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In re Adelphia Communications Corporation Securities and Derivative Litigation

August 5, 2009


The opinion of the court was delivered by: McKENNA, D.J.



This action -- Los Angeles County Employees Retirement Association, et al. v. Motorola, Inc., Scientific-Atlanta, Inc., Wallace Haislip and Julian Eidson (04 Civ. 10252) --was filed in the Superior Court for the State of California for the County of Los Angeles, Central District, removed to the United States District Court for the Central District of California (Western Division), and transferred to this district for inclusion in the above-identified multidistrict litigation.*fn1

Adelphia Communications Corporation ("Adelphia") was a provider of cable television. The corporate defendants, Scientific-Atlanta, Inc. ("SA") and Motorola, Inc. ("Motorola") manufactured cable converters (set top boxes) necessary for cable customers to watch cable programming.*fn2 Adelphia, SA and Motorola entered into arrangements described as follows in the Complaint:

Pursuant to the scheme, Motorola and S-A purported to make "marketing support" payments to Adelphia, which Adelphia then recorded as contra-expenses on its books, thereby reducing its reported expenses and increasing its reported EBITDA. However, the marketing support payments were merely sham transactions with no economic substance. Specifically, at the same time they were purportedly making these marketing support payments, S-A and Motorola imposed fictitious retroactive price increases for digital cable converter boxes already sold to (or contracted to be sold to) Adelphia, which were identical in amount to the purported marketing support payments, thus creating a "wash" in which no economic value was transferred. Defendants knew that these transactions lacked any economic substance and that their only purpose was to fraudulently increase Adelphia's reported EBITDA. With this knowledge, Defendants assisted Adelphia in crafting the transactions and creating bogus documentation in a manner designed to facilitate the fraud and hinder its discovery. (Complaint, ¶ 2.)*fn3 Plaintiffs are purchasers of Adelphia securities.

The complaint alleges claims for (i) aiding and abetting common law fraud and (ii) conspiracy to commit common law fraud.

Defendants move for dismissal on a variety of grounds: that the claims are preempted by the Securities Litigation Uniform Standards Act ("SLUSA"), 15 U.S.C. § 78bb(f); that the claims are barred by limitations; that plaintiffs have failed to allege claims on which relief can be granted, and, further, have failed to plead with the particularity required by Fed. R. Civ. P. 9(b); and that plaintiffs have failed to join Adelphia, an indispensable party under id. 12(b)(7) and 19.

On a motion for dismissal under id. 12(b)(6), a court must accept all non-conclusory factual allegations as true, and may consider documents incorporated into the complaint by reference; the plaintiff must "provide the grounds upon which his claim rests through factual allegations sufficient 'to raise a right to relief above the speculative level.'" ATSI Communications, Inc. v. The Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (quoting Bell Atlantic Corp. V. Twombly, 127 S.Ct. 1955, 1965 (2007) (footnote omitted)). Rule 9(b) requires that, "[i]n alleging fraud . . . a party must state with particularity the circumstances constituting fraud. . . ." Id. "Malice, interest, knowledge, and other conditions of a person's mind may be alleged generally." Id.

Plaintiffs' claims are not preempted by SLUSA because they are not asserted in a "covered class action," 15 U.S.C. § 78bb(f)(5)(B). "A 'covered class action' is a lawsuit in which damages are sought on behalf of more than 50 people." Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 83 (2006) (footnote omitted). The plaintiffs, however, are some 14 entities -- a public pension fund and a number of funds affiliated with Franklin Templeton Investments. Defendants argue, nevertheless, that the present action is brought "on a representative basis," 15 U.S.C. § 78bb(f)(5)(B)(i)(II), because the pension fund has many beneficiaries and the other funds many investors. But there is no logic or persuasive authority supporting that characterization of the facts. Nor is there any logic or persuasive authority to the defendants' alternate argument that the present action is one of a "group of lawsuits" that are "joined, consolidated, or otherwise proceed as a single action for any purpose." Id. § 78bb(f)(5)(B)(ii)(II).

Adelphia is not an indispensable party. It is a joint tortfeasor which is not required under Fed. R. Civ. P. 19 to be joined. Temple v. Synthes Corp., 498 U.S. 5, 7-8 (1990).

In a multidistrict case, "a federal court ruling upon questions of state law [is required] to apply the same state substantive law, including choice of law rules, that would have been applied by a state court in the jurisdiction in which a case was filed." Menowitz v. Brown, 991 F.2d 36, 40 (2d Cir. 1993).

Since the present case was filed in the State of California, the California choice-of-law rule must be determined.

California has jettisoned the relatively predictable choice of law rules based on the place where the transaction occurred (lex locus) in favor of a three-part governmental interest test. Under this amorphous and somewhat result-oriented approach, we must first consider whether the two states' laws actually differ; if so, we must examine each state's interest in applying its law to determine whether there is a "true conflict"; and if each state has a legitimate interest we must compare the impairment to each jurisdiction under the other's rule of law.

Arno v. Club Med Inc., 22 F.3d 1464, 1467 (9th Cir. 1994) (citations omitted). See also, Abogados v. AT&T, Inc., 223 F.3d 932, 934 (9th Cir. 2000); Insurance Co. of North America v. Federal Express Corp., 189 F.3d 914, 921 (9th Cir. 1999); Waggoner v. Snow, Becker, Kroll, Klaris & Krauss, 991 F.2d 1501, 1506-1507 (9th Cir. 1993); Rosenthal v. Fonda, 862 F.2d 1398, 1400 (9th Cir. 1988); Strassberg v. New England Mut. Life Ins. Co., 575 F.2d 1262, 1263-1264 (9th Cir. 1978); Hurtado v. Superior Court of Sacramento County, 522 P.2d 666, 669-670 (Cal. 1974); and Bernhard v. Harrah's Club, 546 P.2d 719, 720-721 (Cal. 1976). The governmental interest test is traced back to Reich v. Purcell, 432 P.2d 727 (Cal. 1967). See Hurtado, 522 P.2d at 669.

Once ... preliminary analysis has identified a true conflict of the governmental interests involved as applied to the parties under the particular circumstances of the case, the 'comparative impairment' approach to the resolution of such conflict seeks to determine which state's interest would be more impaired if its policy were subordinated to the policy of the other state. This analysis proceeds on the principle that true conflicts should be resolved by applying the law of the state whose interest would be the more impaired if its law were not applied.

Bernhard, 546 P.2d at 723.

"Generally, the preference is to apply California law, rather than choose the foreign law as a rule of decision. Therefore, if application for a foreign decisional rule will not significantly advance the interests of the foreign state, a California court will conclude that the conflict is 'false' and apply its own law." Strassberg, 575 F.2d at 1264 (citation omitted). A party advocating application of the law of a non-forum state bears the burden of demonstrating that the law of the non-forum state should be applied. Hurtado, 522 P.2d at 670.

The task of choosing the applicable law therefore requires determination, first, of what state or states other than the forum (here, California) may have an interest in the application of its law which could be more impaired than the interest of the forum if the law of the forum were applied, second, whether the law of the non-forum state differs from that of the forum, third, what the interests of the respective states in the application of their own law is, and, fourth, which ...

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