The Second Circuit Interprets the Securities Exception to CAFA Jurisdiction and Remands a Case to State court

CAFA excepts from federal jurisdiction “any class action that 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.” 28 U.S.C. §1453(d).  In BlackRock Financial Management Inc. v. The Segregated Account of Ambac Assurance Corp., No. 11-5309 (2d Cir. Feb. 27, 2012), the Second Circuit held that this securities exception applied to a case removed from state court based on CAFA’s mass action provision contained in 28 U.S.C. §1332(d)(11). 

The case arose when several institutional investors who had invested in mortgage-backed securities, complained to The Bank of New York Mellon (“BNYM”) as trustee of the trusts holding the securities, that the seller of the mortgages, Countrywide Home Loans (now a subsidiary of Bank of America) had failed to comply with its representations and warranties regarding the quality of the mortgages held in trust. BNYM negotiated a settlement with Bank of America that was contingent upon the filing of a proceeding in the New York Supreme Court pursuant to Article 77 of the New York Civil Practice Law and Rules which authorized a special proceeding to determine a matter relating to any express trust.  BNYM sought confirmation from the state court that BNYM had authority under the trust agreements to settle the claims.  One of the institutional investors opposed to the settlement intervened in the state court proceeding and removed the case to the Southern District of New York.  The district court denied the plaintiff’s motion to remand.  

On appeal, the Second Circuit reversed and remanded the action to state court, holding that CAFA’s securities exception applied.  The Court relied on its prior cases in which it had construed 28 U.S.C. §1453(d) as applying to claims based either on the terms of the instruments that create and define securities, or on the duties imposed on the persons who administer securities, while excluding claims based on rights arising from independent sources of state law. The court examined BNYM’s state court petition and concluded that because the bank was primarily seeking a construction of the trust documents, and instruction about its planned course of action, the claims fell within CAFA’s securities exception in 28 U.S.C. §1453(d).  The Court rejected the district court’s reasoning that the CAFA securities exception did not apply because the trustee’s conduct had to be evaluated under New York common law.  The Second Circuit noted that “certain duties and obligations . . . relate to securities even though they are not rooted in a corporate document but are instead superimposed by a state’s corporation law or common law on the relationships underlying that document.”