Southern District Remands California Securities Law Class Action, Declining to Combine 2 Similar Cases for Purposes of CAFA Jurisdiction

by charlesjung

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In Royalty Alliance, Inc. v. Tarsadia Hotel, et al., Nos. 09CV2739 DMS (CAB), 10CV1231 DMS (CAB), 2010 WL 3339202 (S.D. Cal. Aug. 23, 2010) (slip op.), the court remanded a securities class action to state court and also rejected defendant’s request that the court consider two similar class actions for the purpose of evaluating CAFA jurisdiction.

Plaintiff brought a motion to remand, and Defendant Playground Destination Properties’ (“Playground”) brought a motion to consolidate the action with a similar action.  The case is a proposed class action for alleged violations of California securities laws committed in connection with the sale of condominium units in the Hard Rock Hotel San Diego (“HRHSD”). Plaintiff filed suit in San Diego Superior Court. Id. *1.  Defendants removed, alleging the case implicates a substantial federal question and arises under federal law, namely the Securities Act of 1933. Defendants also noted the similarity between this matter and another matter presently before the Court, Salameh v. Tarsadia Hotel, 09cv2739 DMS (CAB) (“Salameh” ). Salameh contains claims for both state and federal securities laws violations committed in connection with the sale of condominium units at HRHSD.  Playground filed a motion to consolidate.

Federal Question Jurisdiction

The court declined to exercise federal question jurisdiction.  The complaint alleged seven state law claims.  But Defendants argued the case “arises under” federal law because several allegations within the complaint refer to federal law (e.g., Plaintiffs allege “Defendants failed to comply with their legal duty to register the Hard Rock Investment Contracts with the SEC in violation § 12(a)(1) of the Securities Act.”).  But the court concluded that there was no claim under the federal law and the allegation “may therefore be unnecessary”; thus it “does not indicate that federal law forms the basis of Plaintiff’s claims.”

The court also rejected defendants’ “artful pleading” argument.  The court stated the doctrine as follows:

Under this doctrine, ” ‘a plaintiff may not defeat removal by omitting to plead necessary federal questions in a complaint.’ ” ARCO Envtl. Remediation, L.L.C. v. Department of Health & Envtl. Quality, 213 F.3d 1108, 1114 (9th Cir. 2000) (quoting Franchise Tax Bd., 463 U.S. at 22.). “A state-created cause of action can be deemed to arise under federal law (1) where federal law completely preempts state law; (2) where the claim is necessarily federal in character; or (3) where the right to relief depends on the resolution of a substantial, disputed federal question.” Id. (citations omitted). Defendants argue the case necessarily implicates resolution of federal issues because federal securities laws are relied upon to support Plaintiff’s claims. Defendants contend the matter turns on the definition of a security, which is set forth in federal securities laws, that California courts apply federal law in determining whether a transaction is an investment contract, and the California securities laws are modeled on federal securities laws.

Id. *2.

The court found these arguments unavailing:

California has its own securities laws distinct from the Exchange Act, and it those statutes under which Plaintiff brings its claims. In determining whether a transaction is an “investment contract” under California securities laws, courts use either the same test as that applied under federal law or a “risk-capital test,” a test established by the California Supreme Court. See Consolidated Management Group, LLC v. Department of Corporations, 162 Cal. App. 4th 598, 610 (2008). Thus, determination of whether the transaction here falls under the securities laws is not necessarily federal in character, nor does it turn on the resolution of a substantial, disputed federal question. Accordingly, Defendants have not established federal jurisdiction on these grounds.

CAFA Jurisdiction

Defendants also presented an interesting argument for CAFA jurisdiction.  Citing a Sixth Circuit case, Freeman v. Blue Ridge Paper Prods., 551 F.3d 405 (6th Cir. 2008), Defendants argued that Plaintiffs were trying to “game the system” by artificially splitting their class action to avoid CAFA jurisdiction.

The plaintiffs in Freeman filed five lawsuits in state court, each having identical claims and parties except as to the time period of the alleged claims, which were a series of sequential sixmonth periods. In each suit, the plaintiffs limited their aggregate amount in controversy to $4.9 million. Id. at 406. The court determined the five lawsuits should be combined when examining CAFA jurisdiction because “CAFA was clearly designed to prevent plaintiffs from artificially structuring their suits to avoid federal jurisdiction.” Id. at 407. The court went on, however, to limit its holding “to the situation where there is no colorable basis for dividing up the sought-for retrospective relief into separate time periods, other than to frustrate CAFA.” Id. at 409.

Id. *3.

But the court rejected this argument finding that there “is a colorable basis for dividing up the lawsuits as Plaintiffs have done. Accordingly, combining the two matters for purposes of determining CAFA jurisdiction is unwarranted.”

Judge

U.S. District Judge Dana M. Sabraw.

By CHARLES H. JUNG

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