California Public Employees Retirement System v. Moody’s Corp., No. C 09-03628 SI, 2009 WL 3809816 (N.D. Cal. Nov 10, 2009).

This defendant has a case of the Moody Blues. The defendant thought it would have a Night in White Satin. Instead, it rode My See Saw back to state court.

In this action the District Court in California remanded the action to state court concluding that the lawsuit was not a removable mass action, and that the plaintiff was an arm of the State–therefore, not a citizen for diversity purposes.

The plaintiff, the California Public Employees’ Retirement System (“CalPERS”), brought an action in the state court alleging that the defendant credit rating agencies negligently gave their highest investment grade rating to three Structured Investment Vehicles (“SIVs). CalPERS administered retirement, health, and financial benefits for more than 1.6 million California public employees, retirees, and their families. In 2006, CalPERS invested $ 1.3 billion in short-term debt securities issued by the SIVs. The three SIVs collapsed in 2007 and 2008, and CalPERS alleged that it suffered investment losses of hundreds of millions, and possibly more than one billion dollars as a result. CalPERS’ complaint asserted common law and state statutory claims for negligent misrepresentation and negligent interference with prospective economic advantage.

The defendants Moody’s Corp., Moody’s Investors Service, Inc., The McGraw-Hill Companies, Inc., and Fitch, Inc., Fitch Group, Inc., and Fitch Ratings, Ltd. (collectively “Fitch”) removed the case to the federal court, asserting diversity jurisdiction under 28 U.S.C. § 1332(a).  Fitch individually filed a second notice of removal asserting original jurisdiction pursuant to CAFA. CalPERS moved to remand this action arguing that it was an arm of the State of California and, therefore, not a citizen for diversity purposes.

In order to establish a federal diversity jurisdiction, the District Court relied on Mitchell v. Los Angeles Cmty. Coll. Dist., 861 F.2d 198, 201 (9th Cir. 1988), where the Ninth Circuit proposed five factors in making such a determination: (1) whether a money judgment would be satisfied out of state funds; (2) whether the entity performs central governmental functions; (3) whether the entity may sue or be sued; (4) whether the entity has the power to take property in its own name or only the name of the state; and (5) the corporate status of the entity.

Applying these factors, the District Court found that: (1) CalPERS’ financial identity was not completely autonomous from the State; and (2) although CalPERS enjoyed considerable autonomy, however, as a result of the enactment of Proposition 162, it was not independent of the State control. The Court found that the other Mitchell factors also weighed in favor of CalPERS; therefore, it concluded that CalPERS was an arm of the state, and it lacked diversity jurisdiction because the parties were not citizens of different states.

Fitch, however, sought removal under CAFA on the ground that CalPERS’ lawsuit constituted a removable mass action. The Court noted that the term mass action means any civil action in which monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs’ claim involves common questions of law or fact. Therefore, the threshold inquiry here was whether or not the instant action involved monetary relief claims of 100 or more persons. 

The Court found that this action did not fall within the definition because it did not concern numerous named plaintiffs who were electing to try their claims together. The Court found that CalPERS’ individual beneficiaries had not made any direct claims in this action; rather, the sole plaintiff in this case was CalPERS. Accordingly, the Court concluded that Fitch failed to establish federal jurisdiction under CAFA.

Alternatively, Fitch contended that removal under CAFA advanced the express legislative purpose of having federal courts adjudicate interstate cases of national importance. The District Court noted that this discussion pertained to subsection 1332(d)(3), which gives district courts discretion to decline jurisdiction in the interests of justice for class actions in which more than one-third but fewer than two-thirds of members of plaintiff class and the primary defendants were citizens of the state in which the action was filed. Because this action did not fall into that category of class action, the Court concluded that this provision was not relevant to issue.