The Class Action Fairness Act of 2005 Supersedes §22 of the Securities Act of 1933: Katz v. Gerardi

In Katz v. Gerardi, 2009 WL 18137 (7th Cir. Jan. 5, 2009), the class of plaintiffs (“plaintiffs”) contributed real property to Archstone, a real estate investment trust. In exchange for the real estate, plaintiffs received interests called “A-1 Units.” In 2007, Archstone merged into Tishman-Lehman Partnership and the agreement offered holders of the A-1 Units cash or Series O Preferred Units in the partnership.

Katz argues that the merger violated the terms of the A-1 Units because the cash and Series O Preferred Units do not offer the same tax benefits as the A-1 Units. The Illinois state district court held, on remand from federal district court, that the Class Action Fairness Act of 2005 is superseded by § 22(a) of the Securities Act of 1933, which deals specifically with securities litigation, while the 2005 Act covers a broad field of class actions.

The Seventh Circuit disagreed with the district court, holding that the 2005 Act supersedes § 22(a). The court noted the general rule that an older law yields to the newer; however, an exception arises when the older law is more specific than the newer one. The court here held that the exception does not apply when the older law is not a subset of the newer. Here, the court found that the exception did not apply because the 2005 Act deals with only large-multi-state class actions, whereas § 22(a) deals with both small and large class actions.

Additionally, the court held that § 1453(d) of the 2005 Act guides whether the case may be removed. That section identifies three class action claims that are not removable. First, a claim involving a “covered security” – defined as those that trade on a national security exchange, are senior to a traded security, or were issued by a registered investment company. Second, claims that deal with corporate internal affairs. Third, claims that relate to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security. The court did not apply these reasons for non-removal to the facts in the instant case, but instead vacated the district court’s judgment and remanded to determine whether § 1453(d)(3) prevents removal under the 2005 Act.

The primary materials for this post are available on the DU Corporate Governance web site.