Opinion
CASE NO. 00-2413-IEG (CGA)
February 28, 2001
ORDER (1) GRANTING PLAINTIFF'S MOTION TO REMAND ACTION TO STATE COURT; AND (2) DENYING REQUEST FOR SANCTIONS [Doc. No. 9]
Presently before the Court is plaintiffs' motion to remand the above action to state court for lack of federal subject matter jurisdiction, as well as a request for sanctions and costs. For the reasons discussed below, the Court grants plaintiffs' motion to remand the case to state court, but denies plaintiffs' request for sanctions and costs.
BACKGROUND
On October 25, 2000, plaintiffs Cad/Cam Publishing Inc., Stephen Wolfe, and Jeanette M. De Wyze ("plaintiffs") filed a class action complaint in the San Diego County Superior Court against defendants John Thomas Archer, Mony Securities Corporation ("Mony Securities"), James F. Scovie, and David W. Mounier ("defendants"). Plaintiffs' complaint was based on promissory notes issued to more than seventy investors by MHP Conversion LLC ("MHP notes") and sold by defendants. Plaintiffs' complaint alleged two federal causes of action under the Securities Act of 1933, and five causes of action under California state securities laws.
On November 20, 2000, defendant Archer answered the complaint in state court. Ten days later, on November 30, 2000, plaintiffs voluntarily dismissed their federal causes of action under the Securities Act of 1933, leaving only their five state securities causes of action.
Despite the fact that plaintiffs voluntarily dismissed their federal claims, Mony Securities filed a "Notice of Removal," based on federal subject matter jurisdiction on December 4, 2000. Mony Securities acknowledged in the notice of removal that plaintiffs had dismissed their federal securities claims, but stated that those claims were improperly dismissed.
On December 29, 2000, plaintiffs filed the instant motion to remand the case to state court, and requesting sanctions against defendants for improper removal.
DISCUSSION
A. Legal Standard: Motion to Remand
A federal court may exercise removal jurisdiction over a case only if jurisdiction existed over the suit as originally brought by the plaintiff. See 28 U.S.C. § 1441 (a). Generally, the party seeking to invoke the jurisdiction of the federal courts has the burden of proving the existence of jurisdiction, and the burden of proof in removal cases is on the defendant. See McNutt v. General Motors Acceptance Corp., 298 U.S. 178, 189 (1936); Emrich v. Touche Ross Co., 846 F.2d 1190, 1195 (9th Cir. 1988); see also Wilson v. Republic Iron Steel Co., 257 U.S. 92, 97 (1921); Gaus v. Miles, Inc., 980 F.2d 564, 567 (9th Cir. 1992) (per curiam) (holding that the defendant bears the burden of proof on removal of establishing federal jurisdiction). Defendant's burden for the purposes of removal is one of "actually proving the facts to support jurisdiction," or presenting "proof to a reasonable probability that jurisdiction exists." See Gaus, 980 F.2d at 567; Shaw v. Dow Brands, Inc., 994 F.2d 364, 366 n. 2 (7th Cir. 1993). In order to establish removal jurisdiction on the basis of the existence of a federal question under 28 U.S.C. § 1331, the removing defendants must show that the complaint "aris[es] under the Constitution, laws, or treaties of the United States." 28 U.S.C. § 1331. Since 28 U.S.C. § 1441 (a) is strictly construed against removal jurisdiction, there is a strong presumption against the existence of removal jurisdiction. See Boggs v. Lewis, 863 F.2d 662, 663 (9th Cir. 1988); Gaus 980 F.2d at 566. Accordingly, when there is a doubt as to removeability, it is resolved in favor of remanding the case to state court. See Gaus, 980 F.2d at 566.
B. Analysis
Plaintiffs contend that they voluntarily dismissed their federal securities claims on November 30, 2000, four days before Mony Securities filed its notice of removal. Based on the fact that there were no federal claims remaining in the complaint at the time of removal, plaintiffs contend that Mony Securities wrongfully removed the case to federal court.
Defendants present two arguments in support of their contention that removal was proper in this case. First, defendants argue that plaintiffs' federal securities claims were improperly dismissed in state court. According to California law, when a party files a class action in state court, he relinquishes the right to dismiss the action or claims unilaterally. See Marcarelli v. Cabell, 58 Cal.App.3d 51, 53 (1976) (holding that when a party sues in a representative capacity on behalf of a class, he does not have the absolute power to dismiss the complaint, and must seek court approval of any dismissal). Defendants argue that plaintiffs improperly dismissed their federal claims on November 30, 2000, because they did not follow the appropriate procedural steps under California law for class actions. Defendants claim that because the state court should not have dismissed plaintiffs' federal claims, removal was proper when Mony Securities filed its notice of removal on December 4, 2000.
However, regardless of whether the federal securities claims were properly dismissed in state court, Mony Securities was aware at the time it filed its notice of removal that no federal claims existed in the case. (See Boynton Decl. Ex. 5.) To the extent that Mony Securities believed that the federal claims should be reinstated, it should have raised that issue with the state court prior to removing the case to federal court. Mony Securities presents no authority for the contention that defendants can remove the case to federal court, and then ask this Court to give itself subject matter jurisdiction by reinstating the federal claims dismissed by the state court. As noted above, removal jurisdiction is based on whether a federal question existed at the time that the removal petition was filed. See Gaus, 980 F.2d at 556; Libhart v. Santa Monica Dairy Co., 592 F.2d 1062, 1065 (9th Cir. 1979). In this case, when Mony Securities filed its notice of removal on December 4, 2000, there clearly were no existing federal claims. Therefore, the Court finds that the possibility that plaintiffs' federal claims were improperly dismissed in state court did not justify, Mony Securities' removal for federal question jurisdiction.
Defendants also argue that plaintiffs dismissed their federal securities claims solely in order to prevent the application of federal legal limitations on securities lawsuits. According to defendants, Congress enacted the Private Securities Litigation Reform Act ("PSLRA") in 1995 in order to make it more difficult for plaintiffs to bring lawsuits for violations of securities laws. See PSLRA, 15 U.S.C. § 77u-4. Following the enactment of PSLRA, class action plaintiffs began suing under state securities laws in order to defeat removal and the application of PSLRA's limitations. In response, Congress passed the Securities Litigation Uniform Standards Act of 1998 ("SLUSA").See SLUSA, 77 U.S.C. § 77 (b). SLUSA was designed to prevent the frustration of PSLRA by providing that qualified class actions filed in state court are subject to removal in federal court. Therefore, defendants argue that SLUSA provides that plaintiffs cannot manipulate their complaint to defeat removal by dismissing their federal securities claims in order to avoid the application of PSLRA.
However, despite SLUSA's requirement that "qualified" class actions be filed in federal court, SLUSA specifically carves out from this requirement class actions brought under the Securities Act of 1933 that do not involve "covered securities." See 15 U.S.C. § 77v(a). Section 77v(a) provides that claims under the Securities Act of 1933 shall not be removed to federal court unless they fall within certain exceptions set forth in 15 U.S.C. § 77p(c). Under section 77p(c), securities fall within the exception if they (1) are listed on an enumerated stock exchange, (2) are listed on an authorized securities exchange, (3) if they are issued by an investment company registered under the investment Company Act of 1943, (4) if they are sold to certain "qualified purchasers," or (5) if they fall within certain exemptions. See 15 U.S.C. § 77p(c), 77r(b). The MHP notes offered by defendants, and giving rise to plaintiffs' securities causes of action, were not issued pursuant to a registration statement, do not trade on any exchange, and do not qualify for any of the exemptions listed in section 77r(b). Because of this, the MHP notes are not "covered securities," and thus, plaintiffs' previous federal claims under the Securities Act of 1933 do not fall under the removal provisions of SLUSA. Therefore, the Court finds that even if plaintiffs had not properly dismissed their federal securities claims under the Securities Act of 1933, defendants' removal of the case based on federal question jurisdiction under SLUSA ran directly contrary to the explicit language of the statute, and was improper. See 15 U.S.C. § 77v(a).
15 U.S.C. § 77v(a) provides in pertinent part:
Except as provided in section 77p(c) of this title [removal of covered class actions], 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.Id. (emphasis added).
Defendants also urge the Court to retain jurisdiction despite the dismissal of the federal claims to prevent plaintiffs from succeeding in their obvious attempt to avoid federal jurisdiction. However, a party's attempt at forum shopping is not inherently opprobrious, barring evidence of bad faith or fraudulent joinder of parties to defeat federal jurisdiction. Here, plaintiffs' voluntary dismissal of their federal claims is hardly prima facie evidence of bad faith by plaintiffs, nor does it prejudice defendants, in fact, plaintiffs' abandonment of its federal claims to choose a state forum is no more censurable or prejudicial to defendants than defendants' attempt to remove the action to federal court or to request its retention here despite the principles of comity and federalism. See Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22, 40 (1988) (expressing the concern that "defendants will be encouraged to shop for more favorable law by removing to federal court").
Defendants have failed to satisfy their burden of demonstrating that the Court had subject matter jurisdiction over the case at the time Mony filed its notice of removal. Therefore, the Court finds that because there was no basis for federal jurisdiction at the time Mony filed its notice of removal, this Court lacks the jurisdiction over the case. See 28 U.S.C. § 1441 (a); Gaus, 980 F.2d at 566 ("Federal jurisdiction must be rejected if there is any doubt as to the right of removal in the first instance.").
Plaintiffs also argue that the current issue regarding the dismissal of the federal claims prior to removal is moot. Plaintiffs maintain that if the Court determines that the federal claims were improperly dismissed in state court, and declines to remand the case, they will simply request dismissal of those claims in federal court and seek remand based on lack of subject matter jurisdiction. However, plaintiffs fail to recognize that even if their federal claims were voluntarily dismissed in federal court, the Court could still in its discretion exercise pendent jurisdiction over the remaining state law claims. See 28 U.S.C. § 1367; United Mine Workers v. Gibbs, 383 U.S. 715 (1966).
Sanctions/Costs
Improper removal subjects a plaintiff to unnecessary expense, forcing him to appear in federal court, as well as research and prepare a motion to remand, merely to get the action returned to the court where he originally filed the complaint. See Circle Indus. U.S.A. v. Parke Const. Group, 183 F.3d 105, 109 (2d Cir. 1999). Therefore, a district court has broad discretion to award attorneys' fees and costs when granting a motion to remand in order to deter future improper removal. I.d.; 28 U.S.C. § 1447 (c). In the Ninth Circuit, an award of attorneys' fees for wrongful removal is permitted even where defendants' removal was "fairly supportable," but wrong as a matter of law. See Balcorta v. Twentieth Century-Fox Film Corp., 208 F.3d 1102, 1106 n. 6 (9th Cir. 2000) (upholding district court's award of attorneys' fees to plaintiff following remand order).
Although the Court finds that the case was improperly removed from state court, it declines to exercise its discretion to award attorneys' fees and costs. Even though a district court can award fees and costs in cases where the defendant's removal was "fairly supportable," the Court does not believe that awarding fees and costs in this case is necessary to further the goal of deterring improper removal. Defendants' removal, although legally incorrect, does not appear to have been taken in bad faith, or for the purpose of harassing plaintiffs and delaying the progress of the lawsuit. Rather, defendants believed that the federal securities claims were improperly dismissed in state court, and sought federal jurisdiction in order to prevent plaintiffs from avoiding federal limitations on securities lawsuits. Therefore, the Court declines to award plaintiffs fees and costs based on defendants' improper removal.
CONCLUSION
For the reasons discussed above, the Court finds that defendants improperly removed the case to federal court pursuant to 28 U.S.C. § 1441 (b). Accordingly, GRANTS plaintiffs' motion to remand this action to California state court. However, plaintiffs' request for sanctions and costs is DENIED.
IT IS SO ORDERED.