by Brian Wolfman
In Estate of Pew v. Cardarelli, No. 06-5703-mv (May 13, 2008), the Second Circuit resolved a couple issues under the Class Action Fairness Act (CAFA), which greatly expanded federal diversity jurisdiction over class actions. In Pew, an agricultural supply and marketing cooperative issued money market certificates, which were fixed-interest debt instruments. Later, the co-op stopped selling the certificates and ended its practice of repurchasing them prior to maturity. The co-op then filed for bankruptcy. The purchasers were not thrilled and sued the co-op’s officers and auditor in state court under New York’s consumer protection law, asserting, among other things, that the co-op had misrepresented its financial condition. (An earlier suit by the plaintiffs under federal securities law had been dismissed on the merits.)
The defendants removed the case to federal court under CAFA. The parties agreed that the case was removable unless it came under a particular CAFA exception, 28 U.S.C. 1332(d)(9)(C), which carves out any claim that “relates to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security (as defined under . . . the Securities Act of 1933).” The parties also agreed that the money market certificates were “securities” within the meaning of this exception. The district court held that the plaintiffs’ claims fell within the section 1332(d)(9)(C) exception and remanded the case to state court.
The Second Circuit reversed. The court held that the plaintiffs’ claims did not “‘relate[] to the rights . . . and obligations’ . . . ‘created by or pursuant to’ a security [because they were not] claims grounded in the terms of the security itself.” A claim “grounded in the terms of the security itself, the court held, “might arise where the interest rate was pegged to a rate set by a bank that later merges into another bank, or where a bond series is discontinued, or where a failure to negotiate replacement credit results in a default on principal.” But, the Second Circuit concluded, “[t]he present claim–-that a debt security was fraudulently marketed by an insolvent enterprise–-does not enforce the rights of the Certificate holders as holders, and therefore it does not fall within § 1332(d)(9)(C).” In so holding, the Second Circuit relied on a Senate Judiciary Committee Report on CAFA, which asserts that section 1332(d)(9)(C) is limited to claims over the terms of securities. The Second Circuit’s reliance on the Senate Report was a bit odd, since earlier in Blockbuster, Inc. v. Galeno, 472 F.3d 53, 58 (2d Cir. 2006), the Second Circuit had dissed the Report’s legitimacy because it was issued 10 days after CAFA’s enactment. (Go to our prior blog entry to read about the Blockbuster decision.)
Judge Pooler dissented, explaining that the majority’s holding was at odds with CAFA’s plain text. She noted that the plaintiffs’ claim was that the co-op had not paid them the principal and interest on their money market certificates. So, she went on, “[i]f this suit therefore does not solely involve a claim ‘that relates to the rights . . . and obligations relating to or created by or pursuant to’ the [money market] Certificates, I am at a loss to understand why.” She also castigated the majority for relying on the Senate Report for a host of reasons, including that the Report’s statement about the scope of section 1332(d)(9)(C) “simply has no relation to the enacted text.” Hard to quarrel with that.
Speaking of “the enacted text,” this case involved a petition for permission to appeal a district court’s remand order, which, CAFA absurdly says, must be filed with the court of appeals “not less than 7 days after entry of the order.” 28 U.S.C. § 1453(c)(1) (emphasis added to actual statutory text). That means that if you seek permission to appeal in 0, 1, 2, 3, 4, 5, or 6 days after entry of the remand order, your request is premature, but, as long as you wait 7 days, you’re golden. Heck, you can file a whole year later, and you’re still good to go. The Second Circuit in Pew joined every other court of appeals to have rewritten this provision, and held that it means the exact opposite of what it says: a party seeking permission to appeal a remand order must do so “not more than 7 days after entry of the order” (emphasis added to non-existent statutory text).
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