Commercial Litigation and Arbitration

Class Action Fairness Act — Home State Law and Securities Law Carve-Outs

CAFA’s jurisdictional grant is limited. Jurisdiction depends on the non-existence of certain factors. The plaintiffs in Genton v. Vestin Realty Mort. II, Inc., 2007 U.S. Dist. LEXIS 16892 (S.D. Cal. March 9, 2007), were a putative class of investors who owned Vestin Fund II, LLC ("Vestin") securities and voted against Vestin's merger with Vestin Realty Mortgage, Inc. (‛Vestin Realty“). They claimed that Vestin's Operating Agreement required, in the event of a merger, that the successor entity pay each member who voted against the merger a pro-rata share of the company's appraised net value. No payments were made by Vesting Realty, and the plaintiffs sued for breach of contract, breach of the implied covenant of good faith and fair dealing, and — most interestingly for present purposes — elder abuse.

There was no dispute that the basic requirements of §§ 1332(d)(2), (d)(5) were satisfied ($5,000,000 at issue; minimal diversity; more than 100 plaintiffs). Most of the claims were apparently asserted under the law of Maryland (defendant Vestin Realty’s state of incorporation) or Nevada (that of defendant Vestin Mortgage, Inc.), which could have kept everything in state court. Nonetheless, the first question was whether federal jurisdiction was precluded by § 1332(d)(9)(B), which provides that a district court lacks CAFA jurisdiction if an action solely involves a claim "that arises under or by virtue of the laws of the State in which such corporation or business enterprise is incorporated or organized . . . ." The elder abuse claim was brought under California law (California Welfare & Institution Code § 15657.5) ‛ as well as other applicable States' Elder Abuse Statutes.“ Because of the inclusion of that claim, the Court found that removal was not precluded by § 1332(d)(9)(B).

But remand is required if removal is improper under any CAFA exception. Under § 1332 (d)(9)(C), CAFA jurisdiction is lacking if an action solely involves a claim "that relates to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security" as defined by the Securities Act of 1933. Because all of plaintiffs’ claims arose out of their membership interest in Vestin (even the Elder Abuse claim), District Judge Roger Benitez concluded that remand was required. He rejected the defendants’ argument that this section is focused exclusively on fiduciary duty claims, noting that these claims had been relegated to a parenthetical.

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