Manning v. Merrill Lynch Pierce Fenner & Smith, Inc.
2014 U.S. App. LEXIS 21362
| 3rd Cir. | 2014Background
- Shareholders of Escala Group, Inc. sued multiple broker-dealers in New Jersey state court, alleging defendants engaged in abusive "naked" short selling that created "phantom" or "counterfeit" shares, diluting voting rights and depressing stock value.
- Plaintiffs pleaded ten causes of action under New Jersey law only, including New Jersey RICO based on securities fraud and common-law claims (unjust enrichment, tortious interference, breach of contract, breach of covenant of good faith, negligence).
- Defendants removed to federal court invoking federal-question jurisdiction under 28 U.S.C. § 1331 and § 27 of the Exchange Act, arguing plaintiffs’ claims necessarily depend on federal Regulation SHO and related federal securities law.
- The District Court denied remand; the Magistrate Judge had recommended remand. The Third Circuit allowed an interlocutory appeal of the remand order under 28 U.S.C. § 1292(b).
- The Third Circuit concluded plaintiffs’ state-law claims do not necessarily raise a federal issue because recovery can be adjudicated under New Jersey law without resolving Regulation SHO, and exclusive-jurisdiction language in § 27 does not independently confer federal jurisdiction.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether federal-question jurisdiction exists under § 1331 | Manning: Claims are state-law and can be resolved under New Jersey law without reference to federal law | Defendants: Resolution necessarily requires construing Regulation SHO/federal securities law | Held: No § 1331 jurisdiction — federal law is not necessarily raised |
| Whether § 27 (Exchange Act exclusive jurisdiction) creates jurisdiction independent of § 1331 | Manning: § 27 does not expand federal jurisdiction over state-law causes of action | Defendants: § 27 grants federal courts exclusive jurisdiction when federal securities rules are implicated | Held: § 27 does not independently generate federal-question jurisdiction; it only divests state courts where federal jurisdiction otherwise exists |
| Whether references to Regulation SHO and SEC materials on the face of the complaint force federal jurisdiction | Manning: References are not dispositive; claims can succeed on state-law predicates | Defendants: Complaint tracks federal rules and SEC guidance, so federal issues are necessarily raised | Held: Mere citation or overlap with federal regulation does not convert the state-law claims into federal ones |
| Whether potential federal defenses or preemption justify removal | Manning: Preemption is a defense and does not appear on the face of the complaint | Defendants: Federal preemption/conflict will be dispositive and thus supports removal | Held: Preemption is a defense and does not authorize removal; cannot establish jurisdiction on that basis |
Key Cases Cited
- Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308 (state claim arises under federal law only when a federal issue is necessarily raised)
- Gunn v. Minton, 133 S. Ct. 1059 (federal-question analysis for state-law claims follows Grable framework)
- Christianson v. Colt Indus. Operating Corp., 486 U.S. 800 (alternative theories including federal law do not create jurisdiction unless federal law is essential to all theories)
- Pan Am. Petroleum Corp. v. Superior Court of Del., 366 U.S. 656 (exclusive-jurisdiction provisions do not themselves create federal jurisdiction)
- Smith v. Kansas City Title & Trust Co., 255 U.S. 180 (classic example where resolution of state claim required deciding a federal constitutional issue)
- United Jersey Banks v. Parell, 783 F.2d 360 (3d Cir.) (state courts should determine the applicability of state law even where federal law is arguably more robust)
- Barbara v. New York Stock Exch., Inc., 99 F.3d 49 (2d Cir.) (§ 27 covers claims created by the Exchange Act or its rules, not independent state-law claims)