1 15-3856-cv Liana Carrier Ltd. et al. v. Pure Biofuels Corporation et al. 

### UNITED STATES COURT OF APPEALS FOR THE SECO ND CIRCUIT SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007 , IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT = S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DA TABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING TO A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NO T REPRESENTED BY COUNSEL. At a stated term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Fole y Square, in the City of New York, on the 6 th day of December, two thousand sixteen.
Present: A MALYA L. K EARSE , R ICHARD C. W ESLEY , D EBRA A NN L IVINGSTON , Circuit Judges

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_____________________________________ L IANA C ARRIER L TD ., A MIR R IMON , Plaintiffs-Appellants , v. 15-3856
P URE B IOFUELS C ORPORATION , P URE B IOFUELS DEL P ERU , S.A.C., P URE B IOFUELS H OLDINGS , L.P., C ARLOS A LBERTO P INTO R OCHA , Defendants-Appellees , L UIS H UMBERTO G OYZUETA A NGOBALDO , G USTAVO G OYZUETA , B RIAN S. A LPERSTEIN , Defendants. *

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* The Clerk of Court is respectfully di rected to amend the official caption in this case to conform with the caption above.2 For Plaintiffs-Appellants: C HRISTOPHER B. S PUCHES , Ehrenstein Charbonneau Calderin, Miami, Florida For Defendants-Appellees: R ONALD D. L EFTON (Richard A. Edlin, on the brief ), Greenberg Traurig, LLP, New York, New York Appeal from a judgment of the United States District Court for the Southern District of New York (Marrero, J .). UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that the judgment of the district court is MODIFIED and, as so modified, is AFFIRMED

. Plaintiffs-Appellants Liana Carrier Ltd. (“Li ana Ltd.”) and Amir Rimon appeal from a judgment of the United States District Court for the Southern District of New York (Marrero, J .) granting the motion to dismiss by Defendants-A ppellees Pure Biofuels Corporation (“Pure Biofuels”), Pure Biofuels del Pe ru, S.A.C., Pure Biofuels Hold ings, L.P., and Carlos Alberto Pinto Rocha (“Pinto”) and declining to exercise supplemental jurisdiction over Plaintiffs-Appellants’ state law cl aims. Liana Ltd. and Rimon argue that the district court erred (1) in denying them leave to amend their comp laint on grounds of futility; (2) in holding that their state law contract claim di d not “aris[e] under” the laws of the United States for purposes of 28 U.S.C. § 1331; (3) by utilizing a letter-briefing procedure in evaluating the merits of the proposed amendments to the complaint; and (4) in dismissing all of their claims, including their state law claims, with prejudice. We assume the parties’ familiarity with the facts, procedural history of the case, a nd the issues on appeal. A. Background On August 14, 2008, Liana Ltd. and Rimon entered into two private placement subscription agreements for a total 15,714,287 shares of defendant Pure Biofuels at $0.35 a3 share, a cumulative investment of $5,500,000. Pure Biofuels, now dissolved, was, at the time, the parent company of defendant Pure Biofue ls del Peru, S.A.C., and aimed to develop a biodiesel production facility in Lima, Peru serv ing the Peruvian market. Liana Ltd. and Rimon allege that they were led to believe that the pr ospects for Pure Biofuels were bright, that Pure Biofuels’ Securities and Exchange Commission (“SEC”) disclosures suggested that the necessary biodiesel production facility could be constructe d inexpensively, and that Pinto represented to them that Pure Biofuels would soon have steadily rising sales and income. By the end of 2008, however, Pure Biofuels wa s already in desperat e need of a capital infusion. Plaintiffs allege that Pinto, who, at the time, was Pure Biofuels’ Chief Operating Officer, arranged matters so that the only financing options presente d to Pure Biofuels’ board of directors were those which would ultimately pe rmit him to obtain a controlling stake in the company and to take it private. Included among the proposals Pinto encouraged Pure Biofuels’ board to enter into was one from FDS, an en tity Plaintiffs-Appellants allege Pinto secretly controlled. At Pinto’s urging, Pu re Biofuels allegedly entered into several transactions with FDS from late 2008 through 2010 in which Pure Biof uels issued millions of equity warrants to FDS in exchange for financing (together with the transactions described in the remainder of this paragraph, the “Financing Transactions”). Pinto also helped Pure Biofuels secure a line of credit from Trimarine, another entity in whic h Pinto allegedly maintained an interest, in exchange for which Pure Biofuels issued warrants to Trimarine. To protect its own interest in Pure Biofuels, Plainfield Peru I LLC (“Plainf ield”), Pure Biofuels’ largest shareholder, demanded that Pure Biofuels issue warrants in its favor before it would accede to these arrangements. By the end of 2010, Plainfield, FD S and Trimarine controlled more than ninety4 percent of Pure Biofuels’ shares , as computed on a fully diluted basis. In January 2011, Pure Biofuels deregistered its s ecurities with the SEC. In May 2012, Pure Biofuels gave notice th at its parent, PBC Acquisition LLC (“PBC Acquisition”), a Nevada limited liability company, had merged with and into it under Nevada’s short-form merger statute (the “Short-Form Me rger”). Nevada’s short-form merger statute permits a parent corporation owning at least ni nety percent of the outs tanding shares of each class of a subsidiary cor poration to effect a merger of the pa rent with and into the subsidiary without the approval of the minority sharehol ders. Nev. Rev. Stat. § 92A.180(2). Liana Ltd. and Rimon allege that PBC Acquisition was a vehi cle jointly controlled by FDS and Plainfield, used to hold their shares in Pu re Biofuels and thereby effect the Short-Form Merger. The remaining shareholders in Pure Biofuels, incl uding Plaintiffs-Appellant s, received $0.00832 per share in the exchange. 1
B. Procedural History On May 12, 2014, Plaintiffs-Appellants filed this action in the District Court for the Southern District of New York a lleging violations of § 10(b) and Ru le 10b-5 as well as a variety of state law claims. The district court dismisse d those securities law claims that turned on the initial sale of securities on th e grounds that these claims were time barred under the five year statute of repose imposed by 28 U.S.C. § 1658(b) . The district court also rejected the contention that the alleged misrepresentations in Pure Biofuels’ disclosures with respect to the Financing Transactions, which wo uld bring Plaintiffs-Appellants’ cause of action within five years of their filing suit, grounded a separate cause of action under the securities laws. It reasoned that, though these claims would not be barred by § 1658(b)’s term of repose,

1 Plaintiffs’ original $5,500,000 investment was therefor e transformed into a right to receive $130,742.87.5 Plaintiffs-Appellants had not sufficiently elaborated how the various trans actions in which they had no involvement – whether induced by fraudulent misrepresentations or not – had caused the securities transaction at issue, the Short-Form Merger. The district court also held that Plaintiffs-A ppellants’ contract claim – which alleged that defendants had breached their contractual representation that they were in compliance with federal securities law (the “10b-5 Representation”) – did not arise under the securities laws such that federal question jurisdiction w ould attach and declined to exer cise supplemental jurisdiction. It therefore dismissed all Plain tiffs-Appellants’ claims. However, the district court did allow Plaintiffs-Appellants to submit letter briefing de scribing how they would amend their complaint to address the complaint’s deficiencies, after which it would consider whether leave to amend would be appropriate. Plaintiffs-Appellants’ letter briefing argued that they could amend their complaint to make clear that the non-disclosure of the conflict of interest inherent in the Financing Transactions – that the entities providing the fina ncing were largely tied to Pinto – had allowed Pinto and Plainfield to obtain su fficient control over Pure Biofuels to effect the Short-Form Merger, and that this connection grounded their secu rities law claim. The district court denied leave to amend as futile, and this appeal followed. C. Discussion 1. Leave to Amend – Securities Claims “We review a district court’s denial of leave to amend for abuse of discretion, unless the denial was based on an interpretatio n of law, such as futility, in which case we review the legal conclusion de novo. Futility is a determination, as a ma tter of law, that proposed amendments would fail to cure prior deficiencies or to stat e a claim under Rule 12(b)(6) of the Federal Rules6 of Civil Procedure. In assessing whether the pr oposed complaint states a claim, we consider the proposed amendments along with the remainde r of the complaint, accept as true all non-conclusory factual allegations therein, and draw all reasonable inferences in plaintiff’s favor to determine whether the allega tions plausibly give rise to an entitlement to relief.” Panther Partners Inc. v. Ikanos Commc’ns, Inc. , 681 F.3d 114, 119 (2d Cir. 2 012) (internal alterations omitted). “To succeed on a § 10(b) and Rule 10b–5 claim, a plaintiff must prove ‘(1) a material misrepresentation or omission by the defendan t; (2) scienter; (3) a connection between the misrepresentation or omission a nd the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) ec onomic loss; and (6) loss causation.’” GAMCO Inv’rs, Inc. v. Vivendi Universal, S.A. , 838 F.3d 214, 217 (2d Cir. 2016) (quoting Halliburton Co. v. Erica P. John Fund, Inc. , 134 S. Ct. 2398, 2407 (2014)). We have termed the third and fourth elemen ts of a § 10(b) claim “transaction causation,” which requires “an allegation that but for the claimed misrepresent ations or omissions, the plaintiff would not have entered into th e detrimental securiti es transaction.” Lentell v. Merrill Lynch & Co., Inc. , 396 F.3d 161, 172 (2d Cir. 2 005) (emphasis added). We have also held that a plaintiff can allege transact ion causation not only by alleging that but for the defendants’ misleading representations or omissions the plain tiff would not have bought or sold the security at issue, but also by alleging that , but for the defendants’ deception of the plaintiffs , the plaintiffs might have pursued a state law remedy that was ava ilable to prevent the sale of their stock to the defendants at a price significantly below its value. Madison Consultants v. Fed. Deposit Ins. Corp. , 710 F.2d 57, 63-64 (2d Cir. 1983); see also Santa Fe I ndus., Inc. v. Green , 430 U.S. 462, 474 n.14 (1977).7 Liana Ltd. and Rimon argue that, despite the fact that they did not ha ve sufficient votes to block the merger under Nevada law, the absence of disclosure with respect to the Financing Transactions leading up to the merger preven ted them bringing a state law action that would have protected at least some of the value of thei r interest in the corporat ion. Specifically, they point to two state law actions that were foreclosed as a result of the alleged failure to disclose: (1) a derivative action for brea ch of fiduciary duty, and (2) an action for an appraisal. The latter argument can be addressed on st raight-forward loss causation grounds. An appraisal action values the shares of the dissen ting stockholders at the time immediately prior to the merger. Nev. Rev. Stat. § 92A.320(1); Am. Ethanol, Inc. v. Cordillera Fund, L.P. , 252 P.3d 663, 666 (Nev. 2011). Here, however, Plaintiffs-A ppellants do not contend that the valuation used at the time of the merger was inaccurate, but that the Financing Transactions so diluted their stake that it rendered the shares they did hold nearly valueless by the time the Short-Form Merger was executed. Appraisal, therefore, w ould not have offered them hope of recovery. Plaintiffs-Appellants’ theory with respect to the former argument is that, had the conflicts inherent in the Financing Transa ctions been disclosed, they coul d have immediately maintained a derivative action for breach of fiduciary duty on behalf of Pure Bi ofuels. By lulling Plaintiffs-Appellants into complacency, these a lleged omissions ultimately permitted Plainfield, FDS and Trimarine to obtain the control necessar y to execute the Short-Form Merger. Thus, Plaintiffs-Appellants argue, but for these omissi ons, they might have taken preemptive action, preserving the pre-dilution value of their Pure Biofuels holdings. The problem for Plaintiffs-Appella nts’ argument is that the c onnections laid out in their motion to amend are too attenuated to estab lish the “essential link” between the alleged omissions by defendants at the time of the Financing Transactions and PBC Acquisition’s8 capacity to execute the Short-Form Merger y ears later that proof of transaction causation requires. Va. Bankshares, Inc. v. Sandberg , 501 U.S. 1083, 1089 (1991); Grace v. Rosenstock , 228 F.3d 40, 47-49 (2d Cir. 2000). Even assuming th e materiality of the alleged omissions, we have never relieved a securities-law plaintiff of the burden of proving the but-for relationship between the alleged misrepresentat ions and the securities transact ion that our § 10(b) and Rule 10b-5 jurisprudence requires. See Minzer v. Keegan , 218 F.3d 144, 149-50 & n.2 (2d Cir. 2000). Assuming, for purposes of argument, that the allegations about the conflicts underlying the Financing Transactions are true, the causal link in this cas e is broken by (1) the necessity of tapping some source of financing and (2) the fact of Plainfield ’s controlling stake in Pure Biofuels. Plaintiffs-Appellants do not contest that Pure Biofuels wa s in dire need of financing. In fact, Plaintiffs-Appellants’ original complaint turned on the allegation th at Pure Biofuels had failed to disclose just how dire its financial situa tion was at the time its securities were originally sold to Liana Ltd. and Rimon. But if Pure Biofuels was in the fi nancial straits that Plaintiffs-Appellants allow, it is highly likely that it would have been forced to obtain financing on unfavorable terms – perhaps in cluding the issuance of equity warrants such as those that diluted the interests of minority stockholders like Liana Ltd. and Rimon – in any case. Moreover, a significant component of the dilution occurred because of Plainfield’s insistence that it be awarded equity warr ants in exchange for its approval of the proposed Financing Transactions. This is not ev idence of conspiracy, but wa s, instead, a rational demand by Plainfield that enabled it to protect the value of its own interest. As the controlling shareholder, Plainfield likely would have de manded the same in exchange fo r agreeing to any form of financing transaction granting warrants to the lender. Mo reover, as a component of9 demonstrating transaction causa tion, Plaintiffs-Appellants would have to show that, by the mechanism of the derivative suit, they “would have succeeded in preventing the loss [they] in fact suffered.” Madison Consultants , 710 F.2d at 65. Taking into account the clear necessity for some sort of financing and the limited optio ns available even had the board explored more broadly, it is far from clear that they would be able to do so. As a result, the “essential link” between the alleged omissions in connection with the Financing Transactions and the ultimate ability of Pure Biofuels’ controlling shareholders to execute the Short-Form Merger that our precedent requires is not plausible on the facts alleged in this case. Contrary to Plaintiffs-Appe llants’ suggestion, neither Vine v. Beneficial Finance Co. , 374 F.2d 627 (2d Cir. 1967), nor Goldberg v. Meridor , 567 F.2d 209 (2d Cir. 1977), suggest otherwise. In each of those cases, the plainti ffs’ allegations focused on misrepresentations or omissions directly connected with the purchase or sale of securi ties that the plai ntiffs had put at issue. The complaint in Goldberg turned on alleged omissions in the defendants’ disclosures with respect to a transaction betw een a controlling parent corporat ion and its subsid iary that was detrimental to the interests of the subsidiary’s minority shar eholders. 567 F.2d at 211-12; see also id. at 218 (describing the Rule 10b-5 action as arising “when a controlling corporation causes a partly owned subsid iary to sell its secur ities to the parent in a fraudulent transaction and . . . makes a misleading disclosure [in c onnection with that tr ansaction]”). And Vine “alleged a single two-phase scheme to eliminate Class A shareholders.” Grace , 228 F.3d at 49. Particularly in light of the “ser ious obstacle” that the absence of clear congression al intent to provide for a private right of action to enforce th e securities laws places in front of a plaintiff seeking “expansion of cognizable [] causation” under the securities laws, Va. Bankshares , 501 U.S. at 1104, the allegations adduced in Plaint iffs-Appellants’ complaint and motion to amend10 do not articulate transaction caus ation to the degree required by our precedent and leave to amend was therefore properly denied as futile. 2. “Arising Under” Jurisdiction: State Law Contract Claim Plaintiffs-Appellants argue that the district court erred in holding that their state law contract claim did not “aris[e] under” federal law for federal qu estion jurisdiction to attach. See 28 U.S.C. § 1331. The 10b-5 Representation in Pl aintiffs-Appellants’ s ubscription agreement provided as follows: The Company has filed all reports, sche dules, forms, statements and other documents required to be filed by the Company under the Securities Act and the Exchange Act [the “SEC Reports”] . . . . As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act, as applicab le, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated ther ein or necessary in order to make the statements therein, in the light of th e circumstances under which they were made, not misleading. App’x 50. Plaintiffs-Appellants argue that this representation triggers federal question jurisdiction because the question whether defendants breached the contract turns entirely on whether Pure Biofuels’ “SEC Reports complied in all material re spects with the requirements of the Securities Act and the Exchange Act.” 2 The Supreme Court has set out a four-part test for determin ing whether a state law cause of action will trigger federal question jurisdiction. Federal jurisdiction lies if the “federal issue is: (1) necessarily raised, (2) act ually disputed, (3) substantial, and (4) capable of resolution in

2 Plaintiffs-Appellants presumably seek to take advantage of New York’s six year statute of limitations for contract claims. N.Y. C.P.L.R. 213(2).11 federal court without disrupting the federa l-state balance approved by Congress.” Gunn v.
Minton , 133 S. Ct. 1059, 1065 (2013). We assume that the first two prongs of this test are met here; it is on the last two the Plaintiffs-Appe llants’ argument founders. The “substantiality inquiry . . . looks [] to the importance of the issue to the federal system as a whole.” Id. at 1066. For instance, in Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing , 545 U.S. 308 (2005), the Cour t held that the question presented in that case, which we nt to whether the IRS had satisf ied statutory notice requirements in seizing and selling a tax delinquent’s prope rty, grounded federal questi on jurisdiction because of the broad significance of th e question whether the notice the IRS was providing was adequate to enable the transfer of title. Id. at 315. The resolution of th at question, the Court later observed, “would be controlling in numerous other cases.” Empire Healthchoice Assurance, Inc. v. McVeigh , 547 U.S. 677, 700 (2006). However, beca use Plaintiffs-Appellants have not pointed us to “something more, demonstrating th at the question is signi ficant to the federal system as a whole,” and the resolution of the i ssue would be relevant only to these parties, see Gunn , 133 S. Ct. at 1068, the issue in this case is not substantial enough to trigger federal jurisdiction over Plaintiffs-Appellants’ f undamentally state law cause of action. Respect for the state-federal balance also incl ines against attachment of federal question jurisdiction on the facts of this case. It is uncon tested that Plaintiffs-A ppellants’ state law cause of action is structured as a run-of-the-mill st ate law contract claim, governed by state law standards and analyzed using the familiar elemen ts applied in a New York breach of contract action. The fact that the state court’s anal ysis of breach will necessarily turn on the requirements of federal securities law doe s not change the underlying nature of Plaintiffs-Appellants’ claims, which are determin ed as a matter of course by the state courts12 every day – and whose resolution of any embedded federal issue, if decisive to the case, would ultimately be subject to possible Supreme Court review. The Supreme Court has consistently made clear “the need to give due regard to the rightful independence of state governments – and more particularly, to the power of the States to provide for the de termination of controversies in their courts,” and, though the underlying federal la w issue is generally subject to exclusive federal jurisdiction, our “concern fo r state court prerogatives [does not ] disappear . . . in the face of a statute granting exclusiv e federal jurisdiction.” Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning , 136 S. Ct. 1562, 1573 (2016). Thus, because th ere is no clear indication either that the federal question at issue in th is case is substantial, or that it is particularly important to maintaining the federal-state balance that we claim jurisdiction over Plaintiffs-Appellants’ contract claim, federal questi on jurisdiction does not lie. 3. Letter Briefing and Dismissal with Prejudice We deal briefly with two other arguments raised by the Plaintiffs-Appellants. Plaintiffs-Appellants argue that the district co urt erred in evaluating whether leave to amend would be futile by letter briefing rather than fo rmal motion practice. However, the Local Rules used in the Southern District of New York speci fically contemplate lette r-based motion practice,

see Local Rule 7.1, and determining the appropriat e length for either letters or more formal motions is certainly generally committed to the sound discretion of the district court. Other than its demand for brevity, which does not appear to have been prejudicial to Plaintiffs-Appellants’ ability to de scribe its claims, as each of the claims articulated on appeal is encapsulated in the letters to the district court, Plaintiffs-Appellants do not specifically identify any feature of the district cour t’s procedure that they view as problematic. Without more, therefore, we have no grounds for finding the proce dure utilized by the district court improper.13 Cf. Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC , 797 F.3d 160, 190 (2d Cir. 2015) (finding the district court’s procedure inadequate because it was prejudicial and presented the plaintiffs “with a Hobson’s choice”). The district court could not pr operly dismiss Plaintiffs-Appellants’ state law claims with prejudice without exercising supplemental jurisdiction. See Kolari v. New York-Presbyterian Hosp. , 455 F.3d 118, 121-24 (2d Cir. 2006). Thus, once the district court pr operly declined to exercise such jurisdiction over plaintiffs-appellants’ state law cl aims, the appropriate procedure would have been to dismiss those claims without prejudice. The district court having failed to do so, we hereby order that the judg ment of the district court be m odified to reflect the dismissal of Plaintiffs-Appellants’ state la w claims without prejudice.
* * * We have considered Plaintiffs-Appellants’ remaining arguments and find them to be without merit. Accordingly, we MODIFY the judgment of the di strict court to order Plaintiffs-Appellants’ state law claims dismissed without prejudice, and, as so modified, AFFIRM the judgment.
FOR THE COURT: Catherine O’Hagan Wolfe, Clerk