RGH Liquidating Trust v. Deloitte & Touche, 16 N.Y.3d 397 (2011)
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A liquidating trust established under a bankruptcy reorganization plan is considered “one person” under the Securities Litigation Uniform Standards Act of 1998 (SLUSA) single-entity exemption if its primary purpose is broader than simply pursuing state law fraud claims.
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Summary
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The RGH Liquidating Trust, successor to Reliance Group Holdings, Inc. (RGH), sued Deloitte & Touche alleging fraud for the benefit of RGH’s bondholders. Deloitte argued SLUSA preempted the suit. The New York Court of Appeals held that the Trust qualified for SLUSA’s single-entity exemption because its primary purpose extended beyond merely pursuing litigation, encompassing liquidation of assets and distribution to creditors. This determination allowed the state common-law fraud claims to proceed in state court.
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Facts
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Reliance Group Holdings (RGH) owned Reliance Financial Services (RFS), which owned Reliance Insurance Company (RIC). Deloitte & Touche was the auditor for RGH, RFS, and RIC. The Reliance companies’ financial condition deteriorated, leading to RGH’s bankruptcy in 2001. A class action was filed in federal court against RGH alleging securities violations. RGH’s bankruptcy plan created the RGH Liquidating Trust to liquidate assets, including litigation claims, and distribute proceeds to creditors.
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Procedural History
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The Trust sued Deloitte in New York Supreme Court, alleging fraud. Supreme Court initially dismissed but granted leave to amend. The Trust filed an amended complaint, and Deloitte moved to dismiss, arguing SLUSA preemption. Supreme Court denied the motion in part, but the Appellate Division modified, dismissing claims on behalf of bondholders. The Court of Appeals reversed the Appellate Division, reinstating the Supreme Court’s order.
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Issue(s)
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Whether a liquidating trust, established under a bankruptcy reorganization plan as the debtor’s successor, is considered “one person” within the meaning of the single-entity exemption in SLUSA, allowing it to pursue state law claims on behalf of multiple creditors without SLUSA preemption.
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Holding
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No, because the Trust was established for the primary purpose of the liquidation of assets transferred to it, the receipt of trust property, assumption of liabilities, and the liquidation and distribution of trust property for the benefit of the trust beneficiaries not just for the purpose of participating in this specific action.
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Court’s Reasoning
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The Court of Appeals reasoned that SLUSA was enacted to prevent plaintiffs from circumventing federal securities laws by bringing class actions in state court alleging fraud. SLUSA contains a single-entity exemption, treating certain entities as one person when determining whether a lawsuit qualifies as a “covered class action.” The Court focused on the Trust’s “primary purpose” as defined in the bankruptcy plan and trust agreement. Because the Trust’s purpose was broader than simply pursuing litigation – including liquidation of assets and distribution to creditors – it qualified for the single-entity exemption. The Court distinguished cases where trusts were created solely for litigation purposes. The Court emphasized that bankruptcy is a “very special context” where Congress intended to preserve the ability of bankruptcy trustees to assert claims of bankruptcy estates, and that liquidating trusts are frequently used in bankruptcy reorganizations to efficiently manage and liquidate assets. The Court cited the Senate Report accompanying the bill which became SLUSA, noting it was not intended to cover instances where a person or entity is duly authorized by law to seek damages on behalf of another person or entity. The Court reasoned that the bondholder claims were included within the bankruptcy estate, and the Trust brought the action on behalf of the estate for the benefit of the bondholders. The Court stated, “[t]he 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.”