Knowles v. TD Ameritrade Holding Corp.

2 F.4th 751

Russell D. KNOWLES, individually and as attorney in fact and personal representative of the estate of Bernard A. Knowles, on behalf of themselves and all others similarly situated; Plaintiffs - Appellants

v.TD AMERITRADE HOLDING CORPORATION ; TD Ameritrade; TD Ameritrade Clearing, Inc.; TD Ameritrade Investment Management, L.L.C., Defendants - Appellees

No. 19-3684

United States Court of Appeals, Eighth Circuit.

Submitted: November 19, 2020

Filed: June 24, 2021

Rehearing and Rehearing En Banc Denied August 13, 2021

Ronald B. Cox, Robert David Proffitt, Proffitt & Cox, Columbia, SC 29223, Jason W. Grams, Lamson & Dugan, Omaha, NE 68114-3743, Alonzo J. Holloway, Brady R. Thomas, Richardson & Patrick, Columbia, SC 29204, for Plaintiff-Appellant.

Victoria H. Buter, Thomas Harlan Dahlk, Kutak & Rock, Omaha, NE 68102-0000, Theodore Kornobis, Stephen G. Topetzes, K & L Gates, L.L.P., Washington, DC 20036-0000, for Defendants-Appellees.

Before BENTON, ERICKSON, and GRASZ, Circuit Judges.¹

GRASZ, Circuit Judge.

Russell Knowles appeals the district court's² order dismissing with prejudice his second amended complaint against TD Ameritrade, Inc. and related entities (collectively, "TD Ameritrade"). We affirm.

I. Background

Knowles held a joint taxable brokerage account with TD Ameritrade. The relationship between Knowles and TD Ameritrade was governed by various agreements, including a "TD Ameritrade Investment Management, LLC Service Agreement" (the "Agreement").

TD Ameritrade offered its customers an optional tax-loss harvesting feature for the investment accounts. Tax-loss harvesting is a strategy designed to lower taxes on stock-trading profits by selling securities at a loss to offset potential capital gains. Certain TD Ameritrade customers had the ability to opt-in to the computerized tax-loss harvesting tool (the "TLH Tool").

The TLH Tool operates by reviewing a customer's account daily to determine if the securities in the customer's account have unrealized losses exceeding a five-percent threshold. If the threshold is met, the TLH Tool automatically sells the securities at a loss. In most cases, the TLH Tool quickly replaces the sold securities by reinvesting in new securities. Knowles alleges the first two times the TLH Tool sold his securities, it promptly replaced the securities by reinvesting in new ones.

On December 24, 2018, certain securities in Knowles's trading account met the five-percent threshold, and the TLH Tool was triggered. But, after selling off a sizable portion of Knowles's securities, the TLH Tool failed to reinvest Knowles's funds in new securities. Knowles alleges the TLH Tool's failure to reinvest left approximately 35% of his account value idle and uninvested for eighteen days. Knowles alleges this failure to reinvest caused him damages exceeding $16,000 during the eighteen-day delay.

Upon investigation, Knowles learned the TLH Tool's failure to reinvest was the result of a systemic glitch that impacted many other customers. The TLH Tool failed to reinvest Knowles's funds in an effort to avoid violating the "Wash Sale Rule," an IRS regulation which prohibits an investor from claiming a tax loss if the investor repurchases the same security either thirty days before or after selling the same security for a loss. 26 U.S.C. § 1091. Knowles alleges TD Ameritrade negligently set up the TLH Tool to toggle sales between only two groups of securities; so, if both groups of securities experienced a five-percent loss within thirty days, the TLH Tool did not have another pool of securities from which to purchase after selling both sets of devalued securities at losses.

Knowles filed this class-action lawsuit against TD Ameritrade, alleging claims for breach of contract and negligence. He alleges TD Ameritrade failed to (1) reasonably prepare for the TLH Tool to trigger the Wash Sale Rule, and (2) create and administer the TLH Tool in a way that would most benefit TD Ameritrade's customers. TD Ameritrade filed a motion to dismiss Knowles's Second Amended Complaint (the "SAC"), and the district court granted the motion, dismissing the case with prejudice. The district court reasoned that the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") preempted Knowles's putative state-law class action claim. The district court further found that even if SLUSA did not apply, Knowles failed to state a plausible claim for breach of contract or negligence. Knowles appeals.

II. Discussion

We review de novo a district court's grant of a motion to dismiss. Glick v. W. Power Sports, Inc. , 944 F.3d 714, 717 (8th Cir. 2019). We "accept[ ] as true all factual allegations in the light most favorable to the nonmoving party[,]" but "need not accept as true a plaintiff's conclusory allegations or legal conclusions drawn from the facts." Id .

A. Preemption

"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." Dudek v. Prudential Sec., Inc. , 295 F.3d 875, 879 (8th Cir. 2002). "Primarily, SLUSA mandates that any class action based on an allegation that a ‘covered security’ was sold or purchased through misrepresentation, manipulation, or deception shall be removable to federal court." Green v. Ameritrade, Inc. , 279 F.3d 590, 595 (8th Cir. 2002) (cleaned up) (quoting In re Lutheran Bhd. Variable Ins. Prods. Co. Sales Prac. Litig. , 105 F. Supp. 2d 1037, 1039 (D. Minn. 2000) ). To establish SLUSA preemption, a party must show:

(1) the action is a "covered class action" under SLUSA, (2) the action purports to be based on state law, (3) the defendant is alleged to have misrepresented or omitted a material fact (or to have used or employed any manipulative or deceptive device or contrivance), and (4) the defendant is alleged to have engaged in conduct described by criterion (3) "in connection with" the purchase or sale of a "covered security."

Id . at 596 (quoting 15 U.S.C. § 78bb(f)(1)(A)-(B) ); accord Sofonia v. Principal Life Ins. Co. , 465 F.3d 873, 876 (8th Cir. 2006).

There is no dispute that Knowles's allegations: (1) assert a covered class action under SLUSA, (2) are based in state law, and (3) involve conduct in connection with the purchase and sale of a covered security.³ The fight is over the third prong of SLUSA's preemptive test—whether Knowles has alleged a misrepresentation or omission by TD Ameritrade or a manipulative or deceptive device employed by TD Ameritrade.

"To determine whether a plaintiff has alleged a misrepresentation or omission of a material fact, we ‘look at the substance of the allegations, based on a fair reading’ of the complaint." Zola v. TD Ameritrade, Inc. , 889 F.3d 920, 924 (8th Cir. 2018) (quoting Kutten v. Bank of Am., N.A. , 530 F.3d 669, 670 (8th Cir. 2008) ). We must dig below the surface of the complaint to review "the conduct alleged, not the words used to describe the conduct." Id . "SLUSA applies if the gravamen of a state law claim ‘involves an untrue statement or substantive omission of a material fact in connection with the purchase or sale of a covered security.’ " Id . (quoting Lewis v. Scottrade, Inc. , 879 F.3d 850, 854 (8th Cir. 2018) ).

Knowles argues the district court erred in holding that his claims are preempted by SLUSA because his claims are not rooted in misrepresentation, but in TD Ameritrade's failure to operate the TLH Tool in the manner promised under the Agreement. We disagree.

"SLUSA does not preclude ‘genuine contract action[s].’ " Zola , 889 F.3d at 924 (alteration in original) (quoting Kurz v. Fidelity Mgmt. & Rsch. Co. , 556 F.3d 639, 641 (7th Cir. 2009) ). For example, courts have held SLUSA preemption does not apply to breach of contract claims when a plaintiff is disputing the meaning of a key term in a contract involving the purchase or sale of securities. See, e.g., Freeman Invs., L.P. v. Pac. Life Ins. Co. , 704 F.3d 1110, 1115–16 (9th Cir. 2013). But, in other cases, a party's failure to keep its promises about the handling of securities can violate federal securities law. Kurz , 556 F.3d at 642. To avoid SLUSA preemption, the allegations must be rooted in interpretation of contract terms and not allegations of misrepresentations or omissions. Freeman , 704 F.3d at 1115.

After reviewing the SAC, we agree with the district court's assessment that "nondisclosure is the linchpin of the investors’ case." The crux of all of Knowles's claims is that TD Ameritrade failed to disclose: (1) how the TLH Tool would operate in the event it triggered the Wash Sale Rule, and (2) the side effects of the TLH Tool's operation when "market conditions soured." Knowles has failed to demonstrate how his claims are connected to the Agreement. While Knowles generally cites to a provision in the Agreement that describes the operation of the TLH Tool, the cited provision does not establish any deadlines for how quickly TD Ameritrade was required to reinvest a client's funds or how the TLH Tool would operate in the event it triggered the Wash Sale Rule.

We therefore hold that SLUSA preempts Knowles's class action claims because Knowles failed to demonstrate these claims are rooted in a violation of any specific contract provision. While, on its face, the operative complaint focuses on TD Ameritrade's alleged improper administration of the TLH Tool, the allegations are insufficient to demonstrate TD Ameritrade breached any contract terms. Therefore, Knowles's class action claims are rooted in TD Ameritrade's omissions in disclosing information about the operation of the TLH Tool, which triggers SLUSA preemption. The district court did not err in dismissing Knowles's class action claims with prejudice on the basis of SLUSA preemption.

B. Dismissal of Individual Breach of Contract and Negligence Claims

Next, we address whether the district court erroneously dismissed Knowles's...