On May 18, 2011, the California Intermediate Court of Appeals held in the Luther v. Countrywide Financial Corporation case that state courts have concurrent jurisdiction with federal courts to hear liability lawsuits under the Securities Act of 1933, and that more recent legislative enactments did not eliminate the concurrent state court jurisdiction for the plaintiffs’ ’33 Act claims.


 I suspect that those of you who, like The D&O Diary, have been following the Luther case are going to say – wait a minute, didn’t the Ninth Circuit decide that very issue in that same case several years ago? Alas, it is not so simple, nor so straightforward.


For those of you who have not been following the Luther case, here’s the background. The claims are brought on behalf of purchasers of billions of dollars of mortgage pass-through certificates issued between June 2005 and June 2007. The securities were registered but not listed on any national exchange. 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 plaintiffs do not assert any state law claims. The Luther complaint names as defendants several Countrywide subsidiaries and affiliated individuals, multiple loan trusts, and Countrywide’s offering underwriters.



The plaintiffs originally filed their complaint in California Superior Court for Los Angeles County. The defendants, in reliance on the Class Action Fairness Act of 2005, 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, Central District of California Judge Mariana R. Pfaelzer granted the plaintiffs’ motion to remand the case to state court, holding that the removal bar in Section 22(a) of the ’33 Act 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 Class Action Fairness Act, “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.”  


And with that it seemed, and I so concluded at the time, that what would happen next is that the Luther case would go forward in state court.


But that is not exactly what happened. As reflected in the May 18, 2011 opinion of the California Court of Appeal in the Luther case  when the case returned to state court, the defendants filed a demurrer on the ground that the California state court lacked jurisdiction under the ’33 Act as amended by the Securities Litigation Uniform Standards Act (SLUSA). The trial court agreed with the defendants and sustained their demurrer. The plaintiffs appealed.


Before getting to the Court of Appeals ruling, it is worth pausing to review the grounds on which the defendants had demurred. The defendants’ argument was based on the language of Section 22 of the ’33 Act, as amended by SLUSA, which provides in pertinent part:


The district courts of the United States and the United States courts of any Territory shall have jurisdiction of offenses and violations under this title and under the rules and regulations promulgated by the Commission in respect thereto, and, concurrent with State and Territorial courts, except as provided in section 16 with respect to covered class actions, of all suits in equity and actions at law brought to enforce any liability or duty created by this title.


The defendants’ argument is based on the phrase “except as provided in Section 16 with respect to covered class actions” which was added under SLUSA. The parties do not dispute that this case is a “covered class action” within the meaning of SLUSA (as it involves a suit in which damages are sought on behalf of more than 50 people). The question is whether the “except as provided” creates an exception to concurrent jurisdiction for all covered class action or only “as provided” in Section 16.


In the May 18 opinion, a three-judge panel of the Court of Appeals reversed the trial court’s ruling, concluding that SLUSA did not eliminate the concurrent state court jurisdiction in Section 22 of the ’33 Act. Specifically, Court of Appeals concluded that the “except as provided” language did not create an exception to concurrent provisions for all covered class action, but only according to the terms of Section 16. Based on its review of Section 16, the Court of Appeals concluded that “nothing” in Section 16 ”puts this case into the exception to the rule of concurrent jurisdiction,” adding that “the fact that the case is not precluded and can be maintained, but cannot be removed to federal court if filed in state court, tells us that the state court has jurisdiction to hear this action.” The Court of Appeal concluded that the concurrent state court jurisdiction survived the SLUSA amendments.


So, now we can all agree, there is concurrent state court jurisdiction for securities class action lawsuits under the ’33 Act, right? Well, maybe. Or maybe not.


For starters, other Circuit courts have not agreed with the Ninth Circuit’s conclusions regarding the impact of CAFA on the ’33 Act’s concurrent jurisdiction provision. As noted here, in a 2009 opinion in Katz v. Gerardi , the Seventh Circuit held here the provisions of the more recently enacted statutes, particularly CAFA, trump Section 22. The Seventh Circuit expressly rejected Luther v. Countrywide’s conclusion that the more specific securities statute prevailed. However, the Seventh Circuit’s  opinion, depended in part on the fact that the investment instruments involved are not "covered securities" (i.e., do not trade on a national exchange), and therefore did not come within one of CAFA’s removal exceptions. The Seventh Circuit held that the underlying mortgage securities-related class action lawsuit was properly removable to federal court.


Similarly, an October 2008 decision in the Second Circuit in the New Jersey Carpenters’ Fund v. Harborview Mortgage case had refused to remand to state court a ’33 Act case, as is more fully discussed on the 10b-5 Daily blog (here). The Harborview decision was primarily based on the fact that the underlying securities lawsuit did not involve "covered securities" for which SLUSA created an explicit removal exception; because the exception did not apply, the case could appropriately be removed to federal court notwithstanding the nonremoval provision in Section 22.


The Seventh Circuit’s  opinion, like the Second Circuit opinion in Harborview, depended in part on the fact that the investment instruments involved are not "covered securities" (i.e., do not trade on a national exchange), and therefore did not come within one of CAFA’s removal exceptions. Of course that was also the case with the securities in Luther – so where does that leave us?


I suppose where that leave us is that if you are a plaintiff hoping to pursue a ’33 Act claim in state court, your best bet is to file the lawsuit in California stat court. That is, in fact, exactly what the plaintiffs involved in a mortgage securities class action lawsuit filed against Morgan Stanley did. As discussed here, even though the plaintiff is a Mississippi pension fund and the defendant is a New York investment bank, the plaintiff filed lawsuit in Orange County, California, superior court. Clearly, at least one plaintiff concluded that, if there is a tactical advantage to being in state court, then California state court is the place to be.


To be sure, it is not as if pursuing a state court claim has proven to be all that rewarding for the Luther plaintiffs, at least not so far. The Luther plaintiffs filed their lawsuit years ago, they have been through not one but two appeals already, and they have only just now finally established their right to proceed in state court. Or, perhaps not. Who knows, maybe the next stop for this case is in California Supreme Court, And perhaps from there to the U.S. Supreme Court. The parties could be fighting for years before the jurisdictional question is finally decided.


There does seem to be something wrong with a system where what “concurrent jurisdiction” between state and federal courts winds up meaning concurrent jurisdiction in some states but not others. With everything that Congress has to worry about these days, this issue may not make it to the top of the list, but this really does seem like something that Congress ought to clean up. Regardless of where you come down on this issue, there seems to be a lot for both sides to argue about when it comes to concurrent jurisdiction, which is hardly a desirable state of affairs.


Nate Raymond’s May 19, 2011 Am Law Litigation Daily artilcle about the California appellate decision in the Luther case can be found here.


Special thanks to the several readers who sent me copies of the California appellate opinion.