State Law Claims Do Not “Necessarily” Raise Federal Question — Case Remanded To State Court

by Cadwalader, Wickersham & Taft LLP
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The distribution of matters between federal and state court is a key consideration in the international practice sphere.  In re Lehman Bros. Securities and ERISA Litigation, 09 MD 2017 (S.D.N.Y. 2012) (LAK), deserves study on this issue.  The case remanded to state court claims asserted against Lehman by the People of the State of New York.

New York had sued Lehman’s auditors, Ernst & Young, under New York’s Martin Act, which, “broadly speaking, addresses fraudulent and deceptive conduct in the securities industry, and another New York statute that addresses fraudulent practices also”.  The action was removed to federal court and while in federal court was part of the comprehensive set of cases that the Judicial Panel on Multidistrict Litigation determined should be discovered and heard in the same forum.  There are currently 47 such cases.

Notwithstanding, the removing defendant did not appear to have argued to the District Court that the proper administration of the related cases did not provide any basis for removal.  So the analysis had to be done on the basis of the general removal statute, which (given the absence of diversity jurisdiction) required the presence of a federal question.  The Court observed that there was no federal question on the face of the operative and that the issue presented was whether there was “embedded” in the claims to be litigated a federal question such that removal was appropriate.  The four causes of action alleged by the State of New York involved state law claims of fraud and misrepresentation, and the Court stated:  ”The party that removes the case bears the burden of establishing that there is a valid basis for federal question jurisdiction.   So long as there is federal jurisdiction over at least one claim in a complaint, a federal court may hear the entire action.  If there is no federal question jurisdiction over any claim, the case must be remanded to state court.”

In applying he law on “embedded” federal questions, the District Court followed the Supreme Court’s decision in Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing, 545 U.S. 308 (2005).  There the Supreme Court ruled that the presence or possible presence of a federal issue is not “a password opening federal courts to any state action embracing a point of federal law.” Rather, “the question is, does a state-law claim necessarily raise a stated federal issue, actually disputed and substantial, which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities.”  In other words, said the District Court,

the determination of the state law claim “necessarily” must require resolution of the federal issue. The federal issue must be actually disputed and substantial. And federal resolution of the case must be appropriate given considerations of federalism.

This was lacking here said the District Court.  The Court therefore remanded the case.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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