Kircher v. Putnam Funds Trust (05-409)


Appealed from: Seventh Circuit Court of Appeals

Oral argument: April 24, 2006

JURISDICTION, APPELLATE REVIEW OF REMAND ORDERS, SUBJECT MATTER JURISDICTION, SLUSA, 28 U.S.C. § 1447(d), 15 U.S.C. §77p(b)

Petitioners are a group of investors who owned shares in mutual funds offered or advised by respondents, Putnam Funds Trust. These investors brought a class action suit in Illinois state court asserting breach of fiduciary duty and alleging that the mutual funds set prices in a way that allowed arbitrageurs to exploit differences in prices to the detriment of long-term investors. The respondents removed the suit to federal court pursuant to the Securities Litigation Uniform Standards Act (SLUSA). The judge then remanded the case to state court because the petitioners had not alleged a loss “in connection with the purchase or sale of securities” as required under the Act. Pursuant to 28 U.S.C. § 1447(d), such a remand is not appealable if the remand is for lack of subject matter jurisdiction. The Seventh Circuit, in conflict with previous decisions by the Second, Ninth, and Eleventh Circuits, ruled that the remand was reviewable because the basis of the SLUSA remand was not lack of subject matter jurisdiction, and therefore 28 U.S.C. § 1447(d) does not apply. In deciding this case, the Supreme Court will address whether 28 U.S.C. § 1447(d) bars appellate review of remand orders in suits removed under statutes such as SLUSA.

[Question(s) presented] | [Issue(s)] | [Facts] | [Discussion] | [Analysis]

Questions Presented

Whether the court of appeals had jurisdiction, contrary to the holdings of three other circuits, to review a district court order remanding for lack of subject-matter jurisdiction a suit removed under the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), notwithstanding 28 U.S.C. § 1447(d)'s bar on appellate review of remand orders based on lack of subject-matter jurisdiction and the district courts' conclusion that petitioners' claims are not preempted by and thus not removable under SLUSA.

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Issues

Did the Appeals Court have jurisdiction to review the District Court’s order to remand a suit removed under SLUSA, where the district court held the suit in state court was not removable under SLUSA and it thus had no “subject matter jurisdiction,” given that when a case is remanded under the lack of subject matter jurisdiction statute 28 U.S.C. § 1447(d) a party cannot appeal the remand order?

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Facts

In 1998, Congress enacted the Securities Litigation Uniform Standards Act (“SLUSA”). Kircher v. Putnam Funds Trust, 373 F.3d 847, 847 (2004). The statute blocks class action suits based on state law when the issuers involved are covered by the federal securities laws. Id. SLUSA acts as an affirmative defense and allows defendants to remove a suit under 15 U.S.C. § 77p(c) and have a federal court evaluate the defense before state litigation commences. Id., at 848. If the federal court decides that the state law claim is preempted by SLUSA, it dismisses the suit. Id. If the federal court decides the case is not preempted by SLUSA, it remands for proceedings under state law. Id. 

Carl Kircher filed a class action suit on behalf of a group of individuals who own shares in Putnam Funds Trust, a mutual fund regulated by the Securities and Exchange Commission. Id., at 847. The petitioners contended that Putnam Funds Trust and its investment adviser (Putnam Investment Management) had engaged in misconduct by setting prices in a way that arbitrageurs could exploit and thus reduced the value of their shares. Id. Arbitrageurs attempt to profit by exploiting price differences of similar or identical financial instruments on different markets. The petitioners sued in state court alone, avoiding federal law. Id. The respondents then removed the suit under 15 U.S.C. § 77p(c). Id., at 848. The judge concluded that the petitioners did not allege loss “in connection with the purchase or sale of securities” under 15 U.S.C. § 77p(b) because they did not purchase or sell the securities. Id. The petitioners held the securities and claimed injury based on events that affected the value realized by all investors in the securities. Id. The court's conclusion led to a remand of the case under 15 U.S.C. § 77p(d)(4), which requires a remand to state court if the federal court determines that the removed action may be maintained in State court. Id. The respondents then appealed the remand under 28 U.S.C. § 1291Id.

The Seventh Circuit characterized the district court's remand order as one, not based on lack of subject-matter jurisdiction, but based on the fact that they did not have adjudicatory competence to do more. Id., at 850. Therefore, the Seventh Circuit ruled, a SLUSA remand may be appealed because it is not a remand authorized by lack of subject-matter jurisdiction and is not affected by 28 U.S.C. §1447(d)Id.

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Discussion

Removal statutes provide a defendant with some control over forum selection. Thomas F. Lamprecht, How Can It Be Wrong When It Feels So Right? Appellate Review of Remand Orders Under the Securities Litigation Uniform Standards Act, 50 Vill. L. Rev. 305, 309 (2005). Once an action is removed to federal court by a defendant, the district judge will either adjudicate the matter in federal court or remand the action to state court. Id., at 311. While the Supreme Court did conduct appellate review of remand orders starting in 1875, it barred review in 1887 after the Court became overloaded with such appeals. Id., at 311-312. The prohibition of appellate review is presently codified in 1447(d) of the U.S. Code. Id. It rests on Congress’s explicit “policy of not permitting interruption of litigation on the merits of a removed cause by prolonged litigation of questions of jurisdiction of the district court to which the cause is removed.” Kircher, at 850. The former would imply a lack of subject-matter jurisdiction, whereas the latter would imply the presence of jurisdiction. Id. The presence of jurisdiction would indicate that review of an appeal would not be barred by 28 U.S.C. § 1447(d).

The Supreme Court will address the split between the circuit courts on this issue. The Second, Ninth, and Eleventh Circuits have all held that a district court's decision to remand a case removed under SLUSA is not appealable. On Petition for Writ of Certiorari, Brief of Law Professors Arthur R. Miller and E. Farish Percy as Amici Curiae in Support of Petitioners at 2. The Seventh Circuit, in this decision, disagreed. Id., at 3.The court will have to determine whether a case properly removed to federal court can then be remanded based on lack of subject-matter jurisdiction. This is exactly what the Second, Ninth and Eleventh Circuits determined. Id., at 2. However, the Seventh Circuit made a distinction between a case properly removed to federal court under SLUSA and a case that should not have been removed to federal court in the first place. Kircher, at 849. The conflict among the Circuits created by this decision undermines SLUSA’s purpose and provides an incentive to petitioners to file actions subject to potential SLUSA removal in districts where remand of such an action after removal will not be subject to review. Brief of Miller and Percy as Amici Curiae in support of Petitioners at 3.

The Supreme Court's decision will have an impact on businesses, financial institutions, individuals who are part of class action suits, and how cases under SLUSA are handled. Business has an interest in preserving the right of appeal because if the case is remanded to state court, businesses will have their cases tried in an environment that is generally less favorable to them than federal court. The conflict between the Circuits created by this decision undermines SLUSA’s purpose of having these securities cases tried under the federal securities laws. Id. A decision in this case is especially important to provide clear lines of authority in the Second, Seventh, and Ninth Circuits, where most securities litigation arises. Id., at 9.

 The Supreme Court's decision will impact on a party's right to appeal. It may implicate Constitutional rights if a party's case is remanded to state court under SLUSA even though the substantive basis of the decision may not have been lack of subject-matter jurisdiction. The Seventh Circuit states that appellate review of decisions under 15 U.S.C. §77p(b) will promote accurate and consistent implementation of the statute at little cost. Kircher, at 850. On the other hand, if the remand is deemed non-appealable, “a major substantive issue in the case will escape review.” Id. This differs from normal remands under 28 U.S.C. §1447(d), which leave all the substantive issues open to review in the state court. Id.

If the Supreme Court agrees with the Seventh Circuit, it will rule that a remand under SLUSA is appealable. This would be based on the determination that a case removed under SLUSA would not fall under the 28 U.S.C. 1447(d)'s limit on appeal because the district court did have subject matter jurisdiction for the limited purpose of determining whether the state law action was preempted. If the Supreme Court agrees with the Second, Ninth and Eleventh Circuits, it will rule that review of a remand under SLUSA is prohibited by 28 U.S.C. 1447(d). This would reject the reasoning of the Seventh Circuit that cases removed to federal court under SLUSA have subject-matter jurisdiction because SLUSA authorizes the federal courts to resolve a substantive issue.

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Analysis

Characterization of the Issue

In approaching the question of whether a remand order issued under SLUSA is reviewable, we are confronted with 28 U.S.C. 1447(d). It states that when a federal district court remands an action to state court, that remand order is not reviewable. Despite its broad language, the Supreme Court has held that it must be read together with the previous subsection 28 U.S.C. 1447(c) and applies only to remands based on grounds covered therein. Things Remembered, Inc. v. Petrarca, 516 U.S. 124, 127 (1995). These grounds are lack of subject matter jurisdiction and improper removal procedure. Id. One of the Amici Briefs cites Things Remembered on behalf of petitioner for the proposition that “[a]bsent a clear statutory command to the contrary, we assume that Congress is 'aware of the universality of th[e] practice' of denying appellate review of remand orders when Congress creates a new ground for removal.” Brief of Law Professors Arthur R. Miller and E. Farish Percy as Amici Curiae in Support of Petitioners, at 5. Ostensibly, this supports the position that no remand order is reviewable unless there is a “clear statutory command.” Id. This quotation, however, is taken out of context. The opinion in that case states unequivocally that a clear statutory command is only necessary for reviewability if the remand is based on lack of subject matter jurisdiction or improper removal procedure. Things Remembered.

Notwithstanding the requirement that the grounds for the remand action fall within those contemplated by 28 U.S.C. 1447(c), it is irrelevant under which statute the case was actually removed. Id. Thus, even though this case was removed under SLUSA and not the general removal statute, if the removal is properly characterized as one for lack of subject matter jurisdiction, review thereof would be barred by 28 U.S.C. 1447(d). Thus, the issue is whether the remand under SLUSA is, for purposes of 28 U.S.C. 1447(d), a remand for lack of subject matter jurisdiction and therefore non-reviewable.

Statutory Language

The difficulty in resolving this question arises from the apparently inconsistent wording of the statute. 15 U.S.C. 77p(c) reads:  “Any covered class action brought in any State court involving a covered security, as set forth in subsection (b) of this section, shall be removable to the Federal district court for the district in which the action is pending, and shall be subject to subsection (b) of this section.” The most troubling clause is the second one, “as set forth in subsection (b) of this section . . . .”

Subsection (b) appears to state that whenever there is a “covered class action” (the definition of which is included in 15 U.S.C. 77p(f)(2)(A)), the action may be removed to the district court for a determination of whether it is precluded by subsection (b). Then, if the district court determines that this “covered class action” is not one of those precluded by subsection (b), subsection (d)(4) requires the district court to remand the action back to the state court.

If this were the proper reading of the statute, then it would appear a SLUSA remand in accordance with subsection (d)(4) is not for lack of subject matter jurisdiction, but rather that the district court has finished determining all of the issues before it. See Kircher v. Putnam Funds Trust, 373 F. 3d 847 (2004).It appears that subsection (c) gives the district court subject matter jurisdiction specifically so that it can determine this one issue of substantive law. If the statute gives the district court subject matter jurisdiction, its remand to state court, having determined the issue over which it had jurisdiction, cannot be based on a lack of such jurisdiction. See id.

The petitioners, as well as the Second, Ninth, and Eleventh Courts of Appeals read subsection (c) differently. See Williams v. AFT Enters., Inc., 389 F.3d 1185 (11th Cir. 2004);Spielman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 332 F.3d 116, 123 (2d Cir. 2003);Abada v. Charles Schwab & Co., 300 F.3d 1112, 1119 (9th Cir. 2002). According to their argument, the question of whether the action was removable at all depends on whether the case is preempted under subsection (b). See e.g. Spielman. They take the above-mentioned “troubling clause” to mean that only a “covered class action” that meets the limitations of subsection (b) is properly removable. Id. Therefore, the argument goes, a determination that the “covered class action” is not preempted by subsection (b) means that the district court never had subject matter jurisdiction. Id. Its remand order is therefore not reviewable, because it was for lack of subject matter jurisdiction. Id.

Though this argument seems to follow from the precise language of the statute, it may not be consistent with the intended meaning of the statute. If the language of subsection (c) means what the petitioners argue it means, the SLUSA remand provision, subsection (d)(4), is superfluous. That is, if subsection (c) means that only actions preempted by subsection (b) are removable, then there is no subject matter jurisdiction and the case should be remanded under the general remand statute. The presence of subsection (d)(4) suggests rather that actions precluded by subsection (b) are not the only actions removable under subsection (c). It suggests that covered class actions are removable, and only after determination that a covered class action is not preempted, will the action be remanded to state court.

There is a further problem with the petitioner’s textual argument. If only actions preempted by subsection (b) are removable, why does the statute separately define “covered class action?” 15 U.S.C. 77p(f)(2)(A). This interpretation would mean that the only relevant actions for any purpose, as far as this statute is concerned, are preempted actions, which are a subset of all covered class actions. It would seem more natural, if this was the desired meaning, for the drafters to define “covered class action” to be the same as preempted actions under subsection (b). As it is written, the petitioner’s interpretation renders a distinction between “covered class action” and “preempted class action” superfluous. Under the respondent’s and the lower court’s interpretations, however, the distinction is this:  a covered class action is properly removable to federal court for the purpose of determining whether it is a preempted action; if it is, it will be dismissed and if not, it will be remanded.

Res Judicata and Fairness

If the district court held that the state law action was preempted by SLUSA and dismissed the case, that would be a final decision on the merits and reviewable. However, if the petitioners are correct, the opposite determination (i.e. that the claim is not preempted and thus may take place in state court) is not reviewable. As the lower court argues in this case, this is an important substantive issue that will not be subject to appeal, apparently disadvantaging defendants. Kircher, at 850.

However, this situation is not as inequitable as it might at first seem. According to the Restatement of Judgments, there is no issue preclusion where that issue was not subject to appeal. Restatement (Second) of Judgments § 28 (1982). Thus, though defendants are not able to appeal the issue of whether the state law claim is preempted by SLUSA, they will still be able to raise this issue again to the state court. This decision of the state court would in turn be appealable like any other substantive law decision.

Efficiency Concerns

One problem for the respondent is that a decision in its favor would seem to cut against the purposes of 28 U.S.C. 1447(d). The goal of that statute is to avoid excessive delay in litigation over matters that are preliminary to the litigation itself. It may be the case that this policy applies here with equal force.

Of course, the efficiency argument is not as compelling when we remember that this, unlike a normal remand for lack of federal subject matter jurisdiction, is the determination of a substantive issue and thus, at some point, must be appealable. As noted in the previous section, this issue will not be foreclosed as res judicata in the state court and thus can be argued there and appealed afterwards. A normal remand order, on the other hand, merely determines whether the case will be in federal or state court.

Also, the efficiency ramifications in the present situation are different from a normal remand because a determination that the SLUSA remand was incorrect results in a dismissal. In the case of a normal remand order, if appeal were allowed, when all of the appeals were finished the only thing determined would be the forum. The litigation would only then begin. Here, it is possible that the reversal of the district court would end litigation (although the petitioners may file a new action in federal court under the federal securities laws).

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Conclusion

SLUSA is an unusual piece of legislation in that, rather than merely preempting a state law action, its language seems to grant the federal courts jurisdiction to determine a single issue of substantive law. The language of the statute, however, is not perfectly clear on this point, and could be interpreted in such a way that the district court does not have jurisdiction unless SLUSA preempts the state court action. Furthermore, allowing review of the SLUSA remand order seems contrary to the purpose of 28 U.S.C. 1447(d), which is to limit litigation of preliminary jurisdictional questions. However, as this is not merely an issue of which forum is appropriate, but rather appears to be a substantive issue of law, appeal may be inevitable and the efficiency gains we might hope to achieve by applying 28 U.S.C. 1447(d) in this case may be impossible.

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Authors

Prepared by: Kelly McRobie and Anthony Stark

Additional Sources

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