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

“Internal Affairs Doctrine” and the “Securities Exception” Requires District Court to Remand Securities-related Class Action

Posted in Case Summaries

Fannin v UMTH_Land Dev. L.P., CV 16-641-SLR, 2016 WL 7042078 (D. Del. Dec. 2, 2016)

A Delaware district court, when faced with a putative class action whose claims fell solely and squarely within CAFA’s “internal affairs doctrine” and “securities exception,” had no choice but to remand the action to state court.

The plaintiffs, who held units of partnership interest in a Delaware limited partnership, brought a putative class action in the Delaware state court, alleging that the defendants exercised their control of the partnership to further their special interests at the expense of the partnership and its limited partners.  The plaintiffs asserted derivative and class claims for breach of fiduciary duty, waste, breach of the partnership agreement, and unjust enrichment. The defendants removed the case to federal court, and the plaintiffs moved to remand.

The plaintiffs argued that the district court should remand the putative class action to Delaware state court because two of the statutory exceptions to CAFA’s jurisdiction applied: the “internal affairs doctrine” and the “securities exception.” The “internal affairs doctrine,” codified at 28 U.S.C. § 1332(d)(9)(B), recognizes that only one state should have the authority to regulate a corporation’s internal affairs, while the “securities exception,” codified at 28 U.S.C. § 1332(d)(9)(C),  applies to claims that “related to the rights, duties, and obligations relating to or created by or pursuant to any security.” The two relevant exceptions read in full:

(d) Exception. – This section shall not apply to any class action that solely involves a claim … (B) that relates to the internal affairs or governance of a corporation or other form of business enterprise and that arises under or by virtue of the laws of the State in which such corporation or business enterprise is incorporated or organized; or (C) 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.

The district court, faced with competing arguments as to the scope of both the plaintiffs’ complaints and of CAFA’s exceptions, determined that all of the plaintiffs’ claims arose under the partnership agreement, which was governed by Delaware law, and that they all “relate[d] to alleged breaches of fiduciary duty” or breaches of the partnership agreement under Delaware law. The defendants countered the plaintiffs’ arguments that all the claims were derived under the partnership agreement and Delaware law by highlighting the allegations that suggested that the transaction from which the plaintiffs purchased their units were “tainted by fraud.” The court, responding to this argument, explained that the “internal affairs doctrine” encompassed not only breaches of fiduciary duty by directors, but also “fraudulent misrepresentation” by those directors.

Further, the district court found that the plaintiffs’ unjust enrichment claims were rooted in the same breaches of fiduciary duty that fell within the “internal affairs doctrine,” but also that these specific claims fell under the “securities exception.” These breach of contract claims were rooted in the partnership agreement — “an instrument that creates and defines plaintiffs’ securities.”

Therefore, because all of the plaintiffs’ claims solely fell under CAFA’s “internal affairs doctrine” or the “securities exception,” or both, the court granted the plaintiffs’ motion and remanded the putative class action back to Delaware state court.

Laura Cannon