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

Texas is Like a Whole ‘Nother Country, But the Application of Federal Law, in this case an Exception in the Class Action Fairness Act, Sent Texas Commerce Trust Back to State Court.

Posted in Case Summaries

Williams v. Texas Commerce Trust Company of New York, 2006 WL 1696681 (W.D. Mo. June 15, 2006)

While everything is bigger in Texas, Texas Commerce Trust Company of New York was litigating in Missouri, not in Texas.  Shouts of "Remember the Alamo" were not enough to keep United States District Judge Gary A. Fenner from remanding Texas Commerce back to state court.  

The Plaintiffs are or were holders of 7.25% debentures issued by Allwaste, Inc. pursuant to a trust indenture dated June 1, 1989. Texas Commerce was the original indenture trustee. The other defendants were the successors to Texas Commerce. The action was filed in Missouri state court on August 25, 2005 and removed to federal court on October 31, 2005 pursuant to CAFA and bankruptcy jurisdiction. The plaintiffs claimed that their losses in the debentures were caused by the defendants’ breach of duties as trustees because of a corporate merger which they allowed. 

In 1997, Philip Services Corp. sought to acquire Allwaste, Inc. because Philip was in poor financial condition and could use the cash reserves in Allwaste. As part of the merger terms, the debenture holders would no longer have the option to convert their debentures to Allwaste common stock as permitted by the 1989 trust indenture. The plaintiffs stated that such a revocation was a default under the 1989 trust terms which would have required Allwaste to make immediate payment of $30 million to the debenture holders, plus interest. This would have depleted the cash reserves in Allwaste and made Allwaste an unattractive target to Phillip. 

On July 30, 1997, the defendants, as the indenture trustee, entered into a supplemental trust indenture that made the debentures convertible to Phillip common stock and also made the debentures subordinate to $1.5 billion in debt held by Philip at the time of the merger. As expected, in 1998, Philip and Allwaste filed for Chapter 11 bankruptcy protection and the debentures were classified as a valuable but impaired claim in the proceeding. 

In 2003, the merged companies filed a second bankruptcy proceeding and the debentures were classified as unsecured noting that probability of recovery to be extremely small to zero. The plaintiffs then filed the action against the trustee for amending the trust indenture and allowing the merger alleging claims for breach of fiduciary duties, breach of contract, negligence, equitable restitution, accounting for profits, imposition of a constructive trust and civil conspiracy. Allwaste and Philip were not named in the complaint as defendants.

The plaintiffs sought remand to state court arguing that CAFA expressly exempts the suit because the claims “relate to the rights, duties, and obligations relating to or created by or pursuant to any security,” an express exception to CAFA’s jurisdiction under 1332(d)(9)(C). Also, the plaintiffs argued that bankruptcy jurisdiction was inapplicable because the bankrupts, Allwaste and Philip, were not parties to the action as it only sought relief from the indenture trustee based on the trustee’s fiduciary obligations. 

Judge Fenner began his opinion by noting that federal courts are courts of limited jurisdiction and the party opposing remand bears the burden to prove the case should remain in federal court.  In making that statement, the Judge noted in footnote 5 the existence of the split among the courts, but followed Judy v. Pfizer, another Missouri district court case, and Brill v. Countrywide out of the Seventh Circuit.  (Editors’ Note:  See the CAFA Law Blog analysis of Judy posted on November 14, 2005 and the CAFA Law Blog analysis of Brill posted on November 2, 2005.)

Judge Fenner quickly turned to the exception under CAFA and examined the cases cited by the plaintiffs interpreting the security exception: Indiana State Dist. Council of Laborers v. Renal Care Group and In re Textainer Partnership Securities Litigation where each found the plaintiffs’ claims for breach of fiduciary duty precluded jurisdiction under CAFA. (Editors’ Note:  See the CAFA Law Blog analysis of Renal Care Group posted on October 28, 2005 and the CAFA Law Blog analysis of Textainer posted on October 28, 2005.) 

Judge Fenner followed Renal Care Group and held that the court did not have jurisdiction under CAFA over the multiple state law claims asserted by the plaintiffs, all of which arose out of the rights, duties (including fiduciary duties), and obligations owed to the plaintiffs. The Judge held the entire case was exempt from CAFA jurisdiction under 1332(d)(9)(C). 

After quick examination of the bankruptcy jurisdiction ground alleged by the defendants, the Judge held that the claims were not “related to” the bankruptcy proceedings because the action was filed after resolution of the bankruptcy proceeding, the plaintiffs did not assert claims against the bankrupts, and a verdict in the plaintiffs, favor would not effect the bankruptcy estate. The court remanded the case for lack of jurisdiction.