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

Spirit of CAFA Law Encourages Exercising Supplemental Jurisdiction Over State Law Claims If A Federal Court Loses CAFA Jurisdiction Subsequent To Removal

Posted in Case Summaries

F5 Capital v Pappas, No. 16-530 (2d Cir. April 26, 2017).

In this action, while holding that the district court retained jurisdiction, the Second Circuit found that given that CAFA was the jurisdictional anchor for the complaint and that the evident purpose of CAFA was to expand federal jurisdiction over suits that met its requirements, it would be inconsistent with that purpose to interpret 28 U.S.C. § 1367(b) (grant of supplemental jurisdiction over state law claims) to keep the pendent claims out of federal court while allowing the class claims to proceed.

F5 Capital (“F5”), shareholder, brought a shareholder derivative action in the Supreme Court of the State of New York on behalf of Star Bulk Carriers Corp. (“Star Bulk”), alleging that individual members of Star Bulk’s board and affiliated entities improperly exploited their control over the corporation in entering into three separate self-dealing transactions, and asserting derivative and direct class action claims. The owner of F5, Hsin Chi Su, was a minority shareholder in Star Bulk and served in management positions.  After he and the defendant Petros Pappas, had a falling out resulting from a business dispute, the defendants worked to exclude Su from a leadership role at Star Bulk through several self-dealing transactions that F5 claimed harmed the corporation and its minority shareholders.

The defendants removed the action to federal court contending that there was federal jurisdiction over F5’s direct, class action dilution claim under CAFA, and supplemental jurisdiction over the non-class, state law claims. F5 did not contest removal.  Subsequently, the district court dismissed the complaint with prejudice.  On appeal, the Second Circuit affirmed.

The Second Circuit noted that although neither party challenged federal jurisdiction, it had a duty to inquire into the subject matter jurisdiction sua sponte.  While the defendants removed the case from state court, they explained that CAFA, which demanded only minimal diversity, was the basis for subject matter jurisdiction and that the district court could properly exercise supplemental jurisdiction over the derivative claims.

First, the Second Circuit found that the dilution claim might not proceed as a class action because the claim belonged to Star Bulk, not its shareholders. The Second Circuit therefore found that CAFA no longer provided a jurisdictional anchor for F5’s complaint.  The question before the Second Circuit was whether district courts might retain jurisdiction over state-law claims with minimally diverse parties where the class-action component of the complaint was dismissed after the case was removed to federal court.

The Second Circuit noted that the Supreme Court has consistently held that if jurisdiction exists at the time an action is commenced, such jurisdiction may not be divested by subsequent events. The Second Circuit found that at the time of removal, F5’s complaint contained a class-action claim that met CAFA’s other jurisdictional requirements, including a $5 million amount in controversy and minimal diversity.  The Second Circuit further found that the later failure of the class claim did not divest the district court of subject matter jurisdiction because CAFA anchored jurisdiction at the time of removal.  The Second Circuit therefore ruled that because jurisdictional facts were assessed at the time of removal, and at that time the complaint appeared to plead in good faith the class claim necessary for jurisdiction, the fact that the court subsequently determined that the case could not proceed as a class action under CAFA did not deprive it of subject matter jurisdiction.

Next, the Second Circuit examined whether the district court properly exercised supplemental jurisdiction over the claims that F5 pled as derivative, non-class claims. In their notice of removal, the defendants conceded that there was no independent basis for subject matter jurisdiction over F5’s derivative, non-class claims.  However, citing 28 U.S.C. § 1367, they argued that the district court had supplemental jurisdiction over all claims over which CAFA did not provide federal jurisdiction.

The Second Circuit noted that in general, in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action that they form part of the same case or controversy under Article III. The Second Circuit, however, also noted that 28 U.S.C. § 1367(b) significantly curtailed that broad grant of supplemental jurisdiction.

The Second Circuit found that § 1367(b) eliminated supplemental jurisdiction over certain claims brought by the plaintiffs, where exercising jurisdiction over those claims would result in a lack of complete diversity in the underlying dispute. The Second Circuit further found that the statute’s application only to the plaintiffs reflected Congress’ intent to prevent original plaintiffs but not defendants or third parties from circumventing the requirements of diversity.  The Second Circuit therefore found that given that CAFA was the jurisdictional anchor for the complaint and that the evident purpose of that statute was to expand federal jurisdiction over suits that met its requirements, it would be inconsistent with that purpose to interpret § 1367(b) to keep the pendent claims out of federal court while allowing the class claims to proceed.  The Second Circuit thus held that it was proper for the district court to exercise supplemental jurisdiction over the derivative state law claims.

Accordingly, the Second Circuit concluded that the district court properly retained jurisdiction over the instant action.

-Melissa M. Grand