Summary
stating that when deciding a motion to dismiss for lack of jurisdiction, a court may consider materials outside the pleadings, but must credit plaintiffs' averments of jurisdictional facts as true" (citing Hsin Ten Enter. USA, Inc. v. Clark Enters., 138 F. Supp. 2d 449, 452 (S.D.N.Y. 2000); Metropolitan Life Ins. Co. v. Robertson-Ceco Corp., 84 F.3d 560, 567 (2d Cir. 1996))
Summary of this case from Ye Olde Time Keepers, Inc. v. C.R. Martin Auctioneers, Inc.Opinion
Master File No. 1:11–2275 (SAS).
2012-03-6
In re STILLWATER CAPITAL PARTNERS INC. LITIGATION. This document relates to: 11 Civ. 2737.
Frederic Scott Fox, Sr., Esq., Donald R. Hall, Jr., Esq., Hae Sung Nam, Esq., Irina Kobylevsky, Esq., Kaplan Fox & Kilsheimer LLP, Gregory Bradley Linkh, Esq., Lee Albert, Esq., Marvin Lawrence Frank, Esq., Murray Frank LLP, New York, NY, for Plaintiffs. Christopher Patrick Greeley, Esq., Herrick, Feinstein LLP, New York, NY, for Defendants SCP, Doueck, and Rudy.
Frederic Scott Fox, Sr., Esq., Donald R. Hall, Jr., Esq., Hae Sung Nam, Esq., Irina Kobylevsky, Esq., Kaplan Fox & Kilsheimer LLP, Gregory Bradley Linkh, Esq., Lee Albert, Esq., Marvin Lawrence Frank, Esq., Murray Frank LLP, New York, NY, for Plaintiffs. Christopher Patrick Greeley, Esq., Herrick, Feinstein LLP, New York, NY, for Defendants SCP, Doueck, and Rudy.
Alex M. Weingarten, Esq., Ethan J. Brown, Esq., Weingarten Brown LLP, Los Angeles, CA, Stephen Z. Starr, Esq., Vildan Erturk Starr, Esq., Starr & Starr, PLLC, New York, NY, for Defendant Gerova.
Ethan J. Brown, Esq., Weingarten Brown LLP, Los Angeles, CA, for Defendant Bianco.
Joshua Samuel Sohn, Esq, DLA Piper U.S. LLP, New York, NY, for Defendant Hirst.
Edward Patrick Boyle, Esq., Lawrence Henry Cooke, II, Esq., Venable LLP, New York, NY, for Defendant Net Five.
Hlavsa, Ft. Lauderdale, FL, pro se.
OPINION AND ORDER
SHIRA A. SCHEINDLIN, District Judge:
I. INTRODUCTION
This consolidated putative class action, which concerns only state law claims, is part of a larger multi-district litigation.
It arises out of plaintiffs' investments in the various Stillwater Funds
Plaintiffs allege federal claims in related consolidated class actions, however those claims are not addressed by these motions to dismiss.
Plaintiffs list these funds as: 1) Stillwater Asset Backed Fund, LP; 2) Stillwater Asset Backed Fund II, LP; 3) Stillwater WPB Venture Partners I, LP; 4) Stillwater WPB Venture Partners II, LP; 5) Stillwater Market Neutral Fund, LP; 6) Stillwater Market Neutral Fund II, LP; 7) Stillwater Matrix Fund, LP; 8) Stillwater Real Estate Partners Fund, LP; 9) Stillwater Advantage–20 Fund II, LP; 10) Stillwater Asset Backed Offshore Fund, Ltd.; 11) Stillwater Asset Backed Fund SPV; 12) SABF II Onshore SPV; 13) Stillwater Market Neutral Fund Ltd.; 14) Stillwater Loan Opportunities Fund, LLC; 15) Stillwater Loan Opportunities Fund, SPC; and 16) Stillwater Market Neutral Fund III SPC. See Amended Complaint (“Am. Compl.”) ¶ 1, n. 1.
merger agreement with Gerova Financial Group, Ltd. (“Gerova”). Plaintiffs' amended complaint alleges, inter alia, breach of fiduciary duty; aiding and abetting breach of fiduciary duty; and breach of contract claims against SCP, Gerova, Net Five Holdings, LLC (“Net Five”), and various officers and directors of those companies. Defendants now move to dismiss all state law claims. Defendants advance three primary arguments in their motions to dismiss:
Defendant Stillwater is comprised of Stillwater Capital Partners, Inc. (“SCP, Inc.”) and Stillwater Capital Partners, LLC (“SCP, LLC”). I refer to them collectively as “SCP.”
first, that the breach of fiduciary duty claims are derivative and therefore plaintiffs lack standing to bring them directly; second, that the claims are precluded by the Securities Litigation Uniform Standards Act (“SLUSA”); and third, that a corporation does not owe a fiduciary duty to its shareholders. For the following reasons the motions of SCP, Gerova, and the individual SCP and Gerova defendants are granted in part and denied in part, and the claim against Net Five is dismissed.
Defendants initially argued that the plaintiffs' claims were preempted by the Martin Act. However, since the motions were filed, the New York Court of Appeals decided Assured Guar., (UK) Ltd. v. J.P. Morgan Inv. Mgmt., 18 N.Y.3d 341 (2011), which held that such state law claims are not preempted by the Martin Act. Additionally, some of the defendants have now withdrawn their Martin Act preemption arguments.
II. BACKGROUND
Unless otherwise noted, all facts are drawn from the Amended Complaint and are presumed true for the purposes of this motion.
A. Plaintiffs
The proposed class consists of those SCP investors who received restricted, unregistered Gerova shares as part of the SCP/Gerova merger
and SCP investors who sought redemption of their SCP funds, but were not paid in full prior to the SCP/Gerova merger.
See Am. Compl. ¶ 1.
See id.
B. Defendants
There are ten named defendants in this action. SCP, Inc., is a New York corporation that acts as investment manager for the Stillwater Funds,
and SCP, LLC, is a Delaware limited liability company that manages the business affairs of the Stillwater Funds.
See id. ¶ 18.
Jack Doueck is a principal of SCP and sits on an investment committee that manages the Stillwater Funds under Gerova's control.
See id. ¶ 19.
He became a director of Gerova as part of the merger with SCP.
See id. ¶ 21.
Richard Rudy is a principal of SCP and sits on the investment committee with Doueck.
See id.
Plaintiffs allege the same six breach of fiduciary duty claims against each of these defendants: (a) imprudently investing assets and failing to properly value them; (b) failing to sell assets in a timely manner; (c) failing to pay redemptions; (d) failing to perform due diligence on Gerova prior to the merger; (e) entering into the Gerova agreement whereby SCP directors received a lucrative contract at plaintiffs' expense; and (f) failing to submit audits to Gerova so the shares could be registered (Count I(a-f)).
See id. ¶ 22.
See id. ¶ 87. The Amended Complaint lists each of these claims under Count I, however because the claims require different analyses, they are assigned individual identifiers for the purposes of this opinion.
Gerova, was a “blank check company” formerly known as Asia Special Situation Acquisition Corporation, which formed in March 2007.
The name was officially changed to Gerova in connection with its merger with SCP in 2009.
See id. ¶ 17.
Gerova's principal offices are in Hamilton, Bermuda.
Id. A blank check company is “a development stage company that has no specific business plan or purpose or has indicated its business plan is to engage in a merger or acquisition with an unidentified company, or companies, other entity or person.” 17 C.F.R. § 230.419.
Gary Hirst was a founding director of Gerova and was appointed its president in October 2007; he resigned on February 10, 2011.
See Am. Compl. ¶ 17.
Michael Hlavsa has served as Chief Financial Officer (“CFO”) and a director of Gerova since March 2007.
See id. ¶ 24.
Keith Laslop was a Gerova director from May 2008 until his resignation on February 10, 2011. He also served as Gerova's Chief Operating Officer (“COO”) during part of that time.
See id. ¶ 25. Hlavsa is proceeding pro se.
Joseph Bianco served as Gerova's Chief Executive Officer (“CEO”) from at least April 17, 2010 until his resignation on February 10, 2011.
See id. ¶ 26. Laslop has failed to enter an appearance.
Plaintiffs allege the same three breach of fiduciary duty claims against each of these defendants: (a) failing to register plaintiffs' shares; (b) allowing its assets to deteriorate; and (c) transferring substantial assets to Net Five (Count II(a-c)).
See id. ¶ 27.
Plaintiffs also allege an aiding and abetting breach of fiduciary duty claim against Gerova, Hirst and Hlavsa (Count III), and a breach of contract claim against Gerova (Count V).
See id. ¶ 91. The Amended Complaint lists each of these claims under Count II, however, as with Count I, the claims require different analyses, and are therefore assigned individual identifiers for the purposes of this opinion.
Net Five was formed as a real estate joint venture between Gerova and two other non-parties; it is based in Florida.
Plaintiffs allege an aiding and abetting breach of fiduciary duty claim against Net Five (Count IV).
See id. ¶ 28.
C. Stillwater Funds Management and the Gerova Merger
Plaintiffs were investors in the Stillwater Funds, which were managed by SCP and contained “overvalued troubled assets.”
As investors sought to redeem their funds, the Stillwater Funds experienced liquidity issues and SCP was unable to pay out the redemptions.
Id. ¶ 3.
In an attempt to solve the illiquidity of their assets, SCP sought a merger with Gerova.
See id.
See id. ¶¶ 39–40.
As part of the merger agreement, Gerova acquired all of SCP's assets and liabilities.
The investor plaintiffs received “restricted convertible Preferred Stock of Gerova”
See id. ¶ 40.
and those who sought redemptions were to be paid by Gerova.
Consolidated Plaintiffs' Omnibus Memorandum of Law in Opposition to Defendants' Motions to Dismiss the Amended Complaint (“Pl. Opp.”) at 1.
As part of the merger, SCP received 266,667 Gerova ordinary shares, approximately $12 million in cash,
See Am. Comply ¶ 5.
and the SCP directors—including Doueck and Rudy—received $24 million in unpaid management fees
See id. ¶ 42.
and quarterly management fees going forward.
See id. ¶ 45.
Doueck became a Gerova director as part of the merger,
See id.
and both he and Rudy sat on a three-person “investment committee”; the third person was appointed by Gerova.
See id. ¶ 44.
Plaintiffs allege that this merger was not only ill-advised, but that Doueck entered into it “for his own benefit, without even performing any due diligence”
See id. ¶ 45, n7.
and that it was done at plaintiffs' expense.
Id. ¶ 47.
See id. ¶ 87.
D. Gerova Management
Plaintiffs fared no better after the merger. Even though the Amended Registration Rights Agreement (“Am. RRA”) required Gerova to register Plaintiffs' shares, the shares were never registered
and plaintiffs' redemption requests were not honored.
See id. ¶ 49.
Because of this, plaintiffs argue that they have been forced to “hold virtually worthless restricted shares,” which have “declined more than 77 percent” in value.
See id. ¶¶ 13–14.
Plaintiffs allege that life insurance settlement policies and corporate loans defaulted as a result of Gerova's failure to pay premiums,
Id. ¶ 60.
adding to the devaluation of Gerova assets. On May 26, 2010, Gerova formed Net Five as part of a real estate joint venture with two non-parties.
See id. ¶ 62.
Under that agreement, Gerova transferred “all of the owned real estate properties and real estate loan assets acquired from the Stillwater Funds” to Net Five.
See id. ¶ 67.
Gerova received a 49 percent equity interest in the joint venture.
Id. ¶ 68.
See id. ¶ 67.
Between January 20, 2010 and February 15, 2011, Gerova experienced high management turnover, including three different CEOs during that time.
On February 24, 2011, the New York Stock Exchange (“NYSE”) ceased trading of Gerova stock and Gerova securities were delisted on April 18, 2011.
See id. ¶¶ 71, 72, 80, 81.
Gerova terminated its stock registration on June 15, 2011.
See id. ¶ 83.
SCP and Gerova are in negotiations to unwind the SCP/Gerova merger,
See id.
however plaintiffs assert that this will not allow SCP to recoup all the assets that it originally contributed to Gerova.
See id. ¶ 8.
III. LEGAL STANDARDS
A. Motion to Dismiss
In deciding a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the court “accept[s] all factual allegations in the complaint as true, and draw[s] all reasonable inferences in the plaintiff's favor.”
The court evaluates the sufficiency of the complaint under the “two-pronged approach” advocated by the Supreme Court in Ashcroft v. Iqbal.
Wilson v. Merrill Lynch & Co., 671 F.3d 120, 128–29 (2d Cir.2011) (quotation marks omitted).
First, “[a] court ‘can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth.’ ”
.556 U.S. 662, 129 S.Ct. 1937, 1950, 173 L.Ed.2d 868 (2009).
“Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice” to withstand a motion to dismiss.
Hayden v. Paterson, 594 F.3d 150, 161 (2d Cir.2010) (quoting Iqbal, 129 S.Ct. at 1950).Accord Ruston v. Town Bd. for Town of Skaneateles, 610 F.3d 55, 59 (2d Cir.2010).
Second, “[w]hen there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief.”
Iqbal, 129 S.Ct. at 1949 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
To survive a Rule 12(b)(6) motion to dismiss, the allegations in the complaint must meet a standard of “plausibility.”
Id. at 1950,Accord Kiobel v. Royal Dutch Petroleum Co., 621 F.3d 111, 124 (2d Cir.2010).
A claim is facially plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”
Twombly, 550 U.S. at 564, 127 S.Ct. 1955.
Plausibility “is not akin to a probability requirement;” rather, plausibility requires “more than a sheer possibility that a defendant has acted unlawfully.”
Iqbal, 129 S.Ct. at 1949 (quotation marks omitted).
Id. (quotation marks omitted).
“In considering a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6), a district court may consider the facts alleged in the complaint, documents attached to the complaint as exhibits, and documents incorporated by reference in the complaint.”
However, the court may also consider a document that is not incorporated by reference, “where the complaint ‘relies heavily upon its terms and effect,’ thereby rendering the document ‘integral’ to the complaint.”
DiFolco v. MSNBC Cable LLC, 622 F.3d 104, 111 (2d Cir.2010) (citing Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir.2002)).
The court may also consider “legally required public disclosure documents filed with the SEC.”
Id. (quoting Mangiafico v. Blumenthal, 471 F.3d 391, 398 (2d Cir.2006)). Accord Global Network Commc'ns, Inc. v. City of N.Y., 458 F.3d 150, 156 (2d Cir.2006).
ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir.2007).
IV. APPLICABLE LAW
A. Personal Jurisdiction
On a motion under Rule 12(b)(2), when the issue of personal jurisdiction “is decided initially on the pleadings and without discovery, the plaintiff need show only a prima facie case.”
Plaintiffs “can make this showing through [their] own affidavits and supporting materials containing an averment of facts that, if credited ... would suffice to establish jurisdiction over the defendant.”
Volkswagenwerk Aktiengesellschaft v. Beech Aircraft Corp., 751 F.2d 117, 120 (2d Cir.1984). Accord Tamam v. Fransabank Sal, 677 F.Supp.2d 720, 725 (S.D.N.Y.2010) (“As no discovery has yet taken place, to survive a motion to dismiss the plaintiff must plead factual allegations [that] constitute a prima facie showing of jurisdiction.”) (quotation marks omitted).
Thus, a court may consider materials outside the pleadings,
Whitaker v. American Telecasting Inc., 261 F.3d 196, 208 (2d Cir.2001) (quotation marks omitted).
but must credit plaintiffs' averments of jurisdictional facts as true,
See Hsin Ten Enter. USA, Inc. v. Clark Enters., 138 F.Supp.2d 449, 452 (S.D.N.Y.2000).
“[A]ll allegations are construed in the light most favorable to the plaintiff and doubts are resolved in the plaintiff's favor, notwithstanding a controverting presentation by the moving party.”
See Metropolitan Life Ins. Co. v. Robertson–Ceco Corp., 84 F.3d 560, 567 (2d Cir.1996).
Nonetheless, where a “defendant rebuts plaintiffs' unsupported allegations with direct, highly specific, testimonial evidence regarding a fact essential to jurisdiction—and plaintiffs do not counter that evidence—the allegation may be deemed refuted.”
A.I. Trade Fin., Inc. v. Petra Bank, 989 F.2d 76, 79–80 (2d Cir.1993). Accord Whitaker, 261 F.3d at 208.
Schenker v. Assicurazioni Genereali S.p.A., Consol., No. 98 Civ. 9186, 2002 WL 1560788, at *3 (S.D.N.Y. July 15, 2002).
1. Specific Jurisdiction Under CPLR 302(a)(1)
Under section 302(a)(1) a court may exercise specific jurisdiction over a non-domiciliary, provided that two conditions are met: the non-domiciliary defendant transacts business within New York and the claim against the non-domiciliary defendant arises directly out of this activity.
Section 302(a)(1) “is a single-act statute requiring but one transaction—albeit a purposeful transaction—to confer jurisdiction in New York.”
See CutCo Indus., Inc. v. Naughton, 806 F.2d 361, 365 (2d Cir.1986).
Grand River Enters. Six Nations, Ltd. v. Pryor, 425 F.3d 158, 166 (2d Cir.2005). Accord Deutsche Bank Secs., Inc. v. Montana Bd. of Invs., 7 N.Y.3d 65, 71, 818 N.Y.S.2d 164, 850 N.E.2d 1140 (2006) (This is a “single act statute [and] ... proof of one transaction in New York is sufficient to invoke jurisdiction, even though the defendant never enters New York, so long as the defendant's activities here were purposeful and there is a substantial relationship between the transaction and the claim asserted.”) (quotation marks omitted).
“New York courts define ‘transact[ing] business' as purposeful activity—‘some act by which the defendant purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws,’ ”
There is no definitive test to determine if a defendant has purposefully availed itself of the privilege of conducting activities in New York. Rather, the totality of the defendant's contacts must be reviewed to determine whether jurisdiction is proper.
Best Van Lines, Inc. v. Walker, 490 F.3d 239, 246 (2d Cir.2007) (quoting McKee Elec. Co. v. Rauland–Borg Corp., 20 N.Y.2d 377, 382, 283 N.Y.S.2d 34, 229 N.E.2d 604 (1967)).
See CutCo Indus., 806 F.2d at 368.
B. Standing
SCP, Gerova, and the directors and officers of SCP and Gerova argue that plaintiffs lack standing to assert direct claims for breach of fiduciary duties, aiding and abetting breach of fiduciary duties, and breach of contract, because any injuries were sustained by the Funds, the only entities that may bring suit.
See Stillwater Mem., at 10–11; Gerova's Memorandum of Law in Support of Its Motion to Dismiss Amended Complaint (“Gerova Mem,”), at 10–12.
Under New York law,
a claim is direct if “ ‘the wrongdoer has breached a duty owed to the shareholder independent of any duty owing to the corporation wronged.’ ”
SCP is comprised of SCP, LLC, a Delaware limited liability company, and SCP, Inc., a New York corporation. However, SCP has characterized itself as “a New York based registered investment advisor,” and has made no statement that Delaware law should apply to the claims against it. Stillwater's Memorandum of Law in Support of Its Motion to Dismiss (“Stillwater Mem.”), at 2. As such, the court will apply New York law. See, e.g., Schwimmer v. Allstate Ins. Co., 176 F.3d 648, 650 (2d Cir.1999) (“Allstate ... waived its [choice of law] argument by failing to bring to the attention of the district court the potential applicability of [another jurisdiction's] law”). Accord Vacold LLC v. Cerami, 545 F.3d 114, 122–23 (2d Cir.2008).
“Allegations of mismanagement or diversion of assets by officers or directors to their own enrichment, without more, plead a wrong to the corporation only, for which a shareholder may sue derivatively but not individually.”
Anwar v. Fairfield Greenwich Ltd., 728 F.Supp.2d 372, 401 (S.D.N.Y.2010) (quoting Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt., 376 F.Supp.2d 385, 409 (S.D.N.Y.2005)).
Furthermore, “New York courts have consistently held that diminution in the value of shares is quintessentially a derivative claim.”
Abrams v. Donati, 66 N.Y.2d 951, 953, 498 N.Y.S.2d 782, 489 N.E.2d 751 (1985) (“For a wrong against a corporation a shareholder has no individual cause of action, though he loses the value of his investment or incurs personal liability in an effort to maintain the solvency of the corporation.”). Accord Debussy v. Deutsche Bank AG, No. 05 Civ. 5550, 2006 WL 800956, at *3 (S.D.N.Y. Mar. 29, 2006) (“When the duty implicated in a breach of duty claim is the normal duty to manage the affairs of the corporation ... [t]hat duty is owed to the corporation and not separately or independently to the stockholders. Therefore, the injury flowing from a claim of mismanagement ... is a wrong to the corporation.”) (quotation marks omitted) (alteration in original).
Even though decreased share value harms the individual shareholder, it “is said to derive from the harm suffered principally by the corporation and only collaterally to shareholders, and thus is derivative in nature.”
Higgins v. NYSE, Inc., 10 Misc.3d 257, 806 N.Y.S.2d 339, 349 (Sup.Ct.N.Y.Co.2005) (citing Paradiso & DiMenna, Inc. v. DiMenna, 232 A.D.2d 257, 649 N.Y.S.2d 126, 127 (1st Dep't 1996) (a conversion of corporate assets case)).
Id. (citing Paradiso & DiMenna, 649 N.Y.S.2d at 127) (emphasis in original).
C. SLUSA Preclusion
“SLUSA is a statute of preclusion, rather than preemption,” because it does not “displace state law with federal law. Rather, SLUSA renders nonactionable[,] state claims brought by plaintiffs as part of a covered class action because such claims cannot be litigated in state court or federal court.” Romano v. Kazacos, 609 F.3d 512, 519, n. 2 (2d Cir.2010) (emphasis in original) (citing Kircher v. Putnam Funds Trust, 547 U.S. 633, 637, n. 1, 126 S.Ct. 2145, 165 L.Ed.2d 92 (2006)).
“SLUSA was enacted in 1998 to prevent class action plaintiffs from circumventing the heightened pleading requirements under the [Private Securities Litigation Reform Act] through artful pleading.”
In re Beacon Assoc. Litig., 745 F.Supp.2d 386, 429 (S.D.N.Y.2010) (citing Ring v. AXA Fin., Inc., 483 F.3d 95, 97–98 (2d Cir.2007)).
No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging (A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or (B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.
A complaint triggers SLUSA when it alleges “ ‘(1) an explicit claim of fraud or misrepresentation (e.g., common law fraud, negligent misrepresentations, or fraudulent inducement), or (2) other garden-variety state law claims that sound in fraud.’ ”
“ ‘A claim sounds in fraud when, although not an essential element of the claim, the plaintiff alleges fraud as an integral part of the conduct giving rise to the claim.’ ”
In re Merkin, 817 F.Supp.2d 346, 358–59 (S.D.N.Y.2011) (quoting Xpedior Creditor Trust v. Credit Suisse First Boston (USA) Inc., 341 F.Supp.2d 258, 261 (S.D.N.Y.2004)).
Id. (quoting Xpedior, 341 F.Supp.2d at 269).
Courts “ ‘look beyond the face of the complaint to analyze the substance of the allegations made,’ ”
to identify plaintiffs who attempt to avoid SLUSA preclusion through artful pleading. Therefore, “[r]egardless of the words used by plaintiffs in their complaints and regardless of the labels they paste on each claim, the question is whether a material misstatement or omission in connection with the purchase or sale of a covered security is a necessary component of the claim.”
Id. (quoting Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25, 34 (2d Cir.2005), rev'd on other grounds, 547 U.S. 71, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006)).
Xpedior, 341 F.Supp.2d at 268 (emphasis in original).
To qualify as a covered class action, the suit must be one in which “damages are sought on behalf of more than fifty persons or prospective class members.”
Additionally, plaintiffs must allege a misrepresentation or omission of a material fact in connection with a covered security.
A “ ‘covered security is one traded nationally and listed on a regulated national exchange or issued by an investment company that is registered, or files registration statements, under the Investment Company Act of 1940.’ ”
See id. § 78bb(f)(1)(A).
The Supreme Court has shown a preference for “interpret [ing] the phrase ‘in connection with’ broadly.”
Romano, 609 F.3d at 520, n. 3 (quoting 15 U.S.C. § 77r(b)).
In determining whether the “in connection with” requirement is met, a court looks at whether the covered securities are “at the heart of th[e] case.”
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 88–89, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006) (holding that SLUSA preempted claims alleged by holders of securities as well as by purchasers and sellers).
Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Secs., LLC, 750 F.Supp.2d 450, 455 (S.D.N.Y.2010). Accord Anwar, 728 F.Supp.2d at 399, n. 6.
D. Breach of Fiduciary Duty Claims
Under New York law, “[t]he elements of a claim for breach of a fiduciary obligation are: (i) the existence of a fiduciary duty; (ii) a knowing breach of that duty; and (iii) damages resulting therefrom.”
Generally, “ ‘a corporation does not owe fiduciary duties to its members or shareholders,’ ”
Johnson v. Nextel Commc'ns, Inc., 660 F.3d 131, 138 (2d Cir.2011) (citing Barrett v. Freifeld, 64 A.D.3d 736, 883 N.Y.S.2d 305, 308 (2d Dep't 2009)).
because recognizing such a duty “would lead to the confounding possibility that a shareholder of a corporation could bring a derivative action on behalf of the corporation against the corporation itself.”
Peacock v. Herald Square Loft Corp., 67 A.D.3d 442, 889 N.Y.S.2d 22, 23 (1st Dep't 2009) (quoting Hyman v. NYSE, Inc., 46 A.D.3d 335, 848 N.Y.S.2d 51, 53 (1st Dep't 2007)). Accord Gates v. BEA Assocs., No. 88 Civ. 6522, 1990 WL 180137, at *6 (S.D.N.Y. Nov. 13, 1990).
In New York, a director is required to “perform his duties ... in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances”
Hyman, 848 N.Y.S.2d at 53.
and owes this “obligation to [the] corporation and its shareholders.”
Hanson Trust PLC v. ML SCM Acquisition, Inc., 781 F.2d 264, 273 (2d Cir.1986). Accord RSL Commc'ns PLC ex rel. Jervis v. Bildirici, No. 04 Civ. 5217, 2006 WL 2689869, at *4 (S.D.N.Y. Sept. 14, 2006).
Although Gerova is a Bermuda corporation, the analysis of the breach of fiduciary duty claims against Gerova is substantively the same under Bermuda law—which “follows English law”
Tyco Intern. Ltd. v. Walsh, 455 Fed.Appx. 55, 57, n. 2 (2d Cir.2012).
“In the absence of substantive difference ... a New York court will dispense with choice of law analysis; and if New York law is among the relevant choices, New York courts are free to apply it.”
See City of Sterling Heights Police and Fire Ret. Syst. v. Abbey Nat'l, PLC, 423 F.Supp.2d 348, 364 (S.D.N.Y.2006) (stating that under English law corporations do not owe a fiduciary duty to shareholders); Tyco, 455 Fed.Appx. at 57 (“ ‘It is well established that ... directors owe the company a fiduciary duty to act bona fide in the company's interest, and that ‘the company’ in this context is understood to mean the shareholders' ”) (quoting Miller v. Bain [2002] 1 B.C.L.C 266(Ch.), ¶ 67, 2001 WL 1743253).
International Bus. Machs. Corp. v. Liberty Mut. Ins. Co., 363 F.3d 137, 143 (2d Cir.2004).
E. Aiding and Abetting Breach of Fiduciary Duties Claims
“A claim for aiding and abetting a breach of fiduciary duty [under New York law] requires: (1) a breach by a fiduciary of obligations to another, (2) that the defendant knowingly induced or participated in the breach, and (3) that plaintiff suffered damage as a result of the breach.”
Kaufman v. Cohen, 307 A.D.2d 113, 760 N.Y.S.2d 157, 169 (1st Dep't 2003). Accord In re Sharp Int'l Corp., 403 F.3d 43, 49 (2d Cir.2005).
F. Breach of Contract Claim
“In order to state a claim of breach of contract, the complaint must allege: (i) the formation of a contract between the parties; (ii) performance by the plaintiff; (iii) failure of defendant to perform; and (iv) damages.”
“Under New York law, a party's performance under a contract is excused where the other party has substantially failed to perform its side of the bargain or, synonymously, where that party has committed a material breach.”
Johnson, 660 F.3d at 142 (citing Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168, 177 (2d Cir.2004)).
However, “[a] party cannot ‘elect to continue with the contract, continue to receive benefits from it, and thereafter bring an action for rescission or total breach.’ ”
Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171, 186 (2d Cir.2007).
ESPN, Inc. v. Office of the Comm'r of Baseball, 76 F.Supp.2d 383, 392 (S.D.N.Y.1999) (quoting Macfarlane & Assocs. v. Noxell Corp., No. 93 Civ. 5192, 1994 WL 369324, at *4 (S.D.N.Y. July 13, 1994)).
V. DISCUSSION
A. Personal Jurisdiction over Hirst
Plaintiffs assert personal jurisdiction over Hirst
citing his position as president of Gerova during the time of the alleged breaches of fiduciary duty.
Plaintiffs assert that the court has both general and specific jurisdiction over Hirst, See Pl. Opp. at 28, n. 34. Because the facts are not clear enough to support a finding of specific jurisdiction at this point, I do not reach the general jurisdiction analysis.
Hirst does not dispute that he was involved in decisions regarding the SCP/Gerova merger and the he attended two meetings in New York regarding the merger, but presents evidence that undermines plaintiffs' allegations of jurisdiction. Hirst maintains—and plaintiffs do not contest—that he has no real property in New York, does not maintain a bank account in New York, and has never been employed or compensated by a New York corporation.
See id. at 28–29, n. 34.
However, plaintiffs assert that Hirst, as Gerova's president at the time of SCP/Gerova merger, had sufficient ties to New York by negotiating the merger agreement in New York with SCP, a New York corporation.
See Declaration of Gary T. Hirst ¶¶ 4–6.
See Pl. Opp. at 28–29, n. 34.
Construing the allegations in the light most favorable to the plaintiffs and resolving all doubt in plaintiffs' favor, I conclude that plaintiffs have provided sufficient evidence to demonstrate a prima facie case of specific personal jurisdiction over Hirst based on his involvement in the SCP/Gerova merger. However, Hirst's assertions undermine plaintiffs' allegations such that it would be premature to determine conclusively that personal jurisdiction does, in fact, exist. Therefore, I conclude that limited discovery into the issue of personal jurisdiction over Hirst is appropriate.
See Frontera Res. Azerbaijan Corp. v. State Oil Co. of Azerbaijan, 582 F.3d 393, 401 (2d Cir.2009) (stating that “[a] district court has wide latitude to determine the scope of discovery,” but noting that where a plaintiff has not made a prima facie case for jurisdiction, courts typically deny jurisdictional discovery) (quotation marks omitted).
B. Standing
Count I(a-f) concerns plaintiffs' breach of fiduciary claims against SCP and the SCP directors.
Plaintiffs have adequately pled the existence of a fiduciary duty, knowing breach of that duty, and damages arising therefrom. However, under New York law, two of these claims are derivative and therefore plaintiffs lack standing to bring them directly. Count I(a), failure to properly invest and value the assets is “ ‘a classic claim of fund mismanagement that belongs to the Fund, and is therefore derivative.’ ”
See Am. Compl. ¶ 87.
Similarly, Count I(b), the alleged failure to sell the assets in a timely manner, is also a mismanagement claim that belongs to the Fund and not to plaintiffs individually.
In re Optimal U.S. Litig., 813 F.Supp.2d 351, 379 (S.D.N.Y.2011) (quoting San Diego Cnty. Emps. Ret. Ass'n v. Maounis, 749 F.Supp.2d 104, 127 (S.D.N.Y.2010)).
Count II(b-c) alleges the following breach of fiduciary duty claims against the Gerova officers and directors (Doueck, Bianco, Hirst, Hlavsa, and Laslop): allowing its assets to deteriorate and transferring substantial assets to Net Five.
These mismanagement claims are derivative in nature and “ ‘[d]erivative claims against corporate directors belong to the corporation itself.’ ”
See Am. Compl. ¶ 91.
Because plaintiffs lack standing to pursue these claims, they are dismissed.
Marx v. Akers, 88 N.Y.2d 189, 193, 644 N.Y.S.2d 121, 666 N.E.2d 1034 (1996) (quoting Auerbach v. Bennett, 47 N.Y.2d 619, 631, 419 N.Y.S.2d 920, 393 N.E.2d 994 (1979)).
Defendant Laslop has yet to appear in this action, but for the reasons stated above, Counts 11(b) and. 11(c) as alleged against him are dismissed.
C. SLUSA
Count I(d-f), which alleges that SCP breached its fiduciary duty regarding the merger agreement with Gerova, is precluded by SLUSA and must be dismissed.
First, it is undisputed that Plaintiffs are a “covered class.” Second, the shares that plaintiffs received as part of the SCP/Gerova merger were not listed on a national exchange or traded nationally, however, they were “issued by” a registered investment company, and therefore qualify as covered securities.
Even if Count I(d-f) was not precluded by SLUSA it would be dismissed, because it involves derivative claims that plaintiffs have incorrectly pled as direct.
Even though the Amended Complaint expressly disclaims that it sounds in fraud,
See15 U.S.C. § 77r(b) (“A security is a covered security if such security is a security issued by an investment company that is registered, or that has filed a registration statement, under the Investment Company Act of 1940.”).
plaintiffs' complaint rests on the fact that the merger benefitted SCP to the plaintiffs' detriment. The merger required approval by at least fifty percent of the domestic SCP investors,
See Am. Compl. ¶ 84 (“Plaintiffs expressly exclude and disclaim any allegation that could be construed as alleging or sounding in fraud”).
which was obtained. Unless plaintiffs were misled by misrepresentations or by material omissions, it is impossible to understand why they would approve a merger that provided such lucrative management fees at plaintiffs' expense. Because of this, a material misrepresentation or omission in connection with the merger is a “necessary component” of plaintiffs' claim
The plaintiffs initial complaint alleged this breach as “encouraging and inducing the Class's approval of the Stillwater Transactions,” Complaint ¶ 81. Furthermore, the Amended Complaint relies on a research report issued by Dalrymple Finance LLC (“Dalrymple Report”), which alleged that the SCP assets were “likely impaired and overvalued, and that this information was being hidden from investors to allow Stillwater to collect fees based on inflated asset values.” Am. Compl. ¶ 77. While plaintiffs do not explicitly state that approval was required, they rely on the Dalrymple Report as evidence of the breaches of fiduciary duty, and the Dalrymple Report alleged that “information was being hidden from investors.” Id. Furthermore, the proxy statement was included as an exhibit attached to one of plaintiffs' counsel's declarations in a related case under the same MDL. See Exhibit 1 to Declaration of Jonathan Horne, Plaintiffs' Counsel, In Opposition to Defendants' Motions to Dismiss (No. 11 Civ. 07107, Docket No. 111).
and such a claim is precluded by SLUSA.
Xpedior, 341 F.Supp.2d at 268 (emphasis in original).
Count III alleges that Gerova and its officers aided and abetted SCP's breaches of fiduciary duty through their direct participation in the SCP/Gerova. merger and “substantially assisted” the breaches by: negotiating the merger terms; acquiring the assets and liabilities of SCP even though they knew SCP had not performed due diligence; and agreeing to pay SCP large management fees.
Because this claim is predicated on the same facts as the related breach of fiduciary duty claim alleged against SCP (Count I(e)), it is also precluded by SLUSA.
See Am. Compl. ¶ 97.
See e.g., In re Beacon Assoc. Litig., 745 F.Supp.2d at 430–31 (holding that SLUSA precluded breach of fiduciary duty claims and related aiding and abetting claims in connection with the Madoff affair); Newman v. Family Mgmt. Corp., 748 F.Supp.2d 299, 313 (S.D.N.Y.2010) (same); In re Merkin, 2011 WL 4435873, at *12 (same).
Count V, plaintiffs' breach of contract claim against Gerova, is not precluded by SLUSA as defendants suggest. The Am. RRA was entered into as part of the SCP/Gerova merger and was the contract governing the shares plaintiffs received from the merger.
As discussed previously, the plaintiffs are a “covered class” and the Gerova shares at issue in the Am. RRA are “covered securities,” because they were “ ‘issued by an investment company that [was] registered, or file[d] registration statements, under the Investment Company Act of 1940.’ ”
See Am. Compl. ¶ 50.
Romano, 609 F.3d at 520, n. 3 (quoting 15 U.S.C. § 77r(b)).
However, “[b]reaches of contract generally fall outside the scope of the securities laws,”
because failing “ ‘to carry out a promise made in connection with a securities transaction ... does not [constitute fraud] unless, when the promise was made, the defendant secretly intended not to perform or knew that he could not perform.’ ”
Capital Mgmt. Select Fund, Ltd. v. Bennett, 670 F.3d 194, 204–05 (2d Cir.2012).
Even though breach of contract does not require fraud as a necessary component, contract claims that are an integral part of an alleged fraudulent scheme may be precluded by SLUSA,
Id. (discussing fraud within the context of Rule 10b–5 actions) (quoting Gurary v. Winehouse, 235 F.3d 792, 801 (2d Cir.2000)).
but plaintiffs do not allege, and the pleading does not support, any misrepresentation or omission of material fact regarding the Am. RRA. Without such fraudulent conduct, the breach of contract claim is not precluded by SLUSA.
See, e.g., Backus v. Connecticut Cmty. Bank, N.A., No. 09 Civ. 1256, 2009 WL 5184360, at *11 (D.Conn. Dec. 23, 2009).
D. Breach of Fiduciary Duty
Count II(a-c) against Gerova alleges breach of its fiduciary duty by: (a) failing to register plaintiffs' shares; (b) allowing its assets to deteriorate; and (c) transferring substantial assets to Net Five. Plaintiffs claim that Gerova owed them a fiduciary duty because plaintiffs' interests were “directly and disproportionately tied to [the SCP/Gerova] assets,”
but cite no case law to support this proposition. This conclusory argument, without more is not sufficient to survive a motion to dismiss.
Pl. Opp. at 23.
Courts have held that corporate directors owe a fiduciary duty to shareholders where there exists a “special relationship,” such as “holding themselves out as agents”
or when they are “shareholder[s], officer [s], and director[s] of a closely held corporation,”
Feiner Family Trust v. VBI Corp., No. 07 Civ.1914, 2007 WL 2615448, at *7 (S.D.N.Y. Sept. 11, 2007) (quotation marks omitted) (applying English law).
but there is no precedent finding such a “special relationship” between a corporation and its shareholders. A corporation does not owe a fiduciary duty to its shareholders;
American Fed. Grp., Ltd. v. Rothenberg, 136 F.3d 897, 905 (2d Cir.1998).
for this reason, plaintiffs' breach of fiduciary duty claims against Gerova are dismissed for failure to state a claim.
See Peacock, 889 N.Y.S.2d at 23.
Count I(c) concerns SCP's failure to pay investors who sought redemptions. Even though this failure arguably stemmed from SCP's mismanagement of the Funds, the claim is direct and therefore appropriately pleaded. The failure was not felt by all SCP investors, but only those who sought such redemptions. Therefore, the failure to pay redemptions was independent of any duty owed to the corporation,
and survives SCP's motion to dismiss-Count II(a), as against the Gerova officers and directors, alleges breach of their fiduciary duty by failing to register plaintiffs' shares. As with Count I(c), the failure to register the shares was not felt by all Gerova shareholders, but only by those individuals who received the unregistered shares as part of the SCP/Gerova merger. Because of the “asymmetrical injury,” felt by some, but not all, of the shareholders, this claim survives the Gerova officers' and directors' motions to dismiss.
See, e.g., Anwar, 728 F.Supp.2d at 402 (holding that the “asymmetrical injury” felt by investors who redeemed and those who did not was enough at the pleadings stage to show a distinct harm); Brinckerhoff v. JAC Holding Corp., 10 A.D.3d 520, 782 N.Y.S.2d 58, 60 (1st Dep't 2004) (holding that where some shareholders “received a lesser benefit than other shareholders” the harm was “suffered individually”).
See Anwar, 728 F.Supp.2d at 402;Brinckerhoff, 782 N.Y.S.2d at 60.
E. Aiding and Abetting Breach of Fiduciary Duty
Count IV alleges that Net Five
substantially assisted Gerova's breach of fiduciary duty by negotiating the terms of the asset transfer, acquiring the assets, and allowing Gerova to keep the assets out of reach.
Net Five is a Florida LLC, however, because I do not reach the aiding and abetting claims against it, I do not perform a choice of law analysis.
Because the underlying claim against Gerova for breach of fiduciary duty (Count II(c)) is dismissed for failure to state a claim, the related aiding and abetting claim against Net Five is also dismissed.
See Am. Compl. ¶ 103.
F. Breach of Contract
Count V alleges that Gerova breached the Am. RRA. This agreement was made for “the benefit of Gerova Shareholders”
and provided that Gerova would “prepare and file with the [SEC] a ‘Shelf’ Registration Statement covering the resale of the Registrable Securities.”
Am. RRA § 8(f).
The parties agree that the Registration Statement was never filed with the SEC
Id. § 2(a).
and the shares were therefore never registered.
See Am. Compl. ¶ 49.
See id. ¶ 59.
Gerova claims that it failed to register the shares because SCP did not provide it with the audits required for the filing. However, the parties agree that all of the required audits were delivered to Gerova by November 2010.
Whether the audits were filed too late for Gerova to register the shares has not been sufficiently established and remains a question of fact ill-suited for decision at the motion to dismiss stage. Because of this, plaintiffs have sufficiently pled a breach of contract claim against Gerova,
See id. ¶ 57.
VI. CONCLUSION
For the foregoing reasons, Counts I(a-b), and II(b-c) (as relating to the Gerova officers and directors) are dismissed as derivative; Counts I(d-f) and III are dismissed as precluded by SLUSA; and 575Counts II(a-c) (as relating to Gerova) and IV are dismissed for failure to state a claim. Counts I(c) (breach of fiduciary duty against SCP for failing to pay redemptions), II(a) (breach of fiduciary duty against the Gerova officers and directors for failing to register the shares), and V (breach of contract against Gerova) survive defendants' motions to dismiss. Hirst's motion to dismiss for lack of personal jurisdiction is denied with leave to renew after the completion of limited discovery. The Clerk of the Court is directed to close these motions [Docket Nos. 60, 62, 64, 69, 96].