Does the Class Action Fairness Act trump the anti-removal provision of the Securities Act of 1933 giving concurrent jurisdiction to state and federal courts?
In the aftermath of the crumbled financial industry, investors with ruined portfolios are seeking retribution. It should come as no surprise that there has been a substantial uptick in the number of securities class action suits filed in the past year, a large majority of which focus on the fallout of the subprime meltdown. In an effort to circumvent the heightened pleading standards and mandatory discovery stay imposed by the Private Securities Litigation Reform Act of 1995 (PSLRA) for securities cases filed in federal court, many of these recent actions are being brought in state court and allege violations of Sections 11 and 12 of the Securities Act of 1933 ('33 Act). The viability of these suits in state court has led to a conflict among circuits as to whether the Class Action Fairness Act (CAFA) trumps the anti-removal provision of the '33 Act giving concurrent jurisdiction to state and federal courts.
Historically, plaintiffs had their choice of forum for claims brought pursuant to the '33 Act. Plaintiffs could bring these actions in either state or federal courts. Further, plaintiffs did not have to fear removal, because Section 22(a) of the '33 Act provided that "no case arising under this subchapter and brought in any State court of competent jurisdiction shall be removed to any court of the United States." 15 U.S.C. § 77v(a).
In recent years, however, two exceptions have been carved out of this bright-line rule. First, in 1998, the anti-removal provision was amended by the Securities Litigation Uniform Standards Act of 1998 (SLUSA). SLUSA created an exception for securities fraud class actions involving covered securities, which are securities sold on a national exchange. 15 U.S.C. §§ 77p(c), r(b), v(a).
Shortly thereafter, in 2005, Congress enacted the Class Action Fairness Act. CAFA broadens the federal diversity jurisdiction statute (28 U.S.C. § 1332(d)) to create original jurisdiction in federal court over class actions with minimal diversity (one class member is a citizen of a different state from at least one defendant), at least 100 proposed class members and the aggregate amount in controversy exceeding $5 million. CAFA also contains a complementary removal provision (28 U.S.C. § 1453), which allows defendants to remove these large class actions to federal court. Leading up to CAFA's enactment, plaintiffs in securities class actions were carefully crafting actions to make sure that they would remain in state court. Congress enacted CAFA in order to minimize plaintiffs' counsel's ability to "game the system by trying to defeat diversity jurisdiction" because "interstate class actions typically involve more people, more money and more interstate commerce ramifications than any other type of lawsuit." S. Rep. 109-14 at 5 (2005).
Congress did not intend CAFA's federal court original jurisdiction provisions to apply to all class actions, however. CAFA does allow certain actions to remain in state court, namely the following three exceptions:
1. actions falling under SLUSA's provisions, involving securities sold on a national exchange;
2. state law corporate governance cases; and
3. certain other types of state law actions, defined as cases "that solely involvea claim that relates to the rights, duties (including fiduciary duties) and obligations relating to or created by or pursuant to any security. ..." See 28 U.S.C. § 1453(d)(1)-(3).
Unlike SLUSA, CAFA does not directly amend Section 22(a). As a result, a question remains: does CAFA implicitly trump the anti-removal provision of the '33 Act giving concurrent jurisdiction to state and federal courts? The Ninth Circuit has held that it does not, while the Seventh Circuit and Southern District of New York have reached the opposite conclusion.
In July 2008, the Ninth Circuit issued its decision in Luther v. Countrywide Home Loans Servicing LP ( Luther ),1holding that CAFA does not trump the anti-removal provision of the '33 Act. The Ninth Circuit's pronouncement in Luther arose from the collapse of the subprime loan markets. Luther brought a class action against Countrywide alleging various violations of the Securities Act of 1933. Luther alleged that Countrywide issued false and misleading registration statements and prospectus supplements for hundreds of billions of dollars' worth of mortgage pass-through certificates. After Countrywide removed the case to federal court under CAFA, Luther sought to have the case remanded back to state court under § 22(a) of the '33 Act. The Ninth Circuit held that CAFA did not trump § 22(a) of the '33 Act; thus the action was not removable. The Ninth Circuit reasoned that "it is a basic principle of statutory construction that a statute dealing with a narrow, precise, and specific subject is not submerged by a later enacted statute covering a more generalized spectrum."2Applying this general principle of statutory construction, the Ninth Circuit found that the '33 Act is a "more specific statute," since it applies to the narrow subject of securities cases and that § 22(a) "more precisely applies only to claims arising under the Securities Act of 1933." On the other hand, the Ninth Circuit found that CAFA "applies to a 'generalized spectrum' of class actions." Thus, the Ninth Circuit found that the action was not removable and remand was properly granted.
Three months after Luther was decided, the Southern District of New York issued a decision contrary to Luther in New Jersey Carpenters Vacation Fund v. Harborview Mortgage Loan Trust ( Harborview ).3Like Luther, the plaintiffs in Harborview brought a class action against Harborview alleging various violations of the '33 Act arising out of the issuance of several billion dollars' worth of mortgage pass-through certificates. After Harborview removed the case to federal court under CAFA, plaintiffs sought remand to state court pursuant to § 22(a) of the '33 Act. The Southern District of New York held that CAFA's provisions trumped § 22(a) of the '33 Act. While acknowledging the principle of statutory law relied upon in Luther - that a more specific statutory provision trumps a later-occurring general provision - the Southern District of New York held that Congress intended to supersede § 22(a) when it enacted CAFA. Relying on the Second Circuit's holding in California Public Employees' Retirement Systems v. WorldCom, Inc. ( WorldCom ),4the Southern District of New York found that cases pleaded under the '33 Act can be removed even if brought in state court. In WorldCom , the Second Circuit was faced with two specific, conflicting provisions: the bankruptcy removal provisions of 28 U.S.C. § 1452 and the '33 Act's anti-removal provision. The Second Circuit looked at the central purpose of the bankruptcy code - to centralize bankruptcy litigation in a federal forum - and found that this purpose overrode the anti-removal provision in § 22(a) of the '33 Act.
Taking the Second Circuit's analysis of conflicting provisions in WorldCom into account, the Southern District of New York found that taking into account the overriding purpose of CAFA - to have securities cases that have a national impact heard in a federal forum - and the narrow circumscribed exceptions in CAFA, Congress intended CAFA to trump § 22(a) of the '33 Act.
Arriving at the same conclusion as Harborview , the Seventh Circuit in Katz v. Gerardi ( Katz )5focused on the statutory construction of CAFA in reaching its decision that CAFA trumps § 22(a) of the '33 Act. Katz, like Harborview and Luther , is yet another case arising out of the collapse of the subprime market. As in the previous cases, the action was initially brought in state court; defendants removed the action to federal court pursuant to CAFA; and the plaintiffs sought to have it remanded to state court pursuant to § 22(a). The Seventh Circuit rejected the Ninth Circuit's statutory construction theory that a "a statute dealing with a narrow, precise, and specific subject is not submerged by a later enacted statute covering a more generalized spectrum," because, as the Seventh Circuit aptly pointed out, that canon is only applicable to a statute that is a subset of another. Instead, the Seventh Circuit focused on the three enumerated exceptions in CAFA and held that securities class actions covered by CAFA are removable, regardless of § 22(a) of the '33 Act, unless the action is covered by one of the three limited exceptions found in CAFA.
The holding in Katz left the state of removal under § 22(a) in disarray by creating a clear circuit split. Under the Ninth Circuit jurisprudence, '33 Act cases cannot be removed under CAFA, but in the Seventh Circuit, '33 Act cases can be removed, as long as they do not fall within one of the exceptions. Knowing that the Seventh Circuit would create a circuit split, it circulated its decision to all judges in active service before it was released. It is important to note that none of the judges favored a hearing en banc .
It is unclear whether the United States Supreme Court will resolve the circuit split. It does not appear that any of the parties in any of these cases has petitioned the Supreme Court, and frankly, several facts unfavorable to the plaintiffs' case in Katz may hinder their efforts to seek Supreme Court intervention. While we eagerly await other circuits ruling on this issue, and maybe a party petitioning the Supreme Court to resolve the issue once and for all, one thing is for certain, plaintiffs will continue to file in the Ninth Circuit to keep their cases in state court. 1 533 F.3d 1031 (9th Cir. 2008).
2 Citing Radzanower v. Touche Ross & Co., 426 U.S. 148 (1976).
3 581 F.Supp.2d 581 (S.D.N.Y. 2008).
4 368 F.3d 86 (2d Cir. 2004).
5 552 F.3d 558 (7th Cir. 2009).
Heather M. Tashman and Kristin J. Jones are Associates in Stradley Ronon's litigation practice group. Ms. Tashman's practice includes general commercial litigation, in particular, class action, securities litigation, mortgage and lending litigation and insurance coverage. Ms. Jones focuses her practice on general litigation, including employment law, insurance litigation and securities litigation.