Securities Regulation Daily SLUSA is not an independent basis for jurisdiction over state law claims
Thursday, December 22, 2016

SLUSA is not an independent basis for jurisdiction over state law claims

By Rodney F. Tonkovic, J.D.

The Ninth Circuit has joined with the D.C. Circuit in holding that the SLUSA does not provide an independent basis for federal question jurisdiction over a state law claim. In an issue of first impression before the court, the panel adopted a D.C. Circuit holding that that Congress did not intend for the carve-out provision in the SLUSA to independently confer federal court jurisdiction on state-law actions (Rainero v. Archon Corporation, December 21, 2016, Thomas, S.).

Archon, a Nevada corporation, issued shares of preferred stock in 1993. The stock's certificate gave Archon the right to redeem the preferred stock and stated that shareholders would be entitled to a $2.41 per share, plus accrued, unpaid dividends. In 2007, Archon redeemed the shares for $5.241 per share.

Contract claim in federal court. A shareholder filed this action in the U.S. District Court for the District of Nevada, claiming that the redemption price should have been $8.49, and that he and other shareholders were entitled to receive an additional $3.45 per share. The sole claim in the complaint was for breach of contract under Nevada law, and the only basis for federal subject matter jurisdiction alleged in the complaint was 28 U.S.C. § 1332(d)(2), which confers federal subject matter jurisdiction over certain class action lawsuits. An amended complaint added grounds for jurisdiction, including federal question jurisdiction under 28 U.S.C. § 1331 and the SLUSA. The district court dismissed the case without prejudice for lack of subject matter jurisdiction.

Federal question jurisdiction. The question on appeal was whether the SLUSA provided an independent basis for federal question jurisdiction under 28 U.S.C. § 1331. The shareholder argued that the SLUSA provides a basis for jurisdiction under § 1331 because 15 U.S.C. §77p (i.e., Securities Act Section 16(d)(1)(A)) is a federal statute that allows certain class actions, including this one, to be maintained in either state or federal court. Specifically, the shareholder maintained that this case is a covered class action based upon the statutory or common law of the state of the issuer, giving the federal court jurisdiction under the SLUSA.

The Ninth Circuit had never addressed this issue before now but was persuaded by a D.C. Circuit case holding that the SLUSA does not confer federal jurisdiction over state-law claims. In Campbell v. AIG, the D.C. Circuit explained that the plain language of the provision shows that Section 16(a) preserves state law claims except the state law securities fraud claims precluded in Section 16(b). The Campbell court then noted that it is evident that Section 16(d) carves out a specific exception to the preclusive reach of subsection (b). There is no indication, the D.C. Circuit said, that Congress intended the carve-out to create federal jurisdiction over a category of state-law securities class actions.

The panel concluded that the district court correctly held that it lacked federal question jurisdiction because the shareholder did not assert a federal claim. And, Section 16(d) does not provide an independent basis for federal question jurisdiction.

No other bases for jurisdiction. The panel went on to find that the shareholder's other arguments for federal jurisdiction also failed. According to the panel, the district court properly concluded that it lacked diversity jurisdiction under 28 U.S.C. § 1332(d)(2) because of the exception in § 1332(d)(9)(C) barring claims that relate to the rights, duties, and obligations relating to a security. The district court also did not abuse its discretion in declining to exercise supplemental jurisdiction because the complaint failed to plead individual diversity jurisdiction.

The case is No. 14-17106.

Attorneys: Steven Goren (Goren Law) for David Rainero. Justin James Bustos (Dickinson Wright PLLC) for Archon Corp.

Companies: Archon Corp.

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