Owen v. Elastos Foundation

Background

Mark Owen and James Wandling filed a proposed class action alleging that Elastos Foundation, Feng Han, Rong Chen, Fay Li, and Ben Lee violated provisions of the Securities Act of 1933 by offering, soliciting, and selling unregistered Elastos Foundation cryptocurrency tokens, called ELA Tokens. Owen alleged that the tokens were securities and that the defendants targeted the United States market as part of their fundraising efforts.

The action was originally filed in New York state court. Elastos Foundation, Han, and Chen removed it to the U.S. District Court for the Southern District of New York under the Class Action Fairness Act, which allows certain large class actions meeting specified jurisdictional requirements to be heard in federal court. The plaintiffs moved to remand, meaning they asked the federal court to return the case to state court.

Issue

The principal issue was whether the Class Action Fairness Act permits removal of a class action asserting Securities Act claims even though Section 22 of the Securities Act generally says that such cases filed in state court may not be removed to federal court. The plaintiffs also argued that the case fell within an exception in 28 U.S.C. § 1453(d)(3) for class actions involving claims concerning rights and obligations created by or pursuant to a security.

Court’s reasoning

The court concluded that the Class Action Fairness Act and Section 22 cannot both control removal in this situation. Relying on the Second Circuit’s reasoning in a prior related statutory-removal case, the court found no principled basis to distinguish the Class Action Fairness Act from the bankruptcy-removal statute previously held to override Section 22’s removal bar.

The court also applied the rule that, when two statutes irreconcilably conflict, the later-enacted statute generally prevails as the more recent expression of congressional intent. Because the Class Action Fairness Act was enacted after the Securities Act, the court held that the Class Action Fairness Act’s removal authorization was not limited by Section 22. The court rejected the plaintiffs’ reliance on legislative history and on a Ninth Circuit decision reaching the opposite result, explaining that the Second Circuit’s reasoning foreclosed that approach in this Circuit. The court also determined that a Supreme Court decision concerning another Securities Act removal provision did not resolve the Class Action Fairness Act issue.

As to the exception in § 1453(d)(3), the court explained that the exception covers claims grounded in the terms of the security itself and suits enforcing rights of security holders as holders, rather than as purchasers. The court found that the plaintiffs sought to enforce rights under the Securities Act as purchasers of allegedly unregistered securities, not rights under the ELA Token offering documents as token holders. The exception therefore did not apply.

Disposition

The court denied the plaintiffs’ motion to remand. The Clerk of Court was directed to terminate the motion at Dkt. No. 26. The opinion addressed whether the case could remain in federal court; it did not decide whether the defendants actually violated the Securities Act.