Gallier v. Woodbury Fin. Servs., Inc., CIVIL ACTION NO. H-14-888
| Decision Date | 23 March 2015 |
| Docket Number | CIVIL ACTION NO. H-14-888 |
| Parties | VERNON GALLIER, et al., Plaintiffs, v. WOODBURY FINANCIAL SERVICES, INC., et al., Defendants. |
| Court | U.S. District Court — Southern District of Texas |
This lawsuit arises from the four plaintiffs' investments in variable annuities purchased from 2003 to 2007. The plaintiffs alleged in their state-court petition that the investments were made at the direction of David Mierendorf, a financial advisor and retirement-planning investment professional registered with Woodbury Financial Services, Inc. Woodbury is a citizen of Minnesota. Mierendorf is a citizen of Wisconsin. The plaintiffs are all citizens of Texas.
One of the plaintiffs was retired; the others were nearing retirement. They alleged that following Mierendorf's advice, and based on his promises that they were obtaining a secure investment with a guaranteed lifetime income stream, they cashed out their employer-sponsored retirement plans and invested the proceeds in variable annuities that turned out to be high-risk and lost money. After initiating arbitration proceedings before the Financial Industry Regulatory Authority ("FINRA"), and having that prove unsuccessful, the plaintiffs sued Mierendorf, Woodbury, and Ted Ginsberg — the Woodbury Houston office manager and Mierendorf's supervisor—in Texas state court, alleging breach of contract, unjust enrichment, negligence, breach of fiduciary duty, violations of the Texas Securities Act, violations of the Texas Insurance Code, and breach of warranty.
Woodbury removed on the basis of diversity jurisdiction. Ginsberg, the only other served defendant, consented to the removal. Woodbury's notice of removal asserted that Ginsberg was improperly joined and that his Texas citizenship and in-state status should be disregarded for the purpose of federal removal jurisdiction. The plaintiffs moved to remand, and Woodbury responded. (Docket Entry Nos. 6, 10). Woodbury and Ginsberg also moved to dismiss, to which the plaintiffs responded, and Woodbury replied. (Docket Entry Nos. 19, 20, 22, 23, 24, 25). Woodbury finally moved to confirm the FINRA arbitration award issued in its favor. (Docket Entry No. 18). The plaintiffs opposed the motion to confirm the award solely on the basis that the court lacked subject-matter jurisdiction over the case. (Docket Entry No. 21).
Based on the pleadings; the motions, responses, and replies; the arguments of counsel; and the applicable law, the court denies the motion to remand, dismisses the claims against Ginsberg, and grants the application to confirm the FINRA arbitration award. Woodbury's motion to dismiss is under advisement.
The reasons for these rulings are explained in detail below.
Plaintiffs Caron Gallier, Kathy Temple, and Deborah Harrison were friends who were about to retire from careers in sales for the "Yellow Pages" at AT&T. Plaintiff Vernon Gallier was a retired police officer. Between 2003 and 2007, all four plaintiffs were looking for ways to maximize the benefits they would obtain from their employer-sponsored retirement plan savings. The plaintiffs were referred to Mierendorf, an investment adviser and retirement-financial planner at Woodbury. (Docket Entry No. 1, Ex. B, Original Petition, at ¶ 19). Mierendorf allegedly persuaded the plaintiffs to cash out their employer-sponsored pension plans, which guaranteed them monthly payments after retirement, and invest the proceeds in variable annuities he recommended.Mierendorf allegedly promised the plaintiffs that the annuities would guarantee them an annual income of seven percent of the investment for their lifetimes, more than they would receive under their employer-sponsored plans. (Id. at pp. 7, 9, 15).
The plaintiffs allege that based on the promises of a guaranteed seven percent annual payment, they cashed out their retirement plans — representing their retirement savings — and transferred the money to Woodbury for Mierendorf to invest. They allege that Mierendorf invested all their retirement savings in aggressive high-risk annuities and sold them expensive annuity riders. (Id. at pp. 7-12). The annual fees for these investments were almost 2.5 percent. The plaintiffs withdrew seven percent of their investments each year, usually after checking with Mierendorf. (Id. at pp. 7-8). Mierendorf regularly reassured the plaintiffs that their investments were performing as planned, even after the stock market crashed in 2008. (Id. at pp. 9-10, 13-14). When the plaintiffs asked why their 2008 account statements showed a steep loss, Mierendorf allegedly repeated his prior statements that the annuities were guaranteed to provide them an annual income at a rate of seven percent return and that there was no cause for concern. Mierendorf assured the plaintiffs that they could continue to withdraw the same amount each year and did not need to change the investment approach. (Id. at p. 16).
Mierendorf left Woodbury for another financial services company in December 2009. The plaintiffs transferred their accounts from Woodbury to the new company Mierendorf had moved to. The plaintiffs continued to withdraw seven percent of the annuities every year. Mierendorf continued to reassure the plaintiffs that the investments would provide them this income for the rest of their lives. (Id. at ¶ 52).
Temple met with Mierendorf in April 2010 to discuss cashing out her husband's employer-sponsored retirement plan and investing the proceeds in variable annuities. (Id. at ¶ 58). Templehad invested her own retirement savings with Mierendorf in 2007. Temple and her husband tried to transfer his retirement account to Mierendorf, but the transfer was rejected. (Id. at ¶¶ 60-61). When Temple tried to contact Mierendorf, she learned that his phone had been disconnected. (Id. at ¶ 62). Temple and the other plaintiffs then learned that in November 2011, Mierendorf had left the investment business altogether. (Id.). Neither Mierendorf nor the investment firm he then worked for told the plaintiffs of his departure. (Id.).
In August 2012, the plaintiffs spoke to Carrie Tacker, who was assigned to manage their accounts after Mierendorf left the business. (Id. at ¶ 63). Tacker allegedly told the plaintiffs that she could not understand Mierendorf's investment strategy. She described his behavior as "erratic" and his investment decisions as "reckless." She specifically criticized his failure to diversity his clients' investments and to adjust the investments as market conditions changed. (Id.). Tacker allegedly told the plaintiffs that she could not confirm that the annuities, which were complex, provided the annual income Mierendorf had promised. The plaintiffs alleged that they first became suspicious about Mierendorf after they talked to Tacker. (Id. at ¶ 64).
In April 2013, the plaintiffs filed a demand for arbitration against Woodbury under the FINRA rules. After a hearing, the arbitration panel issued an award finding that the plaintiffs had sought arbitration too late and that their claims were time-barred. The panel dismissed the claims against Woodbury on that basis. The plaintiffs then sued in state court, adding Ginsberg as a defendant. Woodbury removed on the basis of diversity jurisdiction, arguing that Ginsberg was improperly joined and that his citizenship and in-state status should be disregarded.
In the operative state-court pleading, the plaintiffs asserted claims against all the defendants, including Ginsberg, for breach of contract, unjust enrichment, negligence, and violations of theTexas Securities Act.1 The factual allegations naming Ginsberg are limited. The only specific factual allegations against him, as opposed to Mierendorf or the "Defendants" globally, are in paragraph 66 of the state-court petition. Paragraph 66 stated:
Upon information and belief, Ginsberg was the designated manager for Mierendorf at all times relevant to this Petition, charged with ensuring that Mierendorf complied with all applicable contractual obligations, regulations, laws, and industry standards. Throughout the time Plaintiffs had accounts with Woodbury, Ginsberg never once contacted Plaintiffs about the problems within their accounts. Furthermore, Ginsberg failed to properly supervise Mierendorf and prevent him from engaging in the misconduct described above.
Most of the claims in the operative pleading are global. In their breach-of-contract claim, the plaintiffs allege that they are third-party beneficiaries of one or more written contracts between the "Defendants" and FINRA that were breached as a result of the defendants' violation of the FINRA rules. The breaches alleged included Ginsberg's failure to supervise Mierendorf as FINRA Rule 3010 requires. (Id. at ¶ 69). In their unjust-enrichment claim, the plaintiffs allege that the "Defendants" received fees to advise the plaintiffs on their investment accounts but "did not fulfill their reasonably expected duties" to advise them on investments. (Id. at ¶ 126). In their negligence claim, the plaintiffs allege that the "Defendants" "failed to exercise ordinary care and diligence inrecommending that Plaintiffs cash out their employer sponsored retirement plans and invest the proceeds in the investments described above, in recommending that Plaintiffs make withdrawals which were unsustainable, and in failing to properly allocate the funds within each Annuity." (Id. at ¶ 123). In their claims under the Texas Securities Act, TEX. CIV. STAT. Art. 581 et seq., the plaintiffs allege that the "Defendants" misrepresented the risks and benefits of the annuities Mierendorf recommended, making untrue statements and omissions of material facts in connection with the sale of securities. The plaintiffs allege that Woodbury and Ginsberg were "control persons" of Mierendorf and were liable for his conduct. (Id. at ¶ 92).
The threshold issue is this court's...
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