Opinion
Case No. SA CV 03-813-GLT (ANx) Calendar Item #14
June 30, 2003
ORDER DENYING PLAINTIFFS' MOTION FOR REMAND AND GRANTING DEFENDANTS' MOTION FOR STAY
Plaintiffs' motion for remand is DENIED. Defendants' motion for stay is GRANTED.
I. BACKGROUND
Plaintiffs purchased WorldCom bonds between 1998 and 2002. Defendants underwrote and/or audited WorldCom's public offerings. In July 2002, WorldCom filed a voluntary petition for Chapter 11 bankruptcy relief in the Southern District of New York. Defendants filed proofs of claims in WorldCom's bankruptcy action, claiming rights of indemnity and contribution based on written agreements. In October 2002, the Multi-District Litigation Panel ("MDL Panel") transferred numerous WorldCom-related suits to the Southern District of New York for consolidated pre-trial proceedings.
In April 2003, Plaintiffs sued Defendants in the Orange County Superior Court, alleging claims under federal and state law. Plaintiffs claim they relied on representations made by Defendants concerning WorldCom's creditworthiness when they purchased WorldCom bonds. Plaintiffs allege they suffered significant financial losses in reliance on Defendants' allegedly false and misleading statements. In May 2003, Defendants timely removed the case to federal court, and requested the MDL Panel accept the case for consolidated pre-trial proceedings with other WorldCom actions.
Defendants move to stay of the proceedings until 30 days after the MDL Panel rules on Defendants' transfer request. Plaintiffs move for remand to the state court.
II. DISCUSSION
Requests for transfer pending before the MDL Panel do not limit the pre-trial jurisdiction of the district court. Smith v. Mail Boxes, Etc. USA, Inc., 191 F. Supp.2d 1155, 1157 (E.D.Cal. 2002) (citing Judicial Panel on Multidistrict Litigation Rule 1.5). The Court has discretion to decide whether to stay a case pending a decision from the MDL Panel. Id.
Plaintiffs' motion for remand raises questions as to the Court's jurisdiction, a preliminary issue that should be resolved early in the case. Id. (collecting cases). Thus, the Court addresses Plaintiffs' motion for remand before considering Defendants' motion for stay.
A. Plaintiffs' Motion for Remand
Plaintiffs contend the Court does not have jurisdiction over the case because, contrary to Defendants' assertion in the notice of removal, Plaintiffs' case is not related to the WorldCom bankruptcy proceedings. Plaintiffs also contend section 22(a) of the Securities Act of 1933 bars removal of their Securities Act claim. Plaintiffs also request the Court abstain or remand the action on equitable grounds.
1. "Related To" Bankruptcy Proceedings
28 U.S.C. § 1452(a) provides for removal of claims related to bankruptcy cases to a federal district court, "if such district court has jurisdiction of such claim or cause of action under section 1334 of this title." Section 1334(b) provides district courts have original jurisdiction over "all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b).
In the Ninth Circuit, a case is "related to" a bankruptcy proceeding if "`the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy.'" In re Feitz, 852 F.2d 455, 457 (9th Cir. 1988) (quoting Pacor. Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir. 1984)). Contingent claims of contribution and indemnification such as those raised by Defendants may be sufficient to invoke "related to" jurisdiction, even if Defendants are not guaranteed indemnification. See In re Down Corning. Corp., 86 F.3d 482, 490 (6th Cir. 1996); In re Sizzler Restaurants Int'l. Inc., 262 B.R. 811, 818-819 (Bankr. C.D. Cal. 2001). If Defendants are found liable in this case, they may be entitled to indemnification and/or contribution from WorldCom. Thus, it is conceivable the present action may have an effect on the WorldCom bankruptcy estate.
Plaintiffs cite Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir. 1984), for the proposition an indemnification claim is insufficient to invoke "related to" jurisdiction. In Pacor, the Court found an indemnification claim to be insufficient for "related to" jurisdiction in the absence of a written agreement with the debtor. Id, at 995. However, the Court went on to distinguish the case from those in which an indemnification agreement existed and concluded "related to" jurisdiction would be present in those cases. Here, Defendants have written indemnification agreements with WorldCom for liabilities arising from false or misleading statements contained in registration statements or prospectus related to bond offerings. Allegedly false and misleading statements in such documents serve as the basis for Plaintiffs' state and federal claims.
Plaintiffs contend Defendants' indemnification and contribution claims will not have any practical effect on the bankruptcy estate. According to Plaintiffs, Defendants cannot receive any distribution under a Reorganization Plan proposed in the WorldCom bankruptcy action. Removal jurisdiction is determined at the time of removal. The Reorganization Plan has not yet been approved. Thus, at the time of removal, it was conceivable the outcome of this litigation may affect the WorldCom bankruptcy estate.
Plaintiffs argue Defendants' indemnification and contribution claims against WorldCom are unenforceable. This argument invites the Court to rule or speculate on the merits of Defendants' claims against WorldCom. The Court declines to do so.
This case is "related to" the WorldCom bankruptcy action, and the Court has removal jurisdiction under 28 U.S.C. § 1452.
2. Section 22(a) of the Securities Act of 1933
Plaintiffs allege a claim against Defendants under section 11 of the Securities Act of 1933. Plaintiffs contend removal of this claim is barred by section 22(a) of the Securities Act of 1933, which provides in part, "no case arising under this subchapter and brought in any State court of competent jurisdiction shall be removed to any court of the United States." 15 U.S.C. § 77v(a).
Section 22(a) proscribes removal based on federal question jurisdiction under 28 U.S.C. § 1441(a), but does not prevent removal based on other grounds. See Emrich y. Touche Ross Co., 846 F.2d 1190, 1196 (9th Cir. 1988) (finding section 22(a) prevents removal under section 1441(a), but not under 1441(c)); In re WorldCom, 2003 WL 716243 (S.D.N.Y. 2003) (finding section 22(a) does not prevent removal based on "related to" jurisdiction under 28 U.S.C. § 1452);Retirement Systems of Alabama v. Merrill Lynch Co., 209 F. Supp.2d 1257, 1260, nt.3 (M.D. Ala. 2002) (stating removal jurisdiction was available under section 1452 even though section 22(a) prevented removal on federal question grounds). But see Tennessee Consolidated Retirement System v. Citigroup, Inc., No. 3:03-0218, slip op. at 6 (M.D. Tenn., May 9, 2003) (holding section 22(a) prevents removal under section 1452).
Here, removal was not based on federal question jurisdiction under 28 U.S.C. § 1441(a), but on "related to" jurisdiction under section 1452. Thus, removal was not barred by section 22(a).
3. Abstention and Equitable Remand
Plaintiffs request the Court to abstain from exercising jurisdiction "in the interest of justice," pursuant to 28 U.S.C. § 1334(c)(1). Section 1334 abstention does not apply to removal cases. McDowell Welding Pipefitting. Inc. v. U.S. Gypsum Co., 285 B.R. 460, 475 (D.Or. 200) (citing Security Farms v. International Broth, of Teamsters. Chauffers. Warehousemen Helpers, 124 F.3d 999, 1009-10 (9th Cir. 1997)).
Plaintiffs also request remand pursuant to 28 U.S.C. § 1452(b), which permits remand on "any equitable ground." They contend the case involves predominately state claims. Section 1452(b) has been understood to permit remand based on general fairness and reasonableness considerations. See Christie v. Chong, 2002 WL 598428 (N.D. Cal. 2002) (collecting cases). However, Plaintiffs allege both federal and state claims, and the state and federal courts are equally suitable forums to hear these claims. Possible transfer to the MDL Panel for consolidated pre-trial hearing and the coordination and efficiency such a transfer would provide weigh in favor of retaining federal jurisdiction.
Plaintiffs' motion for remand is DENIED.
B. Defendants' Motion for Stay
The Court has the authority to stay proceedings to control its docket and for judicial economy considerations. See Smith, 191 F. Supp.2d at 1157. Defendants contend a stay will conserve judicial resources and avoid duplication of pre-trial efforts in the event the MDL Panel accepts the transfer request. Plaintiffs do not oppose a stay of the proceedings if the Court first rules on the motion for remand, which the Court has denied.
Defendants' motion for stay is GRANTED.
III. DISPOSITION
Plaintiffs' motion for remand is DENIED. Defendants' motion for stay pending a decision from the MDL Panel is GRANTED.