Remand of securities case upheld

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The Seventh Circuit Court of Appeals held on Dec. 2 that although it can review a trial judge’s authority to remand a case to state court, it will not review the lower court’s reasoning.

Between 1998 and 2001, the telecommunications company, WorldCom, Inc., issued debt securities worth billions of dollars in connection with which various parties served as underwriters. WorldCom agreed to indemnify the underwriters for liability arising out of untrue statements or omissions in prospectuses issued in connection with the offerings.

In June 2002, WorldCom announced that it had improperly treated $3.8 billion in ordinary costs as capital expenditures and that it would have to restate its financial statements. This led to the filing of numerous lawsuits in state and federal courts across the country.

In October 2002, the Judicial Panel on Multidistrict Litigation (JPML) ordered that actions pending in federal courts be centralized in the Southern District of New York before Judge Cote, pursuant to 28 U.S.C. 1407, the multidistrict litigation statute.

Some bondholders brought individual actions in state courts, asserting claims under the Securities Act of 1933 (1933 Act), 15 U.S.C. 77a, et seq., but not the Securities Exchange Act of 1934 (1934 Act), 15 U.S.C. 78a, et seq.

Unlike the 1934 Act which provides for exclusive federal jurisdiction, the 1933 Act allows for concurrent federal and state jurisdiction and has an antiremoval provision: “[N]o case arising under this subchapter and brought in any State court of competent jurisdiction shall be removed to any court of the United States.” 15 U.S.C. 77v(a).

Nevertheless, many of the state court actions under the 1933 Act were removed to federal court, after WorldCom declared bankruptcy in July 2002. Those actions were then transferred to Judge Cote as “tag-along actions,” defined by JPML Rule 1.1 as “a civil action pending in a district court and involving common questions of fact with actions previously transferred under Section 1407.”

The transfers were ultimately upheld by the Second Circuit in Cal. Pub. Employees’ Ret. Sys. v. WorldCom, Inc., 368 F.3d 86 (2d Cir. 2004).

In June 2003, the Illinois Municipal Retirement Fund (IMRF) filed suit in Illinois state court, also alleging claims only under the 1933 Act.
The underwriters removed the case to Illinois federal court, and requested the action be transferred as a tag-along action to Judge Cote.

IMRF then moved to remand the action to state court, raising three arguments: (1) the 1933 Act absolutely prohibits removal; (2) IMRF’s action does not fall within federal bankruptcy jurisdiction; and (3) even if there is subject matter and removal jurisdiction, the district court should abstain from exercising jurisdiction and should remand pursuant to 28 U.S.C. 1334(c)(1), which permits abstention in cases related to a bankruptcy case “in the interest of justice, or in the interest of comity with State courts or respect for State law,” or 28 U.S.C. 1452(b), which permits remand of claims related to a bankruptcy case “on any equitable ground.” These were the same arguments the Second Circuit had rejected.

The district judge acknowledged the contrary holding by the Second Circuit, but agreed with IMRF, and ordered the case remanded, finding that rules of statutory construction require the 1933 Act’s antiremoval provisions to control over the more general provisions of 28 U.S.C. 1334(b) and 1452.

The court also found that, even if the 1933 Act did not bar removal, the claims were not related to the WorldCom bankruptcy, and that remand was appropriate pursuant to the doctrines of permissive abstention and equitable remand under secs. 1334(c)(1) and 1452(b).

The underwriters appealed, but the Seventh Circuit affirmed in a decision by Judge Joel M. Flaum.

Jurisdiction

The court first considered whether it has jurisdiction to review the remand order, and concluded that it does.

The court acknowledged that a number of statutes limit its jurisdiction. 28 U.S.C. 1447(d) provides that “[a]n order remanding a case to the State court from which it was removed is not reviewable on appeal or otherwise” In addition, sec. 1334(d) bars appellate review of “[a]ny decision to abstain” made in a bankruptcy case or proceeding. Finally, sec. 1452(b) bars review of equitable remands of claims related to a bankruptcy case.

Nevertheless, the court agreed with the underwriters that “antecedent questions of power are properly presented to courts of appeals,” and therefore, the court may vacate the order even though it may not review its reasoning.

The court relied on the U.S. Supreme Court’s decision in Thermtron Products
, Inc. v. Hermansdorfer, 423 U.S. 336 (1976), in which the court held that sec. 1447(d) is not a complete bar to appellate review of remand orders, and that it had appellate jurisdiction to review a remand order premised on the district court’s overcrowded docket.

In addition, in In re Cont’l Cas. Co., 29 F.3d 292, 294 (7th Cir.1994), the Seventh Circuit issued a writ of mandamus ordering a district court to recall a remand order, because the district court had remanded the case sua sponte for a procedural removal defect. The court held that the district court lacked statutory authority to remand a case based on a procedural defect in removal absent a motion by a party.

Finally, the court noted that it has previously suggested that it would be within its appellate jurisdiction to vacate a remand order issued by a transferor court after the case has been transferred by the JPML. Gen. Elec. Co. v. Byrne, 611 F.2d 670, 673 (7th Cir. 1979).

The court wrote: “Today we make the principle underlying this observation explicit: When a district court exceeds its statutory authority by the very issuance of a remand order — as opposed to merely issuing a flawed remand order — it is within our appellate jurisdiction to review that court’s exercise of authority and vacate the ineffective order, provided we can do so without reference to the contents of the remand order. In this case, we can review the contested exercise of authority without considering the reasoning in the district court’s remand order.
Accordingly, we do so here.”

Authority to Remand

Turning to the issue of whether 28 U.S.C. § 1407, the multidistrict litigation statute, prohibits a district court from issuing a remand order in contravention of a potential transferee court’s earlier jurisdictional ruling, the court held that it does not, and held that the district court did not exceed its authority in remanding the case to state court.

Section 1407 provides, in relevant part: “(a) When civil actions involving one or more common questions of fact are pending in different districts, such actions may be transferred to any district for coordinated or consolidated pretrial proceedings. Such transfers shall be made by the judicial panel on multidistrict litigation authorized by this section upon its determination that transfers for such proceedings will be for the convenience of parties and witnesses and will promote the just and efficient conduct of such actions. … (b) Such coordinated or consolidated pretrial proceedings shall be conducted by a judge or judges to whom such actions are assigned by the judicial panel on multidistrict litigation.”

JPML Rule 7.4(a) provides that, upon learning of a potential tag-along action, an order “may be entered by the Clerk of the [JPML] transferring the action to the previously designated transferee district court. … The Clerk of the [JPML] shall serve this order on each party to the litigation but, in order to afford all parties the opportunity to oppose transfer, shall not send the order to the clerk of the transferee district court for fifteen days from the entry thereof.”

Subpart (d) provides that, if there is no opposition to the transfer in response to the conditional transfer order, the clerk of the JPML will transmit a final transfer order to the transferee court. Subpart (e) provides, “Conditional transfer orders do not become effective unless and until they are filed with the clerk of the transferee district court.”

Finally, JPML Rule 1.5 provides that the pendency of a conditional transfer order “does not affect or suspend orders and pretrial proceedings in the district court in which the action is pending and does not in any way limit the pretrial jurisdiction of that court.”

Applying the rules, the court concluded, “In this case, the district court remanded after the JPML issued a conditional transfer order but before transmittal of a final transfer order to the previously designated transferee, Judge Cote in the Southern District of New York.
Therefore, the transfer had not become effective and the conditional order did not ‘in any way limit the pretrial jurisdiction’ of the district court. Under the JPML rules of procedure, the district court did not exceed its authority in issuing the remand order.”

At oral argument, the underwriters acknowledged that they cannot prevail without showing that JPML Rule 1.5 is invalid, but argued that the rule conflicts with the text, structure, and purpose of sec. 1407.

The underwriters noted that subsec. (b) provides that “consolidated pretrial proceedings shall be conducted” by the transferee judge, and contended that the word “shall” signals an obligation of the transferee court and deprives other courts of the authority to interfere with the transferee court’s actions.

The court disagreed, holding, “Subsection (b) provides that the transferee judge shall conduct ‘consolidated pretrial proceedings,’ but subsection (a) states that actions must be ‘transferred,’ not merely designated, for ‘consolidated pretrial proceedings’ to be conducted. Thus, though the statute identifies a duty of the transferee court after an action has been transferred, it does not suggest, even implicitly, that the authority of either court is affected before transfer by the mere designation of a transferee court. Consistent with this, Rule 1.5 states that the authority of the potential transferor court is not limited ‘in any way’ prior to actual transfer. There is no textual conflict between sec. 1407 and Rule 1.5 that would support striking the latter or finding that the district court exceeded its authority in this case.”

The underwriters also argued that its construction must be adopted to avoid absurd results because, “it would allow potential transferor courts to issue rulings discordant with those of the transferee court, which clearly undermines the stated purposes of the multidistrict litigation statute.”

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Again, the court disagreed, finding nothing absurd in district courts individually evaluating their own jurisdiction.

The court added, “Congress has indicated a preference for remands based on such individualized jurisdictional evaluations and a tolerance for inconsistency. As we have explained, 28 U.S.C. 1447(d) bars appellate review of a remand order based on a district court’s determination that it lacks subject matter jurisdiction. This creates a ‘one-bite- at-the-apple scheme,’ under which inconsistent jurisdictional decisions by district courts cannot be brought in line through the appellate process. Even clear errors in a district court’s jurisdictional analysis may not be corrected by the courts of appeals if the district court thought that it lacked subject matter jurisdiction. If the courts of appeals have no power to bring consistency to these remand orders, there is no reason why a sister district court, in a different circuit, should have this power. After a transfer takes place under sec. 1407, the transferee court has authority to issue consistent jurisdictional rulings in all of the transferred cases before it. Before the transfer is effective, however, the potential transferee court wields no such power over individual, unconsolidated cases (cites omitted).”

The court also rejected the underwriters’ argument that the district court’s order undermines the purpose of the multidistrict litigation statute —promoting efficient litigation and avoidance of inconsistent contemporaneous rulings in like cases.

The court wrote, “Undoubtably, efficiency and consistency are goals of sec. 1407. It does not follow from this premise, however, that any rule that limits efficiency or allows inconsistency conflicts with the statute and may not stand.” Accordingly, the court affirmed.

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David Ziemer can be reached by email.