in favor of applying federal law to resolve the question of assignability of federal claims.
Existing authority holds that federal common law, not state law, determines whether federal claims run with the affected security. See In re Nucorp Energy Sec. Litig., 772 F.2d 1486, 1489 (9th Cir. 1985) (assignability of claims arising under the TIA should be decided under federal law); Lowry v. Baltimore & Ohio R.R. Co., 707 F.2d 721, 727 (3rd Cir.) (en banc) (Garth, J., concurring) ("questions regarding rights under the federal securities laws must be decided on the basis of federal, and not state law"), cert. denied, 464 U.S. 893, 78 L. Ed. 2d 229, 104 S. Ct. 238 (1983); In re Saxon Sec. Litig., 644 F. Supp. 465, 473-74 (S.D.N.Y. 1985) (same); cf. Gulfstream III Assoc., Inc. v. Gulfstream Aerospace Corp., 995 F.2d 425, 437 (3rd Cir. 1993) ("the validity of the assignment of an antitrust claim is a matter of federal common law"). These decisions seem to recognize that the policy of protecting investors that underlies federal securities laws such as the TIA is best served by applying a uniform federal rule to measure the validity of certain claims. Congress replaced the existing patchwork of state laws with a unitary scheme of federal regulation. To preserve this scheme and promote the goal of protecting investors, it is necessary that the availability of remedies for breach of the securities laws remains consistent throughout the nation. Lowry, 707 F.2d at 727. Further, uniformity enhances predictability, which in turn heightens the protection of aggrieved investors. "Confusion and uncertainty" would result if investors' rights under the federal securities acts were to depend on varying state laws. Id.
Under federal law, claims for violations of securities laws do not automatically travel with the security upon its sale. Nucorp, 772 F.2d 1486 at 1490; Lowry, 707 F.2d at 729; Saxon, 644 F. Supp. 465 at 471; Soderberg v. Gens, 652 F. Supp. 560, 563-64 (N.D. Ill. 1987); Independent Investor Protective League v. Saunders, 64 F.R.D. 564, 572 (E.D. Pa. 1974); International Ladies' Garment Workers' Union v. Shields & Co., 209 F. Supp. 145, 149 (S.D.N.Y. 1962); but see Phelan v. Middle States Oil Corp., 154 F.2d 978, 1001 (2d Cir. 1946) (claim ran with bonds in receivership case in order to promote goal of protecting integrity of federal receivers). Plaintiff argues this rule of non-transferability is inapplicable here because these cases involved misrepresentation claims under the TIA and the Securities and Exchange Acts, whereas plaintiff's claim is predicated on TIA provisions prohibiting breaches of contract and fiduciary duty. Misrepresentation, unlike plaintiff's claims, requires proof of reliance. Plaintiff contends the personal reliance element required in misrepresentation claims has prompted courts to rule against automatic transfer of claims to subsequent purchasers who did not own the affected securities at the time of the alleged wrongdoing, and therefore could not have relied on the misrepresentations. (Pl. Mem. Opp'n at 41-44)
Plaintiff's observation is correct, but its analysis is misguided. In rejecting automatic assignment, these Courts were concerned with restricting the right to sue to those who actually suffered the injury. Reliance was cited merely as an indication of injury, not as the basis for the holding. See e.g. Nucorp, 772 F.2d at 1490 (assigning TIA claim to remote purchasers who did not rely on misrepresentation strips the remedy from those who were defrauded); Lowry, 707 F.2d at 729 (availability of Rule 10b-5 action should be limited to investors who were defrauded and thereby injured); Soderberg, 652 F. Supp. at 564 (right to bring § 10(b) action remains with injured party who purchased security in reliance on fraud). Thus, the proper inquiry for determining the transferability of claims upon sale of a security is whether the subsequent purchaser was injured by the misconduct. If so, that purchaser acquired not only the security, but also standing to pursue existing claims.
The injury flowing from the breaches of contract and fiduciary duty alleged here is not as discrete as the damage inflicted by a one-time misrepresentation. The alleged breaches occurred over time, throughout the course of Continental's bankruptcy, and any resulting injury was gradual, increasing as the collateral declined in value. The question of which investors were injured, and when that injury was inflicted, is a thorny one, but need not be resolved here because it is clear that plaintiff was not among the injured. Plaintiff purchased its certificates after all the alleged breaches transpired, after Bankruptcy Judge Balick rejected defendants' motion for adequate protection a second time, after the reorganization plan had been confirmed, and after the adverse consequences to certificate holders became painfully apparent. Market forces assured that the price plaintiff paid for certificates which would never be wholly redeemed reflected their diminished value. The injury was sustained by the sellers who parted with these certificates at a reduced price, not by plaintiff who purchased them at their post-bankruptcy value. See Saxon, 644 F. Supp. at 470 (investors who purchased bonds after wrongdoing was revealed paid market price adjusted for the fraud). Within one week after purchasing the certificates, plaintiff filed its first complaint against defendants. The securities laws were enacted to protect those who have been injured, id. at 475, not treasure hunters "shrewd or lucky enough to have put [their] hands on a security that once belonged to a person who was defrauded." Saunders, 64 F.R.D. at 572.
* * *
Because plaintiff suffered no injury, it does not have standing to prosecute its TIA claim, the only basis for subject matter jurisdiction. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560, 119 L. Ed. 2d 351, 112 S. Ct. 2130 (1992); Warth v. Seldin, 422 U.S. 490, 499, 45 L. Ed. 2d 343, 95 S. Ct. 2197 (1975). The court may retain jurisdiction over the pendent state-law claims of negligence, malpractice and breaches of contract and fiduciary duty, if such jurisdiction is justified by judicial economy, convenience and fairness to the litigants. Hagans v. Lavine, 415 U.S. 528, 536, 39 L. Ed. 2d 577, 94 S. Ct. 1372 (1974). These concerns are not implicated here, as the litigation has not progressed significantly past the pleading stage, the court has no special familiarity with the facts and circumstances underlying this case, and the parties can be heard in state court. Accordingly, defendants' motion pursuant to Rule 12(b)(1) is granted, and the complaints are dismissed.
Dated: New York, New York
August 23, 1995
Michael B. Mukasey
U.S. District Judge