In Re: Bankamerica v. ( 2001 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 00-2255
___________
In re: BankAmerica Corporation *
Securities Litigation, *
--------------------
Allison Desmond; Bruce O’Such; *
Dr. Herman Shyken; Mark Luniewski; *
Ted Kraftsow; Ernesto Gumapas; *
Sidney Sorkin; Richard Levy; *
Lani Rothstein; Neil Koni, *
* Appeal from the United States
Appellants, * District Court for the
* Eastern District of Missouri.
Kevin Kloster; Joseph Hempen; *
John M. Koehler; David P. Oetting; *
Selma Kaiser; Brian Markee; *
Walter E. Ryan, Jr.; *
*
Plaintiffs - Appellees, *
*
v. *
*
Hugh L. McColl, Jr.; James H. *
Hance, Jr.;David A. Coulter; *
Michael E. O’Neill; *
John J. Higgins; Marc D. Oken; *
Bank of America, *
*
Defendants - Appellees, *
___________
Submitted: February 12, 2001
Filed: August 24, 2001 (corrected 10/3/01)
___________
Before LOKEN, HEANEY and BYE, Circuit Judges.
___________
HEANEY, Circuit Judge.
Allison Desmond heads a putative class of plaintiffs in a California state-court
securities fraud action. On April 25, 2000, the district court1 presiding over a parallel
federal class action granted an injunction that effectively halted the Desmond suit. Our
task is to decide whether the injunction violates the Anti-Injunction Act, 28 U.S.C. §
2283 (2000). We conclude that it does not and affirm the district court.
I. BACKGROUND
In October 1998, BankAmerica Corporation merged with NationsBank
Corporation to form a new BankAmerica Corporation. Shortly thereafter, it was
disclosed that the new entity would take a $372 million charge-off for a bad loan to
D.E. Shaw, a New York investment firm with which the old BankAmerica had
established a relationship. The price of shares in the new BankAmerica dropped
precipitously. See In re BankAmerica Corp. Sec. Litig., 78 F.Supp.2d 976, 983-84
(E.D. Mo. 1999) (BankAmerica I). Between October 15 and November 18, 1998,
twenty-four class actions were filed in six federal district courts by stockholders of the
1
The Honorable John F. Nangle, Senior United States District Judge for the
Eastern District of Missouri.
-2-
predecessor companies. One of the federal cases was filed on behalf of appellant Lani
Rothstein by the law firm of Milberg, Weiss, Hynes & Lerach (“Milberg Weiss”). The
cases were consolidated by order of the Multidistrict Litigation Panel, and transferred
to the Eastern District of Missouri. Milberg Weiss also filed five class actions related
to the merger in California state court, including separate actions on behalf of Desmond
and Rothstein.
After the district court appointed lead counsel according to the procedures set
out in the Private Securities Litigation Reform Act of 1995 (PSLRA), Rothstein sought
a voluntary dismissal from the federal action. Over the objection of other parties to the
federal action, the district court granted Rothstein’s motion on July 1, 1999. On July
6, 1999, the district court certified the remaining consolidated federal actions as a class
action and certified four separate plaintiff classes.
Meanwhile, the five California class actions were consolidated as Allison
Desmond v. BankAmerica Corp., No. 998629 (Cal. Super. Ct.). The Desmond
plaintiffs, through Milberg Weiss, first sought certification of a single class consisting
of all those who acquired stock in BankAmerica or its predecessors between August
4, 1998, and October 13, 1998 (“the class period”). The motion proposed three class
representatives, and proposed Milberg Weiss as class counsel. One of the proposed
class representatives was subsequently stricken after it was learned that he was a
convicted felon with a record of fraudulent conduct. The motion was denied due to
conflicts among members of the proposed single class and because the proposed lead
plaintiffs, apparently having held stock in the old BankAmerica prior to the class
period, were not truly representative of the whole proposed plaintiff class.
On November 17, 1999, the Desmond plaintiffs filed a second motion seeking
certification of five proposed plaintiff classes: those who purchased NationsBank stock
prior to the class period; those who purchased NationsBank stock during the class
period; those who purchased old BankAmerica stock prior to the class period; those
-3-
who purchased old BankAmerica stock during the class period; and those who
purchased new BankAmerica stock after the consummation of the merger but before
the disclosure of the Shaw charge-off. Just before a hearing on the second motion,
however, defendants filed a notice of removal to federal court based on the Securities
Litigation Uniform Standards Act (SLUSA), 15 U.S.C. §§ 77p, 78bb(f) (2000). The
defendants contended that the addition of new class representatives amounted to a
commencement of a new state-court securities law suit in violation of SLUSA, which
had become effective on November 3, 1998.
The district court to which the Desmond case had been removed concluded that
defendants’ notice of removal was premature and remanded the case to state court.
The court noted, however, that if parties or claims not identified in the original
complaint were brought into the Desmond litigation by a class certification order,
defendants would have 30 days to file a notice of removal under SLUSA.
Following the Desmond remand, Milberg Weiss attorney Reed Kathrein directed
a letter to the California Superior Court judge hearing the case. Kathrein indicated the
Desmond plaintiffs “would like to resubmit a proposed order of class certification to
this Court which would avoid adding new parties, yet resolve this Court’s concerns
with potential conflicts amongst the classes, and provide a mechanism to assure that
each subclass is adequately represented and that the named plaintiffs and the Court are
able to fulfill their fiduciary duties.” (Br. Supp. Mot. Oral Arg., Ex. B, at 2.)
Following Kathrein’s correspondence, a third motion for class certification was
filed. Pursuant to a joint motion filed by the Desmond plaintiffs and BankAmerica,
however, that motion was removed from the calendar to permit the parties to pursue a
mediated settlement.
The federal plaintiffs filed their motion to enjoin the California actions in
November 1999, contending that the California proceedings undermined the PSLRA’s
-4-
lead-plaintiff provisions. The district court granted a broad injunction on April 25,
2000, concluding that such an injunction was expressly authorized by the PSLRA and
therefore permissible under the Anti-Injunction Act. In re BankAmerica Corp. Sec.
Litig., 95 F.Supp. 2d 1044, 1049 (E.D. Mo. 2000) (BankAmerica II).
The court concluded that PSLRA’s lead-plaintiff provisions created new federal
rights for certain plaintiffs in securities class-action lawsuits. Specifically, the court
noted that the PSLRA, in response to abuses by professional plaintiffs and their
attorneys, vested the control over such litigation in the plaintiff with the greatest
financial stake, thereby eliminating the “race to the courthouse” system. The court
further noted that the federal plaintiffs represented more than twenty-six times the
amount of stock represented by the Desmond plaintiffs, and that the Desmond plaintiffs
had entered settlement negotiations after only “minimal written discovery and
document exchanges” and before taking a single deposition. BankAmerica II, 95
F.Supp.2d at 1050.
Singling out Milberg Weiss, the court chastised the firm for engaging in
“precisely the sort of lawyer-driven machinations the PSLRA was designed to
prevent.” Id. In the district court’s view, the Desmond case was “nothing more than
a thinly-veiled attempt to circumvent federal law.” Id.The district court concluded that the federal right of control by the greatest
stakeholder could not “be given its intended scope if competing state court plaintiffs,
representing a significantly smaller number of shares, [could] institute premature
settlement negotiations which threaten the orderly conduct of the federal case and
which could result in the release of the federal claims.” Id. at 1049.
The court granted a broad injunction that (1) barred the named Desmond
plaintiffs from prosecuting any class action claims arising out of the BankAmerica
merger; (2) barred the California court from certifying any Desmond plaintiff classes;
-5-
(3) barred the California court from ordering any alternative dispute resolution in
Desmond and directed the court to stay any alternative dispute resolution that had
already been ordered; (4) established procedures for the Desmond plaintiffs to opt out
of any class certified by the federal court in order to pursue individual actions. Id. at
1053-54. The Desmond plaintiffs now appeal the district court’s issuance of the
injunction.
II. DISCUSSION
The Anti-Injunction Act is part of a scheme, formed by statutory and decisional
law, that serves to forestall the frictions that would result from turf wars between
federal and state courts over control of a particular case. See Atlantic Coast Line R.R.
Co. v. Bhd. of Locomotive Eng’rs, 398 U.S. 281, 286 (1970). The Act bars a federal
court from granting an injunction staying state-court proceedings unless such an
injunction is (1) expressly provided for in a federal statute, (2) necessary in aid of the
federal court’s jurisdiction, or (3) necessary to protect or effectuate the federal court’s
judgments. 28 U.S.C. § 2283 (2000). We have jurisdiction over this appeal pursuant
to 28 U.S.C. § 1292(a)(1), and review de novo the district court’s determination that
§ 2283 permits the Desmond injunction, Prudential Ins. Co. v. Doe, 140 F.3d 785, 788
(8th Cir. 1998).
We begin by briefly describing the relevant legislative landscape. This case
arose after the enactment of the PSLRA but prior to the enactment of SLUSA. With
the PSLRA, which became effective on December 22, 1995, Congress sought to
address abusive practices such as “strike suits”2 by professional plaintiffs and their
2
A “strike suit” is defined as “[a] suit (esp. a derivative action) often based on
no valid claim, brought either for nuisance value or as leverage to obtain a favorable
or inflated settlement.” Black’s Law Dictionary 1448 (7th ed. 1999).
-6-
attorneys by (1) entrusting lead plaintiff status to the plaintiff with the largest financial
interest in the relief sought by the class, 15 U.S.C. §§ 77z-1(a)(3)(B), 78u-4(a)(3)(B);
(2) requiring those seeking lead-plaintiff status to certify that they did not purchase the
security at issue at the direction of counsel or in order to participate in a private
securities lawsuit, 15 U.S.C. §§ 77z-1(a)(2)(A)(ii), 78u-4(a)(2)(A)(ii); (3) requiring
court permission for those who seek to serve as lead plaintiff in a securities class action
more than five times in any three-year period, 15 U.S.C. § 77z-1(a)(3)(B)(vi); and (4)
granting lead plaintiff the right to select class counsel, subject to court approval, 15
U.S.C. § 77z-1(a)(3)(B)(v).
Plaintiffs’ attorneys, however, were able to thwart the PSLRA’s reforms by
turning to state courts, thereby subjecting publicly traded corporations to an array of
differing state-court practices. SLUSA, which became effective on November 3, 1998,
took a more aggressive approach to the regulation of securities litigation by preempting
state-law securities-fraud class actions with more than fifty plaintiffs. 15 U.S.C. §§
77p(b), 77p(f)(2)(A), 78bb(f)(1). SLUSA also explicitly grants federal courts power
to stay discovery in a private state-court action, 15 U.S.C. § 77z-1(4), and permits
removal of state-court actions to federal court, 78 U.S.C. § 78bb(f)(2).
Because both the state-court and federal-court actions are in personam
proceedings, the Desmond injunction does not fit within the Anti-Injunction Act’s
exception for injunctions in aid of the district court’s jurisdiction. See Kline v. Burke
Constr. Co., 260 U.S. 226, 230 (1922). The exception for injunctions necessary to
effectuate or protect the district court’s judgments is likewise inapplicable, because the
district court’s lead-plaintiff order is neither a final appealable order nor an order
appealable under the collateral order doctrine. Z-Seven Fund, Inc. v. Motorcar Parts
& Accessories, 231 F.3d 1215, 1218-19 (9th Cir. 2000) (PSLRA lead-plaintiff order
not appealable order); 17 Charles Alan Wright et al., Federal Practice & Procedure §
4226 (2d ed. 1988) (exception for protection of judgments extends, at best, to
interlocutory orders appealable under collateral order doctrine). We are thus concerned
-7-
here with the “expressly-authorized” exception to the Anti-Injunction Act. This
exception authorizes injunctions against state-court proceedings where the statute in
question creates a federal right or remedy that can only be given its intended scope by
such an injunction. Mitchum v. Foster, 407 U.S. 225, 238 (1972).3
We think it plain that the lead-plaintiff provisions of the PSLRA create
significant federal rights that previously did not exist. It can hardly be gainsaid that the
right to steer litigation of this magnitude is an important privilege. The lead plaintiff’s
control over aspects of litigation such as discovery, choice of counsel, assertion of legal
theories, retention of consultants and experts, and settlement negotiations gives the lead
plaintiff decisional muscle that other members of the class lack. The very fact of the
Desmond plaintiffs’ flight to state court bespeaks the significance of this position.
Appellants attempt to minimize the import of the PSLRA lead-plaintiff
provisions, categorizing the rights created therein as merely procedural. We are,
however, unpersuaded that § 77z-1(a)(3)(B) is so insignificant, and find little meaning
in the proposed distinction between procedural and substantive rights. Although § 77z-
1(a)(3)(B) may be characterized as a mechanism for the selection of lead plaintiff, the
consequences of that mechanism have great significance for plaintiffs in class-action
securities litigation. It is therefore not quite accurate to characterize § 77z-1(a)(3)(B)
as a mere extension of Federal Rule of Civil Procedure 23(a)(4) (class members may
3
We acknowledge that Justice Rehnquist’s plurality opinion in Vendo Co. v.
Lektro Vend Corp., 433 U.S. 623 (1977) suggests Mitchum might not mean what it
says. Writing for himself and two additional justices, Justice Rehnquist stated that the
Court has “clearly recognized that the Act countenancing the federal injunction must
necessarily interact with, or focus upon, a state judicial proceeding.” 433 U.S. at 640-
41 (per Justice Rehnquist with two justices concurring and one justice concurring in the
result). Our reading of the concurring and dissenting opinions, however, fails to show
that this more restrictive view of the expressly-authorized exception was shared by a
majority of the Court.
-8-
sue or be sued as representative parties only if they “fairly and adequately protect the
interests of the class”). Moreover, one need only look to our opinion in Stockslager v.
Carroll Elec. Coop. Corp., 528 F.2d 949 (8th Cir. 1976) to see that we have not been
concerned with such artificial distinctions. In Stockslager, we found an injunction
against state proceedings to be expressly authorized by the National Environmental
Policy Act (NEPA), id. at 952, even though NEPA, like § 77z-1(a)(3)(B), reflects
certain substantive policy judgments but is procedural in operation, Vermont Yankee
Nuclear Power Corp. v. NRDC, 435 U.S. 519, 558 (1978) (“NEPA does set forth
significant substantive goals for the Nation, but its mandate to the agencies is
essentially procedural.”).
Appellants also contend that construction of the PSLRA to authorize the sort of
injunction ordered by the district court renders the amendments accomplished by the
subsequent passage of SLUSA mere surplusage. We disagree. Initially, we are
hesitant to interpret the PSLRA by looking to SLUSA, because “the views of a
subsequent Congress form a hazardous basis for inferring the intent of an earlier one.”
Reno v. Bossier Parish Sch. Bd., 520 U.S. 471, 484-85 (1997) (quoting United States
v. Price, 361 U.S. 304, 313 (1960)). Further, there is a good reason why the injunctive
power granted by SLUSA should be much narrower than the injunctive power the
district court employed here: the inclusion of such injunctive power in SLUSA would
be redundant. This is because SLUSA as a whole goes farther than authorizing
injunctions against state-court class actions, it forbids the bulk of such actions from
ever being filed:
No covered class action based upon the statutory or common law of any
State or subdivision thereof may be maintained in any State or Federal
court by any private party alleging--
(A) a misrepresentation or omission of a material fact in connection
with the purchase or sale of a covered security; or
-9-
(B) that the defendant used or employed any manipulative or deceptive
device or contrivance in connection with the purchase or sale of a covered
security.
§ 78bb(f)(1). Under SLUSA, therefore, Desmond would be preempted altogether,
obviating the need for injunctive power of the sort invoked by the district court under
the PSLRA. SLUSA’s limited injunction power is instead aimed at plaintiffs who
would use state-court actions to circumvent the automatic discovery stay that applies
in federal actions upon the filing of a motion to dismiss, 15 U.S.C. § 77z-1(b)(1).
Compare In re Transcrypt Int’l Sec. Litig., 57 F. Supp.2d 836, 846-47 (D. Neb. 1999)
(concluding SLUSA injunction against state-court discovery applies only to state-court
class actions, not individual actions) with A.C. Pritchard, Constitutional Federalism,
Individual Liberty, and the Securities Litigation Uniform Standards Act of 1998, 78
Wash. U. L.Q. 435, 490 n.267 (2000) (Transcrypt is “inconsistent with the text of the
statute . . . and negates the primary purpose of the provision.”).
Appellants also insist that the district court’s injunction is nothing more than an
impermissible effort to prevent a state-court settlement that would release federal
claims, citing Matsushita Elec. Indus. Co., Ltd. v. Epstein, 516 U.S. 367 (1996) and
National Basketball Ass’n v. Minnesota Prof’l Basketball, 56 F.3d 866 (8th Cir.1995)
(“NBA”). In Matsushita, the Supreme Court held that the Full Faith and Credit Act,
28 U.S.C. § 1738, requires a federal court to give full preclusive effect to a state-court
settlement judgment even though the claims settled include claims within the exclusive
jurisdiction of the federal courts. In NBA, this court reversed a district court’s
injunction against a parallel state-court proceeding, concluding that the Anti-Injunction
Act did not permit the district court to enjoin the state proceeding merely to prevent the
state court from pronouncing judgment first:
Although the district court expressed concern that the state court might
pronounce judgment first and the district court would have little, if
anything, left to decide, this pessimistic forecast is a natural consequence
-10-
of the nation’s dual system of independent state and federal courts, and
not a legal justification for staying state court proceedings.
56 F.3d at 872.
NBA and Matsushita are inapposite here. Neither stands for the proposition that
a federal court must stand idly by while parallel state court proceedings are used to
frustrate an important federal right, nor do they add anything to our Anti-Injunction Act
analysis. The point of the district court’s injunction is not to prevent the resolution of
federal claims through a settlement in state court. Rather, the injunction ensures that
the resolution of the federal claims proceeds in a manner that preserves the federal
rights created by the PSLRA.
We agree with the district court that the rights created by § 77z-1(a)(3)(B) are
meaningless if a state-court plaintiff who has won the race to the state courthouse may
seize control of the litigation of the federal claims. Because an injunction against the
California action was the only means available to the district court of giving those rights
their intended scope, we believe the injunction was proper. The Desmond class
disagrees, suggesting that instead of seeking the injunction against the California
plaintiffs, the federal plaintiffs could have gone to the state court, where they could
have protected their interests in the settlement negotiations or even sought lead-plaintiff
status. Although this might have been an amiable gesture, the flaw in this argument is
appellants’ failure to explain how the federal plaintiffs could ensure that the state court
would accord them the full scope of rights bound up in the PSLRA’s lead-plaintiff
provisions.
Similarly unpersuasive are appellants’ appeals to principles of equity, comity,
and federalism. We recognize that the district court’s injunction prevents the
prosecution of a class action under California securities law, and in that sense prevents
-11-
the vindication of the state’s interests in preventing fraudulent practices. However, the
significance of this aspect of the injunction wanes when one considers Congress’s
determination, albeit after the alleged fraud took place, that the state’s interests must
give way to the national policies behind SLUSA.
We also take issue with the appellants’ suggestion that the injunction reflects an
unjustified distrust of the California courts. Principles of federalism and comity require
that federal courts, “anxious though [they] may be to vindicate and protect federal
rights and federal interests, always endeavor[ ] to do so in ways that will not unduly
interfere with the legitimate activities of the States.” Younger v. Harris, 401 U.S. 37,
44 (1971). In the context of the Anti-Injunction Act, these principles demand that
“[a]ny doubts as to the propriety of a federal injunction against state court proceedings
should be resolved in favor of permitting the state courts to proceed in an orderly
fashion to finally determine the controversy.” Atlantic Coast Line, 398 U.S. at 297(emphasis added).
Yet it is precisely this concern for an orderly resolution of the federal claims that
supports the issuance of an injunction here. In addition to determining that the PSLRA
expressly authorized an injunction against the state proceedings, the district court
concluded that, based upon the tortuous path the state court litigation had taken, the
Desmond action was but an end run around the PSLRA. In short, the district court was
convinced that the Desmond litigation was proceeding in a fashion that was anything
but orderly and that would have subverted the PSLRA by putting small stakeholders
in the driver’s seat.4
4
Pursuant to appellants’ request, we have taken judicial notice of the comments
made by the California court on the record to the effect that counsel for the Desmond
plaintiffs have conducted themselves professionally. These commendations do not,
however, alter our analysis.
-12-
Finally, we conclude that we lack jurisdiction to consider appellants’ challenge
to the sufficiency of the class notice approved by the district court. The class notice
is neither interdependent with nor a part of the injunction, but is a separate issue
entirely. Hence our jurisdiction, which flows from 28 U.S.C. § 1292(a)(1) (courts of
appeals have jurisdiction over interlocutory appeals from district court orders granting
injunctions), is limited to review of the injunction itself. Surgidev Corp. v. Eye Tech.,
Inc., 828 F.2d 452, 457-58 (8th Cir. 1987); cf. In re Federal Skywalk Cases, 680 F.2d
1175, 1179-80 (8th Cir. 1982) (mandatory class certification order was essentially
injunction against pending state-court actions and therefore appealable under §
1292(a)(1)).
-13-
III. CONCLUSION
For the foregoing reasons, the district court’s injunction concerning the Desmond
action is affirmed.
BYE, Circuit Judge, concurring in part and dissenting in part.
The district court unearthed a federal right in various logistical provisions of the
Private Securities Litigation Reform Act of 1995 (PSLRA) that enable “lead plaintiffs”
to “control” securities litigation. I have my doubts that the PSLRA confers the sort of
“uniquely federal right or remedy,” Mitchum v. Foster, 407 U.S. 225, 237 (1972), that
authorizes a district court to enjoin state proceedings of equal dignity. A lead plaintiff’s
opportunity to control litigation is shared by every civil plaintiff, and so it hardly seems
unique. Despite my doubts, however, I am reluctant to disagree with the district court
because few cases explain what qualifies as a federal right, and the mode of discerning
such rights is far from scientific.
The district court ultimately held that a lead plaintiff’s right of control would be
frustrated unless a dueling state securities action were enjoined. I disagree with the
court’s conclusion that an exception to the Anti-Injunction Act permitted an injunction
here. It appears unlikely that a lead plaintiff’s right “could be given its intended scope
only by the stay of a state court proceeding,” id. at 238, when all plaintiffs possess a
constitutional right to opt out of a coercive state court settlement. See Phillips
Petroleum Co. v. Shutts, 472 U.S. 797, 811-12 (1985). More important still—and
irrespective of whether opt-out rights prove illusory in practice—nothing in the
legislative history of the PSLRA suggests that Congress sanctioned the injunction of
state court securities actions. To the contrary, that history reveals that Congress
countenanced their continued availability.
-14-
The majority’s opinion reveals that the propriety of an injunction in these
circumstances is debatable among reasonable jurists. Yet “[a]ny doubts as to the
propriety of a federal injunction against state court proceedings should be resolved in
favor of permitting the state courts to proceed in an orderly fashion to finally determine
the controversy.” Atl. Coast Line R.R. Co. v. Bhd. of Locomotive Eng’rs, 398 U.S.
281, 297 (1970). I respectfully dissent from the majority’s disposition with the sole
exception of its resolution of the class-notice issue.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
-15-