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Luther v. Countrywide Financial Corp.

United States District Court Central District of California

October 9, 2009


The opinion of the court was delivered by: Hon. Mariana R. Pfaelzer United States District Judge



The following background is necessary to understand this case's peculiar posture. That posture, in turn, explains this order's rare conclusion: sua sponte dismissal before any motion or briefing on the issues.*fn1

A. The Issue Presented for Declaratory Judgment

This declaratory judgment action relates to a case in California state court between the same parties ("Luther I"). Defendants previously removed Luther I to this Court under the case number CV-07-08165-MRP. Luther I asserts solely federal claims under the Securities Act of 1933 ("'33 Act").*fn2

Upon removal in Luther I, Defendants argued that removal was proper under the "Class Action Fairness Act" ("CAFA"). This Court and a unanimous panel of the Ninth Circuit concluded that removal was improper. Both opinions mention the Securities Litigation Uniform Standards Act ("SLUSA"). And both opinions recognize that, after CAFA and SLUSA, the federal courts have struggled with securities jurisdiction and removal. 533 F.3d 1031 (9th Cir. 2008); 2008 U.S. Dist. LEXIS 26534 (C.D. Cal. Feb. 28, 2008).*fn3 It appears that Defendants neither moved for rehearing nor petitioned for certiorari. The Ninth Circuit issued its mandate for remand; and this Court remanded. Upon remand, "a district court disassociates itself from the case entirely, retaining nothing of the matter on the federal court's docket." Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 714 (1996).

After remand, Defendants raised a SLUSA jurisdictional issue in Luther I to Judge Emilie H. Elias, who is presiding over Luther I in the state court. Defendants did not raise a SLUSA issue (removal or jurisdictional) in this Court; nor did they raise it before the Ninth Circuit.*fn4

Following a colloquy about Knox v. Agria Corp., 613 F. Supp. 2d 419 (S.D.N.Y. 2009) (recognizing a split of authority on SLUSA removal, reading part of SLUSA "as a 'guide'" by construing a reference to a statutory section as referring to a definitional subsection, and concluding that the reference and a definition affect jurisdiction), Judge Elias suggested removing Luther I again to this Court. Compl. Exh. C at 16. Judge Elias expressed concerns about the issue's gravity; she also stated her preference that a federal court hear Defendants' SLUSA argument in the first instance. Id. at 16-19.

Perhaps because a second removal was not procedurally available, Judge Elias subsequently entered an order staying Luther I. The order also compelled "Plaintiffs to file an action" in this Court. Compl. Exh. A.*fn5 Judge Elias did so "in an abundance of caution, and in order to promote efficiency." Id. at 3. She reiterated her "willing[ness] to preside over the action and to vigorously proceed with the litigation." Id. at 3 n.7.

Plaintiffs then filed this case. It seeks declaratory judgment that SLUSA is no impediment to Judge Elias' jurisdiction in Luther I. Compl. at 14 ¶ A.

This Court understands well the importance of jurisdiction and Judge Elias' concerns. Some observers find SLUSA and CAFA poorly drafted; some have pointed out possible drafting errors. Such drafting is particularly dangerous in legislation that may affect jurisdiction, removal, preemption, or related issues.

Judge Elias' thoughtful and sincere consideration is apparent from the record. This Court is confident that Judge Elias, and the rest of the state judiciary, can reach an appropriate conclusion, regardless whether this Court (or another lower federal court) might come to the same conclusion.

B. Important Issues Raised by this Case's Procedural Posture

The federal courts have jurisdictional and procedural limitations. The present parties may have a case or controversy between them on SLUSA, but this action was filed under court order. See U.S. CONST. art. III, § 2. It may also be that the state court intends to treat a judgment from this Court as an advisory opinion in a literal sense. See id.; Compl. Exh. C at 16 (Elias, J., "If [the federal courts] don't want me to have [Luther I], I probably should listen to them."). And this action splinters from a case already remanded to state court.

There are myriad potential issues raised by this case's procedural posture- including constitutional limits on federal jurisdiction, prudential justiciability and abstention doctrines, and Luther I's possible preclusive effect. See, e.g., Calderon v. Ashmus, 523 U.S. 740 (1998) (discussing some types of justiciable cases and controversies under the Declaratory Judgment Act); Quackenbush, 517 U.S. at 716-23 (surveying abstention doctrines).

Under ordinary circumstances, the Court would have the benefit of a full adversarial dispute to clarify the issues. Though Plaintiffs contend that they were ordered to file this action as a declaratory relief action, they also appeared, at the status conference in this matter, to suggest that this Court should decline to provide declaratory relief. This was apparently part of an argument that Defendants are attempting to delay Luther I.*fn6 Meanwhile, Defendants argued at the status conference that federal jurisdiction over this declaratory judgment action is improper. Defendants may have suggested that Plaintiffs chose, for tactical reasons, to interpret Judge Elias' order as calling for a declaratory relief action.*fn7 In these circumstances, this Court cannot rely on the adversarial system to clarify the issues.

Thus, rather than tackle the bodies of constitutional and other law that this case might implicate, the Court assumes-though it doubts-that this case faces no absolute bar (jurisdictional, procedural, or otherwise). The Court also pretermits the prudential jurisdictional and abstention doctrines-though one or more doctrines almost surely prevent this case from proceeding under any nonabusive exercise of discretion.*fn8

The Court instead follows a path with fewer legal nuances: whether a declaratory judgment would serve a useful purpose under the Declaratory Judgment Act. 28 U.S.C. § 2201(a). The Court does so because "[d]istinct features of the Declaratory Judgment Act . . . vest[] district courts with greater discretion" to decline a case than other doctrines. Wilton v. Seven Falls, 515 U.S. 277, 286 (1995).


"[I]f a district court, in the sound exercise of its judgment, determines after a complaint is filed that a declaratory judgment will serve no useful purpose, it cannot be incumbent upon that court to proceed to the merits before staying or dismissing the action." Wilton, 515 U.S. at 288; see also Exxon Shipping Co. v. Airport Depot Diner, Inc., 120 F.3d 166, 168 (9th Cir. 1997) ("If the relief [requested under the Declaratory Judgment Act] serves no purpose, or an illegitimate one, then the district court should not grant it." (emphasis added)).

First, declaratory judgment would serve no useful purpose because these parties have a case on the merits in the state forum. Parallel proceedings and piecemeal litigation are both disfavored under the Declaratory Judgment Act. Principal Life Ins. Co. v. Robinson, 394 F.3d 665, 672 (9th Cir. 2005); McGraw-Edison Co. v. Preformed Line Prods. Co., 362 F.2d 339, 342-43 (9th Cir. 1966). The state system handling Luther I may resolve any federal issues presented.

Relatedly, declaratory judgment would serve no useful purpose because it would violate at least the spirit of federalism by circumventing the state system.*fn9

Comity and federalism concerns are appropriately considered in a Declaratory Judgment Act analysis. Principal Life, 394 F.3d at 672. Principles of comity and federalism recognize that state courts are competent to decide issues of federal law-no matter whether some federal courts might disagree with a state court's determination. Kruelski v. Conn. Superior Court, 316 F.3d 103, 105-06 (2d Cir. 2003) (Calabresi, J.). Indeed, "[t]he Circuit Courts of Appeals were to be equal in dignity to the Supreme Courts of the several States." Dick v. New York Life Ins. Co., 359 U.S. 437, 448 (1959) (Frankfurter, J., dissenting). And the United States Supreme Court may review federal issues upon final judgment from the "highest [state] court . . . in which a decision could be had." 28 U.S.C. § 1257. Together, these considerations teach that the state judiciaries are entrusted, in the same way as the lower federal courts, to decide issues such as Defendants' SLUSA argument.*fn10 It serves no useful purpose-in fact, it would undermine principles of federalism and comity-to circumvent the state system by this collateral declaratory judgment action.

Moreover, declaratory judgment would serve no useful purpose because such a novel procedure threatens the horizontal separation of powers. Many states-including California-have a well established process by which federal appellate courts can certify questions of state law to a state's highest court. See, e.g., Cal. R. Ct. 8.548. But Congress has not provided for "'reverse' certification from state courts to federal courts . . . ." Kruelski, 316 F.3d at 106 & n.1. In the absence of a federal reverse-certification statute, proper judicial restraint militates against presuming that Congress intended reverse certification as a useful (or even legitimate) purpose for the Declaratory Judgment Act.

In sum, this Court exercises its discretion under the Declaratory Judgment Act. It concludes that this case will serve no useful purpose within the meaning of the Act. A state forum is available, equally competent, and has a case on the merits before it. Moreover, the contrary result would create precedent undesirable for federal-state and legislative-judicial relations.


This declaratory judgment action serving no useful purpose, the case is DISMISSED.


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