Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Mgt. Inc., 2010 Slip Op. 8644 (1st Dept. Nov. 23, 2010)
A U.S. based life reinsurance company which had reinsured more than 370,000 policies with an aggregate insured amount of $36.7 billion formed a new company and turned over its 2004 term life reinsurance liability to it. The company paid for its reinsurance reserves by issuing preference shares and bonds. Assured Guaranty guaranteed the company’s payments to note holders on one of the bond series issued. The company then entered into an investment management agreement with J.P. Morgan, to which Assured Guaranty was a third-party beneficiary entitled to enforce the agreement. Although the agreement was governed by New York law, it provided that “with respect to the assets held in the Reinsurance Trust Account, investment must be made in compliance with . . . Chapter 13 of the Delaware Insurance Code.”
After a monthly statement showed “precipitous declines” in the value of the assets in the company’s portfolio, in correspondence dated September 24, 2007 the reinsurance company exercised its contractual right to amend the investment guidelines and directed J.P. Morgan to make all future investments “in cash, cash equivalents, money market securities or AAA-rated obligations” of government agencies. The guarantor later sued the investment manager alleging breach of fiduciary duty, negligence, and breach of contract. Specifically, the guarantor alleged that the investment manager improperly invested substantially all of the account at issue in risky subprime real estate mortgage investments. The Supreme Court, New York County, found that the fiduciary and negligence claims were preempted by the Martin Act, New York General Business Law §§ 352-359, and dismissed the contract, gross negligence, and willful misconduct claims. The guarantor appealed.
On appeal, the Appellate Division, First Department found initially that the Martin Act did not preempt otherwise validly pleaded common-law causes of action. The Martin Act “authorizes the Attorney General to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York State.” The appellate court held that while a private action cannot be maintained based upon the provisions of the Martin Act, common law causes of action that are properly pleaded are not preempted by the Act. Accordingly, the court held that the guarantor’s fiduciary and negligence claims were not preempted.
The appellate division also reinstated the guarantor’s cause of action for breach of contract. These claims were based upon an alleged violation of Delaware Insurance Code ch. 13. Contrary to the investment manager’s argument, the court found that Delaware Code §1323 was not limited to individual mortgages and included references to bonds, notes, or other evidences of trust representing first or second liens on real estate. The court further noted that a 90-day limit to objections set forth in the parties’ agreement was reasonable and operated as a statute of limitations. Finding that the September 24, 2007 amendment to the investment guidelines constituted a written objection to the investment manager’s acts and transactions, the court held that only those claims that accrued before June 26, 2007 (90 days prior to September 24) were barred. Accordingly, the Supreme Court’s order was modified to reinstate the contract claims that accrued on or after June 26, 2007, as well as claims for breach of fiduciary duty and gross negligence that accrued on or after that date.
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Bryan Richmond and Jeffrey Kingsley