Kenosha Unified School Dist. v. Stifel Nicolaus & Co.

• Decision Date: 10 April 2009
• Docket Number: Case No. 08-C-932.,Case No. 08-C-931.
• Parties: KENOSHA UNIFIED SCHOOL DISTRICT, Kimberly Area School District, School District of Waukesha, West-Allis-West Milwaukee School District, Whitefish Bay School District, Joseph Mangi, Gary M. Kvasnica, Jason P. Demerath, Kurt Wachholz and Shawn M. Yde, Plaintiffs, v. STIFEL NICOLAUS & COMPANY INC., Stifel Financial Corporation, James M. Zemlyak, Royal Bank of Canada Europe, Ltd., RBC Capital Markets Corporation, and RBC Capital Markets Holdings (USA), Inc., Defendants.
• Court: U.S. District Court — Eastern District of Wisconsin

607 F.Supp.2d 967

KENOSHA UNIFIED SCHOOL DISTRICT, Kimberly Area School District, School District of Waukesha, West-Allis-West Milwaukee School District, Whitefish Bay School District, Joseph Mangi, Gary M. Kvasnica, Jason P. Demerath, Kurt Wachholz and Shawn M. Yde, Plaintiffs, v. STIFEL NICOLAUS & COMPANY INC., Stifel Financial Corporation, James M. Zemlyak, Royal Bank of Canada Europe, Ltd., RBC Capital Markets Corporation, and RBC Capital Markets Holdings (USA), Inc., Defendants.

Case No. 08-C-931.

Case No. 08-C-932.

United States District Court, E.D. Wisconsin.

April 10, 2009.

COPYRIGHT MATERIAL OMITTED

Christopher J. Krawczyk, Stephen E. Kravit, Kravit Hovel & Krawczyk SC, Milwaukee, WI, Robert A. Kantas, Shephard

Smith Edwards & Kantas LLP, Houston, TX, for Plaintiffs.

Brian G. Cahill, David J. Turek, Paul F. Heaton, Daniel J. Kennedy, Gass Weber Mullins LLC, Maria Delpizzo Sanders, Terry E. Johnson, Peterson Johnson & Murray SC, Milwaukee, WI, Jeffrey J. Kalinowski, Richard H. Kuhlman, Husch Blackwell Sanders LLP, St. Louis, MO, Andreas A. Frischknecht, Mark A. Kirsch, Clifford Chance U.S. LLP, New York, NY, Stephen M. Nickelsburg, Clifford Chance U.S. LLP, Washington, DC, for Defendants.

DECISION AND ORDER

RUDOLPH T. RANDA, Chief Judge.

Plaintiffs, a group of local school districts and school officials, sued the defendants, a group of investment banking firms as well as the CFO of one of those firms— James Zemlyak. Plaintiffs seek to recover losses allegedly caused by their investment of "$200 million into three Synthetic CDOs created and marketed by the defendants as a safe and secure method of funding plaintiffs' ever-increasing `Other Post-Employment Benefits' liabilities, without increasing the burden on school taxpayers." D. 1-3, Complaint ¶ 25. Plaintiffs allege that defendants' investment scheme caused them losses in excess of $150 million.

This action was originally filed in Milwaukee County Circuit Court. Two groups of defendants filed separate notices of removal. Defendants removed on the basis of diversity jurisdiction, 28 U.S.C. § 1332; the exclusive jurisdiction provision of the Securities Exchange Act, 15 U.S.C. § 78aa; and federal question jurisdiction, 28 U.S.C. § 1331. Once removed, the Court consolidated both actions into one case.

Now before the Court is plaintiffs' timely motion for remand. Plaintiffs argue that the parties lack complete diversity because one of the defendants (James Zemlyak) is a citizen of Wisconsin. Plaintiffs also argue that none of the claims in their complaint present a federal question.

In opposition, defendants argue that the parties are completely diverse because Mr. Zemlyak is a citizen of Missouri. Defendants also argue that one of plaintiffs' claims—a breach of contract, third party beneficiary claim—arises under the exclusive jurisdiction of the Exchange Act. Finally, defendants argue that this claim presents a federal question because it references and relies upon certain regulations enacted pursuant to the Exchange Act by the Financial Industry Regulatory Authority (FINRA).

For the reasons that follow, the Court finds that Zemlyak is a citizen of Wisconsin for jurisdictional purposes. The Court also finds that plaintiffs' third party beneficiary claim does not arise under the exclusive jurisdiction of the Exchange Act and it does not present a substantial federal question. Therefore, plaintiffs' motion for remand is granted.

BACKGROUND

Plaintiffs Kenosha Unified School District, Kimberly Area School District, School District of Waukesha, West Allis-West Milwaukee School District, and Whitefish Bay School District (collectively the School Districts) are the statutorily-authorized, publicly-funded territorial units for school administration for their respective municipalities located in and around Milwaukee County, Wisconsin.

Plaintiffs Joseph T. Mangi, Gary Kvasnica, Jason Demerath, and Kurt Wachholz are all natural persons and Trustees for the various School Districts involved in this lawsuit. All of these individuals are residents of Wisconsin, and all the Trusts for the various School Districts are validly formed and existing under the laws of the State of Wisconsin.

Defendants Stifel Financial Corp. ("Stifel Financial") and Stifel, Nicolaus & Co., Inc. ("Stifel") are foreign corporations incorporated in Missouri with their principal places of business in St. Louis, Missouri. Defendant Royal Bank of Canada Europe, Ltd. ("RBC Europe") is a foreign corporation with its primary place of business in London, United Kingdom. Defendant RBC Capital Markets Corporation ("RBC Capital") is a Minnesota corporation with its principal place of business in New York, NY. Defendant RBC Markets Holdings (USA) Inc. ("RBC Holdings") is a Delaware corporation with its principal place of business in Minneapolis, Minnesota.

The remaining defendant is Mr. Zemlyak. Zemlyak worked for Robert W. Baird & Co. from April 1990 until February 1999. During this time, he rented an apartment in Milwaukee. In February 1999, Zemlyak became the Chief Financial Officer for Stifel Nicolaus in St. Louis. As a "C level" executive of Stifel Financial and Stifel Nicolaus, Mr. Zemlyak performs his numerous duties associated with those jobs from Stifel's headquarters in St. Louis, Missouri. It is impractical for him to do his job from any location other than Stifel's St. Louis headquarters. Stifel maintains 14 offices in Wisconsin, but Zemlyak has never maintained an office in Wisconsin, nor accomplished any appreciable work from any of Stifel's Wisconsin offices.

Zemlyak rented an apartment in St. Louis and lived there until June 2002. In May 2002 he purchased a single-family house in Missouri (the "Laclede Avenue Property"). This house is approximately 2,000 square feet and contains three bedrooms and two-and-one-half baths. Zemlyak purchased the Laclede Avenue Property for $359,101. Zemlyak's future wife (they were dating at the time) Eleni Sommerfeld helped him pick out the Laclede Avenue Property. It was purchased with the expectation that it would be their family home.

In August 2003, Jim and Eleni were married in St. Louis, Missouri. The State of Missouri issued the Zemlyaks' marriage license and the service was performed pursuant to the laws of Missouri.

The Zemlyaks met in the 1990's while Zemlyak worked for Robert W. Baird. At the time of their wedding, Eleni lived in New Berlin, Wisconsin with her two children from a previous marriage. Pursuant to a judgment of divorce, Mrs. Zemlyak has "joint legal custody" of those two children with her ex-husband. The divorce judgment requires that the children spend "fairly equal" time with both parents. The judgment also provides that for Mrs. Zemlyak to move from Wisconsin with her two children, she would likely need the consent of her ex-husband and/or the approval of the Court, based on the "best interest of the children."

Before their marriage, Mr. Zemlyak planned to establish his family's roots at the Laclede Avenue Property in St. Louis. However, Mrs. Zemlyak became ill approximately one month before the couple was married. Thereafter, she began extensive specialized treatment at the University Hospital in Madison, Wisconsin—an institution specifically recognized for its expertise in treating Mrs. Zemlyak's type of illness. Because of the intervening medical situation, as well as the limitations on her ability to move with the two children from her prior marriage, Mrs. Zemlyak chose to remain in Wisconsin and continue treatment for her illness.

In 2003, Mr. Zemlyak acquired Eleni's New Berlin residence.¹ He visited there whenever work allowed, which was initially three out of every four weekends. In 2004, Zemlyak and his wife bought an additional Wisconsin property, located on Hawthorne Drive in Elm Grove (the "Hawthorne Drive Property"). The purchase price was $307,500. Shortly after acquiring the property, the Zemlyaks demolished the single-family home on the Hawthorne Drive Property. The Zemlyaks contracted with Regency Builders, Inc. to construct a new home on the site. The initial amount of the contract was $1,059,880. The Zemlyaks financed the new construction with a mortgage loan through Great Midwest Bank. Zemlyak indicated on the loan application that the Hawthorne Drive Property would be his "primary residence." Construction on the Hawthorne Drive Property was completed in 2006. In the same year, the Zemlyaks sold their New Berlin residence. Zemlyak updated his Wisconsin driver's license to list Hawthorne Drive as his current address. The Hawthorne Drive Property was re-assessed in 2009 and valued at $1,827,000. The dwelling at Hawthorne Drive spans 8,476 square feet and contains five bedrooms and 5.5 baths. Zemlyak pays 100% of the mortgage and property taxes on the Hawthorne Drive Property.

Zemlyak owns or co-owns with his wife four vehicles, all of which are registered and titled in Wisconsin. Of these four, two of the vehicle titles were issued in 2004, the year after Jim and Eleni were wed, including the one car Zemlyak owns independently. The other two vehicles were registered in 2007 and 2008.

In 2006, Jim and Eleni Zemlyak had a child of their own—John Zemlyak—who was born in Waukesha, Wisconsin. John Zemlyak lives (and has always lived) with his mother and two step-brothers at the Hawthorne Drive home. Since his son's birth, Zemlyak increased the frequency of his trips back to Wisconsin from 75% of weekends to 90%. Unless they are traveling on vacation, the Zemlyak family spends every holiday in Wisconsin, celebrates the children's birthdays there, and has rarely visited Missouri together over the past two years.

Mr. Zemlyak and his family worship in Elm Grove and the children attend school there. Zemlyak is also a member of the Western Racquet Club in Brookfield, Wisconsin. When applying for a membership at the club in 2006, Zemlyak listed the Hawthorne Drive Property as his "Home Address"...