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Dudek v. Prudential Securities, Inc.

United States Court of Appeals, Eighth Circuit
Jul 15, 2002
295 F.3d 875 (8th Cir. 2002)

Summary

holding that SLUSA precluded nine causes of action under New York law, including fraud and deceit, breach of fiduciary duty, deceptive business practices, negligent misrepresentation, and unjust enrichment

Summary of this case from Anderson v. Merrill Lynch

Opinion

No. 01-2782.

Submitted: March 14, 2002.

Filed: July 15, 2002.

Appeal from the United States District Judge for the Northern District of Iowa, Edward J. McManus, Senior District Judge.

Robert B. Weintraub, argued, New York City (Daniel W. Krasner, Roger T. Stetson and Michael R. Reck, on the brief), for appellants.

Patrick M. Roby, argued, Cedar Rapids, IA (Robert M. Hogg, James J. Rohn, John H. McKeon, Jr., Patricia M. Hamill, Robert D. Houghton, Nancy J. Penner, Stephen L. Ratner and Bruce M. Sabados, on the brief), for appellees.

Before LOKEN, Circuit Judge, GOLDBERG, Judge of the United States Court of International Trade, and KYLE, District Judge.

The HONORABLE RICHARD W. GOLDBERG, sitting by designation.

The HONORABLE RICHARD H. KYLE, United States District Judge for the District of Minnesota, sitting by designation.



The Private Securities Litigation Reform Act of 1995 enacted procedural reforms to enable district courts to weed out meritless class actions alleging fraud in the purchase and sale of securities. See 15 U.S.C. 77z-1(b), 78u-4(b); Lander v. Hartford Life Annuity Ins. Co., 251 F.3d 101, 107 (2d Cir. 2001). An unintended result was to "dr[i]ve many would-be plaintiffs to file their claims in state court, based on state law, in order to circumvent the strong requirements established by the statute." In re Lutheran Bhd. Variable Ins. Prod. Co. Sales Practices Litig., 105 F.Supp.2d 1037, 1039 (D.Minn. 2000). Congress responded by enacting the Securities Litigation Uniform Standards Act of 1998 (SLUSA) to "prevent plaintiffs from seeking to evade the protections that federal law provides against abuse litigation by filing suit in State, rather than federal, courts." Id. at 1039, quoting H.R. Conf. Rep. No. 105-803 (Oct. 9, 1998). SLUSA amended the Securities Act of 1933 and the Securities Exchange Act of 1934 to preempt certain state law claims and to provide for the removal to federal court of class actions asserting those claims.

The 1933 Act was amended to provide:

(b) No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging —

(1) an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security; or

(2) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.

(c) Any covered class action brought in any State court involving a covered security, as set forth in subsection (b), shall be removable to the Federal district court for the district in which the action is pending, and shall be subject to subsection (b).

15 U.S.C. § 77p(b) and (c). The same provisions were added to the 1934 Act at 15 U.S.C. § 78bb(f)(1) and (2).

Plaintiffs filed this class action in Iowa state court alleging improper marketing of tax-deferred annuities to accounts that already enjoyed tax-deferred status. The annuities were inappropriate investments, plaintiffs allege, because tax-deferred accounts did not need the tax benefits, and therefore the extra fees and costs that tax-deferred annuities entail were a waste of the investors' money. Defendants removed the case and moved to dismiss the state law claims as preempted by SLUSA. The district court denied plaintiffs' motion to remand and dismissed the action. Relying on Lander, the court held that plaintiffs' claims must be dismissed because tax-deferred annuities are securities covered by SLUSA and therefore plaintiffs' claims were in substance based upon material misrepresentations and non-disclosures in the purchase or sale of a covered security.

The HONORABLE EDWARD J. McMANUS, United States District Judge for the Northern District of Iowa.

Plaintiffs appeal, arguing that tax-deferred annuities are not covered securities; that the McCarran-Ferguson Act, 15 U.S.C. §§ 1011- 1015, precludes the preemption of state law claims involving tax-deferred annuities, because they are insurance products; that plaintiffs' state law claims are not preempted because they are not grounded in fraud or misrepresentation in the sale of annuities; and that the district court abused its discretion in denying plaintiffs leave to file an amended complaint. Reviewing all but the last issue de novo, we reject plaintiffs' arguments and affirm. See Gore v. Trans World Airlines, 210 F.3d 944, 948 (8th Cir. 2000), cert. denied, 532 U.S. 921, 121 S.Ct. 1358, 149 L.Ed.2d 288 (2001) (standard of review).

I.

In Lander, plaintiffs commenced a class action asserting state law claims based upon alleged fraud and misrepresentation in the marketing of tax-deferred variable annuities. As in this case, defendants removed and moved to dismiss. The Second Circuit affirmed the dismissal of the claims as preempted by SLUSA. After a thorough review and analysis of the relevant statutes, the court concluded (i) that variable annuities are "covered securities" for purposes of the removal and preemption provisions of 15 U.S.C. §§ 77p and 78bb(f); and (ii) that the McCarran-Ferguson Act does not preclude SLUSA preemption of state law claims relating to variable annuities even thought they are, at least in part, insurance products. Prior to Lander, then Chief Judge Magnuson of the District of Minnesota reached the same conclusions in Lutheran Brotherhood, 105 F.Supp.2d at 1039-42. More recently, the Ninth Circuit reviewed these issues and followed the Second Circuit's decision in Lander. See Patenaude v. The Equitable Life Assur. Soc. of the U.S., 290 F.3d 1020, 1022 (9th Cir. 2002).

On appeal, plaintiffs admit that tax-deferred annuities are securities "covered" by SLUSA but argue that Lander was nonetheless incorrectly decided. Plaintiffs posit that SLUSA preemption should be limited to fraud claims affecting the value of nationally publicly traded securities, and that the McCarran-Ferguson Act should trump SLUSA preemption in the case of insurance products such as annuities. After careful review, we reject these contentions for the reasons stated in Lander, Patenaude, and Lutheran Brotherhood. Plaintiffs further argue their claims are based upon excessive fee charges, not alleged misconduct in connection with the purchase or sale of a security, relying on cases holding that SLUSA does not preempt state law claims arising out of broker/customer disputes not involving transactions in specific securities, such as the breach of contract claim in Green v. Ameritrade, Inc., 279 F.3d 590 (8th Cir. 2002). See also Gutierrez v. Deloitte Touche, 147 F.Supp.2d 584 (W.D.Tex. 2001); Shaw v. Charles Schwab Co., 128 F.Supp.2d 1270 (C.D.Cal. 2001). These cases are readily distinguishable. Here, the claim is that defendants' misconduct caused plaintiffs to invest in inappropriate securities. Regardless of what made the investments inappropriate, if these are covered fraud claims — an issue we take up in Part II of this opinion — they are claims "in connection with the purchase or sale of a covered security" for purposes of SLUSA preemption.

II.

When federal and state law provide overlapping remedies, a plaintiff may normally avoid federal question jurisdiction by pleading only a cause of action under state law. See Caterpillar Inc. v. Williams, 482 U.S. 386, 392, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987). However, if Congress has completely preempted a particular area, plaintiff may not avoid federal question jurisdiction and the preemption of state law claims by artfully concealing the federal question in an otherwise well-pleaded complaint under state law. See M. Nahas Co. v. First Nat'l Bank of Hot Springs, 930 F.2d 608, 612 (8th Cir. 1991); 16 MOORE'S FEDERAL PRACTICE § 107.14[4][b] (Matthew Bender 3d ed.).

Congress has not completely preempted the field of securities regulation. But SLUSA expressly preempts all state law class actions based upon alleged untrue statements or omissions of a material fact, or use of a manipulative or deceptive device or contrivance, in connection with the purchase or sale of a covered security. Plaintiffs argue SLUSA does not apply to this case because their complaint did not allege fraud or a misrepresentation or omission of material fact. The district court rejected this contention and dismissed plaintiffs' class action because its "gravamen . . . involves an untrue statement or substantive omission of a material fact in connection with the purchase or sale of a covered security." We agree.

Congress combined preemption with removal of covered class actions to the federal courts. The express removal provisions of SLUSA are clearly sufficient to confer Article III "arising under" jurisdiction. See Verlinden B.V. v. Central Bank of Nigeria, 461 U.S. 480, 494-97, 103 S.Ct. 1962, 76 L.Ed.2d 81 (1983).

Plaintiffs initially filed this action in New York state court asserting nine causes of action, including fraud and deceit, breach of fiduciary duty, deceptive business practices in violation of the New York General Business Law, negligent misrepresentation, and unjust enrichment. Plaintiffs alleged that defendants "affirmatively mislead prospective customers into believing that deferred annuities may be appropriate investments for placement into qualified retirement plans, and fail to disclose the inappropriateness and unsuitability of such investments," and that these "practices constitute deceptive and abusive practices in violation of common and state statutory law and equitable principles. . . ." After defendants removed to the United States District Court for the Southern District of New York, plaintiffs voluntarily dismissed the complaint to avoid what they described as "disputed threshold issues of personal jurisdiction, venue and a motion to transfer." Plaintiffs obtained court approval of the dismissal without notice to the class by representing to the court that they "protected the interests of the Class by refiling essentially the same action on behalf of the class" in Iowa state court.

Plaintiffs' Iowa complaint asserts five state law causes of action — breach of fiduciary duty by selling "inherently unsuitable and inappropriate" tax-deferred annuities, unjust enrichment, declaratory and injunctive relief, reformation, and conspiracy to breach fiduciary duties. Although plaintiffs deleted the allegations of fraud, misrepresentation, and non-disclosure that permeated their New York complaint, the fact allegations in the two complaints are otherwise essentially the same, and the overall target of both complaints is what plaintiffs call defendants' "general business plan to sell tax-deferred annuities for investment by persons owning qualified retirement plans." As the district court recognized, the essence of both complaints is the unlawful marketing of tax-deferred annuities, either by misrepresenting their suitability for tax-deferred retirement plans, or by failing to disclose their unsuitability for such accounts. In substance, both complaints allege that defendants misstated or omitted material facts in connection with the purchase and sale of the tax-deferred annuities. Moreover, fairly read, plaintiffs' Iowa complaint alleges that defendants "used or employed [a] deceptive device or contrivance in connection with the purchase or sale of a covered security," a claim expressly preempted by 15 U.S.C. §§ 77p(b)(2) and 78bb(f)(1)(B).

III.

Finally, plaintiffs argue the district court abused its discretion in denying them leave to file an amended complaint. See Becker v. Univ. of Nebraska, 191 F.3d 904, 908 (8th Cir. 1999) (standard of review). Plaintiffs first raised this issue at the end of their brief to the district court on the removal and preemption issues, stating that "if defendants' motion to dismiss is granted, plaintiffs' should be permitted to file an amended complaint." Plaintiffs did not include a proposed amended pleading, as Local Rule 15.1 of the Northern District of Iowa requires. Nor did plaintiffs describe what changes they would make to avoid SLUSA preemption, or what non-futile federal causes of action they would seek to assert. In these circumstances, the district court did not abuse its discretion in granting defendants' motion to dismiss.

The judgment of the district court is affirmed.


Summaries of

Dudek v. Prudential Securities, Inc.

United States Court of Appeals, Eighth Circuit
Jul 15, 2002
295 F.3d 875 (8th Cir. 2002)

holding that SLUSA precluded nine causes of action under New York law, including fraud and deceit, breach of fiduciary duty, deceptive business practices, negligent misrepresentation, and unjust enrichment

Summary of this case from Anderson v. Merrill Lynch

finding no abuse of discretion when plaintiff failed to submit proposed amended pleading and failed to describe substance of amended claims

Summary of this case from U.S. ex Rel. Lee v. Fairview Health System

finding that failure to disclose unsuitability of certain accounts amounted to omission of material fact

Summary of this case from Northstar Fin. Advisors Inc. v. Schwab Invs.

finding preemption under SLUSA despite plaintiff's artful pleading

Summary of this case from Johnson v. MFA Petroleum Co.

upholding denial of a request for leave to amend at the end of the plaintiffs' brief because they did not "include a proposed amended pleading" as required by local rule, "describe what changes they would make," or specify what non-futile claims they would assert

Summary of this case from Doe v. Bd. of Regents of Univ. of Neb.

upholding preemption dismissal when, although fraud allegations deleted, the "essence" and "substance" of the plaintiffs' fairly read complaint alleged misstatements and omissions

Summary of this case from Lerner v. TD AmeriTrade, Inc.

upholding preemption dismissal when, although fraud allegations deleted, the "essence" and "substance" of the plaintiffs' fairly read complaint alleged misstatements and omissions

Summary of this case from Verdieck v. TD Ameritrade, Inc.

denying motion for leave to amend because plaintiffs did not include a proposed amended pleading and failed to describe what changes they would make to avoid dismissal

Summary of this case from Clifford A. Zuker, Corp. v. Rodriguez

denying a plaintiff's request to amend where the plaintiff did not submit a motion for leave to amend or provide a proposed amended pleading

Summary of this case from Pliam v. Cendant Mortg. Corp.

affirming district court's dismissal of class action because "gravamen" of action involved untrue statements or omissions in connection with the purchase or sale of covered securities

Summary of this case from Beary v. Nationwide Life Insurance Company

affirming district court's dismissal of class action because "gravamen" of action involved untrue statements or omissions in connection with the purchase or sale of covered securities

Summary of this case from Spencer v. Wachovia Bank

reaching the same result under nearly identical circumstances

Summary of this case from In re 2007 Novastar Financial Inc.

In Dudek v. Prudential Securities, Inc., 295 F.3d 875 (8th Cir. 2002), the Eighth Circuit analogously found the plaintiffs' claims preempted where they alleged that the "defendants' misconduct caused plaintiffs to invest in inappropriate securities" and therefore to pay higher fees and incidental costs than necessary.

Summary of this case from Dabit v. Merrill Lynch, Pierce, Fenner

stating that where complete preemption applies, "plaintiff may not avoid federal question jurisdiction and the preemption of state law claims by artfully concealing the federal question in an otherwise well-pleaded complaint under state law"

Summary of this case from Dabit v. Merrill Lynch, Pierce, Fenner

considering how allegations evolved to ascertain the overall target of the amended complaint

Summary of this case from Knowles v. TD Ameritrade Holding Corp.

In Dudek the Eighth Circuit held that the state law claim by purchasers of tax-deferred annuities against investors was essentially one for misstatement or omitted facts in connection with the purchase and sale of tax-deferred annuities, despite plaintiff's characterization of the claim as one for state law "improper marketing."

Summary of this case from Central Laborers' Pension Fund v. Chellgren

preempting all causes of action where "the essence of [the complaint] is the unlawful marketing of [securities]. . . ."

Summary of this case from Gray v. Seaboard Securities, Inc.

following other courts that have found variable annuities to be covered securities

Summary of this case from Herndon v. Equitable Life Assce. Soc. of United States
Case details for

Dudek v. Prudential Securities, Inc.

Case Details

Full title:Kazimierz J. DUDEK; Margaret Varley Dudek, on behalf of themselves and all…

Court:United States Court of Appeals, Eighth Circuit

Date published: Jul 15, 2002

Citations

295 F.3d 875 (8th Cir. 2002)

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