Court Opinion

ID: 3002491
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:29:48.583965+00
Date Added: 2024-06-11T09:34:48.893421
License: Public Domain

In the

 United States Court of Appeals
                For the Seventh Circuit

No. 08-8031

JACK P. K ATZ, individually and
on behalf of a class,
                                               Plaintiff-Respondent,
                                  v.

E RNEST A. G ERARDI, JR., et al.,
                                             Defendants-Petitioners.

   Petition for Leave to Appeal from the United States District Court
          for the Northern District of Illinois, Eastern Division.
                  No. 08 C 4035—John W. Darrah, Judge.

   S UBMITTED D ECEMBER 8, 2008—D ECIDED JANUARY 5, 2009

  Before E ASTERBROOK, Chief Judge, and K ANNE and SYKES,
Circuit Judges.
  E ASTERBROOK , Chief Judge. Jack Katz proposes to repre-
sent a class of persons who contributed real property (or
interests in real property) to the Archstone real estate
investment trust, in exchange for interests called “A-1
Units.” In 2007 Archstone merged into Tishman-Lehman
Partnership. Holders of A-1 Units were offered a choice of
cash or Series O Preferred Units in the entity formed by the
2                                                 No. 08-8031

merger. Katz contends that the merger violated the terms
of the A-1 Units, because neither cash nor the Series O
Preferred Units offered investors the same tax benefits as
A-1 Units. After a majority of investors approved the
merger, however, Katz took the cash and filed this suit in
a state court against Archstone, Lehman Brothers, Tishman
Speyer Development Corp., and their managers.
   Defendants removed this suit to federal court under the
Class Action Fairness Act of 2005. It comes within federal
jurisdiction not only because the complaint rests on a
federal statute but also because Katz has citizenship
different from some of the defendants, the proposed class
contains more than 100 members, and the stakes exceed $5
million. 28 U.S.C. §1332(d). The district court remanded it
to state court after concluding that removal is forbidden by
§22(a) of the Securities Act of 1933, 15 U.S.C. §77v(a). See
2008 U.S. Dist. L EXIS 76322 (N.D. Ill. Sept. 23, 2008). One
might suppose that a statute enacted in 2005 supersedes a
statute enacted in 1933, but the district court held that
§22(a) controls because it is “more specific” than the 2005
Act—for §22(a) deals only with securities litigation, while
the 2005 Act covers class actions in many substantive
fields. Defendants have applied under 28 U.S.C. §1453(c)(1)
for permission to appeal. See also Spivey v. Vertrue, Inc., 528
F.3d 982 (7th Cir. 2008). We grant that application and
proceed immediately to decision, because the papers filed
at the motion stage address the merits too.
  Only purchasers of securities may pursue actions under
the 1933 Act, see Gustafson v. Alloyd Co., 513 U.S. 561 (1995),
yet Katz (and other members of his class) sold their
securities for cash. (The Securities Exchange Act of 1934
No. 08-8031                                                   3

permits suits by sellers as well as buyers, but it lacks a
provision equivalent to §22(a).) Katz depicts himself as a
buyer by characterizing the supposed failure to honor the
terms of the A-1 Units as if he had sold those securities and
“bought” what Katz calls “new A-1 Units,” which he then
sold for cash. (A “purchase” of “new A-1 Units” would
have been involuntary, but an involuntary purchase is still
a purchase. See SEC v. National Securities, Inc., 393 U.S. 453,
467 (1969).)
  What Katz calls the “fundamental change doctrine” that
turns a sale into a purchase is word play designed to
overcome the actual text of the securities laws, and this
circuit follows the statutes rather than trying to evade them
with legal fictions. See SEC v. Jakubowski, 150 F.3d 675, 680
(7th Cir. 1998); Isquith v. Caremark International, Inc., 136
F.3d 531, 535–37 (7th Cir. 1998). Katz sold his units for cash;
he did not buy any new security. The “new A-1 Units” are
figments of a lawyer’s imagination. Using legally fictitious
(and factually nonexistent) “new A-1 Units” to nullify a
legislative decision that only buyers have rights under the
1933 Act would be wholly unjustified.
  Substantive objections to the terms of corporate mergers
arise under state law (both contract law and corporate law)
rather than federal securities law. Santa Fe Industries, Inc. v.
Green, 430 U.S. 462 (1977). And although any material
falsehoods or omissions in the registration statement or
prospectus for the Series O Preferred Units could give rise
to a claim under federal law, that claim would belong to
the SEC, or the buyers of the units, rather than someone
such as Katz who did not purchase them. Blue Chip Stamps
v. Manor Drug Stores, 421 U.S. 723 (1975).
4                                                 No. 08-8031

   The district court acknowledged some of these problems
but thought them irrelevant to the propriety of removal. It
is enough, in the district court’s view, that the complaint
filed in state court invokes the Securities Act of 1933. That
alone forecloses removal; if Katz lacks a securities claim, he
will lose on the merits in state court, the district judge
concluded.
  It is hard to distinguish between a claim artfully de-
signed to defeat federal jurisdiction and one that is prop-
erly pleaded but unsuccessful on the merits, but it cannot
be right to say that a pleader’s choice of language always
defeats removal. If it did, then Katz could have pleaded a
breach of contract, or a violation of duties under corporate
law, and added: “this is a workers’ compensation suit that
cannot be removed as a result of 28 U.S.C. §1445(c).” A
pleader cannot block removal by specifying inapplicable
legal theories—such as, for example, an assertion that a
pension claim arises under state contract or trust law rather
than ERISA. See Bartholet v. Reishauer A.G. (Zürich), 953 F.2d
1073 (7th Cir. 1992). A complaint pleads grievances rather
than law; a federal court must decide for itself the claim’s
legal classification. This is true whether the pleader tries to
get into federal court by insisting that a state-law claim
“really” arises under federal law, or to stay out by declar-
ing that a claim arising under federal law “really” depends
on state law alone.
  Katz’s citation to the 1933 Act is not quite as bald a
maneuver as a contention that his grievance is a workers’
compensation claim, or the assertion in Bartholet that an
effort to obtain benefits from a pension or welfare trust was
nothing but a state-law contract claim. The merger led to
No. 08-8031                                                 5

the registration and issuance of Series O Preferred Units, so
federal securities law has some role to play—and we know
from decisions such as Merrill Lynch, Pierce, Fenner & Smith
Inc. v. Dabit, 547 U.S. 71 (2006), that it is possible for a
private party to suffer an injury covered by the securities
laws even though there is no private right of action to
vindicate the investor’s entitlements. So we think it best to
assume that Katz’s complaint is not just artful pleading,
and to ask whether §22(a) insulates all claims under the
1933 Act from removal under the 2005 Act.
  Section 22(a) provides in part: “Except as provided in
section 77p(c) of this title, no case arising under this
subchapter and brought in any State court of competent
jurisdiction shall be removed to any court of the United
States.” Section 16(c), 15 U.S.C. §77p(c), which was added
by the Securities Litigation Uniform Standards Act of 1998,
permits the removal of many securities class actions; Dabit
describes the scope of the 1998 Act. In the district court
Katz argued that his suit is not a “covered class action”
within the scope of the 1998 Act and therefore may not be
removed. Defendants replied that the 2005 Act applies to
“all” civil actions, with a few defined exceptions, and that
as Katz’s suit is not among the exceptions it must be
removable.
  Section 22(a) and the 2005 Act are incompatible; one or
the other must yield. Usually the older law yields to the
newer. Luther v. Countrywide Home Loans Servicing LP, 533
F.3d 1031 (9th Cir. 2008), holds that things are otherwise
for §22(a), however, because Radzanower v. Touche Ross &
Co., 426 U.S. 148 (1976), says that an older law maintains its
6                                                 No. 08-8031

vitality when it is more specific than a newer one. Section
22(a) covers only securities suits and thus is more specific
than the 2005 Act, which applies to all civil actions, the
ninth circuit believed. The district court in this suit agreed.
  The canon favoring preservation of specific statutes
arguably affected by newer, but more general, statutes
works when one statute is a subset of the other. For
example, if the 2005 Act dealt with all civil suits, then a law
applicable only to civil securities actions would be more
specific. But §22(a) of the 1933 Act is not a subset of the
2005 Act. Section 22(a) covers only securities actions, but it
includes all securities actions—single-investor suits as well
as class actions, small class actions as well as large multi-
state ones. The 2005 Act, by contrast, covers only large,
multi-state class actions. Is the 1933 Act more specific
because it deals only with securities law, or is the 2005 Act
more specific because it deals only with nationwide class
actions? There is no answer to such a question, which
means that the canon favoring the specific law over the
general one won’t solve our problem. Cf. California Public
Employees’ Retirement System v. WorldCom, Inc., 368 F.3d 86
(2d Cir. 2004) (holding, for this reason among others, that
the specificity canon does not prevent the bankruptcy-
removal provision, 28 U.S.C. §1452, from superseding
§22(a) of the 1933 Act to the extent of any inconsistency).
  The language of the 2005 Act, rather than a canon, tells us
how the new removal rule applies to corporate and securi-
ties actions. Section 1453(b) allows removal of any class
action brought within federal jurisdiction by §1332(d), and
§1453(d) adds:
No. 08-8031                                                   7

    (d) This section shall not apply to any class action
    that solely involves—
        (1) a claim concerning a covered security as
        defined under section 16(f)(3) of the Securi-
        ties Act of 1933 (15 U.S.C. [77p(f)(3)] and
        section 28(f)(5)(E) of the Securities Ex-
        c h a n g e A c t o f 1 9 3 4 ( 1 5 U . S .C .
        78bb(f)(5)(E));
        (2) a claim that relates to the internal af-
        fairs 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; or
        (3) a claim that relates to the rights, duties
        (including fiduciary duties), and obliga-
        tions 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).
Section 1332(d)(9) has a functionally identical list. This tells
us all we need to know. Claims listed in §1453(d) are not
removable. Other securities class actions are removable if
they meet the requirements of the 2005 Act (100 investors,
$5 million in controversy, minimal diversity). To read
§22(a) as Katz does would be to make most of §1453(d)
pointless.
  Canons such as “the specific prevails over the general”
are just doubt resolvers. Section 1453(d) leaves no doubt
8                                                No. 08-8031

about how the 1933 Act, 1934 Act, and 2005 Act fit to-
gether. There is some incongruity in removing a securities
action under the 2005 Act, which creates a species of
diversity-of-citizenship jurisdiction, even though the 1933
Act creates a federal claim, but both the principal removal
rule (§1453(b)), and the exceptions in §1453(d), show that
the 2005 Act applies to claims that arise under federal law
(provided that minimal diversity is present).
  Luther failed to recognize that §22(a) of the 1933 Act is
not a subset of the 2005 Act. More importantly, Luther did
not appear to understand that §1453(d) tells us how the
2005 Act affects securities cases: the ninth circuit did not
analyze this language or even acknowledge its existence.
We therefore disagree with Luther and hold that securities
class actions covered by the 2005 Act are removable,
subject to the exceptions in §1332(d)(9) and §1453(d).
Because it creates a conflict among the circuits, this opinion
was circulated before release to all judges in active service.
See Circuit Rule 40(e). None of the judges favored a
hearing en banc.
  Does any of the three exceptions apply? Subsection (d)(1)
prevents removal of a claim concerning a “covered secu-
rity” defined in 15 U.S.C. §77p(f)(3). That subsection says
that the term “means a security that satisfies the standards
for a covered security specified in paragraph (1) or (2) of
section 77r(b) of this title at the time during which it is
alleged that the misrepresentation, omission, or manipula-
tive or deceptive conduct occurred”. Section 77r(b) in turn
defines covered securities as those that trade on a national
securities exchange, are senior to a traded security, or were
No. 08-8031                                                 9

issued by a registered investment company. The A-1 Units
in Archstone were not “covered securities” by that defini-
tion.
  Subsection (d)(2) deals with corporate internal affairs.
Katz does not characterize his claim as one of that sort. But
he does contend that it comes within subsection (d)(3)
because it “relates to the rights, duties (including fiduciary
duties), and obligations relating to or created by or pursu-
ant to any security” (the A-1 Units are “securities” under
the 1933 Act’s definition). Estate of Pew v. Cardarelli, 527
F.3d 25, 31–33 (2d Cir. 2008), the only appellate decision
about the effect of §1453(d)(3), concludes that it applies to
suits asserting that the promises made in securities have
not been honored but does not apply to suits asserting
fraud or other misconduct in the sale of securities. Neither
side in this appeal takes issue with Cardarelli’s holding. But
they disagree about its application.
  Katz describes his claim as a contention that Archstone
and its successor have failed to keep the promises that the
Declaration of Trust made to owners of A-1 Units. Defen-
dants say that this can’t be the theory, because Katz sold
his A-1 Units and thus lost any rights they may have
conferred. The only possible claim, as defendants see
things, is that the documents sent to the investors offering
the choice among cash, Series O Preferred Units, or dissent
and appraisal under state law, were materially false or
misleading and led investors to choose poorly. That would
be a claim sounding in fraud—not under the 1933 Act, to
be sure, since Katz was a seller rather than a buyer, but for
the purpose of applying §1453(d)(3) it does not matter
10                                              No. 08-8031

whether the plaintiff’s legal theory depends on the federal
securities laws.
  If as Katz insists his claim rests on the terms of the A-1
Units (and the Declaration of Trust), then §1453(d)(3)
prevents removal under the 2005 Act. This also would
mean that the suit might be removed under some other
statute, for a suit to enforce a security’s terms does
not arise under the 1933 Act (or for that matter the
1934 Act, see Santa Fe Industries, 430 U.S. at 475–76) and
so is not governed by §22(a). If as defendants insist the
claim rests on a contention that deceit occurred in the
merger and related transactions, then §1453(d)(3) does not
prevent removal, and the suit must be decided on the
merits in federal court. If the complaint rests on both
theories, then it is removable, because §1453(d) covers only
a class action that is “solely” one of the three enumerated
kinds.
  Because Katz’s effort to invoke §1453(d)(3) is inconsistent
with his reliance on the 1933 Act in general, and §22(a) in
particular, it is tempting to suppose that defendants must
be right. But the plaintiff as master of the complaint may
present (or abjure) any claim he likes. The best approach is
to have the district court hold a hearing at which the
parties can elaborate on their positions, for the character-
ization of an ambiguous claim is closer to a question of fact
than to one of law.
  The judgment of the district court is vacated, and the
case is remanded for a decision whether §1453(d)(3)
prevents removal under the 2005 Act and, if it does,
whether the case is removable under some other grant of
No. 08-8031                                            11

jurisdiction. If the case is not removable, it must be re-
manded; otherwise it must be decided on the merits.

                          1-5-09