Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_05-cv-02328/USCOURTS-cand-3_05-cv-02328-2/pdf.json

Nature of Suit Code: 160
Nature of Suit: Stockholder's Suits
Cause of Action: 28:1332 Diversity-Stockholders Suits

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1

 As noted below, the Labow action was consolidated with Case No. C 05-0969 on

June 17, 2005.

United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

In re: TEXTAINER PARTNERSHIP

SECURITIES LITIGATION

___________________________________

THIS DOCUMENT RELATES TO:

Labow action only (formerly C-05-2328)

 /

No. C 05-0969 MMC

ORDER GRANTING MOTION TO

REMAND LABOW ACTION; VACATING

JUNE 17, 2005 CONSOLIDATION

ORDER; VACATING HEARING

(Docket No. 96)

Before the Court is plaintiff Leonard Labow’s motion, filed June 21, 2005, to remand

Labow v. Textainer Financial Services Corp. (“Labow action”), formerly Case No. C-05-2328,1

to the California Superior Court for the City and County of San Francisco. Defendants have

filed opposition to the motion, to which plaintiff has filed a reply. Having considered the

papers submitted in support of and in opposition to the motion, the Court finds the matter

appropriate for decision without oral argument, see Civil L.R. 7-1(b), and hereby VACATES

the July 29, 2005 hearing. For the reasons set forth below, the motion is GRANTED.

BACKGROUND

The Labow action is a purported class action brought on behalf of holders of limited

partnership units issued by TCC Equipment Income Fund, Textainer Equipment Income Fund

II, Textainer Equipment Income Fund III, Textainer Equipment Income Fund IV, Textainer

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Equipment Income Fund V, and Textainer Equipment Income Fund VI

(collectively, “Textainer partnerships”). (See First Amended Complaint (“FAC”) ¶ 1.) Plaintiff

alleges he is a holder of limited partnership units issued by Textainer Equipment Income Fund

III. (See id. ¶ 8.) The defendants to the action are Textainer Financial Services Corporation,

Textainer Equipment Management Limited, Textainer Capital Corporation, Textainer Group

Holdings Limited, and John A. Maccarone, all of whom are alleged to be general partners of

the Textainer partnerships. (See id. ¶¶ 9-14.) In addition, the Textainer partnerships

themselves are named as nominal defendants. (See id. ¶ 16.) 

Plaintiff challenges a proposed sale of the Textainer partnerships’ assets as

negotiated by the general partners. (See id. ¶ 4.) Plaintiff alleges the sale is “fundamentally

unfair” to the limited partners “because it is the product of a flawed bidding process that

effectively eliminates the entities that comprise over 85% of the market for leasing steel cargo

containers by conditioning any bid on the Partnerships’ assets on a management contract with

defendant Textainer Equipment Management Limited, one of the general partners of the

Partnerships.” (See id.) Plaintiff further alleges the sale is “fundamentally unfair . . . because

the assets are undervalued by a significant amount as the terms on which they are to be sold

do not reflect current market conditions.” (See id.) Additionally, plaintiff alleges “the

defendants, in order to effectuate the Sale, have issued a series of materially misleading

proxy statements which they are using to solicit the proxies of limited partners, as a majority of

them must approve the Sale.” (See id. ¶ 5.) Plaintiff asserts a single cause of action against

defendants, under California law, for breach of fiduciary duty. (See id. ¶¶ 97-202.)

The Labow action was removed to federal court on June 8, 2005. On June 17, 2005,

the Court related the Labow action to Lewis v. Textainer Equipment Income Fund II, C-05-

0959 (“Lewis action”), and Gordon v. Textainer Financial Services, C-05-1146 (“Gordon

action”), and consolidated the three actions. The Lewis and Gordon actions assert federal

proxy solicitation claims as well as state law claims for breach of fiduciary duty; all three

actions are based on the same underlying transaction.

Plaintiff filed the instant motion to remand on June 21, 2005.

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2For purposes of CAFA, “an unincorporated association shall be deemed to be a

citizen of the State where it has its principal place of business and the State under whose laws

it is organized.” See 28 U.S.C. § 1332(d)(10).

3

LEGAL STANDARD

If at any time before final judgment it appears that the district court lacks subject matter

jurisdiction over a case that has been removed to federal court, the case must be remanded. 

See 28 U.S.C. § 1447(c). 

Here, as discussed infra, defendants removed the Labow action primarily in reliance

on the Class Action Fairness Act of 2005 (“CAFA”). As relevant to the instant action, CAFA

generally grants the district courts original jurisdiction over any class action in which (1) the

aggregate amount in controversy exceeds $5,000,000; (2) any member of a class of plaintiffs

is a citizen of a state different from any defendant;2 (3) the primary defendants are not states,

state officials, or other government entities against whom the district court may be foreclosed

from ordering relief; and (4) the number of members of the plaintiff class is 100 or more. See

28 U.S.C. §§ 1332(d)(2), (d)(5). 

The district court lacks original jurisdiction over such action, however, if the action:

solely involves a claim –

(A) concerning a covered security as defined under [section] 16(f)(3) of the

Securities Act of 1933 (15 U.S.C. § 78p(f)(3)) and section 28(f)(5)(E) of the

Securities Exchange Act of 1934 (15 U.S.C. § 78bb(f)(5)(E));

(B) that relates to the internal affairs or governance of a corporation or other

form of business enterprise and that arises under or by virtue of the laws of the

State in which such corporation or business enterprise is incorporated or

organized; or

(C) that relates to the rights, duties (including fiduciary duties), and obligations

relating to or created by or pursuant to any security (as defined under section

2(a)(1) of the Securities Act of 1933 (15 U.S.C. § 77b(a)(1)) and the regulations

issued thereunder).

See 28 U.S.C. § 1332(d)(9); see also 28 U.S.C. § 1453(d) (setting forth same exceptions.)

In addition, the district court “shall decline to exercise jurisdiction” under § 1332(d)(2)

over (1) a class action in which (a) more than two-thirds of the class members are citizens of

the state in which the action was originally filed; (b) plaintiffs seek significant relief against at

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3The six factors are: “(A) whether the claims asserted involve matters of national or

interstate interest; (B) whether the claims asserted will be governed by laws of the State in

which the action was originally filed or by the laws of other States; (C) whether the class action

has been pleaded in a manner that seeks to avoid federal jurisdiction; (D) whether the action

was brought in a forum with a distinct nexus with the class members, the alleged harm, or the

defendants; (E) whether the number of citizens of the State in which the action was originally

filed in all proposed plaintiff classes in the aggregate is substantially larger than the number of

citizens from any other State, and the citizenship of the other members of the proposed class

is dispersed among a substantial number of States; and (F) whether, during the 3-year period

preceding the filing of that class action, 1 or more other class actions asserting the same or

similar claims on behalf of the same or other persons have been filed.” See 28 U.S.C. §

1332(d)(3). None of these factors is relevant herein.

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least one defendant whose conduct forms a significant basis for the claims asserted by the

class and who is a citizen of the state in which the action was originally filed; (c) the principal

injuries were incurred in the state in which the action was originally filed; and (d) during the

three-year period preceding the filing of the class action, no other class action has been filed

asserting the same or similar allegations against any of the defendants on behalf of the same

or other persons. See 28 U.S.C. § 1332(d)(4)(A). The district also must decline to assert

jurisdiction under § 1332(d)(2) over a class action in which two-thirds or more of the class

members, and the primary defendants, are citizens of the state in which the action was

originally filed. See 28 U.S.C. § 1332(d)(4)(B).

Further, the district court may decline to exercise jurisdiction under § 1332(d)(2) over a

class action in which greater than one-third but less than two-thirds of the members of the

plaintiff class and the primary defendants are citizens of the state in which the action was

originally filed, based on consideration of six factors.3 See 28 U.S.C. § 1332(d)(3).

Finally, any class action over which the district court has jurisdiction under § 1332(d) is

removable by any defendant without the consent of the remaining defendants and without

regard to whether any defendant is a citizen of the state in which the action is brought. See 28

U.S.C. § 1453(b). 

While courts ordinarily are required to “strictly construe [a] removal statute against

removal jurisdiction,” rejecting jurisdiction “if there is any doubt as to the right of removal in the

first instance,” see Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992), the legislative

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history of CAFA instructs that CAFA’s jurisdictional provisions “should be read broadly, with a

strong preference that interstate class actions should be heard in a Federal court if removed

by any defendant.” See 151 Cong. Rec. H723-01, H-727 (2005) (statement of Congressman

Sensenbrenner). “[I]f a Federal court is uncertain . . . the court should err in favor of exercising

jurisdiction over the case.” Id. 

Similarly, while the defendant ordinarily bears the burden of proving that removal was

proper, see Gaus, 980 F.2d at 566, CAFA’s legislative history indicates that the plaintiff has

the burden of proving that an action removed under CAFA should be remanded. See S. Rep.

109-14 at 45 (2005) (“If a purported class action is removed pursuant to these jurisdictional

provisions . . . it is the intent of the Committee that the named plaintiff(s) should bear the

burden of demonstrating that a case should be remanded to state court”). 

DISCUSSION

Plaintiff argues, relying on 28 U.S.C. §§ 1332(d)(9) and 1453(d), that the Labow action

should be remanded because CAFA specifically excludes state law fiduciary duty claims from

its application. In response, defendants contend the Labow action was properly removed

under CAFA. Defendants also contend removal was proper on the basis of federal question

jurisdiction, pursuant to 28 U.S.C. § 1331 and 15 U.S.C. § 78aa, and supplemental

jurisdiction, pursuant to 28 U.S.C. § 1367. 

A. Class Action Fairness Act

It is undisputed that the Labow action satisfies CAFA’s threshold jurisdictional

prerequisites, as set forth in 28 U.S.C. §§ 1332(d)(2) and 1332(d)(5). Plaintiff “does not

dispute the amount in controversy, nor the fact that class members reside throughout the

United States.” (See Motion at 5-6.) As defendants observe, the Lewis and Gordon actions,

which are based on the same facts as the Labow action, seek more than $20 million in

damages. (See Notice of Removal ¶ 6 and Ex. D (Forsman Decl.) ¶¶ 5-6). Additionally,

defendants have submitted undisputed evidence that plaintiff is a citizen of New Jersey, that

no defendant is a citizen of that state, and that fewer than one-third of the class members are

citizens of California. (See Notice of Removal ¶¶ 4-5 and Ex. D (Forsman Decl.) ¶¶ 2-4.) 

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 According to CAFA’s legislative history, “the parameters” of 28 U.S.C. § 1332(d)(9)

and 28 U.S.C. § 1453(d) “are intended to be coterminous.” See S. Rep. 109-14 at 50.

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Thus, the minimal diversity requirements of § 1332(d)(2)(A) have been met, and none of the

various thresholds for declining jurisdiction have been satisfied. See 28 U.S.C. §§

1332(d)(2)(A), (d)(3), and (d)(4). Further, as none of the defendants is a state entity, and

defendants have submitted undisputed evidence that there are more than 100 members of the

plaintiff class, (see Notice of Removal Ex. D (Forsman Decl.) ¶ 4), the requirements of

28 U.S.C. § 1332(d)(5) have been met. 

As noted, plaintiff argues that the Labow action nonetheless must be remanded

because it falls within CAFA’s exceptions as set forth, in essentially identical language, at 28

U.S.C. §§ 1332(d)(9)(B) and (C) and 28 U.S.C. §§ 1453(d)(2) and (d)(3).4

To date, no reported decision has discussed the applicability of the exceptions to

CAFA. CAFA’s legislative history indicates that the changes to the jurisdiction of the federal

courts set forth in CAFA were intended to “correct[ ] a flaw in the current diversity jurisdiction

statute (28 U.S.C. § 1332) that prevent[ed] most interstate class actions from being

adjudicated in federal courts.” See S. Rep. 109-14 at 5. Because “interstate class actions

typically involve more people, more money and more interstate commerce ramifications than

any other type of lawsuit,” CAFA was intended to ensure that such actions could “be heard by

federal courts if any of the defendants so desire[d].” See id. In addition, CAFA “makes it

harder for plaintiffs’ counsel to ‘game the system’ by trying to defeat diversity jurisdiction, [and]

creates efficiencies in the judicial system by allowing overlapping and ‘copycat’ cases to be

consolidated in a single federal court[.]” See id. CAFA addresses these concerns by

“allowing a larger number of class actions into federal courts, while continuing to preserve

primary state court jurisdiction over primarily local matters.” See id. at 6.

Nevertheless, the exceptions to CAFA exempt “from new subsection 1332(d)(2)’s

grant of original jurisdiction those class actions that solely involve claims that relate to matters

of corporate governance arising out of state law.” See id. at 45. The purpose of the

exceptions “is to avoid disturbing in any way the federal vs. state court jurisdictional lines

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 “SLUSA generally provides for the removal and dismissal of class actions brought

pursuant to state law alleging misrepresentations in connection with the purchase or sale of a

covered security.” See Patenaude v. Equitable Life Assurance Society of the United States,

290 F.3d 1020, 1023-24 (9th Cir. 2002); see also 15 U.S.C. § 77p(b); 15 U.S.C. § 78bb(f). 

An exception to SLUSA permits such a class action to be maintained if it is “based upon the

statutory or common law of the State in which the issuer . . . is organized.” See 15 U.S.C. §

77p(d)(1); 15 U.S.C. § 78bb(f)(3). “The statute was originally enacted in 1998 because

heightened pleading requirements in federal securities cases caused a pilgrimage of

securities claims to state courts, thus circumventing congressional reforms designed to

restrict federal securities claims.” See Falkowski v. Imation Corp., 309 F.3d 1123, 1128 (9th

Cir. 2002). Defendants concede that the instant action is not removable pursuant to SLUSA. 

(See Opp. at 12.)

7

already drawn in the securities litigation class action context by the enactment of the

Securities Litigation Uniform Standards Act of 1988” (“SLUSA”).5 See id. The exceptions

are intended to be “narrowly construed” to include “only litigation based solely on (a) state

statutory law regulating the organization and governance of business enterprises such as

corporations, partnerships, limited partnerships, limited liability companies, limited liability

partnerships, and business trusts; (b) state common law regarding the duties owed between

and among owners and managers of business enterprises; and (c) the rights arising out of the

terms of the securities issued by business enterprises.” See id. As noted above, plaintiff

bears the burden of demonstrating that the exceptions apply. See id.

1. Internal Affairs

Pursuant to the first of the two exceptions on which plaintiff relies, the Court lacks

jurisdiction over the Labow action if it “solely involves a claim . . . that relates to the internal

affairs or governance of a corporation or other form of business enterprise and arises under

or by virtue of the laws of the State in which such corporation or business enterprise is

incorporated or organized.” See 28 U.S.C. §§ 1332(d)(9)(B), 1453(d)(2). According to

CAFA’s legislative history, “the phrase ‘the internal affairs or governance of a corporation or

other form of business enterprise’ is intended to refer to the internal affairs doctrine defined by

the U.S. Supreme Court as ‘matters peculiar to the relationships among or between the

corporation and its current officers, directors and shareholders.’” See S. Rep. 109-14 at 45

(citing Edgar v. MITE Corp., 457 U.S. 624, 645 (1982)). The phrase “other form of business

enterprise” is “intended to include forms of business entities other than corporations, including,

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but not limited to, limited liability companies, business trusts, partnerships and limited

partnerships.” See id.

“The internal affairs doctrine is a conflict of laws principle which recognizes that only

one State should have the authority to regulate a corporation’s internal affairs – matters

peculiar to the relationships among or between the corporation and its current officials,

directors, and shareholders – because otherwise a corporation could be faced with conflicting

demands.” Edgar, 457 U.S. at 645. In addition to Edgar, CAFA’s legislative history includes

citations to several cases intended to further illustrate the meaning of “internal affairs.” See S.

Rep. 109-14 at 45 n.129. In McDermott, Inc. v. Lewis, 531 A.2d 206 (Del. 1987), for example,

the Delaware Supreme Court defined “internal affairs” as

those matters which are peculiar to the relationships among or between the

corporation and its current officers, directors, and shareholders. It is essential to

distinguish between acts which can be performed by both corporations and

individuals, and those activities which are peculiar to the corporate entity. 

Corporations and individuals alike enter into contracts, commit torts, and deal in

personal or real property . . . The internal affairs doctrine has no applicability in

these situations. Rather, this doctrine governs the choice of law determinations

involving . . . those activities concerning the relationships inter se of the

corporation, its directors, officers, and shareholders.

 

See id. at 214-215. In Ellis v. Mutual Life Ins. Co., 187 So. 434 (Ala. 1939), the Alabama

Supreme Court made a similar distinction:

[W]here the act complained of affects the complainant solely in his capacity as a

member of the corporation . . . and is the act of the corporation . . . then such

action is the management of the internal affairs of the corporation . . . .

See id. at 443. 

Additionally, the Restatement (Second) of Conflict of Laws provides that, under the

internal affairs doctrine, “[t]he local law of the state of incorporation will be applied to

determine the existence and extent of a director’s or officer’s liability to the corporation, its

creditors and shareholders . . . .” See Restatement (Second) of Conflict of Laws § 309

(1971); see also Atherton v. FDIC, 519 U.S. 213, 224 (1997) (citing Restatement). “Liability

will typically be imposed upon directors under [the internal affairs doctrine] . . . for such matters

as the fraudulent or negligent mismanagement of the corporation’s affairs . . . and unlawfully

profiting at the corporation’s expense.” See Restatement (Second) of Conflict of Laws § 309,

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6

 It is undisputed that the Textainer partnerships are organized under California law. 

(See FAC ¶ 16; see also Notice of Removal ¶ 5.) 

9

comment (a).

In light of this authority, the Court finds plaintiff’s breach of fiduciary duty claim relates

exclusively to the “internal affairs or governance” of the Textainer partnerships and “arises

under or by virtue of the laws of the State in which such . . . business enterprise is . . .

organized.” See 28 U.S.C. §§ 1332(d)(9)(B), 1453(d)(2). As noted above, plaintiff alleges

defendants, in their role as general partners of the Textainer partnerships, (1) rendered the

sale of the assets of the partnerships “fundamentally unfair” to the limited partners by

demanding that all potential bidders agree to enter into a management contract with one of

the defendants, (2) rendered the sale “fundamentally unfair” to the limited partners by

undervaluing Textainer’s assets, and (3) gained support for the sale by distributing materially

misleading proxy statements to the limited partners. Each of these alleged acts affects

plaintiff and the other limited partners solely in their capacity as limited partners of the

Textainer partnerships. Indeed, plaintiff essentially claims that defendants “fraudulent[ly] or

negligent[ly] mismanage[d]” the partnership’s affairs, and “unlawfully profit[ed] at the

[partnership’s] expense.” See Restatement (Second) of Conflict of Laws § 309, comment (a). 

Moreover, the fiduciary duties allegedly breached arise solely because of the parties’

relationship as partners of the Textainer partnerships. See California Corp. Code § 16404

(defining fiduciary duties owed among partners in partnership).6 Finally, courts have

consistently applied the internal affairs doctrine to claims for breach of fiduciary duty. See,

e.g., Banjo Buddies, Inc. v. Renosky, 399 F.3d 168, 179 n.10 (3d Cir. 2005); Gabriel v.

Preble, 396 F.3d 10, 13 (1st Cir. 2005); Hollis v. Hill, 232 F.3d 460, 465-66 (5th Cir. 2000);

Nagy v. Riblet Products Corp., 79 F.3d 572, 576 (7th Cir. 1996); Hausman v. Buckley, 299

F.2d 696, 703 (2d Cir. 1962) (noting “the internal affairs rule has been applied repeatedly in

order to determine the fiduciary duty of a foreign corporation’s directors”). 

Thus, the Court finds that plaintiff’s claim for breach of fiduciary duty pertains solely to

the “relationships inter se” of Textainer’s general and limited partners. See McDermott, 531

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A.2d at 215. Accordingly, the Court concludes that plaintiff’s breach of fiduciary duty claim

relates solely to the “internal affairs or governance” of the Textainer partnership and,

consequently, the Court lacks jurisdiction over the instant action under CAFA. 

2. Fiduciary Duty

Although, as discussed above, the Court has found it lacks jurisdiction under CAFA,

the Court will consider plaintiff’s additional argument that the Court must reject jurisdiction

under CAFA because the action “solely involves . . . a claim relating to the rights, duties

(including fiduciary duties), and obligations relating to or created by or pursuant to any

security” as defined by the Securities Act of 1933 (“Securities Act”). See 28 U.S.C.

§§ 1332(d)(9)(C), 1453(d)(3). Plaintiff is correct that this language expressly includes a claim

for breach of fiduciary duty. The issue, however, is whether the fiduciary duty alleged to have

been breached in the Labow action is one “relating to or created by or pursuant to” a

“security.” 

The Securities Act defines “security” to include an “investment contract.” See 15

U.S.C. § 77b(a)(1). Although limited partnerships ordinarily qualify as “investment contracts”

within the meaning of the Securities Act, see Mason v. Unkeless, 618 F.2d 597, 599 n.3 (9th

Cir. 1980), whether any particular interest is an investment contract is determined on a caseby-case basis by applying a three-part test. See Securities and Exchange Comm’n v. W.J.

Howey Co., 328 U.S. 293, 298-99 (1946). Under Howey, an interest is an “investment

contract,” and thus a “security,” if it involves (1) an investment of money, (2) in a common

enterprise, and (3) an expectation of profits solely from the efforts of others. See id.; see also

Hector v. Wiens, 533 F.2d 429, 433 (9th Cir. 1976) (discussing three requirements of “Howey

test”). 

The first requirement is satisfied in the instant action because it is undisputed that

Textainer’s limited partners invested money in the partnership. (See Compl. ¶ 22.) The

“common enterprise” requirement likewise is satisfied. The Ninth Circuit has defined a

common enterprise as “one in which the fortunes of the investor are interwoven with and

dependent upon the efforts and success of those seeking the investment or of third parties.” 

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See SEC v. Turner Enterprises, 474 F.2d 476, 482 n.7 (9th Cir. 1973). “The commonality

required is vertical (between the investor and the promoter) rather than horizontal (among

multiple investors).” See Hector, 533 F.2d at 433. Finally, the third requirement is satisfied,

as Textainer’s limited partners have “an expectation of profits solely from the efforts of a third

party.” In that regard, the Ninth Circuit “has rejected a literal application of ‘solely’ because it

would frustrate the remedial purposes of the Securities Acts.” See Hector, 533 F.2d at 433. 

Instead, the test is “whether the efforts made by those other than the investor are the

undeniably significant ones, those essential managerial efforts which affect the failure or

success of the enterprise.” See Turner, 474 F.2d at 482. Here, the allegations of the

complaint demonstate that the efforts of Textainer’s general partners were essential to

Textainer’s failure or success, as plaintiffs allege that the general partners were responsible

for the “operational and financial aspects concerning the Textainer Partnerships.” (See

Compl. ¶ 25.) Consequently, the Textainer partnerships qualify as “investment contracts,” and

thus are “securities,” within the meaning of the Securities Act. 

Because the sole claim in the Labow action concerns, exclusively, “fiduciary

duties relating to or created by or pursuant to” the limited partnership interests in the Textainer

partnerships, and those interests are securities, the Court finds the instant action falls within

this additional CAFA exception. See 28 U.S.C. §§ 1332(d)(9)(C), 1453(d)(3). 

Accordingly, for this additional reason, the Court lacks jurisdiction under CAFA.

B. Federal Question Jurisdiction

Although the bulk of defendants’ Notice of Removal addresses the propriety of removal

under CAFA, defendants argue that even if CAFA does not provide a basis for removal, the

Court has federal question jurisdiction under 28 U.S.C. § 1331 because plaintiff’s complaint

alleges a federal securities claim pursuant to 15 U.S.C. § 78aa. 

The only claim expressly stated in plaintiff’s complaint is a state law claim for breach of

fiduciary duty. Generally, “the plaintiff [is] the master of the claim” and “may avoid federal

jurisdiction by exclusive reliance on state law.” See e.g. Caterpillar, Inc. v. Williams, 482 U.S.

386, 392 (1987). A “state law claim arises under federal law,” however, where (1) “federal law

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 Defendants note that the Labow and Gordon complaints contain the same factual

allegations with respect to defendants’ proxy statements, but that the Gordon complaint

frames those allegations as a federal securities claim pursuant to § 14(a) of the Exchange

Act.

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completely preempts [the] state law” invoked by the complaint; (2) the state claim “is

necessarily federal in character”; or (3) “the right to relief requires the resolution of a

substantial, disputed federal question.” See ARCO Environmental Remediation, L.L.C. v.

Montana, 213 F.3d 1108, 1114 (9th Cir. 2000). 

The Securities Exchange Act (“Exchange Act”) provides: “The district courts of the

United States . . . shall have exclusive jurisdiction of violations of this chapter or the rules and

regulations thereunder . . . and of all suits in equity and actions at law brought to enforce any

liability or duty created by this chapter . . . .” See 15 U.S.C. § 78aa. Relying on Sparta

Surgical Corp. v. National Ass’n of Securities Dealers, 159 F.3d 1209, 1211 (9th Cir. 1998),

defendants argue that this provision grants the Court exclusive jurisdiction over the misleading

proxy statement claim, despite such claim’s having been labeled a state law claim for breach

of fiduciary duty, because § 14(a) of the Exchange Act imposes liability for such violations.7

 In Sparta, the plaintiff brought suit under a complaint alleging that the National

Association of Securities Dealers (“NASD”) breached a contract by violating its own

exchange rules. The Ninth Circuit held the claim came within the exclusive jurisdiction of the

federal courts, even though the complaint pleaded only state law claims. See Sparta, 159

F.3d at 1212. In particular, the Ninth Circuit noted that the rules NASD was alleged to have

violated “were issued pursuant to the Exchange Act’s directive that self-regulatory

organizations adopt rules and by-laws in conformance with the Exchange Act.” See id. As a

result, the propriety of NASD’s conduct could only be determined in light of federal law: “If

NASD’s actions conformed to the [federally-required] rules, there can be no viable cause of

action; if its actions violated the rules, any claim falls under the imperative of 15 U.S.C. § 78aa

which grants the federal courts ‘exclusive jurisdiction of violations of this chapter or the rules

and regulations thereunder . . . .’” See id. 

One district court faced with a state law claim for breach of fiduciary duty based on

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 For the same reasons, the Court finds plaintiff’s claim does not require resolution of a

“substantial, disputed question of federal law . . . .” See Roskind v. Morgan Stanley, 165 F.

Supp. 2d at 1066 (quoting Franchise Tax Bd. of State of California v. Construction Laborers

Vacation Trust for Southern California, 463 U.S. 1, 22 (1983)). 

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alleged misleading proxy statements has distinguished Sparta, however, finding such claim

did not give rise to federal jurisdiction. In Klein v. Southwest Gas Corp., 1999 WL 33944685

(S.D. Cal. Aug. 3, 1999), where the alleged breach of fiduciary was based on violations that

also could have given rise to liability under § 14(a) of the Exchange Act, the district court held

that it did not have “exclusive jurisdiction” over the claim because

unlike the plaintiff in Sparta . . . plaintiffs do not predicate their . . . claims on

specific violations of federal securities laws, an area committed exclusively to

federal jurisdiction. A finding that defendants violated federal securities laws is

not essential to the question of whether defendants breached their fiduciary

obligations to plaintiffs.

See id. at 5. 

In another case involving a state law claim for breach of fiduciary duty, albeit not in the

area of proxy solicitation, the district court made a similar observation:

In Sparta, the NASD rules were essential to the [plaintiff’s] breach of contract

claim because the rules themselves were the terms of the contract that plaintiff

alleged NASD breached . . . . Federal law was essential in Sparta because the

plaintiff could not prevail without establishing a violation of federal law was the

alleged breach of contract. Here, Plaintiff brings a claim for breach of fiduciary

duty. State common law, not NASD rules, define the scope of Defendant’s

fiduciary duty to Plaintiff . . . . [E]stablishing a violation [of federal law] is not a

necessary element of plaintiff’s claims.

See Roskind v. Morgan Stanley, 165 F. Supp. 2d 1059, 1066-1067 (N.D. Cal. 2001); see

also Gargiulo v. Decker, 2005 WL 755771 at *2-3 (C.D. Cal. March 30, 2005) (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”).

The Court finds the reasoning of the above-cited cases persuasive. Here, plaintiff

need not prove that defendants’ proxy statements, or, for that matter, any of defendants’ other

alleged conduct, violated federal law in order to prevail on his state law claim for breach of

fiduciary duty.8 Accordingly, the Court finds it lacks federal question jurisdiction over the

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Labow action. 

C. Supplemental Jurisdiction

Finally, defendants argue that by consolidating the Labow action with the Gordon and

Lewis actions, both of which actions allege federal claims arising out of the same transaction

at issue in the Labow action, the Court acquired supplemental jurisdiction over the Labow

action pursuant to 28 U.S.C. § 1367. Defendants rely exclusively on two district court

decisions from other circuits, Cohen v. Reed, 868 F. Supp. 489, 494 (E.D.N.Y. 1994), and

Simcox v. McDermott Int’l, Inc., 1993 U.S. Dist. LEXIS 1802 (S.D. Tex. Dec. 21, 2003). 

Defendants concede, however, that “a clear majority” of courts have reached “the opposite

conclusion.” (See Opp. at 16.) 

Indeed, plaintiff cites twelve cases, including one from this district, holding that

consolidation does not give rise to supplemental jurisdiction. See e.g. McClelland v.

Longhitano, 140 F. Supp. 2d 201, 203 (N.D. N.Y. 2001) (“Almost every single authority to

address this issue has concluded that the supplemental jurisdiction statute cannot be used in

this manner”); Pacific Bell v. Covad Communications Company, 1999 WL 390840 at *3 (N.D.

Cal. June 8, 1999) (“The supplemental-jurisdiction statute is not a source of original subject

matter jurisdiction.”) (quoting Ahearn v. Charter Twp. of Bloomfield, 100 F.3d 451, 456 (6th

Cir. 1996)); In re Estate of Tabas, 879 F. Supp. 464, 467 (E.D. Pa. 1995) (holding “the

supplemental jurisdiction statute does not allow a party to remove an otherwise unremovable

action to federal court for consolidation with a related federal action” even where “such an

approach would have the benefits of efficiency”). This Court, in accordance with the reasoning

of the majority of district courts to have addressed the issue, finds consolidation is not a

means by which a district court may acquire jurisdiction. 

Accordingly, the Court concludes it does not have supplemental jurisdiction over the

Labow action by reason of its consolidation with the Lewis and Gordon actions. 

CONCLUSION

For the reasons set forth above, plaintiff’s motion to remand the Labow action, Case

No. C 05-2328, is hereby GRANTED; the Court’s June 17, 2005 order consolidating the

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Labow action with the Lewis and Gordon cases is hereby VACATED; and said action is

hereby REMANDED, pursuant to 28 U.S.C. § 1447(d), to the California Superior Court for the

City and County of San Francisco. Case No. C-05-0969 remains before this Court.

IT IS SO ORDERED.

Dated: July 27, 2005 

MAXINE M. CHESNEY

United States District Judge

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