California Public Employees' Retirement System v. WorldCom, Inc.
Docket: Docket No. 04-0219
Court: Court of Appeals for the Second Circuit; May 11, 2004; Federal Appellate Court
The court is addressing whether a federal district court can assert bankruptcy jurisdiction over claims under the Securities Act of 1933 that are generally nonremovable. This issue arises from a conflict between Section 22(a) of the Securities Act, which prohibits removal of individual claims, and 28 U.S.C. § 1452(a), which allows removal of claims related to bankruptcy cases. The court has decided to hear this appeal on an interlocutory basis due to its significance for numerous pending lawsuits.
After examining the statutes, the court concludes that the bankruptcy removal statute takes precedence, as it does not exempt claims from Acts of Congress prohibiting removal, unlike the general removal statute. The court rejects the plaintiffs' argument that the Securities Act is more specific, asserting that Congress did not intend to grant an absolute choice of forum to plaintiffs when amending the Act in 1998. Consequently, the court determines that Section 22(a) does not prevent the removal of actions related to a bankruptcy case under § 1452(a).
The background includes the case against WorldCom, which disclosed improper financial reporting and led to multiple securities class actions filed in the Southern District of New York. These actions were consolidated, while state and private pension funds (the Bondholders) opted to pursue individual claims under the Securities Act rather than join the class action. Over 120 plaintiffs have filed at least 47 such actions in various state courts.
The Bondholders' litigation strategy focuses on claims under the 1933 Act to prevent removal to federal court, relying on Section 22(a) which typically prohibits such removals from state courts. However, despite their intent, their actions were removed to federal courts due to WorldCom's bankruptcy, as allowed under 28 U.S.C. 1452(a) for actions related to bankruptcy. The Underwriters and Directors argued that the Bondholders' claims were related to the bankruptcy because of potential indemnification and reimbursement rights against WorldCom. Once in federal court, the Bondholders' actions were consolidated for pretrial with existing class actions.
Had the Bondholders included claims under the 1934 Act, removal would have been straightforward. Their focus on nonremovable claims under the 1933 Act led to multiple motions to remand, initiated by NYCERS, which had filed its own action in state court alleging violations of both the 1933 Act and New York law. After NYCERS' action was removed, it sought remand, prompting Judge Cote to allow the Bondholders to intervene and argue for remand.
NYCERS and the Bondholders contended that Section 22(a) grants an absolute choice of forum, barring removal, and that their actions were not sufficiently related to the WorldCom bankruptcy to justify removal under Section 1452(a). They highlighted that indemnification claims would not result in liability for WorldCom unless a separate bankruptcy court action was initiated, diminishing their relevance to the reorganization plan.
Judge Cote ultimately denied the motion to remand on March 3, 2003, and directed other individual plaintiffs to provide supplemental briefs on why her ruling should not apply to them. After reviewing additional arguments, she reaffirmed her decision on May 5, 2003, and declined to reconsider her rulings on May 20, 2003, rejecting the Bondholders' claims that WorldCom’s Plan of Reorganization filing affected the District Court's jurisdiction.
The Court clarified that it retains 'related to' jurisdiction despite potential limitations on the defendants' recovery from the estate due to the Plan of Reorganization, asserting that jurisdiction is determined by circumstances at the time of removal. On May 28, 2003, the Bondholders sought certification for interlocutory appeal of orders denying remand under 28 U.S.C. 1292(b). Despite the pending status of this application, they filed a writ of mandamus on August 8, 2003, requesting the District Court to vacate its remand denials. Judge Cote subsequently viewed the interlocutory appeal application as withdrawn without prejudice on August 11, 2003. On October 31, 2003, the Court denied the mandamus petition, citing the availability of interlocutory appeal as a sufficient means for appellate review and determining that the petitioners did not have a 'clear and indisputable' claim for relief. After the denial, the Bondholders renewed their motion for interlocutory appeal certification. On December 16, 2003, the District Court certified that individual Securities Act claims could be removed despite prohibition in Section 22(a). Following this, on January 16, 2004, the Court accepted the interlocutory appeal and allowed parties to supplement their previous briefs. However, the District Court did not certify whether the individual actions were 'related to' the WorldCom bankruptcy, reasoning that this did not involve a controlling legal question with substantial grounds for difference of opinion. The Court confirmed that the District Court's orders met 1292(b) criteria regarding the removal of Securities Act claims. The District Court had already begun dismissing individual actions by the Bondholders, dismissing one action on November 21, 2003, due to statute of limitations issues, and dismissing 31 more actions on January 20, 2004. It also refused to extend the opt-out period for the class action. On January 21, 2004, the Court ordered the parties to demonstrate whether further action was needed in light of ongoing District Court proceedings. The Bondholders requested a stay of state court cases, vacating recent dismissals, and extending the opt-out deadline until after the appeal resolution.
Defendants initially opposed the requests made by the Bondholders. On February 3, 2004, the Court ordered an extension for the deadline to opt out of the class action and for plaintiffs to voluntarily dismiss their individual actions, extending these deadlines by at least 30 days following the Court’s mandate. This order did not affect the Bondholders’ first two claims for preliminary relief, preserving their rights. The District Court certified one question regarding whether 1933 Act claims can be removed under Section 1452(a), despite the removal prohibition in Section 22(a). However, the Court denied certification of a second question about the 'related to' jurisdiction over the Bondholders’ Securities Act claims, noting that the defendants' indemnification and contribution claims against WorldCom would likely be extinguished in reorganization. Although the Court's determination on the issue may not meet the requirements of 28 U.S.C. 1292(b), the appellate Court can still address issues within the certified order. The appellate Court agreed with the District Court that whether defendants' claims rendered the Bondholders’ actions 'related to' WorldCom’s bankruptcy is not a controlling legal question. The District Court found that certain defendants' contribution claims supported 'related to' jurisdiction over the Bondholders’ actions, as their outcomes might conceivably affect the bankruptcy estate. The District Court did not examine other potential claims for supporting jurisdiction. Since at least one basis for 'related to' jurisdiction exists, the appellate Court is unconvinced that the Bondholders have presented a controlling legal question for interlocutory review. Additionally, the Bondholders' argument against 'related to' jurisdiction challenges the District Court's factual findings regarding the potential impact of defendants' claims on the estate.
Section 1292(b) is limited to challenges regarding legal determinations, and the court does not express an opinion on whether the Bondholders' claims are related to WorldCom’s bankruptcy, although they assume so for this appeal. The focus is on whether the District Court improperly exercised bankruptcy jurisdiction over claims under the Securities Act of 1933, which are generally nonremovable.
The bankruptcy removal provisions under 28 U.S.C. §§ 1452 and 1334 allow the removal of civil actions related to bankruptcy to federal court. Section 1452(a) permits removal of claims if the district court has jurisdiction under Section 1334, which grants original but not exclusive jurisdiction over civil proceedings arising under or related to bankruptcy cases. This jurisdiction aims to reduce costs and delays associated with litigation in bankruptcy cases, as highlighted in the Senate and House Reports on the Bankruptcy Reform Act of 1978.
After a Supreme Court decision in 1984 deemed a previous broad jurisdiction provision unconstitutional, Congress passed the Bankruptcy Amendments and Federal Judgeship Act of 1984, which did not significantly change the existing jurisdictional framework. Consequently, Sections 1452(a) and 1334(b) are integral parts of the Bankruptcy Code.
The Securities Act of 1933, specifically Section 22(a), establishes concurrent jurisdiction between state and federal courts for claims under the Act, allowing district courts to address offenses and violations alongside state courts, except for specific covered class actions noted in Section 16.
Section 22(a) of the 1933 Act prohibits the removal of certain claims to federal court, specifically stating that cases under this subchapter filed in state courts cannot be removed, except for class actions, which are governed by Section 16(c) allowing removal to federal district courts. Additionally, Section 16(b) preempts state law claims in securities class actions related to untrue statements or manipulative practices concerning covered securities. This section was added by the Securities Litigation Uniform Standards Act of 1998 (SLUSA) to address shortcomings of the earlier Private Securities Litigation Reform Act of 1995 (PSLRA), which aimed to reduce meritless fraud claims but did not affect the removal prohibition of individual Securities Act claims.
There exists a statutory conflict between the bankruptcy removal statute, which allows civil actions related to bankruptcy to be removed to federal court, and Section 22(a), which explicitly prohibits the removal of individual Securities Act claims from state court. The district court, led by Judge Cote, determined that the bankruptcy removal statute takes precedence over Section 22(a). Judge Cote's reasoning included the interpretation of the general removal statute (28 U.S.C. § 1441(a)), which allows removal unless explicitly stated otherwise, and the limited exceptions in Section 1452(a). He argued that this exclusivity supports the interpretation that bankruptcy-related actions are removable. Furthermore, he highlighted that this interpretation aligns with the Bankruptcy Code's goal of efficient asset preservation for reorganization, referencing the case of Gonsalves v. Amoco Shipping Co. to illustrate the application of these principles in mixed claim situations.
The appellate court determined that the maintenance and cure claim was not sufficiently independent from the Jones Act claim to allow for its removal under Section 1441(c). However, it noted that if such claims were independent, the nonremovability of Jones Act claims under Section 1445(a) would not preclude removal under Section 1441(c). Judge Cote articulated that the Jones Act's removal bar creates an exception to Section 1441(a) but does not prevent additional removal jurisdiction under Section 1441(c). Similarly, Section 22(a)’s prohibition on removing 1933 Act claims would not obstruct removal if another valid basis existed.
Judge Cote was the first to favor removal regarding the conflict between the Securities Act and the bankruptcy removal statute, contrary to many district courts that sided against removal. Judge Haynes argued for Section 22(a) due to its specificity compared to Section 1452(a), noting Section 22(a) was amended in 1998 with the enactment of SLUSA. Despite Cote's decision to not remand the cases, two other judges in the Southern District of New York sided with Section 1452(a). In Global Crossing, Judge Lynch reasoned that SLUSA's narrow purpose did not influence the longstanding conflict between the two statutes, a view later adopted by Judge McKenna in Adelphia.
The review of a district court's denial of remand is performed de novo, with the defendant bearing the burden to demonstrate proper removal. In the case at hand, the defendants satisfied this burden. The analysis begins with the statutory language, where Section 1452(a) allows the removal of civil claims except for two enumerated exceptions. Conversely, Section 22(a) prohibits the removal of cases arising under the Securities Act. The conflicting language of these statutes cannot be reconciled simply by the principle of inclusio unius est exclusio alterius, as Section 1452(a) only contemplates the specific exceptions listed.
The only exception to nonremoval under the 1933 Act is class actions in state court. The principle of inclusio unius has limited applicability in this case, as both Section 22(a) and Section 1452(a) contain exclusive exceptions that should be interpreted within their broader statutory context. The Bondholders assert that Section 22(a) is more specific than Section 1452(a), which would lead to its precedence. However, this interpretation is rejected. When two conflicting statutes exist, the specific statute generally controls unless Congress indicates otherwise. In this instance, Section 1452(a) offers a comprehensive framework for bankruptcy-related civil actions, suggesting that it is not overshadowed by the more specific claims outlined in Section 22(a). The Supreme Court's precedent indicates that a general statute does not repeal a specific statute by implication unless there is an irreconcilable conflict. The Court found no such conflict between the 1934 Act and the National Bank Act, allowing the more specific statute to prevail. Applying similar reasoning, Section 22(a) cannot be deemed more specific than Section 1452(a), as both statutes address a defined class of claims without exclusivity. Therefore, the broader scope of Section 1452(a) governs the resolution of the statutory conflict.
Section 1452(a) and Section 22(a) have distinct scopes, as Section 1452(a) applies to a variety of claims not under the 1933 Act, while Section 22(a) encompasses numerous claims unrelated to bankruptcy. Although Section 22(a) is more specific than the general removal statute outlined in 28 U.S.C. 1441(a), it does not limit itself to claims related to bankruptcy. The Supreme Court's decision in Radzanower indicates that a specific statute does not necessarily control over a general one if it unduly interferes with the latter's operation. In Radzanower, the Court found that the National Bank Act’s venue provisions did not interfere with the 1934 Act. However, concerns arise regarding Section 22(a)'s potential impact on the Bankruptcy Code, which was designed to provide bankruptcy courts with broad jurisdiction to manage bankruptcy-related matters efficiently. Congress intended Section 1452(a) to facilitate removal by any party, including plaintiffs, without requiring unanimous consent from defendants, and it allows for removal beyond just state courts, as demonstrated in Quality Tooling, Inc. v. United States.
Section 1452(a) is intended to centralize bankruptcy litigation in federal courts, supporting efficient administration of bankruptcy claims. This aligns with established case law emphasizing the need for a unified approach in bankruptcy cases, particularly under Chapter 11, where all pending liabilities must be resolved as part of the reorganization plan. Contribution and indemnification claims potentially affect the administration of a bankrupt estate, as indicated by prior cases.
Section 22(a) cannot supersede Section 1452(a) because it could disrupt the Bankruptcy Code's operations. Even if Section 22(a) is considered more specific, its interference with the Bankruptcy Code's functions means it would not control. The Bondholders argue that Section 22(a), amended by SLUSA in 1998, should take precedence over the earlier Section 1452(a). However, legal principles dictate that the more recent statute only prevails if it clearly indicates a change in congressional intent. The Bondholders failed to demonstrate any intent in SLUSA to alter the jurisdictional framework for individual claims under the 1933 Act. Furthermore, SLUSA’s focus on expanding federal jurisdiction over class actions does not support the Bondholders' position, as it did not modify the nonremoval provision of the 1933 Act.
Congress did not indicate an intention to change existing rules regarding individual Securities Act claims related to bankruptcy when it enacted the Securities Litigation Uniform Standards Act (SLUSA) in 1998. This conclusion is supported by a comparison to a previous case involving the Commodities Exchange Act, where congressional amendments preserved an implied cause of action. Examining Section 1452(a) of the Bankruptcy Code, enacted over fifty years after the Securities Act of 1933, reveals that it does not mention the 1933 Act and lacks an exception for non-removable federal claims, unlike the general removal statute, 28 U.S.C. § 1441(a). Therefore, Section 1452(a) allows for the removal of individual claims brought under the Securities Act, as it does not contain language that would prohibit such removal. The absence of an exception in Section 1452(a) implies that Congress intended to permit the removal of "related to" claims when it was enacted in 1978. This aligns with the principle that intentional inclusion or exclusion of language in legislative texts indicates congressional intent.
The Bondholders argue that Section 22(a) of the relevant statutes overrides both Section 1441(a) and Section 1452(a), asserting that the phrase "except as otherwise expressly provided by Act of Congress" in Section 1441(a) would be rendered meaningless. Statutory interpretation principles dictate that every clause should be given effect, as established in cases like Duncan v. Walker and Babbitt v. Sweet Home. Although surplusage interpretations are not always ambiguous, there is no advantage to treating Section 1441(a) as surplusage. Instead, a reading that harmonizes Section 1452(a) with every clause of Section 1441(a) resolves any conflict. The precedent set in Gonsalves, while not directly applicable, supports this reading, as it illustrates that non-removable claims can coexist with removable claims, although the circumstances differ as the Bondholders did not accept the risk of removal by asserting individual claims solely under the 1933 Act. The analysis from Gonsalves applies similarly to the bankruptcy removal statute, Section 1452(a), which allows for the removal of actions "related to" a bankruptcy case without distinguishing based on federal jurisdiction. Thus, imposing such a distinction would distort the statutory framework.
When invoking an anti-removal provision like Section 22(a), the initial inquiry is whether the removal is occurring via the general removal statute, 28 U.S.C. 1441(a), or through a distinct provision that grants additional removal jurisdiction. If removal stems from a provision that provides extra jurisdiction and lacks an exception for nonremovable federal claims, it should be fully enforced. Following this reasoning, Section 1441(c) allows for the removal of all claims that are “otherwise non-removable” when joined with removable claims, including certain federal law claims.
Applying these principles to Section 1452(a), it is determined that, with two exceptions, this section grants removal jurisdiction over all claims “related to” a bankruptcy case. The interpretation of the introductory clause in Section 1441(a) should not be deemed surplusage, nor should a distinction be made among “related to” claims that doesn’t exist in the bankruptcy removal statute. Consequently, claims under the Securities Act of 1933 that are generally nonremovable may be removed to federal court if they fall under 28 U.S.C. 1452(a), which provides federal jurisdiction for claims related to bankruptcy cases.
While the court does not decide if the specific claims in question fit within 28 U.S.C. 1452(a), it affirms the District Court's jurisdiction over the Bondholders' Securities Act claims, despite potential conflicts between Section 22(a) and Section 1452(a). Section 22(a) states that, with one exception, no case under this subchapter brought in state court may be removed to federal court, while Section 1452(a) allows for removal of claims related to bankruptcy, as defined by Section 1334, which grants district courts original but not exclusive jurisdiction over civil proceedings related to Title 11 cases.
Following WorldCom's Chapter 11 filing on July 21, 2002, the automatic stay provision of the Bankruptcy Code, 11 U.S.C. 362, halted litigation against WorldCom, allowing actions to proceed against other defendants, whose names are noted in the District Court’s opinion. Separate class actions alleging violations of the Employee Retirement Income Security Act of 1974 (ERISA) are also referenced.
29 U.S.C. 1001 et seq. is consolidated in the Southern District as In re WorldCom, Inc. ERISA Litigation, which is not pertinent to the current appeal. The U.S. Bankruptcy Court for the Southern District of New York authorized payments from the WorldCom estate to the Directors' counsel on September 4, 2002, and March 5, 2003, following proper procedures. Under 28 U.S.C. 1292(b), a district judge can permit an appeal for orders involving significant legal questions that could expedite litigation. The Bondholders petitioned for a writ of mandamus to overturn a May 28, 2003 order that consolidated their actions with a class action and placed discovery authority with the lead class-action plaintiff, but this was denied. During oral arguments, Underwriters' counsel acknowledged no prejudice from extending the opt-out date. The court concurred with the District Court that the matter at hand does not present a controlling legal question and therefore did not evaluate the District Court's finding regarding the lack of substantial grounds for differing opinions on the relation of actions to the WorldCom bankruptcy. Historical context is given regarding the unconstitutionality of 28 U.S.C. 1471(c) as established by the Supreme Court in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., which affects the jurisdictional framework for bankruptcy cases. Current statutory provisions under 28 U.S.C. 1441(c) restrict the removal of nonremovable claims unless associated with claims under federal question jurisdiction. Additionally, two judges in the Central District of California have aligned with Judge Cote and Judge Lynch in denying remands of standalone Securities Act claims to state court, referencing their respective judicial reasoning in prior cases.
The venue provision of the National Bank Act, enacted in 1878, and the amendment of Section 22(a) in 1998 hold limited significance due to the later introduction of Section 1452(a). It is argued that 28 U.S.C. 2411(a) should not be considered a later enactment compared to 3771(e) of the Internal Revenue Code of 1939, as a predecessor provision to 2411(a) existed prior to 1942, when 3771(e) was enacted. This principle is referred to as the "dog didn’t bark" canon, suggesting that prior legal rules are retained if not mentioned in legislative discussions.
The current version of the removal provision is narrower than its predecessor. Under the pre-1990 statute, a "separate and independent claim" could be removed if joined with any claim that could be removed on its own. However, the amended statute restricts removal to instances where the separate claim is joined with a claim that falls under federal question jurisdiction (28 U.S.C. 1331). Consequently, for Section 1441(c) to apply, a nonremovable claim must now be joined with a federal claim that is removable under Section 1441(a).
The relevant portion of the Gonsalves case is considered dicta since the court did not need to address whether Section 1441(c) supersedes the Jones Act’s nonremoval provision to determine that the plaintiff's maintenance and cure claim was not sufficiently "separate and independent" from the Jones Act claim. This distinction is important, as it clarifies the nature of judicial comments that are not necessary for case decisions, thus non-precedential but potentially persuasive.
