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PSINet Liquidating LLC v. Bear Stearns & Co.
Citations: 357 F.3d 263; 2004 WL 188075Docket: Docket Nos. 03-7295, 03-7739
Court: Court of Appeals for the Second Circuit; February 1, 2004; Federal Appellate Court
Plaintiff PSINet Liquidating LLC filed two lawsuits in New York State Supreme Court against defendants for allegedly unlawfully collecting broker fees related to the 1999 purchase and resale of debt securities by PSINet Inc. The purchase agreements involved investment dealers based overseas purchasing unregistered senior notes at a discount, with plans to resell them at full price, and included domestic affiliates in the resale process. PSINet claims these transactions were actually loans, leading to the defendants unlawfully retaining profits exceeding the 0.5% cap on loan brokerage fees set by New York General Obligations Law § 5-531. Each suit seeks damages equal to the difference between the profits and the allowable amount under the statute. Both cases were removed to federal court based on diversity jurisdiction. In the first suit, the plaintiff sought to remand, arguing lack of complete diversity due to three defendants being based in New York. The defendants moved to dismiss, claiming the plaintiff failed to state a claim. The District Court found the joinder of New York defendants was “fraudulent” and dismissed the complaint against all defendants. The plaintiff's subsequent motions for leave to amend the complaint and to dismiss without prejudice were denied. In the second suit, the District Court granted a motion to dismiss under Rule 12(b)(6). The plaintiff appealed both dismissals, which were consolidated. Upon review, the appeals court concluded the plaintiff did not state a claim for relief. It noted that section 5-531 applies only to loans or forbearances, and neither the court nor the New York Court of Appeals had determined if it applies to debt securities sales. The plaintiff failed to provide facts supporting the claim that the transactions were loans, as the agreements demonstrated a straightforward sale of debt securities, with obligations to buy and sell at agreed prices, rather than loans. Plaintiffs' allegations that the transactions were a sham do not adequately establish the existence of a loan, leading to the dismissal of their complaint for violation of section 5-531. The District Court's judgments against all defendants are affirmed. Two purchase agreements provided discounts of 2.75% and 2.26% to the defendants. Section 5-531 states that no person may receive more than fifty cents for brokerage or loan solicitation for amounts of one hundred dollars, proportionally for larger sums. The defendants with principal places of business in New York include Bear Stearns Co. Inc., Chase Securities Inc., and Donaldson, Lufkin, Jenrette Securities Corp. The additional defendants, with whom the plaintiff has diversity, are Bear Stearns International Limited, Chase Manhattan International Limited, and Donaldson, Lufkin, Jenrette International. Complete diversity exists between the plaintiff and the foreign defendants, which include Bear Stearns International Limited, Donaldson, Lufkin, Jenrette International, Merrill Lynch International Limited, and Morgan Stanley Co. International.