Commercial Litigation and Arbitration

To Determine a “Mass Action” within CAFA, the Court Does Not Pierce Corporations and Partnerships to Count Beneficial Owners, Not Even in Derivative Actions

From Anwar v. Fairfield Greenwich Ltd., 2009 U.S. Dist. LEXIS 120533 (S.D.N.Y. Nov. 30/Dec. 23, 2009):

Plaintiffs in numerous actions consolidated by this Court for pretrial proceedings assert claims for financial losses allegedly arising from the fraudulent scheme perpetrated by Bernard L. Madoff. Four of those cases were originally filed in New York State Supreme Court, New York County, and removed to this Court by the defendants, Fairfield Greenwich Group, Fairfield Greenwich Limited, Fairfield Greenwich (Bermuda) Ltd., and Fairfield Greenwich Advisors LLC ("FGA") (collectively, "Defendants"), pursuant to 28 U.S.C. §§ 1332 and 1441, as amended by the Class Action Fairness Act of 2005 ("CAFA"). In the instant motion, Plaintiffs in Ferber, Pierce, Morning Mist, and Sentry (collectively, "Plaintiffs") seek to remand their cases to state court on the grounds that under CAFA the Court lacks subject matter jurisdiction over these actions, and thus that the cases were improperly removed. Plaintiffs also request an award of attorney's fees and costs incurred in connection with their remand motions.

By Order dated November 13, 2009, Magistrate Judge Theodore H. Katz, to whom the consolidated action has been referred for supervision of pretrial proceedings, issued a Report and Recommendation (the "Report"), a copy of which is attached and incorporated herein.***

[T]he Court adopts the Report's factual and legal analyses and determinations, as well as its recommendations, in their entirety as the Court's ruling on Plaintiffs' underlying motions. ***

Report and Recommendation of Magistrate Judge Theodore H. Katz dated November 13, 2009 *** The question of whether a derivative action brought on behalf of a corporation or partnership in which there are over 100 investors qualifies as a "mass action" under CAFA is a matter of first impression in this Court. Derivative Plaintiffs argue that the obvious answer to this question is that it does not, because "[t]o qualify as a 'mass action,' a case must involve 'monetary relief claims of 100 or more persons [that] are proposed to be tried jointly.'" *** On its face, Ferber is a derivative action brought by two limited partners of GS to recover losses on behalf of GS. *** Similarly, Pierce is a derivative action brought by one limited partner of GSP, GS's successor fund, to recover losses on behalf of GSP. *** Finally, Morning Mist is a derivative action brought by two shareholders of FSL to recover losses on behalf of FSL. *** Therefore, the named plaintiffs in Ferber, Pierce, and Morning Mist fall woefully short of the 100-person requirement of CAFA.

Defendants, however, ask the Court to look beyond the derivative nature of Ferber, Pierce, and Morning Mist, and count each of the "beneficial equity holders" in the Funds as individual plaintiffs in a larger "mass action." *** The Court rejects Defendants' approach and holds that derivative actions are not "mass actions" subject to federal court jurisdiction under CAFA.

To reach CAFA's requirement of 100 plaintiffs, Defendants focus on the 700 shareholders of FSL in the Morning Mist action. For GSP, Defendants first look to the limited partners and then go further, since GSP currently has only 29 limited partners. ***

To overcome this hurdle, Defendants ask the Court to disregard the investors of record in GSP, and instead count the underlying "beneficial equity holders" of those 29 limited partners. Because some of the investors of record in GSP are other corporate entities, as opposed to individuals, Defendants argue that, for purposes of CAFA counting, the Court should include this second tier of investors (i.e., the investors in the investors). For example, eight limited partners of GSP are themselves other partnerships and trusts. Defendants count both the beneficiaries of those trusts and the partners of those partnerships as alleged "class members." *** Thus, eight limited partners become upwards of sixty "class members" through Defendants' two-tiered approach. *** Nevertheless, Defendants still find themselves short of CAFA's 100-person threshold.

In continuing their ascent up the CAFA ladder, Defendants propose counting yet a third tier of investors. In other words, Defendants count the investors in investors in investors in GSP, stopping only — as far as the Court can tell — because they eventually reached their target of 100. As a clarifying example, Defendants generously count each of the individual members of an LLC, that serves as the general partner of a partnership, that, in turn, is a limited partner in GSP. *** Defendants, through this triple-tiered counting method, conclude that there are a total of 109 current "beneficial equity holders" in GSP. ***

The reach of CAFA simply does not extend this far, and the Court declines to adopt Defendants' astoundingly expansive approach. Cf. Lupo, 28 F.3d at 274 (noting that "federal courts construe the removal statute narrowly"). ***

Defendants note that the Securities Litigation Uniform Standards Act ("SLUSA"), which provides for removal to federal court of certain securities fraud class actions, expressly excludes derivative actions. See 15 U.S.C. §§ 77p, 78bb. Defendants seize upon CAFA's absence of an enumerated exclusion for derivative actions as alleged proof that Congress intended such actions to fall into the jurisdictional arms of the Act. *** In essence, Defendants argue that the Court should infer meaning from Congress's silence in CAFA, in light of the express language in SLUSA, enacted seven years earlier. Leaving aside the obvious question of why a different statute's language is relevant to construing CAFA, it is not surprising that Congress found it necessary to address derivative actions in SLUSA, a statute targeting cases involving securities fraud. Moreover, a comparison of SLUSA and CAFA further underscores why Congress may have included a carve-out for derivative actions in SLUSA, but not CAFA.

SLUSA defines a class action, in part, as "any single lawsuit in which . . . damages are sought on behalf of more than 50 persons or prospective class members." 15 U.S.C. §§ 77p, 78bb.... SLUSA, had it not expressly carved out derivative actions, would have undoubtedly left room for interpretation with its vague "on behalf of" language. CAFA, on the other hand, defines a "mass action," in part, as a suit "in which monetary-relief claims of 100 or more persons are proposed to be tried jointly." 28 U.S.C. § 1332 (d) (11) (B) (i).... CAFA's drafters made clear that the mass action provisions only cover "those cases . . . in which there are at least 100 plaintiffs." 151 Cong. Rec. S1081 (emphasis added). Therefore, it is of limited significance that Congress did not draft an exclusion for derivative claims in CAFA.

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