ORDER GRANTING MOTION TO SEVER AND REMAND AND DENYING CROSS-MOTION TO STAY OR TRANSFER AS MOOT Re: ECF Nos. 11, 15
JON S. TIGAR, District Judge.
In this securities class action for violations of sections 25401, 25501, and 25504 of the California Corporations Code, Plaintiff Matthew Hayden moves to sever the claims against Defendant Worldwide Energy & Manufacturing, Inc. ("WEMU"), which is in bankruptcy, and remand the remainder of the action to California state court.
For the reasons set forth below, the Court will grant the motion. The Court will also deny Defendants' cross-motion to stay, or in the alternative to transfer, as moot.
Defendant Worldwide Energy & Manufacturing, Inc. ("WEMU") is a Colorado corporation with its principal place of business in California. Defendant Ladenburg Thalmann & Co., Inc. ("Ladenburg"), a New York-based financial firm that also conducts business in Florida, served as the placement agent for WEMU's January and February 2010 private placement offerings. Also named as Defendants are several former WEMU officers and directors (collectively, the "Individual Defendants"). Jimmy Wang, Mindy Wang, and Jeffrey Watson are former WEMU officers; Jennifer Maliar, Michael Steingrebe, Jehu Hand, Lauren Byrne, and Gerald Deciccio are former WEMU directors. Defendants Maliar, Byrne, and Steingrebe are residents of Colorado. Plaintiff and Defendants Jimmy and Mindy Wang, Watson, Hand, and Deciccio are California residents.
Plaintiff Matthew Hayden, a California resident, purchased 21, 996 shares of WEMU stock through a private placement in January 2010. First Am. Compl. ("FAC"), ECF No. 1, Ex. B ¶ 23. Plaintiff filed this class action on behalf of himself and other similarly situated WEMU investors in San Mateo County Superior Court on December 4, 2012. Not. of Removal, ECF No. 1 ¶ 2. Plaintiff alleges that Defendants committed securities fraud arising out of WEMU's Securities Purchase Agreements for its private placement transactions in January and February of 2010 because the agreements "contained material omissions and misstatements and that investors were damaged as a result of purchasing WEMU's stock based upon the allegedly misleading Securities Purchase Agreements." Not. of Removal ¶ 5. Plaintiff filed his First Amended Complaint ("FAC") on February 11, 2013. Id . There are fewer than one hundred class members. Mot. to Sever Action and Remand Severed Claims to State Court ("Mot."), ECF No. 11 at 2.
On April 29, 2013, Ladenburg filed a demurrer to the FAC for failure to state a cause of action against Ladenburg. Id . ¶¶ 3, 8. Plaintiff responded to the demurrer on July 3, 2013. Id . ¶ 8. On July 5, 2013, WEMU filed for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Colorado, thereby staying any pending litigation for relief against WEMU. Id . ¶ 4. Ladenburg removed this action to this Court on July 7, 2013, based on the Court's "related to" bankruptcy jurisdiction, pursuant to 28 U.S.C. § 1334(b).
Because WEMU has filed for Chapter 11 relief and has received an automatic stay, Plaintiff recognizes that there is little chance of obtaining relief from WEMU's estate and no longer desires to pursue WEMU in this action. Mot. at 2. Consequently, Plaintiff moves to sever WEMU from the action and remand Plaintiff's remaining claims to state court because (1) this California state securities law class action is a local controversy governed by California state law; (2) Plaintiff requests a jury trial; and (3) Plaintiff and the majority of defendants reside in or do business with California. Id.
Defendants Watson, Jimmy and Mindy Wang, and Maliar (collectively, the "Responding Individual Defendants") filed an opposition to Plaintiff's motion, Indiv. Defs' Opp'n, ECF No. 16, as did Ladenburg, Ladenburg Opp., ECF No. 15.
Ladenburg also filed a cross-motion to stay, or in the alternative, to transfer this action to the bankruptcy court. Cross-Mot., ECF No. 15.
The motions have both been fully briefed, and the Court held a hearing on both motions on November 7, 2013.
A. Motion to Sever
"On motion or on its own, the court may at any time, on just terms, add or drop a party. The court may also sever any claim against a party." Fed.R.Civ.P. 21. Rule 21 "should be construed and administered to secure the just, speedy, and inexpensive determination of every action and proceeding.'" Otsuka v. Polo Ralph Lauren Corp., No. 07-02780-SI, 2010 WL 366653, at *7 (N.D. Cal. Jan. 25, 2010) (quoting Fed.R.Civ.P. 1).
Plaintiff moves to sever WEMU and to remand the remainder of this action. The First Amended Complaint alleges that WEMU committed securities fraud in violation of California Corporations Code section 25401, as well as statutory and common law fraud. Plaintiff alleges that the remaining Defendants are liable pursuant to California Corporations Code section 25504, which imposes joint and several liability on control persons, executives, and directors of primary violators, and section 25504.1, which imposes liability on those who materially assist in any violation of section 25401, as well as for statutory and common law fraud.
The Ladenburg and Responding Individual Defendants oppose severance, arguing that this class action cannot proceed without WEMU - the primary violator - because the non-WEMU Defendants are only alleged to be subject to secondary liability, and a finding of secondary liability cannot exist without first finding ...