Summary
finding state law claim for breach of fiduciary raised no federal claim because "although the complaint discusses possible violations of federal securities law, such references are not `essential elements' of any of Plaintiff's state law claims"
Summary of this case from In re Textainer Partnership Securities LitigationOpinion
GEORGE KING, District Judge.
Plaintiff's Motion to Remand
This matter is before the Court on the above-entitled motion brought by plaintiff Ronald A. Gargiulo, derivatively on behalf of Conexant Sys., Inc., ("Plaintiff") against defendants Dwight W. Decker, Armando Geday, Robert J. McMullan, Balakrishnan S. Iyer, Donald R. Beall, Jerre L. Stead, D. Scott Mercer, F. Craig Farrill, Steven J. Bilodeau, Dipanjan Deb, John W. Marren, Giuseppe P. Zocco, Ralph J. Cicerone, and Does 1-25, and nominal defendant Conexant Sys., Inc. (collectively "Defendants"). We conclude that this matter is appropriate for decision without oral argument. See Fed. R. Civ. P. 78; Local Rule 7-15. After considering all the papers filed, we rule as follows:
On February 22, 2005, plaintiff Steven McGee in McGee v. Decker, et al., SA CV 05-0110 (C.D. Cal. filed Jan. 25, 2005), filed a notice of joinder in Plaintiff's motion to remand. However, pursuant to the parties' stipulation, we consolidated McGee into Gargiulo, and dismissed McGee without prejudice on March 23, 2005. As such, although this order refers only to Plaintiff, it applies equally as well to plaintiff McGee.
I. Background
The parties are familiar with the facts in the current action. Consequently, we will not repeat any facts except as necessary.
II. Discussion
A. Plaintiff's Claims Do Not Arise Under Federal Law
"[A]ny civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending." 28 U.S.C. § 1441.
On a motion to remand, the scope of the removal statute must be strictly construed. See Gaus v. Miles, Inc. , 980 F.2d 564, 566 (9th Cir. 1992). "The strong presumption' against removal jurisdiction means that the defendant always has the burden of establishing that removal is proper." Id. Courts should resolve doubts as to removability in favor of remanding the case to state court. Id.
Federal courts have original jurisdiction over "all civil actions arising under the Constitution, laws, or treaties of the United States." 28 U.S.C. § 1331. A suit arises under the Constitution, laws, or treaties of the United States if federal law creates the cause of action or where "it appears that some substantial, disputed question of federal law is a necessary element of one of the well-pleaded state claims...." Franchise Tax Bd. v. Constr. Laborers Vacation Trust for S. Cal. , 463 U.S. 1, 13 (1983).
However, when a plaintiff has suffered an injury that could give rise to both federal and state causes of action, the plaintiff "is free to ignore the federal cause of action and rest the claim solely on a state cause of action." Garibaldi v. Lucky Food Stores, Inc. , 726 F.2d 1367, 1370 (9th Cir. 1984). Nevertheless, a plaintiff may not avoid federal jurisdiction "by omitting from the complaint federal law essential to his or her claim or by casting in state law terms a claim that can be made only under federal law." Sparta Surgical Corp. v. Nat'l Ass'n of Sec. Dealers, Inc. , 159 F.3d 1209, 1212 (9th Cir. 1998).
Here, Plaintiff's complaint does not assert a substantial federal question. No federal question appears on the face of Plaintiff's complaint. Plaintiff asserts seven causes of action: (1) Violation of Cal. Corp. Code § 25402; (2) Breach of fiduciary duty for insider selling and misappropriation; (3) Breach of fiduciary duty; (4) Abuse of control; (5) Gross mismanagement; (6) Waste of corporate assets; and (7) Unjust enrichment. Plaintiff's complaint, therefore, seeks relief only under California's corporations law or common law, not federal securities laws. Moreover, nowhere in the complaint's recitation of causes of action are any violations of federal securities laws expressly alleged.
Instead, references to the federal securities laws come by way of incorporation of allegations set forth previously in the complaint. Specifically, the Complaint makes the following assertions:
(1) Individual Defendants "participated in the issuance of false and/or misleading statements, including the preparation of the false and/or misleading press releases and [SEC] filings, " Compl. ¶¶ 10-22;
(2) the Individual Defendants had a duty to:
(a) "ensure that the Company complied with its legal obligations and requirements, including acting only within the scope of its legal authority and disseminating truthful and accurate statements to the SEC and investing public, " id. ¶ 29(b);
(b) "to comply with federal and state securities laws, " id. ¶ 29(e); and
(c) "ensure that the Company was operated in a diligent, honest and prudent manner in compliance with all applicable federal, state and local laws, rules and regulations, " id. ¶ 29(f);
(3) "In addition, as a result of defendants' illegal actions and course of conduct... the Company is now the subject of several class action law suits that allege violations of federal securities laws. As a result, Conexant has expended and will continue to expend significant sums of money, " id. ¶ 31; and
(4) Plaintiff has not made any demand on the board of Conexant to bring suit since
(a) "it is their actions that have subjected Conexant to millions of dollars in liability for possible violations of applicable securities laws, " id. ¶ 62(g); and
(b) "[a]ny suit by the current directors... would likely expose the Individual Defendants and Conexant to further violations of the securities laws..., " id. ¶ 62(n).
Nevertheless, although the complaint discusses possible violations of federal securities law, such references are not "essential elements" of any of Plaintiff's state law claims. See Cal. v. Dynergy, Inc. , 375 F.3d 831, 838 (9th Cir. 2003) (stating that the federal issue "must be an element, and an essential one, of the plaintiff's cause of action"). None of Plaintiff's state law claims makes any reference to violations of federal securities laws as an element of such causes of action. For instance, Cal. Corp. Code § 25402 makes no reference to federal securities laws when it provides that:
It is unlawful for... any person who is an officer, [or] director... to purchase or sell any security of the issuer... at a time when he knows material information about the issuer gained from [his position] which would significantly affect the market price of that security and which is not generally available to the public, and which he knows is not intended to be so available.... Cal. Corp. Code § 25402. As such, federal law regarding insider trading is not essential to Plaintiff's claims because use of insider information is independently prohibited by the state Corporations Code.
Similarly; although not specifically identified by Plaintiff, Cal. Corp. Code § 1507 imposes civil liability on any officer or director who
make[s], issue[s], deliver[s] or publish[es] any... financial statement, balance sheet, public notice or document respecting the corporation or its shares [or] business... which is false in any material respect, knowing it to be false....
Cal. Corp. Code § 1507. As such, although the content of the press releases and other public statements may violate federal law, the alleged falsities also violate state law.
Moreover, the complaint does not refer to specific provisions of federal securities laws allegedly violated. The general references to the federal securities laws are never made as the sole or predominant reason for Plaintiff's claims. See Klein v. Southwest Gas Corp., 1999 U.S. Dist. LEXIS 22979, at *15 (S.D. Cal. Aug. 3, 1999) (remanding complaint alleging breach of fiduciary duty, duty of candor, and violation of Cal. Corp. Code § 1101 since "[a]lthough plaintiffs may also have potential claims arising under federal securities law because of defendants' alleged misstatements and omissions, [plaintiffs] have not chosen to enforce any rights stemming from violations of federal law"). For instance, paragraphs 10-22 of the complaint state that the Defendants "participated in the issuance of false and/or misleading statements, including the preparation of the false and/or misleading press releases and [SEC] filings." Compl. ¶¶ 10-22 (emphasis added).
Similarly, references to federal securities laws in the paragraphs discussing the duties on the Individual Defendants are described as duties to not violate "federal and state securities laws." Id. ¶ 29(e) (emphasis added); see also id. ¶ 29(f) ("federal, state and local laws, rules and regulations") (emphasis added). Also, the complaint provides an additional four duties, out of the total of seven, that do not reference any federal securities laws.
References to possible violations of federal securities laws is made only by way of demonstrating alternative ways in which Defendants allegedly violated state corporate law and, as such, do not give rise to jurisdiction. See Merrell Dow Pharmaceuticals Inc. v. Thompson , 478 U.S. 804, 807 (1986) (holding that reference to federal law merely as one available criterion for determining whether a violation of state law has occurred is insufficient to establish jurisdiction). As recognized in Schappel v. UICI, 1999 WL 1101262 (N.D. Tex. Dec. 3, 1999), such "allegations... simply provide the factual basis for [Plaintiff's] state law claims. That they might also present a factual basis for a federal securities law violation is irrelevant since [Plaintiff] has chosen not to assert such claims. To hold otherwise would force [Plaintiff] into federal court anytime facts that formed the basis of his state cause of action also happen to support a federal claim. This would take away a plaintiff's power to be the master of his claim.'" Id. at *2; see also Garibaldi , 726 F.2d at 1370 (stating that when a plaintiff has suffered an injury that could give rise to both federal and state causes of action, the plaintiff "is free to ignore the federal cause of action and rest the claim solely on a state cause of action").
Moreover, contrary to Defendants' contention, Plaintiff's damages do not flow only from the securities fraud class actions. Although the complaint alleges that "Conexant has expended and will continue to expend significant sums of money" due to "several class action law suits that allege violations of federal securities laws, " it states that such damages are "[i]n addition" to those arising from Defendants' alleged violations of their "duties of loyalty and good faith." Compl. ¶ 31. It also provides that Conexant has been forced to incur "[c]osts... to carry out internal investigations, including legal fees paid to outside counsel"; however, such costs would not disappear in the absence of the class action law suits.
Finally, Defendants' cases are inapposite. The majority of the cases involved claims against defendants that required interpretation of federal law and/or were premised on duties derived exclusively from federal law. See D'Alessio v. N.Y. Stock Exch., Inc. , 258 F.3d 93, 103 (2d Cir. 2001) (finding that the plaintiffs' claims were premised, in large part, on the NYSE's failure to abide by duties created by the Exchange Act); Sparta Surgical Corp. , 159 F.3d at 1212 (finding that the duties imposed on the NASD, a SRO like the NYSE, were derived exclusively from rules under the Exchange Act); Ayres v. General Motors Corp. , 234 F.3d 514, 518 (11th Cir. 2000) ("resolution of [the] case depend[ed] entirely on interpretation of the federal mail and wire fraud statutes and their interaction with the [National Traffic and Motor Vehicle Safety Act]"); Ormet Corp. v. Ohio Power Co. , 98 F.3d 799, 801-02 (4th Cir. 1996) (finding that resolution of the plaintiff's contract claims "require[d]" determination of whether the plaintiff was an "owner" as defined in the Clean Air Act); Guardian Nat'l Acceptance Corp. v. Swartzlander Motors, Inc. , 962 F.Supp. 1137, 1143 (N.D. Ind. 1997) (finding that the plaintiff "must establish that [the defendant] violated its duties under the Truth in Lending Act to prove... breach[] [of] the Assignment Agreement"); Schulze v. Legg Mason Wood Walker, Inc. , 865 F.Supp. 277, 284 (W.D. Pa. 1994) (finding that complaint alleging state law causes of action only nevertheless "require[d] an interpretation of provisions of the Internal Revenue Code"). In contrast, although federal securities laws impose duties upon Defendants, so does California law. See Cal. Corp. Code § 309 (imposing duty on directors to serve in good faith in a manner such director believes to be in the best interests of the company and its shareholders and to act with such care as an ordinarily prudent person in a like position would use under similar circumstances). Also, Plaintiff does not predicate his state law claims on specific violations of federal securities laws. See Klein, 1999 U.S. Dist. Lexis 22979, *16-17.
Neither Weitschner v. Gilmartin , 2003 U.S. Dist. LEXIS 18997 (D. N.J. Jan. 14, 2003), nor Gobble v. Hellman, 2002 U.S. Dist. LEXIS 26833 (N.D. Ohio Mar. 26, 2002), changes our conclusion. Gobble itself acknowledged that "[a]llegations that simply provide a factual basis for a claim and which could independently support either a state law claim or a federal law claim are generally not sufficient to create a substantial question of federal law or to confer jurisdiction to the federal courts." Gobble, 2002 U.S. Dist. LEXIS 5977, *8 n.1. The rationale of Wietschner is also unhelpful since the court merely stated that the breach of fiduciary duty claim was "primarily" based on federal securities laws without explaining what made it "primarily" so, and the court relied on D'Alessio, which, as described above, is inapplicable. See Wietschner, 2003 U.S. Dist. LEXIS 18997, *7.
Thus, Plaintiff's complaint does not assert any federal claims or assert any state law claims that require resolution of an essential federal issue. Plaintiff's motion to remand is, therefore, GRANTED.
B. Attorneys' Fees and Costs Are Not Warranted
We have "wide discretion" to determine whether to award fees. Moore v. Permanente Med. Group, Inc. , 981 F.2d 443, 447 (9th Cir. 1992).
An award of attorneys' fees and costs is not warranted in the instant matter. Remand motions are determined on a case by case basis. Since Plaintiff's complaint makes references to federal securities laws, Defendants' position is not frivolous, although ultimately unconvincing. Moreover, there has been no credible showing that removal was motivated by bad faith. Finally, given the complexity and status of this case, Defendants' removal does not appear to have resulted in unreasonable delay or demonstrable prejudice. Consequently, we DENY Plaintiff's request for attorneys' fees and costs.
III. Disposition
Therefore, for the reasons discussed above, Plaintiff's motion to remand is GRANTED. Plaintiff's request for attorneys' fees and costs, however, is DENIED. This action is hereby remanded back to the state court from which it was removed. Additionally, in light of this ruling, we need not consider Defendants' motions to transfer, filed on February 28, 2005, and to dismiss, filed on March 9, 2005.
IT IS SO ORDERED.