Securities Law Updates | New Judicial Opinions

August 11, 2008

Ninth Circuit Affirms Remand to State Court of Countrywide Home Securities Suit

Luther v. Countrywide Home Loans
No. 08-55865, U.S. Court of Appeals for the Ninth Circuit, 7/16/2008

Ninth Circuit Affirms Remand to State Court of Countrywide Home Securities Suit

Holding:

In this action brought under the Securities Act of 1933 ("SA"), the U.S. Court of Appeals for the Ninth Circuit affirmed the district court's order remanding the case to state court. Plaintiff-appellee David H. Luther ("Luther") filed this class action against defendants-appellants Countrywide Home Loans, CWALT, Inc., several of Countrywide’s subsidiaries, various loan trusts, and several underwriters ("defendants-appellants") in Los Angeles County Superior Court ("state court") accusing them of making false and misleading registration statements. Defendants-appellants removed to federal court pursuant to the Class Action Fairness Act of 2005 ("CAFA"). Luther then filed a motion to remand to state court pursuant to Section 22(a) of the SA, which prohibits removal of claims brought in state court under the SA. The district court granted Luther’s motion and remanded to state court. On appeal, the Ninth Circuit held that CAFA’s grant of the right of removal of certain class action proceedings did not supersede SA's Section 22(a) that provides an express exception to removal. Specifically, the SA is the more specific statute: it applies to the narrow subject of securities cases and its Section 22(a) more precisely applies only to claims arising under the SA. CAFA, on the other hand, applies to a “generalized spectrum” of class actions. The district court's grant of Luther motion to remand was therefore warranted.

Detailed Summary:

Alleging various violations of the SA, Luther filed a class action in state court against defendants-appellants. The action was brought on behalf of all persons and entities who acquired hundreds of billions of dollars worth of mortgage pass-through certificates from CWALT, Inc. between January 2005 and June 2007. Opinion, p. 9118.

Luther alleged that the defendants-appellants violated sections 11, 12(a)(2), and 15 of the SA, 15 U.S.C. Sections 77k, 77l(a)(2) and 77o, by issuing false and misleading registration statements and prospectus supplements for the mortgage pass-through certificates. In particular, Luther alleged that the risk of the investments was much greater than represented by the registration statements and prospectus supplements, which omitted and misstated the credit worthiness of the underlying mortgage borrowers. Luther alleged that the value of the certificates has substantially declined since many of the underlying mortgage loans became uncollectible and he now seeks compensatory damages. The complaint expressly “excludes and disclaims” allegations of fraud or intentional or reckless misconduct. Id.

Defendants-appellants removed the action to federal court under the CAFA, Pub. L. No. 109-2, Sections 4(a) & 5(a), 119 Stat. 4, 9-13 (codified at 28 U.S.C. Sections 1332(d) & 1453(b)). Once in federal court, Luther brought a motion to remand the case back to state court under Section 22(a) of the SA, 15 U.S.C. Section 77v(a), which prohibits removal of claims filed in state court and arising under the SA. Id., p. 9119.

In opposition to that motion,  defendants-appellants argued that the Section(a) removal bar does not prevent removal under CAFA and that none of CAFA’s exceptions applies. The district court granted Luther’s motion to remand the case to state court, holding that CAFA and Section 22(a) cannot mutually coexist and that the specific bar against removal in the SA trumps CAFA’s general grant of diversity and removal jurisdiction.  Hence, defendants-appellants filed this appeal.

Generally, a district court’s order remanding a removed case back to state court is not appealable. Id., citing 28 U.S.C. Section 1447(d). However, permission to appeal can be sought and granted in certain class action cases. Id., citing 28 U.S.C. Section 1453(c)(2). In general, removal statutes are strictly construed against removal. Id., p. 9120, citing Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108-09 (1941).

In this appeal, the Ninth Circuit held that Section 22(a) of the SA provides an express exception to removal: “Except as provided in section 77p(c) of this title, 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.” Id., p. 9121, citing 15 U.S.C. Section 77v(a). CAFA’s general grant of the right of removal of high-dollar class actions does not trump Section 22(a)’s specific bar to removal of cases arising under the SA.

“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.” Id., citing Radzanower v. Touche Ross & Co., 426 U.S. 148, 153 (1976). Here, the Securities Act of 1933 is the more specific statute; it applies to the narrow subject of securities cases and Section 22(a) more precisely applies only to claims arising under the Securities Act of 1933. CAFA, on the other hand, applies to a “generalized spectrum” of class actions. Id.

By virtue therefore of Section 22(a) of the SA , Luther’s state court class action alleging only violations of the Securities Act of 1933 was not removable. The grant of Luther’s motion to remand was warranted.

View a PDF of the judicial opinion

Companies Mentioned

Banc of America Securities, LLC

Barclays Capital Inc.

Bear Stearns and Co., Inc.

Citigroup Global Market Inc.

Countrywide Home Loans Servicing LP

Countrywide Home Loans, Inc.

Countrywide Securities Corp.

Credit Suisse First Boston

CWALT, Inc.

Deutsche Bank Securities, Inc.

Edward D. Jones & Co., L.P.

Goldman Sachs & Co.

Greenwich Capital Markets, Inc.

J.P. Morgan Securities, Inc.

Lehman Brothers, Inc.

Morgan Stanley & Co., Inc.

UBS Securities LLC

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Companies Mentioned

Securities Law

The following companies are mentioned in Securities Law Updates:

Securities and Exchange Commission

Harris Associates, L.P.

Banc of America Securities LLC

Citicorp USA, Inc.

The Public Employees’ Retirement System of Mississippi

Morgan Stanley & Co., Inc.

Jan Charles Finance S.A.

Park East, Inc.

CIBC World Markets Corp.

Citigroup Inc.

Barclays Capital Inc.

Citigroup Global Markets, Inc.

Beckstead and Watts, LLP

Barclays Bank PLC

Torchmark Corp.

Public Company Accounting Oversight Board

BNY Capital Markets, Inc.

KPMG Peat Marwick, LLP

Deloitte & Touche LLP

Credit Lyonnais Securities (USA) Inc.

Florida State Board of Administration

Credit Suisse Securities (USA) LLC

Deutsche Bank AG

The Cleaners & Caulkers Local 1 Pension Fund

Credit Suisse, New York Branch

Ameriprise Financial, Inc. f.k.a. American Express Financial Corp.

Harris Nesbitt Corp.

California Department of Corporations

The Royal Bank of Scotland plc

RiverSource Investments, LLC

Asset Management Holding AG

Deutsche Bank

Consolidated Management Group, LLC

The Bank of Nova Scotia

Alex Brown, Inc.

Toronto Dominion Texas, LLC f.k.a. Toronto Dominion Texas, Inc.

SG Cowen Securities Corp.

Tellabs, Inc.

Deutsche Bank Securities, Inc.

Mizuho International PLC

Lydia Capital, LLC

Suntrust Capital Markets, Inc.

Makor Issues & Rights, Ltd.

ABN AMRO Inc.

Tribune Company

Fleet Securities, Inc. n.k.a. Bank of America, N.A.

City of Philadelphia Board of Pensions and Retirement

The Bank of New York Company, Inc.

Staples, Inc.

CIBC, Inc.

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