Hidalgo-Vélez v. San Juan Asset Mgmt., Inc.

• Decision Date: 09 July 2014
• Docket Number: No. 13–1574.,13–1574.
• Citation: 758 F.3d 98
• Parties: Eduardo HIDALGO–VÉLEZ, et al., Plaintiffs, Appellants, v. SAN JUAN ASSET MANAGEMENT, INC., et al., Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

758 F.3d 98

Eduardo HIDALGO–VÉLEZ, et al., Plaintiffs, Appellants,

v.SAN JUAN ASSET MANAGEMENT, INC., et al., Defendants, Appellees.

No. 13–1574.

United States Court of Appeals, First Circuit.

July 9, 2014.

Appeal from the United States District Court for the District of Puerto Rico, Steven J. McAuliffe, U.S. District Judge ^*, Carmen Consuelo Cerezo, U.S. District Judge.

Luis A. Avilés, with whom Jorge M. Izquierdo–San Miguel and Izquierdo–San Miguel Law Offices, PSC were on brief, for appellants.

Eric Pérez–Ochoa, with whom Adsuar Muñiz Goyco Seda & Pérez–Ochoa, P.S.C. was on brief, for appellees San Juan Asset Management, Inc. and Vizcarrondo–Ramírez de Arellano.

Michael S. Flynn, with whom Francisco G. Bruno–Rovira, Leslie Yvette Flores–Rodriguez, McConnell Valdes LLC, Alicia L. Chang, and Davis Polk & Wardwell LLP were on brief, for appellee PricewaterhouseCoopers, LLP (whose brief was adopted by appellees Puerto Rico & Global Income Target Maturity Fund, Inc., Luis Rivera, Rivera Casiano, Lugo–Rivera, and Colón Ascar).

Before THOMPSON and SELYA, Circuit Judges, and McCONNELL, District Judge.^**

SELYA, Circuit Judge.

This case requires us to trace the contours of the “in connection with” element of the Securities Litigation Uniform Standards Act of 1998 (SLUSA), 15 U.S.C. § 78bb(f), in the reflected light of the Supreme Court's recent decision in Chadbourne & Parke LLP v. Troice, ––– U.S. ––––, 134 S.Ct. 1058, 188 L.Ed.2d 88 (2014). Giving full voice to Troice, we conclude that the district court impermissibly extended the SLUSA's reach. Accordingly, we vacate the judgment below, reverse the denial of the plaintiffs' motion to remand, and remit the case to the district court with directions to return it to the Puerto Rico Court of First Instance.

I. BACKGROUND

We begin at the beginning, rehearsing the origin and travel of the case. Because “this appeal follows the granting of a motion to dismiss, we draw the relevant facts from the plaintiff[s'] complaint,” supplemented by “documentation incorporatedby reference in the complaint.” Rivera–Díaz v. Humana Ins. of P.R., Inc., 748 F.3d 387, 388 (1st Cir.2014).

The plaintiffs are mostly investors in the Puerto Rico & Global Income Target Maturity Fund (the Fund),¹ a non-diversified investment company licensed under the Puerto Rico Investment Companies Act, seeP.R. Laws Ann. tit. 10, §§ 661– 683. The Fund solicited investors through a prospectus, which promised that the Fund would invest at least 75% of its assets in notes with an “equally weighted exposure to both European and North American investment grade corporate bond indices.” Relatedly, the prospectus promised that the Fund would invest no more than 25% of its assets in securities issued by a single issuer. Consistent with these two promises—the 75% promise and the 25% promise—the complaint alleges that the primary purpose of the Fund was to expose its investors to certain specialized notes issued by “different international financial institutions such as Banco Bilbao Vizcaya Argentaria, S.A.”

In May of 2008, the Fund spurned these promises and invested more than 75% of its assets in notes sold by a single issuer, Lehman Brothers. The complaint alleges that this lop-sided investment transgressed both the terms of the prospectus and Puerto Rico law.

These transgressions had dire consequences. The Lehman notes soon lost most of their value, and the Fund was forced to adopt a plan of liquidation.

In due course, the plaintiffs, suing on their own behalf and on behalf of all other investors similarly situated, filed a putative class action in a Puerto Rico court. Their complaint asserted both direct claims on behalf of the investors and shareholder derivative claims on behalf of the Fund. The named defendants included the Fund; its officers and directors; its investment advisor, San Juan Asset Management; its sales agent, BBVA Securities of Puerto Rico; and its independent auditor, PricewaterhouseCoopers (PwC). Although the complaint is not a model of clarity, it is clear that its gravamen is that the Fund did not comply with the investment policies promised in the prospectus and that the strategy it did pursue flouted Puerto Rico law.²

PwC, later joined by other defendants, removed the action to the federal district court, asserting that it fell within the ambit of the SLUSA. See15 U.S.C. § 78bb(f)(2); 28 U.S.C. § 1446. The plaintiffs moved to remand. The district court (Cerezo, J.) denied the plaintiffs' motion. See Hidalgo–Vélez v. San Juan Asset Mgmt., Inc. (Hidalgo–Vélez I), No. 11–2175, 2012 WL 4427077, at *3 (D.P.R. Sept. 24, 2012).

At that point, the plaintiffs asked the district court to certify the jurisdictional question for interlocutory appeal. See28 U.S.C. § 1292(b). The defendants not only opposed this request but also pressed dismissal motions premised on SLUSA preclusion. SeeFed.R.Civ.P. 12(b)(6). The district court (McAuliffe, J.) refused to certify the question and granted the motions to dismiss. See Hidalgo–Vélez v. San Juan Asset Mgmt., Inc., No. 11–2175, 2013 WL 1089745, at *7 (D.P.R. Mar. 15, 2013). This timely appeal ensued.

II. ANALYSIS

We review a district court's disposition of a motion to dismiss for failure to state a claim de novo. See Artuso v. Vertex Pharm., Inc., 637 F.3d 1, 5 (1st Cir.2011). In conducting this review, “we accept as true all well-pleaded facts alleged in the complaint and draw all reasonable inferences therefrom in the pleader's favor.” Butler v. Balolia, 736 F.3d 609, 612 (1st Cir.2013).

The defendants invite us to alter this standard of review on the ground that the plaintiffs failed to preserve their central argument. We decline this invitation.

The defendants insist that the plaintiffs' failure to oppose their motions to dismiss constitutes a waiver or, at least, a forfeiture. See generally United States v. Olano, 507 U.S. 725, 733, 113 S.Ct. 1770, 123 L.Ed.2d 508 (1993) (limning distinction between waiver and forfeiture). But this hypertechnical view of the record gives too little weight to the plaintiffs' consistent and vigorous opposition to the defendants' contention that the SLUSA pretermitted the plaintiffs' claims. Common sense suggests that in certain situations substance ought to prevail over form and—in the peculiar circumstances of this case—we believe that the fact that the plaintiffs presented their opposition in their motion for remand rather than as part of formal objections to the motions to dismiss is of no moment.

We briefly explain our reasoning. The SLUSA contains both “a preclusion provision and a removal provision.” Kircher v. Putnam Funds Trust, 547 U.S. 633, 636, 126 S.Ct. 2145, 165 L.Ed.2d 92 (2006) (footnotes omitted). These symbiotic provisions are mirror images of each other: any action that is properly removable under the removal provision is per se precluded under the preclusion provision and, conversely, any action not so precluded is not removable. See id. at 643–44, 126 S.Ct. 2145; Madden v. Cowen & Co., 576 F.3d 957, 965 (9th Cir.2009). Thus, the ruling on the plaintiffs' motion to remand would necessarily be dispositive of the defendants' motions to dismiss. Given this juxtaposition, we hold that the plaintiffs' presentation of their opposition to the SLUSA's applicability in their remand papers sufficed to preserve their position for purposes of appeal. This holding is consistent, we think, with the Supreme Court's admonition that “[r]ules of practice and procedure are devised to promote the ends of justice, not to defeat them.” Hormel v. Helvering, 312 U.S. 552, 557, 61 S.Ct. 719, 85 L.Ed. 1037 (1941).

We are equally unimpressed with the defendants' more general importuning that the plaintiffs failed to develop their central argument sufficiently to preserve it on appeal. While the plaintiffs certainly could have developed their argument more fully, they did enough to put the dispositive issue in play before the district court. In view of the fact that the Supreme Court did not decide Troice until this case was pending on appeal, treating the plaintiffs' argument as abandoned would require an overly strict application of waiver principles.

We turn now to the meat of this appeal. The SLUSA is a spare but sweeping statute, which for present purposes may be viewed as the third in a trilogy of statutory enactments. We find it helpful, therefore, to trace its lineage.

In the aftermath of the 1929 stock market crash, Congress passed the Securities Exchange Act of 1934 (the Exchange Act), ch. 404, 48 Stat. 881. See Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 78, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006). As amended, that statute forbids the use of any manipulative or deceptive devices or contrivances “in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement.” 15 U.S.C. § 78j(b). Exercising regulatory authority granted by the Exchange Act, the Securities and Exchange Commission (SEC) promulgated Rule 10b–5, which likewise prohibits fraud in connection with the purchase or sale of securities. See17 C.F.R. § 240.10b–5. The Supreme Court has read a private right of action into these provisions. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975); Sup't of Ins. of N.Y. v. Bankers Life & Cas. Co., 404 U.S. 6, 13 & n. 9, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971). Moreover, the Court has forged a link between, on the one hand, the “in connection with” provisions of the Exchange Act and Rule 10b–5 and, on the other hand, the SLUSA's parallel “in connection with” terminology. See Dabit, 547 U.S. at 85–86, 126 S.Ct. 1503.

More than sixty years after the passage of the Exchange Act, Congress enacted the second statute in the trilogy: the Private Securities Litigation Reform Act of 1995 (PSLRA), Pub.L. No. 104–67, 109 Stat. 737. Congress fashioned...