Top 10 Opinions of 2012 James A. Hall, Esq.
United States District Court for the District of Rhode Island: Gem Mechanical Services, Inc. v. DV II, LLC, et al., C.A. No. 12-93-M
The matter was originally filed in the Rhode Island Superior Court by a general contractor seeking to enforce certain contract rights and claims under Rhode Island’s mechanics’ lien law. Upon dismissal of those claims subject to the jurisdiction of the Rhode Island Superior Court, the matter was removed to the United States District Court for the District of Rhode Island pursuant to 28 U.S.C. § 1446(b) (diversity of jurisdiction).
Thereafter, on behalf of our client and other Defendants, we petitioned the Court to stay proceedings in order to compel the Plaintiff to arbitrate its remaining claims in Ohio, because arbitration was the contractually agreed-upon mechanism of dispute resolution and because Ohio was the agreed-upon forum for such resolution.
Despite the clear arbitration and venue language in the Contract, Plaintiff argued that a Rhode Island statute operates in such a way as to make voidable any provision in a construction contract whereby a Rhode Island contractor would be compelled to arbitrate in another state. R.I. Gen. Laws § 6-34.1-1(a). Upon substantial briefing and argument, the Federal District Court found that the Rhode Island statute upon which Plaintiff rested its objection has no impact on whether or not the parties must arbitrate and only addresses the location of arbitration. The Court went on to hold, as we argued, that any State statutory provision allowing for the unilateral voidability of arbitration provisions interferes with and is contrary to the Federal Arbitration Act. Thus, the Rhode Island statute is pre-empted by the Federal Arbitration Act. Accordingly, the Court went on to order that arbitration take place in Ohio per the parties’ agreement.
This is the first case to address Rhode Island’s long-standing in-state construction contract arbitration provision. The court’s ruling that the Federal Arbitration Act preempts R.I. Gen. Laws 6-34.1-1(a) is a step toward attracting additional investment in Rhode Island by out-of-state developers who can take comfort in the enforceability of negotiated arbitration terms and the full application of the Federal Arbitration Act.
Automotive Industries Pension Trust Fund v. Textron, Inc., 682 F.3d 34 (1st Cir. 2012).
In Automotive Industries Pension Trust Fund v. Textron, Inc., the United States Court of Appeals for the First Circuit affirmed the United States District Court for the District of Rhode Island’s grant of the Defendants’ motion to dismiss the Plaintiffs’ Complaint for failure to state a claim upon which relief could be granted on the ground that the Plaintiffs’ Complaint failed to satisfy the applicable pleading requirements under the Private Securities Litigation Reform Act (“PSLRA”). Automotive Industries Pension Trust Fund v. Textron, Inc., 682 F.3d 34, 39 (1st Cir. 2012).
The Plaintiffs’ securities fraud putative class action Complaint alleged that Defendants violated § 10(b) of the Securities and Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated under that section, and § 20(a) of the Exchange Act.
The Plaintiffs’ allegations concerned certain public statements made by Defendants to the company’s investors between 2007 and 2008 (on the edge and outset of the recession), regarding the strength and depth of the backlog orders at one of the company’s businesses. Id. at 35. The Plaintiffs’ Complaint did not challenge the accuracy of most of Defendants’ statements. Id. at 36. Rather, Plaintiffs claimed that the company deliberately omitted material information concerning the backlog that would have revealed that the backlog was artificially inflated. Id. Among the Plaintiffs’ allegations was that the company lowered its underwriting standards, provided loans to risky customers and encouraged customers to delay rather than cancel their orders, which resulted in an artificially inflated backlog. Id.
Defendants moved to dismiss the Plaintiffs’ Complaint for failure to state a claim upon which relief could be granted and failure to satisfy the applicable pleading requirements under the Private Securities Litigation Reform Act, which the district court granted. In granting Defendants’ motion, the district court ruled that the Plaintiff’s allegations were insufficient to demonstrate that the company withheld material information. Id. at 37. In particular, the district court concluded that the Plaintiff’s allegations concerning the company’s underwriting standards were too vague. Id. Indeed, the Plaintiffs failed to explain how the underwriting standards changed, how many loans were affected or whether the allegedly risky loans resulted in cancelation of orders or other losses. Id.
On appeal, the First Circuit recognized that Section 10(b) requires plaintiffs to plead (1) material misrepresentation or omission; (2) scienter; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss and (6) loss causation. Id. at 37. In addition, PSLRA requires plaintiffs to specify each allegedly misleading statement and why it is misleading. Id. at 38. Moreover, Section 10(b)’s anti-fraud language, together with the PSLRA, requires that for each misstatement or omission the complaint state with particularly the facts creating a strong inference that the defendant acted with scienter – an intent to deceive, manipulate or defraud or a high degree of recklessness suggesting an indifference to deceit. Id. at 39.
After examining Plaintiffs’ Complaint against this backdrop, the First Circuit held that the Plaintiffs’ Complaint failed adequately to allege scienter. Id. In so holding, the First Circuit agreed with Defendants that “[n]othing in the complaint suggests that any of the named officers believed, or was recklessly unaware, that the backlog’s significance had been undermined by weakened underwriting standards, sales to intermediates, or any of the other flaws on which the plaintiffs rely.” Id. Although the First Circuit noted that even if the Plaintiff’s allegations were accepted as true for purposes of the motion to dismiss, the company’s managers may have been negligent if they were not aware that the backlog had been undermined by the underwriting standards, but negligence is insufficient to establish scienter. Id. at 39.
Consequently, the First Circuit affirmed the district court’s dismissal of Plaintiffs’ Complaint.