The District Court for the Southern District of New York recently upheld the removal to federal court of a complaint alleging violations of the Securities Act of 1933 under the Class Action Fairness Act of 2005 (“CAFA”). See New Jersey Carpenters Vacation Fund v. Harborview Mortgage Loan Trust 2006-4, No. 08cv5093, 2008 WL 4369840 (S.D.N.Y. Sept. 24, 2008). In Harborview, the plaintiffs alleged misrepresentations in prospectuses and registration statements in connection with the issuance of mortgage-backed securities. Harborview, 2008 WL 4369840, at *1. The defendants removed the action to federal court under the CAFA, and the plaintiffs moved to remand the case, arguing that they had the right to bring the action in state court under Section 22(a) of the Securities Act of 1933 (“1933 Act”).
Section 22(a) provides for concurrent jurisdiction in either state or federal court for securities cases arising under the 1933 Act. See id.; see also 15 U.S.C. § 77v(a). CAFA, however, provides for removal of all class actions that meet the requirements of minimal diversity and an amount in controversy exceeding $5 million and that do not otherwise fall within one of CAFA’s limited exceptions. See Harborview, 2008 WL 4369840, at *2; see also 28 U.S.C. §§ 1332(d), 1453(b). The plaintiffs argued that CAFA could not override Section 22(a) of the 1933 Act and that, even if it did, this action fell within an exception under CAFA that prevents removal of class actions relating to the rights, duties, and obligations arising out of a security. See Harborview, 2008 WL 4369840, at *4. In support of their argument, the plaintiffs cited a recent Ninth Circuit Court of Appeals decision, Luther v. Countrywide Home Loans, 533 F.3d 1031 (9th Cir. 2008), which held that CAFA did not override Section 22(a) of the 1933 Act. See id.
The Harborview Court disagreed with this conclusion, holding that CAFA trumps Section 22(a). Id. at *6. The court looked to the statutory text of CAFA and compared the sweeping removal power under CAFA to that of the federal bankruptcy removal provisions for “related to” jurisdiction. Id. at *5. The court explained that, just like the bankruptcy removal provisions, CAFA does not provide an exception for cases that have been explicitly excluded by prior Acts of Congress – as opposed to the general removal provision under 28 U.S.C. § 1441(a), which provides for removal “except as otherwise expressly provided by Act of Congress.” See id.; see 28 U.S.C. § 1441(a). The court also looked to the purpose of CAFA, confirming “‘an overall design to assure that the federal courts are available for all securities cases that have national impact . . . , without impairing the ability of state courts to decide cases chiefly of local import.’” See Harborview, 2008 WL 4369840, at *6 (quoting Estate of Pew v. Cardarelli, 527 F.3d 25 (2d Cir. 2008)). Accordingly, the court determined that it was Congress’ intent “to include within the reach of CAFA all securities class actions except for those set forth in the § 1332(d)(9) exceptions.” Id.
The plaintiffs’ argument that this action fell within the CAFA exception precluding removal of class actions relating to the rights, duties, and obligations arising out of a security also failed. See id. at *8. The court explained that the Second Circuit had already analyzed this CAFA exception in Estate of Pew v. Cardarelli, 527 F.3d 25 (2d Cir.2008). See id. at *7. The plaintiffs in Pew had argued that this exception covered any claim that involved securities, but the Second Circuit expressly rejected that interpretation, holding that such an interpretation would render meaningless the limiting terms included in that provision and would also render another securities related exception in CAFA “completely superfluous.” See id
As explained by the Harborview Court,
[t]he terms “rights, duties and obligations” operate as terms of limitation; they have a specific and limited meaning and it cannot mean that a plaintiff has the right to except from CAFA any cause of action that relates to a security. Similarly, the words “relating to or created by or pursuant to” were also words of limitation that would be rendered meaningless if all securities cases were excluded from CAFA. Since “duties” expressly includes “fiduciary duties,” which commonly reflects duties owed by persons, Congress, we believe, intended to distinguish “obligations” and “rights”-obligations are those created by instruments (since this would distinguish the term from duties), and rights are those of security-holders to whom the duties and obligations run.
. . . .
The Senate Judiciary Committee explained that it meant this exception to be limited to claims “based solely on ‘the rights arising out of the terms of the securities issued by business enterprises’” and that “§ 1332(d)(9) . . . is also intended to cover disputes over the meaning of the terms of a security, which is generally spelled out in some formative document of the business enterprise, such as a certificate of incorporation . . .” The Pew Court found that this exception included claims “such as how interest rates are to be calculated, and so on,” but not claims for securities fraud, such as the claims before me.
Id at *7-*8 (internal citations omitted). Because the exception does not apply to securities fraud claims and plaintiffs’ claims did not implicate the terms or meaning of Harborview stock certificates, the court held that the CAFA exception did not apply and denied plaintiffs’ motion to remand.