FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

U.S. MORTGAGE, INC., a Nevada 

corporation; JOHN KEILLY, an

individual; JOHN W. BROUWERS,

MEMORANDUM DISPOSITION,

BROUWERS FAMILY LIMITED

PARTNERSHIP, FIRST SAVINGS BANK;

COMMUNITY COLLEGE OF SOUTHERN

NEVADA FOUNDATION; CONNELLY

FAMILY TRUST, Terry Connelly and

Mary Connelly, Trustees; ALISA

CROMER; DOVE, LLC; GERALD AND

LUCETTE DOWLINGS TRUST DTD

07/06/99, Gerald and Lucette

No. 04-17494 Dowling, Trustees; DR.

INVESTMENTS, LTD.; LORRAINE A. D.C. No.  ENGLE, Trustee of the Lorraine A. CV-03-01615-SMM

Engle Family Trust UAD OPINION

05/31/79; GUY GAGNON, Trustee of

the Gagnon Family Trust; DIANA

JOAN GAGNON, Trustee of the

Gagnon Family Trust; ARLENE M.

GARMAN LIVING TRUST DTD

02/13/01, Arlene Garman, Trustee;

GUNNING FAMILY TRUST UAD

12/09/94, Sean and Emily

Gunning, Trustees; BARBARA K.

HANFORD LIVING TRUST UAD

05/03/96; MICHAEL HARLAN; CARL

JENSEN, Trustee of the Jensen

Family Trust UAD 10/27/90; 

8389
JANET JENSEN, Trustee of the 

Jensen Family Trust UAD

10/27/90; JOHN M. KEILLY, Trustee

of the Keilly Family Trust; JO M.

KEILLY, Trustee of the Keilly

Family Trust; WILLIAM KREGER

IRA ROLLOVER ACCOUNT,

CUSTODIAN OF THE FIRST SAVINGS

BANK, agent First Savings Bank;

MARVIN L. REHKOP FAMILY TRUST;

EUGENE H. REISE; LEONARD

RODOWICK, Trustee for the

Rodowick Family Trust; ALICE

RODOWICK, Trustee for the

Rodowick Family Trust; SCHEER  FAMILY TRUST, Ronald W. Scheer

and Lori Scheer, Trustees; SCHLAF

FAMILY TRUST, Pauline M. Schlaf

Trustee; ROBERT SEGA; ALLIS SEGA;

VELATIA SPEZIALE, Trustee of the

1994 Speziale Living Trust; DALE

STERNER; WINSTROM PROPERTIES,

INC.; EILEEN WRIGHT; NEVADA

INVESTORS, INC.; STANLEY AMES

TRUST DTD 09/09/86, Stanley

Ames, Trustee; EDWARD U. AUSTIN

REVOCABLE TRUST; EDWARD U. AND

MARJORIE B. AUSTIN UNITRUST

UAD 12/01/95, Robert Austin,

Trustee; MARCEL BAREL TRUST; 

8390 U.S. MORTGAGE, INC. v. SAXTON
ROBERT J. BELL, Trustee of the 

Robert J. Bell and Virginia M.

Bell Trust; VIRGINIA M. BELL,

Trustee of the Robert J. Bell and

Virginia M. Bell Trust; VERIE

BLOOM; MICHAEL B. CHAPMAN,

JTWROS; MARGARET B. CHAPMAN,

JTWROS; ECONOMIC STUDIES, INC.;

PHILIP ENGLE FAMILY PARTNERSHIP,

Philip Engel, Trustee, as General

Partner; PHILIP ENGEL AND ADELE

ENGEL FAMILY TRUST, Philip Engel,

Trustee; WALLEEN Y. EVESLAGE;

LARRY W. FIORENZI; KARL S.

GANZ; KOLAD 5, a Nevada Limited

Liability Company, et al.,

Plaintiffs-Appellants,  v.

JAMES C. SAXTON; JANE DOE

SAXTON; DOUGLAS HENSLEY,

husband; JANE DOE HENSLEY, wife;

MARC S. HECHTER, husband; JANE

DOE HECHTER, wife; TIMOTHY J.

ADAMS, husband; JANE DOE

ADAMS, wife; MICHELE SAXTONPORI, wife; JOHN DOE SAXTON-PORI,

husband; KATRYN WONDERS, wife;

JOHN DOE WONDERS, husband;

KIRK SCHERER, husband; JANE DOE

SCHERER, wife; MELODY J.

SULLIVAN; JOHN DOE SULLIVAN,

husband; DELOITTE AND TOUCHE, a

limited liability partnership,

Defendants-Appellees. 

U.S. MORTGAGE, INC. v. SAXTON 8391
Appeal from the United States District Court

for the District of Arizona

Stephen M. McNamee, District Judge, Presiding

Argued and Submitted

April 19, 2007—San Francisco, California

Filed July 13, 2007

Before: Stephen Reinhardt, Jay S. Bybee, and

Milan D. Smith, Jr., Circuit Judges.

Opinion by Judge Milan D. Smith, Jr.

8392 U.S. MORTGAGE, INC. v. SAXTON
COUNSEL

George C. Lazar, Fox Johns Lazar Pekin & Wexler, APC, San

Diego, California, for the plaintiffs-appellants. 

David M. Furbush, O’Melveny & Myers LLP, Menlo Park,

California, for the defendants-appellees. 

OPINION

MILAN D. SMITH, JR., Circuit Judge: 

Plaintiffs-appellants U.S. Mortgage, et al., appeal the dismissal of their lawsuit against defendants-appellees Saxton,

Inc. (Saxton), Deloitte and Touche LLP, et.al., alleging,

among other things, violations of Arizona law by incorporation of false financial information into Saxton’s regulatory filings on which plaintiffs relied in making several loans and

granting several loan-related concessions to Saxton and its

affiliates. Defendants removed the lawsuit to federal court

under the Securities Litigation Uniform Standards Act of

1998, 15 U.S.C. § 78bb (SLUSA), and the district court dismissed the lawsuit for failure to state a claim upon which

U.S. MORTGAGE, INC. v. SAXTON 8395
relief can be granted in conformity with SLUSA. We affirm

the removal and the dismissal of the lawsuit. 

FACTUAL BACKGROUND

Defendant Saxton1 is a real estate development company

incorporated and domiciled in Nevada. At all times relevant

to this appeal until June 14, 2000, Saxton’s stock was listed

and publicly traded on the NASDAQ exchange2 and Saxton

was engaged in several real estate development projects that

it financed, in part, with loans from individuals, trusts, and

commercial investors. The plaintiff class consists of hundreds

of investors. Plaintiffs’ claims arise out of twelve separate

loan investments that Saxton solicited from various members

of the plaintiff class to finance several of its projects and

activities. The twelve loan transactions alleged in plaintiffs’

second amended complaint (SAC) are as follows: 

1. Pelican Creek Loan: 

In December 1996, 29 members of the plaintiff class made

a combined loan of $1,500,000 to Savannah, LLC, a Nevada

limited liability company, to finance the construction of living

units in a residential area of Clark County, Nevada. The loan

was evidenced by a promissory note secured by the lien of a

deed of trust on the property. In 1999, Pelican Creek Development, Inc., whose president was defendant James Saxton,

acquired Savannah’s interest in the relevant property. At Pelican Creek’s request, the plaintiff lenders consented to Pelican

Creek’s assumption of Savannah’s obligations under the note

and waived enforcement of the due on sale clause in the deed

1Defendants in this case include both Saxton, Inc., a Nevada corporation, and James Saxton, the Chairman of the Board of Directors, President,

and Chief Executive Officer of Saxton, Inc. All references to “Saxton” in

this opinion are to Saxton, Inc., and not to James Saxton. 

2Saxton stock was officially delisted from the NASDAQ exchange on

June 14, 2000. 

8396 U.S. MORTGAGE, INC. v. SAXTON
of trust securing the note, in exchange for which Saxton

extended a repayment guarantee to the plaintiff lenders. The

relevant plaintiff lenders allege that they would not have consented to Pelican Creek’s assumption of the loan had they

known Saxton’s true financial condition. 

2. Taylor Ranch Loan:

In January 1997, Saxton entered into an agreement with

Howard Hughes Properties, L.P., to acquire property in the

City of North Las Vegas. Saxton intended to develop the

property into residential units, but was required to obtain certain entitlements before being permitted to do so. Thereafter,

Saxton solicited and received a loan of $5,300,000 from a

large number of the plaintiff lenders. The loan was evidenced

by a note and was secured by the lien of a deed of trust on the

property. Saxton was unable to obtain the necessary rezoning

and was, therefore, unable to develop the property. Saxton

requested and received two extensions of maturity on the

note, but ultimately defaulted on the loan in March of 2000.

Collateral for the loan was eventually liquidated, leaving an

unpaid principal balance due of $941,205.12. The plaintiff

lenders allege that they relied on Saxton’s misrepresentations

of financial strength in its public filings, and would not have

granted the extensions had they known Saxton’s true financial

condition. 

3. The Saxton $1,220,000 Loan: 

In October 1997, Saxton sought a $1,220,000 working capital loan from a number of plaintiff lenders. The loan was evidenced by a note and was secured by a pledge of 491,754

shares of Saxton stock owned by defendant James Saxton. In

alleged reliance on misrepresentations concerning Saxton’s

financial strength as reflected in its public filings, plaintiffs

agreed to two extensions of the loan. Saxton defaulted on the

loan in March of 2000. 

U.S. MORTGAGE, INC. v. SAXTON 8397
4. The Corte Madera Loan:

In late 1997, 23 plaintiff lenders loaned Corte Madera, LLC

the sum of $2,000,000 to permit it to acquire 15.8 acres of

real property in the City of Las Vegas. Corte Madera intended

to develop the property into a 192-unit town home project.

The loan was represented by a note and secured by the lien

of a deed of trust on the property and was guaranteed by Saxton. Saxton subsequently entered into an agreement with

Corte Madera whereby Saxton agreed to construct the town

homes and to serve as Corte Madera’s manager. Plaintiffs

agreed to two extensions of the note’s maturity date, again in

alleged reliance on misrepresentations in Saxton’s public filings. The note went into default in March of 2000. 

5. The Sutter Creek Loan: 

In December 1997, numerous plaintiff lenders loaned funds

to Saxton to enable it to acquire the interest of Sutter Creek,

LLC in a subdivision project in Clark County, Nevada. The

loan was evidenced by a note secured by the lien of a deed of

trust on the acquired property. The remaining principal balance due on the loan is $877,347. Plaintiffs allege that they

were induced by misrepresentations in Saxton’s public filings

to agree to extensions of the note and to refrain from exercising available rights under the deed of trust. Saxton defaulted

on this loan in March of 2000. 

6. The United Mortgage Loan: 

In June 1998, certain plaintiff lenders loaned funds to U.S.

Mortgage Corporation to permit it to acquire and develop certain real property in Clark County, Nevada. The loan is evidenced by a note and secured by the lien of a deed of trust on

the property. The outstanding principal balance of the loan is

$7,957,591. Saxton agreed to manage the construction of

warehouses on the acquired property and also executed a

repayment guarantee and an environmental and accessability

8398 U.S. MORTGAGE, INC. v. SAXTON
indemnity agreement for the benefit of the plaintiff lenders.

Plaintiff lenders allege that Saxton used the proceeds of the

loan to pay off an existing line of credit with one of its institutional lenders and not for the purposes represented. These

plaintiffs also allege that defendants made misrepresentations

and permitted omissions in Saxton’s public filings and that

they relied on these misrepresentations and omissions both in

making the loans and in failing to exercise remedies included

in the loan agreements. 

7. The Sterling Springs Loan: 

In September 1998, certain plaintiff investors made an

$8,590,000 loan to Saxton to enable it to fund certain construction costs in its Sterling Spring project in Clark County,

Nevada and to secure release of the project from the liens of

several institutional lenders. The loan was evidenced by a

note and secured by the lien of a deed of trust on the project.

Saxton defaulted on the loan in March of 2000. The remaining principal balance of the loan is $6,558,775. Plaintiffs

allege unspecified harm from reliance on misrepresentations

in Saxton’s public filings. 

8. The Diamond Key Acquisition Loan:

In November 1998, Saxton sought a $1,000,000 short-term

loan from 15 plaintiff lenders to fund its acquisition of Diamond Key Homes, Inc., a Phoenix-based construction company. The loan was evidenced by a note and was secured by

a pledge of certain Saxton stock held by defendants James and

Dorothy Saxton. In 1999, certain of the plaintiff lenders

agreed to an extension of the maturity date of the loan while

other lenders were paid in full. Saxton defaulted on the note

in March of 2000. Plaintiffs allege unspecified harm from

reliance on misrepresentations in Saxton’s public filings. 

9. The Diamond Key Loan:

In March 1999, 21 plaintiff lenders made a $1,000,000 loan

to Saxton affiliate Diamond Key Homes to enable it to

U.S. MORTGAGE, INC. v. SAXTON 8399
develop certain Arizona real property. The loan was evidenced by a note and secured by the lien of a deed of trust on

the lots to be developed. Diamond Key Homes defaulted on

the loan and the involved plaintiff lenders allege unspecified

harm from reliance on misrepresentations in Saxton’s public

filings. 

10. The Levitz Plaza Loan:

In September 1999, Saxton approached Investors Mortgage

Corporation, a Nevada mortgage broker, seeking a loan to

consolidate certain existing loans and to provide working capital. Certain plaintiff lenders made a $5,655,000 loan to Saxton and its affiliates, Levitz Plaza, LLC, and Diamond Key

Homes. The loan was evidenced by a note and was secured

by the liens of deeds of trust on a number of properties in

Nevada and Arizona. This loan also went into default in

March of 2000 and has an outstanding principal balance of

$5,336,200. Plaintiff lenders allege unspecified harm from

reliance on misrepresentations in Saxton’s public filings. 

11. The Saxton $1,025,000 Loan:

In December 1999, Saxton executed a note for $1,025,000

to 33 plaintiff lenders, which note was secured by the pledge

of 691,050 shares of Saxton stock. Saxton defaulted on the

loan in March of 2000. Plaintiff lenders claim unspecified

harm from reliance on misrepresentations in Saxton’s public

filings. 

12. Arizona Project:

In February 2000, a group of plaintiff lenders loaned

$1,400,000 to Diamond Key Homes alone and $2,600,000 to

Diamond Key Homes and Saxton. The $1,400,000 loan was

secured by the lien of a deed on trust on property in Maricopa

County, Arizona and the proceeds of the loan were to be used

to develop the property securing the loan. The $2,600,000

8400 U.S. MORTGAGE, INC. v. SAXTON
loan was secured by the assignment of an interest in a purchase contract for land near Tucson, Arizona. The loan proceeds were to be used to develop the property being acquired.

The borrowers on both these loans defaulted in March of

2000. Plaintiff lenders claim unspecified harm from reliance

on misrepresentations in Saxton’s public filings. 

PRIOR PROCEEDINGS

In 2000, Saxton voluntarily restated its financial results to

correct a miscalculation of certain interest expenses. The

incorrect interest calculation had caused Saxton to overstate

its earnings in several public filings and accompanying press

releases in 1998 and 1999. Certain of the individual defendants were signatories of the regulatory filings, and defendant

Deloitte & Touche was responsible for auditing and approving those filings. The restatement resulted in an increase of

approximately 4.7% in Saxton’s total expenses for the first

three quarters of 1999. 

Following the restatement, certain plaintiffs—not parties to

this suit—brought a securities class action in Nevada federal

district court against Saxton, several of its directors and officers, and Deloitte & Touche. The complaint alleged that

defendants issued false financial statements in order to inflate

the price of Saxton stock, and that class members relied upon

the misrepresentations to purchase the stock at that inflated

price. The Nevada complaint further alleged that Saxton used

its artificially-inflated shares as payment for its acquisition of

several entities, including Diamond Key Homes and Homebank Mortgage Corporation. 

The Nevada district court dismissed the complaint for failure to comply with the substantive and procedural requirements of the Private Securities Litigation Reform Act of 1995,

U.S. MORTGAGE, INC. v. SAXTON 8401
15 U.S.C. § 78u-4 (PSLRA). The dismissal of the Nevada

lawsuit was the subject of a separate appeal to this court.3

Following dismissal of the federal claim, present plaintiffs

filed a substantially similar complaint in Arizona state court

and a first amended complaint (FAC) in the same court several months later. Both the Nevada and Arizona complaints

pled the same essential misconduct, but the Arizona complaint claimed violations of Arizona state law rather than federal law.4

 While the Nevada complaint only presented

allegations concerning the purchase of Saxton stock, the FAC

pled that the plaintiffs had loaned Saxton money as investment interests and listed several specific projects to which

these loans related. The FAC includes an extensive list of

individual investors who extended loans to Saxton in support

of various real estate projects.5 The essential theory of liability

in the FAC is that the loans would not have been made,

renewed, or continued if plaintiffs had known Saxton’s true

financial condition or had plaintiffs not relied on Saxton’s

erroneous financial statements. 

The defendants removed the action to the Arizona district

court under SLUSA. Plaintiffs filed a motion to remand,

claiming that SLUSA did not apply to their lawsuit, and submitting a declaration purporting to add additional facts to supplement the complaint. The district court denied plaintiffs’

remand motion, holding that SLUSA barred the complaint.

While the district court noted that SLUSA authorizes outright

dismissal of a SLUSA barred lawsuit, it nevertheless gave

plaintiffs an opportunity to file a second amended complaint

3

In re Saxton, Inc. Securities Litigation, No. 02-16172. The decision in

that appeal is noted in an unpublished memorandum disposition. 

4Present plaintiffs have acknowledged this by arguing in their motion to

remand that they, “having been shut out of federal court, are simply

endeavoring to prosecute state law claims that are not preempted by

SLUSA.” 

5Most plaintiffs lent between $10,000 and $50,000. 

8402 U.S. MORTGAGE, INC. v. SAXTON
in an attempt to meet the requirements of SLUSA while

avoiding the impediments of the PSLRA. 

Plaintiffs filed a 207-page SAC that differed substantially

from the FAC in form, but not in substance. Whereas the FAC

gave one comprehensive list of all plaintiff lenders and one

comprehensive set of factual allegations, the SAC divides the

plaintiff lenders into twelve overlapping sets and alleges individualized facts regarding the twelve loan transactions. As

alleged in the SAC, some factual differences exist among the

different loan transactions; however, the underlying allegations of Saxton’s misconduct remain virtually unchanged. As

was done in the FAC, the SAC claims that Saxton, through its

officers and employees, made material misrepresentations

concerning the financial status of the company in its SEC filings and other public statements; that Deloitte & Touche

failed to comply with the applicable accounting standards in

approving those misrepresentations; and that the plaintiff

lenders reasonably relied on the misrepresentations and, as a

result, suffered damages. 

The essential theories of legal liability also remained

unchanged in the SAC. The FAC alleges five theories of liability: negligence, negligent misrepresentation, and fraud

against all defendants; breach of fiduciary duty against the

individual defendants; and aiding and abetting breach of duty

against Deloitte & Touche. The SAC alleges these same five

theories of liability against these same defendants, but it subdivides them based on the particular transaction involved and

also adds additional theories regarding several of the transactions. The SAC also clarifies that SEC rules and regulations6

are the sources of defendants’ duties and that those duties

6The allegations of negligence and negligent misrepresentation specifically identify SEC rules and regulations as the source of the duty. The

allegations of breach of fiduciary duty, however, identify no specific

source of that fiduciary duty. Presumably plaintiffs refer to an unspecified

provision of Arizona state or common law. 

U.S. MORTGAGE, INC. v. SAXTON 8403
were allegedly breached by misrepresentations in public filings and other public statements. 

The district court dismissed the SAC with prejudice. Plaintiffs appeal the dismissal to this court. 

STANDARD OF REVIEW AND JURISDICTION

We review the grant of a motion to dismiss and the denial

of a motion to remand de novo. Patenaude v. Equitable Life

Assurance Soc’y of U.S., 290 F.3d 1020, 1023 (9th Cir. 2002).

We review the denial of leave to amend for abuse of discretion. Gompper v. VISX, Inc., 298 F.3d 893, 898 (9th Cir.

2002). “Dismissal without leave to amend is improper unless

it is clear, upon de novo review, that the complaint could not

be saved by any amendment.” Id. (citing Polich v. Burlington

N., Inc., 942 F.2d 1467, 1472 (9th Cir. 1991)). 

The district court had jurisdiction over the removed action

under SLUSA, 15 U.S.C. § 78bb(f)(1). We have appellate

jurisdiction over the dismissal under 28 U.S.C. § 1291. 

DISCUSSION

I. Statutory Background.

The historical background of Congress’ enactment of the

PSLRA and its subsequent enactment of SLUSA is wellknown and well-documented elsewhere. See, e.g., Merrill

Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 126 S.Ct. 1503,

1510-12 (2006); Falkowski v. Imation Corp., 309 F.3d 1123,

1128 (9th Cir. 2002); Spielman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 332 F.3d 116, 122-24 (2d Cir. 2003). Nevertheless, we briefly summarize key points of this history that

are relevant to the resolution of this case. In 1995, Congress

passed the PSLRA because it was distressed with the proliferation and cost of allegedly meritless federal securities class

actions. The PSLRA sought to curb abusive and frivolous

8404 U.S. MORTGAGE, INC. v. SAXTON
securities suits by imposing new procedural and substantive

requirements. Among other things, the PSLRA (1) required

plaintiffs to identify in their pleadings actual statements

alleged to have been misleading and particular facts supporting a “strong inference” that the defendants acted with the

required scienter, (2) imposed an automatic stay of discovery

during the pendency of any motion to dismiss, and (3) established safe-harbors for certain forward-looking statements.

Dabit, 126 S.Ct. at 1510-11; see also Patenaude, 290 F.3d at

1025; In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970,

974 (9th Cir. 1999). 

[1] Although the PSLRA was effective in reducing allegedly frivolous federal securities claims, this was largely

because class action attorneys avoided its reach by filing their

securities class actions in state court under state and common

law. Congress recognized this unexpected development in a

joint House-Senate Committee report, noting that the decline

in federal securities class actions following the enactment of

the PSLRA was accompanied by a corresponding increase in

state class actions. See H.R. Conf. Rep. No. 105-803 (1998).

Congress enacted SLUSA to foreclose this alternative. Patenaude, 290 F.3d at 1025. To that end, SLUSA permits removal

and dismissal of “covered class actions,”

7

 brought under state

7SLUSA defines the term “covered class action” as: 

(i) any single lawsuit in which— 

(I) damages are sought on behalf of more than 50 persons

or prospective class members, and questions of law or

fact common to those persons or members of the prospective class, without reference to issues of individualized reliance on an alleged misstatement or

omission, predominate over any questions affecting

only individual persons or members; or 

(II) one or more named parties seek to recover damages

on a representative basis on behalf of themselves and

other unnamed parties similarly situated, and questions of law or fact common to those persons or memU.S. MORTGAGE, INC. v. SAXTON 8405
law, alleging a misrepresentation or omission of material fact

in connection with the purchase or sale of a “covered security.”

8

15 U.S.C. §§ 78bb(f)(1) and (2);9 Falkowski, 309 F.3d at

1128. 

II. Propriety of the Initial Removal of the

Arizona Action.

As noted, defendants removed the Arizona action to federal

court under SLUSA and plaintiffs filed a motion to remand

the case back to Arizona state court. In their opening brief,

plaintiffs conceded that “if the remand motion were to be

determined solely on the basis of the First Amended Combers of the prospective class predominate over any

questions affecting only individual persons or members; or 

(ii) any group of lawsuits filed in or pending in the same court

and involving common questions of law or fact, in which—

(I) damages are sought on behalf of more than 50 persons; and 

(II) the lawsuits are joined, consolidated, or otherwise

proceed as a single action for any purpose. 

15 U.S.C. § 78bb(f)(5)(B). 

8SLUSA defines the term “covered security” as: 

a security that satisfies the standards for a covered security specified in paragraph (1) or (2) of section 18(b) of the Securities Act

of 1933, at the time during which it is alleged that the misrepresentation, omission, or manipulative or deceptive conduct

occurred, 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

4(2) of that Act. 

15 U.S.C. § 78bb(f)(5)(E). 

9This provision amends the Securities Exchange Act of 1934. An identical provision, codified at 15 U.S.C. § 77p, amends the Securities Act of

1933. 

8406 U.S. MORTGAGE, INC. v. SAXTON
plaint’s allegations, their motion to remand was properly

denied [because it] did not clearly delineate the varying facts

and circumstances applicable to each loan.” Appellant’s

Opening Brief at 46. While this concession arguably resolves

the question of initial removability, plaintiffs still argue that

the district court erred by failing to look beyond the face of

the FAC to consider a declaration that plaintiffs presented in

support of the motion detailing the specifics of the various

loans at issue. This argument fails. 

[2] SLUSA expressly applies to covered class actions “alleging” fraud in connection with the purchase or sale of a covered security, 15 U.S.C. § 78bb(f)(1), and authorizes removal

and dismissal based on the allegations in the complaint and

does not require any additional evidentiary showing from

either party. See Williams v. Costco Wholesale Corp., 471

F.3d 975, 976 (9th Cir. 2006) (“the propriety of removal is

determined solely on the basis of the pleadings filed in state

court”) (citing Sparta Surgical Corp. v. Nat’l Ass’n of Sec.

Dealers, Inc., 159 F.3d 1209, 1213 (9th Cir. 1998)). While the

court may permit the defendant to support removal by supplementing the pleadings with additional evidence of SLUSA’s

applicability, see Lasley v. New Eng. Variable Life Ins. Co.,

126 F. Supp. 2d 1236, 1239 (N.D. Cal. 1999), no authority

requires that a district court must consider additional evidence

from the plaintiffs on a motion to remand. Moreover, any

error that may have occurred due to the district court’s failure

to take account of the additional evidence in plaintiffs’ declaration was cured by its grant of leave to amend. Plaintiffs

incorporated the essential factual information in the declaration into their SAC, and the district court considered those

facts in its evaluation of that amended complaint. 

III. SLUSA does not prohibit post-removal amendment

of a complaint.

[3] Whether SLUSA allows or prohibits amendment of the

complaint in a removed action is an issue of first impression

U.S. MORTGAGE, INC. v. SAXTON 8407
in this circuit. As a general rule, a plaintiff “may not compel

remand by amending a complaint to eliminate the federal

question upon which removal was based.” Sparta Surgical

Corp., 159 F.3d at 1213. This principle is applicable to

SLUSA, which “stands as an express exception to the wellpleaded complaint rule, and its preemptive force cannot be

circumvented by artful drafting.” Rowinski v. Salomon Smith

Barney, Inc., 398 F.3d 294, 304 (3d Cir. 2005). Following this

rationale, other circuits that have considered the issue have

not allowed a plaintiff class to amend its way around a

SLUSA dismissal, at least where the amended complaint,

“fairly read,” still contains allegations of fraud or deception

involving a covered security. See Dudek v. Prudential Sec.,

Inc., 295 F.3d 875, 879-80 (8th Cir. 2002) (plaintiffs’ omission of certain fraud allegations previously pled in a different

case did not save complaint from SLUSA dismissal); Behlen

v. Merrill Lynch, 311 F.3d 1087, 1095-96 (11th Cir. 2002)

(dismissing claims under SLUSA despite attempt to remove

federal claims by amendment). 

[4] However, Congress included no express prohibition

against amendment and no court has held that SLUSA completely and categorically bars any amendment of the complaint following removal. Moreover, there is precedent in the

district courts of this circuit for the view that a plaintiff may

avoid SLUSA dismissal through amendment. For example, in

Schuster v. Gardner, 319 F. Supp. 2d 1159 (S.D. Cal. 2003),

the district court permitted plaintiffs to amend their complaint

to avoid SLUSA dismissal. The court credited the plaintiffs’

argument that any federal claim in the original complaint was

inadvertently pled, allowed amendment, and remanded the

resulting state-law action to state court. Id. at 1164.10 Simi10Specifically, the court reasoned that while “subject matter jurisdiction

is generally determined by looking at the facts as pled in the complaint

operative at the time the notice of removal is filed, . . . defendants have

the burden of establishing federal jurisdiction, and any doubt as to the

right of removal must be construed in favor of remand.” Id. at 1163 (internal citations omitted). 

8408 U.S. MORTGAGE, INC. v. SAXTON
larly, in Chinn v. Belfer, No. 02-00131, 2002 WL 31474189

(D. Or. 2002), the court noted that “[i]nterpreting Ninth Circuit authority, other district courts have granted leave to

amend a removed complaint to eliminate federal claims.” Id.

at *7 (collecting cases). The court accordingly allowed plaintiffs the opportunity to amend to eliminate any federal claim

and thereby avoid SLUSA dismissal. 

[5] We are not, of course, bound by district court decisions,

and there are certainly defensible policy justifications for the

defendants’ position. Allowing amendment of claims to avoid

dismissal could allow plaintiffs to “artfully plead” their way

around federal jurisdiction and back into state court—by some

accounts, precisely what SLUSA was meant to prevent. See

Rowinski, 398 F.3d at 304. However, district courts that have

confronted the issue have also recognized the inequity of dismissing otherwise valid and viable state law claims on the

ground that plaintiff pled— perhaps inadvertently—a cause of

action that may be construed as federal in nature. In light of

the statutory silence on the issue in SLUSA, the existence of

competing policy rationales, and the fact that the granting or

denial of leave to amend is ordinarily a matter left to the discretion of the district court, we hold that SLUSA does not

prohibit amendment of the complaint after removal. 

IV. The district court properly dismissed the Second

Amended Complaint for failure to state a claim in

conformity with SLUSA.

[6] Having concluded that the Arizona action was properly

removed and that the district court properly permitted plaintiffs to amend the FAC, we turn to the propriety of the district

court’s dismissal of the SAC with prejudice.11 On appeal,

11We review denial of leave to amend only for abuse of discretion, and

generally find that such discretion is not abused if further amendment

would be futile. See Polich, 942 F.2d at 1472. The district court here did

not abuse its discretion in denying further leave to amend. It had already

given plaintiffs one chance to amend, and plaintiffs essentially re-pled the

same facts and legal theories. Most significantly, plaintiffs conceded in

oral argument before the district court that they could not improve on the

SAC beyond mere “tweaking.” 

U.S. MORTGAGE, INC. v. SAXTON 8409
plaintiffs concede the first three elements of SLUSA preemption: that (1) the class action here is a “covered” class action,

and that it alleges (2) state and common law claims and (3)

a misrepresentation or omission of material fact.12 Plaintiffs

do, however, challenge elements four and five, claiming that

(4) the misrepresentations or omissions at issue were not “in

connection with” the purchase or sale of a security under 15

U.S.C. § 78bb(f)(1)(A), and (5) the action does not involve

“covered securities” within the meaning of 15 U.S.C.

§ 78bb(f)(5)(E). Both arguments fail. 

In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit,

126 S.Ct. 1503 (2006), the Supreme Court dramatically simplified the analysis of whether a particular complaint alleges

fraud in connection with the purchase or sale of a covered

security within the meaning of SLUSA. In Dabit, the plaintiff

class members were stock brokers who purchased and held

various stocks during a period of approximately one year. The

plaintiffs filed suit against Merrill Lynch in federal court

under Oklahoma state law, alleging that the investment banking firm violated the “fiduciary duty and covenant of good

faith and fair dealing it owed its brokers by disseminating

misleading research and thereby manipulating stock prices,”

and that this misleading research induced them to hold shares

they would have sold had they known the truth. Id. at 1507.

The plaintiff brokers argued that their claim was not subject

to SLUSA preemption because it was a pure “holding” claim

and did not allege the purchase or sale of any particular security. 

12At oral argument, plaintiffs’ counsel attempted to resurrect an objection to the “covered class action” requirement by arguing that the SAC

effectively disaggregated claims based on separate loan transactions,

thereby bringing it outside SLUSA’s numerical scope. In addition to being

waived by concession in the briefing, see Currier v. Potter, 379 F.3d 716,

723 n.4 (9th Cir. 2004), this argument is wrong on its merits. While plaintiffs’ counsel might have avoided SLUSA’s reach by bringing each of the

individual claims separately in Arizona state court, he did not do so in the

first instance and did not attempt in the SAC to disaggregate the claims

into separate actions. 

8410 U.S. MORTGAGE, INC. v. SAXTON
[7] A unanimous Supreme Court flatly rejected a strict

“purchaser/seller” requirement and endorsed an expansive

view of SLUSA’s preemptive scope. The Court began its

analysis by noting that “[t]he magnitude of the federal interest

in protecting the integrity and efficient operation of the market for nationally traded securities cannot be overstated.” Id.

at 1509. The Court reasoned that, for purposes of SLUSA preemption, “[t]he identity of the plaintiffs does not determine

whether the complaint alleges fraud ‘in connection with the

purchase or sale’ of securities. The misconduct of which

respondent complaints here—fraudulent manipulation of

stock prices—unquestionably qualifies as fraud ‘in connection

with the purchase or sale’ of securities.” Id. at 1515. It did not

matter that the plaintiffs themselves did not purchase or sell

a covered security; rather, “it [was] enough that the fraud

alleged ‘coincide’ with a securities transaction—whether by

the plaintiff or by someone else.” Id. at 1513 (emphasis added).13

[8] Plaintiffs in this case seek to avoid SLUSA dismissal by

arguing that they did not purchase or sell any listed security

in response to the misrepresentations, and that, therefore, they

do not allege fraud in connection with the purchase or sale of

a security. This is the very argument that Dabit rejected.

Plaintiffs allege a scheme to fraudulently hide Saxton’s financial condition—having the necessary effect of artificially

inflating the price of Saxton’s publicly traded shares—

through material misrepresentations in Saxton’s public filings

and other public statements. They allege harm from this

scheme through inducement by misleading financial information to refrain from exercising rights under their several loan

documents. While plaintiffs themselves did not purchase or

13The Court also distinguished the limitation it imposed in Blue Chip

Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), that only actual buyers and sellers of securities have a private right of action under Securities

and Exchange Commission Rule 10b-5, explaining that it previously

imposed that limitation because the private right of action was a judiciallycrafted remedy, and because even weak cases under Rule 10b-5 may have

substantial settlement value. Dabit, 126 S.Ct. at 1509-15. 

U.S. MORTGAGE, INC. v. SAXTON 8411
sell any of the publicly traded shares of Saxton, Dabit does

not require that they do so. They have alleged fraud that

“coincide[s]” with the purchase or sale of securities, and

SLUSA therefore preempts their claim. 

[9] For similar reasons, the Court’s decision in Dabit also

forecloses plaintiffs’ arguments on SLUSA’s “covered security” requirement. SLUSA preemption applies only if the misrepresentation affects the purchase or sale of a “covered

security,” as defined at 15 U.S.C. § 78bb(f)(5)(E). Plaintiffs

advance different arguments for the various types of debt

instruments described in their SAC. They maintain that each

debt instrument is not itself a “covered security,” either

because it was not issued by a publicly-traded corporation,

was not in existence at the time of the alleged misrepresentations, is otherwise outside the scope of the statutory definition, or is eligible for one or more statutory exemptions.

However, the Supreme Court’s decision in Dabit renders all

these arguments irrelevant. Whether or not one or more of the

relevant debt instruments is a “covered security” does not

affect the applicability of SLUSA to this action because the

alleged harm stems from misrepresentations in Saxton’s public filings and public statements. These misrepresentations

undoubtedly “coincide” with the purchase or sale of Saxton’s

publicly traded shares, and those shares are clearly “covered

securities” under SLUSA. 

We our mindful of the general “presum[ption] that Congress does not cavalierly pre-empt state-law causes of action.”

Dabit, 126 S.Ct. at 1514 (citing Medtronic, Inc. v. Lohr, 518

U.S. 470, 485 (1996) (alterations in original)). But, as the

Court noted in Dabit, 

that presumption carries less force here than in other

contexts because SLUSA does not actually pre-empt

any state cause of action. It simply denies plaintiffs

the right to use the class action device to vindicate

certain claims. The Act does not deny any individual

8412 U.S. MORTGAGE, INC. v. SAXTON
plaintiff, or indeed any group of fewer than 50 plaintiffs, the right to enforce any state-law cause of

action that may exist. 

126 S.Ct. at 1514. The holding in Dabit is thus both broad and

narrow in its application. The Court’s articulation of the “in

connection with” requirement is expansive, broad enough to

reach present plaintiffs. But it is also very narrow, in that

present plaintiffs could have completely avoided SLUSA’s

reach by pursuing their claims in groups of 50 or less or by

bringing a federal claim that meets the strict pleading requirements of the PSLRA.14 Instead, plaintiffs chose to proceed in

Arizona state court under Arizona state law as an aggregated

class of hundreds of plaintiff lenders, and it is access to that

procedural device that SLUSA denies. Our empathy for possibly defrauded plaintiffs does not permit us to flout the clear

instruction of the United States Supreme Court. 

V. The district court did not err by not remanding

viable state law causes of action under 15 U.S.C.

§ 78bb(f)(3)(D).

[10] SLUSA provides that “[i]n an action that has been

removed from a State court pursuant to paragraph (2) [as a

“covered class action”], if the Federal court determines that

the action may be maintained in State court pursuant to this

subsection, the Federal court shall remand such action to such

State court.” 15 U.S.C. § 78bb(f)(3)(D). Plaintiffs argue that

this statutory provision allows the district court to dismiss

only preempted claims and requires it to remand any remaining viable state-law causes of action to the state court. It is not

14We also note that SLUSA contains several express exemptions for

certain kinds of state actions, though plaintiffs are not eligible for these.

See, e.g., 15 U.S.C. § 78bb(f)(3)(A) (exempting actions based on the law

of the defendant’s state of incorporation or organization) and 15 U.S.C.

§ 78bb(f)(5)(C) (exempting pure derivative actions from the definition of

“covered class action”). 

U.S. MORTGAGE, INC. v. SAXTON 8413
settled whether SLUSA either permits or requires the remand

of particular claims in a single suit that contains some claims

that are preempted, and some claims that are not. After the

Supreme Court’s decision in Dabit, however, plaintiffs have

no claims that avoid SLUSA preemption. Thus, there are no

viable state-law claims to remand, and we need not—and do

not—reach this issue in this case. 

CONCLUSION

[11] Under the standards the Supreme Court announced in

Merrill Lynch v. Dabit, plaintiffs’ lawsuit is clearly covered

by SLUSA. We therefore hold that plaintiffs’ Arizona lawsuit

was properly removed to federal court under SLUSA and that

the district court properly dismissed the SAC with prejudice.

AFFIRMED. 

8414 U.S. MORTGAGE, INC. v. SAXTON