Jurisdiction re 13D's Delaware lawsuit. After leav
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Posted On: 08/26/2021 7:14:10 PM
Jurisdiction re 13D's Delaware lawsuit. After leaving early and returning late from golf, I saw that 13D has commenced a state court lawsuit against CYDY venued in the Delaware Court of Chancery. Several posters have already opined regarding their assessment of the implications of this development; so I 'll toss mine in as well for whatever limited value it may have.
We now have dueling lawsuits: CYDY's in federal court; 13D's in state court. Sorting out the jurisdictional issues related to these lawsuits will involve the application of legal principles addressing the appropriate balance between federal and state power. This means that both sides' law firms will be billing hundreds of hours on legal research and preparation of briefs in order to advance their respective positions as to which court(s) should exercise jurisdiction. I've done about an hour of legal research on my computer before typing this post, but that's going to be woefully inadequate to support any reliable opinions on this matter. Nevertheless, here are my thoughts and hunches.
I believe CYDY will file in state court a notice of removal to federal court of the 13D lawsuit. 13D will then file a motion in federal court to remand (return) its lawsuit to state court. My hunch is that the federal court (Judge Noreika) will deny the remand motion, and will be upheld on any appeal to the 3rd Circuit, for the following reasons:
CYDY's federal court suit seeks an injunction and other relief based solely on alleged violations by 13D of the Security Exchange Act of 1934 and the rules and regulations promulgated thereunder.
13D's state court suit seeks an injunction and other relief based solely on alleged violations by CYDY involving application of its corporate By-laws, which were adopted pursuant to Delaware state law. This suit does not allege any violation of the Exchange Act or related rules or regulations.
Section 27 of the Securities Exchange Act provides that federal courts shall have exclusive jurisdiction over violations of the Act. Moreover, under the legal doctrine of "pendent jurisdiction," a federal court adjudicating a question of federal law may also resolve questions of state law as long as both the federal and state questions arise under the same set of facts and circumstances, which, here, they do. Consequently, 13D, citing pendent jurisdiction, can have their alleged By-law violations resolved by Judge Noreika as part of CYDY's suit.
Had 13D filed its By-law claims in the Court of Chancery before CYDY filed its SEA claims in federal court, it is likely that any attempt by CYDY to remove that suit to federal court would have ultimately failed due to a successful remand motion by 13D. My conclusion is based on the holding of the US Supreme Court in Merrill Lynch vs Manning (May 16, 2016), which involved the fact pattern of a state court suit, alleging only state claims, being filed prior to any federal suit, However, with CYDY having filed first, and with 13D able to assert its By-law claims under pendent jurisdiction, I see no basis for Judge Noreika granting a remand motion from 13D.
We now have dueling lawsuits: CYDY's in federal court; 13D's in state court. Sorting out the jurisdictional issues related to these lawsuits will involve the application of legal principles addressing the appropriate balance between federal and state power. This means that both sides' law firms will be billing hundreds of hours on legal research and preparation of briefs in order to advance their respective positions as to which court(s) should exercise jurisdiction. I've done about an hour of legal research on my computer before typing this post, but that's going to be woefully inadequate to support any reliable opinions on this matter. Nevertheless, here are my thoughts and hunches.
I believe CYDY will file in state court a notice of removal to federal court of the 13D lawsuit. 13D will then file a motion in federal court to remand (return) its lawsuit to state court. My hunch is that the federal court (Judge Noreika) will deny the remand motion, and will be upheld on any appeal to the 3rd Circuit, for the following reasons:
CYDY's federal court suit seeks an injunction and other relief based solely on alleged violations by 13D of the Security Exchange Act of 1934 and the rules and regulations promulgated thereunder.
13D's state court suit seeks an injunction and other relief based solely on alleged violations by CYDY involving application of its corporate By-laws, which were adopted pursuant to Delaware state law. This suit does not allege any violation of the Exchange Act or related rules or regulations.
Section 27 of the Securities Exchange Act provides that federal courts shall have exclusive jurisdiction over violations of the Act. Moreover, under the legal doctrine of "pendent jurisdiction," a federal court adjudicating a question of federal law may also resolve questions of state law as long as both the federal and state questions arise under the same set of facts and circumstances, which, here, they do. Consequently, 13D, citing pendent jurisdiction, can have their alleged By-law violations resolved by Judge Noreika as part of CYDY's suit.
Had 13D filed its By-law claims in the Court of Chancery before CYDY filed its SEA claims in federal court, it is likely that any attempt by CYDY to remove that suit to federal court would have ultimately failed due to a successful remand motion by 13D. My conclusion is based on the holding of the US Supreme Court in Merrill Lynch vs Manning (May 16, 2016), which involved the fact pattern of a state court suit, alleging only state claims, being filed prior to any federal suit, However, with CYDY having filed first, and with 13D able to assert its By-law claims under pendent jurisdiction, I see no basis for Judge Noreika granting a remand motion from 13D.
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