However, Judge Jed Rakoff concluded, Picard's pursuit of the assigned claims--to the extent he sues on behalf of more than 50 assignors--constitutes a covered class action for Securities Litigation Uniform Standards Act purposes.
SLUSA was enacted to close a loophole in the 1995 Private Securities Litigation Reform Act that allowed plaintiffs suing in state courts to avoid PSLRA's heightened securities fraud pleading requirements. The statute provides generally for federal preemption--removal, followed by dismissal--of state law class actions alleging misrepresentations in connection with the purchase or sale of a covered security.
The defendants moved to dismiss the allegations, the court continued. They argued that the trustee lacks standing to pursue such claims, and that even if he did have standing, the allegations are precluded by SLUSA.
Addressing each argument in turn, the court first said the doctrine of in pari delicto precludes Picard from bringing his claims on behalf of BLMIS itself. It also cited Caplin v. Marine Midland Grace Trust Co. of N.Y., 406 U.S. 416 (1972), for the proposition that the implied prohibition in Article III against third-party standing applies to a bankruptcy trustee.
Seeking to escape Caplin, the court said, Picard argued that SIPA rather than the Bankruptcy Code provides for such standing. Picard also offered three theories of standing: bailment, subrogation and assignment. Rejecting the subrogation and bailment theories, the court focused on whether Picard has standing to bring common law claims assigned to him by various BLMIS customers.
The court noted that according to the defendants, under SIPA, a trustee may only be assigned a customer's net equity claim, not a customer's claims against third parties. They contended that SIPA conflicts with the broader assignment rights afforded by Section 541(a)(7) of the Bankruptcy Code, “and therefore §541(a)(7) must give way.”
The court, however, didn't agree. It said SIPA does not at any point state that the trustee “has less power with respect to assignments than an ordinary bankruptcy, implying that Congress did not intend such a reading.”
It explained that among other criteria, SLUSA defines a covered class action as a lawsuit in which damages are sought on behalf of more than 50 persons class members. The court said SLUSA also includes a “counting provision” under which an entity may be treated as one person “'but only if the entity is not established for the purpose of participating in the action.'”
According to the court, Picard argued that he is entitled to the protection of SLUSA's counting provision “in that he is a single entity not created solely in order to bring these specific adversary proceedings”; thus, his pursuit of the assigned claims should not be deemed a covered class action.
Rejecting the argument, the court acknowledged that bankruptcy trustees generally are viewed as a single entity under SLUSA “to avoid undermining a trustee's ability under the Bankruptcy Code to pursue claims owned by the debtor.” However, it said, in this case, Picard is not pursuing claims belonging to the debtor, a single entity, for the benefit of many. “[R]ather, he seeks to assert claims belonging to many creditors as a single entity.”
Looking through the form of the trustee to the source of his claims, the court said Picard stands in the shoes of the assignor, not the bankruptcy estate. As such, questions of damages, reliance, and other issues “would be addressed to the thousands of customers and other creditors who assigned their claims to the Trustee, just as they would in a shareholder class action.”
In addition, the court held, for purposes of this action, “the Trustee is in effect an entity 'established for the purpose of participating in the action.'” It reasoned that in pursuing the claims, Picard “is acting in his role as assignee, and that role solely entails the litigation of these claims.”
Finally, the court said, allowing Picard to aggregate and assert the state law claims in such a way as to avoid SLUSA's prohibition against the original claim holders asserting the same allegations would permit him to make an “end-run” around SLUSA's limitations.
In sum, the court concluded, Picard has standing to sue on behalf of BLMIS customers to the extent those customers validly assigned him their claims. However, Picard's pursuit to the assigned claims, to the extent he brings claims or more than 50 assignors, is a covered class action for SLUSA purposes.
The court remanded for the bankruptcy court to decide whether SLUSA applies to bar these claims in a given action.
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