Katz v. Gerardi

• Decision Date: 05 January 2009
• Docket Number: No. 08-8031.,08-8031.
• Citation: 552 F.3d 558
• Parties: Jack P. KATZ, individually and on behalf of a class, Plaintiff-Respondent, v. Ernest A. GERARDI, Jr., et al., Defendants-Petitioners.
• Court: U.S. Court of Appeals — Seventh Circuit

552 F.3d 558

Jack P. KATZ, individually and on behalf of a class, Plaintiff-Respondent, v. Ernest A. GERARDI, Jr., et al., Defendants-Petitioners.

No. 08-8031.

United States Court of Appeals, Seventh Circuit.

Submitted December 8, 2008.

Decided January 5, 2009.

Jeffrey S. Davis (submitted), Sonnenschein, Nath & Rosenthal, Chicago, IL, for Plaintiff-Respondent

Christopher J. Stuart, Wexler Toriseva Wallace, Chicago, IL, for Defendants-Petitioners.

Before EASTERBROOK, Chief Judge, and KANNE and SYKES, Circuit Judges.

EASTERBROOK, Chief Judge.

Jack Katz proposes to represent a class of persons who contributed real property (or interests in real property) to the Archstone real estate investment trust, in exchange for interests called "A-1 Units." In 2007 Archstone merged into Tishman-Lehman Partnership. Holders of A-1 Units were offered a choice of cash or Series O Preferred Units in the entity formed by the merger. Katz contends that the merger violated the terms of the A-1 Units, because neither cash nor the Series O Preferred Units offered investors the same tax benefits as A-1 Units. After a majority of investors approved the merger, however, Katz took the cash and filed this suit in a state court against Archstone, Lehman Brothers, Tishman Speyer Development Corp., and their managers.

Defendant removed this suit to federal court under the Class Action Fairness Act of 2005. It comes within federal jurisdiction not only because the complaint rests on a federal statute but also because Katz has citizenship different from some of the defendants, the proposed class contains more than 100 members, and the stakes exceed $5 million. 28 U.S.C. § 1332(d). The district court remanded it to state court after concluding that removal is forbidden by § 22(a) of the Securities Act of 1933, 15 U.S.C. § 77v(a). See 2008 WL 4376815, 2008 U.S. Dist. LEXIS 76322 (N.D.Ill. Sept. 23, 2008). One might suppose that a statute enacted in 2005 supersedes a statute enacted in 1933, but the district court held that § 22(a) controls because it is "more specific" than the 2005 Act—for § 22(a) deals only with securities litigation, while the 2005 Act covers class actions in many substantive fields. Defendants have applied under 28 U.S.C. § 1453(c)(1) for permission to appeal. See also Spivey v. Vertrue, Inc., 528 F.3d 982 (7th Cir.2008). We grant that application and proceed immediately to decision, because the papers filed at the motion stage address the merits too.

Only purchasers of securities may pursue actions under the 1933 Act, see Gustafson v. Alloyd Co., 513 U.S. 561, 115 S.Ct. 1061, 131 L.Ed.2d 1 (1995), yet Katz (and other members of his class) sold their securities for cash. (The Securities Exchange Act of 1934 permits suits by sellers as well as buyers, but it lacks a provision equivalent to § 22(a).) Katz depicts himself as a buyer by characterizing the supposed failure to honor the terms of the A-1 Units as if he had sold those securities and "bought" what Katz calls "new A-1 Units," which he then sold for cash. (A "purchase" of "new A-1 Units" would have been involuntary, but an involuntary purchase is still a purchase. See SEC v. National Securities, Inc., 393 U.S. 453, 467, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969).)

What Katz calls the "fundamental change doctrine" that turns a sale into a purchase is word play designed to overcome the actual text of the securities laws, and this circuit follows the statutes rather than trying to evade them with legal fictions. See SEC v. Jakubowski, 150 F.3d 675, 680 (7th Cir.1998); Isquith v. Caremark International, Inc., 136 F.3d 531, 535-37 (7th Cir.1998). Katz sold his units for cash; he did not buy any new security. The "new A-1 Units" are figments of a lawyer's imagination. Using legally fictitious (and factually nonexistent) "new A-1 Units" to nullify a legislative decision that only buyers have rights under the 1933 Act would be wholly unjustified.

Substantive objections to the terms of corporate mergers arise under state law (both contract law and corporate law) rather than federal securities law. Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977). And although any material falsehoods or omissions in the registration statement or prospectus for the Series O Preferred Units could give rise to a claim under federal law, that claim would belong to the SEC, or the buyers of the units, rather than someone such as Katz who did not purchase them. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975).

The district court acknowledged some of these problems but thought them irrelevant to the propriety of removal. It is enough, in the district court's view, that the complaint filed in state court invokes the Securities Act of 1933. That alone forecloses removal; if Katz lacks a securities claim, he will lose on the merits in state court, the district judge concluded.

It is hard to distinguish between a claim artfully designed to defeat federal jurisdiction and one that is properly pleaded but unsuccessful on the merits, but it cannot be right to say that a pleader's choice of language always defeats removal. If it did, then Katz could have pleaded a breach of contract, or a violation of duties under corporate law, and added: "this is a workers' compensation suit that cannot be removed as a result of 28 U.S.C. § 1445(c)." A pleader cannot block removal by specifying inapplicable legal theories—such as, for example, an assertion that a pension claim arises under state contract or trust law rather than ERISA. See Bartholet v. Reishauer A.G. (Zürich), 953 F.2d 1073 (7th Cir.1992). A complaint pleads grievances rather than law; a federal court must decide for itself the claim's legal classification. This is true whether the pleader tries to get into federal court by insisting that a state-law claim "really" arises under federal law, or to stay out by declaring that a claim arising under federal law "really" depends on state law alone.

Katz's citation to the 1933 Act is not quite as bald a maneuver as a contention that his grievance is a workers' compensation claim, or the assertion in Bartholet that an effort to obtain benefits from a pension or welfare trust was nothing but a state-law contract claim. The merger led to the registration and issuance of Series O Preferred Units, so federal securities law has some role to play—and we know from decisions such as Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006), that it is possible for a private party to suffer an injury covered by the securities laws even though there is no private right of action to vindicate the investor's entitlements. So we think it best to assume that Katz's complaint is not just artful pleading, and to ask whether § 22(a) insulates all claims under the 1933 Act from removal under the 2005 Act.

Section 22(a) provides in part: "Except as provided in section 77p(c) of this title, no case arising under this subchapter and brought in any State court of competent jurisdiction shall be removed to any court of the United States." Section 16(c), 15 U.S.C. § 77p(c), which was added by the Securities Litigation Uniform Standards Act of 1998, permits the removal of many securities class actions; Dabit describes the scope of the 1998 Act. In the district court Katz argued that his suit is not a "covered class action" within the scope of the 1998 Act and therefore may not be removed. Defendants replied that the 2005 Act applies to "all" civil actions, with a few defined exceptions, and that as Katz's suit is not among the exceptions it must be removable.

Section 22(a) and the 2005 Act are incompatible; one or the other must yield. Usually the older law yields to the newer. Luther v. Countrywide Home Loans Servicing LP, 533 F.3d 1031 (9th Cir.2008), holds that things are otherwise for § 22(a), however, because Radzanower v. Touche Ross & Co., 426 U.S. 148, 96 S.Ct. 1989, 48 L.Ed.2d 540 (1976), says that an older law maintains its vitality when it is more specific than a newer one. Section 22(a) covers only securities suits and thus is more specific than the 2005 Act, which applies to all civil actions, the ninth circuit believed. The district court in this suit agreed.

The canon favoring preservation of specific statutes arguably affected by newer, but more general, statutes works when one statute is a subset of the other. For example, if the 2005 Act dealt with all civil suits, then a law applicable only to civil securities actions would be more specific. But § 22(a) of the 1933 Act is not a subset of the 2005 Act. Section 22(a) covers only securities actions, but it includes all securities actions—single-investor suits as well as class actions, small class actions as well as large multistate ones. The 2005 Act, by contrast, covers only large, multi-state class actions. Is the 1933 Act more specific because it deals only with securities law, or is the 2005 Act more specific because it deals only with nationwide class actions? There is no answer to such a question, which means that the canon favoring the specific law over the general one won't solve our problem. Cf. California Public Employees' Retirement System v. WorldCom, Inc., 368 F.3d 86 (2d Cir.2004) (holding, for this reason among others, that the specificity canon does not prevent the bankruptcy-removal provision, 28 U.S.C. § 1452, from superseding § 22(a) of the 1933 Act to the extent of any inconsistency).

The language of the 2005 Act, rather than a canon, tells us how the new removal rule applies to corporate and securities actions. Section 1453(b) allows removal of any class action brought within federal jurisdiction by § 1332(d), and § 1453(d) adds:

(d) This section shall not apply to any class action that solely involves—

(1) a claim concerning a covered security as defined under section 16(f)(3) of the Securities Act of 1933 (15...