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The rule that state actions brought under the Securities Act of 1933 cannot be removed to federal court is trumped by a bankruptcy rule that says suits should be removed where they “relate to” the bankruptcy action, the 2nd U.S. Circuit Court of Appeals has ruled. Addressing a case of first impression, a two-judge panel said it was resolving what it called the close question posed by a direct conflict between the 1933 act and the bankruptcy removal statute, 28 U.S.C. �1452(a). The appeals court said it took the interlocutory appeal because “resolution of this controlling question of law will determine whether scores of pending lawsuits are properly in federal court.” The panel decided the question presented by California Public Employees’ Retirement System v. WorldCom Inc., 04-0219, on interlocutory appeal from a ruling by Southern District Judge Denise Cote. Judge Cote is presiding over the consolidated class actions filed after it was revealed that top officials at WorldCom had committed a massive accounting fraud. A portion of those actions were tentatively settled on Monday when Citigroup Inc. agreed to pay $2.65 billion to investors. The issue of removal arose before Cote when scores of individual actions were filed on behalf of state and private pension funds that bought WorldCom bonds. The claims were brought by Milberg Weiss Bershad Hynes & Lerach in state courts under the 1933 act to take advantage of the more lenient pleading requirements for actions brought in state court. Section 22(a) of the act states that, with one exception that did not apply to the WorldCom litigation, no “case arising under this subchapter and brought in any State court of competent jurisdiction shall be removed to any court of the United States.” The actions were removed to federal court, however, because 28 U.S.C. � 1452(a) allows for removal of actions within the jurisdiction of the federal bankruptcy courts, including those actions “related to” the bankruptcy. Cote denied a motion by Milberg Weiss to send the individual actions back to state court. Milberg Weiss has since divided into two firms. The lead lawyer in the WorldCom cases, William S. Lerach, now heads Lerach Coughlin Stoia & Robbins in San Diego. Cote certified the question on the collision of the two removal provisions to the 2nd Circuit but declined to send to the circuit the question of whether the individual actions were “related to” the company’s bankruptcy action. WorldCom emerged from bankruptcy last month under the name MCI. 2nd Circuit Judge Jose A. Cabranes wrote that “Judge Cote was the first district judge to resolve the conflict between the Securities Act and the bankruptcy removal statute in favor of removal,” with the other courts to have considered the question reaching the opposite conclusion. Since that time, two Southern District judges have adopted the position taken by Cote. Judge Cabranes wrote that “in every detail, � 1452(a) is designed to further Congress’ purpose of centralizing bankruptcy litigation in federal forum.” “Were � 22(a) construed to trump � 1452(a), � 22(a) could interfere with the operation of the Bankruptcy Code, especially in large chapter 11 cases,” he said. And the fact that some of the claims brought by Milberg Weiss might not have had a meaningful impact on the bankruptcy proceeding does not matter, he said. “When a debtor seeks to reorganize, as WorldCom has, its plan of reorganization must resolve all lawfully pending liabilities, and, to do so, the plan must marshal and allocate all of the debtor’s assets,” he said. “Regardless of whether the defendants’ contribution or indemnification claims in this particular case ultimately had a material impact on WorldCom’s final plan of reorganization, it is apparent that contribution and indemnification claims can, in some circumstances, affect the administration of a bankruptcy estate.” Judge James L. Oakes joined in the opinion. Jay B. Kasner of Skadden, Arps, Slate, Meagher & Flom represented the underwriting investment bank defendants. Paul C. Curnin of Simpson Thacher & Bartlett represented the WorldCom director defendants. John P. Coffey and Max Berger of Bernstein Litowitz Berger & Grossman, along with Barrack, Rodos & Bacine of Philadelphia are lead counsel for the plaintiffs.

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