Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Assured Guaranty (Uk) Ltd., &C v. J. P. Morgan Investment

December 20, 2011


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

This opinion is uncorrected and subject to revision before publication in the New York Reports.

At issue on this appeal is whether the Martin Act (General Business Law art 23-A) preempts plaintiff's common-law causes of action for breach of fiduciary duty and gross negligence. For the reasons that follow, we conclude that plaintiff's common-law claims are not preempted.

Plaintiff Assured Guaranty (UK) Ltd. commenced this action against defendant J.P. Morgan Investment Management Inc., asserting causes of action for breach of fiduciary duty, gross negligence and breach of contract. The gravamen of the complaint is that J.P. Morgan mismanaged the investment portfolio of an entity -- Orkney Re II PLC -- whose obligations plaintiff guaranteed.

As an express third-party beneficiary of an investment management agreement between J.P. Morgan and Orkney, plaintiff alleges that J.P. Morgan invested Orkney's assets heavily in high-risk securities, such as subprime mortgage-backed securities, and failed to diversify the portfolio or advise Orkney of the true level of risk. The complaint further contends that J.P. Morgan improperly made investment decisions in favor of nonparty Scottish Re Group Ltd., a client of J.P. Morgan and Orkney's largest equity holder, rather than for the benefit of Orkney or plaintiff. As a consequence, the complaint claims that Orkney suffered substantial financial losses, triggering plaintiff's obligation to pay under its guarantee.

J.P. Morgan moved to dismiss the complaint pursuant to CPLR 3211. As relevant here, J.P. Morgan argued that the breach of fiduciary and gross negligence claims were preempted by the Martin Act. Supreme Court granted the motion and dismissed the complaint in its entirety. The court held that the breach of fiduciary duty and gross negligence claims fell "within the purview of the Martin Act and their prosecution by plaintiff would be inconsistent with the Attorney General's exclusive enforcement powers under the Act."

The Appellate Division modified by reinstating the breach of fiduciary duty and gross negligence causes of action and part of the contract claim (80 AD3d 293 [1st Dept 2010]). In reinstating the two tort claims, the Appellate Division concluded that "there is nothing in the plain language of the Martin Act, its legislative history or appellate level decisions in this state that supports defendant's argument that the Act preempts otherwise validly pleaded common-law causes of action" (id. at 304). The Appellate Division granted J.P. Morgan leave to appeal on a certified question, and we now affirm.*fn1

J.P. Morgan's position can be simply stated --plaintiff's common-law breach of fiduciary duty and gross negligence claims must be dismissed because they are preempted by the Martin Act. Contending that the Martin Act vests the Attorney General with exclusive authority over fraudulent securities and investment practices addressed by the statute, J.P. Morgan asserts that it would be inconsistent to allow private investors to bring overlapping common-law claims. J.P. Morgan cites our decisions in CPC Intl. v McKesson Corp. (70 NY2d 268 [1987]) and Kerusa Co. LLC v W10Z/515 Real Estate Ltd. Partnership (12 NY3d 236 [2009]) in support of its contention that the Martin Act abrogated all nonfraud common-law claims. Plaintiff, joined by various amici curiae, including the New York Attorney General, counters that neither the language nor the history of the Martin Act requires preemption. Plaintiff also asserts that CPC Intl. and Kerusa favor its interpretation of the statute -- common-law claims not predicated exclusively on violations of the Martin Act may proceed in private actions.

The Martin Act -- New York's "blue sky" law --"authorizes the Attorney General to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York" (Kerusa, 12 NY3d at 243, citing General Business Law §§ 352, 353). We have observed that the Martin Act was enacted "to create a statutory mechanism in which the Attorney General would have broad regulatory and remedial powers to prevent fraudulent securities practices by investigating and intervening at the first indication of possible securities fraud on the public and, thereafter, if appropriate, to commence civil or criminal prosecution" (CPC Intl., 70 NY2d at 277; see also Kralik v 239 E. 79th St. Owners Corp., 5 NY3d 54, 58-59 [2005]).

When the Martin Act was originally adopted in 1921, "the primary weapon afforded to the Attorney General to combat securities fraud was that of injunctive relief" (Mihaly and Kaufmann, Securities, Commodities and Other Investments, McKinney's Cons Laws of NY, Book 19, General Business Law art 23-A, at 13; see also General Business Law § 353 [1]). The Act has since been amended on a number of occasions to broaden its reach. In 1955, for example, the Legislature added section 352-c, which allowed the Attorney General to bring criminal proceedings against those engaging in fraudulent practices "even absent proof of scienter or intent" (People v Landes, 84 NY2d 655, 660 [1994]). Analogously, in contrast to a common-law fraud claim, the Attorney General "need not allege or prove either scienter or intentional fraud" in a civil enforcement action under the Martin Act (State of New York v Rachmani Corp., 71 NY2d 718, 725 n 6 [1988]). And in 1976, the Attorney General was authorized to seek monetary restitution on behalf of investors who were the victims of fraudulent activities (see General Business Law § 353 [3]).

The scope of the Martin Act was expanded to include the real estate industry in 1960, when the Legislature added section 352-e to address the offer and sale of condominiums and cooperative apartments. The goal of this amendment was to prevent fraud in the sale and transfer of such properties. Consequently, "[t]he Martin Act makes it illegal for a person to make or take part in a public offering of securities consisting of participation interests in real estate unless an offering statement is filed with the Attorney General" and numerous disclosures are made pursuant to the statute and its implementing regulations (Kerusa, 12 NY3d at 243).

Legislative intent is integral to the question of whether the Martin Act was intended to supplant nonfraud common-law claims. It is well settled that "when the common law gives a remedy, and another remedy is provided by statute, the latter is cumulative, unless made exclusive by the statute" (Burns Jackson Miller Summit & Spitzer v Lindner, 59 NY2d 314, 324 [1983] [internal quotation marks and citation omitted]). We have emphasized that "a clear and specific legislative intent is required to override the common law" and that such a prerogative must be "unambiguous" (Hechter v New York Life Ins. Co., 46 NY2d 34, 39 [1978]).

Here, the plain text of the Martin Act, while granting the Attorney General investigatory and enforcement powers and prescribing various penalties, does not expressly mention or otherwise contemplate the elimination of common-law claims (see ABN AMRO Bank, N.V. v MBIA Inc., 17 NY3d 208, 224 [2011] [stating that, if the Legislature intended to extinguish common-law remedies, "we would expect to see evidence of such intent within the statute"]). Certainly the Martin Act, as it was originally conceived in 1921 with its limited relief, did not evince any intent to displace all common-law claims in the securities field. Nor can J.P. Morgan point to anything in the legislative history of the various amendments that demonstrates a "clear and specific" legislative mandate to abolish pre-existing common-law claims that private parties would otherwise possess. True, we have held that the Martin Act did not "create" a private right of action to enforce its provisions (see CPC Intl., 70 NY2d at 276-277). But the fact that "no new per se action was contemplated by the Legislature does not . . . require us to conclude that the traditional . . . forms of action are no longer available to redress injury" (Burns Jackson, 59 NY2d at 331). Hence, we agree with plaintiff that the Martin Act does not preclude a private litigant from bringing a nonfraud common-law cause of action.

Despite the absence of an unambiguous legislative intention to bar common-law claims, J.P. Morgan nevertheless posits that our decisions in CPC Intl. and Kerusa settled the issue in favor of preemption. We believe that J.P. Morgan overreads the import of these cases.

In CPC Intl., the plaintiff -- a corporation that purchased the stock of another company -- brought a "private" Martin Act claim and a common-law fraud cause of action against a number of defendants stemming from the fraudulently inflated price of the stock. Addressing the viability of plaintiff's Martin Act claim, we first observed that the statute did not explicitly authorize a private ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.