Seventh Circuit Directs Illinois District Court to Determine Removability of Gerardi Suit

Holding:

Disagreeing with a previous ruling by the U.S. Court of Appeals for the Ninth Circuit, the Seventh Circuit held that the anti-removal provisions of the Securities Act of 1993 (“SA”) do not bar a case from being removed to federal courts so long as the requirements of a recent law, the Class Action Fairness Act of 2005 (“CAFA”) are satisfied. In this case, the U.S. District Court for the Northern District of Illinois remanded to state court a proposed class suit filed by plaintiff Jack P. Katz (“Katz”). The district court based its ruling on Section 22(a) of the SA which forbids removal to federal courts. On appeal by defendants Archstone Trust, Lehman Brothers, Tishman Spreyer Development Corp. and their respective officers (“defendants”), the Seventh Circuit reversed, and ordered a remand in order for the district court to determine removability of the case. Specifically, the Seventh Circuit asked the district court to determine whether CAFA bars removal, and if it does, to determine whether the case is removable under some grant of jurisdiction. If the case is not removable, the district court should remand it to state court; otherwise, the district court should decide it on the merits.

Detailed Summary:

By way of background, Katz Katz proposed to represent a class of persons who contributed real property (or interests in real property) to the Archstone real estate investment trust, in exchange for interests called “A-1 Units.” In 2007 Archstone merged into Tishman-Lehman Partnership. Holders of A-1 Units were offered a choice of cash or Series O Preferred Units in the entity formed by the merger.

Katz argued that the merger violated the terms of the A-1 Units, because neither cash nor the Series O Preferred Units offered investors the same tax benefits as A-1 Units. After a majority of investors approved the merger, however, Katz took the cash and filed this suit in a state court against defendants.

Defendants removed this suit to federal court under the CAFA on the basis that the complaint rested on a federal statute,  Katz has citizenship different from some of the defendants, the proposed class included more than 100 members, and the amount involved in the litigation exceeded $5 million. Opinion, p. 2, citing 28 U.S.C. §1332(d). The district court remanded it to state court after concluding that removal is forbidden by §22(a) of the SA, 15 U.S.C. §77v(a).

Section 22(a) of the SA provides in part: “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.” Section 16(c), 15 U.S.C. §77p(c), which was added by the Securities Litigation Uniform Standards Act of 1998 (“1998 Act”), permits the removal of many securities class actions.

In the district court Katz argued that his suit is not a “covered class action” within the scope of the 1998 Act and therefore may not be removed. Defendants replied that CAFA applies to “all” civil actions, with a few defined exceptions, and that as Katz’s suit is not among the exceptions it must be removable.

In resolving the contentions of the parties, the Seventh Circuit took note of, and disagreed with the holding of the Ninth Circuit in Luther v. Countrywide Home Loans Servicing LP, 533 F.3d 1031 (9th Cir. 2008).  In Luther, the NInth Circuit held that the conflicting provisions on removability of the SA and the CAFA should be resolved in favor the SA.  Specifically, Section 22(a) of the SA covers only securities suits and thus is more specific than the CAFA, which applies to all civil actions. The district court in this suit agreed with the Ninth Circuit.

The Seventh Circuit cited Section 1453 of the CAFA to support its opinion that CAFA allows removability of any class action, despite the prohibition against under the SA.  Section 1453(d) provides: (d) This section shall not apply to any class action that solely involves—(1) a claim concerning a covered security as defined under section 16(f)(3) of the Securities Act of 1933 (15 U.S.C. [77p(f)(3)] and section 28(f)(5)(E) of the Securities Exchange Act of 1934 (15 U.S.C. 78bb(f)(5)(E)); (2) a claim that relates to the internal affairs or governance of a corporation or other form of business enterprise and arises under or by virtue of the laws of the State in which such corporation or business enterprise is incorporated or organized; or (3) a claim that relates to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security (as defined under section 2(a)(1) of the Securities Act of 1933 (15 U.S.C. 77b(a)(1)) and the regulations issued thereunder).

According to the Seventh Circuit, claims listed in this provision are not removable. But other securities class actions are removable if they meet the requirements of the 2005 Act (i.e. the class suit consists of 100 investors; the amount involved is $5 million in controversy; and there is minimal diversity). The Seventh Circuit thus stated: “To read §22(a) as Katz does would be to make most of §1453(d) pointless.” Opinion, p. 7.

The best approach, wrote the Seventh Circuit, was to have the district court hold a hearing at which the parties can elaborate on their positions, for the characterization of an ambiguous claim is more of a question of fact than of law.

On the basis of the foregoing, the Seventh Circuit vacated the district court’s judgment, and ordered a and ordered a remand in order for the district court to determine removability of the case.

Specifically, the Seventh Circuit asked the district court to determine whether CAFA bars removal, and if it does, to determine whether the case is removable under some grant of jurisdiction.  If the case is not removable, the district court should remand it to state court; otherwise, the district court should decide it on the merits.

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