Over the last several years, Congress has made several different efforts to concentrate class action litigation in federal court.
For example, in the Securities Litigation Uniform Standards Act of 1998 (SLUSA), Congress amended portions of the Securities Act of 1933 and the Securities Exchange Act of 1934 to preempt class actions alleging fraud under state law in connection with the purchase or sale of securities. The Act specifically made state law securities class action lawsuits removable to federal court.
In addition, in the Class Action Fairness Act of 2005 (CAFA), Congress expanded federal court jurisdiction over class actions and mass actions. CAFA gives federal courts jurisdiction over certain class actions in which the amount in controversy exceeds $5 million and in which any of the class members is a citizen of a state different from any defendant.
But while Congress enacted these various legislative changes designed to concentrate class action litigation in federal court, Section 22(a) of the ’33 Act preserved state court jurisdiction by specifying that federal courts’ jurisdiction for ’33 Act lawsuits is “concurrent with State and Territorial courts.” Moreover, Section 22(a) specifically provides that no case “brought in any state court of competent jurisdiction shall be removed to any court of the United States.”
These jurisdictional provisions have been a part of the federal securities laws since the basic statutes’ enactment. But the legislative developments in the interim raise the question whether the subsequent enactments override the concurrent state court jurisdictional provisions in Section 22(a).
As I have previously noted (here), plaintiffs’ lawyers have chosen to file a number of subprime-related securities class action lawsuits alleging ’33 Act violations in state court. In particular, plaintiffs’ lawyers have elected to file in state court several class action lawsuits alleging misrepresentations in connection with the creation and issuance of subprime mortgage-backed securities. These lawsuits, of which by my count there have been at least four, exclusively allege violations of the ’33 Act.
One of the first of these lawsuits to be filed is the case styled as Luther v. Countrywide, the background regarding which can be found here. The plaintiffs originally filed their complaint in California Superior Court for Los Angeles County. The Luther complaint names as defendants several Countrywide subsidiaries and affiliated individuals, multiple loan trusts, and Countrywide’s offering underwriters.
The claims in the Luther lawsuit are brought on behalf of purchasers of billions of dollars of mortgage pass-through certificates issued between June 2005 and June 2007. The complaint alleges that the defendants violated Sections 11, 12 and 15 of the ’33 Act, essentially on the grounds that the risk of investing in the mortgage pass-through certificates was much greater than represented by the registration and prospectus supplements, which allegedly omitted and misstated the creditworthiness of the underlying borrowers.
The defendants, in reliance on CAFA, removed the Luther case to federal court. The plaintiffs filed a motion to remand the case to state court.
As discussed here, on February 28, 2008, Judge Mariana R. Pfaelzer granted the plaintiffs’ motion to remand the case to state court, holding that Section 22(a)’s removal bar trumps CAFA’s general grant of diversity and removal jurisdiction. The defendants appealed.
In an opinion filed on July 16, 2008 (here), the Ninth Circuit affirmed the district court, specifically holding that CAFA, “which permits in general the removal to federal court of high-dollar class actions involving diverse parties, does not supersede Section 22(a)’s specific bar against removal of cases arising under the ’33 Act.”
The defendants had argued that CAFA superseded Section 22(a)’s removal bar. But the Ninth Circuit, applying principles of statutory construction, held that while CAFA applies to a “generalized spectrum” of class actions, the ’33 Act is “the more specific statute” and that the removal bar “more precisely applies only to claims” under the ’33 Act. The Ninth Circuit concluded that the plaintiff’s initial state court class action “was not removable” and that “the motion to remand was properly granted.”
In other words, the Luther lawsuit will now go forward in state court. In light of the Ninth Circuit’s opinion, it seems likely that the various other subprime-related class action lawsuits filed against the mortgage securitizers will also eventually proceed in state court as well.
The “where” question has been resolved, but the “why” question still remains – that is, why do plaintiffs’ counsel want to proceed in state court rather than federal court?
One possibility is that plaintiffs’ counsel believes that state courts will be more sympathetic to the interests of local claimants, especially in connection with their claims against out-of-state moneyed interests. The search for a more favorable court has always driven forum shopping, and there may be some of that here. But I do wonder why plaintiffs’ securities attorneys, whose practices historically (especially in recent years) have concentrated in federal court, want to litigate in a state court with which they may be less familiar, and that will be unfamiliar with federal securities laws and securities litigation generally.
Another possible reason plaintiffs lawyers want to proceed in state court is that they want to try to circumvent the procedural requirements of the PSLRA. I have speculated elsewhere (most recently here) that plaintiffs’ counsel may try to argue that the PSLRA’s procedural requirements do not apply to a ’33 Act case in state court. The plaintiffs’ argument would be that the PSLRA, codified in Section 27(a) of the ’33 Act, provides that the PSLRA applies only to private actions “brought as a plaintiff class action pursuant to the Federal Rules of Civil Procedure.” The plaintiffs’ counsel may argue that because their suit was not brought pursuant to the Federal Rules of Civil Procedure, the PSLRA’s procedural requirements (such as the notice provisions, the discovery stay, and the lead plaintiff provision) do not apply. There could be a great deal of litigation turbulence if plaintiffs’ lawyers pursue these arguments (which seems likely).
Plaintiffs’ counsel apparently have the right to pursue ’33 Act claims in state court, which for whatever reason they seem inclined to do. There were of course a few securities lawsuits filed in state court after the enactment of the PSLRA, but my recollection is that that experiment did not go particularly well. Due to the state courts’ crowded dockets and unfamiliarity with federal securities laws, the cases bogged down. The enactment of SLUSA seemingly ended this prior flawed experiment.
Nevertheless, plaintiffs’ securities attorneys, for reasons they deem good and sufficient, are back again in state court, a place where they now seem eager to be. Some recalibration may be required to accommodate the prospect of further state court securities litigation. The plaintiffs’ lawyers’ interest in pursuing state court ’33 Act class action litigation is an unexpected development with uncertain implications. The road could be rough for all concerned.