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Commonwealth of Pennsylvania Public School Employees v. Citigroup

May 20, 2011

COMMONWEALTH OF PENNSYLVANIA PUBLIC SCHOOL EMPLOYEES' RETIREMENT SYSTEM AND PENNSYLVANIA MUNICIPAL RETIREMENT BOARD, PLAINTIFFS,
v.
CITIGROUP, INC., ET AL.,
DEFENDANTS.



The opinion of the court was delivered by: Schiller, J.

MEMORANDUM

The Commonwealth of Pennsylvania Public School Employees' Retirement System ("PSERS") and the Pennsylvania Municipal Retirement Board ("PMRB") brought this action in the Philadelphia County Court of Common Pleas to recover damages they allege resulted from Citigroup's undisclosed exposure to mortgage-backed securities. Defendants removed, arguing that neither Plaintiff is an arm of the state for jurisdictional purposes. Plaintiffs' motion to remand is presently before the Court. For the reasons that follow, the Court will grant the motion.

I. BACKGROUND

PSERS is a defined benefit pension fund that manages assets for public school employees. (Notice of Removal Ex. A-1 [Compl.] ¶ 11.) PMRB administrates over 900 pension plans for Pennsylvania municipalities and their employees. (Id. ¶ 13.) PSERS and PMRB both invested in Citigroup securities between January 1, 2004 and January 15, 2009. (Id. ¶¶ 12, 14.) However, they were unaware of Citigroup's exposure to mortgage-related assets, including subprime and residential mortgage-backed securities. (Id. ¶ 2.)

Plaintiffs' investments decreased in value after Citigroup's exposure to mortgage-backed securities nearly destroyed the company in 2008. (Id. ¶¶ 5-6.) Plaintiffs subsequently brought this action in state court in February of 2011 against Defendants including Citigroup, its holding company, and various current and former Citigroup employees. (Id. ¶¶ 15-27.) Plaintiffs' Complaint brings claims for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, violations of the Pennsylvania Securities Act, negligence, unjust enrichment, and fraud.

Plaintiffs named other Defendants in the state-court action, including KPMG. (See Notice of Removal ¶ 4.) KPMG is a citizen of Pennsylvania. (Id.) Plaintiffs dismissed their claims against KPMG and various other Defendants without prejudice on April 12, 2011. (Id.) The remaining Defendants are citizens of Florida, New York and New Jersey. (Id. ¶ 8.) Defendants filed a notice of removal on April 15, 2011. That same day, Defendants also filed a notice with the Clerk of the Judicial Panel on Multidistrict Litigation requesting transfer to Multidistrict Litigation No. 2070, In re Citigroup Inc., Securities Litigation, currently pending in the Southern District of New York.

Plaintiffs' motion to remand followed on April 22, 2011. Plaintiffs also seek fees and costs that they have incurred as a result of removal.

II. STANDARD OF REVIEW

District courts have jurisdiction over civil actions between citizens of different states where the amount in controversy exceeds $75,000. 28 U.S.C. § 1332. A state-court defendant may remove a case if the plaintiff could originally have brought the action in federal court. 28 U.S.C. § 1441(a). The removing defendant bears the burden of establishing jurisdiction. Boyer v. Snap-On Tools Corp., 913 F.2d 108, 111 (3d Cir. 1990). District courts construe the removal statutes strictly, resolving all doubts in favor of remand. Id.

III. DISCUSSION

A state's "arm or alter ego" is not a "citizen" within the meaning of § 1332. Moor v. Alameda Cnty., 411 U.S. 693, 717-18 (1973); see also Harris v. Pa. Tpk. Comm'n, 410 F.2d 1332, 1333 n.1 (3d Cir. 1969). Plaintiffs assert that they are state entities not amenable to diversity jurisdiction. The Third Circuit applies a three-part test to determine whether a state agency is a state's alter ego, examining: (1) whether the state would be liable for a judgment against the agency;

(2) the agency's status under state law; and (3) the agency's autonomy. Fitchik v. N.J. Transit Rail Operations, Inc., 873 F.2d 655, 659 (3d Cir. 1989). Examining these factors in this case, the Court concludes that Defendants have failed to demonstrate that PSERS is not an arm of the state.*fn1

A. PSERS's Financial Interest in the Case

When a state agency is a Defendant, courts have recognized that the most important element of the Fitchik analysis is whether a judgment would be paid out of the state treasury. See, e.g., Christy v. Pa. Tpk. Comm'n, 54 F.3d 1140, 1145 (3d Cir. 1995) (citing Fitchik, 873 F.2d at 659). However, the funding analysis is ill-suited to address litigation in which a state agency is a plaintiff. N.J. Dep't of Envtl. Protection v. Nestle USA, Inc., Civ. A. No. 06-4025, 2007 WL 703539, at *2 n.2 (D.N.J. Mar. 2, 2007); Pa. Human Relations Comm'n v. USAir, Inc., 615 F. Supp. 75, 77 (W.D. Pa. 1985). In cases involving state agency plaintiffs, courts have looked instead to whether any recovery by the entity inures to the state's benefit. Md. Stadium Auth. v. Ellerbe Becket Inc., 407 F.3d 255, 262 (4th Cir. 2005) (citing Mo., Kan., & Tex. Ry. v. Hickman, 183 U.S. 53, 59 (1901)); W.V. Inv. Mgmt. Bd. v. Residential Accredited Loans, Inc., Civ. A. ...


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