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holding that when plaintiff seeks only declaratory and injunctive relief, there is simply no indication that the plaintiff is trying to manipulate the system and the underlying action is not a covered class action under SLUSA
Summary of this case from Feitelberg v. Merrill Lynch & Co., Inc.Opinion
Civil No. 3:00-CV-2520-H.
March 8, 2001.
MEMORANDUM OPINION AND ORDER
Before the Court are 1) Plaintiff's Motion to Remand, filed December 7, 2000; 2) Defendant C.M. Life Insurance Company's Memorandum in Opposition to Plaintiff's Motion to Remand, filed January 8, 2001; and 3) Reply Brief in Support of Plaintiff's Motion to Remand, filed January 22, 2001.
After considering all of the motions and briefs, all attached exhibits and the applicable law, and for the reasons expressed below, the Court GRANTS Plaintiff's motion to remand.
I. Background
In his Original Petition, filed October 10, 2000 in the 134th Judicial District Court of Dallas County, Texas, named plaintiff, Michael H. Wald, asserts a claim under Tex. Civ. Prac. Rem. Code § 37.001 et seq. for declaratory judgment, injunctive relief and attorney fees on behalf of himself and a putative class consisting of all consumers who exchanged Defendant's Flexible Purchase Payment Multi-Fund Variable Annuity ("Flex Extra Annuity") for the Panorama Premier Variable Annuity ("Panorama Annuity"). The complaint has not been amended.
Plaintiff alleges that he signed two documents to effectuate the exchange-an Exchange Disclosure Form and the Panorama Annuity contract. The documents, according to Plaintiff, use conflicting language to address the manner of assessing surrender charges. Usually, in order to exchange or cash an annuity during the early years of a contract, Defendant charges surrender charges. The Exchange Program that Defendant established in order to encourage consumers to acquire the new Panorama Annuity, however, stated in its Exchange Disclosure Form that for any participants in the exchange, applicable surrender fees associated with the Panorama Annuity would be calculated from the date of the issue of the purchaser's older Flex Extra Annuity. Plaintiff contends, however, that the language of the Exchange Disclosure Form conflicts with the contractual language governing the Panorama Annuity which states that surrender fees are calculated from the date that the Panorama Annuity was purchased.
As Defendant indicates in its brief, Plaintiff does not contend that Defendant failed to comply with terms by imposing a surrender charge. Indeed, Plaintiff contacted Defendant by telephone and was assured that he would incur no charge to acquire the Panorama Annuity as the surrender charges were calculated from the date he had purchased the Flex Extra Annuity. (Def. App. at 1-2; Aff. Christopher Reno.) The affidavit thus raises questions of adequacy/typicality of plaintiff as a class representative and whether a "case or controversy" exists.
The surrender charges for the Panorama Annuity are calculated based on the length of time from Defendant's receipt of a consumer's initial purchase payments. If withdrawals are made within one year, the surrender fees are 7%. This amount decreases annually so that in the seventh year consumers' fees are 1%, and are eliminated entirely for withdrawals made eight years from receipt and beyond.
Specifically, Plaintiff seeks class certification; a declaratory judgment establishing from which date surrender charges are calculated for those Flex Extra Annuity holders who exchanged their contract for the newer Panorama Annuity; injunctive relief requiring Defendant to record contract values from the date of the original purchase of the Flex Extra Annuity for purposes of calculating any surrender charges; and costs and attorney fees.
II. Analysis
Defendant removed this case asserting federal jurisdiction under principles of both diversity and federal question jurisdiction.
It is well settled in this circuit that the removing party, C. M. Life Insurance Co., bears the burden of establishing the facts necessary to show that federal jurisdiction exists. St. Paul Reinsurance Co., Ltd. v. Greenberg, 134 F.3d 1250, 1253 (5th Cir. 1998); Frank v. Bear Stearns Co., 128 F.3d 919, 921-22 (5th Cir. 1997); Allen v. RH Oil Gas Co., 63 F.3d 1326, 1335 (5th Cir. 1995). Removal jurisdiction must be strictly construed because it implicates important federalism concerns. Frank v. Bear Stearns Co., 128 F.3d 919, 922 (5th Cir. 1997). Any doubts concerning removal must be resolved against removal and in favor of remanding the case back to state court. Ray v. State Farm Lloyds, 1999 WL 151667 at * 1 (N.D. Tex. March 10, 1999).
A. Diversity Jurisdiction
Plaintiff concedes that the parties are diverse. The only issue in question is whether or not the $75,000 amount in controversy requirement has been met. 28 U.S.C. § 1332.
In a case such as this, in which the plaintiff fails to specify an amount in controversy, the defendant must establish by a preponderance of the evidence that the amount in controversy exceeds $75,000. De Aguilar v. Boeing Co., 11 F.3d 55, 58 (5th Cir. 1993). A court may determine that removal is proper if it is facially apparent from the state court petition that the claims are likely above $75,000. Where the plaintiff offers prayer for a specific sum that exceeds the threshold amount, that amount controls if it has been made in good faith. St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 289 (1938). However, in cases such as the one currently before the Court, where jurisdiction is not apparent from the face of the petition, the Court may rely on facts asserted in the removal notice or in an affidavit submitted by the removing defendant to support a finding of the requisite amount. See Allen, 63 F.3d at 1335.
Defendant fails to demonstrate that the amount in controversy exceeds $75,000. While Plaintiff fails to submit an affidavit swearing that the amount in controversy does not exceed $75,000, the prayer for relief in the state court petition requests only declaratory relief and injunctive relief as well as costs and attorney fees. There is no indication on the face of the petition that this amount would near $75,000 and Defendant fails to submit supporting evidence to convince the Court otherwise.
In Defendant's Notice of Removal, filed November 16, 2000, Defendant makes a blanket statement that the claims of at least one class member and the value of injunctive and declaratory relief of at least one class member equals $75,000. However, Defendant does not articulate why this is true and fails to submit any affidavit to support its contentions of the value of the declaratory judgment or injunctive relief. To the contrary, Defendant asserts that Plaintiff suffered no cognizable monetary damage. (Def.'s Brief at 1.)
In a declaratory judgment action, the amount in controversy is determined by the value of the right that is being protected, or of the injury being prevented. See, e.g., New York Life Ins. Co. v. Swift, 38 F.2d 175, 176 (5th Cir. 1930). Defendant claims that the injury being prevented would be the entire value of the Annuity, that is $273,392.79. The injury being prevented, however, is the potential inappropriate charge of surrender fees. Therefore, the only amount in question that should be used to calculate the diversity jurisdiction threshold amount would be surrender fees, if any. If the fees were calculated from the time articulated in the Panorama Annuity contract, the amount that Plaintiff would have been charged would be 7% of Plaintiff's entire $273,392.79 for a total of $19,137.50. If the surrender fees were charged pursuant to the Exchange Disclosure Form, then there would not be any surrender fees. Either way, the amount in question would be far less than the $75,000 required under 28 U.S.C. § 1332.
Defendant contends that Plaintiff has not submitted an affidavit swearing that the amount in controversy is less than $75,000, and that the failure to swear such an affidavit is fatal to Plaintiff's Motion to Remand. Defendant cites Ray v. State Farm Lloyds, 1999 WL 151667 at *3 (N.D. Tex. March 10, 1999) as evidence of this proposition. The Court finds that this is a misreading of Ray. The Ray decision concerns a controversy in which monetary damages were claimed by the plaintiff. There was an affidavit filed in which the plaintiffs, through counsel, actively refused to stipulate to the amount of damages. This fact, however, was not in and of itself dispositive for the Ray court, but was, instead, used in concert with other facts to indicate that the amount in controversy was likely greater than $75,000. The court determined that the underlying claims and the evidence submitted by the defendant suggested that it was more likely than not that the amount in controversy exceeded the $75,000 threshold. Id. at *3.
The facts of Ray are easily distinguishable from the case currently before this Court. Plaintiff, in the case before the Court, did not swear that he refused to stipulate the amount in controversy, he simply did not file any affidavit leaving that fact for Defendant to establish. Furthermore, there are no additional facts, as there were in Ray, to support that the damages would amount to $75,000.
Finally, Defendant contends that attorney fees should be included in calculating the amount in controversy. This is a true statement of the law. See, e.g., Holt v. State Farm Lloyds, 1999 WL 20956 at *2 (N.D. Tex. Jan. 7, 1999). Plaintiff counters that for purposes of calculating the amount in controversy threshold in a class action, attorney fees are allocated pro rata across all putative class members. See HD Tire Automotive Hardware, Inc. v. Pitney Bowes, Inc., 227 F.3d 326, 330-31 (5th Cir. 2000). Plaintiff reads HD Tire overly broadly. HD Tire holds that if there is a statutory cause of action, one looks to the underlying statute to determine the allocation of those fees. HD Tire involves the interpretation of the Connecticut Unfair Trade Practices Act. Plaintiff based his Original Complaint on the Texas Declaratory Judgment Act which would, therefore, control the determination of how to allocate attorney fees. Tex. Civ. Prac. Rem Code § 37.001 et seq; HD Tire, 227 F.3d at 330-31. It is unnecessary for this Court to determine the proper way of allocating attorney fees because regardless of whether attorney fees would be allocated exclusively to the Plaintiff or allocated pro rata, Defendant has presented no evidence to demonstrate that even with attorney fees the amount in controversy would reach $75,000. It is insufficient for Defendant to make a blanket statement, as it does, that it is probable that Plaintiff's attorney fees will satisfy the jurisdictional amount.
In HD Tire the district court denied certification of the class and then granted summary judgment for defendant. The only issue on appeal is the motion for summary judgment. Therefore, the analysis therein discusses the allocation of fees across members of a putative class. HD Tire, 227 F.3d at 328-29.
The Court declines to determine the proper choice of law, that is, whether Texas or Connecticut law should control this action.
For all of the reasons stated above, the Court finds that it lacks jurisdiction over this case pursuant to 28 U.S.C. § 1332.
B. Federal Question Jurisdiction
Defendant also asserts that this Court has original federal question jurisdiction. 28 U.S.C. § 1331. Specifically, Defendant contends that the putative class action is covered by the Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. § 78bb ("SLUSA").
Federal question jurisdiction extends to all civil actions arising under the Constitution, laws or treaties of the United States. 28 U.S.C. § 1331. As was discussed above, this Court lacks jurisdiction over this action based on the diversity of the parties and so removal to federal court must be predicated on the existence of a federal question. Although Plaintiff does not allege a federal claim in his complaint, Defendant asserts that SLUSA preempts Plaintiff's state law claim, and that, therefore, the case has been properly removed.
The Court concludes, for the reasons stated below, that this action is not preempted by SLUSA, and that the Court lacks federal question jurisdiction.
Federal district courts have jurisdiction over a cases "arising under the Constitution, laws or treaties of the United States." 28 U.S.C. § 1331. Questions concerning federal question jurisdiction are guided by the "well pleaded complaint" rule which states that if the plaintiff's complaint raises no issue of federal law, federal question jurisdiction is lacking. Hart v. Bayer Corp., 199 F.3d 239, 244 (5th Cir. 2000) (citing Federal Tax Bd. V. Laborers Vacation Trust, 463 U.S. 1, 10 (1983)). "[T]he plaintiff's well pleaded complaint, not the removal petition, must establish that the case arises under federal law." Willy v. Coastal Corp., 855 F.2d 1160, 1165 (5th Cir. 1988). Plaintiff's complaint alleges only a state-law claim. Therefore, in order for the Court to have jurisdiction over this case, Defendant must demonstrate that by enacting SLUSA, Congress intended to completely preempt state law in this particular area. Johnson v. Baylor University, 214 F.3d 630, 632 (5th Cir. 2000).
The legislative history of SLUSA demonstrates that SLUSA was passed to augment the Private Securities Litigation Reform Act ("PSLRA") which had been passed in 1995. PSLRA was passed to prevent abuses of securities suits by enacting stricter standards governing private securities suits in federal courts. Three years later, in 1998, Congress determined that class action attorneys were filing lawsuits in state court and under state law in order to circumvent the requirements of PSLRA. As a response, Congress enacted SLUSA with the intent of making the federal court the primary venue for the litigation of class action security claims. H.R. Rep. No. 105-803 (1998). See also Shaw v. Charles Schwab Co., Inc., 2001 WL 62903 at *2 (C.D. Cal. Jan. 23, 2001); In re. Lutheran Brotherhood Variable Insurance Products Co. Sales Practices Litigation, 105 F. Supp.2d 1037, 1039 (Minn. 2000); Prager v. Knight/Trimark Group, Inc., 124 F. Supp.2d 229, 232-33 (NJ 2000); Gibson v. PS Group Holdings, Inc., 2000 WL 777818 at *2 (S.D. Cal. June 14, 2000); Derdiger v. Tallman, 75 F. Supp.2d 322, 324 (Del. 1999).
The general preemption provision of SLUSA precludes class actions under state law where plaintiffs allege facts actionable under the federal securities laws. In sum, SLUSA authorizes the removal and dismissal of any 1) "covered class action"; 2) based on state law; 3) that either alleges a misrepresentation or omission of a material factor that the defendant used, or employed a manipulative or deceptive device or contrivance with regard to the purchase or sale; 4) of a "covered security." 15 U.S.C. §; 78 bb(f). See also Shaw, 2001 WL 62903 at *2, Gibson, 2000 WL 777818 at *2-3.
The basic requirements under SLUSA are codified as:
(1) CLASS ACTION LIMITATIONS
No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging —
(A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or
(B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.
(2) REMOVAL OF COVERED CLASS ACTION
Any covered class action brought in any State court involving a covered security, as set forth in paragraph (1), shall be removable to the Federal district court for the district in which the action is pending, and shall be subject to paragraph (1).
15 U.S.C. § 78bb(f)(1) (2).
"The term `covered class action' means any single lawsuit in which one or more named parties seek to recover damages on a representative basis. . . ." 15 U.S.C. § 78bb(f)(5)(B)(II).
Plaintiff asserts that this case should be remanded for three reasons. First, he asserts that as this action does not seek any monetary damages, it fails to satisfy SLUSA's definition of a "covered class action." Second, he asserts that this action fails to satisfy SLUSA's definition of "covered security" because SLUSA is limited to actions involving fraud, which this action does not contend. Finally, and in the alternative, Plaintiff asserts that remand is necessary under 15 U.S.C. § 78bb(f)(3)(A), because Plaintiff was already a holder of Defendant's securities and the substantive common law of Defendant's domiciliary state may properly be applied in this case. Neither party contests that the underlying contract claim will be governed by state law.
If a federal court determines that a class action is "preserved" under this section, SLUSA requires remand to state court. 15 U.S.C. § 78bb(f)(3)(D).
The Court will now consider each of Plaintiff's arguments in turn.
1. "Covered Class Action"
Plaintiff urges remand because the language of SLUSA requires there to be monetary damages and Plaintiff seeks only declaratory and injunctive relief. The Court finds that based on the facial language of the statute and on the facts of the underlying action this is not a "covered class action."
The Court has found only one court opinion addressing whether an action qualifies as a covered class action if the plaintiff does not seek damages. See Gibson v. Group Holdings, Inc., 2000 WL 777818 (S.D. Cal. June 14, 2000). In Gibson, the plaintiff had filed an Original Complaint seeking monetary damages. The Original Complaint would not have been removable under SLUSA. Subsequently, the plaintiff filed an Amended Complaint that added a claim which made the case removable under SLUSA. In the Amended Complaint, the plaintiff removed the prayer for damages. Id. at *3.
The Gibson court, finding that the plaintiff had "selectively omitted the damages," reasoned that allowing a plaintiff to amend and remove a prayer for damages would allow plaintiffs to circumvent the intention of SLUSA. The Gibson court soundly rejected the idea that a plaintiff should be allowed to file a case seeking only injunctive and declaratory relief, avoid removal, pursue discovery, and then amend its complaint at a later date to add monetary relief. Id. at *3. The Gibson court sought to limit plaintiff's ability to manipulate the courts and the application of SLUSA.
In the action currently before the Court, however, there is simply no indication that Plaintiff is attempting to manipulate the system. Plaintiff has filed only an Original Complaint in which he seeks declaratory and injunctive relief to rectify potentially conflicting language in the Exchange Disclosure Form and the Panorama Annuity contract and to avoid the unnecessary charge of surrender fees in the future. Defendant states that Plaintiff was never charged surrender fees for exchange of his annuities. (Def.'s Brief at 1-2.)
The Court therefore finds that the underlying action is not a "covered class action" under SLUSA, and accordingly SLUSA preemption does not apply.
2. "Covered Security"
Plaintiff also argues that SLUSA does not preempt because the facial language of SLUSA makes it clear that the product at issue is not a covered security. However, Plaintiff goes on to argue that the definition of a covered security requires that there be a showing of fraud. The Court finds that this element of Plaintiff's argument is based on a misreading of the statute.
A "covered security" is:
. . . a security that satisfies the standards for a covered security specified in paragraph (1) or (2) of section 77r(b) of this title, at the time during which it is alleged that the misrepresentation, omission, or manipulative or deceptive conduct occured, except that such term shall not include any debt security that is exempt from registration under the Securities Act of 1933 pursuant to rules issued by the Commission under section 77d(2) of this title.15 U.S.C. § 78bb(f)(5)(E) (emphasis added). A covered security must be covered during the period in which the alleged misrepresentative behavior took place; however, actual "misrepresentation, omission or manipulative or deceptive conduct" is not a requirement for finding that security is a "covered security." Therefore, the important inquiry is whether the security falls into the language of 15 U.S.C. § 77r(b)(1) (2).
As Defendant argues in its brief, the security in question falls squarely under the facial language of a covered security. 15 U.S.C. § 77r(b)(2) provides that a covered security is a security "issued by an investment company that is registered, or that has filed a registration statement, under the Investment Company Act of 1940 . . . at the time during which it is alleged that the misrepresentation, omission or manipulative or deceptive conduct occurred." The Panorama Annuity is registered under the Investment Act of 1940. (Def.'s App. Banowsky Aff. at 14). Plaintiff does not contest this registration. Therefore, under the facial language of the statute, the Panorama Annuity is a covered security.
Plaintiff's allegation that this case should be remanded because only fraud actions fit within the definition of "covered class actions" is incorrect. SLUSA does require a showing of misrepresentation, omission of material fact, manipulation or deception. 15 U.S.C. § 78bb(f)(1). Indeed, as stated above, SLUSA uses at least four different terms to outline that which is covered, indicating that preemption is intended to cover allegations of a broad array of misfeasance. Plaintiff alleges that Defendant indicated conflicting terms regarding surrender charges, namely that the Panorama Annuity contract indicated surrender charges that were, in fact, never charged. The Court finds that this allegation sufficiently refers to an alleged misrepresentation by Defendant, and is therefore covered under the language of SLUSA.
3. Preserved Exception
Even if SLUSA preemption did apply, Plaintiff argues that this case should be remanded based on the narrow provision of SLUSA which allows for the preservation of certain actions in state court. 15 U.S.C. § 77bb(f)(3)(A). The Court finds that Plaintiff's action is not preserved in state court under the terms of SLUSA.
The section cited by Plaintiff requires the case to involve the "purchase or sale of securities by the issuer or an affiliate of the issuer exclusively from or to holders of equity securities of the issuer." 15 U.S.C. § 78bb(f)(3)(A) (emphasis added). Plaintiff is the holder of annuities issued by Defendant, not of any shares or equivalent securities. Equity securities are defined fairly generically as "stock or similar security" or securities that can be converted into this form. 15 U.S.C § 78c(a)(1). Under this definition, an annuity is not an equity security. Therefore, Plaintiff's action is not preserved under SLUSA.
Furthermore, actions which are preserved must involve claims centered around the voting, tender offer or appraisal rights of shareholders. 15 U.S.C. § 78bb(f)(3)(A)(ii). This provision is also known as the "Delaware carve-out." See Gibson, 2000 WL 777818 at *4. Plaintiff simply alleges no breach of fiduciary duty on the part of Defendant. Because the underlying action does not involve equity securities and because there is no allegation of the requisite breach of fiduciary duty, the preservation provision contained in SLUSA does not apply.
III. Conclusion
This Court lacks both diversity jurisdiction and federal question jurisdiction over this case. Accordingly, it is ORDERED that this case be REMANDED to the 134th Judicial District Court, Dallas County, Texas for lack of jurisdiction.
The Court declines to award attorney fees and costs. 28 U.S.C. § 1447(c).
SO ORDERED.