Russell Knowles v. TD Ameritrade Holding Corp. ( 2021 )

United States Court of Appeals
For the Eighth Circuit
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No. 19-3684
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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
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Appeal from United States District Court
for the District of Nebraska - Omaha
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Submitted: November 19, 2020
Filed: June 24, 2021
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Before BENTON, ERICKSON, and GRASZ, Circuit Judges. 1
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GRASZ, Circuit Judge.
1
Judge Duane Benton recused himself from further participation in this case
following oral argument and did not participate in the decision. Pursuant to 8th Cir.
R. 47E, the two remaining judges on the panel have decided the case.
Russell Knowles appeals the district court’s 2 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.
2
The Honorable Robert F. Rossiter, Jr., United States District Judge for the
District of Nebraska.
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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.-3-
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
3
Knowles’s brief does not separately address the applicability of SLUSA
preemption to his class action negligence claim. TD Ameritrade argues Knowles’s
negligence claim is similarly preempted by SLUSA because the core of the
negligence claim is rooted in TD Ameritrade’s alleged misrepresentations and
omissions. Therefore, we decide Knowles’s breach of contract claim and his
negligence claim identically under the SLUSA preemption analysis.
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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
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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
individual claims for relief under Federal Rule of Civil Procedure 12(b)(6).
Rule 8 requires a complaint to allege “a short and plain statement of the claim
showing that the pleader is entitled to relief.” Braden v. Wal-Mart Stores, Inc., 588
F.3d 585, 594 (8th Cir. 2009) (quoting Fed. R. Civ. P. 8). To meet Rule 8’s standard
and survive a motion to dismiss, “a complaint must contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is plausible on its face.’” Id. (quoting
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “The plausibility standard requires a
plaintiff to show at the pleading stage that success on the merits is more than a ‘sheer
possibility[,]’” and “a well-pleaded complaint may proceed even if it strikes a savvy
judge that actual proof of the facts alleged is improbable, and ‘that a recovery is very
remote and unlikely.’” Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556
(2007)).
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Knowles argues the district court erred in dismissing his breach of contract
claim because the district court: (1) required Knowles to “clearly establish” his claim
rather than plausibly allege it, and (2) incorrectly interpreted certain Agreement
provisions as a disclaimer from responsibility for the performance of the TLH Tool.
We conclude that these arguments lack merit.
The Agreement provision at issue states TD Ameritrade “does not represent
or guarantee that the objectives of the TLH [Tool] will be met. The performance of
the replacement security may be better or worse than the performance of the security
that is sold for TLH [Tool] purposes.”
Under Nebraska law, the elements of a claim for breach of contract are:
“(1) the existence of a contract; (2) breach of the contract; and (3) damages which
flow from the breach.” United States v. Basin Elec. Power. Coop., 248 F.3d 781,
810 (8th Cir. 2001); accord Phipps v. Skyview Farms, Inc., 610 N.W.2d 723, 730
(Neb. 2000) (“In order to recover in an action for breach of contract, the plaintiff
must plead and prove the existence of a promise, its breach, damage, and compliance
with any conditions precedent that activate the defendant’s duty.”). The district
court dismissed Knowles’s claims, holding that Knowles failed to allege TD
Ameritrade breached any contract terms or promises in the administration of the
TLH Tool.
Despite referencing several contract excerpts throughout the SAC, Knowles
never explicitly identified the contractual provision purportedly violated by TD
Ameritrade. Accordingly, the allegations failed to provide TD Ameritrade with
reasonable notice of the breach of contract claim as required by Rule 8. While
Knowles generally alleged various duties owed by TD Ameritrade “to perform the
contract with care, skill, reasonable expediency, and faithfulness[,]” these vague and
conclusory allegations were insufficient to survive a motion to dismiss under Rule
12(b)(6).
We next consider the dismissal of Knowles’s negligence claims. Under
Nebraska law, “a plaintiff must show a legal duty owed by the defendant to the
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plaintiff, a breach of such duty, causation, and damages.” Baumann v. Zhukov, 802
F.3d 950, 953 (8th Cir. 2015) (quoting A.W. v. Lancaster Cnty. Sch. Dist. 0001, 784
N.W.2d 907, 913 (Neb. 2010)). Pursuant to the economic loss rule, “Nebraska law
bar[s] recovery in tort for economic loss resulting from conduct amounting to a
breach of contract.” Inacom Corp. v. Sears, Roebuck & Co., 254 F.3d 683, 692 (8th
Cir. 2001) (alteration in original).
We conclude that the duty Knowles alleges in his negligence claim arose out
of the contract between the parties and thus activated the economic loss rule, which
precludes a negligence cause of action. Knowles argues his mention of the implied
duty of good faith and fair dealing under his breach of contract claim saves his tort
claim from application of the economic loss rule. But the allegations in the
negligence claim clearly focus on TD Ameritrade’s perceived duties to properly
create, establish, and manage the TLH Tool. These duties are not grounded in tort
law. Knowles has failed to set forth any persuasive argument as to how TD
Ameritrade owed these purported duties independent of a contractual agreement.
We therefore affirm the district court’s dismissal of Knowles’s negligence claim.
C. Futility
Last, we consider Knowles’s alternative argument that if dismissal was
proper, the district court should have given him leave to amend instead of dismissing
the case with prejudice. We review the district court’s dismissal of the SAC with
prejudice for abuse of discretion. See Pet Quarters, Inc. v. Depository Tr. &
Clearing Corp., 559 F.3d 772, 782 (8th Cir. 2009). It is well settled that a district
court may dismiss a complaint with prejudice under Rule 12(b)(6) when amendment
of a complaint would be futile. Id. The district court allowed Knowles to amend his
complaint multiple times, and Knowles was still unable to plead adequate claims.
Accordingly, we conclude the district court did not abuse its discretion in dismissing
the SAC with prejudice.
The judgment of the district court is affirmed.
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