Defendants appeal from an order of the Supreme Court, New York County (Karla Moskowitz, J.), entered on or about November 13, 2007, which, insofar as appealed from, denied their motion to dismiss the amended complaint with respect to claims asserted on behalf of identified creditors and groups of creditors of Reliance.
The opinion of the court was delivered by: Friedman, J.
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Angela M. Mazzarelli, J.P., David B. Saxe, David Friedman, Rolando Acosta, Leland G. DeGrasse, JJ.
This appeal requires us to determine whether a federal statute, the Securities Litigation Uniform Standards Act of 1998 (Pub L 105-353, 112 US Stat 3227, codified in pertinent part at 15 USC § 78bb[f] [SLUSA or the Act]), mandates the dismissal of fraud claims against an accounting firm asserted by plaintiff RGH Liquidating Trust (the RGH Trust) on behalf of the holders of bonds issued by Reliance Group Holdings, Inc. (RGH), a now-defunct insurance holding company. We hold that SLUSA bars the assertion of the bondholders' claims in this single action because these claims, which did not originally belong to RGH itself, seek recovery under state law on behalf of more than 50 persons for injuries allegedly arising from misrepresentations relating to the purchase or sale of securities traded on a national exchange. On this pleading motion, however, the claims asserted by the RGH Trust on behalf of three other categories of RGH creditors (bank lenders, two former Reliance employees, and the Pension Benefit Guarantee Corporation [PBGC]) were correctly sustained. We therefore modify the order appealed from to the extent of granting the motion to dismiss the RGH Trust's amended complaint solely as to the claims asserted on behalf of the RGH bondholders, and affirm the denial of the motion as to the claims asserted on behalf of other identified RGH creditors. Relevant Facts Set Forth in the Amended Complaint and Documentary Evidence RGH, through its subsidiary Reliance Financial Services Corp. (RFS), owned Reliance Insurance Company (RIC), a property and casualty insurer*fn1. At all relevant times, defendant Deloitte & Touche LLP (Deloitte) functioned as Reliance's independent actuary and auditor. On or about February 25, 2000, Deloitte issued a statement of actuarial opinion for the year ended December 31, 1999, concerning RIC's insurance business. The statement of actuarial opinion was incorporated into Reliance's consolidated financial statements for the year ended December 31, 1999, which were audited by Deloitte. Based on its audit, Deloitte certified the 1999 consolidated financial statements as a fair presentation of Reliance's financial condition in accordance with generally accepted accounting principles. The 1999 financial statements, along with Deloitte's independent auditor's report, dated February 29, 2000, were publicly filed with the United States Securities and Exchange Commission on March 30, 2000, as an attachment to RGH's Form 10-K for the year ended December 31, 1999 (the 1999 10-K).
The amended complaint alleges that Reliance's 1999 consolidated financial statements, which Deloitte had certified, incorporated various inaccuracies and misleading omissions whose "combined effect . . . was an overstatement of surplus by approximately $500 million and an underreporting of net loss reserves by approximately $500 million resulting in a total overstatement of $1 billion." It should be noted, however, that the picture of Reliance's financial condition available to its creditors at the time of the filing of the 1999 10-K was far from rosy; indeed, it was grim. Among other setbacks, the company was reported to have suffered an operating loss of $318.3 million in 1999. The 1999 10-K also included a message to shareholders stating that "Reliance Group's 1999 results were unacceptable" and describing 1999 as "our annus horribilis." A month before the filing of the 1999 10-K, on February 29, 2000, RGH had announced that it was suspending its quarterly dividends and that the maturity of its bank loans had been extended from March 31 to August 31, 2000.
The amended complaint alleges that the four categories of Reliance creditors on whose behalf this action is being prosecuted --- bondholders; bank lenders; employees; and the PBGC --- relied to their detriment on Deloitte's certification of the allegedly inaccurate 1999 financial statements in the following general ways: "(i) trustees for the bondholders did not exercise their rights under Trust Indenture Agreements including, but not limited to, notifying the bondholders that specific events of default had occurred and declaring the bonds due and payable; (ii) present bondholders did not take action to sell their bonds; (iii) new bond investors purchased bonds at inflated prices; (iv) the bank lenders and agents to the Credit Agreement did not know that specific events of default had occurred and did not exercise their rights under that Agreement including, but not limited to, calling the loans; (iv) [sic] the PBGC did not take action to prevent the inflation of pension benefits for which it would ultimately become financially responsible; and (v) employees of RGH and RFS did not take action to cash out their pension and employee benefits and instead stayed with the company. These Creditors reasonably relied upon Deloitte's and Lommele's misrepresentations and thus did not act or refrained from acting in a way to prevent or mitigate their losses of hundreds of millions of dollars."
Within a brief period after the filing of the 1999 10-K on March 30, 2000, RGH filed additional reports making plain that it was in dire straits. The Form 10-Q for the first quarter of 2000, which RGH filed on May 15, 2000, reported that Reliance had an operating loss (before gains on sales of investments) of $36.5 million during that period; that it had agreed to sell its surety operations; that Standard & Poor's and Moody's had placed RGH's senior and subordinated bonds on "credit watch with negative implications"; and that A.M. Best & Co. (Best) had placed its rating of RIC "under review with negative implications."
Thereafter, on August 14, 2000, RGH filed its 10-Q for the second quarter of 2000 (the August 14 10-Q), which reported, among other bad news: (1) that the company had an after-tax net loss of approximately $504 million for the quarter; (2) that actuarial net loss reserves were being increased by $444.2 million; (3) that Best's downgrading of RIC's rating during the quarter (from "A-" [Excellent] to "B" [Very Good] and then to "B" [Fair]) was believed to "seriously impair [RIC's] ability to write many of its lines of business," as a result of which Reliance had entered into agreements to sell much of its property and casualty businesses and had written off its remaining $195.6 million goodwill balance; and (4) that, as a result of the Best downgrade, RGH "d[id] not expect to be able to obtain regulatory approval for dividends from [RIC] sufficient to fund the repayment at maturity of [RGH's] bank debt and the senior notes." The August 14 10-Q also warned, ominously: "The Company is in discussions with its creditors and regulators to develop a comprehensive plan to restructure its outstanding debt. However, there can be no assurance that its efforts will be successful. The Company is exploring a full range of alternatives to restructure its debt, among which would be to seek protection under the Federal Bankruptcy Code, which could be in conjunction with a negotiated settlement in advance of filing."
Reliance ultimately could not recover from its financial difficulties. A Pennsylvania court placed RIC in rehabilitation in May 2001 and in liquidation the following October. On June 12, 2001, RGH and RFS filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code.
In 2005, the bankruptcy court approved a reorganization plan for Reliance (the reorganization plan), pursuant to which plaintiff RGH Trust was created and charged with, among other tasks, the liquidation of the assets of the Reliance estate for the benefit of the creditors. The property assigned to the RGH Trust pursuant to the reorganization plan included, besides the assets of the Reliance estate, certain "Creditor Litigation Claims." The "Creditor Litigation Claims" were defined, in pertinent part, to include any claim of any member of certain impaired classes of creditors (except for claims retained by creditors choosing to opt out and certain other exceptions not relevant here) that arose "from or in connection with [the creditor's] claims against [RFS] or [RGH]." The reorganization plan provided that, upon its taking effect, the RGH Trust obtained "all rights to litigate" the Creditor Litigation Claims, among other causes of action.
In 2006, the RGH Trust commenced this action against Deloitte and defendant Jan A. Lommele, a Deloitte principal. The original complaint asserted causes of action for fraud, inter alia, on behalf of both Reliance and its unsecured creditors. Supreme Court granted Deloitte's motion to dismiss the original complaint but gave the RGH Trust leave to replead the fraud claims on behalf of the creditors so as to allege reliance with more particularity. On the RGH Trust's appeal, this Court affirmed the dismissal with prejudice of all claims on behalf of Reliance (47 AD3d 516 ). The fraud claims asserted on behalf of Reliance's unsecured creditors were not at issue on the prior appeal.
After the dismissal of the original complaint, the RGH Trust filed the present amended complaint on behalf of Reliance's unsecured creditors. The amended complaint asserts one cause of action for "actuarial fraud" and one cause of action for "accounting and auditing fraud" on behalf of the creditors, but, consistent with this Court's affirmance of the order dismissing the original complaint, omits any claims on behalf of Reliance itself. Deloitte again moved to dismiss. Supreme Court granted the motion solely to the extent of dismissing the claims asserted on behalf ...