Katz v. Gerardi, ___ F.3d ___, 2009 WL 18137 (7th Cir. Jan. 5, 2009)

In Katz, the Seventh Circuit* (Bad-ass Easterbrook) holds that CAFA trumps Section 22(a) of the Securities Act of 1933, which prohibited removal of certain securities actions brought under the Act, and dogs out the Ninth Circuit’s recent opinion in Luther v. Countrywide Home Loans Servicing LP, 533 F.3d 1031 (9^th Cir. 2008) for not knowing how to read statutes.

The Illinois state court action was brought by Katz, the former holder of real estate security interests (“units”), who surrendered them for cash when an impending merger gave him the choice of a cash-out or units in the new entity, neither of which allegedly provided the tax benefits of the original units. 

After taking the cash, he sued the investment trust, its partnership and managers under the Securities Act of 1933 (which provides a right of action for purchasers of securities who were misled based on falsehoods or omissions in a registration statement or prospectus) claiming that he and “hundreds, if not thousands” of members of a nationwide class were “purchasers” under the merger because of the “fundamental change doctrine,” a legal fiction allowing them to claim that they had involuntarily “purchased” units in the new entity which they then sold for cash. 

The action was removed by the defendants, but the district court gave Katz the benefit of the doubt on his questionable pleading of a Securities Act claim, and held that Section 22(a) of the Act prohibits removal of such claims.

On appeal, Chief Judge Easterbrook found the “fundamental change doctrine” laughable: “Using legally fictitious (and factually nonexistent) ‘new A-1 Units’ to nullify a legislative decision that only buyers have rights under the 1933 Act would be wholly unjustified.” He also questioned to what extent a district court should defer to the label a plaintiff affixes to his cause of action, stating: “It is hard to distinguish between a claim artfully designed to defeat federal jurisdiction and one that is properly pleaded but unsuccessful on the merits, but it cannot be right to say that a pleader’s choice of language always defeats removal. If it did, then Katz could have pleaded a breach of contract, or a violation of duties under corporate law, and added: ‘this is a workers’ compensation suit that cannot be removed as a result of 28 U.S.C. § 1445(c).’” 

Notwithstanding, Judge Easterbrook decided to let Katz call a mule a horse long enough for him to reach the question of whether Section 22(a) in fact “insulates” all class action claims brought under the 1933 Act from otherwise proper removal under CAFA.

Recognizing that Section 22(a) and CAFA are incompatible and that “one or the other must yield,” Judge Easterbrook cited the general rule that “the older law yields to the newer,” but noted (eyebrows raised) that “things are otherwise for Section 22(a)” in the Ninth Circuit. Under the Ninth Circuit’s analysis in Luther, Section 22(a) trumps because it only deals with securities and thus is more specific than the newer statute. According to Judge Easterbrook, this logic is flawed because Section 22(a) is not a subset of CAFA, and because a provision dealing only with securities is not necessarily more specific than a provision dealing only with nationwide class actions.

Moreover, says Judge Easterbrook, the Ninth Circuit never would have resorted to such “doubt resolvers” had it just read the damn CAFA statute. Section 1453(d) states explicitly that CAFA does not provide a basis for removal of actions that involve solely “covered securities,” internal corporate governance under state law, or fiduciary duties related to securities. Says Judge Easterbrook, “This tells us all we need to know. Claims listed in § 1453(d) are not removable. Other securities class actions are removable if they meet the requirements of the 2005 Act (100 investors, $5 million in controversy, minimal diversity). To read § 22(a) as Katz does would be to make most of § 1453(d) pointless.”   

Judge Easterbrook criticized the Ninth Circuit in Luther for not analyzing the language in Section 1453(d) or even “acknowledg[ing] its existence.” “We therefore disagree with Luther and hold that securities class actions covered by the 2005 Act are removable, subject to the exceptions in § 1332(d)(9) and § 1453(d).”

In the remainder of his opinion, Judge Easterbrook goes through a dizzying exercise to determine whether Katz had in fact inartfully pleaded himself into state court by basing his claims, factually, on a breach of the terms of the original A-1 securities, which would not support a claim under the 1933 Act, but might fall under the third exception to removal in Section 1453(d). Ultimately, Judge Easterbrook remanded the case for the trial court to decide whether Section 1453(d)(3) would prevent removal based on the facts as pleaded by Katz, and if so, whether the case would be removable under some other grant of jurisdiction.

As usual Chief Judge Easterbrook has taught us a valuable lesson – this time that removal under CAFA would be straightforward and painless if only plaintiffs could write, and judges could read.

 *Because this decision conflicts with a decision of another Court of Appeals (Luther), the opinion was circulated before release to all judges on the Seventh Circuit, none of whom favored a hearing en banc. In other words, “Rehearing? Oh, hell no.”