Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc., 18 N.Y.3d 341 (2011)

The Martin Act does not preempt common-law claims for breach of fiduciary duty or gross negligence that are not solely predicated on violations of the Martin Act itself; mere overlap between the common law and the Martin Act is insufficient for preemption.

Summary

Assured Guaranty (UK) Ltd. sued J.P. Morgan, alleging breach of fiduciary duty, gross negligence, and breach of contract related to the mismanagement of an investment portfolio. J.P. Morgan argued that the Martin Act preempted the common-law claims. The Court of Appeals held that the Martin Act, which grants the Attorney General broad powers to investigate securities fraud, does not preempt common-law claims that are not exclusively based on violations of the Martin Act. The Court emphasized that legislative intent to override common law must be clear and specific, which was absent here.

Facts

Assured Guaranty guaranteed the obligations of Orkney Re II PLC. J.P. Morgan managed Orkney’s investment portfolio. Assured Guaranty alleged J.P. Morgan invested heavily in high-risk securities, failed to diversify the portfolio, and made investment decisions favoring another client, Scottish Re Group Ltd., to the detriment of Orkney and Assured Guaranty. These actions allegedly caused substantial financial losses for Orkney, triggering Assured Guaranty’s obligations under its guarantee.

Procedural History

J.P. Morgan moved to dismiss the complaint, arguing the Martin Act preempted the breach of fiduciary duty and gross negligence claims. Supreme Court granted the motion, dismissing the entire complaint. The Appellate Division modified the Supreme Court’s decision, reinstating the breach of fiduciary duty and gross negligence claims and part of the contract claim. The Appellate Division then granted J.P. Morgan leave to appeal to the Court of Appeals.

Issue(s)

Whether the Martin Act preempts common-law causes of action for breach of fiduciary duty and gross negligence when those claims arise from conduct related to securities and investment practices.

Holding

No, because the Martin Act does not explicitly or implicitly eliminate common-law claims that are not solely dependent on violations of the Martin Act for their viability.

Court’s Reasoning

The Court of Appeals determined that the Martin Act does not expressly or implicitly preempt common-law claims for breach of fiduciary duty or gross negligence. The Court emphasized that a clear and specific legislative intent is required to override the common law, and such intent was not evident in the Martin Act’s language or legislative history.

The Court distinguished its prior holdings in CPC Intl. v McKesson Corp. and Kerusa Co. LLC v W10Z/515 Real Estate Ltd. Partnership, explaining that those cases only prevent private litigants from pursuing common-law claims that are exclusively predicated on violations of the Martin Act. Here, Assured Guaranty’s claims were based on common-law duties independent of the Martin Act.

The Court stated, “Read together, CPC Intl. and Kerusa stand for the proposition that a private litigant may not pursue a common-law cause of action where the claim is predicated solely on a violation of the Martin Act or its implementing regulations and would not exist but for the statute. But, an injured investor may bring a common-law claim (for fraud or otherwise) that is not entirely dependent on the Martin Act for its viability. Mere overlap between the common law and the Martin Act is not enough to extinguish common-law remedies.”

The Court also noted that allowing private common-law actions complements the Attorney General’s enforcement authority under the Martin Act by further combating fraud and deception in securities transactions.

The Court affirmed the Appellate Division’s order, allowing Assured Guaranty’s breach of fiduciary duty and gross negligence claims to proceed.