In another recent Court of Appeals decision addressing important issues in class or collective actions, Blackrock Financial Management Inc. et al. v. The Segregated Account of Ambac Assurance Corp., Dkt Nos. 11-5309-cv(L) (2d Cir. 2012), the Court addressed the issue of the removal of a case from state to federal court under the Class Action Fairness Act of 2005 (“CAFA”) — an act that has had major impact on collective actions in the U.S.

The underlying litigation involves residential mortgage-securitization trusts, which the Second Circuit has had extensive experience in considering in what it says is the “recent annals of litigation”.   In this case institutional investors are aligned with the Bank of New York Mellon.  The other side (whose lead company is Walnut Place) involves a group of investors opposed to what the “majors” (institutional investors) had agreed on.  As the Court of Appeals observed, “Everyone is a sophisticated investor”.

As a result of negotiations between the first set of investors and Mellon, a settlement in the amount of $8.5 billion was reached.  The settlement is contingent on court approval, and to obtain that court approval Mellon was required to commence and successfully prosecute what is known as an Article 77 proceeding in New York state court, which would determine that Mellon had the authority to enter into the settlement.

Walnut Place intervened in the Article 77 proceeding and complained that Mellon and the institutional investors had “negotiated the Settlement Agreement ‘in secret'”.  Walnut Place then removed the entire case to federal court pursuant to CAFA.

As the Second Circuit observed, CAFA “expanded federal jurisdiction to permit a defendant to remove to federal court a class actions or ‘mass action’ notwithstanding the absence of the complete diversity or federal question otherwise required for removal”.  Furthermore, although district court orders on motions to remand are typically unappealable under the collateral order doctrine, CAFA creates an expanded basis to secure immediate appellate jurisdiction, which might not otherwise be available at all.

Notwithstanding the broader access both to federal court and to federal appellate jurisdiction, CAFA created an exception when the class action solely involves “a claim that relates to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security” (as defined by federal law).

On analysis, the Second Circuit found that the Mellon act was solely limited to rights and obligations relating to a security.  The Court of Appeals did so based on the trustee’s powers and then by examining the relief being sought.

Since an exception to CAFA applied, the Second Circuit found that not only did it lack appellate jurisdiction but that the District Court did not have subject matter jurisdiction over the improvidently removed case.  The case was thus remanded to state court.