Herman v. Salmon Smith Barney, Inc.

• Decision Date: 27 February 2003
• Docket Number: No. 03-CV-0016W J AH.,03-CV-0016W J AH.
• Citation: 266 F.Supp.2d 1208
• Parties: Jerome HERMAN, on behalf of the General Public, Plaintiff, v. SALOMON SMITH BARNEY, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of California

266 F.Supp.2d 1208

Jerome HERMAN, on behalf of the General Public, Plaintiff, v. SALOMON SMITH BARNEY, INC., et al., Defendants.

No. 03-CV-0016W J AH.

United States District Court, S.D. California.

February 27, 2003.

Jeffrey R. Krinsk, Finkelstein and Krinsk, San Diego, CA, for Jerome Herman, on behalf of the General Public.

William F. Alderman, Orrick, Herrington and Sutcliffe, Hojoon Hwang, Munger, Tolles and Olson, Timothy T. Scott, Sidley, Austin, Brown and Wood, Sonya Diane Winner, Covington and Burling, Paul M. Foster, Prudential Securities Inc., Gilbert R. Sevota, Howard Rice Nemerovski Canady, Falk and Rabkin, James A. Hughes, Sullwold and Hughes, Melvin R. Goldman, Morrison and Foerster, Bernard Reynold Suter, Keesal, Young and Logan, San Francisco, CA, for Salomon Smith Barney, Inc., UBS Paine Webber Inc., Merrill Lynch & Co., Morgan Stanley, Dean Witter & Co, Prudential Securities, Inc., Charles Schwab & Co., Inc., U.S. Bancorp, Bank of America Corporation, Does, 1-40, inclusive, Bear Stearns Companies, Inc.

ORDER GRANTING DEFENDANTS' MOTION TO DISMISS; DENYING PLAINTIFF'S MOTION TO REMAND

WHELAN, District Judge.

Defendants Salomon Smith Barney, Inc., et al., ("Defendants") move to dismiss pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure. Plaintiff Jerome Herman ("Plaintiff) opposes. The Court decides the matter on the papers submitted and without oral argument pursuant to Civil Local Rule 7.1.(d.1). For the reasons outlined below, the Court GRANTS Defendants' motion to dismiss.

I. BACKGROUND

On December 6, 2002 Plaintiff commenced this action in San Diego Superior Court alleging that Defendants violated California Business and Professions Code § 17200, et seq. (the "Unfair Competition Law," hereinafter "UCL") in connection with municipal bond sales. More specifically, Plaintiff alleges that Defendants charged excessive fees on Triple A and Double A secondary market municipal bonds and then failed to disclose such markups to consumers.

On January 3, 2003 Defendants removed the case to this Court pursuant to 28 U.S.C. § 1441. According to Defendants, federal jurisdiction is proper because federal law interpretation is required to resolve the case. Additionally, Defendants allege that this case is properly in federal court due to the 1934 Securities Exchange Act's exclusive jurisdiction provision. See 15 U.S.C. § 78aa. On January 10, 2003 Defendants moved to dismiss. Defendants argue that this case must be dismissed because (1) the 1934 Exchange Act's exclusive jurisdiction provision prevents Plaintiff from pursuing this matter in state court; and (2) Plaintiffs admitted lack of Article III standing precludes federal court litigation.

On February 3, 2003 Plaintiff moved to remand the case to San Diego Superior Court due to Plaintiffs admitted lack of Article III standing. Further, Plaintiff alleges that state court is the appropriate forum because the case revolves around state, rather than federal law.

II. LEGAL STANDARD

The party seeking to invoke removal jurisdiction bears the burden of supporting its jurisdictional allegations with competent proof. Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir.1992) (per curiam); Emrich v. Touche Ross & Co., 846 F.2d 1190, 1195 (9th Cir.1988). "The propriety of removal thus depends on whether the case originally could have been filed in federal court." Chicago v. International College of Surgeons, 522 U.S. 156, 163, 118 S.Ct. 523, 139 L.Ed.2d 525 (1997); 28 U.S.C. § 1441(a).

A court's removal jurisdiction must be analyzed on the basis of the pleadings at the time of removal. See Sparta Surgical Corp. v. National Ass'n of Sec. Dealers, 159 F.3d 1209, 1213 (9th Cir. 1998). District courts must generally construe the removal statutes strictly against removal and resolve any uncertainty as to removability in favor of remanding the case to state court. Takeda v. Northwestern Natl Life Ins. Co., 765 F.2d 815, 818 (9th Cir.1985).

III. DISCUSSION

Defendants argue that this case must be dismissed because Plaintiff cannot litigate this case in either federal or state court. More specifically, Defendants argue that Plaintiff lacks the Article III standing necessary to properly present a cause of action in federal court. Additionally, Defendant argues that this matter cannot be litigated in state court because exclusive federal jurisdiction exists. The Court will examine each argument in turn.

A. PLAINTIFF LACKS THE ARTICLE III STANDING NECESSARY TO LITIGATE THIS CASE IN FEDERAL COURT

The Court must first determine whether Plaintiff has standing. As the Supreme Court noted, Article III standing's first element is that "the plaintiff must have suffered an `injury in fact'—an invasion of a legally protected interest which is (a) concrete and particularized and (b) actual or imminent, not `conjectural' or `hypothetical.'" Lujan v. Defenders of Wildlife, 504 U.S. 555, 560, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992) (internal citations omitted). Here, it is undisputed that Plaintiff has suffered no injury in fact.¹ Indeed, both parties agree that Plaintiff has suffered no injury. Accordingly, Plaintiff does not retain Article III standing, and cannot pursue his claims in federal court.

B. PLAINTIFF CANNOT PURSUE HIS UCL CLAIM IN STATE COURT BECAUSE IT DEALS EXCLUSIVELY WITH FEDERAL LAW

As noted above, it is undisputed that Plaintiff lacks the ability to pursue his UCL claim in federal court because he lacks Article III standing. The parties are in tremendous disagreement, however, as to what should be done as a consequence of this undisputed fact. Plaintiff asks this Court to remand the case to state court in order to adjudicate his state law UCL claim. In contrast, Defendants argue that because remand would be futile, dismissal is the appropriate disposition. Before answering this question, the Court must first determine whether Plaintiffs claims are exclusively federal in nature, or whether they may be properly remanded to state court.

Before proceeding, the Court notes that this is a case of first impression. The Court could not find, nor has either party noted, any binding Ninth Circuit authority dealing squarely with jurisdictional considerations associated with the Municipal Securities Rulemaking Board (hereinafter "MSRB"). Nonetheless, a review of both the existing law and Plaintiffs claims sufficiently directs this Court to the only legally supported conclusion: Plaintiffs complaint deals exclusively with federal law. Remand is not warranted.

The Securities and Exchange Act of 1934 (hereinafter "Exchange Act"), 15 U.S.C. § 78a et seq., mandates exclusive federal jurisdiction over Exchange Act violations. In relevant part, it states:

The district courts of the United States and the United States courts of any Territory or other place subject to the jurisdiction of the United States shall have exclusive jurisdiction of violation of this chapter or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder.

15 U.S.C. § 78aa; see also Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 370, 116 S.Ct. 873, 134 L.Ed.2d 6 (1996); Sparta Surgical Corp. v. Nat'l Ass'n of Securities Dealers, Inc., 159 F.3d 1209, 1211-1212 (9th Cir.1998). The MSRB is a regulatory board promulgated by the Exchange Act to regulate the purchase and sale of municipal securities. See 15 U.S.C. § 78o-4(b)(2) ("[t]he [MSRB] shall propose and adopt rules to effect the purposes of this chapter with respect to transactions in municipal securities effected by brokers, dealers, and municipal securities dealers.") Those persons or entities selling or dealing municipal securities must comply with MSRB rules. See 15 U.S.C. § 78o-4(c)(1) ("No broker, dealer, or municipal securities dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any municipal security in contravention of any rule of the [MSRB].") MSRB rule violations may result in license revocation and suspension, see 15 U.S.C. § 78o(b)(4)(D); see also 15 U.S.C. § 78o-4(c)(2), as well as potential federal criminal penalties. See 15 U.S.C. § 78ff(a).

A plaintiff may generally avoid federal jurisdiction by failing to plead independent federal claims. See Caterpillar Inc. v. Williams, 482 U.S. 386, 399, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987). "However, under the artful pleading rule `a plaintiff may not defeat removal by omitting to plead necessary federal questions in a complaint.'" ARCO Environmental Remediation, LLC v. Dep't of Health and Environmental Quality of the State of Montana, 213 F.3d 1108 (9th Cir.2000) (citing Franchise Tax Bd. of California v. Construction Laborers Vacation Trust for S. California, 463 U.S. 1, 22, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983)). "A statecreated cause of action can be deemed to arise under federal law (1) where federal law completely preempts state law; (2) where the claim is necessarily federal in character; or (3) where the right to relief depends on the resolution of a substantial, disputed federal question." Id. (internal citations omitted).

Here, Plaintiffs complaint makes clear that, at a minimum, the right to relief depends on the resolution of a substantial, disputed federal question. Plaintiff states that "[m]unicipal bonds are regulated by the MSRB. The MSRB was established in 1975 by Congress to develop rules regulating securities firms and banks involved in underwriting, trading and selling municipal securities. The MSRB... sets standards for all municipal securities dealers."² Plaintiff goes on to state "[t]he MSRB has broad rulemaking authority over municipal securities dealers' activities, including rules pertaining to the conduct of brokers and dealers with respect to customers involving: [1]...