Banks v. N. Trust Corp.

929 F.3d 1046

Lindie L. BANKS, individually and on behalf of all others similarly situated; Erica LeBlanc, Plaintiffs-Appellants,

v.NORTHERN TRUST CORPORATION; Northern Trust Company, Defendants-Appellees.

No. 17-56025

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 15, 2019 Pasadena, California

Filed July 5, 2019

Brian J. Malloy (argued) and Thomas J. Brandi, The Brandi Law Firm, San Francisco, California; Derek G. Howard, Derek G. Howard Law Firm, Mill Valley, California; for Plaintiffs-Appellants.

Craig C. Martin (argued), Brienne M. Letourneau, Amanda S. Amert, Daniel J. Weiss, and Craig C. Martin, Jenner & Block LLP, Chicago, Illinois; for Defendants-Appellees.

Before: Jacqueline H. Nguyen and John B. Owens, Circuit Judges, and John Antoon II,^* District Judge.

OWENS, Circuit Judge:

Lindie Banks and her daughter Erica LeBlanc ("Banks"), hoping to represent a class of plaintiffs, appeal from the dismissal of their putative class action lawsuit against Northern Trust Company and Northern Trust Corporation ("Northern") for violations of state law involving breaches of fiduciary duty by a trustee. The district court interpreted the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") to bar the case from proceeding in federal court. We have jurisdiction under 28 U.S.C. § 1291, and we reverse and remand.

I. FACTUAL AND PROCEDURAL BACKGROUND

Banks is the beneficiary of the irrevocable Lindstrom Trust, created under California law. As trustee, Northern has sole discretion on how to manage the trust’s assets; Banks cannot participate in, direct, or be involved in those decisions.

According to the First Amended Complaint ("FAC"), Northern invested the trust’s assets in Northern’s own affiliated "Funds Portfolio," rather than seeking superior investments outside its financial umbrella. This practice allegedly led to the trust suffering suboptimal returns, which would not have happened if Northern prioritized the interests of the trust beneficiaries (and not merely its own). Banks argues that favoring these inferior affiliated funds — over better-performing non-Northern funds — put money in the pockets of Northern, which thereby violated its duties of prudent investment and loyalty to Banks.

The FAC also alleges that Northern, as part of an "undisclosed internal decision to create a new profit center," charged improper and excessive fees for "routine preparation of fiduciary tax returns" and failed to maintain records to justify these expenses. These new fees, which previously were "part of the base fee and a fundamental duty for a trustee," allegedly breached Northern’s duty of prudent administration.

In addition, the FAC alleges elder abuse and unfair competition claims under California law, both premised on the same factual allegations underlying the investment and fee-related claims.

Northern filed a Rule 12(b)(6) motion to dismiss, contending that SLUSA prohibited these state-law claims from proceeding in federal court. Over Banks’ objection, the district court agreed with Northern and dismissed the FAC without leave to amend. The court reasoned that the allegedly imprudent investments were in connection with the purchase or sale of covered securities and featured material misrepresentations or omissions. The court concluded that SLUSA precluded Banks from bringing state-law fiduciary duty claims as a class action in federal court.

The district court dismissed the fee, elder law, and unfair competition claims without directly addressing them.

II. DISCUSSION

Although Northern moved to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), the parties now agree that Rule 12(b)(1) — lack of subject matter jurisdiction — is the proper rule to challenge a complaint under SLUSA. See Hampton v. Pac. Inv. Mgmt. Co. , 869 F.3d 844, 846–47 (9th Cir. 2017) (holding that Rule 12(b)(1), and not Rule 12(b)(6), governs SLUSA motions to dismiss).

We review de novo whether the district court should have dismissed this case under Rule 12(b)(1). See U.S. ex rel. Hartpence v. Kinetic Concepts, Inc. , 792 F.3d 1121, 1126 (9th Cir. 2015) (en banc).

A. SLUSA does not preclude Banks’ imprudent investment claims.

1. SLUSA

In 1995, Congress passed the Private Securities Litigation Reform Act ("PSLRA"), which limited the filing of federal securities class actions in federal court. Pub. L. No. 104-67, 109 Stat. 737. "[T]o avoid PSLRA’s heightened pleading requirements for class-action securities lawsuits, plaintiffs began asserting what were essentially federal securities law claims as state law causes of action in state courts. Congress sought to end this practice by enacting SLUSA." Northstar Fin. Advisors, Inc. v. Schwab Invs. , 904 F.3d 821, 828 (9th Cir. 2018) (citation omitted). SLUSA prohibits certain state-law class actions:

(1) Class action limitations.

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—

(A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or

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

15 U.S.C. § 78bb(f)(1).

To simplify, SLUSA deprives a federal court of jurisdiction to hear "(1) a covered class action (2) based on state law claims (3) alleging that the defendants made a misrepresentation or omission or employed any manipulative or deceptive device (4) in connection with the purchase or sale of (5) a covered security." Northstar , 904 F.3d at 828.¹

When applying SLUSA to a complaint, courts must "look to the substance of the allegations" to ensure that "artful pleading" does not "remove[ ] the covered words ... but leave[ ] in the covered concepts." Freeman Invs., L.P. v. Pac. Life Ins. Co. , 704 F.3d 1110, 1115 (9th Cir. 2013) (second alteration in original) (quoting Segal v. Fifth Third Bank N.A. , 581 F.3d 305, 311 (6th Cir. 2009) ). With that important principle in mind, we recognize that this case turns primarily on the "in connection with" requirement.² Even assuming Banks adequately alleged that Northern made a misrepresentation or omission or employed a manipulative device or contrivance, we must decide if Northern’s alleged activity was in connection with the purchase or sale of a covered security.

2. The "in connection with" requirement

The Supreme Court twice has spoken about SLUSA and its "in connection with" requirement. In Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit , 547 U.S. 71, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006), the Court stressed that the "in connection with" requirement should be interpreted broadly, as "[a] narrow reading of the statute would undercut the effectiveness of the [PSLRA] and thus run contrary to SLUSA’s stated purpose," which is to prevent state-law class actions from end-running the PSLRA. Id . at 86, 126 S.Ct. 1503. The Court explained that "it is enough that the fraud alleged ‘coincide’ with a securities transaction — whether by the plaintiff or by someone else" — to meet the "in connection with" requirement. Id . at 85, 126 S.Ct. 1503.

In Chadbourne & Parke LLP v. Troice , 571 U.S. 377, 134 S.Ct. 1058, 188 L.Ed.2d 88 (2014), the Court revisited the "in connection with" requirement. The plaintiffs in Troice alleged that the defendants induced victims to purchase uncovered securities (certificates of deposit that are not traded on any national exchange) by falsely stating that covered securities (securities traded on a national exchange) backed the uncovered securities. Id . at 380, 134 S.Ct. 1058. The Court held that SLUSA did not preclude the claims because the statute required "misrepresentations that are material to the purchase or sale of a covered security." Id. at 387, 134 S.Ct. 1058. In discussing materiality, the Court addressed the "in connection with" requirement, which demands "a connection ... where the misrepresentation makes a significant difference to someone’s decision to purchase or to sell a covered security." Id. at 387, 134 S.Ct. 1058 (citing Matrixx Initiatives, Inc. v. Siracusano , 563 U.S. 27, 36–40, 131 S.Ct. 1309, 179 L.Ed.2d 398 (2011) (stating that a misrepresentation or omission is "material" if a reasonable investor would have considered the information significant when contemplating a statutorily relevant investment decision)).

The Court also held that, under SLUSA, "[a] fraudulent misrepresentation or omission is not made ‘in connection with’ ... a ‘purchase or sale of a covered security’ " unless that fraudulent conduct "is material to a decision by one or more individuals (other than the fraudster ) to buy or sell a ‘covered security.’ " Id . at 387, 134 S.Ct. 1058 (emphasis added). The Court stressed that "the ‘someone’ making that decision to purchase or sell must be a party other than the fraudster." Id . at 388, 134 S.Ct. 1058. "If the only party who decides to buy or sell a covered security as a result of a lie is the liar, that is not a ‘connection’ that matters." Id .

The Court was careful to state that Troice did not overrule Dabit , noting:

[I]n Dabit , we held that [SLUSA] precluded a suit where the plaintiffs alleged a "fraudulent manipulation of stock prices" that was material to and " ‘coincide[d]’ with" third-party securities transactions, while also inducing the plaintiffs to "hold their stocks long beyond the point when, had the truth been known, they would have sold." We do not here modify Dabit .

Id . at 387, 134 S.Ct. 1058 (citations omitted). Nevertheless, the Court distinguished Dabit and other dissimilar cases because they "involved a victim who took, tried to take, or maintained an ownership position in the statutorily relevant securities through ‘purchases’ or ‘sales’ induced by the fraud." Id . at 389, 134 S.Ct. 1058. The Court emphasized that "[e]very one of these...