Thursday, January 15, 2009

Class Action Removable to Federal Court Under CAFA

Securities class actions covered by the Class Action Fairness Act of 2005 were removable to federal court, concluded a 7th Circuit panel. The case, which arose from a real estate investment trust merger,conflicts with a July 2008 9th Circuit case on the interplay between the non-removal provisions of the 1933 Act and CAFA.

In the earlier decision, Luther v. Countrywide Home Loans Servicing, LP, the 9th Circuit held that the class action was not removable because the CAFA did not supersede the specific bar against removal contained in Securities Act Section 22(a). The court explained that Section 22(a) bars the removal of cases brought in state court asserting only claims arising under the Securities Act. The 9th Circuit panel found that the specific bar to removal in Section 22(a) was not trumped by the CAFA's more general grant of removal.

The 7th Circuit, however, rejected this interpretation,finding that CAFA prevailed. Initially, the 7th Circuit panel rejected the plaintiff's claim that he was a "buyer" of securities after he converted his existing holdings into cash. Judge Easterbrook wrote for the panel that "the `fundamental change doctrine' that turns a sale into a purchase is word play designed to overcome the actual text of the securities law." He added that the 9th Circuit in Luther "failed to recognize" the proper relationship between the statutes and that the court in Luther "did not appear to understand" the impact of CAFA.

The appellate panel remanded the case to the federal district court to determine if any exemption from CAFA was available. "The best approach is to have the district court hold a hearing at which the parties can elaborate on their positions,for the characterization of an ambiguous claim is closer to a question of fact than to one of law," explained the court.

Katz v. Gerardi