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27001 Partnership v. BT Securities Corp.

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION


July 17, 2008

27001 PARTNERSHIP, HONEYWELL INTERNATIONAL INC. MASTER RETIREMENT TRUST, EDWARD JEPSON, BRANDEIS UNIVERISTY, BROWN FAMILY PARTNERSHIP, CENTRAL STATES, SOUTHEAST AND SOUTHWEST AREAS PENSION FUND, CHRISTIAN SCIENTIST TRUSTEES FOR GIFTS AND ENDOWMENTS, EMPLOYEES' RETIREMENT FUND OF THE CITY OF DALLAS, POLICE AND FIRE PENSION FUND OF THE CITY OF DALLAS, DELTA AIR LINES MASTER TRUST, FATHER FLANAGAN'S FOUNDATION FUND, INC., THE FIRST CHURCH OF CHRIST, SCIENTIST, FOUNDATION FOR RESEARCH, GMAN INVESTMENT FUNDS TRUST, GOLDSMITH FAMILY FOUNDATION, ESTATE OF HAROLD GOLDSMITH, EDWIN GOULD FOUNDATION FOR CHILDREN, STATE EMPLOYEE RETIREMENT SYSTEM OF PENNSYLVANIA, HALL FAMILY FOUNDATION, ALLEGHENY TECHNOLOGIES INCORPORATED PENSION TRUST, INTERNATIONAL MONETARY FUND STAFF RETIREMENT PLAN, J.C. PENNEY CORPORATION, INC. PENSION PLAN, MCDERMOTT INCORPORATED MASTER TRUST, MONSANTO COMPANY MASTER PENSION TRUST, EMPLOYEES' RETIREMENT SYSTEM OF MONTGOMERY COUNTY, MARYLAND, KRAFT FOODS MASTER RETIREMENT TRUST, NEW YORK CITY EMPLOYEES' RETIREMENT SYSTEM, NEW YORK CITY FIRE DEPARTMENT PENSION FUND, NEW YORK CITY POLICE DEPARTMENT PENSION FUND, NORTHWEST AIRLINES, INC. MASTER INVESTMENT TRUST, PEOPLES ENERGY CORPORATION PENSION TRUST, RESEARCH DEVELOPMENT FOUNDATION, RETAIL CLERKS PENSION TRUST, REYNOLDS AMERICAN DEFINED BENEFIT MASTER TRUST, SAN DIEGO COUNTY EMPLOYEES' RETIREMENT ASSOCIATION, SPRINT MASTER TRUST, RETIREMENT SYSTEM OF THE TENNESSEE VALLEY AUTHORITY, UNITED AIRLINES, INC. GROUP INVESTMENT TRUST, WAGNER & BROWN, LTD., WESTERN PENNSYLVANIA TEAMSTERS AND EMPLOYERS PENSION FUND, XEROX CORPORATION TRUST TO FUND RETIREMENT PLANS, X.L. INVESTMENT LTD., HORACE MANN EDUCATOR CORP., LOUISIANA STATE EMPLOYEES' RETIREMENT SYSTEM, ALAN GREEN, AND SIMON YOUNG, PLAINTIFFS-APPELLANTS/CROSS-RESPONDENTS,
v.
BT SECURITIES CORPORATION, A SUBSIDIARY OF DEUTSCHE BANC ALEX BROWN, INC., A DELAWARE CORPORATION, DELOITTE & TOUCHE LLP, A DELAWARE LIMITED PARTNERSHIP, DEFENDANTS-RESPONDENTS,
and
ARTHUR ANDERSEN LLP, A DELAWARE LIMITED LIABILITY PARTNERSHIP, DEFENDANT-RESPONDENT/CROSS-APPELLANT.

On appeal from Superior Court of New Jersey, Law Division, Morris County, Docket No. L-3341-06.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued May 6, 2008

Before Judges Coburn, Fuentes and Grall.

Plaintiffs filed this class action suit alleging securities fraud. The class consists of forty-six investors who purchased senior subordinated notes during the recapitalization of a major supermarket chain in the State of Alabama. The complaint named defendants BT Securities Corporation ("BT Securities"), Deloitte & Touche LLP ("Deloitte"), and Arthur Andersen LLP ("Andersen"). Specifically, plaintiffs sought compensatory and punitive damages for: (1) fraudulent suppression; (2) fraudulent and reckless misrepresentation; (3) fraudulent and reckless deceit; (4) violation of "the New Jersey Securities Act";*fn1 (5) negligent misrepresentation of financial information; (6) civil conspiracy; and (7) aiding and abetting.

Plaintiffs appeal from the order of the Law Division holding that this suit was governed by the law of the State of Alabama. Thereafter, applying the relevant Alabama statute of limitations, the court dismissed plaintiffs' claims as untimely brought. Defendant Andersen cross-appeals from the court's order denying its motion to dismiss plaintiffs' complaint for lack of personal jurisdiction. We now affirm.

I.

Plaintiffs, as a class, consist of a variety of individuals, trust funds, pension plans, state and local government entities, endowment foundations, and other institutional investors. They all utilize the services of W.R. Huff Asset Management Company, an investment manager based in Morristown, New Jersey ("Huff").

In November 1995, Huff began purchasing, on plaintiffs' behalf, senior subordinated notes issued in conjunction with the leveraged recapitalization of Bruno's, Inc., a major supermarket chain in the southeastern United States ("Bruno's"). Defendant BT Securities underwrote much of the Bruno's recapitalization.

During this recapitalization, Kohlberg Kravis Roberts & Company ("KKR"), who is not a party in this case, acquired Bruno's by purchasing more than eighty percent of its common stock. Defendant Deloitte performed due-diligence and investigatory services for KKR during the acquisition process. In May 1995, Deloitte prepared a report for KKR, detailing Deloitte's findings as to the soundness of investing in Bruno's. This report was entitled "Project Crimson."

Plaintiffs allege that Project Crimson concluded that Bruno's had serious financial problems, including: (1) overstated real estate assets, inventory and technology; and (2) understated self-insurance reserves and depreciation. According to plaintiffs, defendants BT Securities and Deloitte purposely kept Project Crimson and its findings secret from plaintiffs, allowing plaintiffs to invest heavily in the Bruno's notes. Specifically, plaintiffs allege that they relied on "misrepresentations and omissions that defendants made in the [Bruno's] Prospectus, Leveraged Recapitalization, road shows and one-on-one meeting, reports filed with the SEC and in other disclosures, such as press releases."

Defendant Andersen, an auditor and accounting firm, presently located in Chicago, Illinois, served as Bruno's independent auditor in 1994 and 1995. Andersen maintained offices in New Jersey during both Bruno's recapitalization, and the time plaintiffs were purchasing Bruno's notes. For reasons unrelated to this case, Andersen has had no presence in New Jersey since August 2002.

Plaintiffs allege that during the Bruno's recapitalization, Andersen "knew or was reckless or negligent in not knowing the true financial condition of Bruno's through its audit work and/or through its receipt of Project Crimson." Further, plaintiffs allege that "Andersen never required that Bruno's audited financial statements reflect or present the material adverse financial information regarding Bruno's."

On February 2, 1998, Bruno's filed for bankruptcy, causing plaintiffs to lose their investments in Bruno's notes.

II.

The Bruno's recapitalization project has been the subject of at least four separate law suits prior to this matter in New Jersey. We adopt the parties' appellation for these controversies, and will refer to these litigations as: (1) "Huff I"; (2) "Huff II"; (3) "Alabama 27001"; and (4) "the Haskell class action." For purposes of this appeal, we will focus our attention only on Huff II and Alabama 27001. For the sake of completeness, however, we will briefly describe all four cases.

Huff I

On August 6, 1999, plaintiffs' investment manager Huff filed a lawsuit in Alabama state court against KKR, the company that had acquired Bruno's during the leveraged recapitalization. The initial complaint contained claims of fraudulent transfer and breach of fiduciary duty.

The Huff I defendants successfully removed the action to United States Bankruptcy Court for the Northern District of Alabama, arguing that the case was inextricably connected to the Bruno's bankruptcy which was pending in Delaware. In conjunction with the Bruno's bankruptcy, the Delaware bankruptcy court issued a report describing Project Crimson. Arguably, this was the first time that either Huff or the plaintiffs here had heard of Project Crimson.

Based on the exposure of Project Crimson, Huff was granted leave to amend its complaint in Huff I to include various Alabama state law claims in May 2000. Thereafter, the Alabama bankruptcy court sua sponte transferred the case to the United States District Court for the Northern District of Alabama. The Alabama District Court ultimately dismissed the case as untimely filed under applicable federal law. On plaintiffs' appeal, the Eleventh Circuit Court of Appeals reinstated the complaint; presumably, that case is still pending.

Huff II

Based on the October 1999 release of Project Crimson by the Delaware bankruptcy court, plaintiffs' investment manager Huff filed a second lawsuit in Alabama state court on April 28, 2000, on behalf of its investor clients against BT Securities, Deloitte, and Andersen. Defendants removed the matter to the United States District Court. Rejecting defendants' argument under the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"),*fn2 the federal court remanded the matter to the Alabama state court.

The Alabama trial court denied defendants' renewed motion to dismiss under SLUSA, prompting defendants to file an interlocutory appeal directly to the Alabama Supreme Court. See BT Sec. Corp. v. W.R. Huff Asset Mgmt. Co., 891 So. 2d 310 (Ala. 2004). The Alabama Supreme Court held: (1) that plaintiffs' claims fell within SLUSA's limitations, id. at 313-15; and (2) that SLUSA applied retroactively to plaintiffs' claims because Huff filed its action after SLUSA's enactment, id. at 315-16.

On April 16, 2004, the Alabama Supreme Court dismissed Huff II as preempted by SLUSA. Id. 316-17. On October 4, 2004, the United States Supreme Court denied Huff's petition for certiorari. W.R. Huff Asset Mgmt. Co. v. BT Sec. Corp., 543 U.S. 873, 125 S.Ct. 103, 160 L.Ed. 2d 122 (2004).

Alabama 27001

On December 16, 2004 (shortly after the United States Supreme Court denied certiorari in Huff II), the same group of plaintiffs in this case filed a class action in Alabama state court against the same defendants from Huff II. The action, denoted as "Alabama 27001," was filed by the forty-six investors in their individual names.

Defendants moved to dismiss, arguing that the action was barred under the applicable two-year Alabama statute of limitations. In response, plaintiffs argued that the statute of limitations had been tolled under the "class action tolling principle," first described by the United State Supreme Court in American Pipe and Construction Company v. Utah, 414 U.S. 538, 94 S.Ct. 756, 38 L.Ed. 2d 713 (1974). Specifically, plaintiffs argued that the filing of Huff II, having been held a class action for SLUSA purposes by the Alabama Supreme Court, tolled the statute of limitations for the plaintiffs in Alabama 27001.

The Alabama court rejected this argument, and granted defendants' motions to dismiss on October 14 and November 17, 2005.*fn3 Plaintiffs' petition for appellate review of the trial court's interlocutory order was denied on June 28, 2006.

The Haskell Class Action

On August 5, 1999, within one day of the filing of Huff I, a class action entitled Haskell v. KKR was filed in Alabama state court, alleging substantially the same claims as Huff I. Haskell claimed to represent a class of more than 1700, "'consisting of all similarly situated natural persons or entities who presently own 10[.5]% Senior Subordinated Notes due 1 August 2005, issued on 10 August 1995 by Bruno's Inc. . . . or who purchased such Notes on or after 10 August 1995 and thereafter sold the Notes at a loss.'"

The Haskell class action traced a procedural history similar to that of Huff I. As in Huff I, the federal district court held that Haskell fell under SLUSA, and permitted Haskell to amend his complaint to include only federal claims. In March 2006, the federal court dismissed Haskell with prejudice for failing to file an amended complaint.

III.

On August 30, 2006, the same individual plaintiffs filed essentially the same action as Alabama 27001 in Superior Court sitting in Essex County, New Jersey. Venue was thereafter changed to Morris County. Against this procedural history, the three named defendants filed motions to dismiss.

Defendants argue that the present action in New Jersey was nothing more than forum shopping. According to defendants, when their tactical decision to litigate their claims in Alabama failed, plaintiffs filed in this State as a fallback position. In light of the procedural history in Alabama, defendants argue that plaintiffs' New Jersey claims were barred by collateral estoppel, or issue preclusion.

In an order and memorandum of opinion, dated May 19, 2007, the trial court granted defendants' motions to dismiss, holding that: (1) Alabama law applied to plaintiffs' New Jersey action; and (2) the claims were time-barred under the relevant Alabama statute of limitations. The court also denied Andersen's motion to dismiss based on a lack of personal jurisdiction.

We affirm substantially for the reasons expressed by Judge Harper in his memorandum of opinion. In this context, Andersen's cross-appeal is rendered moot.

Affirmed.


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