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CAFA Law Blog Information, cases and insights regarding the Class Action Fairness Act of 2005

Class Actions Solely Involving Claims Related to Securities Invoke CAFA Exception Depriving Courts of Subject Matter Jurisdiction

Posted in Case Summaries, Jurisdictional Amount

Rainero v. Archon Corporation, 2016 WL 7384031 (9th Cir. Dec. 21, 2016).

The Ninth Circuit held it lacked federal question jurisdiction under 28 U.S.C.§ 1331 because the plaintiff did not assert a federal claim and the Securities Litigation Uniform Standards Act, 15 U.S.C. § 77p(d)(1)(A), did not provide an independent basis for federal question jurisdiction over plaintiff’s state-law claim.

The Ninth Circuit also held that CAFA does not allow a district court to assert diversity jurisdiction over a class action under 28 U.S.C. § 1332(d)(2) because the exception in 29 U.S.C.§ 1332(d)(9)(C) states that § 1332(d)(2) shall not apply to any class action that solely involves a claim that relates to the rights, duties, and obligations relating to or created by or pursuant to any security.

Background Facts:

The defendant, Archon Corporation, a Nevada Corporation with its principal place of business in Las Vegas, created a class of equity securities designated as Exchangeable Redeemable Preferred Stock in 1993. After filing a Certificate of Designation, the defendant issued shares of the preferred stock.  The Certificate reserved the defendant’s right to redeem the preferred stock at the defendant’s election, and upon providing notice to shareholders.  Upon redemption, shareholders would be entitled to $2.14 per share in addition to accrued, unpaid dividends.  Under the terms of the Certificate, the dividends would “cease to accrue on the shares redeemed … provided that the redemption price … has been duly paid or provided for.”

On July 31, 2007, the defendant issued a Notice of Redemption to the holders of the outstanding shares of preferred stock, announcing its intent to redeem all outstanding shares of the preferred stock on August 31, 2007. The Notice also announced that the preferred stock’s redemption price would be $5.241 per share. The plaintiff, a Pennsylvania resident, claimed that he held 9,140 shares of the preferred stock at the time of redemption.

The District Court’s Rulings:

The plaintiff filed a complaint in the U.S. District Court for the District of Nevada on the behalf of himself and the other holders of outstanding preferred stock, alleging breach of contract. The plaintiff argued that, under the terms of the Certificate, the redemption price should have been $8.69 per share; therefore, he and other shareholders were entitled to an additional $3.45 per share. The class members allegedly held a total of 1,483,270 outstanding shares of the preferred stock at the time of redemption.

Shortly before Rainero’s filed his complaint, the investment group D.E. Shaw Laminar Portfolios, LLC (“D.E. Shaw”) filed a similar complaint against Archon. Then, the investment group Leeward Capital filed its own complaint shortly after Raniero’s. The three cases were consolidated only for the purpose of discovery.  The District Court held that in D.E. Shaw and Leeward that the properly calculated redemption price was $8.69 and that the defendant owed the shareholders an additional $3.449 per share.

In light of the two decisions, Rainero sought partial summary judgment as to the method of calculating the redemption price, which the District Court granted.  The defendant filed a motion to dismiss arguing that the District Court did not have subject matter jurisdiction over the action because under CAFA the amount-in-controversy did not reach $5 million. Archon argued that the value of the 1,439,270 shares held by the plaintiffs totaled $4,964,42.23.

The District Court required Rainero to show cause why his complaint should not be dismissed for lack of subject matter jurisdiction. In addition to filing a brief on the subject matter issue, Rainero also moved for leave to file an amended complaint asserting federal question jurisdiction under 28 U.S.C. § 1331, and 15 U.S.C. § 77p, individual diversity jurisdiction under 28 U.S.C. § 1332(a), and supplemental jurisdiction over the class members’ claims under 28 U.S.C. § 1367. The district court granted Archon’s motion to dismiss, and the plaintiff appealed.

Rainero’s Appeal:

At the very outset, the Ninth Circuit affirmed that the district court properly held that it lacked federal question subject matter jurisdiction. Under 28 U.S.C. § 1331, “[t]he district courts shall have original jurisdiction of all civil actions arising under the Constitution laws, or treaties of the United States.” The sole claim in the plaintiff’s complaint was a breach of contract arising under Nevada law. Because Rainero did not assert a federal claim, the district court lacked subject matter jurisdiction.

The plaintiff argued that the Securities Litigation Uniform Standards Act (“SLUSA”) provided a basis for the District Court’s federal question jurisdiction under § 1331 because 15 U.S.C. § 77p(d)(1)(A) was a federal statute that allows certain class actions, including this one, to be maintained in either state or federal court.  Specifically, the plaintiff asserted that this case was a “covered class action” under § 77p that was “based upon the statutory or common law of the state in which the issuer is incorporated,” and, therefore, the District Court has jurisdiction over the action.

The Ninth Circuit held that SLUSA does not create an independent basis for federal question jurisdiction, relying on the D.C. Circuit’s decision in Campbell v. American International Group, Inc., 760 F.3d 62 (D.C. Cir. 2014), finding that the SLUSA did not confer federal jurisdiction over state law claims.

The Ninth Circuit also held that the district court properly concluded it lacked diversity jurisdiction over the class action because of the exception provided in 28 U.S.C. § 1332(d)(9)(C).  Under CAFA, 28 U.S.C. § 1332(d)(2), a federal court may exercise diversity jurisdiction over a class that has over 100 members who are minimally diverse and whose aggregated claims exceeded $5 million. The Ninth Circuit, however, noted that § 1332(d)(9)(C) provides that § 1332(d)(2) shall not apply to any class action that solely involves a claim that “relates to the rights, duties … and obligations relating to or created by or pursuant to any security.”

The plaintiff did not dispute that the preferred stock was the type of security covered by § 1332(d)(9)(C). Instead, Rainero argued that § 1332(d)(9)(C) does not apply because the shares of preferred stock were redeemed, and thereby cancelled, on August 31, 2007, and therefore no longer in existence when the plaintiff filed this complaint.

The Ninth Circuit remarked that the plain language of § 1332(d)(9) does not require that the covered security be “in existence” at the time the complaint is filed; rather, it applies to “any class action” solely raising claims relating to the rights, duties, and obligations relating to or created by or pursuant to any security.

Accordingly, Because Rainero’s claim seeks to enforce the terms of the Certificate, which set forth the rights, duties, and obligations relating to the preferred stock, § 1332(d)(9)(C) divested the district courts of jurisdiction under § 1332(d)(2).

Finally, the Ninth Circuit held that the district court properly determined that it lacked diversity jurisdiction over Rainero’s individual claim under 28 U.S.C. § 1332(a), and therefore could not exercise § 1367 supplemental jurisdiction over the class members’ claims because Rainero did not allege diverse citizenship; he alleged only that he was a resident of Pennsylvania, and that Archon had its principal place of business in Nevada.