Court of Appeals Says No Martin Act Preemption of Breach of Fiduciary Duty and Gross Negligence Claims

Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Mgt. Inc. (Crt. App. N.Y. Dec. 30, 2011)

Plaintiff guarantor, Assured Guaranty (UK) Ltd. (“Assured”), sued defendant investment management company, J.P. Morgan Investment Management, Inc. (“J.P. Morgan”), asserting causes of action for breach of fiduciary duty, gross negligence, and breach of contract.  The gravamen of the complaint was that J.P. Morgan mismanaged the investment portfolio of an entity whose obligations Assured guaranteed.  J.P. Morgan moved to dismiss the complaint on the grounds that Assured’s breach of fiduciary duty and gross negligence claims were preempted by the Martin Act.

The trial court dismissed the complaint in its entirety, finding that Assured’s breach of fiduciary duty and gross negligence claims were within the purview of the Martin Act and therefore prosecution of those claims would interfere with the Attorney General’s exclusive enforcement powers under the Act.  On appeal, the Appellate Division determined that nothing in the plain language of the Martin Act, its legislative history, or the relevant precedent supported the contention that the Act preempts otherwise validly pled common-law causes of action and reinstated Assured’s claims.

J.P. Morgan appealed to Court of Appeals on a certified question: whether the Martin Act preempts common law causes of action for breach of fiduciary duty and gross negligence?  The Act authorizes the Attorney General to investigate and enjoin fraudulent practices in the marketing securities products.  It was intended to give Attorney General broad regulatory and remedial powers to prevent fraudulent securities practices, including authority to commence civil or criminal prosecution. 

For the court, understanding the legislative intent behind the Act was essential to a determination of the certified question.  This was so because well settled law establishes that when the common law provides a remedy and another remedy is provided by statute, the statutory remedy is in addition to the common law remedy unless there is clear, specific and unambiguous legislative intent to the contrary.  The court noted that the plain language of the Act does not expressly mention or otherwise contemplate the elimination of common law claims and there is no legislative history of demonstrating a clear and specific legislative mandate to abolish preexisting common law claims.

The court distinguished the cases cited by J.P. Morgan, noting that the proffered cases stand for the proposition that a private litigant may not pursue a common-law cause of action where the claim is predicated solely on the a violation of the Martin Act and would not exist but for the statute.  Thus, an injured investor remains free to bring a common-law claim that is not entirely dependant on the Martin Act for its viability.  According to the court, “mere overlap between the common law and the Martin Act is not enough to extinguish common-law remedies.”  Therefore, the court held that Assured’s breach of fiduciary duty and gross negligence claims were not barred by the Martin Act.

For a copy of the decision click here

Matt Cabral and Michael Saltzman

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