672 F. App'x 85
2d Cir.2016Background
- In 2008 Liana Carrier Ltd. and Amir Rimon bought 15,714,287 shares of Pure Biofuels for $5.5M via private subscription agreements; Pure Biofuels planned a biodiesel facility in Peru.
- From 2008–2010 Pinto (Pure Biofuels COO) allegedly arranged financing deals that issued large numbers of warrants to entities (FDS, Trimarine, Plainfield) tied to him, diluting minority shareholders.
- By end of 2010 those entities controlled >90% of Pure Biofuels on a fully diluted basis; Pure Biofuels deregistered with the SEC in 2011.
- In May 2012 a parent entity (PBC Acquisition) merged into Pure Biofuels via Nevada’s short-form merger statute, paying minority shareholders $0.00832/share; Plaintiffs’ $5.5M effectively became $130,742.87.
- Plaintiffs sued in 2014 asserting §10(b)/Rule 10b-5 claims and state-law claims (including breach of a contractual 10b-5 representation). The district court dismissed the securities claims as time-barred or deficient, declined to exercise supplemental jurisdiction over state-law claims, and denied leave to amend as futile.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether leave to amend §10(b)/10b‑5 claims should be allowed (futility) | Plaintiffs: nondisclosure of Pinto’s conflicts in the Financing Transactions caused dilution and prevented pre-merger state-law remedies, so amendments can plead transaction causation | Defendants: the alleged omissions are too attenuated from the short-form merger; financing was necessary and dilution would likely have occurred anyway; Plainfield’s demands explain dilution | Denied — amendments futile: plaintiffs failed to plausibly plead the required but‑for transaction causation linking omissions to the merger outcome |
| Whether the state-law contract claim (breach of 10b‑5 representation) "arises under" federal law for §1331 jurisdiction | Plaintiffs: breach turns on whether SEC reports complied with federal securities laws, so federal question jurisdiction exists | Defendants: claim is a state-law breach of contract; embedded federal issue is not substantial in the federal system | No federal-question jurisdiction: issue not substantial and would disrupt federal‑state balance; district court correctly declined jurisdiction |
| Whether district court erred by using letter briefing to evaluate leave to amend | Plaintiffs: letter procedure was improper and prejudicial | Defendants: Local Rule 7.1 permits letter briefing; plaintiffs had opportunity to present arguments | No reversible error: letter briefing appropriate here and not shown prejudicial |
| Whether state-law claims were properly dismissed with prejudice after court declined supplemental jurisdiction | Plaintiffs: district court dismissed all claims with prejudice | Defendants: dismissal with prejudice stands | Modified: dismissal of state-law claims must be without prejudice; court’s dismissal with prejudice was improper and is reversed on that narrow ground |
Key Cases Cited
- Panther Partners Inc. v. Ikanos Commc’ns, Inc., 681 F.3d 114 (2d Cir. 2012) (standards for reviewing denial of leave to amend/futility)
- GAMCO Inv’rs, Inc. v. Vivendi Universal, S.A., 838 F.3d 214 (2d Cir. 2016) (elements of §10(b)/Rule 10b‑5 claim)
- Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161 (2d Cir. 2005) (transaction causation/but‑for requirement)
- Madison Consultants v. Fed. Deposit Ins. Corp., 710 F.2d 57 (2d Cir. 1983) (a plaintiff may show transaction causation by alleging prevention of a state‑law remedy)
- Va. Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991) (limitations on expanding securities‑law causation)
- Gunn v. Minton, 133 S. Ct. 1059 (2013) (four‑part test for when a state claim "arises under" federal law)
- Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308 (2005) (when embedded federal issues create federal‑question jurisdiction)