Kazimierz Dudek v. Prudential

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 01-2782
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Kazimierz J. Dudek; Margaret Varley *
Dudek, on behalf of themselves and all *
others similarly situated, *
*
Plaintiffs - Appellants, * Appeal from the United States
* District Court for the
v. * Northern District of Iowa.
*
Prudential Securities, Inc., et al., *
*
Defendants - Appellees. *
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Submitted: March 14, 2002
Filed: July 15, 2002
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Before LOKEN, Circuit Judge, GOLDBERG,* Judge of the United States Court of
International Trade, and KYLE,** District Judge.
___________
LOKEN, Circuit Judge.
The Private Securities Litigation Reform Act of 1995 enacted procedural
reforms to enable district courts to weed out meritless class actions alleging fraud in
*
The HONORABLE RICHARD W. GOLDBERG, sitting by designation.
**
The HONORABLE RICHARD H. KYLE, United States District Judge for the
District of Minnesota, sitting by designation.
the purchase and sale of securities. See 15 U.S.C. 77z-1(b), 78u-4(b); Lander v.
Hartford Life & Annuity Ins. Co., 251 F.3d 101, 107 (2d Cir. 2001). An unintended
result was to “dr[i]ve many would-be plaintiffs to file their claims in state court,
based on state law, in order to circumvent the strong requirements established by the
statute.” In re Lutheran Bhd. Variable Ins. Prod. Co. Sales Practices Litig., 105
F. Supp. 2d 1037, 1039 (D. Minn 2000). Congress responded by enacting the
Securities Litigation Uniform Standards Act of 1998 (SLUSA) to “prevent plaintiffs
from seeking to evade the protections that federal law provides against abuse
litigation by filing suit in State, rather than federal, courts.” Id. at 1039, quoting H.R.
Conf. Rep. No. 105-803 (Oct. 9, 1998). SLUSA amended the Securities Act of 1933
and the Securities Exchange Act of 1934 to preempt certain state law claims and to
provide for the removal to federal court of class actions asserting those claims.1
1
The 1933 Act was amended to provide:
(b) 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 --
(1) an untrue statement or omission of a material fact in
connection with the purchase or sale of a covered security; or
(2) that the defendant used or employed any manipulative or
deceptive device or contrivance in connection with the purchase
or sale of a covered security.
(c) Any covered class action brought in any State court involving
a covered security, as set forth in subsection (b), shall be removable to
the Federal district court for the district in which the action is pending,
and shall be subject to subsection (b).
15 U.S.C. § 77p(b) and (c). The same provisions were added to the 1934 Act at 15
U.S.C. § 78bb(f)(1) and (2).
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Plaintiffs filed this class action in Iowa state court alleging improper marketing
of tax-deferred annuities to accounts that already enjoyed tax-deferred status. The
annuities were inappropriate investments, plaintiffs allege, because tax-deferred
accounts did not need the tax benefits, and therefore the extra fees and costs that tax-
deferred annuities entail were a waste of the investors’ money. Defendants removed
the case and moved to dismiss the state law claims as preempted by SLUSA. The
district court2 denied plaintiffs’ motion to remand and dismissed the action. Relying
on Lander, the court held that plaintiffs’ claims must be dismissed because tax-
deferred annuities are securities covered by SLUSA and therefore plaintiffs’ claims
were in substance based upon material misrepresentations and non-disclosures in the
purchase or sale of a covered security.
Plaintiffs appeal, arguing that tax-deferred annuities are not covered securities;
that the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015, precludes the preemption
of state law claims involving tax-deferred annuities, because they are insurance
products; that plaintiffs’ state law claims are not preempted because they are not
grounded in fraud or misrepresentation in the sale of annuities; and that the district
court abused its discretion in denying plaintiffs leave to file an amended complaint.
Reviewing all but the last issue de novo, we reject plaintiffs’ arguments and affirm.
See Gore v. Trans World Airlines, 210 F.3d 944, 948 (8th Cir. 2000), cert. denied,
532 U.S. 921 (2001) (standard of review).
I.
In Lander, plaintiffs commenced a class action asserting state law claims based
upon alleged fraud and misrepresentation in the marketing of tax-deferred variable
annuities. As in this case, defendants removed and moved to dismiss. The Second
2
The HONORABLE EDWARD J. McMANUS, United States District Judge
for the Northern District of Iowa.
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Circuit affirmed the dismissal of the claims as preempted by SLUSA. After a
thorough review and analysis of the relevant statutes, the court concluded (i) that
variable annuities are “covered securities” for purposes of the removal and
preemption provisions of 15 U.S.C. §§ 77p and 78bb(f); and (ii) that the McCarran-
Ferguson Act does not preclude SLUSA preemption of state law claims relating to
variable annuities even thought they are, at least in part, insurance products. Prior to
Lander, then Chief Judge Magnuson of the District of Minnesota reached the same
conclusions in Lutheran Brotherhood, 105 F. Supp. 2d at 1039-42. More recently,
the Ninth Circuit reviewed these issues and followed the Second Circuit’s decision
in Lander. See Patenaude v. The Equitable Life Assur. Soc. of the U.S., 290 F.3d
1020, 1022 (9th Cir. 2002).
On appeal, plaintiffs admit that tax-deferred annuities are securities “covered”
by SLUSA but argue that Lander was nonetheless incorrectly decided. Plaintiffs posit
that SLUSA preemption should be limited to fraud claims affecting the value of
nationally publicly traded securities, and that the McCarran-Ferguson Act should
trump SLUSA preemption in the case of insurance products such as annuities. After
careful review, we reject these contentions for the reasons stated in Lander,
Patenaude, and Lutheran Brotherhood. Plaintiffs further argue their claims are based
upon excessive fee charges, not alleged misconduct in connection with the purchase
or sale of a security, relying on cases holding that SLUSA does not preempt state law
claims arising out of broker/customer disputes not involving transactions in specific
securities, such as the breach of contract claim in Green v. Ameritrade, Inc., 279 F.3d
590 (8th Cir. 2002). See also Gutierrez v. Deloitte & Touche, 147 F. Supp. 2d 584
(W.D. Tex. 2001); Shaw v. Charles Schwab & Co, 128 F. Supp. 2d 1270 (W.D. Cal.
2001). These cases are readily distinguishable. Here, the claim is that defendants’
misconduct caused plaintiffs to invest in inappropriate securities. Regardless of what
made the investments inappropriate, if these are covered fraud claims -- an issue we
take up in Part II of this opinion -- they are claims “in connection with the purchase
or sale of a covered security” for purposes of SLUSA preemption.
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II.
When federal and state law provide overlapping remedies, a plaintiff may
normally avoid federal question jurisdiction by pleading only a cause of action under
state law. See Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987). However, if
Congress has completely preempted a particular area, plaintiff may not avoid federal
question jurisdiction and the preemption of state law claims by artfully concealing the
federal question in an otherwise well-pleaded complaint under state law. See M.
Nahas & Co. v. First Nat’l Bank of Hot Springs, 930 F.2d 608, 612 (8th Cir. 1991);
16 MOORE’S FEDERAL PRACTICE § 107.14[4][b] (Matthew Bender 3d ed.).
Congress has not completely preempted the field of securities regulation. But
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.3
Plaintiffs argue SLUSA does not apply to this case because their complaint did not
allege fraud or a misrepresentation or omission of material fact. The district court
rejected this contention and dismissed plaintiffs’ class action because its “gravamen
. . . involves an untrue statement or substantive omission of a material fact in
connection with the purchase or sale of a covered security.” We agree.
Plaintiffs initially filed this action in New York state court asserting nine
causes of action, including fraud and deceit, breach of fiduciary duty, deceptive
business practices in violation of the New York General Business Law, negligent
misrepresentation, and unjust enrichment. Plaintiffs alleged that defendants
“affirmatively mislead prospective customers into believing that deferred annuities
3
Congress combined preemption with removal of covered class actions to the
federal courts. The express removal provisions of SLUSA are clearly sufficient to
confer Article III “arising under” jurisdiction. See Verlinden B.V. v. Central Bank
of Nigeria, 461 U.S. 480, 494-97 (1983).
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may be appropriate investments for placement into qualified retirement plans, and fail
to disclose the inappropriateness and unsuitability of such investments,” and that
these “practices constitute deceptive and abusive practices in violation of common
and state statutory law and equitable principles . . . .” After defendants removed to
the United States District Court for the Southern District of New York, plaintiffs
voluntarily dismissed the complaint to avoid what they described as “disputed
threshold issues of personal jurisdiction, venue and a motion to transfer.” Plaintiffs
obtained court approval of the dismissal without notice to the class by representing
to the court that they “protected the interests of the Class by refiling essentially the
same action on behalf of the class” in Iowa state court.
Plaintiffs’ Iowa complaint asserts five state law causes of action -- breach of
fiduciary duty by selling “inherently unsuitable and inappropriate” tax-deferred
annuities, unjust enrichment, declaratory and injunctive relief, reformation, and
conspiracy to breach fiduciary duties. Although plaintiffs deleted the allegations of
fraud, misrepresentation, and non-disclosure that permeated their New York
complaint, the fact allegations in the two complaints are otherwise essentially the
same, and the overall target of both complaints is what plaintiffs call defendants’
“general business plan to sell tax-deferred annuities for investment by persons
owning qualified retirement plans.” As the district court recognized, the essence of
both complaints is the unlawful marketing of tax-deferred annuities, either by
misrepresenting their suitability for tax-deferred retirement plans, or by failing to
disclose their unsuitability for such accounts. In substance, both complaints allege
that defendants misstated or omitted material facts in connection with the purchase
and sale of the tax-deferred annuities. Moreover, fairly read, plaintiffs’ Iowa
complaint alleges that defendants “used or employed [a] deceptive device or
contrivance in connection with the purchase or sale of a covered security,” a claim
expressly preempted by 15 U.S.C. §§ 77p(b)(2) and 78bb(f)(1)(B).
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III.
Finally, plaintiffs argue the district court abused its discretion in denying them
leave to file an amended complaint. See Becker v. Univ. of Nebraska, 191 F.3d 904,
908 (8th Cir. 1999) (standard of review). Plaintiffs first raised this issue at the end
of their brief to the district court on the removal and preemption issues, stating that
“if defendants’ motion to dismiss is granted, plaintiffs’ should be permitted to file an
amended complaint.” Plaintiffs did not include a proposed amended pleading, as
Local Rule 15.1 of the Northern District of Iowa requires. Nor did plaintiffs describe
what changes they would make to avoid SLUSA preemption, or what non-futile
federal causes of action they would seek to assert. In these circumstances, the district
court did not abuse its discretion in granting defendants’ motion to dismiss.
The judgment of the district court is affirmed.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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