Assured Guar. (UK) Ltd. v. J. P. Morgan Inv. Mgmt. Inc.

• Decision Date: 20 December 2011
• Docket Number: No. 227,227
• Citation: 2011 NY Slip Op 09162
• Court: New York Court of Appeals Court of Appeals
• Parties: Assured Guaranty (UK) Ltd., & c., Respondent, v. J. P. Morgan Investment Management Inc., Appellant.

2011 NY Slip Op 09162

Assured Guaranty (UK) Ltd., & c., Respondent,
v.
J. P. Morgan Investment Management Inc., Appellant.

No. 227

Court of Appeals of New York

Decided December 20, 2011

Walter Rieman, for appellant.

William A. Maher, for respondent.

Richard Dearing for Hon. Eric T. Schneiderman, Attorney General of the State of New York, amicus curiae.

Public Investors Arbitration Bar; Cornell Securities Law Clinic; New York State AFL-CIO et al.; Securities Industry and Financial Markets Association et al.; New York State Common Retirement Fund et al., amici curiae.

GRAFFEO, J.:

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

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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.¹

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

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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])....