Spielman v. Merrill Lynch, Pierce, Fenner & Smith, Docket No. 01-9189.

• Decision Date: 13 June 2003
• Docket Number: Docket No. 01-9189.
• Parties: Michael SPIELMAN, on behalf of himself and all other similarly situated persons, Plaintiff-Appellee, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED, Defendant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

332 F.3d 116

Michael SPIELMAN, on behalf of himself and all other similarly situated persons, Plaintiff-Appellee, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED, Defendant-Appellant.

Docket No. 01-9189.

United States Court of Appeals, Second Circuit.

Argued: September 12, 2002.

Decided: June 13, 2003.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Edward J. Yodowitz, Skadden, Arps, Slate, Meagher, & Flom, LLP, New York, N.Y. (Jay B. Kasner, Andrew W. Reiss, on the brief), for Defendant-Appellant Merrill Lynch, Pierce, Fenner & Smith, Incorporated.

John Peter Zavez, Adkins, Kelston & Zavez, P.C., Boston, MA (John M. Dillon, Stephen P. Moore, Caruso & Dillon, PC, Mamaroneck, NY; Jody E. Anderman, LeBlanc & Waddell, LLC, Baton Rouge, LA; Glen DeValerio, Berman DeValerio & Pease LLP, Boston, MA; on brief), for Plaintiff-Appellee Michael Spielman.

Before: NEWMAN, F.I. PARKER, Circuit Judges, and UNDERHILL,^* District Judge.

Judge JON O. NEWMAN joins the opinion and concurs in a separate opinion.

F.I. PARKER, Circuit Judge.

Defendant-appellant Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch") appeals from the order of the United States District Court for the Southern District of New York (Denise Cote, Judge) entered on October 9, 2001, remanding claims brought by plaintiff-appellee Michael Spielman ("Spielman") in New York state court. Spielman, on behalf of himself and others similarly situated, brought suit on various state law grounds against Merrill Lynch alleging Merrill Lynch misled certain of its account holders to believe they would not be charged a transaction fee that they were, in fact, charged. Merrill Lynch removed the case to federal district court under both the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), 15 U.S.C. §§ 77p & 78bb(f), which permits removal of certain class actions alleging state law claims based on "a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security," 15 U.S.C. § 78bb(f)(1)-(2), and under the general removal statute, 28 U.S.C. § 1441(b) which permits removal of civil actions over which federal courts have original jurisdiction. On Spielman's motion, the district court remanded after determining that the alleged misrepresentations lacked a sufficient nexus to the underlying securities to fall within the scope of SLUSA preemption.

Reading the remand order in the most logical light possible, we find that the district court remanded based on its conclusion that it lacked subject matter jurisdiction to consider Spielman's claims under SLUSA. For the reasons set forth herein, this Court lacks appellate jurisdiction under 28 U.S.C. § 1447(d) to review the remand order. Accordingly, we dismiss the appeal. Spielman's request for attorneys' fees is not properly before this Court and is denied. Spielman's request for costs is granted under Fed. R.App. P. 39.

I. BACKGROUND

A. Spielman's State Suit

Spielman, a New York resident, filed his complaint in the Supreme Court of the State of New York, New York County, in February 2001 against Merrill Lynch, a Delaware corporation with its principal place of business in New York. Spielman alleged in the complaint that he opened a Cash Management Account ("CMA") with Merrill Lynch in 1999. One type of security offered by Merrill Lynch to CMA account holders was "Holding Company Depository Receipts" ("HOLDRS"), an interest in a trust that held shares of common stock issued by twenty specified companies from distinct industry sectors (e.g., utilities, telecommunications, pharmaceuticals). Spielman alleged that, through a series of confusing statements in its marketing materials, Merrill Lynch represented that a CMA would enable clients, with certain exceptions, to purchase securities such as HOLDRS without paying a transaction fee. Spielman maintains, however, that he was charged a two percent transaction fee — styled by Merrill Lynch as an underwriting fee — for each HOLDRS purchase he made during 2000.

Spielman's suit alleged six causes of action under New York state law: breach of contract; breach of an implied covenant of good faith and fair dealing; fraud; negligent misrepresentation; breach of fiduciary duty; and violation of New York Consumer Protection Law, N.Y. GEN. BUS. LAW § 349 (McKinney 1988)¹. Spielman's complaint alleged no federal cause of action.

B. Removal and Remand

On April 10, 2001, Merrill Lynch removed the case to the United States District Court for the Southern District of New York pursuant to SLUSA's removal provision, 15 U.S.C. §§ 77p(c), 78bb(f)(2)² and the general removal statute, 28 U.S.C. § 1441(b)³. Spielman moved on May 10, 2001 to remand the action back to the originating state court. The district court granted Spielman's motion to remand after determining that Merrill Lynch's alleged misrepresentations were not made "in connection with the purchase or sale of" the HOLDRS securities. Spielman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2001 WL 1182927 at *5 (S.D.N.Y. Oct.9, 2001) (internal quotation marks omitted). Merrill Lynch appeals the remand order as erroneously granted.

II. DISCUSSION

The threshold question presented here is whether this Court may review the district court's remand order. Spielman maintains that 28 U.S.C. § 1447(d) prohibits appellate review in this case. He contends that Section 1447(d), the provision governing reviewability of remand orders generally, prohibits appellate review of remand orders that are predicated on any basis enumerated in 28 U.S.C. § 1447(c), which includes lack of subject matter jurisdiction.

Merrill Lynch counters that the district court did not specify whether it remanded under SLUSA, 15 U.S.C. § 78bb(f)(3)(D), or the general remand statute, 28 U.S.C. § 1447(c). Merrill Lynch urges that SLUSA's remand provision controls, asserting that the remand was "based on an interpretation of specific language in the SLUSA statute, and not on any of the grounds specified in section 1447(c)." Further, Merrill Lynch maintains that appellate review is available because SLUSA, unlike Section 1447(d), contains no express bar on appellate review of remand orders.

Because we construe the district court's remand to have been based on a perceived lack of subject matter jurisdiction under SLUSA, a remand basis expressly recognized in Section 1447(c), the order is not reviewable on appeal. See 28 U.S.C. § 1447(d).

A. SLUSA's Enactment and the Scope of Federal Question Jurisdiction

SLUSA was enacted in 1998 in response to a demonstrably unavailing attempt by Congress, through the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub.L. 104-67, 109 Stat. 737 (1995) (codified in part at 15 U.S.C. §§ 77z-1, 78u), to "prevent strike suits," described as "meritless class actions that allege fraud in the sale of securities." Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 107 (2d Cir.2001). Congress had enacted the PSLRA to filter out potential strike suits. Instrumental to achieving this objective was imposition of more stringent pleading requirements⁴ and mandatory discovery stays for securities fraud class actions filed in federal court. The PSLRA afforded district courts the opportunity in the early stages of litigation to make an initial assessment of the legal sufficiency of any claims before defendants were forced to incur considerable legal fees or, worse, settle claims regardless of their merit in order to avoid the risk of expensive, protracted securities litigation. Id. (citing H.R. Conf. Rep. No. 104-369 (1995)). Although theoretically capable of paralyzing the efforts of potential "strike suit" plaintiffs, the PSLRA proved ineffective in actual practice to prevent litigation of meritless suits.

Driving enactment of SLUSA was Congress' finding that litigants eluded PSLRA's reach with relative ease. Confronted with more onerous procedural requirements and dimmed prospects of success under the PSLRA, litigants simply abandoned use of federal court and filed suit in state court under state securities laws. Lander, 251 F.3d at 107-08 and n. 4 (citing Pub.L. No. 105-353 § 2(2)). PSLRA's objectives went largely unrealized due to this "federal flight" loophole. SLUSA was enacted to close the loophole by mandating federal court as "the exclusive venue for class actions alleging fraud in the sale of certain covered securities and by mandating that such class actions be governed exclusively by federal law." Id. at 108 (citing 15 U.S.C. §§ 77p(b)-(c)); see also 15 U.S.C. §§ 78bb(f)(1)(A) and (f)(2). SLUSA's "preemption" and "removal" provisions, read together, accomplish this task. However, examination of SLUSA's statutory language, a necessary predicate step in this analysis, clarifies SLUSA's broad, but not unlimited, scope.

SLUSA's preemption provision provides, in pertinent part:

No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging ... a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security....

15 U.S.C. § 78bb(f)(1)(A). SLUSA's removal provision makes removable any class action preempted by 15 U.S.C. § 78bb(f)(1)(A). See 15 U.S.C. § 78bb(f)(2). Congress could not have spoken more clearly. The clear and unambiguous language convinces us that SLUSA was intended to completely preempt the field of certain types of securities class actions by essentially converting a state law claim into a federal claim and creating federal jurisdiction and venue for specified types of state securities fraud claims.⁵ See Beneficial Nat'l Bank v. Anderson, ___ U.S. ___, ___, 123 S.Ct. 2058, 2063, 156 L.Ed.2d 1 (2003) ("When the federal statute completely pre-empts the state-law cause of action, a claim which comes within the scope of that cause of action, even...