As shown through recent U.S. Supreme Court decisions, the Class Action Fairness Act (“CAFA”) continues to be interpreted some ten years after its enactment (see, e.g., my posts from Jan. 17, 2014 and Dec. 18, 2014). This time, in Eminence Investors, L.L.L.P. v. Bank of New York Mellon, No, 15-15237 (Apr. 2, 2015), the Ninth Circuit considered the securities exception, holding that the exception applied despite “collateral” issues that did not fall within the exception.
The case arose from the issuance of certain bonds governed by an indenture. Eminence, as the successor-in-interest to the indenture trustee, brought a class action on behalf of itself and other bond holders, alleging breach of fiduciary duty and gross negligence, and seeking over $10 million and an injunction.
The case was filed in state court and Bank of New York removed it to federal court under CAFA. Eminence moved to remand, arguing that the removal was untimely and that CAFA could not supply federal jurisdiction because its securities exception applied. The district court remanded based on its view that the removal was untimely and did not reach the question of the applicability of the securities exception. Pursuant to CAFA, the Ninth Circuit heard the appeal of the remand order.
CAFA contains certain exceptions on its face, including the so-called “securities exception,” 28 U.S.C. section 1453(d)(3), pursuant to which, CAFA (and thus, federal jurisdiction), does not pertain to “any class action that solely involves . . . a claim that relates to the rights, duties (including fiduciary duties), and obligations relating to or created pursuant to any security (as defined under section 2(a)(1) of the Securities Act of 1933…)….”
Neither party disputed that the bonds were “securities.” Rather, they disputed whether all of the claims “‘relate to the rights, duties . . . ., and obligations relating to or created by to pursuant to’ the [b]onds.” The Court examined the causes of action, which essentially alleged that the bank had breached its fiduciary duties in various ways. It held that “[a]lthough it is true that Eminence’s causes of action also rely on various sources of law . . . that are not part of the [b]onds themselves or the [i]ndenture governing their administration, the same would also be true of any cause of action that relates to the duties created by a security….” And, that the bank had certain defenses, such as the statute of limitations, outside the securities laws, and could raise “collateral” issues, such as state contract law, did not change this analysis.
The Ninth Circuit followed the Second Circuit in its reasoning, but it remains to be seen how other courts interpret the word “solely” in understanding when a case “solely involves . . . a claim that relates to the rights, duties … and obligations relating to or created pursuant to any security.” Here, the Ninth Circuit disregarded “collateral” issues, but the case law on this appears to just be beginning.