CAFA Takes A Back Seat In Sovereignty Driven Action

Connecticut v. Moody’s Corp., No. CIV 308CV1314 AWT, CIV 308CV1315 AWT, CIV 308CV1316 AWT, Slip Copy, 2009 WL 3245888 (D. Conn. Sep 30, 2009).

The District Court in Connecticut remanded the case to the state court holding that when the State brings an action as a sovereign and not on behalf of a circumscribed group of its citizens, CAFA does not apply.

The State of Connecticut (the “State”) filed separate actions against Moody’s Corporation (“Moody’s), Fitch, Inc. (“Fitch”), and the McGraw-Hill Companies, Inc. (“McGraw-Hill”) in the state court, seeking redress for the defendants’ alleged unfair, deceptive and illegal business practice of systematically and intentionally giving lower credit ratings to bonds issued by states, municipalities, and other public entities as compared to corporate and other forms of debt with similar or even worse rates of default. The State alleged that the defendants’ actions harmed those public bond issuers by forcing them to purchase bond insurance to improve their credit rating or to pay higher costs on their lower-rated bonds. The State alleged that these costs were ultimately borne by all Connecticut taxpayers.

The defendant in each action removed it to the federal court under CAFA, and the State moved to remand each action.

In the section for “Prayer and Relief” in the complaints against Fitch and McGraw-Hill the State sought an order pursuant to Conn. Gen. Stat. § 42-110m of the Connecticut Unfair Trade Practices Act (“CUTPA”), directing to the defendants to pay restitution. However, in the State’s complaint against Moody’s the State requested an order directing Moody to pay restitution to the ‘State, its municipalities, and other public entities,’ pursuant to § 42-110m, which was later eliminated from the section for ‘Prayer and Relief’ after the removal.

The District Court noted that the defendants were not residents of Connecticut; Moody’s and Fitch were incorporated in Delaware, and had a principal place of business in New York; and McGraw-Hill was incorporated and had a place of business in New York. The District Court remarked that although, a State is not a citizen for purposes of the diversity jurisdiction, in certain circumstances, however, a state may assume the citizenship of other real parties in interest, and a federal court must disregard nominal or formal parties and rest jurisdiction only upon the citizenship of real parties to the controversy. When a state agency files an action in state court, the out-of-state defendant can remove on the basis of diversity, if the state is not the real party plaintiff.

The State contended that it was not a nominal party because it had a sovereign interest in enforcing its own laws and was acting solely on its own behalf under § 42-110m of CUTPA.

The defendants contended that the factual allegations in the complaints, which repeatedly referred to the harm to bond issuers, and the type of relief the State was seeking demonstrated that the State was really suing on behalf of a subset of Connecticut citizens, and therefore, the State assumed the citizenship of those real parties in interest. The District Court noted that the court in Connecticut v. Levi Strauss & Co., 471 F. Supp. 363 (D. Conn. 1979) was placed in a similar situation, when Connecticut brought an antitrust action against a defendant pursuant to Conn. Gen. Stat. § 35-32(a), which authorized the Attorney General to bring action in his enforcement capacity and under Conn. Gen. Stat. § 35-32(c) as parens patriae for state residents who suffered damages from high prices and impaired competition. In Levis Strauss, the court analyzed the State’s capacity as a citizen, and also recognized that the basis on which the Attorney General was authorized to bring suit did not change the nature of the action. The Levis Strauss court held that if Connecticut was suing as parens patriae for the benefit of all its citizens, its capacity would be essentially sovereign, and it would not be a citizen for diversity purposes. Likewise, in Butler v. Cadbury Beverages, Inc., No. 3:97-CV-2241 (EBB), 1998 WL 422863 (D. Conn. July 1, 1998), when the Labor Commissioner sought to double damages, the court, relying on Levis Strauss,held that the plain face of complaint did not mandate a holding – that the citizen status of that individual controls for diversity purposes – when no relief was requested that would inure to any other person.

The District Court noted that if it was to accept the defendants’ arguments, it would be re-characterizing the factual allegations in the complaints. In other words, the defendants sought to have descriptions of the impact of the defendants’ alleged actions on particular persons treated as the assertion of claims on behalf of those persons. The District Court found that in this case, the State was proceeding for the benefit of a circumscribed group of its citizens.

The defendants contended that based upon the number of citizens that the State’s action may benefit, i.e., bond issuers and investors, CAFA applied. The District Court, however, found that CAFA only applies if one accepts the premise that the State was suing not in its capacity as sovereign but on behalf of a circumscribed group of its citizens. Because this was a state enforcement action, the District Court concluded that CAFA did not apply and remanded the case to the State Court.