bb(f)(5)(B). As noted above,
SLUSA's "single-entity exemption" specifies that
for the purposes of counting whether there are fifty or more
persons or prospective class members, "a corporation,
investment company, pension plan, partnership, or other entity,
shall be treated as one person or prospective class member, but
only if the entity is not established for the purpose of
participating in the action." See 28 U.S.C. §§ 77p(f)(2)(C);
78bb(f)(5)(D).
RGH Liquidating Trust (the "Trust") filed suit against
Deloitte LLP and Jan Lommele, a principal of Deloitte, for
accounting fraud in New York State Supreme Court. Deloitte
moved to dismiss, arguing that the Trust represented more than
fifty claimants, thereby making its claim subject to dismissal
under SLUSA. The Trust countered that it qualified for the
single-entity exemption. The trial court agreed, holding that
the Trust was a single entity within the meaning of
SLUSA. Deloitte appealed. The Appellate Division, First Department, reversed
in part, holding that the Trust was not completely exempt from
SLUSA as a single entity because some of its claims were being
asserted on behalf multiple bondholders and not on behalf of the
estate. RGH Liquidating Trust v. Deloitte & Touche,
LLP, 71 A.D.3d 198 (1st Dep't Dec. 8,
2009). The Appellate Division, however, agreed that the trial
court properly declined to dismiss the Trust's claims for
the benefit of the of the other groups of creditors. On July
8, 2010, the Appellate Division certified a question to the New
York Court of Appeals, asking whether its modification of the trial
court's order was proper. The Court of Appeals
answered that it was not and that the order of the trial court
should be reinstated.
In reviewing the Appellate Division's decision, the Court
of Appeals concentrated on whether the Trust was established for
the "purpose of participating in the action" and thereby
was precluded from taking advantage of SLUSA's
single-entity exemption. The Court held that the "primary
purpose" of the Trust was far broader than the pursuit of
creditors' causes of action. Rather, the Trust was
created to receive trust property, assume any liabilities, and
thereafter to liquidate and distribute the trust property for the
benefit of the trust beneficiaries. The Trust was indeed
empowered to evaluate litigation claims and to maximize the value
of the Trust Property, but litigation was not its primary
purpose.
The Court of Appeals also disagreed with the Appellate
Division's conclusion that the Trust's claims for
the benefit of the bondholders, as opposed to the claims for the
benefit of the banks, the former employees and the Pension Benefit
Guarantee Corporation, should be dismissed. The Appellate
Division held that these claims were barred by SLUSA because they
were not being asserted on behalf of the Reliance bankruptcy estate
but were being asserted on behalf of the individual
bondholders. The Court of Appeals held, however, that the
bondholders' claims were property within the bankruptcy
estate, and that the Trust brought the action on behalf of the
estate for the benefit of the bondholders. Because the claims
were included within the bankruptcy estate, the Court held that
identification of the true injured party was unnecessary.
This decision of first impression in New York confirms that in
determining the scope of SLUSA preemption and the single-entity
exemption, a court should look to the primary purpose of the
plaintiff entity, and not to the identity of the true "injured
parties" on whose "behalf" the litigation was
brought.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.