A Split Over The Application Of The Class Action Fairness Act to ’33 Act Claims

Recent decisions by the Seventh and Ninth Circuit Courts of Appeals have created a split in the circuits regarding the removal of class action Securities Act claims brought in state court. Compare Katz v. Gerardi, Case No. 08-8031 (9th Cir. Jan. 5, 2009) with Luther v. Countrywide Home Loans Servicing LP, Case No. 08-55865 (9th Cir. July 16, 2008).

The split between Gerardi and Countrywide involves the interpretation of Section 22(a) of the Securities Act and the application of The Class Action Fairness Act of 2005, 28 U.S. § 1332(d)(2) (“CAFA”). Section 22(a) of the Securities Act provides in part that “Except as provided in section 16(c), no case arising under this title and brought in any State court of competent jurisdiction shall be removed to any court of the United States.” Section 16(c) is a provision in the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) which permits the removal of certain securities class actions. The language of Section 22(a) makes it clear that suits brought in state court asserting ’33 Act claims cannot be removed unless covered by SLUSA, which did not apply to either Gerardi or Countrywide.

CAFA was passed in 2005 as an amendment to the diversity jurisdiction statues. The statute grants original jurisdiction over class actions exceeding $5 million in controversy where at lest one plaintiff is diverse from at least one defendant. The statute also provides for removal. CAFA however, does not apply to any suit: 1) essentially regarding a security traded on a national exchange; 2) based on a claim that relates to the “internal affairs or governance of a corporation or other form of business enterprise and arises under or by virtue of the laws of the State …” of incorporation; or 3) based on a claim that relates to the rights, duties and obligations “relating to or created by or pursuant to any security …” as defined in Section 2(a) of the Securities Act.

In Countrywide, the court held that CAFA does not trump Section 22(a) and permit removal. The Ninth Circuit based is conclusion on the theory that “‘[i]t is a basic principle of statutory construction that a statute dealing with a narrow, precise, and specific subject is not submerged by a later enacted statute covering a more generalized spectrum,'” quoting Radzanower v. Touche Ross & Co., 426 U.S. 148 (1976). The court went on to conclude that Section 22(a) is a specific, narrow statute dealing with a single subject, while CAFA is a more general statute. Accordingly, CAFA does not conflict with Section 22(a) and cannot be used to remove Securities Act class actions filed in state court. This ruling was made in a class action brought by holders of mortgage pass-through certificates.

In Gerardi, the Seventh Circuit reached the opposite conclusion. That court held that CAFA is in direct conflict with Section 22(a) of the Securities Act. In that event, the newer statute trumps the older resulting in the removal of class actions filed in state court based on the Securities Act.

In reaching its conclusion, the Seventh Circuit specifically rejected the determination of the Ninth Circuit: “Is the 1933 Act more specific because it deals only with securities law, or is the 2005 Act more specific because it deals only with nationwide class actions? There is no answer to such a question, which means that the canon favoring the specific law over the general one won’t solve our problem.”

Ultimately, the court concluded that the factual claims asserted by plaintiffs may fall within exception three to CAFA jurisdiction regarding rights and duties that relate to a security. This question was remanded to the district court. The Seventh Circuit ruling is based on a class action brought by holders of interests in a real estate investment trust involved in a merger.

In reaching their conclusions, neither court considered the overall structure of CAFA or its history. Likewise, neither commented on the overall tenor of the three exceptions to CAFA’s removal provisions, which at least suggest an intent to exclude securities cases and state law corporate disputes. Those and other questions about the interplay of Section 22(a) and CAFA will no doubt be considered in the future. At least for now however, these two decisions leave the question of whether state court class actions based on the Securities Act can be removed under CAFA in dispute.