Aiello v. Brown

Background

The plaintiffs, holders of common units in Brown (RI) Investment Company, LLC, sued several individuals and entities under federal securities laws and state common law. They alleged that the defendants made material omissions and misstatements about potential acquisitions, financing, and a preferred-equity offering. They also alleged that the defendants carried out a restructuring that benefited certain insiders and preferred-unit holders while leaving common members with limited cash proceeds and substantial tax obligations.

The BIC Defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. The ArrowMark Defendants moved under Rules 12(b)(1) and 12(b)(6), which address subject-matter jurisdiction and failure to state a claim.

Federal Securities Claims

The plaintiffs alleged violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act, as well as control-person liability under Section 20(a). The court used “statutory standing” to describe whether the plaintiffs had a right to sue under those provisions.

The court held that the plaintiffs had not shown that they were actual purchasers or sellers of securities. The plaintiffs acknowledged that they did not exercise their preemptive rights to purchase securities during the April 2018 offering. The court concluded that the operating agreement did not create a completed contractual right to purchase or sell securities merely because the plaintiffs received a preemptive offer. The plaintiffs had not incurred an irrevocable obligation because they did not accept the offer through the agreement’s required procedures.

The court also rejected the argument that being misled into not exercising preemptive rights was enough to support a claim under Section 10(b) and Rule 10b-5. It concluded that the plaintiffs were seeking recovery for the loss of an opportunity to buy or sell securities, which the court viewed as the type of speculative injury restricted by Supreme Court precedent.

Because the plaintiffs failed to state a primary federal securities claim, the court held that the control-person claim against David Corkins also failed. Section 20(a) liability depends on an underlying securities-law violation.

State-Law Claims and Jurisdiction

The court dismissed all federal claims and declined to exercise supplemental jurisdiction over the remaining state-law claims. Supplemental jurisdiction is a court’s authority to hear related state-law claims alongside federal claims. The court stated that, when federal claims are eliminated before trial, considerations such as judicial economy, convenience, fairness, and respect for state courts generally favor declining that jurisdiction.

The court also found that the amended complaint did not properly plead diversity jurisdiction because it did not allege the citizenship of the parties. The court therefore granted the motions to dismiss the state-law claims without prejudice and with leave to replead.

Disposition

The court granted the defendants’ motions to dismiss the federal claims and granted the defendants’ motions to dismiss the state-law claims without prejudice. The plaintiffs could file a second amended complaint by April 15, 2021, alleging the citizenship of each constituent person or entity. If they did not timely and truthfully allege complete diversity, the case would be closed. Judge Analisa Torres directed the Clerk of Court to terminate the two motions.