Opinion
CASE NO.: CV 02-7268 ABC (PJWx)
October 16, 2002
ORDER REMANDING THE ACTION TO STATE COURT
Before the Court is Plaintiffs' Motion to Remand this action to state court. Plaintiffs contend that Defendants improperly removed this action to federal court under the Securities Litigation Uniform Standards Act of 1998. Having reviewed and considered Plaintiffs' Motion to Remand, Defendants' Opposition, Plaintiffs' Reply, all attached declarations and the applicable law, the Court finds the Motion suitable for decision without oral argument. See Fed.R.Civ.Pro. 78; Local Rule 7-15. For the reasons detailed below, the Court GRANTS Plaintiffs' Motion to Remand.
I. BACKGROUND
Plaintiffs David Shen and Joseph Catalano commenced this action in Los Angeles Superior Court by filing two shareholder derivative actions on March 22, 2002, and March 25, 2002, respectively. On June 20, 2002, the state court consolidated the two actions pursuant to stipulation of counsel. Plaintiffs then filed a Consolidated Complaint in state court on August 23, 2002. Unlike the first two complaints, the Consolidated Complaint's first cause of action includes a class action for breach of fiduciary duty related to shareholder voting rights. Complaint ¶ 102. The Complaint's other five claims are all shareholder derivative actions, as opposed to class actions.
On September 18, 2002, Defendant MaxWorldwide, Inc. (formerly L90, Inc.) and several individual defendants removed this action to federal court pursuant to the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"). Pub.L. No. 105-353, 112 Stat. 3227 (codified as amended in scattered sections of 15 U.S.C.). Defendants contend that SLUSA preempts Plaintiffs' first cause of action. Notice of Removal ¶ 4. On September 30, 2002, Plaintiffs moved to remand this action to state court.
The individual defendants include Christopher J. Cardinali, Mitchell Cannold, William M. Apfelbaum, Peter G. Diamandis, Peter Sealey, Glenn S. Meyers, and G. Bruce Redditt. Defendants John C. Bohan and Thomas A. Sebastian filed separate joinders in the Notice of Removal on September 18, 2002, as well.
II. DISCUSSION
In enacting SLUSA, Congress sought to prevent litigants from strategically pursuing meritless class actions in state court in an effort to evade the protections of federal law. See H.R. Conf. Rep. 105-803 at 13. SLUSA, therefore, preempts and mandates removal of any (1) covered class action, (2) based on state law, (3) alleging a misrepresentation or omission of a material fact or act of deception; (4) in connection with the purchase or sale of a covered security. See 15 U.S.C. § 78bb(f)(1); Zoren v. Genesis Energy, L.P., 195 F. Supp.2d 598, 603 (D. Del. 2002).
Plaintiffs advance three arguments in support of their motion to remand. First, Plaintiffs argue that SLUSA is inapplicable here because their class action does not meet the test for a "covered class action." Second, Plaintiffs contend that they did not bring the first cause of action "in connection with the purchase or sale of a covered security." Plaintiffs' final argument relies on an exception under SLUSA known as the Delaware carve-out. Because Plaintiffs' first two arguments have persuaded the Court, the Court will not address whether the Delaware carve-out applies here.
1. Plaintiffs' Class Action Is Not a "Covered Class Action" Under SLUSA
SLUSA defines a "covered class action" as one in which either (1)damages are sought on behalf of more than 50 persons or prospective class members or (2) one or more named parties seek to recover damages on a representative basis. See 15 U.S.C. § 77p(f)(2)(A)(i) (emphasis added). Plaintiffs maintain that because they are only seeking equitable relief, and not damages, under the first cause of action, the action is not a "covered class action." See Complaint ¶ 114 (requesting that the Court exercise its equitable powers with respect to the first cause of action because there is no adequate remedy at law). Defendants point the Court to Plaintiffs' prayer for relief in which Plaintiffs clearly request damages. See Complaint ¶ B. Defendants insist the action is covered under SLUSA, arguing that Plaintiffs have requested damages and, even if they had not, courts have allowed removal even where a class did not include damages in its prayer for relief. The Court finds that each of the cases cited by Defendants is distinguishable from the instant case.
The cases Defendants rely upon are inapposite because they involve class actions exclusively, and Plaintiffs' action primarily concerns shareholder derivative claims. See Zoren, 195 F. Supp.2d at 600 (dismissing class action alleging breach of fiduciary and contractual duties); Bertram v. Terayon Communications Sys., 2001 WL 514358 at *1 (C.D. Cal. 2001) (involving action brought "on behalf of and for the benefit of members of the general public"); Gibson v. PS Group Holdings, Inc., 2000 WL 777818 at *1 (S.D. Cal. 2000) (remanding class action brought on behalf of plaintiff and a class of shareholders). Defendants argue that because Plaintiffs have made an unambiguous request for damages, Plaintiffs' action is a "covered class action." However, the Court concludes that Plaintiffs' prayer for damages clearly relates to the derivative claim and not the class claim, rendering the action outside of the purview of SLUSA.
To qualify as a "covered class action" under SLUSA, plaintiffs must seek damages on behalf of a class, and not on behalf of the company as part of a shareholder derivative action. Compare 15 U.S.C. § 77p(f)(2)(A) with 15 U.S.C. § 77p(f)(2)(B). CitingZoren, Defendants suggest that the Court should look to the complaint as a whole, and not attempt to pair the relief with the claim, in determining whether SLUSA mandates removal. However, in crafting SLUSA's language, Congress defined "covered class action" to capture mass actions and specifically excluded shareholder derivative actions. See S. Rep. 105-182 at 9. As such, Plaintiffs' request for damages in connection with the shareholder derivative actions does not render the action removable under SLUSA.
Defendants argue that, even if Plaintiffs had not requested damages at all, the action would still be removable under the reasoning in Gibson and Bertram. The Court disagrees. In Gibson, the procedural history suggested that the "plaintiff had selectively omitted the damages prayer form his Amended Complaint to defeat removal." 2000 WL 777818 at *3, InBertram, the court doubted the plaintiffs only sought equitable relief when the plaintiffs' prayer for relief was indistinguishable from the money damages remedy usually sought in securities cases. 2001 WL 514358 at *3. Both courts expressed concerns that the plaintiffs were deceptively evading the protections that SLUSA provides. Id. at *4; 2001 WL 777818 at *3.
However, the Gibson and Bertram courts' reasoning does not apply where there is no evidence that the plaintiffs are fraudulently pleading to circumvent SLUSA. See In re Waste Management Inc., 194 F. Supp.2d 590, 596 (S.D. Tex. 2002) (remanding shareholder class action to state court where there was no evidence that shareholders attempted to fraudulently plead around SLUSA to avoid removal, and non-removal clause prohibited removal of federal securities claims brought in state court); Wald v. C.M. Life Ins. Co., 2001 WL 256179 at *6 (N.D. Tex. 2001) (rejecting SLUSA preemption where plaintiff sought only declaratory and injunctive relief, and there was no indication that the plaintiff attempted to manipulate the system). Here, Plaintiffs' current prayer for damages is identical to the prayer in their original complaints, which asserted only derivative actions. While Plaintiffs did amend their Consolidated Complaint to include a class action claim, the record does not suggest that the amended pleadings are the result of deception. Instead, Plaintiffs subsequently added the class action claim because the alleged injury which it details occurred after the original complaints were filed. The original prayer for damages for the derivative claims was simply "carried over" in the amended Consolidated Complaint. While Plaintiffs undoubtedly fashioned their pleadings to preserve a state forum, there is no indication that the pleadings are deceptive or fraudulent. Therefore, under the circumstances of this case, the Court will not grant removal in an effort to prevent the thwarting of SLUSA.
Plaintiffs assert that Defendants failed to have the annual shareholders meeting before June 3, 2002, resulting in Plaintiffs' voting disenfranchisement. Pls.' Reply at 2:4-6.
2. Plaintiffs Did Not Bring the Class Action "In Connection With" the Purchase or Sale of Securities
In arguing that Plaintiffs brought the class action claim "in connection with" the purchase or sale of a covered security, Defendants urge a broad reading of the statutory language that would not require that Plaintiffs be the actual purchasers or sellers of the security. Under a narrower interpretation of the "in connection with" requirement, Plaintiffs argue that because they are alleging Defendants diluted their shareholder voting rights when stock was issued to acquire DoubleClick, the first cause of action was not brought "in connection with" the purchase or sale of securities. SLUSA does not define the phrase "in connection with" the purchase or sale of a covered security. However, "in the absence of a plaintiff or class of plaintiffs who purchased or sold a covered security, removal is not authorized by [SLUSA]." Shaev v. Claflin, et al., 2001 WL 548567 at *6 (N.D. Cal. 2001).
In Shaev, as in the instant case, the plaintiffs' claims were unrelated to the plaintiffs' purchase or sale of a security. Instead, a class of shareholders alleged that the defendants' adjustment of the company's stock options diluted the existing shareholders' interests. Relying on the interpretation of similar language in Section 10(b) of the Securities Exchange Act of 1934, the Shaev court held that the "in connection with" requirement was not satisfied. Here, Plaintiffs are similarly arguing that their voting rights, as L90 shareholders, were diluted when Defendants issued stock. The Court finds Shaev persuasive and follows it.
Defendants have not established that Plaintiffs brought the class action claim "in connection with" the purchase or sale of securities to satisfy the requirements for removal. The removing parties bear the burden of establishing the facts necessary to show that federal jurisdiction exists. See, e.g., Prize Frize, Inc. v. Matrix Inc., 167 F.3d 1261, 1265 (9th Cir. 1999). Removal jurisdiction should be strictly construed to limit, not expand, federal jurisdiction. Id. Any doubts concerning removal must be resolved against removal and in favor of remanding the case back to state court. See, e.g., Duncan v. Stuetzle, 76 F.3d 1480, 1485 (9th Cir. 1996) (citation omitted) Defendants have not shown that removal would be proper here.
III. CONCLUSION
For the foregoing reasons, the Court hereby GRANTS Plaintiff's Motion to Remand and REMANDS the action to state court. The Court, in its discretion, DENIES Plaintiffs' request for attorney's fees and costs incurred in remanding this action.