Opinion ID: 3049361
Heading Depth: 2
Heading Rank: 2

Heading: Propriety of the Initial Removal of the

Text: 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). 8 SLUSA 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). 9 This provision amends the Securities Exchange Act of 1934. An identical provision, codified at 15 U.S.C. § 77p, amends the Securities Act of 1933. U.S. MORTGAGE, INC. v. SAXTON 8407 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 8408 U.S. MORTGAGE, INC. v. SAXTON 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 Simi10 Specifically, 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). U.S. MORTGAGE, INC. v. SAXTON 8409 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  (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, 11 We 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.” 8410 U.S. MORTGAGE, INC. v. SAXTON 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. 12 At 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. U.S. MORTGAGE, INC. v. SAXTON 8411 [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 13 The 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. 8412 U.S. MORTGAGE, INC. v. SAXTON 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 U.S. MORTGAGE, INC. v. SAXTON 8413 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.