Gilman v. BHC Securities, Inc.

• Decision Date: 17 January 1997
• Docket Number: No. 1616,D,1616
• Citation: 104 F.3d 1418
• Parties: Michael G. GILMAN, Plaintiff-Appellant, v. BHC SECURITIES, INC., Defendant-Appellee. ocket 95-9290.
• Court: U.S. Court of Appeals — Second Circuit

Page 1418

104 F.3d 1418

Michael G. GILMAN, Plaintiff-Appellant, v. BHC SECURITIES, INC., Defendant-Appellee.

No. 1616, Docket 95-9290.

United States Court of Appeals Second Circuit.

Argued June 6, 1996.

Decided Jan. 17, 1997.

Richard M. Meyer, Milberg Weiss Bershad Hynes & Lerach, L.L.P., New York City, for Plaintiff-Appellant.

Jack C. Auspitz, New York City (Charles L. Kerr, David S. Berg, Morrison & Foerster, L.L.P., of counsel), for Defendant-Appellee.

Before: NEWMAN, Chief Judge, JACOBS, Circuit Judge, and CHATIGNY, District Judge. ¹

JACOBS, Circuit Judge:

This putative class action for breach of contract and breach of fiduciary duty in the sale of securities was commenced by plaintiff Michael G. Gilman in New York State Supreme Court (New York County) and was removed, on the basis of diversity jurisdiction, to the United States District Court for the Southern District of New York by defendant BHC Securities, Inc. ("BHC"). BHC moved in federal court to dismiss the action on the grounds that (1) Gilman's claims were preempted by federal law; and (2) there was no contractual or fiduciary relationship between BHC and Gilman. The district court dismissed the complaint on the preemption ground. On appeal, Gilman disputes that his claims were preempted, but also argues that the district court lacked subject matter jurisdiction. We agree that the district court was without jurisdiction, and therefore we vacate the judgment and remand with instructions to remand the case to state court. We do not reach the issue of whether the claims in this case are preempted by federal law.

BACKGROUND

Gilman commenced this action on January 21, 1994, alleging various state law claims on The complaint alleges that order flow payments are tantamount to kickbacks, and that BHC's failure to disclose its receipt of such payments violated various New York statutes, "breached the fiduciary relationship between principal and agent, [and] violated the express and implied terms of the contracts between BHC and its customers." Gilman pled no federal claims. Although the complaint recites that the suit "is brought as a class action" on behalf of "several thousand" clients of BHC, there was apparently no ruling on class certification in the state court (and likewise none in the district court). It is undisputed that Gilman's individual stake in this lawsuit--as well as that of every other member of the putative class--is trivial, only a few cents per share traded. The complaint seeks: (a) compensatory damages both for "the amount of kickbacks and other inducements received [by BHC] from market makers for the execution of customer orders," and for "the amounts of commissions received by BHC" from Gilman and the other class members for handling their securities transactions; (b) an unspecified amount of "punitive damages for commercial bribe receiving and fraudulent conduct"; (c) litigation costs; and (d) an injunction against BHC's further acceptance of order flow payments.

                behalf of a putative class of all persons for whom BHC had executed securities transactions in which BHC received "order flow payments."   As the district court explained, "[p]ayment for order flow is the practice in the securities industry of brokers receiving payments from market makers or exchange specialists for having directed a volume of transactions to such market makers or exchange specialists for execution of the orders placed by investors."  Gilman v. BHC Securities, Inc., No. 94-CV-1133 (AGS), 1995 WL 747738, at * 2 (S.D.N.Y. Dec. 18, 1995).  Order flow payments are thus a type of volume discount--in either cash or in-kind services--by which market makers (who actually execute securities transactions) reward brokers for having directed business to them.  SEC regulations require brokers to disclose the nature of any order flow payments received in respect of their customers' orders (when the orders involve a type of security on which such payments are received), and also require additional disclosures (upon request) regarding order flow payments received on a customer's specific transactions.  Id. at * 3;  see Payment for Order Flow, SEC Release No. 34-34902, 59 Fed.Reg. 55,006, 55,010 (Nov. 2, 1994);  17 C.F.R. § 240.10b-10(a)(7)(iii)
                

On February 18, 1994, BHC removed Gilman's action to federal district court pursuant to 28 U.S.C. §§ 1441(a) and 1446. The petition averred that the district court had jurisdiction under 28 U.S.C. § 1332 because there was complete diversity of citizenship and because the amount in controversy exceeded $50,000. In support of its claim that the jurisdictional amount was satisfied, BHC stated, first, that "the relief sought is in the nature of a common fund for the benefit of the putative class members and in which each putative class member has a common and undivided interest," and that the value of any such fund would exceed $50,000. Second, the petition predicted that Gilman would seek more than $50,000 in punitive damages, which would create another "common fund" in which "[e]ach putative class plaintiff would have a common and undivided interest." ²

Gilman moved to remand the case to the New York State Supreme Court on April 18, 1994, arguing that each class member's claim was "independent and individual," and that no one could say "to a legal certainty" that each class member who transacted with BHC On November 16, 1994, BHC moved to dismiss the complaint on the grounds that Gilman's claims were preempted by federal law and that BHC had no contractual or fiduciary relationship with Gilman. Gilman, 1995 WL 747738, at * 1. In an Opinion and Order issued on December 18, 1995, the district court granted the motion on the preemption ground and declined to address the second ground. Id. at * 5-* 6.

"could receive a punitive damage award of $50,000." But Gilman withdrew the motion before it was decided, and the district court did not thereafter consider the issues of subject-matter jurisdiction that Gilman had raised.

DISCUSSION

Although Gilman abandoned his remand motion challenging the district court's jurisdiction, we are of course bound to consider his jurisdictional challenge now because "any party[,] ... at any stage of the proceedings, may raise the question of whether the court has subject matter jurisdiction." United Food & Commercial Workers Union, Local 919 v. Centermark Properties Meriden Square, Inc., 30 F.3d 298, 301 (2d Cir.1994) (quoting Manway Constr. Co. v. Housing Auth. of Hartford, 711 F.2d 501, 503 (2d Cir.1983)) (internal quotations omitted).

The party asserting federal jurisdiction bears the burden of proving that the case is properly in federal court. McNutt v. General Motors Acceptance Corp., 298 U.S. 178, 189, 56 S.Ct. 780, 785, 80 L.Ed. 1135 (1936); United Food, 30 F.3d at 304-05. BHC must shoulder that burden here, because BHC removed this case to the district court on the basis of diversity jurisdiction. See 28 U.S.C. § 1332(a)(1). Diverse citizenship is uncontested (Gilman being a citizen of Maryland, and BHC a citizen of Delaware and Pennsylvania). ³ The sole jurisdictional question is whether Gilman's complaint alleges more than $50,000 in controversy. ⁴ "To that end, it bears repeating that [the] party invoking [federal] jurisdiction ... has the burden of proving that it appears to a 'reasonable probability' that the claim is in excess of the statutory jurisdictional amount." United Food, 30 F.3d at 304-05 (quoting Tongkook America, Inc. v. Shipton Sportswear Co., 14 F.3d 781, 784 (2d Cir.1994)) (internal quotations omitted). BHC must "justify [its] allegations" that Gilman's complaint asserts claims exceeding $50,000 "by a preponderance of evidence." McNutt, 298 U.S. at 189, 56 S.Ct. at 785.

For reasons expressed below, we hold that BHC has not met its burden of proof and that the district court therefore lacked subject matter jurisdiction. Accordingly, we vacate the dismissal of Gilman's complaint and remand to the district court with instructions to remand the case to state court. See Caterpillar Inc. v. Lewis, --- U.S. ----, ----, 117 S.Ct. 467, 477, 136 L.Ed.2d 437 (1996) ("if, at the end of the day and case, a jurisdictional defect remains uncured, the judgment must be vacated"); United Food, 30 F.3d at 301.

Resolving this jurisdictional question entails consideration in some detail of the governing legal standards for Gilman's claims, as well as their factual predicate. BHC does not contend that Gilman or any member of the class he purports to represent has an individual claim exceeding $50,000. BHC never disputes Gilman's assertion that the "individual stake" of each class member "is relatively small," totaling only "one [or] two cents per share" of stock traded through BHC, and points to no class member whose trading volume would support a claim exceeding $50,000. Instead, BHC argues that the class members--each of whom may have suffered only a trivial loss--"assert a common and undivided interest," and that such claims, under "long established principles of diversity jurisdiction," may be aggregated to satisfy the jurisdictional amount in controversy.

It is true that claims may be aggregated to reach the jurisdictional minimum "when several plaintiffs unite to enforce a single title or right, in which they have a common and undivided interest." Zahn v. International Paper Co., 414 U.S. 291, 294, 94 S.Ct. 505, 508, 38 L.Ed.2d 511 (1973). But that rule is inapplicable here, because the class members' claims are "separate and distinct" and therefore cannot be aggregated, and because aggregation is not justified by the manner in which order flow payments originate or by the demand for punitive damages.

A. The "Non-Aggregation" Rule and the "Common Fund" Exception.

In Snyder v. Harris, 394 U.S. 332, 89 S.Ct. 1053, 22 L.Ed.2d 319 (1969), the Supreme Court considered whether, in light of the 1966 amendments to Rule 23 of the Federal Rules of Civil Procedure, the separate...