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Anwar v. Fairfield Greenwich Ltd., Slip Copy, 2009 WL 1181278 (S.D.N.Y., May 01, 2009)(NO. 09 CIV. 0118 VMTHK)

When the plaintiffs realized that Bernard Madoff had “made-off” with their investments (tough crowd?) with Fairfield Greenwich, the first logical thing to do was to sue the defendant…in state court. Of course, Fairfield Greenwich preferred defending those claims in federal court and had the case removed from state court to the federal district court for the Southern District of New York pursuant to jurisdiction under the Class Action Fairness Act of 2005. 

As one would expect, once in federal court, the plaintiffs filed a motion to remand the actions to state court for lack of subject matter jurisdiction. The plaintiffs argued that because the cases were filed as derivative actions, they are not “class actions” within the meaning of CAFA. Nor could they be designated as such because they do not qualify as “mass actions” and further submitted that the case did not satisfy CAFA’s 100-person requirement.

The defendant agued that the 100-person requirement for “mass actions” may be met by counting either the “beneficial owners of the current and former limited partners,” or only the beneficial owners of the current limited partners. The issue before the court arises when the defendants, in furtherance of the their claim of CAFA jurisdiction, seek “limited and targeted discovery of ten limited partners” of one of the plaintiff corporations to establish the identity and domicile of all beneficial owners of those limited partners.

This discovery request by defendant is strange in that a party who has already successfully had the case removed to federal court under CAFA jurisdiction is now seeking discovery in order to keep the case in federal court. The question becomes why would someone who has been successful in establishing CAFA jurisdiction need more information in order to defend that jurisdiction.

In support of their request for discovery, the defendants cite the Senate Judiciary Committee Report on CAFA, which notes that “a federal court may have to engage in some fact-finding” to address issues of jurisdiction. S.Rep. No. 109-14, at 44 (2005). 

The plaintiffs, on the other hand, rely on the Lowery v. Alabama, 483 F.3d 1184 (11th Cir. 2007), in which the Eleventh Circuit ruled that a defendant which had removed an action pursuant to CAFA was not entitled to jurisdictional discovery for the purpose of opposing the plaintiff’s motion to remand the case to state court. (Editors’ Note: See the CAFA Law Blog analysis of Lowery posted on May 15, 2007).

At this point the plaintiffs were probably high-fiving and proclaiming “he shoots, he scores,” as it appeared that they had found exactly what was needed to have the court deny jurisdictional discovery. However, the District Court for the Southern District of New York did not hear “string music” in the plaintiffs argument and instead ruled it for the home team.

In disregarding the Eleventh Circuit ruling proposed by the plaintiffs, the court recognized a circuit split between the Eleventh Circuit and the Second Circuit, which would be reviewing any appeals from this district court. In Cantor Fitzgerald, L.P., v. Peaslee, 88 F.3d 152 (2d Cir. 1996), the Second Circuit held that when a plaintiff moves to remand an action to state court after a defendant has removed it to federal court, a district court “may have . . . to authorize . . . discovery on the issue of subject matter jurisdiction.” 

Relying on this Second Circuit ruling, although prior to the existence of CAFA, the court in the present case determined that the rule proposed by the plaintiffs from Lowery contradicts the Second Circuit’s statement in Cantor Fitzgerald and that discovery may be necessary in deciding a motion to remand following a removal on the basis of diversity. 

The court bluntly explained its reasoning in holding for the defendants by allowing jurisdictional discovery in this case by stating that “Lowery cannot constrain this Court from exercising its ‘considerable latitude’ in supervising the development of ‘facts pertinent to jurisdiction.’” The court further opined that “the number of beneficial owners . . . and the domicile of those individuals, are ‘pertinent facts bearing on the question of jurisdiction.’”

The court in this case showed its allegiance to the circuit charged with reviewing its decisions even though the rule it relied upon was created prior to CAFA and when this case probably would have had no chance of ever seeing the inside of a federal court. This allegiance to the circuit court shot down a promising argument by the plaintiffs and opened the doors for the defendants to defend themselves in federal court. This goes to show that in circuit splits the “he said-she said” will most likely be settled based on the deciding courts ties to the respective circuits.

By: Scott Falgoust

Posted By McGlinchey Stafford at 07:30 AM | Comments / Questions (0)