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From Securities Regulation Daily, August 13, 2018

Securities Act claim did not bar removal under CAFA

By Rodney F. Tonkovic, J.D.

A judge in the Northern District of California has denied a motion to remand a securities class action back to the California state court from whence it originated. The reasoning in this case, which involves the Securities Act and the California Corporations Code, could make waves by providing a detour around the Supreme Court’s recent Cyan opinion for defendants. In an issue of apparent first impression, the court concluded that the presence of a Securities Act claim did not bar removal of an action under Section 1453 of the Class Action Fairness Act (CAFA) where the removal was based on state law claims that independently satisfied CAFA's jurisdictional requirements (Coffey v. Ripple Labs Inc., August 10, 2018, Hamilton, P.).

Removal. The plaintiff sued Ripple Labs, creator of a digital currency called XRP, in a California state court for violations of the registration provisions of the Securities Act and the California Corporations Code. The complaint alleged that XRP has all the hallmarks of a security and that Ripples sales of XRP are essentially a "never ending ICO" in violation of state and federal securities law. Invoking the Class Action Fairness Act, Ripple removed the case to the federal district court. CAFA Section 1453 permits removal of nationwide class actions brought on behalf of more than 100 class members in which minimal diversity exists and more than $5 million is in controversy.

The plaintiff fired back with a motion to remand, arguing that the Securities Act plainly bars removal of state-court cases asserting claims under the Act, with one exception for state-law class actions alleging fraud. The plaintiff’s memorandum relied on the Supreme Court's recent Cyan case holding that held that the SLUSA did not prevent state courts from exercising jurisdiction over claims alleging only violations of the Securities Act and that state court defendants in such cases are not entitled to seek removal to federal court. Ripple argued that it removed the case under CAFA, not the Securities Act, and that Congress intended CAFA’s removal authority to be broader.

Securities Act v. CAFA. At issue, then, was the narrow issue (apparently one of first impression) of whether the presence of a Securities Act claim bars removal of an action under CAFA Section 1453 based on state law claims that independently satisfy CAFA's jurisdictional requirements. The parties agreed that without the federal claims, the action would properly be removed under CAFA. While the plaintiff maintained that Securities Act Section 22(a) operates a complete bar to removal of an action including a Securities Act claim, Ripple contended that the state law claims satisfied CAFA, so the entire action could be removed.

The court first shot down the plaintiff's argument that Supreme Court and Ninth Circuit precedent demanded remand. First, the issues in Supreme Court's decisions in Kircher v. Putnam Funds Trust (2006) and Cyan, Inc. v. Beaver County Employees Retirement Fund (2018) had no bearing on removability under CAFA, the court said. While the Ninth Circuit addressed both CAFA and 22(a) in Luther v. Countrywide Home Loans Servicing LP (2008), holding that a state court class action alleging only violations of the Securities Act was not removable, the plaintiff here alleged claims under both California law and the Securities Act, and the action was removed under CAFA.

Turning to the language of Section 1453, the court noted that a qualifying class action may be removed by any defendants, subject to three limited exceptions set forth in subsection (d). The plain language of the statute, then, suggest that this action was properly removed based on the state law claims that independently satisfied CAFA's requirements.

The plaintiff argued that the general removal statute of 28 U.S.C. §1441, which provides for removal "Except as otherwise expressly provided by Act of Congress" (the "except clause"), should govern. The court disagreed, however, noting that courts have interpreted this clause to provide for recognition of statutory anti-removal provisions such as Section 22(a). Continuing, the court noted that Congress enumerated only three specific exceptions to removal under Section 1453. The fact that CAFA explicitly excepts certain Securities Act-related claims (with no reference to Section 22(a)) strongly suggested to the court that additional Securities Act exceptions should not be read into CAFA. The plaintiff's arguments showed, at most, the Congress is capable of creating removal provisions that are not subject to Section 1441(a)'s except clause and can do so by enacting an independent removal provision like Section 1453(b).

The court concluded that because Section 1453 says nothing about incorporating the except clause or deferring to other removal provisions, Section 22(a) does not bar removal of this action. Additionally, to apply Section 22(a) to all removal provisions would render numerous statutory clauses superfluous. Removal also accords with Congress' intent to strongly favor the exercise of federal diversity jurisdiction. The court accordingly denied the motion to remand.

The case is No. 18-cv-03286.

Attorneys: James Quinn Taylor-Copeland (Taylor-Copeland Law) for Ryan Coffey. Peter Bradley Morrison (Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates) and Andrew J. Ceresney (Debevoise & Plimpton LLP) for Ripple Labs Inc. and XRP II, LLC.

Companies: Ripple Labs Inc.; XRP II, LLC

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