Opinion ID: 3039127
Heading Depth: 2
Heading Rank: 2

Heading: SLUSA and the District Court’s decision

Text: The Banks filed a motion to dismiss, arguing, inter alia, that the Trust’s lawsuit was preempted 2 by SLUSA. Congress 1 The parties have spent a great deal of (perhaps not altogether productive) energy fighting over whether the Trust is a “litigation trust” or a “liquidating trust.” Litigation trusts are common in securities and bankruptcy litigation: they exist as vehicles for maintaining suits for the benefit of, and distributing proceeds to, large numbers of people. Liquidating trusts are common in bankruptcy as successor entities to Chapter 11 debtors, and are often tasked with the responsibility of liquidating and distributing the assets that remain after confirmation of the plan of reorganization. These are not formal terms of art, and they do not have hard and fast definitions. Here, the Trust is a hybrid. It is like a litigation trust inasmuch as it was assigned a variety of individual claims by the Purchasers and was tasked with litigating them; it is also like a liquidating trust inasmuch as it took title to many of the remaining assets of the bankruptcy estate (including the estate’s causes of action) and was tasked with liquidating and distributing them. The hybrid nature of the Trust, far from being suspect, may be seen as a gratifying testament to the flexibility and creative license that Chapter 11 accords parties in fashioning plans of reorganization. 2 For ease and consistency with other cases, we refer throughout this opinion to SLUSA “preemption.” In so doing, we 5 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 nonmeritorious 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 caution that SLUSA does not actually “preempt” causes of action, so much as it prevents causes of action from being asserted through the vehicle of a class action lawsuit. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 87 (2006) (“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 statelaw cause of action that may exist.”). 3 SLUSA defines an affected “covered class action” as: (i) any single lawsuit in which-- (I) damages are sought on behalf of more than 50 persons or prospective class members, and questions of law or fact 6 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 actions 5 and common to those persons or members of the prospective class, without reference to issues of individualized reliance on an alleged misstatement or omission, predominate over any questions affecting only individual persons or members; or (II) one or more named parties seek to recover damages on a representative basis on behalf of themselves and other unnamed parties similarly situated, and questions of law or fact common to those persons or members of the prospective class predominate over any questions affecting only individual persons or members; or (ii) any group of lawsuits filed in or pending in the same court and involving common questions of law or fact, in which-- (I) damages are sought on behalf of more than 50 persons; and (II) the lawsuits are joined, consolidated, or otherwise proceed as a single action for any purpose. 15 U.S.C. § 78bb(f)(5)(B). 4 Under SLUSA, a lawsuit contains the securities-trade ingredient if the plaintiff alleges: (A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or (B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security. 15 U.S.C. § 78bb(f)(1). 5 By “mass actions” we mean actions that operate like class actions, inasmuch as they seek to impose liability on a defendant for injuries to many people arising out of a common set of facts, but are not necessarily brought pursuant to Federal Rule of Civil Procedure 23 or one of its state-law equivalents. 7 individual actions. S. Rep. No. 105-182, at 7–8. The securitiestrade ingredient is designed to distinguish between state-lawbased suits that, no matter how pleaded, in essence allege securities fraud, and those that allege other wrongs. See Rowinski v. Salomon Smith Barney, Inc., 298 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