The Second Circuit Court of Appeals recently ruled that a putative securities class action brought under New York’s state consumer fraud law should be removed to federal court under the Class Action Fairness Act of 2005 (CAFA). Estate of Barbara Pew v. Cardarelli, No. 06-5703-mv, slip op. (2d. Cir. May 13, 2008).
In a prior lawsuit, the same plaintiffs brought a putative class action suit in New York state court against officers of Agway Inc., the issuer, and against PriceWaterhouseCoopers, the company’s auditor, alleging that the Agway defendants and PwC violated federal securities laws by failing to disclose Agway’s insolvency while marketing debt securities. The defendants removed the case to federal court, where plaintiffs amended their complaint to add a state consumer fraud claim based on “essentially the same acts of concealment” as the federal claim. The federal court subsequently dismissed the federal claims with prejudice and declined to exercise jurisdiction over the state claim, dismissing that claim without prejudice, thereby leaving the plaintiffs the right to refile in state court.
The plaintiffs then filed suit in state court seeking relief on the state law claim only. The defendants again removed the action to federal court, contending that removal jurisdiction existed under CAFA. The federal court disagreed and remanded the case back to state court on the ground that it “fell within an exception to CAFA’s removal provision for actions that relate to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security.”
On appeal, the Second Circuit Court of Appeals reversed the district court’s decision, finding that the state claim was subject to removal under CAFA. In reaching its decision, the court found that, although the certificates issued by Agway were securities and created “obligations” and “rights” in the holders, the CAFA exception did not apply because the substance of the plaintiffs’ complaint did not relate to those rights but instead focused on Agway’s alleged violation of the state consumer fraud action by fraudulently concealing its insolvency.
Judge Rosemary Pooler dissented from the majority opinion, stating that the securities at issue were obviously covered under the CAFA exception and the majority engaged in “judicial redrafting” of the statute.
The Court’s ruling demonstrates the power of CAFA to effectively allow state law causes of action to be litigated in federal court, thereby taking advantage of the superior judicial resources and procedural litigation tools often available to federal litigants.
