Introduction

The case of Commonwealth of Pennsylvania Public School Employees' Retirement System (PSERS) et al. v. Morgan Stanley & Co., Inc., 772 F.3d 111 (2d Cir. 2014), serves as a pivotal reference in understanding the stringent requirements of complete diversity under 28 U.S.C. § 1332(a) and the complexities surrounding standing for successor plaintiffs in fraud claims. This commentary delves into the background, key issues, court's decision, and the broader implications of this judgment.

Summary of the Judgment

The Second Circuit Court of Appeals addressed multiple facets of the litigation arising from the collapse of the Cheyne Structured Investment Vehicle (SIV) in 2007. The plaintiffs, including PSERS and Commerzbank AG, sought to represent a class of investors claiming fraud against Morgan Stanley & Co., who were accused of manipulating credit ratings agencies to secure artificially high ratings for the SIV's notes.

The district court had previously:

• Denied class certification under Federal Rule of Civil Procedure 23 due to failure in establishing numerosity and commonality.
• Dismissed PSERS's claims for lack of diversity, as PSERS, being an arm of the state of Pennsylvania, was not a citizen of any state.
• Dismissed Commerzbank's claims for lack of standing, asserting that the right to sue had not been properly transferred from the original purchaser.

On appeal, the Second Circuit upheld the dismissal of PSERS and the denial of class certification but reversed the district court's decision regarding Commerzbank's standing, certifying key legal questions to the New York Court of Appeals.

Analysis

Precedents Cited

The judgment extensively references pivotal cases to establish the boundaries of jurisdiction and standing:

• EXXON MOBIL CORP. v. ALLAPATTAH SERVICES, INC., 545 U.S. 546 (2005) – Addressed the “contamination theory” and the interaction between § 1332’s complete diversity and § 1367’s supplemental jurisdiction.
• Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171 (2d Cir. 2007) – Elaborated on the strict requirements for complete diversity.
• MOOR v. COUNTY OF ALAMEDA, 411 U.S. 693 (1973) – Established that arms of the state are not considered citizens for diversity purposes.
• Fraternity Fund Ltd. v. Beacon Hill Asset Management, LLC, 479 F.Supp.2d 349 (S.D.N.Y. 2007) – Defined standing and the assignment of tort claims under New York law.

Legal Reasoning

The court's reasoning hinged on two primary legal issues:

• Complete Diversity Requirement: The court reiterated that for diversity jurisdiction under § 1332(a), complete diversity among all plaintiffs and defendants is mandatory. PSERS, being an arm of the state, did not qualify as a citizen of any state, thus destroying diversity.
• Standing and Assignment of Claims: Commerzbank's standing hinged on whether the right to sue for fraud had been properly assigned from Dresdner Bank AG (DAF) to Commerzbank. The district court had erroneously limited Commerzbank's ability to present evidence for this transfer, which the appellate court found impermissible.

Impact

This judgment underscores the unwavering nature of the complete diversity requirement, even in cases involving permissive joinder of parties. It also highlights the necessity for district courts to allow adequate opportunity for plaintiffs to establish standing, particularly in complex financial fraud cases involving successor entities. The certification of questions to the New York Court of Appeals may set significant precedents regarding the assignment of fraud claims under New York law.

Complex Concepts Simplified

Conclusion

The Second Circuit's decision in Commonwealth of Pennsylvania Public School Employees' Retirement System v. Morgan Stanley & Co., Inc. reinforces the rigid application of complete diversity under federal jurisdiction statutes. It also sheds light on the procedural obligations of courts to allow plaintiffs, especially successor entities like Commerzbank, the opportunity to substantiate their standing claims adequately. By certifying key questions to the New York Court of Appeals, the court seeks to resolve unresolved ambiguities in state law that have broader implications for multi-jurisdictional financial fraud litigation. Legal practitioners and scholars must closely monitor the outcomes of these certified questions, as they will shape future litigation strategies and the interpretation of standing in complex financial disputes.

This judgment serves as a crucial reminder of the interplay between federal and state laws in civil litigation and the importance of adhering to jurisdictional prerequisites to ensure the proper administration of justice.