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From Securities Regulation Daily, April 2, 2015

CAFA securities exception deprived appeals panel of jurisdiction

By Mark S. Nelson, J.D.

The Ninth Circuit for the first time has dismissed an appeal of a lower court’s decision to remand to state court a case brought by a bond holder against an indenture trustee because the Class Action Fairness Act’s (CAFA’s) securities exception applied. As a result, the Ninth Circuit said it lacked jurisdiction to hear the trustee’s appeal, but in other types of cases, CAFA gives reviewing courts discretion to take up these appeals (Eminence Investors, L.L.L.P. v. Bank of New York Mellon, April 2, 2015, Wallace, J.).

Bank invokes CAFA. Eminence Investors, L.L.L.P. (Eminence) sued Bank of New York Mellon (BNY Mellon) in California state court over a soured bond deal in which neither Eminence nor BNY Mellon took part in the original transaction, but Eminence now held bonds issued by Jensen Ranch Public Finance Authority for which BNY Mellon had become the successor indenture trustee. Three of Eminence’s five claims fell into the category of breach of fiduciary duty, while a fourth claim alleged the bank failed to live up to professional standards of care and ethics, and the fifth asked the district court to impose an injunction against the bank.

Eminence later amended its suit to add up to 100 class members and to demand $10 million in compensatory damages. Seizing upon a chance to move the case to federal court, BNY Mellon invoked CAFA in an effort to persuade the district court to hear the case. Congress enacted CAFA in 2005 to help prevent class action law suit abuses, while keeping federal courthouse doors open to cases meeting CAFA’s minimal diversity and numerosity tests, and its more than $5 million jurisdictional amount.

The district court sided with Eminence, saying that BNY Mellon’s attempt to use CAFA to remove the case to federal court was untimely. But the district court’s opinion remanding the case to state court never dealt with CAFA’s securities exception. The bank then appealed to the Ninth Circuit, which dismissed the appeal because CAFA’s securities exception deprived it of jurisdiction.

Claims related to bonds. Because the parties did not dispute either that a bond is a “security” under CAFA, or that bonds create rights between their holders, the borrower, and the indenture trustee, the only remaining question was whether Eminence’s claims related to the rights inherent in the bonds. That gave the Ninth Circuit a chance to interpret CAFA’s securities exception as a matter of first impression.

The court first decided that all of Eminence’s claims related to the rights and duties created by the bonds Eminence and BNY Mellon were battling over. As a result, the bank lost its argument that a part of Eminence’s claims dealt with properties outside the original bond deal because, as Eminence told the court, these properties still were wrapped up in its fiduciary duty claims against the bank. Likewise, the bank could not argue that the indenture barred some of Eminence’s claims because that theory assumed the claims related to BNY Mellon’s fiduciary duties.

Moreover, the Ninth Circuit said the Second Circuit’s prior treatment of CAFA was not only persuasive, but it would help the Ninth Circuit panel adhere to its policy of not rushing to create new federal circuit splits. Following the Second Circuit also backs CAFA’s design, and it helps to establish national rules for securities, which the court noted often span many states or the entire country.

The Second Circuit’s 2008 Cardarelli opinion was the key to the Ninth Circuit’s thinking. In Cardarelli, the Second Circuit held as matter of first impression in the federal circuit courts that CAFA’s securities exception did not apply to a case involving allegations that an issuer and its auditor marketed debt certificates and yet failed to make needed disclosures about the issuer’s solvency in violation of a state consumer fraud law. As a result, the Second Circuit said it had jurisdiction to hear the appeal, and it then reversed the district court’s ruling that would have sent that case back to a state court.

The Cardarelli majority noted CAFA’s vagaries, while explaining the different outcomes possible depending on whether someone was a “purchaser” or a “holder.” The Ninth Circuit concluded that Eminence was a holder, not a purchaser, so CAFA’s securities exception applied. As an aside, one of the judges on the Cardarelli panel issued a lengthy dissent. Still, the Ninth Circuit today said later rulings by the Second Circuit reaffirmed the Cardarelli majority’s reasoning, even if the Ninth Circuit might have taken a different approach had it decided the issues posed to the Second Circuit.

Lastly, the Ninth Circuit began its opinion by noting that a federal appeals court can take up jurisdictional issues on its own.  BNY Mellon had argued that Eminence waived its right to address CAFA. But the court rejected the bank’s theory and instead quickly shifted gears to interpret CAFA’s securities exception.

The case is No. 15-15237.

Attorneys: Robert Branch, contract attorney via Thornton Law Group, P.C., (Rummonds Thornton, LLP) for Eminence Investors, L.L.L.P. David J. Bird (Reed Smith LLP) and Donald H. Glasrud (Dietrich, Glasrud, Mallek & Aune) for Bank of New York Mellon.

Companies: Eminence Investors, L.L.L.P.; Bank of New York Mellon; Jensen Ranch Public Finance Authority

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