The Rgh Liquidating Trust v. Llp
| Decision Date | 23 June 2011 |
| Court | New York Court of Appeals Court of Appeals |
| Parties | The RGH LIQUIDATING TRUST, on Behalf of Reliance Group Holdings, Inc., and Others, Appellant,v.DELOITTE & TOUCHE LLP et al., Respondents. |
OPINION TEXT STARTS HERE
Gage Spencer & Fleming LLP, New York City (William B. Fleming and G. Robert Gage, Jr., of counsel), for appellant.Kramer Levin Naftalis & Frankel LLP, New York City (Michael J. Dell and Adina C. Levine of counsel), for respondents.
We hold that The RGH Liquidating Trust (the Trust or the Liquidating Trust), established under the bankruptcy reorganization plan of Reliance Group Holdings, Inc. (RGH) as the debtor's successor, is “one person” within the meaning of the single-entity exemption in the Securities Litigation Uniform Standards Act of 1998 (Pub. L. 105–353, 112 U.S. Stat. 3227 [SLUSA]; see 15 USC § 77p [f][2][C]; § 78bb [f][5][D] ).1 AS A RESULT, SLUSA DOEs not precluDE SUpreme court from adJudicatiNg the state common-law fraud claims that plaintiff Trust has brought against defendants Deloitte & Touche LLP an accounting and consulting firm, and Jan A. Lommele, a principal of the firm, for the benefit of RGH's and Reliance Financial Services Corporation's (RFS) bondholders.
RGH, a publicly held company, owned 100% of the stock of RFS, which, in turn, owned 100% of the stock of Reliance Insurance Company (RIC). RIC generated upwards of 90% of the income of RGH, whose principal business was its ownership, through RFS, of RIC and its property and casualty insurance subsidiaries. Deloitte was the independent outside accountant and auditor for RGH, RFS and RIC and its subsidiaries, supplying annual audits of their financial statements; Lommele served as RIC's appointed actuary, responsible for assessing the adequacy of the company's loss reserves.
By the end of 1999, the Reliance companies, their financial condition deteriorating, were edging toward insolvency RGH suffered an operating loss of $318.3 million in 1999, and, in February 2000, announced that it was suspending its quarterly dividend and extending the maturity of its bank loans. Then in May, RGH reported a $36.5 million operating loss (before gains on sales of investments) for the first quarter of 2000. Sometime in June 2000, RIC stopped underwriting property and casualty insurance. In July, a deal for a major holding company to acquire RGH collapsed, and Moody's Investors Service downgraded its ratings for the company. By December 5, 2000, RGH's shares had fallen 99.9% during the year, closing at 39 cents. On December 6, 2000, the New York Stock Exchange suspended trading of RGH's securities.
On June 22, 2000, certain RGH common stockholders filed a class action complaint (the first of several) in the United States District Court for the Southern District of New York against RGH and three former directors and officers of RGH and RIC. These stockholder plaintiffs alleged that RGH and the individual defendants violated federal securities laws by making false and misleading statements regarding RGH's financial condition, thereby artificially inflating the company's stock price. Subsequently, bondholders launched similar federal securities class actions against RGH and individual directors and officers in the same court. All the cases were consolidated in October 2000. On July 16, 2001, an amended class action complaint was filed on behalf of stockholders who purchased common stock during the period from February 8, 1999 through December 6, 2000, and bondholders who purchased 9% senior notes due November 15, 2000 (hereafter, the senior bondholders) or 9.75% senior subordinated debentures due November 15, 2003 (hereafter, the subordinated bondholders) (collectively, the bondholders) during that same time period.2
On May 29, 2001, the Commonwealth Court of Pennsylvania placed RIC in rehabilitation, and named the Pennsylvania Insurance Commissioner as RIC's rehabilitator. RIC entered liquidation on October 3, 2001, and the Commissioner was appointed liquidator. Meanwhile, on June 12, 2001, RGH and RFS filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York, seeking chapter 11 bankruptcy protection. For administrative and procedural purposes, the court consolidated the two bankruptcies.
On April 22, 2005, RFS's plan of reorganization, approved by the bankruptcy court, went into effect and RFS emerged from bankruptcy as Reorganized RFS Corporation. Under RFS's bankruptcy plan, its litigation claims and those of its general unsecured creditors were assigned to RGH. The bankruptcy court subsequently confirmed RGH's bankruptcy plan—the First Amended Plan of Reorganization of Reliance Group Holdings, Inc. (the Plan), effective December 1, 2005—which created the Trust as successor to RGH pursuant to a Liquidating Trust Agreement and Declaration of Trust (the Trust Agreement). The Plan transferred the bankruptcy estate's assets, which included the litigation claims of RGH, RFS and their respective general unsecured creditors who did not opt out of the Plan, to the Trust.
Specifically, the Plan stated that the Trust was established for the “primary purpose” of “the liquidation of the assets transferred to it.” Concomitantly, the Trust Agreement specified that the Trust's “primary purpose” was to “receive the Trust Property and assume the Assumed Liabilities, and thereafter liquidate and distribute the Trust Property for the benefit of the Trust Beneficiaries [i.e., bankruptcy estate creditors].” The Plan defined “Trust Property” as “the Assets that vest in the Liquidating Trust on the [Plan's] Effective Date plus any income earned thereon and all proceeds thereof minus all costs and expenses of and paid by the Liquidating Trust and Distributions [i.e., transfers of cash or other property to those whose claims were allowed]”; and “Assets” as “any and all assets of the Estate as of the [Plan's] Effective Date, whether tangible or intangible, liquidated or unliquidated.”
In furtherance of the Trust's primary purpose, the Plan authorized it to
“issue the beneficial interests in the Liquidating Trust to Trust Beneficiaries [i.e., bankruptcy estate creditors], in accordance with the terms hereof, preserve, protect and maximize the value of the Trust Property, evaluate litigation claims, sell or otherwise liquidate the Trust Property as promptly and efficiently as is reasonably possible, and distribute all income and proceeds from the Trust Property in accordance with the terms of the Plan and the Liquidating Trust Agreement.”
Under the Trust Agreement, the Trust was permitted to exercise any powers consistent with its powers under the Plan and the Trust Agreement, including investing the Trust's assets; making distributions; paying taxes and any other obligations owed or incurred by the Trust; creating and administering reserves in accordance with the Plan; filing tax returns; and acting in accordance with the various court-approved settlements forming the Plan's basis. The Plan also clarified that the Trust was empowered to object to and/or otherwise resolve any disputed claims against RGH's bankruptcy estate.
On January 6, 2006, the Trust filed an action in Supreme Court against Deloitte and Lommele on behalf of RGH, RFS and their general unsecured creditors, alleging causes of action for actuarial fraud, accounting and auditing fraud, breach of contract and fraudulent conveyance. Defendants moved to dismiss on various grounds, and Supreme Court granted the motion on September 27, 2006; however, as for the creditors' fraud claims, Supreme Court granted the Trust leave to serve and file an amended complaint to plead “reliance and the consequence of that reliance with more specificity” (13 Misc.3d 1219[A], 2006 N.Y. Slip Op. 51908[U], *6, 2006 WL 2872525 [Sup.Ct., N.Y. County 2006] ). The Trust appealed (except as to the creditors' fraud claims), and the Appellate Division affirmed (47 A.D.3d 516, 851 N.Y.S.2d 31 [1st Dept.2008] ).
On November 2, 2006, the Trust filed an amended complaint, which alleged two causes of action: one for actuarial fraud against Deloitte and Lommele, and one for accounting and auditing fraud against Deloitte. The Trust asserted these claims for the benefit of unidentified general unsecured creditors; the senior and subordinated bondholders; 15 bank lenders; former employees; and the Pension Benefit Guaranty Corporation (PBGC), a wholly owned United States government corporation and agency of the United States. The Trust committed to distribute any monies recovered on the bondholders' claims on a pro rata basis to a “participant list” maintained by a depository trust company, as well as to those who “have identified [themselves] as bondholders by filing proofs of claims with the Bankruptcy Court.” Deloitte again moved to dismiss, now arguing that SLUSA preempted the lawsuit. The Trust countered that it qualified for the so-called single-entity exemption that SLUSA affords “a corporation, investment company, pension plan, partnership, or other entity ... not established for the purpose of participating in the action” ( see 15 USC § 77p [f][2][C]; § 78bb[f][5][D] ).
In a decision dated November 7, 2007, Supreme Court held that the Trust was a single entity within the meaning of SLUSA because its primary purpose was broader than the pursuit of the state law fraud claims. Accordingly, the court granted the motion only as to the Trust's claims on behalf of the unidentified general unsecured creditors, whose reliance was not specifically pleaded (17 Misc.3d 1128[A], 2007 N.Y. Slip Op. 52181[U], 2007 WL 4097413 [Sup.Ct., N.Y. County 2007] ). Deloitte appealed; the Trust did not cross-appeal.
On December 8, 2009, the Appellate Division modified Supreme Court's order by granting the motion to dismiss the Trust's claims for the benefit of the bondholders (71 A.D.3d 198, 891 N.Y.S.2d 324 [1st...
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