The U.S. District Court for the Eastern District of New York recently denied a motion to remand involving a putative securities fraud class action that alleged violations of Sections 11 and 15 of the Securities Act of 1933. See City of Ann Arbor Employees’ Ret. Sys. v. Citigroup Mortgage Loan Trust Inc., No. CV 08-1418, 2008 WL 3891221 (E.D.N.Y. Aug. 11, 2008). In many cases arising out of the subprime mortgage/credit crisis, plaintiffs are choosing to bring their 1933 Act claims in state as opposed to federal court. As a result, several decisions have been issued this year, such as the recent Citigroup opinion, concerning whether such claims may be successfully removed by the defendants to federal court.
The plaintiff in Citigroup commenced its action in New York state court, alleging that the defendants had filed false registration statements in connection with the sale of certain mortgage pass-through certificates. Id. at *1. Defendants allegedly misrepresented the underwriting philosophy of the various mortgage lenders, including American Home Mortgage (“AHM”), whose loans supported the pass-through certificates. Id. The case was subsequently removed to the United States District Court for the Eastern District of New York, and plaintiff sought to have the case remanded to state court. Id.
The 1933 Act provides for concurrent jurisdiction over claims asserting violations of the Act in both state and federal court. See 15 U.S.C. § 77v(a). Plaintiff argued that Section 22(a) of the Act prevented its 1933 Act claims from being removed to federal court. Citigroup, 2008 WL 3891221, at *2. Although acknowledging the existence of Section 22(a), the defendants in Citigroup took the position that another federal law provision nevertheless permitted the removal of these claims. Id. United States Code Section 1452(a) provides that a civil action is removable “to the district court for the district where such civil action is pending, if such district court has jurisdiction of such claim or cause of action under Section 1334 of this title.” 28 U.S.C. § 1452(a). Section 1334(b), in turn, “provides for federal jurisdiction of cases arising under, in, or ‘related to’ a case [filed] under Title 11 of the Bankruptcy Code.” Citigroup, 2008 WL 3891221, at *3 (citing 28 U.S.C. § 1334(b)). Defendants in Citigroup relied on AHM’s bankruptcy filing to argue that the present case was sufficiently “related to” the pending bankruptcy proceeding to justify its removal to federal court. Id. at *2.
In the Second Circuit, “related to” bankruptcy jurisdiction exists “where the outcome of the removed litigation could conceivably have any effect on the bankruptcy estate.” Id. at *3 (internal citations and quotations omitted). Relying on prior precedent, the District Court held that the plaintiff’s failure to name AHM as a defendant was not dispositive. Id. at *3-*4. Rather, plaintiff’s claims were found to have the required conceivable effect on AHM’s bankruptcy estate given the defendants’ assertion that they were entitled to indemnification from AHM in the event they were found liable. Id. at *4-*5.
The court did not address the defendants’ alternative argument that removal was also appropriate under the Class Action Fairness Act of 2005 (“CAFA”). Id. at *5. However, the U.S. Court of Appeals for the Ninth Circuit recently held in another subprime mortgage case that CAFA does not provide an independent basis for removal of 1933 Act claims. See Luther v. Countrywide Home Loans Servicing LP, 533 F.3d 1031 (9th Cir. 2008).