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In re Merrill Lynch & Co.

September 18, 2007


The opinion of the court was delivered by: John F. Keenan, United States District Judge.



Plaintiff Shadi S. Dabit ("Dabit", or "Plaintiff") has moved to join or, alternatively, to substitute the trustee of his estate in bankruptcy as plaintiff in this putative securities class action. For the reasons that follow, Dabit's motion is denied.

Dabit, a former broker of Defendant Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch", or "Defendant"), commenced this action on April 26, 2002, on behalf of himself and other current and former Merrill Lynch brokers who, from December 1, 1999, through December 31, 2000, (i) purchased and then refrained from selling Merrill Lynch-recommended securities that were the subjects of allegedly misleading or false research reports (the "holding claims"); and (ii) lost clients, and thus commissions, as a result of Merrill Lynch's alleged misconduct (the "lost commissions claims"). Dabit filed his action in the United States District Court for the Western District of Oklahoma, asserting claims under Oklahoma state law for breaches of fiduciary duty and of the covenants of good faith and fair dealing, and alleging jurisdiction on diversity grounds. On October 23, 2002, the Judicial Panel for Multidistrict Litigation transferred this action to the Southern District of New York for consolidated pre-trial proceedings before the late Honorable Milton Pollack, along with numerous other lawsuits that had been filed nationwide against Merrill Lynch in the wake of the New York Attorney General's highly publicized investigation of Merrill Lynch's issuance of allegedly false research reports.

On April 10, 2003, Judge Pollack dismissed Dabit's amended complaint in its entirety with prejudice on the ground that both Dabit's holding claims and lost commissions claims were preempted by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") because they were state law claims alleging fraud in connection with the purchase or sale of nationally traded securities. See In re Merrill Lynch & Co. Research Reports Sec. Litig., 02 MDL 1484, 2003 U.S. Dist. LEXIS 5999, at *1-2 (S.D.N.Y. Apr. 10, 2003). On January 11, 2005, the Second Circuit affirmed in part and vacated in part Judge Pollack's dismissal of Dabit's claims. See Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25 (2d Cir. 2005), vacated 547 U.S. 71 (2006). Regarding the dismissal of the holding claims, the Second Circuit held that, to the extent Dabit was able to plead that he and other members of the class had been fraudulently induced to hold, rather than purchase, securities, such allegations would not be preempted by SLUSA. Accordingly, the Circuit vacated the with-prejudice dismissal of the holding claims and remanded to this Court for those claims to be dismissed without prejudice to allow Dabit leave to replead.

Regarding the lost commissions claims, the Circuit vacated Judge Pollack's judgment, holding that those claims were not preempted by SLUSA. On September 27, 2005, the Supreme Court granted the defendant's petition for a writ of certiorari for the sole purpose of reviewing the Second Circuit's disposition of the holding claims. On March 21, 2006, the Supreme Court vacated the judgment of the Second Circuit regarding Dabit's holding claims. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006). The Supreme Court held that, for purposes of determining whether claims are preempted under SLUSA, the distinction between holders and purchasers of securities was irrelevant and that Dabit's allegations that Merrill Lynch's fraud induced the plaintiffs to hold securities were sufficient to trigger preemption under SLUSA. Thus, the Supreme Court reinstated Judge Pollack's dismissal-with-prejudice of Dabit's holding claims. The Circuit's reinstatement of Dabit's lost commissions claims was not reviewed by the Supreme Court. Thus, the lost commissions claims are the only claims that remain pending in this Court.

In June 2003, subsequent to the dismissal of Dabit's amended complaint, Merrill Lynch obtained an arbitration award of $130,000 against Dabit on a cross-claim against him. On February 11, 2004, Dabit filed for Chapter 7 bankruptcy protection in the United States Bankruptcy Court for the Western District of Oklahoma. Merrill Lynch holds an unsecured claim of approximately $5 million against Dabit, which Defendant states, and Plaintiff does not dispute, is the largest unsecured claim in the bankruptcy proceeding. On February 17, 2004, L. Win Holbrook ("Holbrook", or the "Trustee") was appointed trustee of Dabit's bankruptcy estate (the "Estate"). Dabit's interest in the instant causes of action is among the assets that are listed as belonging to the Estate.

On December 12, 2006, Dabit filed a motion in the bankruptcy court for an order, pursuant to 11 U.S.C. § 554, directing Holbrook to abandon the Estate's interest in this lawsuit to allow it to re-vest in Dabit. On January 12, 2007, the bankruptcy court denied Dabit's motion. It is undisputed that Dabit's claims in this action remain property of the Estate.

At a conference on June 27, 2007, after being informed about Dabit's bankruptcy proceedings, the Court directed Plaintiff's counsel to file a motion to substitute the Trustee for Dabit as the named plaintiff. Accordingly, Dabit moved, pursuant to Rule 25(c) of the Federal Rules of Civil Procedure, to join or, alternatively, to substitute the Trustee of the Estate as plaintiff in this lawsuit. Plaintiff Dabit contends that, although all interest in his claims has been transferred to the Trustee, he is entitled to receive a percentage of the recovery through an agreement reached between Dabit and the Trustee. Therefore, Dabit asserts that he "retain[s] an interest in the case" and, accordingly, it is appropriate that he remain named plaintiff in this case, in joinder with the Trustee. (Pl. Mot. 3.) In the alternative, Dabit argues that the Trustee should be substituted for him as the named plaintiff.

Defendant opposes Plaintiff's motion for joinder or substitution of the Trustee as a plaintiff. Defendant contends that joinder is inappropriate because Dabit is no longer a real party in interest and thus has no standing to remain as a plaintiff in this action. Defendant opposes substitution of the Trustee as plaintiff on the ground that the Trustee, as a fiduciary of the Estate, has interests that conflict with other potential class members and therefore cannot serve as an adequate representative of the putative class.


Plaintiff has moved for joinder or substitution pursuant to Rule 25(c) of the Federal Rules of Civil Procedure. Rule 25(c) provides that

[I]n case of any transfer of interest, the action may be continued by or against the original party, unless the court upon motion directs the person to whom the interest is transferred to be ...

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