Frank v. Bear Stearns & Co., No. 96-21019

CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)
Citation128 F.3d 919
PartiesRobert S. FRANK, Plaintiffs-Appellants, v. BEAR STEARNS & CO., Defendants-Appellees.
Docket NumberNo. 96-21019
Decision Date26 November 1997

Page 919

128 F.3d 919
Robert S. FRANK, Plaintiffs-Appellants,
BEAR STEARNS & CO., Defendants-Appellees.
No. 96-21019.
United States Court of Appeals,
Fifth Circuit.
Nov. 26, 1997.
As Amended on Denial of Rehearing Dec. 19, 1997.

Page 920

Jerald David Mize, Crain, Caton & James, Houston, TX, for Plaintiffs-Appellants.

Gerald G. Pecht, William Joseph Boyce, Fulbright & Jaworski, Houston, TX, for Defendants-Appellees, Bear Stearns & Co., CS First Boston Corp., Goldman Sachs & Co., Kidder Peabody & Co., Inc., Lehman Brothers, Nomura Securities Intern. and Salomon Bros., Inc.

Edward Morgan Carstarphen, III, Woodard, Hall & Primm, Houston, TX, for Greenwich Capital Markets, Inc., Defendant-Appellee.

Charles W. Schwartz, Vinson & Elkins, Houston, TX, for Painewebber, Inc., Defendant-Appellee.

Page 921

David D. Sterling, Jane Nenninger Bland, Baker & Botts, Houston, TX, for Prudential Securities, Inc., Defendant-Appellee.

Appeal from the United States District Court for the Southern District of Texas.


REYNALDO G. GARZA, Circuit Judge:

The defendants-appellees in this case are the underwriters for one or more securities offerings made by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae"). Between 1991 and 1994, Freddie Mac, a federally chartered, sponsored, and regulated corporation, see 12 U.S.C. §§ 1451-1459 (1997), issued securities described as Multiclass Mortgage Participation Certificates and Multiclass Mortgage Securities ("Collateralized Mortgage Obligations"). During the same time period, Fannie Mae, another federally chartered, sponsored, and regulated corporation, see 12 U.S.C. §§ 1716-1723h (1997), issued securities described as Guaranteed REMIC Pass-Through Certificates ("REMIC Certificates"). As underwriters, each defendant then sold the securities to others in arms-length transactions, who in turn sold these securities to other brokers or individuals.

One of the many purchasers that bought these securities directly or indirectly from the defendants was High Yield Management, Inc. ("HYM"). HYM then sold these securities directly to the plaintiffs. HYM is now insolvent. The defendants never sold any of the securities at issue to the plaintiffs. None of the defendants maintained any accounts or acted as brokers for any of the plaintiffs. The defendants did not have any contact or communication with or make any statements to the plaintiffs, and did not solicit the plaintiffs' purchases of the securities at issue. The plaintiffs did not own, directly or indirectly, any voting securities of HYM and none of the purchasers from which the plaintiffs bought these securities, such as HYM, ever acted as agents of the defendants in further transactions.

The plaintiffs ended up losing $8,687,323.60 on the securities and on June 9, 1995 filed an original petition against the defendants in the 129th Judicial District Court of Harris County, Texas. The original petition alleged breach of contract and violations of the Texas Securities Act. TEX.REV.CIV.STAT.ANN. art 581-33A(2), -33F. The plaintiffs asserted that the defendants breached their alleged duty under the purchase agreements with Fannie Mae and Freddie Mac to deliver disclosure documents to the purchasers of the securities. On August 2, 1995, the defendants removed the case to federal court on the grounds that (1) the plaintiffs' claims that they were intended third-party beneficiaries of contracts between the defendants and federally-sponsored enterprises arose under federal law, and (2) appellants had artfully pled federal securities law as state law claims. Plaintiffs moved to remand the matter to state court, but the district court denied the motion on October 6, 1995. Plaintiffs appeal this denial.

On March 25, 1996, the magistrate judge signed an extensive 23-page memorandum and recommendation granting Paine Webber's motion for summary judgment. The district court adopted the recommendation on May 20, 1996. The magistrate judge then issued recommendations to grant summary judgment for the remaining defendants which, again, the district court adopted by orders signed on September 24, 1996. The district court then signed a final judgment on September 26, 1996. Our decision will not reach plaintiffs' appeal of these decisions because we find that the district court lacked subject matter jurisdiction to hear this case and, therefore, should have remanded the case to the state court. Accordingly, we reverse the district court's denial of the plaintiffs' motion to remand.


We review a district court's denial of a motion to remand de novo. Carpenter v. Wichita Falls Indep. Sch. Dist., 44 F.3d 362, 365 (5th Cir.1995). The party invoking the removal jurisdiction of federal courts bears the burden of establishing federal jurisdiction

Page 922

over the state court suit. Id. The federal removal statute, 28 U.S.C. § 1441 (1997), is subject to strict construction because a defendant's use of that statute deprives a state court of a case properly before it and thereby implicates important federalism concerns. Id. The removal statute ties the propriety of removal to the original jurisdiction of the federal district courts. Id. Absent diversity of citizenship, removal is appropriate only for those claims within the federal question jurisdiction of the district courts. 28 U.S.C. § 1331 (1997).

Under the "well pleaded complaint" rule, as discussed in Franchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983), a movant may not remove a case to federal court unless the plaintiff's complaint establishes that the cause of action arises under federal law. 463 U.S. at 10-11, 103 S.Ct. at 2846-47. Courts will, however, typically look beyond the face of the complaint to determine whether removal is proper. Villarreal v. Brown Express, Inc., 529 F.2d 1219, 1221 (5th Cir.1976). A federal court may find that a plaintiff's claims arise under federal law even though the plaintiff has not characterized them as federal claims. Aquafaith Shipping Ltd. v. Jarillas, 963 F.2d 806, 808 (5th Cir.), cert. denied, 506 U.S. 955, 113 S.Ct. 413, 121 L.Ed.2d 337 (1992); see also Uncle Ben's Intern. Div. of Uncle Ben's, Inc. v. Hapag-Lloyd Aktiengesellschaft, 855 F.2d 215, 217 (5th Cir.1988) (removal was proper notwithstanding pleading that made no reference to federal statutes). The plaintiffs' state court petition alleged only breach of contract claims and violations of state securities laws. As the petition did not allege violation of any federal statute, we are left with the defendants' contention that the case arises under federal common law, which we find to be without merit.

Federal question jurisdiction extends to "all civil actions arising under the Constitution, laws, or treaties of the United States." 28 U.S.C. § 1331 (1997). It is well established that the "arising under" language of section 1331 has a narrower meaning than the corresponding language in Article III of our Constitution, which defines the limits of the judicial power of the United States. See U.S. CONST. art. III, § 2, cl. 1 ("The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority...."). Federal question jurisdiction under section 1331 extends to cases in which a well-pleaded complaint establishes either that federal law creates the cause of action or that the plaintiff's right to relief necessarily depends on resolution of a substantial question of federal law. Franchise Tax Bd., 463 U.S. at 27-28, 103 S.Ct. at 2855-56. Here, the parties are not diverse and the complaint alleged state law causes of action, therefore, removal to federal court depends on the existence of a federal question. See Sam L. Majors Jewelers v. ABX, Inc., 117 F.3d 922, 924 (5th Cir.1997) ("Absent diversity of citizenship, federal question jurisdiction is required to support removal."). Although the plaintiffs did not literally allege federal claims in their original complaint, the...

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