Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, December 20, 2011

New York's Highest Court Holds that Investors Can Bring Common Law Claims for Breach of Fiduciary Duty and Gross Neglience

In a short and sweet opinion, the New York Court of Appeals significantly improved investor protection in New York state law today by holding that the state's Martin Act does not preempt an investor's common law claims for breach of fiduciary duty and gross negligence.  Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Management Inc., 2011 NY Slip Opinion 09162 (Dec. 20, 2011).  The lower state courts had split on this question, and the federal district court in S.D.N.Y., in particular, had asserted preemption.

Plaintiff, Morgan Investment Management, alleged that J.P. Morgan had mismanaged the investment portfolio of an entity (Orkney Re II) whose obligations MOM guaranteed.  As an express third-party beneficiary of an investment management agreement between J.P. Morgan and Orkney, MOM alleged that J.P. Morgan invested Orkney's assets heavily in high-risk securities and failed to diversify the portfolio or advise Orkney of the risks.  In addition, it alleged that J.P. Morgan improperly made investment decisions in favor of another Orkney investor that was a J.P. Morgan client.

The Supreme Court granted J.P. Morgan's motion to dismiss the complaint in its entirety on grounds of preemption.  The Appellate Division, however, modified by reinstating the breach of fiduciary duty and gross negligence claims, thus setting up the appeal to the Court of Appeals.

The Court of Appeals rejected J.P. Morgan's argument that the common law breach of fiduciary duty and gross negligence claims must be dismissed because they are preempted by the Martin Act in short order.  The Court stated that "[legislative intent is integral to the question of whether the Martin Act was intended to supplant nonfraud common-law claims."  Moreover, it was "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'....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'...."  The Court found no evidence in the plain text of the Martin Act that the legislature contemplated the elimination of common-law claims.

True, we have held that the Martin Act did not "create" a private right of action to enforce its provisions ....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...."

Accordingly, an investor may bring a common-law claim that is not entirely dependent on the Martin Act for its viability, and "[m]ere overlap between the common law and the Martin Act is not enough to extinguish common-law remedies."

Finally, the Court recognized that policy concerns supported its conclusion because private actions further the goal of combating fraud and deception in securities transactions.  Quoting Judge Marrero from the S.D.N.Y. (whose scholarly opinion in Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 354, was instrumental in rethinking the analysis in the lower courts' preemption decisions), the Court concluded that to hold otherwise would leave the marketplace "less protected than it was before the Martin Act's passage, which can hardly have been the goal of its drafters...'"

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