Atkinson v. Morgan Asset Mgmt. Inc.

• Decision Date: 08 September 2011
• Docket Number: No. 09–6265.,09–6265.
• Citation: 658 F.3d 549
• Parties: Richard A. ATKINSON, MD, et al., Plaintiffs–Appellants,v.MORGAN ASSET MANAGEMENT, INC., et al., Defendants–Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

658 F.3d 549

Richard A. ATKINSON, MD, et al., Plaintiffs–Appellants,

v.MORGAN ASSET MANAGEMENT, INC., et al., Defendants–Appellees.

No. 09–6265.

United States Court of Appeals, Sixth Circuit.

Argued: Dec. 10, 2010.Decided and Filed: Sept. 8, 2011.

ARGUED: Vernon Jay Vander Weide, Head, Seifert & Vander Weide, P.A., Minneapolis, Minnesota, for Appellants. David Bruce Tulchin, Sullivan & Cromwell LLP, New York, New York, Matthew M. Curley, Bass, Berry & Sims, PLC, Nashville, Tennessee, Timothy A. Duffy, Kirkland & Ellis LLP, Chicago, Illinois, for Appellees. ON BRIEF: Vernon Jay Vander Weide, Head, Seifert & Vander Weide, P.A., Minneapolis, Minnesota, Jerome A. Broadhurst, Charles D. Reaves, Apperson Crump, Memphis, Tennessee, Richard A. Lockridge, Gregg M. Fishbein, Matthew R. Salzwedel, Lockridge Grindal Nauen P.L.L.P., Minneapolis, Minnesota, for Appellants. David Bruce Tulchin, David E. Swarts, Sullivan & Cromwell LLP, New York, New York, Matthew M. Curley, Michael L. Dagley, Wade Brantley Phillips, Jr., Shayne R. Clinton, Bass, Berry & Sims, PLC, Nashville, Tennessee, Jeffrey B. Maletta, David T. Case, Nicholas G. Terris, Nicole A. Baker, K & L Gates, LLP, Washington, D.C., Timothy A. Duffy, Kristopher Scott Ritter, Kirkland & Ellis LLP, Chicago, Illinois, for Appellees.Before: BOGGS and COOK, Circuit Judges; CARR, District Judge. ^*

OPINION

COOK, Circuit Judge.

Mutual-fund shareholders brought a state-law class action against various fund affiliates. The district court held that the Securities Litigation Uniform Standards Act of 1998 (SLUSA), Pub. L. No. 105–353, 112 Stat. 3227, bars Plaintiffs' claims, and so do we.

I.

Plaintiffs held shares in three mutual funds issued by Morgan Keegan Select Fund, Inc., an open-end investment company. See 15 U.S.C. § 80a–5(a)(1). The company structured these shares as “redeemable securities,” entitling the holders to redemption at any time for their “proportionate share of the issuer's current net assets.” See id. § 80a–2(a)(32).

Like most investments, Plaintiffs' shares lost value between 2007 and 2008; but, unlike most investors, Plaintiffs attributed their losses to fraud. They filed a class action suit in state court against the funds' advisers, officers, directors, distributor, auditor, and affiliated trust company (collectively, Defendants), bringing thirteen state-law claims for breach of contract, violations of the Maryland Securities Act, breach of fiduciary duty, negligence, and negligent misrepresentation. The crux of Plaintiffs' argument was that Defendants took unjustified risks in allocating the funds' assets and concealed these risks from shareholders. Had Plaintiffs been aware of the funds' mismanagement, they claimed, they would have redeemed their shares before they dropped in value.

Defendants removed the state action to federal court under SLUSA, which generally prohibits plaintiffs from using state-law class actions to vindicate fraud-based securities claims. See 15 U.S.C. § 77p(b), (c), (f)(2)(A), (f)(3). Plaintiffs moved for remand, arguing that their case comes within an exception to SLUSA and that, in any event, most of their claims fall outside of SLUSA's scope.

Concluding that SLUSA precludes the action, the district court denied Plaintiffs' motion for remand and dismissed their claims with prejudice.

II.

“SLUSA was not enacted in a vacuum.” Segal v. Fifth Third Bank, N.A., 581 F.3d 305, 308 (6th Cir.2009), cert. denied, ––– U.S. ––––, 130 S.Ct. 3326, 176 L.Ed.2d 1221 (2010). Its story begins with the enactment of the Private Securities Litigation Reform Act of 1995 (PSLRA), Pub. L. No. 104–67, 109 Stat. 737, which sought to curb the “perceived abuses” of federal class-action securities litigation by imposing various burdens on plaintiffs. Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81–82, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006). Facing PSLRA's hurdles, some plaintiffs began to skirt the federal forum by recasting their claims under state law and filing them in state court. Id. at 82, 126 S.Ct. 1503. Congress shut this state-law back door by enacting SLUSA, which prevents “State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of [PSLRA].” Id. (internal quotation marks and citation omitted).

SLUSA precludes claimants from filing class actions that (1) consist of more than fifty prospective members; (2) assert state-law claims; (3) involve a nationally listed security; and (4) allege “an untrue statement or omission of a material fact in connection with the purchase or sale of” that security. 15 U.S.C. § 77p(b), (f)(2)(A), (f)(3); see also Segal, 581 F.3d at 309.

Where, as here, defendants believe that SLUSA precludes the state-court class action that names them, SLUSA authorizes removal to federal court in contemplation of termination of the proceedings. 15 U.S.C. § 77p(c). A plaintiff's subsequent motion to remand that “claim[s] the action is not precluded” then poses “a jurisdictional issue,” and the court has the “adjudicatory power ... to determine its own jurisdiction to deal further with the case.” Kircher v. Putnam Funds Trust, 547 U.S. 633, 643–44, 126 S.Ct. 2145, 165 L.Ed.2d 92 (2006). If the court finds that “the action is precluded [by SLUSA], neither the district court nor the state court may entertain it, and the proper course is to dismiss.” Id. at 644, 126 S.Ct. 2145.

Plaintiffs challenge the district court's denial of their motion to remand and dismissal of their action, arguing that (a) their action falls into the so-called “first Delaware carve-out,” one of SLUSA's saving provisions; (b) regardless of the carve-out, nine of their thirteen claims merit remand to state court because they lack fraud-based allegations; and (c) even if SLUSA ends their case, the district court improperly dismissed their claims with, instead of without, prejudice, based on the court's holding that amendment would be futile.

SLUSA preclusion being a jurisdictional issue, id., we review the district court's SLUSA-based dismissal de novo, see Dixon v. Ashcroft, 392 F.3d 212, 216 (6th Cir.2004). But we give only abuse-of-discretion review to its decision to dismiss Plaintiffs' claims with prejudice. See Brown v. Matauszak, 415 Fed.Appx. 608, 611 (6th Cir.2011).¹

A.

Plaintiffs first contend that their entire action falls within a specific exemption to SLUSA's general reach. This exemption, known as the first Delaware carve-out, preserves a class action otherwise facing SLUSA preclusion if it “involves ... the purchase or sale of securities by the issuer or an affiliate of the issuer exclusively from or to holders of equity securities of the issuer.” 15 U.S.C. § 77p(d)(1)(B).

An initial plain-language difficulty looms large over Plaintiffs' carve-out effort. While they claim, as they must, that their action “involves ... the purchase or sale of securities,” id., it appears to involve no “purchase” or “sale” at all: Plaintiffs already held their mutual-fund shares when Defendants' alleged misconduct began, and they argue only that Defendants deceived them into holding the shares too long.

To overcome this hurdle, Plaintiffs first set their sights on the term “purchase.” They note that while SLUSA does not define this term, the securities acts that SLUSA amended broadly construe “purchase” to include contracts to purchase securities, such as options. See 15 U.S.C. §§ 77b(a)(3), 78c(a)(13). And they argue that we should likewise construe the carve-out to apply to actions that “involve contracts to purchase securities,” and that the funds' obligation to redeem Plaintiffs' shares amounts to an ongoing contract to purchase them.

This contract-to-purchase argument ends where it begins. Even assuming that Plaintiffs have entered a “contract to purchase,” the cases on which they rely confirm that the relevant “purchase” under the carve-out is the acquisition of their “contract,” and they allege no acquisition misconduct. See, e.g., Falkowski v. Imation Corp., 309 F.3d 1123, 1130 (9th Cir.2002) ( “[T]he granting of an option constitutes a ‘purchase or sale’ under SLUSA.” (emphasis added)), abrogated on other grounds by Kircher, 547 U.S. at 633, 126 S.Ct. 2145. These cases transform Plaintiffs not from holders into purchasers, but, at best, into different types of holders—holders of “contracts to purchase.” And Plaintiffs provide no authority for their actual argument: that a fund's redemption obligation under an already-acquired contract to purchase amounts to an indefinitely extending “purchase” under the carve-out.

Turning next to the term “involves,” Plaintiffs argue that, even if they are mere holders, their action still “ involves the purchase or sale of securities.” 15 U.S.C. § 77p(d)(1)(B) (emphasis added). They point to SLUSA's bar on actions alleging fraud “ in connection with the purchase or sale of a ... security,” id. § 77p(b)(1) (emphasis added), and correctly note that Dabit interpreted this to include holder claims, 547 U.S. at 86–87, 126 S.Ct. 1503. Plaintiffs maintain that the distinction between “in connection with,” as used in 15 U.S.C. § 77p(b)(1), and “involves,” as used in its carve-out, amounts to an “insignificant semantic difference”—if the former language includes their action, so must the latter. And they point to a senate report that originally used the “in connection with” terminology in lieu of the actually enacted “involves” as further evidence that Congress intended to use them synonymously. See S.Rep. No. 105–182, at 6 (1998).

Yet the difference between these terms is quite significant, because “in connection with” is a statutorily significant term of art. In deciding that mere holders of securities brought claims “in connection with the purchase or sale of a ... security,” Dabit viewed Congress's inclusion of that term as dispositive. 547 U.S. at 85, 126 S.Ct. 1503. The Court noted that it had previously construed this term broadly, a...