Friday, October 23, 2015

Motion to Remand Under SLUSA Not Quixotic

By Rodney F. Tonkovic, J.D.

A plaintiff was not tilting at windmills when he asked a district court to remand an action to the state court. Arthur Cervantes contested the removal to the federal court of a proposed class action alleging violations of the Securities Act. The court remanded the case to the state court after finding that the federal claims did not constitute a covered class action under the Securities Litigation Uniform Standards Act (SLUSA) (Cervantes v. Dickerson, October 21, 2015, Hamilton, P.).

Background. Cervantes filed the proposed class action in the San Mateo County Superior Court alleging Securities Act claims against Etsy, Inc., several of its officers and directors, and the underwriters of Etsy's initial public offering. The defendants then removed the case to the Northern District of California, claiming jurisdiction under Section 22 of the Securities Act. Shortly thereafter, Cervantes filed this motion to remand.

SLUSA. The court noted at the outset that the issue in this case—whether removal was improper—has generated a split among district courts. Courts are divided as to whether the intent of Congress in enacting the SLUSA was to completely eliminate states' concurrent jurisdiction over Securities Act claims, or whether the goal was just to eliminate certain securities class actions brought under state law. Cervantes based his argument for removal on the plain language of the Act, its legislative history, and the fact that any doubt about the propriety of removal should be resolved against removability.

Cervantes first asserted that removal was barred because he only brought claims under the Securities Act, and the removal provision permits removal of only those class actions based on state law. The court agreed, finding that the most logical way of reading the SLUSA provisions was that "only covered class actions based on state law can be removed to federal court, and only for the purpose of dismissing the precluded state law claims as required by § 77p(b)." There was nothing in the statute indicating that there is any other basis for removal beyond the narrow exception allowing federal courts to dismiss precluded state law class actions, the court said. This interpretation, the court continued, reflects the increasing majority view among district courts in the Ninth Circuit and is bolstered by dicta from the Supreme Court and the Ninth Circuit.

Next, Cervantes argued that the SLUSA's legislative history contains no explicit indication that stand-alone Securities Act claims are removable. The court said that the legislative history cited by the parties was too generalized to provide useful guidance and that while the statutory language was clear enough, the practical application of the provisions was "somewhat difficult to determine."

Finally, the court pointed to the Ninth Circuit's approach that, in situations where federal jurisdiction is in doubt, those doubts must be resolved against removability. Given the lack of clear authority, the court said, and in view of the trend to deny removability, the court found that remand was appropriate. The court concluded that Cervantes's federal claims did not constitute a covered class action under Securities Act Section 16(b) and, consequently, the action was not removable to federal court under Section 16(c).

The case is No. 15-cv-3825.