Title: The RGH Liquidating Trust v. Deloitte & Touche LLP, et al.

State: new-york

Issuer: New York Appellate Court

Document:

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This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 99  
The RGH Liquidating Trust, &c.,
            Appellant,
        v.
Deloitte & Touche LLP et al.,
            Respondents.
William B. Fleming, for appellant.
Michael J. Dell, for respondents.
READ, J.:
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 No 105-353, 112 Stat 3227 [1998]
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No. 99
[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 RFS's bondholders.  
I.
RGH, a publicly held company, owned 100% of the stock
of Reliance Financial Services Corporation (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
1SLUSA was incorporated into both the Securities Act of 1933
(Pub L No 73-22, 48 Stat 74 [1933]) and the Securities Exchange
Act of 1934 (Pub L No 73-291, 48 Stat 881 [1934]) in
substantially similar form.
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No. 99
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 Services downgraded
its ratings for the company.  By December 5, 2000, RGH's shares
had fallen 99.9% during the year, closing at 0.39 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
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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
2In May 2001, the parties to the federal securities class
action entered into a Memorandum of Understanding and Funding
Agreement whereby underwriters of insurance coverage for RGH and
its subsidiaries and directors would pay $17.4 million to settle
the lawsuit (see In re Reliance Sec Litig, 2004 WL 943545 [SD NY
2004] [granting the plaintiffs' motion to enforce the MOU and
Settlement Agreement and describing the interrelated history of
the federal securities class action, RGH's bankruptcy and RIC's
liquidation]).  The order and final judgment in this lawsuit,
signed by the United States District Court Judge on March 22,
2006 and filed four days later, excluded Deloitte and Lommele
from the class of persons eligible to participate in the
settlement; specified that Deloitte and Lommele were not
"Released Parties"; and excluded any claims against them from the
definition of "Settled Claims," "Settled Defendants' Claims" and
"Settled Insurance Claims."   
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No. 99
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 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
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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 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 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
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No. 99
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 consequences of that
reliance with more specificity" (13 Misc 3d 1219A [Sup Ct, NY
County 2006]).  The Trust appealed (except as to the creditors'
fraud claims), and the Appellate Division affirmed (47 AD3d 516
[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 Guarantee 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 himself 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 .
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. . not established for the purpose of participating in the
action" (see 15 USC § 77p [f] [2] [C]; 15 USC § 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 1128A [Sup Ct, NY 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 AD3d 198
[1st Dept 2009]).  The court took the position that the Trust was
not exempt from SLUSA as a single entity because "the
bondholders' claims against Deloitte [were] not being asserted on
behalf of the Reliance bankruptcy estate; the claims originally
belonged to the bondholders, not Reliance" (id. at 214).  The
Appellate Division agreed, however, that Supreme Court properly
declined to dismiss the Trust's claims for the benefit of the
other groups of creditors -- i.e., the 15 banks, two former
employees and the PBGC (71 AD3d at 215).  On July 8, 2010, the
Appellate Division certified the following question to us: "Was
the order of the Supreme Court, as modified by this Court,
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No. 99
properly made?" 
    II.
To combat the perceived harm to markets from frivolous
private securities class actions, Congress enacted the Private
Securities Reform Litigation Act of 1995, Pub L No 104-67, 109
Stat 737 (codified in part at 15 USC §§ 77z-1, 78u-4) (the PSLRA)
(see HR Conf Rep No 104-369, at 31-32 [1995]).  The PSLRA created
hurdles to discourage strike suits,3 including heightened
pleading standards and an automatic stay of discovery once a
defendant filed a motion to dismiss.  These requirements were
intended to make it difficult for plaintiffs to survive a motion
to dismiss in nonmeritorious cases.  "In enacting these changes,
Congress made clear its belief that opportunistic trial lawyers
were undermining the securities litigation system and were the
primary target of the legislation" (Painter, "Responding to a
False Alarm: Preemption of State Securities Fraud Causes of
Action," 84 Cornell L Rev 1, 33-34 [1998]).
But passage of the PSLRA created an incentive for
3A "strike suit" has been defined as "an action making
largely groundless claims to justify conducting extensive and
costly discovery with the hope of forcing the defendant to settle
at a premium to avoid the costs of the discovery" (Francis v
Giacomelli, 588 F3d 186, 193 at n 2 [4th Cir 2009] [citing 5A
Wright & Miller, Federal Practice and Procedure, § 1296, at 46
and n 9]; see also Black's Law Dictionary 1573 [9th ed 2009]
[defining a strike suit as a lawsuit "based on no valid claim,
brought either for nuisance value or as leverage to obtain a
favorable or inflated settlement"]).
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plaintiffs' attorneys to shift class action litigation against
publicly traded issuers from federal to state courts (see S Rep
No 105-182, at 3 [1998] [noting that during the course of
hearings to review the effect of the PSLRA, "one disturbing trend
became apparent; namely, that there was a noticeable shift in
class action litigation from federal to state courts"]). 
Congress worried that this migration endangered "the benefits
flowing to investors from a uniform national approach," and,
"beyond the number of, and dollar amounts involved, . . . created
a ripple-effect that . . . inhibited small, high-growth companies
in their efforts to raise capital, and . . . damaged the overall
efficiency of our capital markets" (id. [internal quotation marks
omitted]).  To close this "'federal flight' loophole," Congress
enacted SLUSA, which effectively vested federal courts with
exclusive jurisdiction, subject to stated exceptions not
applicable here, for securities fraud class actions (see Spielman
v Merrill Lynch, Pierce, Fenner & Smith (332 F3d 116, 123 [2d Cir
2003]).
SLUSA provides that no state or federal court may
entertain a "covered class action" brought by a private party and
based on state statutory or common law, which alleges fraud
(misrepresentation or omission of a material fact) or
manipulation in connection with the purchase or sale of a
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No. 99
"covered security."4  To implicate SLUSA, the complaint must
advance "either (1) an explicit claim of fraud or
misrepresentation (e.g., common law fraud, negligent
misrepresentations, or fraudulent inducement), or (2) other
garden-variety state law claims that sound in fraud.  A claim
sounds in fraud when, although not an essential element of the
claim, the plaintiff alleges fraud as an integral part of the
conduct giving rise to the claim" (In re Kingate Mgmt. Litig.,
2011 US Dist LEXIS 41598 at *23-24 [SD NY 2011] [internal
quotation marks and citation omitted]).  
SLUSA defines a "covered class action" as a "single
lawsuit" or "group of lawsuits" in which "damages are sought on
behalf of more than 50 persons or prospective class members, and
questions of law or fact common to those persons or members . . .
predominate over any questions affecting only individual persons
or members" (see 15 USC §§ 77p [f] [2] [A]; 78bb [f] [5] [B]); a
"covered security" is one traded nationally and listed on a
regulated national exchange (see 15 USC §§ 77p [f] [3]; 78bb [f]
4Courts often talk about SLUSA in terms of "preemption." 
The United States Supreme Court in Merrill Lynch, Pierce, Fenner
& Smith, Inc. v Dabit (547 US 71, 87 [2006]), however, highlights
that "SLUSA does not actually pre-empt any state cause of action. 
It simply denies plaintiffs the right to use the class-action
device to vindicate certain claims.  The Act does not deny any
individual plaintiff, or indeed any group of fewer than 50
plaintiffs, the right to enforce any state-law cause of action
that may exist."  In Dabit, the Supreme Court interpreted SLUSA
to preclude suits by "holders" of securities (i.e., those
allegedly induced by fraud to retain or delay selling) as well as
suits by purchasers or sellers.
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[5] [E]).  As relevant to this appeal, SLUSA specifies that, for
purposes of counting whether there are 50 or more persons or
prospective class members, "a corporation, investment company,
pension plan, partnership, or other entity, shall be treated as
one person or prospective class member, but only if the entity is
not established for the purpose of participating in the action"
(15 USC §§ 77p [f] [2] [C]; 78bb [f] [5] [D]). 
Finally, SLUSA makes all "covered class actions"
removable to the federal district court for the district in which
the action is pending (15 USC §§ 77p [c]; 78bb [f] [2]). 
"Congress inserted this provision so that federal courts, rather
than state courts, would interpret the scope of the preemption
under the statute" (M. Perino, Securities Litigation Under the
PSLRA [formerly Securities Litigation After the Reform Act] §
11.03, pp 11-14-11-15 [2010]; see also HR Rep No 105-640, at 16
[noting that the removal provision was meant "to prevent a State
court from inadvertently, improperly, or otherwise maintaining
jurisdiction over an action" precluded by SLUSA]).  The district
court must dismiss any removed action that SLUSA precludes (see
Romano v Kazacos, 609 F3d 512 [2d Cir 2010]).  Conversely, the
district court must remand a removed action to state court if it
decides that SLUSA does not bar the suit; federal appeals courts
lack jurisdiction to review an order directing remand (see
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No. 99
Kircher v Putnam Funds Trust, 547 US 633 [2006]).5 
The question presented by this appeal is a difficult
one, which will ultimately be resolved by the federal courts.6 
The difficulty resides in SLUSA's abbreviated treatment of
bankruptcy trustees.  In discussing the single-entity exemption,
the Senate Report accompanying S. 1260, the bill that became
SLUSA, made the point that the drafters had changed
"[t]he class action definition . . . from the original
text of S. 1260 to ensure that the legislation does not
cover instances in which a person or entity is duly
authorized by law, other than by a provision of state
or federal law governing class action procedures, to
5Obviously, Deloitte and Lommele elected not to remove this
lawsuit to the United States District Court for the Southern
District of New York, as they were entitled to do. 
6And the federal courts continue to grapple with SLUSA.  We
note, for example, that two judges in the Southern District of
New York are currently considering the question of whether the
trustee appointed pursuant to the Securities Investor Protection
Act (SIPA) for the consolidated liquidation of Madoff Securities
may bring state common law claims against third parties "for
failing to adequately investigate Madoff Securities despite being
confronted with myriad red flags and indicia of fraud" (Picard v
HSBC Bank PLC, 2011 WL 1544494 at *1 [SD NY 2011] [Rakoff, J.]
[internal quotation marks omitted]; see also Picard v JPMorgan
Chase, 2011 WL 2119720 [SD NY 2011] [McMahon, J.]).  Judge Rakoff
observed that the trustee would "clearly" be an entity treated as
one person under SLUSA "if the Trustee were suing on behalf of
the Madoff Securities estate . . . However, . . . the Trustee
[was] primarily suing, not on behalf of the Madoff Securities
estate, but on behalf of thousands of customers.  Thus, whether
the Trustee's Action is a 'covered class action' under SLUSA is a
novel question" (id. at *5).  A SIPA trustee is vested with the
same powers and title with respect to the debtor and the debtor's
property as a bankruptcy trustee, in addition to those powers set
forth in SIPA (15 USC § 78fff-1 [a]).
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seek damages on behalf of another person or entity.7 
Thus, a trustee in bankruptcy, a guardian, a receiver,
and other persons or entities duly authorized by law
(other than a provision of state or federal law
governing class action procedures) to seek damages on
behalf of another person or entity would not be covered
by this provision" (see S Rep No 105-182, at 6 [1998]
[emphases added]).
In this case, the Trust is the successor of RGH, the
debtor, under the Plan and the Trust Agreement, which were
endorsed by the bankruptcy judge in the Chapter 11 bankruptcy
proceeding.  The assets of RGH's bankruptcy estate vested in the
7The original version of S 1260 defined a "class action" as 
"Any single lawsuit, or any group of lawsuits filed in or
pending in the same court involving common questions of law
or fact, in which -
 
(A) damages are sought on behalf of more than 25 persons;
(B) one or more named parties seek to recover damages on a
representative basis on behalf of themselves and other
unnamed parties similarly situated; or
(C) one or more of the parties seeking to recover damages
did not personally authorize the filing of the lawsuit" 
(see Painter, 84 Cornell L Rev at 47-49, 56-58 [discussing the
original versions of HR 1689 and its near mirror image, S 1260,
and changes in these bills as approved by each house, adopted by
the House-Senate Conference Committee and passed by Congress]). 
By adding a single-entity exemption in the final bill to cover
legal entities that may act on behalf of numerous beneficiaries,
Congress made sure that, in bringing suits in their own names,
these entities would be counted as one person, unless they were
"established for the purpose of participating in the action" (see
15 USC §§ 77p [f] [2] [C]; 78bb [f] [5] [D]). 
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No. 99
Trust, and these assets included claims of the bankruptcy
estate's creditors, who are the beneficiaries of any recoveries
from Deloitte and Lommele.  Thus, it could certainly seem that
the Trust is an "entity duly authorized by law . . . to seek
damages on behalf of another person or entity" (id.).
Moreover, Chapter 11 plans apparently often call for
this type of postconfirmation vehicle (PCLV) to collect,
administer and distribute estate assets after the debtor's plan
has been confirmed.  Indeed, "[t]he shortening of Chapter 11
timelines" effected by the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005 (Pub L 109-8, 119 Stat 23 [2005])
(the BAPCPA) may have "increas[ed] the importance and prominence
of PCLVs" because they "allow a Chapter 11 debtor to focus
preconfirmation on the more pressing needs of its reorganization
or liquidation while deferring issues regarding illiquid estate
assets, causes of action, and claims reconciliation until after
the confirmation of its plan" (Thau, Friedland and Geekie, Jr.,
"Postconfirmation Liquidation Vehicles [Including Liquidating
Trusts and Postconfirmation Estates]: An Overview," 16 J Bankr L
& Prac 2 Art 4 [2007]).
Further, liquidating trusts and postconfirmation
estates seem to have grown in popularity because of the "post-
Enron/Worldcom world of Sarbanes-Oxley" in which we live, "where
claims might exist against the debtor's former insiders,
accountants, financiers, and others" (id.).  Because this kind of
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litigation is "complicated, expensive, and time-consuming," it
"can take years to get to trial and many months to try, not
something that fits with BAPCPA's contemplated timeline for plan
confirmation" (id.).  These issues may be resolved 
"by transferring the right to bring these actions (with
unsecured and secured creditors even agreeing to share
in recoveries) to a PCLV.  Debtor's management is no
longer faced with the prospect of suing those with whom
they have possibly worked or with the expense and
distraction of contentious litigation, and it can
devote its energies toward more pressing, internal
reorganization efforts and plan confirmation issues. 
On the other hand, creditors do not face the same
concerns or constraints as debtor management, and those
creditors faced with little or no cash distribution
under the plan[] are happy to take a flier on such
litigation.  By transferring this litigation to a PCLV,
debtor management can avoid unattractive litigation
while creating incentives for plan approval" (id.
[emphasis added]).8 
 
SLUSA's single-entity exemption was first examined in
the bankruptcy context in Cape Ann Inv. LLC v Lepone (296 F Supp
2d 4 [D Ma 2003]).  There, Cape Ann, an investor syndicate, and
other shareholders assigned their claims to a litigation trust
created by the bankruptcy court to pursue any potentially
recoverable assets of the bankruptcy estate.  When the trustee of
8The authors suggest additional reasons why liquidating
trusts have grown in popularity in recent years: they (1)
maximize value for creditors by increasing the speed of
restructuring; (2) are consistent with the growing trend of major
section 363 sales and liquidating cases rather than stand-alone
reorganization; (3) provide a potential source of recovery to
otherwise out-of-the-money creditors, providing an incentive for
them to support the Chapter 11 plan; and (4) reduce the expenses
of administering the estate by eliminating the redundancy in
professional costs. 
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No. 99
the litigation trust brought a state court action on the
shareholders' behalf against the defunct company's accountants,
the accounting firm (Deloitte, as in this case) removed the
complaint to the federal district court, and moved to dismiss on
the ground of SLUSA preclusion.  In response, the trustee moved
to remand.  There were 50 or more of these shareholders (although
Cape Ann itself was acknowledged to be a single entity).
The United States District Court for the District of
Massachusetts held that the trust was not "one person" within the
meaning of SLUSA's single-entity exemption (296 F Supp 2d at 10). 
The District Court Judge was principally persuaded that the trust
was not "a unitary entity" because "[t]he Trust Agreement
describe[d] the primary purpose of the Trust as prosecuting the
Causes of Action contributed to it . . . and distributing to the
[beneficiaries; i.e., the shareholders] the assets of the Trust
remaining after payment of all claims against or assumed by the
Trust" (id. [internal quotation marks omitted]).
Similarly, in LaSala v Bank of Cyprus Pub. Co. Ltd.
(510 F Supp 2d 246 [SD NY 2007]), the United States District
Court for the Southern District of New York looked to the
"primary purpose" of a trust to decide whether it qualified for
treatment as "one person" under SLUSA.9  In this case, a
9The judge actually dismissed this lawsuit on the basis of
forum non conveniens, but nonetheless discussed the alternative
ground of SLUSA preclusion in the event the Circuit Court
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No. 99
liquidating trust was formed under state law pursuant to three
court orders issued in connection with the settlement of a
securities fraud class action lawsuit involving AremisSoft, a
bankrupt corporation, and its Chapter 11 plan of reorganization
(see LaSala v Bordier et Cie, 452 F Supp 2d 575, 578 [D NJ
2006]).  Claims arising out of the purchase or sale of
AremisSoft's securities during the relevant time period and all
of the company's pre-bankruptcy claims were assigned to this
trust.
The Judge concluded, based on various provisions in the
trust agreement, that "the [AremisSoft] Trust was formed for the
primary purpose of engaging in litigation" on behalf of more than
6,000 beneficiaries, and therefore "the entity exception [did]
not apply" (LaSala, 510 F Supp 2d at 270 [SD NY 2007]).  The same
court, in another case involving the AremisSoft Trust,
distinguished Smith v Arthur Andersen LLP (421 F3d 989 [9th Cir
2005]), discussed infra, on the ground that "the prevalence of
ordinary bankruptcy-related tasks in the mandate of the trust [in
Smith] precluded a finding that it was organized for the primary
purpose of litigating trust claims" (LaSala v UBS, AG, 510 F Supp
2d 213, 237 [SD NY 2007]).   The United States District Court for
the District of New Jersey -- which approved the creation of the
AremisSoft Trust in the first place -- distinguished that trust
disagreed (510 F Supp 2d at 267).
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No. 99
from the trust in Smith on the basis that the latter
"did not receive an assignment of claims from a class
of shareholders pursuant to a class action settlement
as in the instant case and in Cape Ann.  Instead, the
Smith trust was formed to be the bankruptcy estate's
representative for all purposes.  Therefore, by the
terms of its creation, the [AremisSoft] Trust, like the
Cape Ann trust, functions more like a shareholder class
representative than a traditional bankruptcy trustee,
pursuing this litigation on behalf of a class of
approximately 6,000 persons" (LaSala, 452 F Supp 2d at
584).
In Smith, the Ninth Circuit cited the reasoning of the
district court in Cape Ann with approval, noting that the Cape
Ann court's "suggest[ion] that an entity is not one person if its
'primary purpose' is to pursue causes of action" was "sensible"
(Smith, 421 F3d 1007).  Further, a
"contrary interpretation, under which any entity
established 'at least in part' for the purpose of
pursuing litigation is not a 'person,' [would be]
inconsistent with [SLUSA's] plain language, which
provides that an entity 'shall be treated as one
person' if the entity is not 'established for the
purpose of participating in the action.'  Moreover,
that interpretation could potentially deprive many
bankruptcy trustees of the ability to pursue state-law
securities fraud claims on behalf of an estate. 
Nothing in SLUSA suggests that Congress intended to
work such a radical change in the bankruptcy laws" (id.
at 1007-08).
The Smith court concluded that "pursuing causes of
action" was not the trustee's "'primary' purpose" because 
"[t]he Debtor's Plan, under which the Trustee was
appointed, provides that the Trustee will 'act as the
Estates' representative for all purposes, and will be
responsible for (i) controlling and managing the
consideration received from [the company to which some
of the debtor's assets were sold under the bankruptcy
plan] and all Retained Assets, (ii) monetizing Retained
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Assets, (iii) filing, prosecuting and settling Estate
causes of action, (vi) making distributions in
accordance with the terms of the Plan, and (vii)
winding-up and closing the Estates" (id. at 1008).
The court held that, "[b]ecause the Trustee [was] to
'act as the Estates' representative for all purposes,' and not 
just for the purpose of pursuing causes of action, the Trustee
[was] one person, and the Trustee's action [was] not a 'single
lawsuit' barred by SLUSA" (id.).  In Smith, unlike Cape Ann (and
LaSala), the trustee was not asserting claims assigned to a trust
by a debtor's creditors, although this was not the reason given
by the court for its decision.
More recently, the Third Circuit examined the single-
entity exemption in LaSala v Bordier et Cie (519 F3d 121 [3d Cir
2008], cert denied 129 S Ct 593 [2008]), an appeal from the
District Court's dismissal (discussed earlier) of the state and
Swiss law fraud claims brought by the trustees of the AremisSoft
Trust against two banks.  The defendants allegedly assisted the
debtor's officers and directors in a "pump and dump" scheme
whereby after "pumping" the stock's price by misrepresenting the
company's finances, the insiders "dumped" the stock on the market
for unsuspecting investors to purchase at the artificially
inflated prices.  The court vacated the District Court's order,
holding that SLUSA did not preclude the action.
The Third Circuit observed that the trustees were
claiming damages "in their capacity as assignees of the true
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No. 99
injured parties," and that "the injured party [was], at least in
the first instance, AremisSoft," while the banks asserted that
the injured parties were, in fact, the "[p]urchasers in their
individual capacities as purchasers of securities" (id. at 131). 
"Reading the complaint against the background of Delaware law,"
the court first concluded that the complaint's aiding-and-
abetting claims were "originally owned by AremisSoft, and
assigned to the Trust by the AremisSoft bankruptcy estate" (id.
at 132).  Put another way, the claims originally "belonged to
AremisSoft, not to the purchasers of AremisStock stock" (id.).
Turning to SLUSA, the Third Circuit then considered
that the single-entity exemption, by its wording, directed judges
"to follow the usual rule of not looking through an entity to its
constituents unless the entity was established for the purpose of
bringing the action, i.e., to circumvent SLUSA" (id. at 132-133;
see also id. at 134 ["SLUSA's single exception to this rule is
that when [a] corporation is established for the purpose of
litigation, i.e., when plaintiffs try to avoid SLUSA by running
their securities claims through a corporate entity, the court
should look to the corporation's constituents"]).  To evaluate
the District Court's ruling, the court opined that it was
"first necessary to recall the nature and ownership of
these claims [, which] at one time belonged to
AremisSoft, the entity allegedly injured by its
Directors' breaches of duty and the Banks' aiding those
breaches.  In bankruptcy, the claims passed to
AremisSoft's bankruptcy estate . . . but the debtor-in-
possession did not assert them during the pendency of
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No. 99
the bankruptcy.  Rather, the bankruptcy estate assigned
them to the Trust, a state-law entity created in large
part to pursue these and similar claims for the
ultimate benefit of the Purchasers, the only group
whose interests were impaired by the plan of
reorganization.  Thus, the Trust can only bring these
claims as assignee of the bankruptcy estate" (id. at
133). 
The court then observed that "[t]hough the parties do not go into
detail on this point, one would assume that this deal was struck
so that the Purchasers would vote to approve the plan of
reorganization, even though their interests were impaired" (id.
at n 16).10 
The Third Circuit concluded that it was, in fact,
irrelevant whether the AremisSoft Trust was established for the
purpose of litigation; the purchasers were simply the beneficial
owners of the claims assigned by the true injured party,
AremisSoft, to the AremisSoft Trust.  The banks argued that
"allowing these claims to go forward [would] re-create a loophole
for abusive securities litigation that Congress intended, through
SLUSA, to close," to which the Court replied that it was
difficult to "imagin[e] such assignments occurring outside very
special contexts, such as bankruptcy, a context in which Congress
clearly intended fiduciary-duty actions to go forward" (id. at
142).
Thus, the majority of the federal courts to have
10The interests of the senior and subordinated bondholders
in this case were, of course, likewise impaired by the Plan.
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No. 99
considered whether a liquidating trust may press state law fraud
claims against a bankrupt corporation's outside counselors and
consultants for the benefit of the corporation's creditors have
zeroed in on whether the trust's "primary purpose" is litigation
of such claims.  This was the analytical test applied by Supreme
Court to decide that SLUSA does not preclude this action, and we
agree with that court that, judged by the language in the Plan
and the Trust Agreement, the "primary purpose" of the Trust is
far broader than the pursuit of creditors' causes of action.
There are many reasons why a liquidating trust appeals
to debtors, creditors and bankruptcy courts.  As the Third
Circuit noted in LaSala, bankruptcy is a "very special context[]"
where Congress clearly intended to preserve the prerogative of
bankruptcy trustees to assert claims of bankruptcy estates (id.
at 135-136).  In short, the Liquidating Trust was not a device
created by plaintiffs or their attorneys to circumvent SLUSA,
which is what the statutory language precluding unitary status
for entities created for "the purpose of participating in the
action" was designed to forestall.
The dissent favors the approach taken by the Third
Circuit, which did not assess the "primary purpose" of the
particular trust at issue.  Instead, based on an assessment of
the pleadings in light of Delaware law, that court determined
that AremisSoft, the bankrupt corporation, was the true "injured
party" on whose "behalf" the litigation was brought, not the
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No. 99
6,000 purchasers who assigned their claims to the AremisSoft
Trust.  Indeed, the dissent is certain that the Third Circuit
"would have held the present case to be barred by SLUSA"
(dissenting op at 6).  The facts in LaSala, however, are very
different from the facts here.
In LaSala, the bankruptcy estate assigned the debtor's
claims to the purchasers and the purchasers separately assigned
these claims (which were originally the debtor's claims) to the
AremisSoft Trust.  Here, as previously discussed, 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.  Under section of 541 (7) of the Bankruptcy Code, a
bankruptcy estate includes "[a]ny interest in property that the
estate acquires after the commencement of the case" (11 USC § 541
[a] [7]; see In re CBI Holding Co., 529 F3d 432, 457-458 [2d Cir
2008] [discussing legislative history of section 541 (a) (7)]). 
In other words, the bondholders' claims were property within the
estate, and the Trust brought this action on behalf of the estate
for the benefit of the bondholders.  Put yet another way, in
LaSala the creditors (i.e., the purchasers) owned the debtor's
(i.e., AremisSoft's) claims and enlisted the AremisSoft Trust to
prosecute the debtor's claims for their benefit.  Here, the
debtor's estate owned the creditors' (i.e., the bondholders')
claims and enlisted the Trust to prosecute the estate's claims
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No. 99
for their benefit.  We assume the Third Circuit would not have
even needed to analyze the identity of the true injured party in
LaSala if the purchasers' claims had been included within a
bankruptcy estate, rather than separately assigned by the
purchasers to the AremisSoft Trust.
Finally, we have decided in this appeal, involving a
pre-answer motion to dismiss, only that SLUSA does not preclude
the bondholders' lawsuit against Deloitte and Lommele.  We do not
opine on any issues related to the merits of their claims.  When
defendants interpose their answers they are, of course, free to
plead any potentially applicable affirmative defense.
Accordingly, the order of the Appellate Division,
insofar as appealed from, should be reversed, with costs, the
order of Supreme Court reinstated, and the certified question
answered in the negative.
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The RGH Liquidating Trust, &c. v Deloitte & Touche LLP, et al.
No. 99 
SMITH, J.(dissenting):
More than 50 bondholders of Reliance Group Holdings,
Inc. (RGH) assigned claims to the RGH Liquidating Trust, which
agreed to distribute to those bondholders the net proceeds
resulting from any recovery on those claims.  The Trust then
brought this action asserting the claims of the bondholders
(among others) against Deloitte & Touche and a Deloitte principal
under New York law.  The Trust alleges that Deloitte, as RGH's
auditor, fraudulently caused RGH's financial condition to be
misstated, thus inducing the bondholders to buy, or to refrain
from selling, RGH bonds.  The reason for bringing the case under
State law is apparent: a federal securities law claim against
Deloitte would have been time-barred (see Lampf, Pleva, Lipkind,
Prupis & Petigrow v Gilbertson, 501 US 350, 364 [1991]; 28 USC §
1658 [b]).
Congress enacted the Securities Litigation Uniform
Standards Act (15 USC § 78 bb) (SLUSA) to prevent exactly this
kind of evasion of federal securities law barriers to suit.  The
majority nevertheless finds the Trust's action on behalf of the
bondholders permissible under SLUSA.  It does so through a narrow
reading of the statute that is inconsistent with the approach
taken to similar questions by the federal courts.
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No. 99
SLUSA says: "No covered class action based upon the
statutory or common law of any State . . . may be maintained in
any State or Federal court . . . alleging . . . a
misrepresentation or omission of a material fact in connection
with the purchase or sale of a covered security" (15 USC § 78 bb
[f] [1] [A]).  It is undisputed that RGH's bonds are covered
securities; the issue here is whether the Trust's lawsuit is a
"covered class action."  SLUSA defines that term, in relevant
part, as:
"any single lawsuit in which --
   "(I) damages are sought on behalf of more
than 50 persons . . . and questions of law or
fact common to those persons . . . . without
reference to issues of individualized
reliance on an alleged misstatement or
omission, predominate over any questions
affecting only individual persons"
(15 USC § 78 bb [f] [5] [B] [i]).
This is a covered class action if the Trust is seeking
damages "on behalf of more than 50 persons."  In common sense, of
course it is: it is the assignee of more than 50 bondholders, and
any damages it recovers will be distributed to those bondholders. 
Indeed, the Trust's amended complaint says that it is suing "on
behalf of the general unsecured creditors" of RGH, a term that
includes the bondholders.
But the Trust argues, and the majority holds, that the
action may be treated as though it were brought on behalf of only
one person, the Trust, because of the following SLUSA provision,
captioned "Counting of certain class members":
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No. 99
"For purposes of this paragraph, a
corporation, investment company, pension
plan, partnership, or other entity, shall be
treated as one person . . . but only if the
entity is not established for the purpose of
participating in the action"
(15 USC § 78 bb [f] [5] [D]).
Deloitte argues, persuasively it seems to me, that this
provision is not relevant to this case, because even if the Trust
is "treated as one person" it is still suing "on behalf of" more
than 50 others -- just as a class representative may be one
person, but a class action will still be barred by SLUSA.  If the
"counting" provision is controlling here, however, that should
not change the result. 
The counting provision means, as the United States
Court of Appeals for the Third Circuit has explained, "that the
court is to follow the usual rule of not looking through an
entity to its constituents unless the entity was established for
the purpose of bringing the action, i.e., to circumvent SLUSA"
(LaSala v Bordier Et Cie, 519 F3d 121, 132-133 [3d Cir 2008]).
The record makes clear that bringing actions like this one -- and
thus circumventing SLUSA -- was an important part of the reason
for the Trust's creation.  That was not, it is true, the Trust's
sole purpose.  According to the Plan of Reorganization that
brought the Trust into existence, it was "established . . . for
the purposes of receiving the Trust Property and assuming the
Assumed Liabilities, and liquidating and distributing the Trust
Property for the benefit of the Trust Beneficiaries."  But the
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No. 99
bondholders are "Trust Beneficiaries" and the "Trust Property"
includes what the Plan calls "Creditor Litigation Claims" --
among them the claims that the Trust is now asserting.  Indeed,
Creditor Litigation Claims, and the resulting proceeds, were
viewed as a very significant part of the Trust's assets.  The
Disclosure Statement prepared in connection with the Plan of
Reorganization says:
"on the Effective Date, the primary assets of
the Liquidating Trust will consist of: (i)
Causes of Action, including, but not limited
to, the D&O Litigation Proceeds and the
Creditor Litigation Proceeds . . ."
In short, bringing lawsuits like this one was one of
the major purposes of the Trust.  To treat the Trust as a single
person when it is implementing that purpose, and to ignore the
obvious fact that it is acting on behalf of more than 50 other
persons, simply invites evasion of SLUSA.  That, as I view it, is
all there is to this case.
The majority reaches another conclusion through what
seems to me a confused reading of SLUSA's legislative history. 
It is true, as the majority says, that the legislative history
shows that SLUSA's authors did not want to bar litigation by
trustees in bankruptcy and similar entities "duly authorized by
law . . . to seek damages on behalf of another person or entity"
(S Rep No 105-182 at 8 [1998]) (quoted in majority op at 13-14). 
That is why language in the draft legislation that might have
been read to bar an action by a trustee in bankruptcy was
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No. 99
deleted.  But the majority ignores the difference, critical for
SLUSA purposes, between a trustee in bankruptcy -- who sues,
ordinarily, on behalf of a single entity, the debtor -- and a
liquidating trust like this one, which is bringing claims
assigned to it for the purpose of suit by more than 50 potential 
plaintiffs.  Nothing in either the language or the legislative
history of SLUSA suggests that Congress meant to grant an
exemption to any "liquidation vehicle" that is doing precisely
what SLUSA was enacted to prevent.
The federal cases dealing with this sort of question
are consistent with the distinction I have made between the
successor in interest to a single entity (e.g. a trustee in
bankruptcy) and the assignee of many (e.g. the Trust here).  That
distinction is explicitly drawn by Judge Pollak's opinion for the
Third Circuit in LaSala.
LaSala was, in a critical way, the mirror image of this
case: the claims being litigated there had originally belonged
not to many entities, but to one, a bankrupt company called
AremisSoft.  The claims had passed, as the court explained, "from
a corporation to its bankruptcy estate to a trust" (519 F3d at
126).  That was the critical fact supporting the Third Circuit's
holding that the case was not barred by SLUSA.  The court
concluded, after a careful analysis, that the claims it was
analyzing "originally belonged to AremisSoft, not to the
purchasers of AremisSoft stock" (id. at 132).  If the claims had
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No. 99
originally belonged to the purchasers (of whom there were more
than 50) the LaSala court would have come out differently. 
Interpreting the words of SLUSA that are critical here -- "on
behalf of 50 or more persons" -- the court explained that that
phrase
"seems to refer to someone bringing a claim
on behalf of 50 or more injured persons.  In
other words, the phrase refers to the
assignors of a claim, not to the assignee . .
.  Under this reading, the Trust is not
bringing its claims 'on behalf of' the
Purchasers, as SLUSA uses the term, because
the Purchasers are not the injured parties;
rather, the Trust is bringing the claims 'on
behalf of' AremisSoft."
(Id. at 134). 
It is apparent that the LaSala court would have held
the present case to be barred by SLUSA.  Here, it is undisputed
that "the assignors" were not a bankrupt corporation, but more
than 50 bondholders.  It is they, in LaSala's terms, who are the
"injured parties," and this action is brought on their "behalf." 
The majority takes a contrary view of LaSala's
application to this case, based, apparently, on the majority's
belief that the claims of the bondholders here were momentarily
included in "the bankruptcy estate's assets" (majority op at 24)
-- i.e., that the claims passed through the estate's hands on
their way from the bondholders to the Trust, rather than being
directly assigned to the Trust by the bondholders.  Even if true,
that would be irrelevant under the LaSala court's reasoning: it
would not alter the fact that the bondholders were the injured
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No. 99
parties.  But I believe the majority is factually wrong: I see
nothing in the record to support the assertion that the RGH
bankruptcy estate ever owned these claims.  The majority is
correct in saying that the assignment of the claims from the
bondholders to the Trust was effected in RGH's Plan of
Reorganization -- but why this purely formal distinction would
change the LaSala court's analysis is something the majority does
not explain.   
Other Federal cases are consistent with the LaSala
approach.  In Smith v Arthur Andersen LLP (421 F3d 989 [9th Cir
2005]), the action was brought by a trustee in bankruptcy, the
successor in interest to a single entity, Boston Chicken, Inc. 
The court held the action not barred by SLUSA, observing that a
contrary holding "could potentially deprive many bankruptcy
trustees of the ability to pursue state-law securities fraud
claims on behalf of an estate" (id. at 1008).  By contrast, in
Cape Ann Investors LLC v Lapone (296 F Supp 2d 4 [D Mass 2003]),
the court dismissed under SLUSA claims that had been assigned to
a litigation trust by shareholders who claimed they had been
induced to purchase, or to refrain from selling, stock in a
company that went bankrupt.  The trustee, as the court pointed
out, had a duty to act "for the benefit of the . . .
Shareholders.  In that respect, his role is no different than
that of any shareholder class representative" (id. at 9-10).
The Smith and Cape Ann opinions, like the majority
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No. 99
opinion here, speak of the "primary purpose" for which a
particular entity is formed.  But unlike today's majority, these
federal cases address the "primary purpose" question with
reference to the particular purpose being carried out in the
lawsuit at hand -- i.e., they in substance ask whether the
lawsuit is an evasion of SLUSA or not.  The Third Circuit in
LaSala adopted what seems to me a more useful interpretation of
SLUSA's "established for the purpose of participating in the
action" language: "when the corporation is established for the
purpose of litigation, i.e., when plaintiffs try to avoid SLUSA
by running their securities claims through a corporate entity,
the court should look to the corporation's constituents" (519 F3d
at 134).  Because that is exactly what happened here -- the
bondholders have tried to avoid SLUSA by running their claims
through a liquidation trust -- I would affirm the Appellate
Division's order dismissing those claims.   
*   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *
Order, insofar as appealed from, reversed, with costs, order of
Supreme Court, New York County, reinstated, and certified
question answered in the negative.  Opinion by Judge Read.  Chief
Judge Lippman and Judges Ciparick, Graffeo, Pigott and Jones
concur.  Judge Smith dissents and votes to affirm in an opinion.
Decided June 23, 2011
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