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Seventh Circuit Holds that CAFA Trumps
Securities Act

By Sherry L. Talton, Litigation News Associate Editor – April 1, 2009

The Seventh Circuit’s recent decision in Katz v. Gerardi [PDF], regarding the removal of class action Securities Act claims brought in state court, has raised questions about the intersection between Section 22(a) of the Securities Act of 1933 and the Class Action Fairness Act of 2005 (CAFA) (28 U.S. § 1332(d)(2)).

The dispute in Katz arose from a real estate investment trust merger. The issue was “whether §22(a) insulates all claims under the 1933 Act from removal under the 2005 Act.”

The Seventh Circuit found that “Section 22(a) and the 2005 Act are incompatible; one or the other must yield,” and it held that Section 22 of the 1933 Act does not prevent removal when the requirements of CAFA are met. Instead, “securities class actions covered by the 2005 Act are removable, subject to exceptions in §1332(d)(9) and §1453(d).”

In so holding, the Katz court disagreed with the Ninth Circuit’s 2008 decision in Luther v. Countrywide Home Loans Servicing LP [PDF], which held CAFA does not permit removal of claims under the 1933 Act and ruled that there was no conflict between the two acts.

Although the Katz court indicated that its decision caused “a conflict among the circuits,” some ABA Section of Litigation leaders are not so sure that there is any tension between these two cases.

“I do not believe that this ‘split’ between Circuits is a significant one or one that will get the Supreme Court's attention because both decisions ended up with potentially the same result—a remand to state court,” says Todd A. Holleman, Wilmington, DE, cochair of the Section of Litigation’s Appellate Practice Committee.

In addition, Luther can be construed as working within the context of Katz,” Holleman says. “In Katz, the issue became whether a CAFA exception applied, and the Seventh Circuit remanded the case to the district court for a determination of that issue without foreclosing the possibility that the case would be remanded to the state court,” he notes.

“In Luther, the district court had already held that no CAFA exceptions applied,” Holleman says. “There is no indication that the issue of whether a CAFA exception actually applied was ever raised by the parties in Luther or was presented to the Luther court. Thus, Luther can be construed consistently with Katz because, in the absence of a CAFA exception, Section 22(a) of the Securities Act prohibits the removal,” he says.

“If you apply the reasoning of Katz to the facts of Luther, it may be that the results in Luther would have been the same,” agrees Todd A. Murray, Dallas, a member of the Class Actions and Derivative Suits subcommittee of the Section’s Securities Litigation Committee.

“The import of the decision turns on whether there are claims previously affected by Section 22(a) that are outside the exception provided for in Section 1453(d)(1) of CAFA,” Murray notes.

Katz seems to involve the Ninth Circuit recasting an artfully pleaded complaint, then sending it back to the district court for review of what was actually asserted. It does not appear to decide whether or not Katz’s claim would have been treated by Section 22(a) as non-removable, but now as removable under CAFA,” Murray says.

Regardless of whether Katz and Luther actually represent a conflict between the circuits, litigators are awaiting a clearer guide through this myriad of statutory formulations than what the Seventh Circuit has provided.

Keywords: Katz v. Gerardi, Luther v. Countrywide Home Loans Servicing LP, CAFA, Securities Act


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