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

CAFA’s Securities Exception Prevents Federal Jurisdiction Over the Action

Posted in Case Summaries

Eminence Investors, L.L. L.P. v. Bank of N.Y. Mellon, 782 F.3d 504 (9th Cir., 2015)

The Ninth Circuit affirmed the District Court’s order remanding the action, finding that the CAFA’s securities exception prevented federal jurisdiction over the action.

In this case, the plaintiff brought an action in California state court seeking to recover for the defendant’s alleged breaches of duties that the defendant owed as the Indenture Trustee of bonds issues to fund the development of real property. Almost two years later, the plaintiff amended the complaint adding class allegations on behalf of more than 100 class members and requesting compensatory damages expected to exceed $10 million for each of the alleged four causes of action.  Within 30 days after filing the complaint, the defendant removed the action to federal court.

The plaintiff moved to remand, arguing that removal was untimely and that the CAFA securities exception applied. The District Court agreed with the plaintiff regarding the untimeliness of the removal under 28 U.S.C. § 1446(b), and remanded the case to the state court without reaching the securities exception.  The defendant appealed to the Ninth Circuit.

At the very outset, the Ninth Circuit noted that cases falling under securities exemption, i.e. claims relating to the rights, duties, and obligations relating to or created to any security under the Securities Act, were expressly exempted from CAFA removal.  The Ninth Circuit observed that the plaintiff’s first three causes of action were for breach of fiduciary duty, based respectively on nondisclosure, loyalty and due care.  The fourth cause of action was for gross negligence.  Therefore, the Ninth Circuit concluded that all causes of action related to the rights, duties, and obligations related to or created by or pursuant to the Bonds, hence the securities exception must apply.

The defendant relied on Estate of Pew v. Cardarelli, 527 F.3d 25 (2nd Cir., 2008),  where purchasers of certain money market certificates brought suit against the issuers of the certificates and their auditors under a state consumer fraud statute.  (Editors’ Note: See the CAFA Law Blog analysis of Cardarelli posted on August 20, 2008).  The Second Circuit held that because the plaintiffs sought to enforce their rights as purchasers of the securities rather than as holders of the securities under a state fraud statute that focused on the transaction in which they acquired the notes; therefore, the exception did not apply.

The defendant quoted Cardarelli for the proposition that, in order to apply the securities exception, the cases involved must be causes grounded in the terms of the security itself.  The Ninth Circuit, however, noted that Cardarelli clarified that the key distinction was whether the plaintiffs were seeking to enforce their rights as holders of the certificates or purchasers of the certificates.  In this action, however, the Ninth Circuit found that the plaintiffs asserted its rights as a holder of the Bonds rather than as a purchaser of the Bonds, hence Cardarelli can be distinguished from this case.

The defendant next pointed to Blackrock Fin. Mgmt. Inc. v. Segregated Account of Ambac Assurance Corp., 673 F.3d 169 (2nd Cir., 2012) , where the Second Circuit agreed with the district court that the securities exception did not apply if the trustee’s conduct in approving the settlement must also be evaluated under some source of law other than laws, such as New York’s common law of trusts.  (Editors’ Note: See the CAFA Law Blog analysis of BlackRock posted on October 1, 2012).  The defendant cited to BlackRock for the principle that the securities exception should not be applied to causes of action seeking solely to enforce the terms of the indenture.

The Ninth Circuit, however, observed that the defendant did not discuss BlackRock’s preceding phrase stating that the securities exception applies to causes based on the duties imposed on persons who administered securities.  The Ninth Circuit held that an indenture trustee is the one responsible for administering bonds, so under the reasoning of this passage in BlackRock, the securities exception should apply because all of Plaintiff’s causes of action were based on the Defendant’s alleged duties in administering the Bonds.

Accordingly, the Ninth Circuit concluded that the causes of action in this case were covered by the CAFA securities exception.

-Melissa M. Grand