Behlen v. Merrill Lynch
| Decision Date | 08 November 2002 |
| Docket Number | No. 01-16424.,01-16424. |
| Parties | Charles H. BEHLEN, individually and on behalf of a class of similarly situated persons and entities, Plaintiff-Appellant, v. MERRILL LYNCH, Phoenix Investment Partners, Ltd., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
Albert L. Jordan, Michael L. Jackson, Wallace, Jordan, Ratliff & Brandt, L.L.C., Birmingham, AL, Joseph M. Druhan, Jr., Mobile, AL, M. Stephen Dampier, Montgomery, AL, Anthony M. Hoffman, Zieman, Speegle, Oldweiler & Jackson, L.L.C., Mobile, AL, for Plaintiff-Appellant.
Luther M. Dorr, Jr., A. Inge Selden, III, Maynard, Cooper, Frierson & Gale, Birmingham, AL, Kelly D. Reese, Mobile, AL, Julie Wilson, Maynard, Cooper & Gale, P.C., Montgomery, AL, D. Brent Baker, Frazer, Greene, Upchurch & Baker, P. Russel Myles, McDowell, Knight, Roedder & Sledge, LLC, Mobile, AL, for Defendants-Appellees.
Appeal from the United States District Court for the Southern District of Alabama.
Before WILSON, RONEY and ALARCON*, Circuit Judges.
Charles H. Behlen, individually and on behalf of a class of similarly situated individuals, appeals the district court's denial of his motion to remand his case to state court and its order dismissing his lawsuit. The district court determined that it had removal and supplemental jurisdiction over the action and therefore denied the motion to remand. The court further determined that the action was barred by the Securities Litigation Uniform Standards Act of 1998 (SLUSA), 15 U.S.C. §§ 77p, 78bb. Thus, the court dismissed Behlen's class-wide claims with prejudice and his individual claims without prejudice. Because we determine that the action was preempted by the SLUSA and subject to dismissal, we affirm.
From November 1999 to March 2000 Behlen purchased shares in a mutual fund known as the Phoenix-Engemann Aggressive Growth Fund. Behlen purchased the shares from Merrill Lynch & Co. and Phoenix Investment Partners, Ltd. (the defendants). On March 15, 2001, Behlen filed a civil action in state court seeking to recover money damages resulting from his purchase of those shares. In his original complaint, which was styled as a class action, Behlen asserted various state law claims, including claims for breach of contract, breach of implied covenants and duties, breach of fiduciary duty, unjust enrichment, suppression, misrepresentation, and negligence and/or wantonness. He alleged that the defendants sold him and the class members Class B shares in the growth fund when they were unknowingly eligible to purchase Class A shares. He further alleged that the defendants sold them the wrong shares, because the Class B shares were subject to higher fees and commissions than the Class A shares.
On April 27, 2001, the defendants removed the lawsuit from state court to the United States District Court for the Southern District of Alabama, asserting that the district court had subject matter jurisdiction over the case pursuant to the SLUSA. Three days later, the defendants filed a motion to dismiss Behlen's complaint. Behlen subsequently filed an amended complaint, in which he asserted the same state law claims, deleted the claims for misrepresentation and suppression, and added claims for money had and received and for an accounting. Behlen also removed all explicit references to any fraudulent activity by the defendants. He argued that the SLUSA was no longer applicable to his claims and filed a motion to remand the case to state court.
The district court ultimately denied Behlen's motion to remand and granted the defendants' motion to dismiss the action, dismissing the class-wide claims with prejudice and Behlen's individual claims without prejudice. This appeal followed.
We review the denial of a motion to remand de novo. Butero v. Royal Maccabees Life Ins. Co., 174 F.3d 1207, 1211 (11th Cir.1999). We also "review[ ] de novo the dismissal of a complaint pursuant to [Federal Rule of Civil Procedure] 12(b)(6)." Oxford Asset Mgmt., Ltd. v. Jaharis, 297 F.3d 1182, 1187 (11th Cir. 2002).
We first address whether the district court had removal jurisdiction over this action. Although Behlen asserted only state law claims in his original complaint, the defendants removed the case to the district court based upon their belief that Behlen actually alleged violations of federal securities laws, which fell within the scope of the SLUSA.
Generally, whether an action raises a federal question "is governed by the `well-pleaded complaint rule,' which provides that federal jurisdiction exists only when a federal question is presented on the face of the plaintiff's properly pleaded complaint." Caterpillar Inc. v. Williams, 482 U.S. 386, 392, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987). Thus, the plaintiff is "the master of the claim ... [and] may avoid federal jurisdiction by exclusive reliance on state law." Id. Furthermore, "a case may not be removed to federal court on the basis of a federal defense, including the defense of pre-emption, even if the defense is anticipated in the plaintiff's complaint, and even if both parties concede that the federal defense is the only question truly at issue." Id. at 393, 107 S.Ct. 2425.
The Supreme Court, however, has recognized "an `independent corollary' to the well-pleaded complaint rule, known as the `complete pre-emption' doctrine." Id. (citation omitted). The Court explained,
On occasion, the Court has concluded that the pre-emptive force of a statute is so extraordinary that it converts an ordinary state common-law complaint into one stating a federal claim for purposes of the well-pleaded complaint rule. Once an area of state law has been completely pre-empted, any claim purportedly based on that pre-empted state law is considered, from its inception, a federal claim, and therefore arises under federal law.
Id. (citation omitted) (internal quotation marks omitted).
Thus, whether a district court has removal jurisdiction over a state law case alleging securities fraud depends upon whether the claims fall within the scope of the SLUSA and are therefore preempted. In making this determination, it is helpful to consider the SLUSA and its historical context.
Congress passed the Private Securities Litigation Reform Act of 1995 (PSLRA), which established uniform standards for class actions alleging securities fraud. The procedural reforms enacted by the PSLRA were intended to prevent plaintiffs from bringing "strike suits"1 in securities matters. H.R. Conf. Rep. No. 105-803, at 13 (1998) (discussing the PSLRA). Congress found that the high costs of defending strike suits often forced defendants to settle meritless class actions. H.R. Conf. Rep. No. 104-369, at 31 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 730. The PSLRA addressed this problem by instituting heightened pleading requirements for class actions alleging fraud in the sale or purchase of national securities.2 Riley v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 292 F.3d 1334, 1340 (11th Cir.), cert. denied, 71 U.S.L.W. 3178 (U.S. Oct. 15, 2002) (No. 02-378). The PSLRA also required a mandatory stay of discovery until the district court could determine the legal sufficiency of the class action claims. See 15 U.S.C. § 78u-4(b)(3)(B).
By 1998, however, it became apparent to Congress that the objectives of the PSLRA were being frustrated, because plaintiffs were evading its heightened pleading requirements by bringing suit in state court rather than federal court. Securities Litigation Uniform Standards Act of 1998, Pub.L. No. 105-353, § 2(2)-(3), 112 Stat. 3227, 3227; Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 108 (2d Cir.2001) (). Congress thus resolved that
in order to prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of the Private Securities Litigation Reform Act of 1995, it is appropriate to enact national standards for securities class action lawsuits involving nationally traded securities, while preserving the appropriate enforcement powers of State securities regulators and not changing the current treatment of individual lawsuits.
As a result, Congress passed the SLUSA, which amended the Securities Act of 1933 and the Securities Exchange Act of 1934 and made federal court, with limited exceptions, the sole venue for class actions alleging fraud in the purchase and sale of covered securities.3 Riley, 292 F.3d at 1341. Congress further mandated that such class actions would be governed by federal law rather than state law. See H.R. Conf. Rep. No. 105-803, at 13. To that end, the SLUSA preempts certain state law claims, allows for removal of state actions to federal court, and requires immediate dismissal of "covered lawsuits." Riley, 292 F.3d at 1341.
A party seeking to remove an action to federal court pursuant to the SLUSA bears the burden of showing that "(1) the suit is a `covered class action,' (2) the plaintiffs' claims are based on state law, (3) one or more `covered securities' has been purchased or sold, and (4) the defendant misrepresented or omitted a material fact `in connection with the purchase or sale of such security.'" Id. at 1342 (emphasis omitted). The district court found that each of these requirements had been met and that the action was therefore removable. Behlen, however, argues that the case was not removable, because the action was not a "covered class action" and the misconduct alleged in the complaint was not "in connection with" the sale or purchase of a security.
Behlen argues that his case was not removable, because it was not a "covered class action." Behlen points...
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