Gavel-and-Book

Derivative claims against former reinsurance firm Scottish Re Group will be allowed to move forward in New York without first obtaining leave from the Cayman Islands, the state Court of Appeals ruled recently.

The high court’s decision is seen as a win for finance litigators, helping to keep New York’s legal pre-eminence in the area intact.

“The Cayman Islands are one of the most important offshore jurisdictions in the world, and we are pleased the Court of Appeals recognized that New York courts are fully capable of handling derivative cases against Cayman companies,” Boies Schiller Flexner partner Eric Brenner said in a statement. “There are sound policy reasons behind this decision, which carefully explained why Cayman law does not stand in the way of Cayman shareholders who wish to pursue derivative claims in New York.”

The suit was initiated by investor Paul Davis against Scottish, members of its board, and the majority shareholders in the company, Massachusetts Mutual Life Insurance Co. and the private equity firm Cerberus Capital Management.

Davis has asserted both direct and derivative causes of action, alleging among other things MassMutual and Cerberus colluded with directors at Scottish to unfairly enrich themselves, while harming minority shareholders.

The derivative portion of his legal action has been winding its way through the New York court system since it was first filed in 2012. At each turn, the courts ruled that because Scottish was incorporated in the Cayman Islands—as many companies are—Davis’ standing was dependent on following local Rule 12A of the Grand Court. The New York courts found, under that rule, which addresses shareholder derivative actions, Davis should have sought leave in the Cayman Islands Grand Court before taking any action in New York.

The Court of Appeals sought to distinguish whether Rule 12A represented a substantive law, or a procedural rule. If it was the former, the lower courts were right to deny Davis the ability to bring his stand-in derivative claims. If, however, Rule 12A was actually a procedural rule, it would have no bearing on suits brought in New York, where Cayman Islands Companies Law, in which Rule 12A appears, would be applied.

The Court of Appeals reasoned that Rule 12A falls into the latter category. Looking at the language of the actual rule, the court found that the rule acts as a “gatekeeping function”—“but only as to derivative actions brought in the Cayman Islands, not for derivative actions, wherever brought, concerning Cayman companies specifically,” Judge Paul Feinman wrote.

Additionally, the rule didn’t make mention of applying to derivative actions against Cayman-based companies in other forums, unlike other jurisdictions, the court found.

Were Rule 12A to be a substantive law, the result would be a confusing one, according to the court.

“Must the party first proceed by writ in the Grand Court and then discontinue the Cayman action to return to, or commence its action here in New York? Would the ruling by the Grand Court that there was a sufficient showing of merit be binding on a New York court on a motion to dismiss or for summary judgment? Rule 12A provides no answers,” Feinman wrote.

The court reversed the decision in the Appellate Division, First Department, and remanded the suit back to that court for further proceedings.

Mayer Brown partner Jean-Marie Atamian was counsel for the Scottish respondents. He could not be reached for comment.