UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

ROCKWELL KING, ET AL.,

Plaintiffs,

VS.

LINCOLN FINANCIAL ADVISORS

CORPORATION a/k/a LINCOLN

FINANCIAL GROUP, ET AL.,

Defendants.

)

)

)

) CIVIL ACTION NO.

)

) 3:05-CV-1626-G

)

) ECF

)

)

)

MEMORANDUM OPINION AND ORDER

Before the court is the motion of the plaintiffs, Rockwell King, Cora King,

Pacific High Point, LLC, Pacific Heights, LLC, Santa Margarita Partners, Pacific

Shoreline Corporation, John M. Borders, Pamela Borders individually and as trustee

of Pam Borders Irrevocable 1997 Trust, JB Sunburst Investments, LLC, Sunburst

Investment Partners, Sunburst II, Inc., John Gregory Borders as trustee of the John

Gregory Borders Irrevocable 1997 Trust, Jeffrey Alan Borders as Trustee of the Jeffery

Alan Borders Irrevocable 1997 Trust, Gab Investments I, LLC, and Gab Investments

 

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1 Johnson was subsequently dismissed without prejudice pursuant to the

plaintiffs’ unopposed motion. Order, filed July 17, 2006. 

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II, LLC, (collectively, “the plaintiffs”), to remand this case to the state court from

which it was previously removed. For the reasons stated below, the motion is granted.

I. BACKGROUND

On June 23, 2005, the plaintiffs filed an original petition in the County Court

at Law No. 2 of Dallas County, Texas. Plaintiff’s Original Petition, Request for

Disclosure and Motion for Level Three Discovery Plan (“Petition”), attached to Notice

of Removal as Exhibit C. Pursuant to 28 U.S.C. § 1446(b), Lincoln Financial

Advisors Corporation a/k/a Lincoln Financial Group, David Rhodes, and Reagan

Lorenzen (collectively, “the defendants”) filed a timely notice of removal. Defendant

Lincoln Financial Advisors Corporation, David Rhodes and Reagan Lorenzen’s Notice

of Removal (“Notice of Removal”). Sara Johnson (“Johnson”), the only other

defendant, consented to the removal.1

 Consent to Removal, attached to Notice of

Removal as Exhibit A. 

In their original petition, the plaintiffs assert the following nine claims founded

on state law: (1) unjust enrichment; (2) breach of fiduciary duty; (3) fraud;

(4) negligent misrepresentation; (5) negligence/professional malpractice; (6) breach of

contract; (7) declaratory judgment; (8) civil conspiracy; and (9) violation of the Texas

Deceptive Trade Practices Act (“TDTPA”). Petition ¶¶ 116-175. 

 

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2 “[T]o hold the risk and the resulting profit potential to a minimum, the

FX Contracts are structured as follows: Each client entered into two opposing

transactions -- one where the client would be PAID if the spot rate on a particular

foreign currency was at or below a certain rate, and one where the client would have

to PAY OUT if the spot rate was at or below a certain rate. The two rates that were

set . . . were different by only fractions of a penny. On all of the FX Contracts, the

trigger occurred when the spot rate on the underlying currency pair . . . was at or

(continued...)

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These claims arise from transactions associated with a tax strategy developed

and marketed by the defendants and their associates in the 1990s. Petition ¶¶ 23,

34. The defendants, serving primarily as marketing agents for the tax strategy,

allegedly represented to prospective clients that the tax strategy would generate

substantial federal income tax benefits. Id. ¶ 35. As a part of the scheme, the

defendants further represented to the plaintiffs that independent legal opinions from

specific law firms would support the strategy. Id. ¶¶ 39, 51, 62. However,

unbeknownst to the plaintiffs, the legal opinions were actually generated by the very

law firms that developed the tax strategies and recruited the defendants to market

them. Id. ¶¶ 34-35. 

 Most of the plaintiffs had bought into the plan by the summer of 2000. Id.

¶¶ 37, 41, 51. As a part of the tax strategy, clients purchased two opposing

European-style digital options and transferred those options into a partnership. Id.

¶ 24. Although the defendants represented to the plaintiffs that the options had a

potential for profit, they actually had no such potential because the transactions

inevitably cancelled each other out.2

 Id. ¶¶ 25-26. Transferring these economically

 

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2

(...continued)

below a specific spot rate on a certain date at a certain time. Thus, there was almost no

chance of only one position being acted upon. Either the spot rate would be above

both, so neither were acted upon, or the spot rate would be below both, so both were

acted upon . . .. Of course, Plaintiffs were never informed that they had as good of a

chance of winning the lottery as they had of earning a profit on the FX Contracts.” 

Petition ¶¶ 25-26 (footnotes omitted) (emphasis in original). 

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valueless options into the partnership created an artificially high basis for the client’s

partnership interest. Id. ¶¶ 25-27. The supposed income tax benefits emerged out of

this artificially high basis. Id. 

In December, 1999, the IRS published Notice 1999-59, entitled Tax

Avoidance Using Distribution of Encumbered Property, which clearly notified

accountants, lawyers, and other professionals that purported losses stemming from

transactions wholly lacking in economic substance were not allowable for federal

income tax purposes. Id. ¶ 77. IRS Notice 2000-44, entitled Tax Avoidance Using

Artificially High Basis, was published on August 11, 2000. Id. ¶ 27. It notified

accountants, lawyers, and other professionals that the IRS considered illegal any tax

strategy that created an artificially high basis purely for the purpose of avoiding

taxation. Id. The plaintiffs assert that the defendants never disclosed to the plaintiffs

the effect or existence of these IRS notices; rather, the defendants continued to

market the tax strategy even after the publication of the notices. Id. ¶ 30. The

plaintiffs further assert that the defendants failed to disclose that the digital options

had no potential for profit and that the defendants misrepresented the nature of their

 

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relationship with each other and the law firms who generated the legal opinions. Id.

The plaintiffs argue that, as a result of these non-disclosures and misrepresentations,

they suffered significant pecuniary damages. Id. ¶ 111.

II. ANALYSIS

Title 28 U.S.C. § 1441(a) permits removal of “any civil action brought in a

State court of which the district courts of the United States have original

jurisdiction.” Under this statute, “[a] defendant may remove a state court action to

federal court only if the action could have originally been filed in the federal court.” 

Aaron v. National Union Fire Insurance Company of Pittsburg, Pennsylvania, 876 F.2d

1157, 1160 (5th Cir. 1989), cert. denied, 493 U.S. 1074 (1990) (citations omitted). 

Removal jurisdiction must be strictly construed, however, because it “implicates

important federalism concerns.” Frank v. Bear Stearns & Co., 128 F.3d 919, 922 (5th

Cir. 1997); see also Willy v. Coastal Corporation, 855 F.2d 1160, 1164 (5th Cir.

1988). Furthermore, “any doubts concerning removal must be resolved against

removal and in favor of remanding the case back to state court.” Cross v. Bankers

Multiple Line Insurance Company, 810 F. Supp. 748, 750 (N.D. Tex. 1992); see also

Shamrock Oil & Gas Corporation v. Sheets, 313 U.S. 100, 108-09 (1941); Healy v. Ratta,

292 U.S. 263, 270 (1934). The burden of establishing federal jurisdiction is on the

party seeking removal. Frank, 128 F.3d at 921-22; Willy, 855 F.2d at 1164.

 

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District courts have federal question jurisdiction over civil cases “arising under

the Constitution, laws, or treaties of the United States.” 28 U.S.C. § 1331; Frank,

128 F.3d at 922. In determining whether a claim arises under federal law, the wellpleaded complaint rule allows a plaintiff to be the “master to decide what law he will

rely upon” in pursuing his claims. The Fair v. Kohler Die & Specialty Company, 228

U.S. 22, 25 (1913); Beneficial National Bank v. Anderson, 539 U.S. 1, 6 (2003); Aaron,

876 F.2d at 1160-61. Where potential remedies exist under both state and federal

law, a plaintiff may choose to proceed only under state law and avoid federal court

jurisdiction. Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987); Carpenter v.

Wichita Falls Independent School District, 44 F.3d 362, 366 (5th Cir.1995).

The recent Supreme Court decision in Grable & Sons Metal Products, Inc. v.

Darue Engineering & Manufacturing, 545 U.S. 308, 125 S. Ct. 2363 (2005), illustrates

that a cause of action created by federal law is not a necessary condition for federal

question jurisdiction under 18 U.S.C. § 1331 or removal jurisdiction under 28 U.S.C.

§ 1441(a). Grable, 545 U.S. , 125 S. Ct. at 2366-67. The relevant post-Grable

inquiry is whether a state-law claim “necessarily raises[s] a stated federal issue,

actually disputed and substantial, which a federal forum may entertain without

disturbing any congressionally approved balance of federal and state judicial

responsibilities.” Id. at 2368. 

 

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This inquiry is a two-step process: the court must (1) determine whether a

federal question is sufficiently substantial to support federal jurisdiction and

(2) consider whether the exercise of jurisdiction would disrupt “any congressionally

approved balance of federal and state judicial responsibility.” Grable, 125 S. Ct. at

2368. A federal question is sufficiently substantial if “the vindication of a right under

state law necessarily turns[s] on some construction of federal law.” Franchise Tax

Board of State of California v. Construction Laborers Vacation Trust for Southern California,

463 U.S. 1, 9 (1983). A federal question is not sufficiently substantial, however, if it

appears only in an alternative argument for relief. See Howery v. Allstate Insurance

Company, 243 F.3d 912, 918 (5th Cir.) (citing Christianson v. Colt Industrial Operating

Corp., 486 U.S. 800, 809-810 (1988)), cert. denied, 534 U.S. 993 (2001). If the court

does find a substantial federal question, it must then consider whether an exercise of

jurisdiction under the particular circumstances would open the proverbial floodgates

of litigation into the federal system. Grable, 125 S. Ct. at 2367-68. The court should

decline to exercise jurisdiction if doing so would cause a significant shift of cases into

the federal system from the state system. Id.

A. Substantial Disputed Federal Question

The defendants argue that federal questions pervade the plaintiffs’ petition and

that a determination of the validity of the IRS notices is central to the resolution of

the entire case. Response at 6-8. The defendants note that the IRS notices are not

 

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binding upon this or any other court but are more properly understood as

proclamations of the IRS’s position regarding the tax strategy in question. Id. at 6;

see Guilzon v. Commissioner of Internal Revenue, 985 F.2d 819, 822 (5th Cir. 1993)

(discussing the non-binding nature of IRS notices). Upon that basic premise, the

defendants contend that if the advice they offered to the plaintiffs was in fact correct

(i.e., the tax strategy was legitimate) and the IRS notices were actually incorrect, then

the plaintiffs’ claims fall apart. Response at 7. Furthermore, since neither a tax court

nor an Article III federal court has ruled on the specific issues addressed in the IRS

notices, the question of their accuracy is undecided. Id. at 6. Finally, the defendants

argue that, unlike the plaintiffs, they have never adopted, nor acquiesced in, the IRS’s

position; thus, the accuracy of the notices is disputed. Id. at 5-6. On those grounds,

the defendants argue that the entire case turns on a substantial contested issue of

federal law -- namely, the validity of the IRS notices. Id. at 6-9.

In asserting this position, the defendants rely on Grable, where the United

States Supreme Court upheld an exercise of federal question jurisdiction over statelaw claims. Grable, 125 S. Ct. at 2368 (the plaintiff’s claims were premised on the

failure of the IRS to give it adequate notice of sale). The Court explained that the

meaning of the federal statute appeared to be “the only legal or factual issue

contested in the case.” Id. Accordingly, the Court found that a federal question

existed. Id. In the case at bar, the accuracy of the IRS notices is relevant to a portion

 

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of the plaintiffs’ claims; unlike Grable, however, the majority of the plaintiffs’

allegations here rest not on the construction of the IRS notices but from the

defendants’ primary conduct. Petition ¶¶ 121-175.

A couple of examples illustrate the point. The plaintiffs allege, inter alia, that

the defendants breached their fiduciary duty to the plaintiffs. Id. ¶ 123. To prevail

on this claim, the plaintiffs must prove (1) that the defendants owed them a fiduciary

duty, (2) that they breached that duty, (3) that the breach resulted in injury, and

(4) that the breach was the proximate cause of that injury. See In re Segerstrom, 247

F.3d 218, 225 n.5 (5th Cir. 2001) (applying Texas law); Jones v. Blume, S.W.3d 

 , 2006 WL 1688434 (Tex. App.--Dallas, June 21, 2006) at *4. The court is not

asked to resolve any substantial federal issue because the plaintiffs allege only that the

defendants breached their fiduciary duty. In other words, the plaintiffs allege facts

that, if proven, would satisfy the elements of the cause of action without any

reference to the correctness or accuracy of the IRS notices. The focus of the

factfinder would be on the propriety of the defendants’ conduct, not on the legality of

the tax strategy. 

Similarly, the plaintiffs allege that the defendants defrauded them by making 

knowingly false affirmative representations and intentional omissions of material facts

to obtain substantial service fees. Petition ¶ 128. To prevail on this claim, the

plaintiffs must prove that the defendants: (1) made a material representation;

 

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3 These are unjust enrichment, negligent misrepresentation,

negligence/professional malpractice, breach of contract, declaratory judgment, civil

conspiracy, and violation of the TDTPA. Petition ¶¶ 116-120, 134-175.

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(2) that was false when made; (3) that they knew the representation was false or

made it recklessly without knowledge of its truth; (4) that they made the

representation with the intent that the plaintiffs should act upon it; and (5) that the

plaintiffs acted in reliance upon it and suffered injury as a result. Great Plains Trust

Company v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 322 (5th Cir. 2002)

(citing Beijing Metals & Minerals Import/Export Corp. v. American Business Center, Inc.,

993 F.2d 1178, 1185 (5th Cir. 1993) (applying Texas law)). The court need not

determine the legality of the IRS notices to rule on this claim. The plaintiffs can

prevail if they establish that the “independent” legal opinions were not actually

independent but rather a part of a scheme to defraud them. Again, the relevant

inquiry is whether the defendants’ conduct satisfies the elements of the state-law

claim, not whether the IRS correctly interpreted federal tax law.

This reasoning applies equally as well to the other seven state-law claims pled

by the plaintiffs.3

 These claims allege facts that, if proven, would allow the plaintiffs

to recover from the defendants without regard to the validity of the IRS notices. 

Therefore, in accordance with Howery, the federal question cannot be considered

substantial. 

 

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4 The defendants failed to carry their burden on the first step of the

Grable analysis; therefore, it is not necessary for the court to address the sound

division of labor question. However, it appears that the potential for shifting the

division of labor from state to federal court is much greater here than in Grable. See

Sheridan, 406 F. Supp.2d at 795 (“The potential for shifting the division of labor

from state to federal courts is much greater in this case [than in Grable] because if

federal jurisdiction exists here, any malpractice, breach of fiduciary duty, or similar

state law claim alleging an unreasonable interpretation of federal law, be it tax,

securities, ERISA, etc. would invoke federal question jurisdiction.”).

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Dozens of factually related cases are pending throughout the country. See

Response at 5-6. These related cases arise out of the same tax strategy and involve

identical arguments and issues. The majority of courts examining subject matter

jurisdiction in these cases have found it lacking. See Cantwell v. Deutsche Bank

Securities, Inc., No. 3:05-CV-1378-D, 2005 WL 2296049 (N.D. Tex. Sept. 21, 2005)

(remanding similar state-law claims arising out of the same tax strategy because no

substantial federal question existed); Sheridan v. New Vista, LLC, 406 F. Supp.2d 789

(W.D. Mich. 2005) (granting the plaintiff’s motion to remand); Acker v. AIG

International, Inc., 398 F. Supp. 2d 1239 (S.D. Fla. 2005) (granting plaintiff’s motion

to remand); but see Becnel v. KPMG, LLP, 387 F. Supp.2d 984 (W.D. Ark. 2005)

(denying the plaintiff’s motion to remand and holding that the validity of the IRS

notices is a substantial federal question). Accordingly, the court concludes that the

defendants have failed to establish that the plaintiffs’ claims necessarily raise a

substantial disputed federal issue.4

 

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B. Whether Judicial Estoppel Bars the Plaintiffs’ Motion

Notwithstanding their contention that substantial federal questions pervade

the plaintiffs’ petition, the defendants argue that the plaintiffs are judicially estopped

from arguing that a federal question does not exist. Response at 3-4. In a related

New York class action, these same plaintiffs, represented by the same counsel,

successfully argued that questions of federal law predominated over state law issues. 

The defendants now assert that the plaintiffs’ prior position -- that federal issues

predominate -- bars them from arguing here that federal issues are not substantial and

disputed.

Judicial estoppel is “a common law doctrine by which a party who has assumed

one position in his pleadings may be estopped from assuming an inconsistent

position.” Brandon v. Interfirst Corporation, 858 F.2d 266, 268 (5th Cir. 1988). The

purpose of the doctrine is “to protect the integrity of the judicial process” by

“prevent[ing] parties from ‘playing fast and loose’ with (the courts) to suit the

exigencies of self interest.” Id. Judicial estoppel is generally applied when

“intentional self-contradiction is being used as a means of obtaining unfair

advantage.” In re Coastal Plains, Inc., 179 F.3d 197, 206 (5th Cir. 1999), cert. denied,

528 U.S. 1117 (2000). The Fifth Circuit has stated that judicial estoppel applies: 

(1) where the position of the party to be estopped is clearly inconsistent with its

previous one; and (2) that party must have convinced the court to accept that

 

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previous position. Ahrens v. Perot Systems Corp., 205 F.3d 831, 833 (5th Cir.), cert.

denied, 531 U.S. 819 (2000). Courts, however, may invoke the equitable doctrine of

judicial estoppel at their discretion. New Hampshire v. Maine, 532 U.S. 742, 750

(2001). 

The defendants point out that the plaintiffs previously argued that “federal tax

law and the nationwide standard of care applicable to Federal tax practitioners

predominate over individual issues.” Response at 5. The plaintiffs contend that their

prior position is not “clearly inconsistent” with their position here. See Reply at 6. 

They acknowledge that this case involves issues of federal law but maintain that those

issues are not substantial or disputed. See id. 

The court need not decide whether the plaintiffs’ positions are clearly

inconsistent because application of judicial estoppel in this case would not effectively

serve the policy underlying that doctrine. The primary purpose of judicial estoppel is

to protect the integrity of the judicial system by preventing a party from abandoning

an established position to fit the exigencies of the moment. New Hampshire, 532 U.S.

at 749-750. Any threat to the integrity of the judicial process is mitigated when the

subsequent position is proffered to a different court. Moreover, these defendants

were not present in the class action suit; thus, they could neither have acquiesced in,

nor been adversely affected by, the plaintiffs’ prior position. See Davis v. Wakelee,

156 U.S. 680, 689 (1895) (“where a party assumes a certain position in a legal

 

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proceeding, and succeeds in maintaining that position, he may not thereafter, simply

because his interests have changed, assume a contrary position, especially if it be to

the prejudice of the party who has acquiesced in the position formerly taken by

him.”). For those reasons, the court declines to apply the equitable doctrine of

judicial estoppel.

III. CONCLUSION

For the reasons disused above, the plaintiffs’ motion for remand is

GRANTED. This case is REMANDED to the County Court at Law No. 2 of

Dallas County, Texas. The clerk shall mail a certified copy of this memorandum

opinion and order to the county clerk of Dallas County, Texas. 28 U.S.C. § 1447(c).

SO ORDERED.

July 25, 2006.

 

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