Burns v. Prudential Securities, No. 3:99CV7643.

CourtUnited States District Courts. 6th Circuit. United States District Court of Northern District of Ohio
Citation116 F.Supp.2d 917
Docket NumberNo. 3:99CV7643.
PartiesDale BURNS, et al., Plaintiffs, v. PRUDENTIAL SECURITIES, et al., Defendants.
Decision Date08 May 2000
116 F.Supp.2d 917
Dale BURNS, et al., Plaintiffs,
PRUDENTIAL SECURITIES, et al., Defendants.
No. 3:99CV7643.
United States District Court, N.D. Ohio, Western Division.
May 8, 2000.

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Thomas A. Hargett, Maddox, Koeller, Hargett & Caruso, Indianapolis, IN, James R. Knepp, II, Robison, Curphey & O'Connell, Toledo, OH, Mark E. Maddox, Maddox, Koeller, Hargett & Caruso, Indianapolis, IN, David P. Meyer, Ricketts & Onda, Columbus, OH, Jon M. Myers, Starr, Austen, Tribbett & Meyers, Logansport, IN, Scott L. Starr, Starr, Austen, Tribbett & Meyers, Logansport, IN, for plaintiffs.

Bernard C. Daley, Ulmer & Berne, Cleveland, OH, Brian M. Eisenberg, Calfee, Halter & Griswold, Cleveland, OH, Stacey M. Garrett, Keesal, Young & Logan, Long Beach, CA, James R. Greene, Keesal, Young & Logan, Long Beach, CA, Robert N. Rapp, Calfee, Halter & Griswold, Cleveland, OH, Terry Ross, Keesal, Young & Logan, Long Beach, CA, Michael N. Ungar, Ulmer & Berne, Cleveland, OH, for Defendants.


CARR, District Judge.

This is a class action case in which plaintiffs, current and former clients of Prudential Securities (Prudential), allege that a broker at Prudential liquidated their accounts without their approval, thereby violating their brokerage contracts. Pending are defendants' motions to dismiss (Docs. 6 and 15) and plaintiffs' motion for remand (Doc. 22). For the following reasons, defendants' motions are denied and plaintiffs' motion is granted.


Plaintiffs are a class of Prudential clients whose accounts were managed by Jeffrey Pickett, a broker employed in Prudential's Marion, Ohio branch office. At the time plaintiffs established their accounts,

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each entered into a contract for brokerage services with Prudential. The brokerage contracts specified that plaintiffs would make investment decisions with regard to their accounts, and that Prudential could not sell, purchase, or otherwise trade account assets without plaintiffs' consent.

Plaintiffs allege that on or about October 8 and 9, 1998, Mr. Pickett, without notice to or authorization from plaintiffs, sold a substantial majority of the stock and other assets in plaintiffs' accounts. Because these sales took place without plaintiffs' consent, they claim that the sales violated their brokerage contracts.

On September 10, 1999, plaintiffs sued Mr. Pickett and Prudential in the Court of Common Pleas of Marion County, Ohio. Plaintiffs' complaint included four state law causes of action: 1) conversion, 2) breach of contract, 3) breach of fiduciary duties, and 4) negligent supervision. (See Doc. 1 at Ex. 1).

Defendants removed the case to federal court. Removal was based on the presumed applicability of a federal statute, the Securities Litigation Uniform Standards Act of 1998 (SLUSA), to plaintiffs' lawsuit. SLUSA amended the Securities Exchange Act of 1934, and it provides for the removal of "covered class actions" based on state law claims alleging either a "misrepresentation or omission of a material fact" or use of "any manipulative device or contrivance" in connection with the purchase or sale of a covered security. See 15 U.S.C. §§ 78bb(f)(1) and (2).

Defendants now move for dismissal under SLUSA. Plaintiffs seek remand to state court, alleging that SLUSA does not apply to this case.


Removal is governed by 28 U.S.C. § 1441, et seq. The Supreme Court has admonished lower courts to read § 1441 narrowly with "[d]ue regard for the rightful independence of state governments. ..." Shamrock Oil & Gas Corp. v. Sheets, et al., 313 U.S. 100, 108-09, 61 S.Ct. 868, 85 L.Ed. 1214 (1941). See also Long v. Bando Manufacturing of America, Inc., 201 F.3d 754, 757 (6th Cir.2000) ("[R]emoval statutes are to be narrowly construed."); Musson Theatrical, Inc., et al. v. Federal Express Corp., 89 F.3d 1244, 1252 (6th Cir.1996) ("The Constitution allows federal courts only a limited and special jurisdiction, and powers not given to the federal courts by Congress are reserved to the primary repositories of American judicial power: state courts."). "Only state-court actions that originally could have been filed in federal court may be removed to federal court by the defendant." Caterpillar Inc., et al. v. Williams, et al., 482 U.S. 386, 392, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987). Absent diversity of citizenship, federal-question jurisdiction is required. Id. See also Franchise Tax Board v. Construction Laborers Vacation, 463 U.S. 1, 10, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983) ("[A] defendant may not remove a case to federal court unless the plaintiff's complaint establishes that the case `arises under' federal law.").

"The presence or absence of federal-question jurisdiction 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, 482 U.S. at 392, 107 S.Ct. 2425 (citing Gully v. First National Bank, 299 U.S. 109, 112-13, 57 S.Ct. 96, 81 L.Ed. 70 (1936)). This rule makes the plaintiff the master of the claim; the plaintiff may avoid federal jurisdiction by exclusive reliance on state law. Id.

Consistent with the well-pleaded complaint rule, a case generally cannot be removed to federal court on the basis of a federal defense, including the defense of preemption. Caterpillar, 482 U.S. at 392-93, 107 S.Ct. 2425. But there is an exception, known as the "complete preemption" doctrine. Id. "On occasion, ... the preemptive force of a statute is so `extraordinary' that it `converts an ordinary state common-law complaint into one stating a

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federal claim for purposes of the well-pleaded complaint rule.'" Id. (citing Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 65, 107 S.Ct. 1542, 95 L.Ed.2d 55 (1987)). Once an area of state law has been completely preempted, any claim purportedly based on that preempted state law is considered, from its inception, a federal claim, and therefore arises under federal law. Id. (citing Franchise Tax Board, 463 U.S. at 24, 103 S.Ct. 2841)). In such cases, the state claims are treated from the outset as federal in nature. Franchise Tax Board, 463 U.S. at 13, 103 S.Ct. 2841. See also Striff v. Mason, 849 F.2d 240, 244 (6th Cir.1988) (the "well-pleaded complaint rule is not absolute," and "an action may be removed `where the real nature of the claim asserted ... is federal, irrespective of whether it is so characterized.'") (citations omitted).

State claims are preempted and therefore removable to federal court only when there is a "clearly manifested" intent by Congress. Taylor, 481 U.S. at 64, 107 S.Ct. 1542. The party seeking removal bears the burden of establishing its right thereto. Her Majesty the Queen in Right of the Province of Ontario v. City of Detroit, 874 F.2d 332, 339 (6th Cir.1989) (citing Wilson v. Republic Iron & Steel Co., 257 U.S. 92, 97-98, 42 S.Ct. 35, 66 L.Ed. 144 (1921)). All doubts are to be resolved against removal. Wilson v. USDA, 584 F.2d 137, 142 (6th Cir.1978).


In this case, the removal issue is dispositive of defendants' motions to dismiss. That is, if I find that defendants properly removed plaintiffs' lawsuit to federal court, then, under SLUSA, it follows that those claims must be dismissed.1 Conversely, if I determine that the case should be remanded to state court, defendants' motions to dismiss will have been made moot.

Thus, the question presented here is relatively straight-forward: did Congress "clearly manifest" a desire, in passing SLUSA, to preempt the kinds of state law claims alleged by plaintiffs in their class action complaint, thereby permitting removal in accordance with the complete preemption doctrine?

Plaintiffs argue that Congress adopted SLUSA to eliminate strike-suits—i.e., suits in which issuers of securities were being accused of defrauding the public by disseminating false prospectuses, tender offers, initial public offerings, proxies, and similar materials. In doing so, plaintiffs assert that Congress took care not to preempt state law claims that traditionally fell outside the purview of the Securities Act. Plaintiffs argue that claims against brokers for breach of contract, such as are asserted in this case, simply are not covered by SLUSA. Plaintiffs further point out that they have made no allegation of securities fraud against defendants, and that none of their state law claims require that they prove fraud.

Defendants counter that plaintiffs' state law claims all are based on Mr. Pickett's alleged failure to inform plaintiffs that their accounts were being liquidated. Such conduct, defendants contend, constitutes

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either 1) a "misrepresentation or omission of a material fact," or 2) use of a "manipulative device or contrivance." See 15 U.S.C. § 78bb(f)(1). This, in defendants' view, brings plaintiffs' complaint within the ambit of SLUSA. (Doc. 1 at ¶ 5).

I agree with plaintiffs. There is little support for defendants' position that Congress clearly manifested an intent to preempt the state law claims alleged by the class in this case.

I. What SLUSA Preempts

In 1998, Congress passed SLUSA to establish the federal courts as the "exclusive venue for most securities fraud class action[s]" involving nationally traded securities. H.R. Conf. Rep. No. 803, 105th Cong., 2d Sess. at 13 (1998) (House Report). By steering most securities fraud cases to the federal courts, SLUSA intended to "prevent plaintiffs from seeking to evade the protections that Federal law provides against abusive litigation by filing suit in State, rather than Federal, court." Id.

The federal protections being evaded by plaintiffs were those contained in the Private Securities Litigation Reform Act of 1995 (PSLRA). Congress passed PSLRA to guard against abusive and meritless "strike" suits. Strike suits are suits designed to "extract a sizable settlement from companies that are forced to settle, regardless...

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