Ronald Dennis v. John Hart, et al

Filing

FILED OPINION (SIDNEY R. THOMAS, BARRY G. SILVERMAN and RAYMOND C. FISHER) VACATED; REMANDED. Costs are awarded to Plaintiff. Judge: SRT , Judge: BGS , Judge: RCF Authoring. FILED AND ENTERED JUDGMENT. [8724202] [12-55241, 12-55266, 12-55291, 12-55282]

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FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

RONALD DENNIS, derivatively on
behalf of Pico Holdings, Inc.,
Plaintiff-Appellant,
v.

No. 12-55241
D.C. No.
3:11-cv-02271WQH-WVG

JOHN R. HART ; RONALD LANGLEY ;
RONALD G. DEUSTER ; RICHARD D.
RUPPERT ; JULIE H. SULLIVAN ;
KRISTINA M. LESLIE; CARLOS C.
CAMPBELL; KENNETH J. SLEPICKA ;
PICO HOLDINGS, INC., Nominal
Defendant,
Defendants-Appellees.

GEORGE ASSAD , Derivatively on
Behalf of Pico Holdings, Inc.,
Plaintiff-Appellant,
v.
JOHN R. HART ; RONALD LANGLEY ;
ROBERT G. DEUSTER ; RICHARD D.
RUPPERT ; JULIE H. SULLIVAN ;
KRISTINA M. LESLIE; CARLOS C.

No. 12-55266
D.C. No.
3:11-cv-02269WQH-BGS

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DENNIS V . HART

CAMPBELL; KENNETH J. SLEPICKA ,
Defendants-Appellees,

PICO HOLDINGS, INC.,
Nominal Party.

RONALD DENNIS, derivatively on
behalf of Pico Holdings, Inc.,
Plaintiff-Appellee,
v.

No. 12-55282
D.C. No.
3:11-cv-02271WQH-WVG

JOHN R. HART ; RONALD LANGLEY ;
RONALD G. DEUSTER ; RICHARD D.
RUPPERT ; JULIE H. SULLIVAN ;
KRISTINA M. LESLIE; CARLOS C.
CAMPBELL; KENNETH J. SLEPICKA ;
PICO HOLDINGS, INC., Nominal
Defendant,
Defendants-Appellants.

GEORGE ASSAD , Derivatively on
Behalf of Pico Holdings, Inc.,
Plaintiff-Appellee,
v.
JOHN R. HART ; RONALD LANGLEY ;
ROBERT G. DEUSTER ; RICHARD D.

No. 12-55291
D.C. No.
3:11-cv-02269WQH-BGS

OPINION

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DENNIS V . HART
RUPPERT ; JULIE H. SULLIVAN ;
KRISTINA M. LESLIE; CARLOS C.
CAMPBELL; KENNETH J. SLEPICKA ,
Defendants-Appellants,

PICO HOLDINGS, INC.,
Nominal Party.

Appeal from the United States District Court
for the Southern District of California
William Q. Hayes, District Judge, Presiding
Argued and Submitted
June 4, 2013—Pasadena, California
Filed July 31, 2013
Before: Sidney R. Thomas, Barry G. Silverman,
and Raymond C. Fisher, Circuit Judges.
Opinion by Judge Fisher

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DENNIS V . HART
SUMMARY*

Securities
The panel vacated the district court’s orders in
shareholder derivative suits alleging that a corporation’s
executive compensation policies violated state law.
The suits followed shareholders’ advisory “say-on-pay”
vote on executive compensation pursuant to the Dodd-Frank
Wall Street Reform and Consumer Protection Act. The panel
held that removal of the suits from state court was improper
because the plaintiffs asserted state-law causes of action, and,
under the well-pleaded complaint rule, their allegations
regarding the say-on-pay vote were insufficient to establish
federal-question jurisdiction. The panel rejected defendants’
arguments that federal jurisdiction existed under § 27 of the
Securities Exchange Act of 1934, the “significant federal
issue” rule, or the complete preemption doctrine.
The panel vacated the decisions of the district court with
instructions to remand the cases to state court. The panel
dismissed the cross-appeals for lack of jurisdiction.

*

This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.

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COUNSEL
Kathleen A. Herkenhoff (argued), The Weiser Law Firm,
P.C., San Diego, California; Robert B. Weiser, Brett D.
Stecker, Jeffrey J. Ciarlanto, and Joseph M. Profy, The
Weiser Law Firm, P.C., Berwyn, Pennsylvania, for PlaintiffAppellant-Cross-Appellee George Assad.
Louis N. Boyarsky (argued), Lionel Z. Glancy, and Michael
Goldberg, Glancy Binkow Goldberg LLP, Los Angeles,
California, for Plaintiff-Appellant-Cross-Appellee Ronald
Dennis.
Robert W. Brownlie (argued) and Gerard A. Trippitelli, DLA
Piper LLP (US), San Diego, California, for DefendantsAppellees-Cross-Appellants John R. Hart, Ronald Langley,
Robert G. Deuster, Richard D. Ruppert, Julie H. Sullivan,
Kristina M. Leslie, Carlos C. Campbell and Kenneth J.
Slepicka and nominal party PICO Holdings, Inc.

OPINION
FISHER, Circuit Judge:
The Dodd-Frank Wall Street Reform and Consumer
Protection Act requires corporations to hold periodic advisory
votes on executive compensation. Nominal defendant PICO
Holdings, Inc. held such a vote, and a majority of
shareholders expressed dissatisfaction with PICO’s executive
compensation policies. Soon thereafter, the plaintiffs in these
consolidated cases filed shareholder derivative suits in
California state court, alleging that PICO’s compensation
policies violated state law. The defendants removed the cases

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to federal court and argued that Dodd-Frank bars the suits.
The district court dismissed portions of each case and
remanded the remaining portions for lack of jurisdiction. As
we explain below, removal of these cases was improper and
the district court lacked jurisdiction to do anything other than
remand them to state court. Accordingly we vacate the
decisions of the district court with instructions to remand the
cases to state court. We dismiss the defendants’ crossappeals for lack of jurisdiction.
BACKGROUND
The Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank) provides that, at least every
three years, public companies must conduct a shareholder
vote “to approve the compensation of executives.” 15 U.S.C.
§ 78n-1(a)(1). However, these “say-on-pay” votes “shall not
be binding on the issuer or the board of directors of an issuer,
and may not be construed . . . (1) as overruling a decision by
such issuer or board of directors; (2) to create or imply any
change to the fiduciary duties for such issuer or board of
directors; [or] (3) to create or imply any additional fiduciary
duties for such issuer or board of directors.” Id. § 78n-1(c).
Nominal defendant PICO Holdings, Inc. is a California
holding company. In 2010, it reported negative net income
and free cash flow.1 Disappointing financial results
notwithstanding, PICO’s board of directors (the Board)
increased executive compensation in 2010. Shareholders, it
appears, were not happy with this. In a May 2011 advisory
vote mandated by Dodd-Frank, 61 percent of shareholders

1

These facts are drawn from the complaints.

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voted against the 2010 compensation package. The Board
took no action in response to the vote.
After the vote, the plaintiffs in these cases filed
shareholder derivative actions in California state court against
PICO and the members of the Board. Plaintiff Ronald Dennis
asserted claims for breach of fiduciary duty, gross
mismanagement, contribution and indemnification, abuse of
control, waste, and unjust enrichment. In the “prayer for
relief” section of his complaint, he also requested a
declaration “that the adverse May 13, 2011 advisory
shareholder vote on the PICO Board’s executive
compensation rebutted the business judgment surrounding the
PICO Board’s decisions to increase executive compensation
in 2010.” Plaintiff George Assad asserted claims for breach
of fiduciary duty in association with the Board’s issuance of
false and misleading statements, the Board’s compensation
practices, and the Board’s failure to respond to the say-on-pay
vote. Assad also asserted an unjust enrichment claim.
The defendants removed both cases to federal court. The
defendants moved to dismiss both cases, and both plaintiffs
moved to remand. In Dennis, the district court dismissed the
request for declaratory judgment for failure to state a claim.
It then held that the remaining claims did not state a federal
claim or involve a substantial issue of federal law, declined
to exercise supplemental jurisdiction and remanded the case
to state court. In Assad, the district court dismissed the count
alleging the Board breached its fiduciary duty by failing to
respond to the adverse say-on-pay vote. It then held that the
remaining claims did not state a federal claim or involve a
substantial issue of federal law, declined to exercise
supplemental jurisdiction and remanded the case to state
court.

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In each case, the plaintiff appealed the dismissal of parts
of his case, and the defendants cross-appealed the district
court’s decision remanding the remainder of the case to state
court rather than dismissing it on the merits.
STANDARD OF REVIEW
Orders denying remand and granting Federal Rule of
Civil Procedure 12(b)(6) motions to dismiss are both
reviewed de novo. See Proctor v. Vishay Intertechnology
Inc., 584 F.3d 1208, 1218 (9th Cir. 2009).
DISCUSSION
Unless Congress has expressly provided otherwise, a
defendant may remove to federal court “any civil action
brought in a State court of which the district courts of the
United States have original jurisdiction.” 28 U.S.C.
§ 1441(a). “If a case is improperly removed, the federal court
must remand the action because it has no subject-matter
jurisdiction to decide the case.” ARCO Envtl. Remediation,
L.L.C. v. Dep’t of Health & Envtl. Quality of Mont., 213 F.3d
1108, 1113 (9th Cir. 2000). “As a general rule, ‘the presence
or absence of federal-question jurisdiction is governed by the
well-pleaded complaint rule, which provides that federal
jurisdiction exists only when a federal question is presented
on the face of the plaintiff’s properly pleaded complaint.’”
Id. (quoting Caterpillar, Inc. v. Williams, 482 U.S. 386, 392
(1987)) (alterations omitted).
The defendants argue that the well-pleaded complaint rule
confers federal jurisdiction because the say-on-pay vote
precipitated plaintiffs’ suits and the complaints are suffused
with references to the vote. This is insufficient to support

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federal jurisdiction under the well-pleaded complaint rule.
See id. (holding that “the fact that ARCO’s complaint ma[de]
repeated references to” federal law was insufficient to confer
jurisdiction). Federal-question jurisdiction does not attach
here, because the plaintiffs’ complaints allege state – not
federal – causes of actions. “As the master of the complaint,
a plaintiff may defeat removal by choosing not to plead
independent federal claims.” Id. at 1114. The defendants
argue that federal jurisdiction nevertheless exists under (1)
Section 27 of the Securities Exchange Act of 1934 (Exchange
Act), (2) the “significant federal issue” rule and (3) the
complete preemption doctrine. We consider each argument
in turn.
A. Section 27 of the Exchange Act Does not Confer
Jurisdiction
The defendants argue that the Exchange Act confers
federal jurisdiction. Section 27 of the Exchange Act vests
federal courts with exclusive jurisdiction over actions
“brought to enforce any liability or duty created by [the
Exchange Act] or the rules and regulations thereunder.”
15 U.S.C. § 78aa(a). Section 27 is inapplicable because the
plaintiffs’ suits do not seek to enforce any liability or duty
created by the Exchange Act or the rules and regulations
thereunder. Nothing in either complaint alleges any implicit
or explicit violation of the say-on-pay provision or any other
provision of the Exchange Act. On the contrary, the parties
agree that PICO did what the Act requires: it held a vote. The
suits allege violations of state law and seek to enforce
liabilities created by state law.
The defendants’ reliance on Sparta Surgical Corp. v.
National Association of Securities Dealers, Inc., 159 F.3d

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1209 (9th Cir. 1998), is misplaced. There, we held that
Section 27 conferred federal jurisdiction over a suit alleging
that the National Association of Securities Dealers (NASD)
had violated its own rules about whether to de-list an
offering. See id. at 1211–12. We explained that NASD rules
are created under federal law and “[t]he Exchange Act
requires [NASD] to comply . . . with [its] own rules.” Id. at
1212. Sparta therefore held that “subject matter jurisdiction
was specifically vested in the federal district court under
[Section 27]” because “Sparta’s complaint sought relief based
upon violation of exchange rules.” Id. at 1211. Here, by
contrast, the plaintiffs admit that PICO complied with the
Exchange Act and allege only violations of state laws.
Accordingly, we reject defendants’ contention that Section 27
confers jurisdiction.
B. No Significant Federal Issue Confers Jurisdiction
We next turn to the defendants’ contention that a
significant federal issue warrants the exercise of federal
jurisdiction. Whether or not a complaint pleads a federal
cause of action, “federal-question jurisdiction will lie over
state-law claims that implicate significant federal issues.”
Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg.,
545 U.S. 308, 312 (2005). The defendants argue that
Congress, in enacting Dodd-Frank, went to great lengths to
ensure that say-on-pay votes were merely advisory and to bar
any adverse consequences from a negative vote. This
congressional desire to preclude liability, they say, is a
significant federal issue conferring federal jurisdiction. We
disagree.
The defendants characterize the plaintiffs as
impermissibly seeking to impose liability based on the

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adverse say-on-pay vote. The plaintiffs dispute this
characterization, but it is irrelevant to the jurisdictional issue.
If the defendants are correct – both that the plaintiffs are
seeking to impose liability based on the vote and that such
liability has been barred by Congress – then the defendants
might have a very strong federal defense.2 A federal defense,
however, is “inadequate to confer federal jurisdiction.”
Merrell Dow Pharm. Inc. v. Thompson, 478 U.S. 804, 808
(1986). This is true even when the defense is that federal law
preempts the state law claim. See Marin Gen. Hosp. v.
Modesto & Empire Traction Co., 581 F.3d 941, 945 (9th Cir.
2009) (“The general rule is that a defense of federal
preemption of a state-law claim . . . is an insufficient basis for
original federal question jurisdiction . . . .”).
Aside from their potential defense, the defendants have
identified no significant federal issue that would confer
jurisdiction. Therefore, this theory of federal jurisdiction also
fails.
C. The Doctrine of Complete Preemption Does not Apply
We turn next to defendants’ argument that the doctrine of
complete preemption confers federal jurisdiction. Complete
preemption is “really a jurisdictional rather than a preemption
doctrine, as it confers exclusive federal jurisdiction in certain
instances where Congress intended the scope of a federal law

2

Of course, because we do not have jurisdiction, we express no view as
to the merits of any preemption defense that the defendants may raise in
state court. See Marin Gen. Hosp. v. M odesto & Empire Traction Co.,
581 F.3d 941, 951 (9th Cir. 2009) (“Defendants may assert in state court
their defense of conflict pre-emption under [federal law], as well as any
other defenses they might have.”).

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to be so broad as to entirely replace any state-law claim.”
Marin Gen. Hosp., 581 F.3d at 945 (quoting Franciscan
Skemp Healthcare, Inc. v. Cent. States Joint Bd. Health &
Welfare Trust Fund, 538 F.3d 594, 596 (7th Cir. 2008))
(alterations omitted). Complete preemption is a limited
doctrine that applies only where a federal statutory scheme is
so comprehensive that it entirely supplants state law causes
of action. Examples include Section 502 of the Employee
Retirement Income Security Act of 1974 (ERISA), Section
301 of the Labor Management Relations Act (LMRA) and the
usury provisions of the National Bank Act. See Beneficial
Nat’l Bank v. Anderson, 539 U.S. 1, 7–8, 11 (2003); Ansley
v. Ameriquest Mortg. Co., 340 F.3d 858, 862 (9th Cir. 2003).
Nothing in the Exchange Act generally or Section 78n-1
specifically suggests that Congress intended to totally
displace state law. On the contrary, we have recognized that
the Exchange Act does not so fully displace state law as to
invoke complete preemption. See Lippitt v. Raymond James
Fin. Servs., Inc., 340 F.3d 1033, 1042 (9th Cir. 2003) (“We
conclude that the Exchange Act does not create exclusive
jurisdiction for any and all actions that happen to target false
advertising and deceptive sales practices in the sale of
callable CDs.”); see also Matsushita Electric Indus. Co. v.
Epstein, 516 U.S. 367, 383 (1996) (“Congress plainly
contemplated the possibility of dual litigation in state and
federal courts relating to securities transactions.”).
Two other considerations confirm that complete
preemption does not apply here. First, the complete
preemption doctrine applies only to “claim[s] which come[]
within the scope of [a federal] cause of action.” Beneficial
Nat’l Bank, 539 U.S. at 8. Here the parties agree that there is
no federal cause of action for plaintiffs’ claims, which places
this case outside the realm of complete preemption. See

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Marin Gen. Hosp., 581 F.3d at 947–49 (holding that complete
preemption did not apply to state law contract and tort claims
because they were not cognizable as federal claims). Second,
§ 78n-1 – unlike ERISA, the LMRA and National Bank Act
– created neither a federal cause of action nor a complex
federal regulatory scheme. On the contrary, it created no new
fiduciary duties and explicitly preserved existing state laws.
See 15 U.S.C. § 78n-1(c) (“The shareholder vote . . . may not
be construed . . . to create or imply any change to the
fiduciary duties of [an] issuer or board of directors . . . [or] to
create or imply any additional fiduciary duties for such issuer
or board of directors . . . .”). This is the exact opposite of the
type of comprehensive federal regime that would justify
complete preemption.
None of defendants’ arguments in favor of federal
jurisdiction are persuasive. Accordingly, removal to federal
court was improper and the district court lacked jurisdiction
to do anything other than remand these cases to state court.
We therefore vacate the district court’s orders with
instructions to remand to state court. We likewise dismiss
defendants’ cross-appeals for lack of jurisdiction.
The plaintiffs are awarded their costs of appeal.
VACATED AND REMANDED.