Fernandez v. UBS AG

222 F.Supp.3d 358

Nora FERNANDEZ ; Augusto Schreiner; Eddie Toro Velez; Victor R. Vela Diez de Andino; Juan Viera; Georgina Velez Montes; and Esther Santana, on behalf of themselves and all others similarly situated, Plaintiffs,

v.UBS AG; UBS Financial Services, Inc.; UBS Financial Services Incorporated of Puerto Rico ; UBS Trust Company of Puerto Rico ; UBS Bank USA; Carlos V. Ubiñas; Miguel A. Ferrer ; Banco Popular de Puerto Rico; and Popular Securities, LLC, Defendants.

15–Cv–2859 (SHS)

United States District Court, S.D. New York.

Signed December 7, 2016

Deborah A. Elman, Robert Daniel Gerson, Daniel L. Berger, Grant & Eisenhofer P.A. (NY), New York, NY, Hannah Elizabeth Ross, Jacob Nachmani, Jeremy P. Robinson, PHV Gerald H. Silk, Bernstein Litowitz Berger & Grossmann LLP, New York, NY, Johnston Whitman, Jr., Joshua E. D'Ancona, Margaret E. Onasch, Michael K. Yarnoff, Kessler Topaz Meltzer & Check, LLP (PA), Radnor, PA, Mary Sikra Thomas, Grant & Eisenhofer, PA (DE), Wilmington, DE, Andres W. Lopez, The Law Offices of Andres W. Lopez, San Juan, PR, Daniel Lawrence Berger, Grant & Eisenhofer P.A., New York, NY, for Plaintiff.

Salvador J. Antonetti–Stutts, Ubaldo M. Fernandez–Barrera, Aura A. Montes–Rodriguez, O'Neill & Borges, LLC, San Juan, PR, Janet A. Gochman, Janet Anne Gochman, Jonathan K. Youngwood, Joshua Coleman Polster, Simpson Thacher & Bartlett LLP (NY), New York, NY, Francis C. Healy, Francis Charles Healy, Melvin Arnold Brosterman, Stephanie Ann Weathers–Lovin, Stroock & Stroock & Lavan LLP, New York, NY, Nestor Mendez–Gomez, Maria Dolores Trelles–Hernandez, Pietrantoni Mendez & Alvarez, San Juan, PR, James Finnegan Ianelli, Joseph Emanuel Neuhaus, Matthew Alexander Schwartz, Myla Gounder Arumugam, PHV Joseph E. Neuhaus, Sullivan & Cromwell, LLP(NYC), New York, NY, for Defendant

OPINION & ORDER

SIDNEY H. STEIN, United States District Judge.

Contents

I. Background...365

A. The Funds...365–

B. The Parties...365

1. Plaintiffs...365

2. The UBS Defendants...366

3. The Popular Defendants...366

4. The Individual Defendants...367

C. Alleged Misconduct...367

D. This Litigation...369

II. Standard of Review...369

III. The Court's Jurisdiction...370

A. Plaintiffs Have Standing to Bring Claims on Behalf of Absent Class Members....371

B. SLUSA Does Not Preclude Plaintiffs' Claims Because Any Alleged Misrepresentations Are Not in Connection with the Sale or Purchase of Covered Securities....373

1. The Funds' Investments....3742. Securities sold in order to purchase shares in the Funds or in lieu of selling shares in the Funds....376

IV. The Timeliness of Plaintiffs' Action....377

A. Puerto Rico's One–Year Statute of Limitations Bars Plaintiffs' Tort Claims Against the UBS Defendants and Ferrer but Not Against the Popular Defendants ...377

1. Puerto Rico's Statute of Limitations....378

2. Time of Injury ...379

3. Notice of Injury....379

B. Puerto Rico Uniform Securities Act ("PRUSA") ...384

V. Sufficiency of the Pleadings....387

A. Pleading Standard....387

B. The Breach of Fiduciary Duty and the Breach of the Implied Covenant of Good Faith and Fair Dealing Claims Are Not Pled with the Particularity Required by Rule 9(b)...387

1. Popular Defendants' alleged breach of fiduciary duty and breach of the implied covenant of good faith and fair dealing ...388

2. UBS Defendants' alleged breach of the implied covenant of good faith and fair dealing....388

C. Aiding and Abetting Breach of Fiduciary Duty ...389

D. Breach of Contract ...389

1. UBS Defendants...389

2. Popular Defendants ...390

VI. Conclusion...390

This action tells part of the story of Puerto Rico's debt crisis. It arises out of the regulatory exceptions that apply to Puerto Rico and the resulting lack of safeguards for the investors in certain mutual funds. Plaintiffs and putative class members are clients of UBS Financial Services Inc. of Puerto Rico ("UBS Puerto Rico") and Popular Securities, LLC who invested in any of 23 closed-end mutual funds¹ (the "Funds") administered by defendants UBS Trust Co. of Puerto Rico ("UBS Trust") and Banco Popular de Puerto Rico ("Banco Popular") during the period from May 5, 2008 through May 5, 2014. Taking advantage of gaps in regulations that apply to Puerto Rico, the Funds were highly leveraged and also highly concentrated in debt securities issued by the Puerto Rico government. As a result, when the Puerto Rico government was facing default in 2013–2014 and the ratings of its general debt obligations were downgraded to junk bond status, the Funds collapsed and plaintiffs and putative class members—many of them retirees—faced staggering losses.

Plaintiffs now bring this putative class action for state law claims of breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and breach of contract against the entities involved in the Funds' management and those entities that were party to client relationships with investors in the Funds—UBS AG, UBS Financial Services, Inc. ("UBS Financial"), UBS Puerto Rico, UBS Trust, and UBS Bank USA (collectively the "UBS Defendants" or "UBS"), and Banco Popular and Popular Securities (collectively the "Popular Defendants" or "Popular")—as well as against individual defendants Carlos Ubiñas, CEO of UBS Puerto Rico, and Miguel Ferrer, the former Chair and CEO of UBS Puerto Rico and the founder and former CEO of UBS Trust. Plaintiffs do not assert any federal claims.

The UBS Defendants,² Ferrer, and the Popular Defendants have brought three separate motions to dismiss the Amended Class Action Complaint ("Amended Complaint") pursuant to Fed. R. Civ. P. 12(b)(1) and 12(b)(6). Defendants contend variously that plaintiffs lack standing to bring claims regarding funds in which the individually named plaintiffs did not invest; plaintiffs' claims are precluded by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"); plaintiffs' tort claims are time-barred by the statute of limitations and certain of plaintiffs' claims are barred by the Puerto Rico Uniform Securities Act ("PRUSA"); plaintiffs have failed to state a claim upon which relief can be granted pursuant to Fed. R. Civ. P. 8, 9(b), and 12(b)(6).

For the reasons set forth below, the UBS Defendants' and the Popular Defendants' motions to dismiss are granted in part and denied in part; Ferrer's motion to dismiss is granted in its entirety. This Court has jurisdiction over plaintiffs' claims, as plaintiffs have standing to bring claims on behalf of unnamed class members and their claims are not barred by SLUSA. However, Puerto Rico's one-year statute of limitation that applies to tort claims bars plaintiffs' breach of fiduciary duty claims against the UBS Defendants, Ubiñas, and Ferrer. Accordingly, Counts I and II—the breach of fiduciary duty claims against the UBS Defendants, Ubiñas, and Ferrer—are dismissed with prejudice.

Plaintiffs' tort claims against the Popular Defendants, on the other hand, are timely pursuant to Puerto Rico's statute of limitations because plaintiffs were not on notice of their claims against the Popular Defendants.

However, PRUSA's two-year statute of repose applies to Vela's 2011 and Toro's breach of fiduciary duty claims against the Popular Defendants because plaintiffs' allegations sound in fraud. Similarly, Vela's 2011, Toro's, and Montes' claims for breach of the implied covenant of good faith and fair dealing sound in fraud and are time-barred pursuant to PRUSA. Accordingly, these claims are dismissed with prejudice. However, those breach of contract claims against the UBS Defendants and the Popular Defendants which are based on defendants' failures to perform any suitability analyses are timely because those breach of contract claims do not sound in fraud.

Vela's remaining 2012 breach of fiduciary duty claim and breach of the implied contractual duty of good faith and fair dealing claim against the Popular Defendants—which were brought within PRUSA's timeframe—sound in fraud and plaintiffs have not adequately pled these claims pursuant to Fed. R. Civ. P. 9(b). Accordingly, Vela's breach of fiduciary duty claim and breach of the implied covenant of good faith and fair dealing claim against the Popular Defendants premised on Vela's 2012 purchase of Fund Shares are dismissed without prejudice for failure to state a claim. Fernandez's, Schreiner's, Santana's, and Viera's breach of the implied covenant of good faith and fair dealing claims against the UBS Defendants— similarly brought within PRUSA's timeframe—are dismissed without prejudice for failure to state a claim pursuant to Fed. R. Civ. P. 9(b), as well.

Plaintiffs' remaining breach of contract claims for defendants' purported failures to perform any suitability analyses, on the other hand, must be examined pursuant to Fed. R. Civ. P. 8 because they do not sound in fraud. Plaintiffs Fernandez, Montes, Schreiner, and Vela have adequately pled their breach of contract claims against the UBS Defendants and Popular Securities for defendants' failure to have a reasonable basis for believing that the Funds were suitable and appropriate for plaintiffs. The Court finds, however, that the remaining plaintiffs (Santana, Viera, and Toro) cannot assert a breach of contract claim because their contracts did not contain any provision that obligated defendants to conduct a suitability analysis. Accordingly, defendants' motions to dismiss Counts V and VI are granted in part and denied in part.

I. BACKGROUND

The following facts are as alleged in the Amended Complaint and are taken as true solely for purposes of this motion.

A. The Funds

The closed-end mutual funds at issue in this case are incorporated pursuant to Puerto Rico law and are structured to provide tax-free income to Puerto Rico residents. As long as at least 67% of each Fund's holdings are comprised of Puerto Rico assets, the income that shareholders receive from the Funds' investments is not taxed by the municipal, state, or federal governments. (Am. Compl. ¶¶ 2, 44.) In order to take advantage of this tax benefit, a high...