Lasala v. Bordier et Cie

• Decision Date: 11 March 2008
• Docket Number: No. 06-4323.,06-4323.
• Citation: 519 F.3d 121
• Parties: Joseph P. LaSALA and Fred S. Zeidman, as Co-Trustees of the Aremis-Soft Liquidating Trust, Appellants v. BORDIER ET CIE and Dominick Company, A.G.
• Court: U.S. Court of Appeals — Third Circuit

519 F.3d 121

Joseph P. LaSALA and Fred S. Zeidman, as Co-Trustees of the Aremis-Soft Liquidating Trust, Appellants v. BORDIER ET CIE and Dominick Company, A.G.

No. 06-4323.

United States Court of Appeals, Third Circuit.

Argued December 13, 2007.

Filed: March 11, 2008.

[519 F.3d 125]

Hal M. Hirsch, Esq., Greenberg Taurig, LLP, New York, NY, Gary R. Greenberg, Esq. (Argued), Louis J. Scerra, Jr., Esq., Peter M. Casey, Esq., Greenberg Taurig, LLP, Boston, MA, for Appellants Joseph P. LaSala and Fred S. Zeidman.

Elliot Cohen, Esq. (Argued), Troutman Sanders, LLP, New York, NY, for Appellee Bordier et Cie.

Paul J. Bschorr, Esq. (Argued), Lawrence J. Reina, Esq., Casey D. Laffey,

[519 F.3d 126]

Esq., Reed Smith, LLP, New York, NY, Anthony J. Laura, Esq., John J. Zefutie, Esq., Reed Smith, LLP, Princeton, NJ, Charles J. Becker, Reed Smith, LLP, Philadelphia, PA, for Appellee Dominick Company, A.G.

Before: SLOVITER and AMBRO, Circuit Judges, and POLLAK,^* District Judge.

OPINION OF THE COURT

POLLAK, District Judge.

In this appeal, we are called upon to decide whether state-law aiding-and-abetting-breach-of-fiduciary duty claims, which have passed from a corporation to its bankruptcy estate to a trust, may be brought in federal court by the trustees of the trust notwithstanding the Securities Litigation Uniform Standards Act ("SLUSA"), 15 U.S.C. § 78bb. We must further decide whether, under SLUSA, the trustees, as assignees of individual investors in the bankrupt enterprise, may assert, in federal court, against foreign entities, claims characterized as arising under foreign law for aiding and abetting money laundering. For the reasons that follow, we hold that SLUSA is no impediment to federal adjudication of either the state-law or the foreign-law claims.

I. Facts and procedural history

The story begins with AremisSoft, which (prior to its demise) was a software enterprise incorporated under the laws of Delaware. Between 1998 and 2001, two of AremisSoft's directors and officers, Lycourgos Kyprianou and Roys Poyiadjis (collectively, the "Directors"), allegedly executed a classic "pump-and-dump" scheme. According to the complaint, they artificially inflated AremisSoft's stock price by representing that its financial position was far stronger than it really was. Having "pumped" the stock price, they "dumped" the AremisSoft stock they had accumulated by selling their shares on the open market to unsuspecting investors. To cover their tracks, the Directors allegedly ran these insider-trading transactions through a variety of sham entities and bank accounts, all, so the complaint alleged, with the assistance and knowledge of defendants Bordier et Cie and Dominick Company (collectively, the "Banks"), both banking institutions organized under the laws of Switzerland. A few months and some hundreds of millions of dollars later, AremisSoft's real financial status was discovered, and its stock price plummeted. AremisSoft's condition deteriorated to the point that NASDAQ halted trading of its common stock in July 2001.

The situation continued to worsen and, in March 2002, AremisSoft petitioned for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of New Jersey. At the time of the bankruptcy petition, a federal class-action securities suit, in which a group of purchasers of AremisSoft stock (the "Purchasers") requested rescission of their stock-purchase contracts, was pending against AremisSoft. To settle the Purchasers' suit, the parties to the bankruptcy proceeding agreed that the plan of reorganization would assign to the Purchasers all causes of action owned by AremisSoft. An agreement of this sort would not seem to be either uncommon or problematic. While many corporations become insolvent for reasons that do not render anyone legally at fault, it is also not unusual for a bankrupt corporation to have viable legal claims against parties that wrongfully contributed to its demise. These claims can take myriad forms, from breach-of-contract claims against suppliers or customers, to tort claims against those who injured the corporation's property or economic interests, to, as here, claims for disloyalty against corporate fiduciaries and those who, so it is alleged, aided them. In bankruptcy—a process that seeks to gather and preserve all of the debtor's assets, and distribute them to creditors and interest holders in an orderly fashion—legal claims that belonged to the debtor are often important assets of the bankruptcy estate, and are fair game for distribution to the debtor's creditors and equity holders.

In the case at bar, rather than trying to assign to each of the Purchasers some portion of the estate's claims, the plan of reorganization provided for the creation of a state-law trust (the "Trust") to take title to and prosecute the assigned claims for the Purchasers' benefit. The Purchasers also assigned to the Trust any causes of action that they owned individually for activities related to the purchase of the AremisSoft securities. Assigning both sets of claims (the debtor corporation's claims and individual Purchasers' claims) to the Trust made logistical sense, as it rendered one entity responsible for prosecuting and distributing to the Purchasers the proceeds of all of the claims.¹

In bringing this lawsuit in the District Court for the District of New Jersey, plaintiffs Joseph LaSala and Fred Ziedman, trustees of the Trust, asserted four causes of action: two counts of aiding and abetting a breach of fiduciary duty, one against Bordier (Count I), and one against Dominick (Count II); and two counts of violating Swiss money-laundering laws, one against Bordier (Count III), and one against Dominick (Count IV). All causes of action were allegedly assigned to the Trust by the AremisSoft bankruptcy estate or by the Purchasers in their individual capacities.

II. SLUSA and the District Court's decision

The Banks filed a motion to dismiss, arguing, inter alia, that the Trust's lawsuit was preempted² by SLUSA. Congress enacted SLUSA in 1998 as a supplement to the Private Securities Litigation Reform Act ("PSLRA") of 1995, 15 U.S.C. § 77z-1 & 78u-4, so, to understand SLUSA, one must first understand the PSLRA. Congress enacted the PSLRA because it determined that securities plaintiffs and their attorneys were bringing abusive securities class actions that had no legitimate chance of success, but, because of the expense of discovery, were enough of a nuisance to force defendants to settle non-meritorious claims. S.Rep. No. 104-98, at 9, 1995 U.S.S.C.A.N. 679, 688. Moreover, class members typically recovered very little from those settlements, while class counsel were paid exorbitant fees. Id. at 6, 685. The PSLRA imposed on securities plaintiffs a number of requirements designed to deter the filing of these "strike suits" and to enable district courts more easily to dismiss frivolous suits on the pleadings. Id. at 35, 714. In response, plaintiffs began abandoning the federal courts altogether and bringing suit under state securities laws that did not impose these additional requirements. S.Rep. No. 105-182, at 3-6 (1998).

SLUSA undertook to close this perceived loophole by preventing securities plaintiffs from using the class-action vehicle to prosecute state-law securities claims. To be preempted by SLUSA an action must (1) make use of a procedural vehicle akin to a class action,³ and (2) allege a misrepresentation or deceptive device in connection with a securities trade.⁴ 15 U.S.C. § 78bb(f)(1). The class-action ingredient is designed to distinguish between mass actions⁵ and individual actions. S.Rep. No. 105-182, at 7-8. The securities-trade ingredient is designed to distinguish between state-law-based suits that, no matter how pleaded, in essence allege securities fraud, and those that allege other wrongs. See Rowinski v. Salomon Smith Barney, Inc., 398 F.3d 294, 299-300 (3d Cir.2005). When a claim contains both the class-action and the securities-trade ingredients, it must be dismissed.⁶ 15 U.S.C. § 78bb(f)(1). A plaintiff may pursue such a claim either (1) as a federal securities fraud class action, or (2) as a state-law individual action; she may not pursue such a claim as a state-law class action.

In the case at bar, the District Court ruled that all four claims were preempted by SLUSA, and thus dismissed the action. The court determined that all of the counts involved substantive allegations of misrepresentations in connection with securities trades. It further concluded that the lawsuit operated like a class action, inasmuch as the Trust was asserting claims for the benefit of some 6000 former shareholders of AremisSoft. The Trust now appeals that dismissal.⁷

III. Counts I & II — Aiding and abetting breaches of fiduciary duty

A. Clarifying the claims pleaded

In their briefs and at oral argument, the parties have largely talked past one another. This is somewhat understandable, as the parties differ in their definition of the nature of the claims at issue. Therefore, we begin by making clear what claims are asserted by the Trust, and how the Trust became the owner of those claims.

Much of the confusion stems from the fact that the nature of a pump-and-dump scheme perpetrated by corporate directors and officers is that it typically gives rise to multiple viable causes of action—causes of action that are owned by different parties and are assertable against different defendants. For example, for the offending directors and officers, carrying out a pump-and-dump scheme almost certainly constitutes a breach of their duty of loyalty to the corporation they serve. Thus, the scheme gives the corporation a colorable claim against the directors and officers (and anyone who knowingly aided them) for breach of fiduciary duty (and aiding and abetting a breach of fiduciary duty).⁸ The remedy for such a breach, under Delaware law, is that the directors and officers and...