Sung ex rel. Lazard Ltd. v. Wasserstein

• Decision Date: 17 February 2006
• Docket Number: No. 05 CIV. 5785(VM).,05 CIV. 5785(VM).
• Citation: 415 F.Supp.2d 393
• Parties: Jing SUNG, Derivatively, on behalf of LAZARD LTD., Plaintiff, v. Bruce WASSERSTEIN, Michael J. Castellano, Scott D. Hoffman, Charles G. Ward III, Steven J. Golub, Robert Charles Clark, Ellis Jones, Vernon E. Jordan, Jr., Anthony Orsatelli and Goldman Sachs & Co., Defendants, and Lazard Ltd., a Bermuda company, Nominal Defendant.
• Court: U.S. District Court — Southern District of New York

415 F.Supp.2d 393

Jing SUNG, Derivatively, on behalf of LAZARD LTD., Plaintiff, v. Bruce WASSERSTEIN, Michael J. Castellano, Scott D. Hoffman, Charles G. Ward III, Steven J. Golub, Robert Charles Clark, Ellis Jones, Vernon E. Jordan, Jr., Anthony Orsatelli and Goldman Sachs & Co., Defendants, and Lazard Ltd., a Bermuda company, Nominal Defendant.

No. 05 CIV. 5785(VM).

United States District Court, S.D. New York.

February 17, 2006.

Gregory Bradley Linkh, Murray, Frank & Sailer, LLP, New York City, Christopher J. Gray, Christopher J. Gary, PC, New York City, Brian J. Robbins, Mare M. Umeda, Robbins, Umeda & Fink, LLP, San Diego, CA, for Plaintiffs.

Marc Wolinsky, Adir Gurion Waldman, Sarah Fern Meil, Wachtell, Lipton, Rosen & Katz, New York, NY, for Defendants.

DECISION AND ORDER

MARRERO, District Judge.

Plaintiff Jing Sung ("Sung") commenced a shareholder derivative action (the "Sung Action") on behalf of Lazard Ltd. ("Lazard") in the Supreme Court of the State of New York, New York County, based on events surrounding Lazard's initial public offering ("IPO"). Defendants in this action Bruce Wasserstein, Michael J. Castellano, Scott D. Hoffman, Charles G. Ward III, Steven J. Golub, Robert Charles Clark, Ellis Jones, Vernon E. Jordan, Jr., Anthony Orsatelli (collectively the "Individual Defendants") and nominal defendant Lazard, with the consent of defendant Goldman Sachs & Co. ("Goldman") (collectively "Defendants") removed the action to federal court, invoking the Court's original jurisdiction under 28 U.S.C. § 1331 and the Securities Litigation Uniform Standards Act ("SLUSA"), Pub. L. No. 105-353, 112 Stat. 3227 (codified in scattered sections of 15 U.S.C.). The Sung Action was thereupon consolidated with another shareholder derivative action pending before this Court, Pease v. Lazard, No. 05 Civ. 5785, 2005 WL 1803392 (S.D.N.Y. filed June 21, 2005) (the "Pease Action"), pursuant to the Court's orders of August 8, 2005 and September 26, 2005. Sung filed the instant motion seeking to remand the Sung Action to state court and for an award of attorneys' fees and costs. For the reasons set forth below, Sung's remand motion is granted.

I. BACKGROUND¹

Nominal defendant Lazard is a financial advisory and asset management firm. On May 4, 2005, Lazard issued approximately 34 million shares of its common stock at $25 per share in an IPO (the "Lazard IPO"). Sung alleges that defendants Wasserstein and Goldman knew or should have known that the market would not support this share price absent manipulation, that defendant Goldman made secret agreements with hedge funds pursuant to which the hedge funds would buy the Lazard stock at $25 per share and immediately sell them back to Goldman, thereby creating the appearance of a market for the shares at the offering price, and that a subset of the Individual Defendants "participated in the issuance of false and/or misleading statements, including the preparation of the false and/or misleading press releases and SEC filings." (Compl. ¶¶ 20-24.) Based on these allegations, Sung asserts claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, aiding and abetting a breach of fiduciary duty, and professional negligence, all grounded on New York state law.

In addition to the Sung and Pease Actions, five class actions based on the events surrounding the Lazard IPO are pending before this Court. Another shareholder derivative action based on these events is pending before the District Court for the Eastern District of New York.

II. DISCUSSION

Pursuant to the general removal statute, 28 U.S.C. § 1441(b), "a state court defendant may remove a case to federal court ... only if the plaintiffs claims could originally have been brought there." Barbara v. New York Stock Exch., Inc., 99 F.3d 49, 53 (2d Cir.1996). Defendants assert that the Sung Action could have been commenced in federal court pursuant to 28 U.S.C. § 1331 (" § 1331"), which provides that "[t]he district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States." In addition, SLUSA has its own removal provisions, under which actions covered by SLUSA that are filed in state court may be removed to federal court. See 15 U.S.C. §§ 77p(c), 78bb(f)(2). Defendants contend that these provisions apply to the instant action.

A. FEDERAL QUESTION JURISDICTION

1. Legal Standard

Section 1331 grants federal courts jurisdiction over actions arising under federal law. "[T]he question whether a claim `arises under' federal law must be determined by reference to the `well-pleaded complaint.'" Merrell Dow Pharms., Inc. v. Thompson, 478 U.S. 804, 808, 106 S.Ct. 3229, 92 L.Ed.2d 650 (1986) (citing Franchise Tax Bd. v. Constr. Laborers Vacation Trust, 463 U.S. 1, 9-10, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983)). That is, "federal jurisdiction exists only when a federal question is presented on the face of the plaintiff's properly pleaded complaint." Caterpillar, Inc. v. Williams, 482 U.S. 386, 392, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987). "Thus, `a case may not be removed to federal court on the basis of a federal defense, . . . even if the defense is anticipated in the plaintiff's complaint, and even if both parties admit that the defense is the only question truly at issue in the case.'" Rivet v. Regions Bank of Louisiana, 522 U.S. 470, 475, 118 S.Ct. 921, 139 L.Ed.2d 912 (1998) (alteration in original) (quoting Franchise Tax Bd., 463 U.S. at 14, 103 S.Ct. 2841).

Courts have used two tests to determine whether an action presents a federal question. See West 14th St. Commercial Corp. v. 5 W. 14th Owners Corp., 815 F.2d 188, 192 (2d Cir.1987). First, federal question jurisdiction exists when federal law creates the cause of action. See Franchise Tax Bd., 463 U.S. at 8-9, 103 S.Ct. 2841; American Well Works Co. v. Layne & Bowler Co., 241 U.S. 257, 260, 36 S.Ct. 585, 60 L.Ed. 987 (1916). The Supreme Court has cautioned that the vast majority of cases falling within the statutory grant of federal question jurisdiction are covered by this test, see Merrell Dow, 478 U.S. at 808, 106 S.Ct. 3229, while recognizing that the test "has been rejected as an exclusionary principle," Franchise Tax Bd., 463 U.S. at 9, 103 S.Ct. 2841, in that it does not describe which cases are beyond district court jurisdiction. This test can best be understood as involving an inquiry into whether the right or remedy that plaintiff is asserting is strictly a function of substantive state law, that is, whether the underlying cause of action is created by state law. If this is the case, on looking at the elements of the state cause of action, none will explicitly require application of federal law, although collateral questions or interpretations implicating federal law may also be involved that could affect, even if not necessarily dispose of, the state law action. For example, if such a case were to go to a jury, the jury would be instructed only on the substantive content of state law that established the rights and remedies for liability upon which the action depends, as well as applicable defenses.

The second test posits that a case may also arise under federal law when "some substantial, disputed question of federal law is a necessary element" of a state claim in a well-pleaded complaint, and thus an adjudication of the merits of the underlying dispute, and the existence, or not, of a right or remedy asserted, depends on the interpretation or application of federal law. Id. at 13, 103 S.Ct 2841. As the Supreme Court articulated this inquiry, a case may be said to arise under federal law "where the vindication of a right under state law necessarily turn[s] on some construction of federal law." Id. at 9, 103 S.Ct. 2841 (emphasis added). However, this statement "must be read with caution." Merrell Dow, 478 U.S. at 809, 106 S.Ct. 3229 (noting that while the central issue in Franchise Tax Board was the meaning of a federal statute, the Court nevertheless "concluded that federal jurisdiction was lacking" there). "[C]ourts have found that removal to federal court is proper where the state action simply provides the vehicle for the vindication of rights and ... relationships created by federal law.'" Donovan v. Rothman, 106 F.Supp.2d 513, 517 (S.D.N.Y.2000) (alteration in original) (quoting West 14th St., 815 F.2d at 196).

Courts have referred to this second test as the artful pleading doctrine, a legal drafting technique that may also be characterized as creative concealment, a "corollary to the well-pleaded complaint rule, [which] prevents a plaintiff from avoiding removal by framing in terms of state law a complaint the real nature of which is federal, regardless of plaintiff's characterization, or by omitting to plead necessary federal questions in a complaint." Marcus v. AT&T Corp., 138 F.3d 46, 55 (2d Cir.1998) (alteration, citation and internal quotation marks omitted). "[A] complaint which appears to be grounded solely in state law actually may be federal in nature, and thus removable, if its true nature has been disguised by the plaintiff's artful pleading.'" Id. at 55 (alteration in original) (quoting Traveler's Indem. Co. v. Sarkisian, 794 F.2d 754, 758 (2d Cir.1986)).

After "[e]xamining only those allegations which are properly raised in a well-pleaded complaint, [a] court must then determine whether the substance of those allegations raises a federal question." West 14th St., 815 F.2d at 192. The Second Circuit has offered further guidance: "To determine when the federal element is deemed sufficiently substantial [courts] must look to the nature of the federal interest at stake." Id. at 193 (citing Merrell Dow, 478 U.S. at 814 n. 12, 106 S.Ct. 3229). Courts must consider whether a question of federal law is a substantial and necessary element "with an eye to practicality and necessity." Franchise Tax Bd., 463 U.S. at...