In prior posts, I have detailed the havoc that the U.S. Supreme Court’s March 2018 decision in the Cyan case has wrought, as Securities Act liability class action defendants find themselves facing multiple parallel suits in both federal and state court. A recent ruling in a consolidated federal court action involving the failed Miller Energy Company underscores the procedural disarray that Cyan continues to cause; in this case, the federal court, in reliance on Cyan, has remanded to state court two actions that pre-Cyan had been removed to federal court and consolidated with a third federal court action. As discussed below, this decision demonstrates yet another way in which Cyan produces outcomes contrary to procedural simplicity and judicial efficiency. Eastern District of Tennessee Judge Thomas Varlan’s December 6, 2019 decision in the case can be found here.
In October 2015, Miller Energy Company filed for bankruptcy. Prior to the bankruptcy, during the period 2013 to 2014, Miller conducted a series of registered offerings of redeemable preferred stock. On November 12, 2015, two investors (Gaynor and Goldberg) who had purchased securities in the offerings filed liability actions under the Securities Act of 1933 in Tennessee state court. The complaints in the Gaynor and Goldberg actions, which can be found here and here, named as defendants certain former directors and officers of Miller, as well as Miller’s offering underwriters. (Because of its bankruptcy, Miller itself was not named as a defendant in the securities lawsuits.)
In December 2015, the defendants in the Gaynor and Goldberg actions removed the actions to federal court. In January 2016, the plaintiffs in the Gaynor and Goldberg actions filed a motion to remand the actions back to state court. In May 2016, the federal court denied the motion to remand, and also granted the defendants’ motion to consolidate the Gaynor and Goldberg actions with the Hull action, a separate, third action that had been filed in federal court while the motion to remand had been pending.
After the actions were consolidated, the plaintiffs filed an amended consolidated complaint. The defendants moved to dismiss the amended complaint. The defendants’ dismissal motion was granted in part and denied in part. The plaintiffs later moved for class certification. A magistrate’s report recommended granting the motion for class certification. In June 2018, the plaintiffs in the Gaynor and Goldberg actions filed a renewed motion to remand the cases to state court.
In August 2018, the Court granted a joint motion to stay the consolidated proceedings to allow the parties to pursue mediation. The court later extended the stay two additional times while the parties continued to pursue mediation. The mediation did not result in a settlement and the court lifted the stay.
Having lifted the stay, the Court then turned to the issues pending at the time the stay was entered, including in particular the Gaylord and Goldberg plaintiffs to remand their cases to federal court.
The December 6, 2019 Ruling
In a thorough December 6, 2019 opinion, Judge Varlan granted the motion to remand the Gaylord and Goldberg actions to state court. In granting the motion, Judge Varlan said that the U.S. Supreme Court’s March 2018 entry of its opinion in the Cyan case, entered subsequent to his prior ruling in which he had previously denied the plaintiffs’ motion to remand, represented the kind of “extraordinary circumstances” that would warrant a court to reconsider previously decided issues.
Judge Varlan said further that while the court lacked removal jurisdiction over the Gaylord and Goldberg actions, the court retained original federal question jurisdiction over the disputes sufficient to permit him to rule on the pending motion. He also ruled that the plaintiffs by engaging in litigation activity in the consolidated federal court action had not waived their right to object to improper removal.
Finally, while Judge Varlan ruled that the Gaynor and Goldberg actions properly should be remanded to state court, he ruled that the Hull case, which had originally filed in federal court, should remain in federal court. Even though the cases had previously been consolidated federal court for procedural purposed, the three cases had not been merged into a single cause, nor did the consolidation change the rights of the parties. Because the plaintiff in the Hull action had filed in federal court, the Hull action, the court said, may not be remanded to state court.
As I will elaborate below, the remand of the Gaynor and Goldberg cases to state court, turning a series of proceedings which had been consolidated in one court back into divided and duplicative proceedings in multiple courts, disserves the causes of procedural simplicity and judicial efficiency. Which is not to say that Judge Varlan somehow got things wrong here. To the contrary, there is a pretty compelling case to be made that Judge Varlan did nothing more than what Cyan requires. The inefficiency that could well result from Judge Varlan’s ruling is not the fault of the ruling itself, but rather is the fault of Cyan– or, perhaps more accurately, the fault of Congress when it amended the securities laws in the Securities Litigation Uniform Standards Act of 1998 (SLUSA) in order to try to consolidate all liability actions under the federal securities laws but made a hash of things when it came to the ’33 Act’s jurisdictional provision.
Cyan held that notwithstanding SLUSA, state courts retain concurrent jurisdiction for liability actions under the ’33 Act. Cyan also held that ’33 Act liability actions filed in state court are not removable to federal court. Judge Varlan’s issued his earlier ruling denying the plaintiffs’ motion to remand before the U.S. Supreme Court decided Cyan. Given the Supreme Court’s ruling in Cyan, it comes as no surprise that after Cyan the plaintiffs in the Gaynor and Goldberg actions renewed their motions to remand.
It may come as some surprise that at this late date after the Cyan decision that a Court is only now remanding a case pending in federal court back to state court where it had been originally filed. The long lag-time between the Cyan decision and Judge Varlan’s ruling on the renewed motion to remand is attributable to the stay of proceedings the court had entered in August 2018 (and twice later renewed). Judge Varlan did not take up the renewed remand motion while the stay was in place, and only took up the renewed motion once the stay was lifted.
There are a number of features of this situation that make the circumstances at least distinctive if not unique, and which suggest that the precise situation involved here is unlikely to recur. First, the Gaylord and Goldberg actions were filed in state court well before the U.S. Supreme Court took up the Cyan case, and at a time when relatively few ’33 Act class actions were filed in state court (at least outside California). Second, Judge Varlan initially ruled on the remand motion well before the Supreme Court decided Cyan, and thus Judge Varlan lacked the Supreme Court’s guidance when deciding the motion. And finally, Judge Varlan is only now addressing the renewed remand motion because of the lengthy stay that was in place in the consolidated proceedings.
But while this situation may be distinctive, it does also provide a vivid example of the procedural disarray that Cyan can produce. Here, from a situation in which three pending actions were consolidated for procedural purposes in a single proceeding, the cases will now proceed on separate tracks in parallel proceedings. The defendants will be forced to fight a multi-front war, with the ensuing likelihood of increased defense expense. Unless the respective courts adopt a coordinated approach, the duplicate proceedings will create the risk of conflicting rulings. Negotiated resolution may also be complicated by the existence of parallel but separate proceedings.
As I have previously said with respect to the consequences of the Supreme Court’s Cyan holding, the last thing Congress intended when it enacted SLUSA was to permit the kind of chaotic mess that the defendants in these proceedings now face. On a more general level, without regard to what Congress may or may not have intended in SLUSA, it makes no sense for defendants to have to face what is in effect the same lawsuit in multiple different jurisdictions.
As I have also noted before, this is a problem that Congress could easily address. It would be a relatively simple fix to amend Section 22 of the ’33 Act to eliminate concurrent state court jurisdiction for ’33 Act liability claims and to provide for the removal to federal court of any ’33 Act liability actions that are filed in state court. Whether you think this is a situation that Congress might address depends on how you feel about the likelihood of the current divided and distracted Congress actually taking steps to provide a common sense solution to a messed up situation.