Batchelar v. Interactive Brokers, LLC
| Decision Date | 30 September 2019 |
| Docket Number | Civil No. 3:15-cv-1836(AWT) |
| Citation | 422 F.Supp.3d 502 |
| Parties | Robert Scott BATCHELAR, Plaintiff, v. INTERACTIVE BROKERS, LLC; Interactive Brokers Group, Inc.; and Thomas A. Frank, Defendants. |
| Court | U.S. District Court — District of Connecticut |
Gary N. Reger, Pro Hac Vice, Orgain, Bell and Tucker, LLP, Austin, TX, Larry DeWayne Layfield, Pro Hac Vice, Law Office of L. DeWayne Layfield, PLLC, Beaumont, TX, Christopher M. Mattei, Michael P. Koskoff, William M. Bloss, Koskoff, Koskoff & Bieder, P.C., Bridgeport, CT, for Plaintiff.
Andraya Pulaski Brunau Day Pitney LLP-Htfd-CT Hartford, CT Benjamin M. Rose, Gary J. Mennitt, Dechert LLP, New York, NY, Thomas D. Goldberg, Day Pitney LLP, Stamford, CT, for Defendants.
RULING ON MOTION TO DISMISS
Plaintiff Robert Scott Batchelar ("Batchelar") brings a claim against Interactive Brokers, LLC ("Interactive") alleging that its trading software was negligently designed, and the result was an automatic liquidation of the positions in his account that cost him thousands of dollars more than it should have. He has also sued Interactive's parent company, Interactive Brokers Group, Inc. ("IBG"), under a theory of respondeat superior, and Thomas A. Frank ("Frank"), an officer of IBG, claiming he was personally responsible. The defendants have moved to dismiss these claims pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons set forth below, the motion to dismiss is being denied.
Interactive is a federally licensed online deep-discount broker-dealer. Interactive executes orders on behalf of its customers for a variety of securities. However, Interactive does not provide customers with any investment advice or strategy, and all trades are made at the direction of the customer. This is known in the securities industry as a non-discretionary broker. Customers place their orders to Interactive online, and Interactive then uses a proprietary computer software to automatically execute its customers' orders on various exchanges.
Batchelar was a customer of Interactive starting in August 2011. He had a margin-trading account with Interactive. A margin-trading account allows an investor to purchase securities beyond her cash on hand, with the additional purchase secured by certain collateral in her trading account. However, when a customer's risk threshold becomes too high due to inadequate collateral--called a margin deficiency--federal regulations and the Customer Agreement allow the broker-dealer to liquidate the positions in the account to eliminate the deficiency and the risk to the broker-dealer and the financial system as a whole. Both the regulations and the Customer Agreement permit the broker-dealer to make such a liquidation without notifying the customer.
Interactive's computer software continuously and automatically determines whether there is a margin deficiency in an account. The software compares the margin account requirement (also referred to as the collateral requirement) as determined by Interactive with the net liquidating value of the margin account at that time. If the margin account requirement exceeds the net liquidating value, the software declares a margin deficiency and begins to automatically liquidate the positions in the account without notice. Once it determines a margin deficiency, the software locks the account, cancels all pending trades, and prohibits the customer from depositing additional collateral or ordering particular trades to cure the deficiency while it liquidates the positions. No human interaction or decision-making is involved once the software declares a deficiency.
On August 24, 2015, Interactive's software declared a margin deficiency in Batchelar's account and began liquidating his positions. All that Batchelar held in his account at that time were positions in a security called "SPX put option," which is a derivative on the Standard and Poor's 500 stock index. Batchelar had short-sold these positions, so as the sale price went higher, he lost more money.
After declaring a margin deficiency, the software began liquidating Batchelar's positions. It started at 10:11:15 A.M. and ended at 10:31:37 A.M. In that time, Interactive's software made fifty-one trades at prices ranging from $5.00 to $83.40 per unit. At one point, during a nineteen-second period, the software executed eight trades at prices ranging from $7.00 to $83.40 per unit. This was higher than the going market price for the securities at the time of the sale. Batchelar claims that those transactions disproportionate to the market cost him somewhere between $95,145 and $113,807.
In his Second Amended Complaint, Batchelar alleges that the auto-liquidation was "the result of negligent design, coding, testing and maintenance." (Second Am. Compl. ("SAC") ¶ 65, ECF No. 70.) He alleges that the programming flaws were the result of Interactive's failure to meet industry standards in its design and testing of the software (see id. ¶ 69) and its failure to include certain instructions in the algorithm (see id. ¶¶ 74-75; 74 n.3; 75 n.4). Consequently, Batchelar brings a claim for negligence against Interactive. In addition, he brings a claim for negligence against Frank alleging that Frank is personally responsible for developing, programming, and maintaining the software, and a claim against Frank's employer, IBG, alleging vicarious liability.
When deciding a motion to dismiss under Rule 12(b)(6), the court must accept as true all factual allegations in the complaint and must draw inferences in a light most favorable to the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974). Although a complaint "does not need detailed factual allegations, a plaintiff's obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (citing Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986) ) (on a motion to dismiss, courts "are not bound to accept as true a legal conclusion couched as a factual allegation"). "Nor does a complaint suffice if it tenders naked assertions devoid of further factual enhancement." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 557, 127 S.Ct. 1955 ). "Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all allegations in the complaint are true (even if doubtful in fact)." Twombly, 550 U.S. at 555, 127 S.Ct. 1955 (citations omitted). However, the plaintiff must plead "only enough facts to state a claim to relief that is plausible on its face." Id. at 568, 127 S.Ct. 1955. "The function of a motion to dismiss is ‘merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof.’ " Mytych v. May Dep't Stores Co., 34 F. Supp. 2d 130, 131 (D. Conn. 1999) (quoting Ryder Energy Distribution v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir. 1984) ). "The issue on a motion to dismiss is not whether the plaintiff will prevail, but whether the plaintiff is entitled to offer evidence to support his claims." United States v. Yale New Haven Hosp., 727 F. Supp. 784, 786 (D. Conn. 1990) (citing Scheuer, 416 U.S. at 232, 94 S.Ct. 1683 ).
In its review of a motion to dismiss for failure to state a claim, the court may consider "only the facts alleged in the pleadings, documents attached as exhibits or incorporated by reference in the pleadings and matters of which judicial notice may be taken." Samuels v. Air Transp. Local 504, 992 F.2d 12, 15 (2d Cir. 1993). Goel v. Bunge, Ltd., 820 F.3d 554, 559 (2d Cir. 2016) (quoting Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002) ).
"Absent law from a state's highest court, a federal court sitting in diversity has to predict how the state court would resolve an ambiguity in state law." Haar v. Nationwide Mut. Fire Ins. Co., 918 F.3d 231, 233 (2d Cir. 2019) (quoting Michalski v. Home Depot, Inc., 225 F.3d 113, 116 (2d Cir. 2000) ).
The defendants make three arguments in support of their motion to dismiss the claim against Interactive. First, they assert that Interactive's duties are defined exclusively by the Customer Agreement, that the Customer Agreement expressly authorized Interactive to liquidate the positions in a margin-deficient account, and that under the Customer Agreement Interactive has "sole discretion to determine the assets to be liquidated and the order/manner of liquidation." Supp. of Defs.' Mot. to Dismiss ( ) 18, ECF No. 75-7.) Then, the defendants argue that "Batchelar's negligence claim ‘is essentially an allegation that if [Interactive] had correctly performed its obligations under the contract ... [Batchelar] would not have suffered harm.’ " (Id. at 22.) However, while that may have been the essence of the allegations with respect to the plaintiff's previously dismissed breach of contract claim,1 as reflected in the discussion below, that is not the substance of Batchelar's negligence claim.
Second, the defendants argue that this claim is barred under the economic loss doctrine. "[T]he economic loss doctrine bars negligence claims that arise out of and are dependent on breach of contract claims that result only in economic loss." Ulbrich v. Groth, 310 Conn. 375, 410,...
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Batchelar v. Interactive Brokers, LLC
...of the plaintiff's contract claim, and that can survive even if the contract claim fails." Id.Batchelar v. Interactive Brokers, LLC, 422 F. Supp. 3d 502, 510 (D. Conn. 2019). Specifically referring to the securities-brokerage industry in the proposed question does not affect the applicabili......