Daniels v. Morgan Asset Mgmt., Inc.

C. FRED DANIELS, as trustee and litem in substitution for Regions Bank, dba Regions Morgan Keegan Trust as trustee for the Juanita H. Schaffer irrevocable trust; THE TRUST UNDER WILL OF MARY B. WELCH THE TRUST UNDER LAST WILL AND TESTAMENT OF J.S. COOPER FOR BENEFIT OF CORRINE COOPER; THE TRUST UNDER WILL OF WILLIAM THOMAS HARDISON, SR. THE TRUST UNDER WILL OF HORACE SMALL FOR BENEFIT OF ROGER SMALL THE MAMIE C. HOWELL TRUST UNDER AGREEMENT; THE DAVID T. UNDERWOOD JR. REVOCABLE TRUST; THE TRUST FOR NOEL A.M. GAYLOR UNDER LAST WILL AND TESTAMENT OF ANN GAYLOR; THE TRUST UNDER WILL OF JESSE S. COOPER FOR BENEFIT OF JUDITH ANNE CARRAWAY; THE SANDRA CARR REVOCABLE TRUST UNDER AGREEMENT; A CLASS OF ALL SIMILARLY SITUATED TRUSTS AND CUSTODIAL ACCOUNTS, together with their respective trustees, representatives and fiduciaries, Plaintiffs-Appellants, v. MORGAN ASSET MANAGEMENT, INC.; MORGAN KEEGAN & COMPANY, INC.; MK HOLDINGS, INC.; REGIONS FINANCIAL CORPORATION; JAMES C. KELSOE, JR.; ALLEN B. MORGAN, JR.; J. KENNETH ALDERMAN; BRIAN B. SULLIVAN; JOSEPH C. WELLER; J. THOMPSON WELLER; CHARLES D. MAXWELL; MICHELL F. WOOD; DAVID H. TANNEHILL; JOHN BOSTON; CHARLIE A. MURRAY; MATT R. SMITH; DOUG WILLIAMS; GARY PARTRIDGE; JENNY JOHNS; GUILLERMO R. ARAOZ; JOHN 1-20 DOES, Defendants-Appellees.

No. 10-6335

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Dated: August 31, 2012

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION

File Name: 12a0964n.06

ON APPEAL FROM THE

UNITED STATES DISTRICT

COURT FOR THE WESTERN

DISTRICT OF TENNESSEE

OPINION

Before: BATCHELDER, Chief Judge; NORRIS and STRANCH, Circuit Judges.

JANE B. STRANCH, Circuit Judge. A group of trust funds and C. Fred Daniels, as Trustee ad Litem,¹ brought a state-law class action against various corporate affiliates for breach of contract and negligence. Holding that the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), Pub. L. No. 105-353, 112 Stat. 3227, bars Plaintiffs' claims, the district court dismissed the complaint. Plaintiffs argue that their claims are not precluded by SLUSA because they are not based on any untrue statement or omission of material fact nor do they involve the use of any manipulative or deceptive devise in connection with the purchase, sale, or retention of a security. We AFFIRM.

I. FACTUAL AND PROCEDURAL BACKGROUND

Because this appeal arises from dismissal of Plaintiffs' First Amended Complaint, we begin review by accepting as true the facts alleged therein. Regions Bank does corporate-trust business under the name Regions Morgan Keegan Trust ("Regions Trust") and serves as a corporate trustee, custodian, or agent of certain accounts. Acting in this capacity, Regions Trust became the record owner of shares of seven Regions Morgan Keegan mutual funds ("RMK Funds").²

Regions Trust entered into two written Investment Advisory Services Agreements with Morgan Asset Management ("MAM") —the "2003 Contract" and the "2007 Contract"—for theprovision of investment services by MAM. In both Contracts, MAM agreed to recommend investments to be purchased for, or sold from, clients' Trusts and Custodial Accounts. Both Contracts required MAM to perform these services "with ordinary skill and diligence."

Compliance with its contractual duties required MAM to use all available information to continuously evaluate and investigate whether the RMK Funds in which the Trusts and Custodial Accounts were invested remained appropriate and advantageous investments. Plaintiffs allege that negative information concerning the RMK Funds and the vulnerability of their assets was reasonably available to MAM at the end of 2006 and in the first half of 2007, such that MAM should have determined that those funds were no longer appropriate investments. Plaintiffs specifically allege that MAM, Regions Financial, Morgan Keegan, and MK Holdings, Inc. (collectively, the "Regions Morgan Keegan Entity Defendants") "caused the Trust and Custodial Accounts (through Regions Trust as trustee) to make, continue, and hold investments in the RMK Funds during the Class Period, rather than to discontinue and liquidate them." The individually named Defendants were officers, directors, or employees of one or more of the Regions Morgan Keegan Entity Defendants during the relevant time period.

Compared with peer funds, the RMK Funds were disproportionately invested in illiquid securities backed largely by mortgages. Following the adverse market events of 2007 and 2008, the RMK Funds suffered greater losses than those suffered by peer funds and were comparatively slower to rebound. These losses caused the Trusts and Custodial Accounts to suffer substantial financial losses and implicated the fiduciary duties of Regions Trust. Perceiving a potential conflict of interest between its role as a fiduciary for the Trusts and Custodial Accounts and its role as a defendant in several federal securities class actions, Regions Trust petitioned the Probate Court of JeffersonCounty, Alabama to appoint a Trustee ad Litem. The court appointed Plaintiff C. Fred Daniels as Trustee ad Litem for the limited purposes of monitoring, evaluating, and participating in litigation in substitution for Regions Trust on behalf of the Trusts and Custodial Accounts relating to the RMK Funds.

In furtherance of this appointment, Daniels filed at least five other putative class actions against the same or similar defendants in the Western District of Tennessee, each alleging violations of federal securities laws. See Daniels v. Morgan Keegan & Co., Nos. 08-2452 et al., 2009 WL 2749963 (W.D. Tenn. Aug. 26, 2009) (consolidating actions). Daniels filed the present class action in Shelby County Circuit Court on behalf of all Trusts and Custodial Accounts (and their respective trustees, representatives, and fiduciaries) for which Regions Trust is or was a trustee or a directed trustee, custodian, or agent and that owned or held shares in the RMK Funds at any time during the period of November 9, 2006 through November 9, 2009. Plaintiffs brought three claims against the Regions Morgan Keegan Entity Defendants: one breach of contract claim for each of the 2003 and 2007 Contracts and one negligence claim. Plaintiffs also asserted one negligence claim against the individually named Defendants.

The Defendants removed the action to the Western District of Tennessee and moved to dismiss Plaintiffs' complaint on the basis that it failed to meet the pleading requirements of Federal Rule of Civil Procedure 8(a)(2) and its allegations were barred by SLUSA. Plaintiffs amended their complaint by adding additional information about the relationship of the Regions Morgan Keegan Entity Defendants and further allegations about the Defendants' obligations. Defendants again moved to dismiss this First Amended Complaint for substantially the same reasons raised in theirfirst motion. Plaintiffs opposed the Motions to Dismiss and proposed a Second Amended Complaint.

In the First Amended Complaint, Plaintiffs alleged that Regions Financial sits atop a corporate structure of overlapping and interwoven enterprises that includes the other Regions Morgan Keegan Entity Defendants and through which those Defendants, and not MAM, made the ultimate investment determinations with regard to Plaintiffs' Funds. Specifically, and with greater detail in their proposed Second Amended Complaint, Plaintiffs allege that: the Regions Morgan Keegan Entity Defendants operated MAM "as a mere instrumentality, agent, or alter ego"; several Regions Morgan Keegan Entity Defendants had a financial interest in the RMK Funds; and this intertwined corporate structure made it impossible for MAM to exercise independent judgment in determining whether RMK Funds should be purchased or retained. Based on this conduct, Plaintiffs assert the Regions Morgan Keegan Entity Defendants are liable for breaching the 2003 and 2007 Contracts and that all Defendants are liable for negligence.

The district court held that Plaintiffs' claims amounted to allegations that the "Defendants misrepresented how investments would be determined and omitted a material fact: an undisclosed conflict of interest that required Defendants to invest assets of the trusts and custodial accounts in the RMK Funds." Daniels v. Morgan Asset Mgmt., Inc., 743 F. Supp. 2d 730, 738 (W.D. Tenn. 2010). On this basis, the court held that SLUSA precluded Plaintiffs' claims, dismissed the First Amended Complaint, and because amendment would be futile, the court denied Plaintiffs' Motion for Permission to File Second Amended Complaint and dismissed Plaintiffs' suit with prejudice. Plaintiffs challenge the district court's finding of SLUSA preclusion and its judgments dismissing Plaintiffs' First Amended Complaint and denying leave to amend.

II. DISCUSSION

A. Standard of Review

This court reviews a district court's dismissal of complaint under Rule 12(b)(6) de novo. Segal v. Fifth Third Bank, N.A., 581 F.3d 305, 308 (6th Cir. 2009). When considering a motion to dismiss, all well-pled allegations in the complaint are treated as true. Yuhasz v. Brush Wellman, Inc., 341 F.3d 559, 562 (6th Cir. 2003). In order to survive a motion to dismiss under Rule 12(b)(6), allegations "must be enough to raise a right to relief above the speculative level." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). The court must determine whether the allegations plausibly state a claim for relief. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

Denial of leave to amend is normally reviewed for abuse of discretion. Sec. Ins. Co. of Hartford v. Kevin Tucker & Assocs., Inc., 64 F.3d 1001, 1008 (6th Cir. 1995). However, where a district court denies a plaintiff"s motion to amend based on its determination that the amended pleading would not withstand a motion to dismiss, we review the decision de novo. Demings v. Nationwide Life Ins. Co., 593 F.3d 486, 490 (6th Cir. 2010). Finally, we review for abuse of discretion a district court's decision to dismiss...