Source: https://casetext.com/case/riley-v-merrill-lynch-2
Timestamp: 2020-07-11 17:28:00
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Matched Legal Cases: ['§ 517', '§ 501', '§ 78', '§ 6', '§ 6', '§ 1332', '§ 77', '§ 78', '§ 77', '§ 78', '§ 240', '§ 10', '§ 78', '§ 77', '§ 2', '§ 10', '§ 10', '§ 10', '§ 10', '§ 77', '§ 78', '§ 11', '§ 11', '§ 11']

Riley v. Merrill Lynch, 292 F.3d 1334 | Casetext Search + Citator
Riley v. Merrill Lynch
Dabit v. Merrill Lynch, Pierce, Fenner
1. SLUSA's Enactment and Scope Congress enacted SLUSA in 1998 in response to the perceived failure of the…
Magyery v. Transamerica Financial Advisors, Inc., (N.D.Ind. 2004)
Green, 279 F.3d at 594-95. The Eleventh Circuit has also considered SLUSA's preemptive reach, in Riley v.…
Full title:Robert E. RILEY, Jr., as trustee of, and participant in, the Performance…
Date published: Jun 7, 2002
292 F.3d 1334 (11th Cir. 2002)
holding a trust's citizenship is determined solely by reference to the citizenship of the trust's beneficiaries
Summary of this case from Conagra Foods, Inc. v. Americold Logistics, LLC
Guy M. Burns, Jonathan Strickland Coleman, Johnson, Blakely, Pope, Boker, Ruppel Burns, Tampa, FL, for Plaintiffs-Appellants.
Mark Holland, Clifford, Chance, Rogers Wells, LLP, New York City, John Eamon Johnson, Marvin E. Barkin, Trenam, Kemker, Scharf, Barkin, Frye, O'Neill Mullis, Tampa, FL, for Defendants-Appellees.
Before BARKETT and MARCUS, Circuit Judges, and HIGHSMITH, District Judge.
Honorable Shelby Highsmith, U.S. District Judge for the Southern District of Florida, sitting by designation.
Robert E. Riley and Sheila Cantrell are the trustees of the Performance Toyota, Inc. Profit Sharing Plan ("Performance Plan"), and Gregory Dingle is the trustee of the Master Packaging, Inc. 401(K) plan ("Master Packaging"). Both plaintiffs initially filed a class action in federal district court against Merrill Lynch alleging a violation of two Florida statutes: the Florida Securities and Investor Protection Act (Fla. Stat. Ann. § 517.011 et seq.) and the Florida Deceptive and Unfair Trade Practices Act (Fla. Stat. Ann. § 501.201 et seq.). The complaint alleged that Merrill Lynch made "material Misrepresentations and Omissions [that] induced the Plaintiffs and other Class members to purchase and retain shares of the Growth Fund. . . ." Merrill Lynch moved to dismiss, arguing (a) that the Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. § 78bb ("SLUSA") specifically barred the plaintiffs' class action and (b) there was no diversity jurisdiction because one of the Merrill Lynch defendants, the Growth Fund, was required to be treated as a Florida citizen for diversity purposes because it had shareholders who, like the plaintiffs, were Florida citizens. While Merrill Lynch's motion to dismiss was pending, the district court sua sponte issued an order to show cause why the complaint should not be dismissed for lack of jurisdiction. Performance Plan responded by filing a Notice of Voluntary Dismissal Without Prejudice and then refiling its action in state court.
The putative class consisted of "all persons and entities who purchased or sold shares of the [Growth] Fund in Florida through Defendant Merrill Lynch Pierce Fenner Smith, Inc. or any related entity between November 1, 1997 and April 30, 1999." Plaintiffs estimate that both the Master Packaging and Performance Plan classes include thousands of putative class members.
Specifically, the four defendants were Merrill, Lynch, Pierce, Fenner Smith, Inc., the Merrill Lynch Growth Fund ("Growth Fund"), the individual trustees of the Growth Fund and Merrill Lynch Asset Management. For convenience, we refer collectively to the four defendants as "Merrill Lynch."
The Plaintiffs did not bring any claims directly under federal law.
The purported basis for jurisdiction was diversity. As noted, all claims were brought under Florida state law.
Thus, parallel actions were proceeding in state and federal court, with the Performance Plan plaintiffs in state court and the Master Packaging plaintiffs remaining in federal court.
We review the district court's grant of a motion to dismiss de novo. Lowell v. Am. Cyanamid Co., 177 F.3d 1228, 1229 (11th Cir. 1999). We review the district court's jurisdictional rulings and its interpretation of SLUSA de novo. United States v. Hooshmand, 931 F.2d 725, 737 (11th Cir. 1991).
As always, jurisdiction is a threshold inquiry that we are required to consider before addressing the merits of any claim. But the jurisdictional analysis here is complicated by the unique procedural posture of this case. Master Packaging filed suit in diversity directly in federal court, and never left. Thus, the district court was, and this court now is, required to assess whether Master Packaging was diverse from each and every defendant before addressing the merits of its Florida statutory claims and before determining whether SLUSA barred those claims. See University of S. Ala. v. American Tobacco Co., 168 F.3d 405, 412 (11th Cir. 1999).
There are two issues raised with respect to Master Packaging's appeal. The threshold issue is whether there is diversity jurisdiction. If we conclude that there is jurisdiction, we must turn to the question whether SLUSA bars Master Packaging's lawsuit. For the reasons set forth below, we conclude that the requisite diversity is lacking. Therefore we do not reach the question of whether SLUSA bars Master Packaging's lawsuit.
As detailed below, we do consider SLUSA's applicability with respect to Performance Plan's lawsuit. We recognize that our application of SLUSA to Performance Plan will, in the abstract, also be applicable to Master Packaging. But because there is no diversity jurisdiction, which is the threshold inquiry in the Master Packaging action, we do not address SLUSA in the context of its appeal.
In Carden the Supreme Court held that, for diversity purposes, an Arizona limited partnership was a citizen of each state in which at least one of its general or limited partners was a citizen. See id. at 195, 110 S.Ct. 1015. In reaching this conclusion, the Court very clearly reaffirmed the doctrinal distinction between corporations on the one hand, and all other types of business entities on the other, stating that only corporations would be treated as citizens of their state of incorporation: "While the rule regarding the treatment of corporations as `citizens' has become firmly established, we have (with an exception to be discussed presently) just as firmly resisted extending that treatment to other entities." Id. at 189, 110 S.Ct. 1015. The Court emphasized, "[t]here could be no doubt . . . that at least common-law entities (and likely all entities beyond the Puerto Rican sociedad en comandita) would be treated for purposes of the diversity statute pursuant to . . . `[t]he tradition of the common law,' which is `to treat as legal persons only incorporated groups and to assimilate all others to partnerships.'" Id. at 190, 110 S.Ct. 1015 (internal citations omitted) (second emphasis added). Thus, the Court stated, "we reject the contention that to determine, for diversity purposes, the citizenship of an artificial entity, the court may consult the citizenship of less than all of the entity's members. We adhere to our oft-repeated rule that diversity jurisdiction in a suit by or against the entity depends on the citizenship of all the members." Id. at 195, 110 S.Ct. 1015 (internal quotations and citations omitted).
The district court and the Fifth Circuit had previously ruled that the partnership's citizenship would be based on the citizenship of the general partners alone.
The Puerto Rican sociedad en comandita is the only artificial entity that the Court has treated as a traditional corporation for diversity purposes.
Arkoma claims to have found another exception to our Chapman tradition in Navarro Savings Assn. v. Lee, 446 U.S. 458, 100 S.Ct. 1779, 64 L.Ed.2d 425 (1980). That case, however, did not involve the question whether a party that is an artificial entity other than a corporation can be considered a "citizen" of a State, but the quite separate question whether parties that were undoubted "citizens" (viz., natural persons) were the real parties to the controversy. The plaintiffs in Navarro were eight individual trustees of a Massachusetts business trust, suing in their own names. The defendant, Navarro Savings Association, disputed the existence of complete diversity, claiming that the trust beneficiaries rather than the trustees were the real parties to the controversy, and that the citizenship of the former and not the latter should therefore control. In the course of rejecting this claim, we did indeed discuss the characteristics of a Massachusetts business trust — not at all, however, for the purpose of determining whether the trust had attributes making it a "citizen," but only for the purpose of establishing that the respondents were "active trustees whose control over the assets held in their names is real and substantial," thereby bringing them under the rule, "more than 150 years" old, which permits such trustees "to sue in their own right, without regard to the citizenship of the trust beneficiaries." Id., at 465-466, 100 S.Ct., at 1784. Navarro, in short, has nothing to do with the Chapman question, except that it makes available to respondent the argument by analogy that, just as business reality is taken into account for purposes of determining whether a trustee is the real party to the controversy, so also it should be taken into account for purposes of determining whether an artificial entity is a citizen. That argument is, to put it mildly, less than compelling.
Significantly, prior to Carden (but based on its underlying precedents) this Court has applied the incorporated/unincorporated distinction in determining the citizenship of trusts on the basis of the citizenship of their shareholders. See Laborers Local 938 Joint Health Welfare Trust Fund v. B.R. Starnes Co. of Fla., 827 F.2d 1454, 1457 (11th Cir. 1987). In B.R. Starnes, we stated that, "Trust Funds, which appear to be voluntary unincorporated associations, are not citizens of any particular state; rather, the citizenship of trust fund members is determinative of the existence of diversity of citizenship." Id. (emphasis added). Accordingly, we affirmed the district court's dismissal of the complaint for lack of diversity jurisdiction.
Master Packaging argues that the capacity rule of Fed.R.Civ.P. 17(b), in combination with Mass. Gen. Laws ch. 182 § 6, compels us to conclude that Growth Fund is a Massachusetts Citizen for diversity purposes. We disagree. Fed.R.Civ.P. 17(b) provides that the "capacity of a corporation to sue or be sued shall be determined by the law under which it is organized." (emphasis added). Mass. Gen. Laws ch. 182 § 6, under which the Growth Fund was organized, in turn states that "[a]n association or trust may be sued in an action at law for debts and other obligations or liabilities . . . and its property shall be subject to attachment and execution in like manner as if it were a corporation. . . ."
Thus, the district court correctly determined that complete diversity was lacking between Master Packaging and the Merrill Lynch defendants, requiring the dismissal of the Master Packaging class action for lack of jurisdiction. As noted, this determination eliminates the need to reach the SLUSA question with respect to Master packaging. However, in order to review the district court's denial of Performance Plan's motion to remand its action to state court (as well as its subsequent dismissal of that action), we must determine SLUSA's applicability to the Performance Plan action.
Because we determine that Growth Fund must be treated as a citizen of Florida (among other states) for purposes of diversity jurisdiction, there is no need for us to address Merrill Lynch's argument that neither Master Packaging nor Performance Plan meets the amount in controversy requirement for diversity jurisdiction under 28 U.S.C. § 1332.
SLUSA is the most recent in a line of federal securities statutes originating with Congress' passage of the Securities Act of 1933 ("1933 Act"), 48 Stat. 74 (1933) (codified as amended at 15 U.S.C. § 77a et seq.), and the Securities Exchange Act of 1934 ("1934 Act"), 48 Stat. 881 (1934) (codified as amended at 15 U.S.C. § 78a et seq.), and continuing through Congress' 1995 passage of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub.L. 104-67, 109 Stat. 737 (1995) (codified in part at 15 U.S.C. §§ 77z- 1, 78u). In construing the meaning of SLUSA's key terms, we must view SLUSA in this larger statutory context.
The 1933 Act deals with the contents of stock registration statements and prospectuses, giving purchasers a private right of action against stock issuers who fail to comply with the statute's requirements. In relevant part, the 1934 Act, Section 10, makes it "unlawful for any person . . . [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities Exchange Commission (`SEC')] may prescribe. . . ." 15 U.S.C. § 78j(2)(b) (emphasis supplied). The SEC accordingly promulgated Rule 10b-5, 17 CFR § 240.10b-5, the basis for a vast amount of modern securities litigation, which provides as follows:
In 1995, after determining that the federal securities laws, and especially § 10b-5, were being abused through the bringing of "strike suits," Congress passed the PSLRA. The PSLRA set heightened pleading requirements for class actions alleging fraud in the sale of national securities, see 15 U.S.C. § 78u-4, and also provided for a mandatory stay of discovery to allow district courts, prior to discovery, to determine the legal sufficiency of claims brought in securities class actions, see 15 U.S.C. § 77z-1(b). These reforms were designed to enable securities defendants to obtain early dismissal of frivolous class actions, and thereby avoid the high expense of discovery. See, e.g., Lander v. Hartford Life and Annuity Ins. Co., 251 F.3d 101, 107 (2d Cir. 2001).
By "strike suits," Congress referred to securities class actions that had no merit, but that were improperly brought for the purpose of forcing securities defendants into large settlements in order to avoid costly discovery. See H.R. Conf. Rep. No. 105-803 (1998).
By 1998, however, Congress realized that many of the goals of PSLRA were being frustrated because plaintiffs were simply shifting their securities class actions from federal to state court, where the PSLRA did not restrict their claims. See Pub.L. No. 105-353 § 2(2). By suing in state court under state statutory or common law (rather than under the federal securities laws), litigants were able to circumvent the restrictions placed upon securities claims in federal court. See id. To close this loophole in the PSLRA, Congress passed SLUSA, making federal court the exclusive venue for class actions alleging fraud in the sale of "covered securities." Congress accomplished this by providing for removal of state actions to federal court, and requiring the immediate dismissal of "covered lawsuits." To this end, SLUSA provides, in relevant part:
According to a joint House-Senate Committee Report, the decline in federal securities class action suits that occurred after the passage of PSLRA was accompanied by a nearly identical increase in state court filings. See H.R. Conf. Rep. No. 105-803 (1998).
a security that satisfies the standards for a covered security specified in paragraph (1) or (2) of section 77r(b) of this title, at the time during which it is alleged that the misrepresentation, omission, or manipulative or deceptive conduct occurred. . . .
Thus, in order to remove an action to federal court under SLUSA, the removing party must show that (1) the suit is a "covered class action," (2) the plaintiffs' claims are based on state law, (3) one or more "covered securities" has been purchased or sold, and (4) the defendant misrepresented or omitted a material fact " in connection with the purchase or sale of such security." See Spielman v. Merrill, Lynch, Pierce, Fenner Smith, Inc., No. 01 Civ. 3013(DLC), 2001 WL 1182927 (S.D.N.Y. Oct. 9, 2001) (unpublished opinion); Shaev v. Claflin, Fed. Sec. L. Rep. P 91,452, 2001 WL 548567 (N.D. Cal. May 17, 2001); Shaw v. Charles Schwab Co., Inc., 128 F.Supp.2d 1270, 1272 (C.D.Cal. 2001).
SLUSA does not define the term "in connection with the purchase or sale of a covered security." Nor has the Supreme Court yet had occasion to address this phrase in the context of SLUSA, although it has construed and applied the identical phrase as it appears in § 10b-5. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). As Performance Plan points out, however, one court of appeals and several district courts have had an opportunity to construe the meaning of this phrase in SLUSA. See Green v. Ameritrade, Inc., 279 F.3d 590, 597-98 (8th Cir. 2002); Shaev, at 91456, 2001 WL 548567; Gordon v. Buntrock, No. 00 CV 303, 2000 WL 556763 (N.D.Ill. Apr.28, 2000) (unpublished opinion); Shaw, 128 F.Supp.2d at 1273-74; Gutierrez v. Deloitte Touche, L.L.P., 147 F.Supp.2d 584, 595 (W.D.Tex. 2001); Simon v. Internet Wire, Inc., Fed. Sec. L. Rep. P 91,408, 2001 WL 688542 (C.D.Cal. Apr. 3, 2001); Burns v. Prudential Sec., 116 F.Supp.2d 917, 922-23 (N.D.Ohio 2000). In interpreting this key term in SLUSA, each of these courts has looked, for guidance, to the law interpreting the same phrase, "in connection with the purchase or sale of a covered security," in the context of § 10b-5. They have done so based on the principle that "[w]here Congress uses terms that have accumulated settled meaning under either equity or the common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning of these terms." NLRB v. Amax Coal Co., 453 U.S. 322, 329, 101 S.Ct. 2789, 69 L.Ed.2d 672 (1981).
Relying on 10b-5 case law, federal district courts have held, for example, that SLUSA does not apply to state law claims for breach of fiduciary duty that occurred after the sale of the securities in question, see Hines v. ESC Strategic Funds, Inc., No. 3:99-0530, 1999 WL 1705503 (M.D.Tenn. Sept.17, 1999) (unpublished opinion), and that SLUSA does not bar a state fraud claim where the alleged fraud caused the plaintiffs to choose a particular brokerage house rather than to buy or sell a particular security, see Shaw, 128 F.Supp.2d at 1273-74.
Performance Plan argues that its action was properly brought in state court, under state law because Merrill Lynch's alleged misrepresentations caused it to hold shares of Growth Fund rather than to "purchase or sell" them. Therefore, Performance Plan argues, its complaint falls outside the scope of SLUSA, which covers only claims involving misrepresentations made "in connection with purchase or sale." Performance Plan asserts that Supreme Court precedent interpreting the phrase "in connection with the purchase or sale of a covered security," in the context of § 10b-5, compels this conclusion. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). Performance Plan also relies heavily on Gutierrez v. Deloitte Touche, L.L.P., 147 F.Supp.2d 584 (W.D.Tex. 2001), which applied Blue Chip's § 10b-5 ruling in the context of SLUSA to hold that SLUSA does not cover claims based purely upon "retention" of securities. Subsequent to the briefing in this case, the Eighth Circuit issued Green v. Ameritrade, Inc., 279 F.3d 590 (8th Cir. 2002), which also relied on Blue Chip to hold that SLUSA did not bar a state law claim for breach of contract.
[T]he critical question is whether Green's amended complaint can reasonably be read as alleging a sale or purchase of a covered security made in reliance on the allegedly faulty information provided to himself and to putative class members by Ameritrade . . . Green's amended complaint completely omits any mention of such reliance. He alleges no sale or purchase of a covered security, only that he did not receive the type of information from Ameritrade for which he believed he had contracted and paid twenty dollars monthly. We are satisfied that nothing in Green's amended complaint suggests that his cause of action arises from a sale or purchase of a security in reliance on information gained from Ameritrade's real-time quote service. The amended complaint simply is not susceptible to being read as alleging anything of the sort. It therefore does not satisfy the criteria for SLUSA preemption.
[a]ll persons or entities that held any "covered security" as that term is defined in the Private Securities Litigation Reform Act of 1995 at all relevant times through 1993 through present and did not sell or otherwise dispose of said products prior to June 1999. . . .
category (iii) is explicitly limited to damages caused by the holding of covered securities and the loss of value which resulted from such holding. [It does not seek] purchaser or seller damages arising out of any alleged misrepresentation which may or may not have occurred when the[plaintiffs] purchased the covered stock. Rather, plaintiffs seek damages for being fraudulently induced to continue to hold stock after they and the category (iii) putative class members had purchased the securities. Plaintiffs maintain they are not asserting a claim "in connection with the sale or purchase" of a covered security and thus their claims are not subject to mandatory removal under the SLUSA.
Alternatively, Performance Plan argues that SLUSA does not apply to state law claims that lack the scienter requirement of the federal securities laws. Performance Plan's syllogistic argument appears to be as follows: Congress did not intend to bar claims pursuant to state laws that are stricter than federal securities laws; Performance Plan's state claims do not require scienter and are thus stricter than federal securities laws; therefore Performance Plan's lawsuit is not preempted by SLUSA. In support of this argument, Performance Plan relies on the district court opinion in Green, supra, (reported at 120 F.Supp.2d 795 (D.Neb. 2000)), and Burns v. Prudential Sec., 116 F.Supp.2d 917 (N.D.Ohio 2000). Performance Plan claims these cases stand for the proposition that the presence or absence of scienter in a state law securities claim is the determinative factor in deciding whether a pleaded state law claim is a mere substitute for the federal securities laws and, therefore, whether it is barred by SLUSA.
See H.R. Conf. Rep. No. 105-803, at *2; Compare Ernst Ernst v. Hochfelder, 425 U.S. 185, 193, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976) (acknowledging scienter requirement of federal securities laws), and Messer v. E.F. Hutton Co., 833 F.2d 909, 916 (11th Cir. 1987), with W.S. Badcock Corp. v. Myers, 696 So.2d 776, 779 (Fla.Dist.Ct.App. 1996) (no scienter requirement in Florida securities laws), and Davis v. Powertel, Inc., 776 So.2d 971 (Fla.Dist.Ct.App. 2000) (DUTPA liability is objective; question is whether the practice complained of was likely to deceive a consumer acting reasonably in the same circumstances).
More fundamentally, the premise of Performance Plan's argument is incorrect. SLUSA amends both the 1933 Act ( 15 U.S.C. § 77p) and the 1934 Act ( 15 U.S.C. § 78bb), preempting claims brought under both of those statutes. The sections of SLUSA that amend the 1933 Act track the language of §§ 11 and 12(a)(2), and claims under §§ 11 and 12(a)(2) of the 1933 Act do not require a showing of scienter. Thus, SLUSA preempts some claims — namely, those brought under § 11 or 12(a)(2) of the 1933 Act — that lack a scienter requirement. Accordingly, we cannot accept Performance Plan's contention that scienter is the dispositive factor in determining whether a given lawsuit falls within the scope of SLUSA.
Finally, the plaintiffs argue that SLUSA is unconstitutional because it exceeds Congress' power under the Commerce Clause. We readily disagree.
The plaintiffs also argue that SLUSA violates the Equal Protection clause. This argument lacks merit.
The Supreme Court has identified three categories of conduct that Congress may regulate under the Commerce Clause: (1) the use of the channels of interstate commerce; (2) the instrumentalities of interstate commerce, or persons or things in interstate commerce; and (3) activities that substantially affect interstate commerce. United States v. Lopez, 514 U.S. 549, 558-59, 115 S.Ct. 1624, 131 L.Ed.2d 626 (1995). Within each category, Congress' regulatory power is plenary. Id.
SLUSA regulates only national securities markets and expressly deals with claims pertaining to nationally-traded securities. As the district court recognized, "both the securities in question and the defendant in this action are entrenched in interstate commerce." SLUSA defines a "covered security" as "a security issued by an investment company that is registered, or that has filed a registration statement, under the Investment Company Act of 1940." The Growth Fund shares in this case are federally-registered securities and Merrill Lynch's trading operations for Growth Fund shares extend throughout the country. SLUSA thus is constitutional because it regulates both "channels" of interstate commerce ( i.e., national securities markets) and "things" in interstate commerce ( i.e., nationally-traded securities themselves). Indeed, though it has addressed the 1933 and 1934 securities Acts on countless occasions, the Supreme Court has never invalidated any part of either statute (which SLUSA amended) — or for that matter, any federal statute regulating the national securities markets — on Commerce Clause grounds. See e.g., North Am. Co. v. SEC, 327 U.S. 686, 696, 66 S.Ct. 785, 90 L.Ed. 945 (1946) (rejecting Commerce Clause challenge to Section 11(b)(1) of the 1933 Act because it is long established "that Congress may deal with and affect the ownership of securities in order to protect the freedom of commerce").
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