Trigo-Gonzalez et al v. Banco Santander, S.A. et al
Filing
30
STATEMENT OF REASONS in support of 27 Court Order denying plaintiffs' 13 Motion to Remand. Signed by Judge Carmen C. Cerezo on 12/1/2017. (mld)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
DIONISIO TRIGO GONZALEZ and
ANA RITA SUAREZ SEÍN, individually
and on behalf of all others similarly
situated, and derivatively on behalf of
FIRST PUERTO RICO TAX-EXEMPT
TARGET MATURITY FUND II, INC.;
FIRST PUERTO RICO TAX-EXEMPT
TARGET MATURITY FUND III, INC.;
FIRST PUERTO RICO TAX-EXEMPT
TARGET MATURITY FUND IV, INC.;
FIRST PUERTO RICO TARGET
MATURITY FUND V, INC.; and
FIRST PUERTO RICO TAX-EXEMPT
TARGET MATURITY FUND VII, INC.
Plaintiffs
vs
BANCO SANTANDER, S.A.;
SANTANDER BANCORP; BANCO
SANTANDER PUERTO RICO;
SANTANDER SECURITIES LLC;
SANTANDER ASSET MANAGEMENT,
LLC; JUAN CARLOS BATLLE;
FRANCISCO JAVIER HIDALGO; LUIS
ROIG; ROMAN BLANCO; FREDY F.
MOLFINO; FERNANDO L. BATLLE;
MARIO F. GAZTAMBIDE; FRANCISCO
MARRERO MELENDEZ; JOSE E.
VÁSQUEZ BARQUET; and ANTONIO
ARIAS III
Defendants
vs
FIRST PUERTO RICO TAX-EXEMPT
TARGET MATURITY FUND II, INC.;
FIRST PUERTO RICO TAX-EXEMPT
TARGET MATURITY FUND III, INC.;
FIRST PUERTO RICO TAXEXEMPT
TARGET MATURITY FUND IV, INC.;
FIRST PUERTO RICO TARGET
MATURITY FUND V, INC.;
CIVIL 16-2868CCC
CIVIL 16-2868CCC
2
and FIRST PUERTO RICO
TAXEXEMPT TARGET MATURITY
FUND VII, INC.
Nominal Defendants
STATEMENT OF REASONS
The plaintiffs’ Motion to Remand (d.e. 13) was denied on September 29,
2017 (d.e. 27). The Court now provides its statement of reasons in support
thereof.
This putative shareholder derivative and class action was removed by
defendant Banco Santander, S.A. (BSSA) from the Court of First Instance of
the Commonwealth of Puerto Rico, Superior Court of San Juan, on October 25,
2016 pursuant to the Class Action Fairness Act of 2005, 28 U.S.C.
section 1332(d) (CAFA). Before the Court is plaintiffs’ Motion to Remand
(d.e. 13) filed on November 15, 2016 arguing that the Court lacks jurisdiction
over the action based on the “local controversy” exception under CAFA,
28 U.S.C. section 1332(d)(4)(A). Defendants BSSA, Santander Bancorp
(BanCorp), Banco Santander Puerto Rico, Santander Securities LLC
(Santander
Securities), Santander Asset
Management,
LLC (SAM)
(collectively, the Santander Defendants), Luis Roig, and Fredy Molfino filed an
opposition (d.e. 14) on November 29, 2016, which was joined by defendants
Mario F. Gaztambide, Francisco Marrero Meléndez, José E. Vázquez Barquet,
and Antonio Arias III.
I.
PROCEDURAL AND FACTUAL BACKGROUND
On September 16, 2016, plaintiffs filed a lawsuit against defendants in
state court, asserting derivative and class claims, contending that defendants
CIVIL 16-2868CCC
3
breached their fiduciary and contractual duties as to a number of closed-end
Santander funds and as to the funds’ investors in violation of various state
laws. (d.e. 1-1, State Court Complaint, and 1). The closed-end Santander
funds in question are First Puerto Rico Tax-Exempt Target Maturity Fund II,
Inc., First Puerto Rico Tax-Exempt Target Maturity Fund III, Inc., and First
Puerto Rico Tax-Exempt Target Maturity Fund V, Inc. (collectively referred to
as “Funds”), incorporated in Puerto Rico that pool capital to earn income by
investing in securities. (d.e. 1-1, State Court Complaint, p. 43). The Funds,
part of the Santander “First Puerto Rico Funds,” were offered exclusively to
individuals having their principal residence in Puerto Rico and to others whose
principal office and principal place of business was located in Puerto Rico. Id.
The complaint alleges that SAM served as the investment advisor, Santander
Securities as the primary underwriter and primary broker dealer and Banco
Santander Puerto Rico as the primary transfer agent, administrator and
custodian of the First Puerto Rico Funds. (D.e. 1-1, State Court Complaint,
p. 45). The overall management of the business and affairs of the First Puerto
Rico Funds were vested with its Board of Directors. (d.e. 1-1, State Court
Complaint, p. 46). In order to purchase shares of the Funds, shareholders
were required to enter into a binding contract for securities and services
referred
to
as
the
Puerto
Rico
Residency Representation
Letter
(“Representation Letter”) which incorporated by reference the terms of the
Funds’ prospectuses. (d.e. 1-1, State Court Complaint, p. 58). Plaintiffs
further allege at paragraph 75 that Santander Securities served as underwriter
for a significant portion of the bonds issued by the Commonwealth of Puerto
CIVIL 16-2868CCC
Rico
and
its
political
4
subdivisions,
organizations,
agencies
and
instrumentalities. (d.e. 1-1, & 75).
On October 25, 2016, defendant BSSA removed the case pursuant to
CAFA. Plaintiffs acknowledge that CAFA applies. What is in issue is the
applicability of CAFA’s “local controversy” exception.
II.
ANALYSIS
The Class Action Fairness Act of 2005 (CAFA) provides for removal to
federal court of state class actions that satisfy the statute's minimal diversity
and class size requirements and have more than $5 million in controversy.
Amoche v. Guarantee Trust Life Ins. Co., 556 F.3d 41, 42-43 (1st Cir. 2009);
28 U.S.C. section 1332(d)(2). This grant of subject matter jurisdiction is
limited, however, by the “local controversy” exception, 28 U.S.C. section
1332(d)(4)(A), and the “home state” exception, 28 U.S.C. section
1332(d)(4)(B).
CAFA's language favors federal jurisdiction over class actions and
CAFA's legislative history suggests that Congress intended the local
controversy exception to be a narrow one, with all doubts resolved “in favor of
exercising jurisdiction over the case.”
Evans v. Walter Indus., Inc.,
449 F.3d 1159, 1163 (11th Cir. 2006) (citing S.Rep. No. 109-14 at 42,
U.S. Code Cong. & Admin. News 3, 40).
The “local controversy” exception to CAFA jurisdiction under 28 U.S.C.
section 1332(d)(4)(A) provides that federal courts shall decline to exercise
jurisdiction where the following requirements are established: (a) greater than
CIVIL 16-2868CCC
5
two thirds of the plaintiffs of the member class are from the state in which the
complaint was originally filed; (b) at least one defendant is (1) a citizen of the
state in which the complaint was originally filed, (2) significant relief is sought
against defendant(s) by the plaintiff class, and (3) relief is sought due to
defendant's conduct, which forms a significant basis of the claim; (c) the
principal injuries resulting from the alleged conduct or any related conduct of
each defendant were incurred in the State in which the action was originally
filed; and (d) no other similar claim against any defendant by similar persons
asserting similar facts has been filed within the preceding three years. The
burden lies with plaintiff to show that the local controversy exception to CAFA
jurisdiction applies. In re Hannaford Bros. Co. Customer Data Sec. Breach
Litig., 564 F.3d 75, 78 (1st Cir. 2009). See also Evans, 449 F.3d at 1164
(affirming that when a party seeks to avail itself of an express statutory
exception to federal jurisdiction granted under CAFA . . the party seeking
remand bears the burden of proof with regard to that exception.)
The parties do not dispute that requirements one, two and four of the
“local controversy” exception have been satisfied. As to the first requirement,
all plaintiffs are Puerto Rico citizens, and as to the second requirement,
defendants BanCorp, Santander Securities, Banco Santander Puerto Rico
and SAM are incorporated under the laws of the Commonwealth of Puerto Rico
and have principal offices in Puerto Rico. The complaint seeks relief from
these defendants, and their conduct formed a significant basis for plaintiffs’
claims. As for the fourth requirement, plaintiffs state that “[t]o the best of [their]
knowledge, no other class action asserting similar allegations against the
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6
defendants has been filed within the past three years.” (d.e. 13, p. 7). The
dispute centers on the third requirement: “principal injury.”
A.
The “Principal Injury” Requirement
“[P]rincipal injury” is satisfied either (1) when principal injuries resulting
from the alleged conduct of each defendant were incurred in the state in which
the action was originally filed, or “(2) when principal injuries resulting from any
related conduct of each defendant were incurred in that state.” Premo v.
Family Dollar Stores of Masachusetts, 2014 WL 1330911, at *5
(D. Mass. 2014). The legislative history discussing the purpose underlying the
“principal injury” requirement is instructive:
The third criterion is that the principal injuries resulting from the
actions of all the defendants must have occurred in the state where
the suit was filed. By this criterion, the Committee means that all
or almost all of the damage caused by defendants' alleged conduct
occurred in the state where the suit was brought. The purpose of
this criterion is to ensure that this exception is used only where the
impact of the misconduct alleged by the purported class is
localized. For example, a class action in which local residents
seek compensation for property damage resulting from a chemical
leak at a manufacturing plant in that community would fit this
criterion, provided that the property damage was limited to
residents in the vicinity of the plant. However, if the defendants
engaged in conduct that could be alleged to have injured
consumers throughout the country or broadly throughout several
states, the case would not qualify for this exception, even if it were
brought only as a single-state class action.
S. REP. 109-14, 40, 2005 U.S.C.C.A.N. 3, 38 (emphasis ours).
Plaintiffs contend in their petition to remand (d.e. 13) at page 7 that the
plaintiffs and the class’ principal injuries “were caused by the defendants’
wrongdoing and, because the funds were offered only to Puerto Rico residents,
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7
there can be no doubt that the injuries were incurred in Puerto Rico.”
Defendants, in turn, posit that:
. . . while it is true that the Funds were marketed solely to Puerto
Rico residents, to argue that this case concerns only the
management of the Funds is to rob the allegations of their broader
context. At the heart of Plaintiffs’ claims are allegations of selfdealing and conflicts of interest, and Defendants’ use of the Funds
as just one part of an alleged intricate and elaborate fraudulent
scheme.
Opposition to Motion to Remand (d.e. 14), pp. 8-9.
They further argue that:
Plaintiffs’ simplistic assertion that “because the Funds were offered
only to Puerto Rico residents, there can be no doubt that the
injuries were incurred in Puerto Rico” (Mot. at 7) betrays a
misunderstanding of the “principal injuries” test, and it
mischaracterizes the alleged relevant conduct. Like the billing
practices at issue in Coll. of Dental Surgeons [v. Triple S
Management, Inc., 2011 WL 414991], the Santander Defendants’
underwriting and sale of the bonds at issue – the first and most
critical level of the alleged house of cards – led to losses suffered
by thousands of investors throughout the U.S., not solely the
investors in these Funds. Where, as here, the alleged conduct
“could be alleged to have injured consumers throughout this
country or broadly throughout the several states” (S. Rep. 109-14
at 38), Congress and relevant case law mandate that CAFA’s
broad jurisdictional reach is not annulled merely because Plaintiffs
seek relief on behalf of a class of Puerto Rico residents.
Id., at p. 10.
Plaintiffs’ own allegations set forth at paragraphs 75, 76, 77 and 78 of the
Complaint defeat their primary argument that the principal injuries resulting
from the defendants’ alleged misconduct was localized and did not extend
beyond the shores of Puerto Rico. These allegations read as follows:
75.
First, Santander Securities served as underwriters for a
significant portion of the bonds issued by the Commonwealth
of Puerto Rico and its political subdivisions, organizations,
agencies, and instrumentalities, generating hundreds of
millions of dollars in fees for doing so.
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8
76.
According to official statements publicly available on GDB’s
website, COFINA had 14 separate bond offerings from 2007
to 2011 worth more than $16 billion. Santander Securities
served as either lead or co-lead underwriter on 12 of these
offerings, which were worth a combined amount of
$15.3 billion, including the financing of COFINA’s
Series 2009-B bonds. As underwriter, Santander Securities
sold over $100 million in COFINA’s Series 2009-B bonds. As
underwriter, Santander Securities sold over $100 million in
COFINA’s Series 2009-B bonds directly to the Funds, where
they remain today at a market value of roughly half their
original face value.
77.
Moreover, the same materials indicate that between 2006
and 2012, the GDB had 15 separate bond offerings of its
Senior Notes, totaling $11 billion. Santander Securities
served as underwriter on 10 of these Senior Note issuances,
underwriting a total of $9 billion. Suggestive of brazen selfdealing, the Funds hold over $98 million in face value of the
very same GDB Senior Notes that Santander Securities
underwrote. It is estimated that, between 2008 to present,
Santander Securities underwrote over $42 billion in bonds
issued by the Commonwealth of Puerto Rico and its political
subdivisions, organizations, agencies, and instrumentalities.
78.
In addition, in BanCorp.’s Annual report for 2009 it boasts
that, in that year, Santander Securities “participated in the
underwriting and structuring of over $8.2 billion of fixed
income products in the U.S. and Puerto Rico capital
markets,” including “the issuance and sale of over
$1.25 billion in Puerto Rico sales Tax Financing Corporation
bonds in the local capital market.” As discussed, in part, in
paragraphs 66-68 and paragraph 77, bonds issued by both
of these Puerto Rico government agencies represent a
significant portion of the holdings in the Funds’ portfolios.
Additionally, the filing of other class actions in this District founded on
essentially similar allegations, such as Civil No. 12-1663(CCC), Roman et al
v. UBS Financial Services, Inc., et al, and Civil No. 17-2243(CCC),
Ponsa-Rabell et al v. Santander Securities, L.L.C., militate against the
applicability of the “local controversy” exception to this case.
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III.
9
CONCLUSION
For the reasons stated above, plaintiffs’ Motion to Remand (d.e. 13) was
DENIED since the plaintiffs did not discharge their burden of proof, as the party
seeking remand, that would entitle it to avail itself of the narrow local
controversy exception to CAFA jurisdiction.
SO ORDERED.
At San Juan, Puerto Rico, on December 1, 2017.
S/CARMEN CONSUELO CEREZO
United States District Judge
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