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Supreme Court Decision Update - Kircher v. Putnam Funds Trust

supreme3.jpgIn today’s last Supreme Court case, Kircher v. Putnam Funds Trust (PDF of the opinion), we get the District Court and the Seventh Circuit and the Supremes all squabbling with each other over issues of federal jurisdiction and appealability.

QuizLaw Analysis: Much like the day’s earlier federal jurisdiction case (Empire HealthChoice Assurance, Inc. v. McVeigh), this case focuses on a narrow jurisdictional issue. Here, we learn that when a case is removed from a state court to a federal court and the federal court then sends the case back to the state court because it says it doesn’t have jurisdiction over the case, that decision isn’t appealable. This case may not be terribly interesting on a substantive level, but if you pull back and look at the big picture, it’s kinda fun to watch a great big judicial pissing match.

Various investors in mutual funds filed eight different lawsuits in Illinois state courts against some mutual fund companies, investment advisors and an insurance company. In all eight of these cases, the claims were state-law claims for things like negligence and breach of duty. The fund companies (and other defendants) all removed the lawsuits to federal court (“removal” is where a party basically takes the case from a state trial court to a federal trial court because the federal court has authority over the case). The fund companies relied upon the Securities Litigation Uniform Standard Act of 1998 (“SLUSA”) for making this removal. The fund companies also argued that SLUSA actually precludes such lawsuits from being filed in the first place, which means the District Court should throw out all eight cases. The investors argued that SLUSA did not preclude their claims and that the District Court lacked subject matter jurisdiction over them in the first place (because the claims were all state-law based). The District Court determined that SLUSA did not preclude the investors’ claims and that, since it only had jurisdiction over such precluded cases, and this case was otherwise based in state law, it had no jurisdiction. Thus, the cases were all remanded back down to the Illinois courts.

The fund companies appealed all eight decisions to send the cases back down to the state level. The Seventh Circuit first issued an opinion in one of these cases, basically shitting on the District Court. It began by looking at a federal statute, 28 U.S.C. § 1447(d), which says that an appeals court is not entitled to review a lower court’s decision to remand a case back to the state court it was originally removed from, if the lower court did so because it did not have subject matter jurisdiction. The Seventh Circuit said it could review the lower court’s decision here, despite this statute, because the District Court did not actually decide it didn’t have subject matter jurisdiction, even though that’s what it said. To fall under SLUSA, lawsuits must meet certain requirements (for example, the class-action must represent more than 50 investors). According to the Court of Appeals, if the District Court decided that SLUSA didn’t apply because one of these requirements was not met, that would be a jurisdictional decision which would kick in the appeal-ban of § 1447(d). However, in actuality the District Court only decided that the claims weren’t precluded and the Seventh Circuit argues that inherent in this decision is a finding that the lawsuits were all properly removed in the first place. Thus, the District Court’s decision was substantive (on the issue of preclusion), and an appeal is not barred by § 1447(d). In an attempt to further make sense of this, the Seventh Circuit suggested that SLUSA reserves the authority to decide the preclusion issue solely for the federal courts. So the case had to be removed for that issue to be decided by the District Court and the District Court’s didn’t reverse the removal by remanding the case, it was simply sending the case back on its way once it had done its federal business. The Seventh Circuit then turned to the District Court’s decision about preclusion, and decided the court biffed that one too. It consolidated all eight cases and threw them all out on the grounds that the investors’ claims were precluded.

At the Supreme level, Justice Souter wrote the virtually unanimous opinion (Justice Scalia declined to join in one large part, although he agrees with the ultimate judgment). It’s clear from the get-go that Souter is not happy with the Seventh Circuit. In going over the procedural history explained above, he notes that “[t]he Court of Appeals…decided that the District Court had the last word neither on the characterization of its decision as jurisdictional nor on the correctness of its conclusion that remand was required.” Turning to the substance of this case, Souter notes that statutes limit the ability of federal appellate courts to review decisions to remand a case precisely to avoid the long interruption of the actual litigation which we see in this situation (the investors’ cases have been tied up on this jurisdictional issue for almost three years). As for § 1447(d), the Seventh Circuit is right that it only bans appeals of a remand if the remand decision was based on a lack of subject matter jurisdiction (or a procedural defect). However, it applies where a lower court kicks out the case for lack of subject matter jurisdiction even if the appellate court thinks the District Court did have jurisdiction and was erroneous in its decision. So this ends the discussion - the District Court said it was remanding because it lacked subject matter jurisdiction, and that means the Seventh Circuit was not entitled to review the decision.

Only it doesn’t end the discussion, since we’re only on page 7 of a 14 page opinion.

Souter next turns to what was behind the Seventh Circuit’s decision, namely, a line of cases noting that some decisions “loosely called jurisdictional are patently not jurisdictional in the strict sense.” The Seventh Circuit thought this was one of those situations. Souter disagrees - the District Court was correct in deciding that it lacked jurisdiction. Without going into the nitty-gritty of the relevant SLUSA provisions, you can understand it like this - the Supremes read SLUSA as saying that the only cases which can be removed to federal courts are those that are precluded (and in that instance, the federal court then throws those cases out, since they’re precluded). Since the District Court decided these cases weren’t precluded, they were wrongfully removed to federal court in the first place and that’s a jurisdictional decision.

The last thing Souter wants to hit on is the Seventh Circuit’s suggestion that SLUSA only gives federal courts the jurisdiction to preclude and throw out cases (meaning any case where preclusion is an issue would have to first be removed from state court to federal court). If that were right, it opens a dangerous door in light of the Court’s ruling, namely, if a District Court’s remand decision can’t be appealed when it decides a case isn’t precluded, and only federal courts can decide the preclusion issue, there’s no possibility of reviewing that decision (because following the District Court’s decision, the case would go back to a state court). But that’s not the case, says Souter, because state courts can also decide the preclusion issue. Thus, once a case was remanded by a federal court, the state court could turn around on its own and decide that the case is actually precluded, and throw it out.

So the long and the short of it is that the Supremes remand the case to the Seventh Circuit and instruct the Court of Appeals to dismiss the appeal because there is no jurisdiction - meaning the whole mess goes back to Illinois now.

Meanwhile, Justice Scalia wrote a separate opinion concurring in part with the majority’s opinion and concurring in the judgment. So he agrees with the ultimate decision to remand and vacate, and he agrees with Souter’s argument that state courts can also decide the preclusion issue. Where he parts ways is on the manner in which Souter handled spanking the Seventh Circuit. The way Scalia sees it, Souter has told the Seventh Circuit that its recharacterization was wrong (by noting that the District Court was correct in remanding for lack of jurisdiction). Scalia wants to make it very clear that the recharacterization was “categorically forbidden.” So, basically, Scalia thinks Souter wasted a lot of words and the majority opinion should simply have said: “The original remand was because of lack of subject matter jurisdiction? No appeal for you!”