Emrich v. Touche Ross & Co.

Decision Date16 May 1988
Docket NumberNo. 86-6347,86-6347
Citation846 F.2d 1190
PartiesFed. Sec. L. Rep. P 93,762, 11 Fed.R.Serv.3d 226, RICO Bus.Disp.Guide 6943 Phillip EMRICH; Eric Gillberg, Plaintiffs-Appellants, v. TOUCHE ROSS & COMPANY; Sam Battistone Sr.; Sam D. Battistone Jr.; F. Newell Bohnett; Robert Hild; Owen Johnston; William L. Wagner Sr.; George McKaig; Dan V. Angeloff; George A. Cavelletto; Bruce N. Anticouni, Defendants-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Richard M. Mosk and Scott L. Zimmerman, Sanders, Barnet, Jacobson, Goldman & Mosk, Los Angeles, Cal., for plaintiffs-appellants.

Gary R. Ricks and Dana M. Sabraw, Price, Postel & Parma, Santa Barbara, Cal., for defendants-appellees.

Appeal from the United States District Court for the Central District of California.

Before TANG, WIGGINS and KOZINSKI, Circuit Judges.

TANG, Circuit Judge:

Phillip Emrich and Eric Gillberg (plaintiffs) appeal the district court's grant of Touche Ross & Co., et al.'s (defendants) motion to dismiss the action with prejudice in plaintiffs' suit alleging violations of federal and state securities laws, California common law, and the Racketeer Influenced and Corrupt Organizations Act (RICO). Emrich and Gillberg challenge the district court's subject matter jurisdiction over the removed action and its ruling on the motion to dismiss under Fed.R.Civ.P. 12(b)(6), that all causes of action in the complaint were time barred. We affirm in part, reverse in part and remand for further proceedings.

BACKGROUND

This action arises out of the sale and purchase in 1977 and 1978 of securities in two joint ventures organized by Sambo's Restaurant, Inc. ("Sambo's") to finance the expansion of its restaurant operations. Appellants Phillip Emrich and Eric Gillberg, plaintiffs below, brought this action individually and on behalf of a class consisting of all purchasers of the securities, except for former management of Sambo's who also purchased the securities. The individually named defendants were officers and/or directors of Sambo's at the time the securities were sold. Defendant Touche Ross & Co., a partnership of certified public accountants, performed audit work in connection with the preparation of the prospectuses and certified the financial portions thereof. 1

Plaintiffs filed this action on May 1, 1986 in the Santa Barbara Superior Court. The complaint states four counts:

Count One: violations of the Securities Act of 1933 and California Corporation Code Sec. 25401 et seq.;

Count Two: violations of the Securities Exchange Act of 1934 (Section 27 and Rule 10(b)(5));

Count Three: fraud claim under California common law and California Civil Code Secs. 1572, 1709 and 1710; and

Count Four: violations of the Racketeer Influenced Corrupt Organizations Act of 1970 ("RICO") (Sections 1962 and 1964), 18 U.S.C. Secs. 1962, 1964.

On June 6, 1986, seven of the eleven named defendants filed a petition for removal to the United States District Court, Central District of California. The petition stated the district court had original jurisdiction under the provisions of 28 U.S.C. Sec. 1331 (1982) (federal question) and that the action could be removed pursuant to 28 U.S.C. Sec. 1441(a) and (c) (1982) "because it is a civil action wherein Count IV, the RICO claim, is a separate and independent claim from Count I, the non-removable 1933 Act claim."

Upon removal, the same defendants filed a motion to dismiss the complaint under Fed.R.Civ.P. 12(b)(1) and 12(b)(6) on the grounds that each count was barred by the applicable statutes of limitation and one count had been improperly filed in state court. Plaintiffs opposed the motion to dismiss and, in a supplemental memorandum, requested remand to state court.

On July 21, 1986 the district court granted defendant's motion to dismiss the complaint on the grounds that Counts One through Four were time barred and, that the court lacked subject matter jurisdiction over Count Two. The district court's judgment, entered August 5, 1986, ordered the dismissal of the complaint, without leave to amend, and thus, dismissal of the action with prejudice. Emrich and Gillberg filed a timely notice of appeal. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291.

Related Lawsuits

The securities transactions that are the subject of the instant suit (hereinafter "Emrich III "), have also been the subject of three other class actions previously adjudicated or pending in the district court. The three cases generally involve the same plaintiffs, the same issues and arise from the same transactions, but involve different sets of defendants. These actions are as follows:

(1) Muller, et al. v. Sambo's Restaurants, Inc., et al., No. CV 80-3757-R, hereinafter "Muller", filed August 25, 1980. This case was settled in the district court.

(2) Emrich and Gillberg v. Touche Ross & Co., No. CV 81-4104-R, and Nos. 86-5577, 81-5940 on appeal, hereinafter "Emrich I". Filed August 12, 1981; district court's final judgment dismissing the action without prejudice, reversed by a Ninth Circuit panel on June 15, 1987 on the grounds that "plaintiff's were clearly entitled to file the amended complaint." The case is currently proceeding in the district court.

(3) Emrich, et al. v. Battistone, et al., No. CV 81-4547-R, No. 82-5356 on appeal, hereinafter "Emrich II", filed September 2, 1981. The current status of this case is disputed.

ANALYSIS
I. Removal Jurisdiction

A threshold issue is whether or not the district court acquired subject matter jurisdiction on removal from the Santa Barbara Superior Court. Defendants petitioned for removal on the grounds that the action fell within the original jurisdiction of the district court under 28 U.S.C. Sec. 1331 (case which "arises under the Constitution, laws, or treaties of the United States") and within the removal jurisdiction of the court under 28 U.S.C. Sec. 1441(a) and (c). Diversity between the parties was not alleged.

Subject matter jurisdiction of the district court turns first on the question of RICO jurisdiction. 2 RICO is pivotal insofar as none of the remaining claims is independently removable because of obstacles presented by the derivative jurisdiction doctrine, statutory bars, or the plain absence of a federal claim. Following the submission of this case, we resolved the difficult question of whether federal courts have concurrent or exclusive jurisdiction over RICO claims by ruling that such jurisdiction is concurrent. Lou v. Belzberg, 834 F.2d 730, 739 (9th Cir.1987).

This ruling, however, does not end our inquiry regarding the propriety of removal. We must still consider whether removal of the non-federal claims was appropriate under 28 U.S.C. Sec. 1441(a) under a pendent jurisdiction theory or, whether removal of the entire action was correct under section 1441(c) on the basis that the RICO claim was "separate and independent" from the other nonremovable claims. In effect, we must consider whether the relationship of the federal RICO claim to the remaining non-federal claims is sufficiently close so as to be within the pendent jurisdiction of the district court or whether the claims presented are so tenuously connected that federal jurisdiction is more properly asserted via the "separate and independent" clause of section 1441(c). These competing provisions of the removal statute are not always easily reconciled. Nonetheless, to that task we now turn.

A. Standard of Review

Removal of a case from state to federal court is a question of federal subject matter jurisdiction which is reviewed de novo. Williams v. Caterpillar Tractor Co., 786 F.2d 928, 930 (9th Cir.1986) (citing Bright v. Bechtel Petroleum, Inc., 780 F.2d 766, 768 (9th Cir.1986)). The issue presented is whether the case was properly removed to the federal court in the first instance under 28 U.S.C. Sec. 1441. Salveson, 731 F.2d at 1426.

The burden of establishing federal jurisdiction is upon the party seeking removal, Wilson, 257 U.S. at 97, 42 S.Ct. at 37, and the removal statute is strictly construed against removal jurisdiction. Salveson, 731 F.2d at 1426; Libhart v. Santa Monica Dairy Co., 592 F.2d 1062, 1064 (9th Cir.1979).

B. Section 1441(a)

Under section 1441(a), cases joining federal and state claims can be removed so long as the joined claims would be within the district court's original jurisdiction. 3 28 U.S.C. Sec. 1441(a) (1982). The basis for the district court's jurisdiction over nonfederal claims stems from the doctrine of pendent jurisdiction. The doctrine of pendent jurisdiction, in turn, permits the district court to adjudicate factually related state claims in cases raising federal questions, whenever the federal law claims and state law claims "derive from a common nucleus of operative fact." United Mine Workers v. Gibbs, 383 U.S. 715, 725, 86 S.Ct. 1130, 1138, 16 L.Ed.2d 218 (1966); Hurn v. Oursler, 289 U.S. 238, 243-247, 53 S.Ct. 586, 588-590, 77 L.Ed. 1148 (1933); see also, Carnegie-Mellon Univ. v. Cohill, --- U.S. ----, 108 S.Ct. 614, 618, 98 L.Ed.2d 720 (1988) (discussing the "modern doctrine" of pendent jurisdiction).

If the district court exercised original jurisdiction over the RICO claim because it "arises under" federal law, then it would have also properly exercised its discretion to adjudicate sufficiently related state law claims pursuant to its pendent jurisdiction. In Contemporary Servs. Corp. v. Universal City Studios, Inc., 655 F.Supp. 885, 889 (C.D.Cal.1987), one district court squarely approved the removal of a procedurally similar case stating a federal claim under RICO and pendent state claims pursuant to sections 1441(a) and (b) of the removal statute, in contrast to section 1441(c). Similar decisions, involving federal but not RICO claims, have been rendered by the Seventh and Tenth Circuits. Thomas v. Shelton, 740 F.2d 478, 483 (7th Cir.1984); Sheet Metal Workers Int'l Ass'n v. Seay, 696 F.2d 780, 782 (10th Cir.1...

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