By Rodney F. Tonkovic, J.D.
A Second Circuit panel affirmed the dismissal of a fraud action involving two Bermudan companies for lack of subject matter jurisdiction. On appeal, a buyer argued that the parties' investment agreement was completed in New York, and that the claims had extensive domestic contacts. In this case, the court assumed, without deciding, that the transaction was domestic. But that was not enough: the transaction itself was structured to avoid U.S. law and implicated only the interests of two foreign companies and Bermuda. The panel accordingly affirmed the entire judgment (Cavello Bay Reinsurance Ltd. v. Stein, January 25, 2021, Jacobs, D.).
Bermudan companies. The complaint was brought by a Bermudan company organized under Bermudan law against a holding company also organized under Bermudan law, but with its principal place of business in New York. In 2015, the plaintiff purchased $5 million of the holding company's shares after some back-and-forth emailing between the holding company's New York office and the buyer in Bermuda; title to the shares was transferred at the closing in Bermuda.
The buyer later filed suit, alleging that the seller misrepresented its fee arrangement with the portfolio manager. The complaint asserted fraud and controlling persons claims under the Exchange Act and also sought rescission under Section 29(b). The district court granted the holding company's motion to dismiss on grounds that the transaction was not "domestic" because irrevocable liability was incurred in Bermuda. Even if the transaction was domestic, the court said, the claims were "so predominantly foreign" as to be impermissibly extraterritorial.
Transaction location arguable. On appeal, the buyer argued that the parties' investment agreement was completed in New York, and that its claims had extensive domestic contacts. At the outset, the court was forced to assume, without deciding, that the transaction was domestic. Here, the dispute over whether the agreement became binding when signed in New York or when received in Bermuda illustrated "how locating the 'meeting of the minds' can be arranged or confused by the parties or can become enmeshed in state contract law." The place of transaction was difficult to locate, the court said, and impossible to do without making state law.
Claims are predominantly foreign. The court was left to affirm solely on the ground that the claims were predominantly foreign as to be impermissibly extraterritorial under the Second Circuit's 2014 Parkcentral decision. In Parkcentral, the court held that Section 10(b) does not reach claims that are predominantly foreign, even if a transaction occurs in the United States. The court must then consider whether a claim is predominantly foreign in light of the security and the transaction as structured.
Applying these principles, the court concluded that the buyer failed to plead a domestic application of Section 10(b). The shares at issue are not listed on any U.S. exchange and are not otherwise traded in the U.S., the court said. The main link to the U.S. is a clause in the subscription agreement requiring that the shares be registered with the SEC if the buyer wants to sell them. But, the buyer provided no reason that this contingent and future requirement should trigger any U.S. or other interest that Section 10(b) is meant to protect. The transaction was essentially structured to avoid the "bother and expense" of U.S. law, the court observed, and implicated only the interests of two foreign companies and Bermuda.
The case is No. 20-1371.