Abbate v. Wells Fargo Bank, Nat. Ass’n, No. 09-62047-CIV, Slip Copy, 2010 WL 3446878 (S.D. Fla. Aug 31, 2010).

A District Court in Florida denied the plaintiffs’ motion to remand holding that the plaintiffs’ post removal amendment to the complaint to bring the action within CAFA exception was an effort to circumvent the defendants’ challenges to the proposed remand.

The plaintiffs brought a class action against defendants, Medical Capital Holdings (MCH), Wells Fargo Bank and the Bank of New York Mellon Corporation (BNYM), for breach of contract; breach of fiduciary duty; securities fraud in violation of Chapter 517 of the Florida Securities and Investor Protection Act (FSIPA); and negligence.

MCH purchases accounts receivable at a discount from healthcare providers and then collects the debts owed on those accounts. MCH raised money for the accounts receivable purchases through six separate special purpose corporations, each of which issued notes (the “Notes”) to qualified investors. The Notes were sold by registered broker-dealers to investors under SEC Regulation D for private placements and were to be secured by separate assets. Separate trust accounts were created to hold the assets and MCH and its affiliates also created separate trust indentures for each separate series of Notes. The BNYM and Wells Fargo served as the indenture trustee in connection with the Notes sold to corporations.

The plaintiffs who invested in Notes issued by the MCH corporate affiliates alleged that MCH engaged in a variety of wrongful acts and omissions including misappropriating investors’ funds to pay administrative fees, making inappropriate investments, and failing to issue accurate financial statements.  The complaint further alleged that as the indentured trustees for the MCH Notes, BNYM and Wells Fargo assumed fiduciary duties to protect the noteholders’ interests, and should have detected and prevented the alleged fraudulent activity.  

The defendants removed this action to the federal court under CAFA.  

The plaintiffs moved for remand arguing that the case fell under the securities exception of CAFA, 28 U.S.C. §1332(d)(9)(C). 

The defendants opposed remand stating that the FSIPA claims took the action outside of the CAFA jurisdictional carve-out exception.  

In response to the defendants’ opposition, the plaintiffs filed their first amended complaint, which withdrew the FSIPA claims. (Heh, if you can’t beat them, then amend.)

The plaintiffs argued that the first amended complaint allowed for the undeniable applicability of the CAFA carve-out exception, which would require the Court to remand the action to the state court. 

The Court did not agree. First, striking the first amended complaint, the Court noted that because the plaintiffs filed the amended complaint after lapse of 21 days, they lost the right to amend its pleading “as a matter of course” under Fed. R. Civ. P. 12. The plaintiffs’ motion for remand challenged the Court’s subject matter jurisdiction, thus, it was a “motion” within the meaning of Rule 15(a); and failing to seek leave of the Court or the defendants’ written consent prior to filing the first amended complaint amounted to an effort to circumvent the defendants’ challenges to the proposed remand. In addition, the plaintiffs admitted that the FSIPA claims were removed to bring the action “within the scope of the securities exception which would deny the Court’s subject matter jurisdiction”.  

Thus, the Court observed that allowing the plaintiffs to amend their complaint would effectively allow them to amend around their motion for remand, which would be prejudicial to the defendants.  Absent leave of the Court or the defendants’ written consent, the Court found that the first amended complaint was procedurally invalid.  The Court remarked that even if the first amended complaint was procedurally proper, it would be irrelevant for purposes of ruling on the motion for remand because for the purpose of remand, the Court’s inquiry was limited only to the documents available when the motion to remand was filed.   

Next, the Court observed that the plaintiffs’ FSIPA claims in the original complaint rendered the CAFA exception inapplicable.  Pursuant to the allegations of the original complaint, the FSIPA claims refer to actions taken prior to the issuance of the Notes. Allegations that the Notes were fraudulently marketed, or other wrongful acts which occurred prior to the issuance of the Notes, do not relate to the rights and obligations created by or pursuant to the security in question and therefore do not fall within the scope of the CAFA jurisdictional exception, the Court maintained.  Therefore, the Court concluded that it had subject matter jurisdiction pursuant to 28 U.S.C. §1332(d)(11).

Finally, the Court transferred this action to the United States District Court for the Central District of California where ten similar cases were pending against these defendants.