Schulze v. Legg Mason Wood Walker, Inc., Civ. A. No. 93-82J.

• Decision Date: 14 September 1994
• Docket Number: Civ. A. No. 93-82J.
• Citation: 865 F. Supp. 277
• Parties: Winnie L. SCHULZE and Jason C. Schulze and Chad J. Schulze, Plaintiffs, v. LEGG MASON WOOD WALKER, INC., Defendant.
• Court: U.S. District Court — Eastern District of Pennsylvania

865 F. Supp. 277

Winnie L. SCHULZE and Jason C. Schulze and Chad J. Schulze, Plaintiffs, v. LEGG MASON WOOD WALKER, INC., Defendant.

Civ. A. No. 93-82J.

United States District Court, W.D. Pennsylvania.

September 14, 1994.

Loreen M. Kemps, Emerick & Kemps, Duncansville, PA, for plaintiffs.

Mark S. Stewart, Robert R. Baron, Jr., Ballard Spahr Andrews & Ingersoll, Philadelphia, PA, for defendant.

OPINION

D. BROOKS SMITH, District Judge.

Winifred, Jason, and Chad Schulze (the "plaintiffs") seek compensatory and punitive damages from Legg Mason Wood Walker, Inc. ("Legg Mason"), an investment brokerage firm, for selling assets in stock investment accounts held jointly by the plaintiffs and Kenneth Schulze, a delinquent taxpayer, and forwarding the proceeds to the IRS. Legg Mason acted in response to an IRS-issued levy on property owned by Kenneth Schulze.

This action is before me on Legg Mason's notice of removal and motion to dismiss. I find that removal is proper and, further, that the complaint fails to state a claim on which relief can be granted. Accordingly, I will grant Legg Mason's motion to dismiss.

I. FACTS

Kenneth Schulze held three joint stock investment accounts at Legg Mason. One account was registered jointly to Kenneth and Winifred Schulze, the second to Kenneth and Jason Schulze, and the third to Kenneth, Jason, and Chad Schulze. Each account was governed by a Discretionary Account Agreement. The plaintiffs contend that each Agreement, which authorized Legg Mason to trade on the account, established a principal-agent fiduciary relationship between the account owners and Legg Mason. Complaint, ¶¶ 9, 48, 69, and Exh. A attached thereto.

In December 1991 Legg Mason received a Notice of Levy stating that Kenneth Schulze owed the IRS $4537.49 in back taxes and penalties. Complaint, ¶ 73, and Exh. B attached thereto. The Notice stated that "Chapter 64 of the Internal Revenue Code provides a lien for the above tax and statutory additions," and demanded that Legg Mason forward to the IRS a check for the amount of Kenneth Schulze's debt. Exh. B to the Complaint. After receiving another Notice of Levy and further correspondence from the IRS, Legg Mason froze the assets in the three joint accounts and, eventually, sold them and forwarded the proceeds to the IRS. Complaint, ¶¶ 74, 82, 87, 96, and Exhs. C-G attached thereto. The plaintiffs allege that Legg Mason acted without giving them prior notice, much less obtaining their consent. Complaint, ¶¶ 82, 87, 96. The plaintiffs maintain that Legg Mason's failure to obtain their consent before selling the jointly owned assets was tortious.

On February 26, 1993, the plaintiffs filed a complaint in the Court of Common Pleas of Cambria County alleging three state-law causes of action: conversion, breach of fiduciary duty of good faith and loyalty, and breach of fiduciary duty of timely notice. In response, Legg Mason filed a notice of removal, an amended notice of removal, and a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6).

II. DISCUSSION

According to the motion to dismiss, the Internal Revenue Code authorized Legg Mason's actions and, indeed, absolves it from any liability. Legg Mason argues that the plaintiffs' sole remedy is to sue the IRS. The specific federal law on which Legg Mason relies is the civil enforcement provision found in 26 U.S.C. § 7426(a)(1), and the immunity provision found in 26 U.S.C. § 6332(e). Those sections provide:

If ... property has been sold pursuant to a levy, any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States.

26 U.S.C. § 7426(a)(1).

Any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made who, upon demand by the IRS, surrenders such property or rights to property (or discharges such obligation) to the IRS (or who pays a liability under subsection (d)(1)¹) shall be discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment.

Id. § 6332(e) (emphasis added). This Court, of course, lacks jurisdiction to decide the motion to dismiss unless removal is proper. Therefore, I will first address the jurisdiction issue.

A. REMOVAL JURISDICTION

Removal is governed by 28 U.S.C. § 1441. Section 1441(a) provides that removal is proper if the district courts have original jurisdiction over the action. Because the requirements for diversity jurisdiction are not met here,² original jurisdiction must rest on a federal question. Caterpillar Inc. v. Williams, 482 U.S. 386, 392, 107 S.Ct. 2425, 2429, 96 L.Ed.2d 318 (1987); Krashna v. Oliver Realty, Inc., 895 F.2d 111, 113 (3d Cir.1990).

Federal-question jurisdiction exists over actions "arising under" federal law. 28 U.S.C. § 1331. Whether an action "arises under" federal law is governed by the well-pleaded complaint rule, which requires that a federal question be presented on the face of the complaint. Caterpillar, 482 U.S. at 392, 107 S.Ct. at 2429; Krashna, 895 F.2d at 113. If a well-pleaded complaint affirmatively relies on state law alone, and federal law arises only as an anticipated defense, the action is not removable. Caterpillar, 482 U.S. at 393, 107 S.Ct. at 2430; Allstate Ins. Co. v. 65 Sec. Plan, 879 F.2d 90, 93 (3d Cir.1989). "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." Caterpillar, 482 U.S. at 393, 107 S.Ct. at 2430.

There exist, however, two exceptions to the well-pleaded complaint rule. First, under the doctrine of complete preemption, "on occasion ... the pre-emptive force of a federal 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.'" Id. (quoting Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 65, 107 S.Ct. 1542, 1547, 95 L.Ed.2d 55 (1987)). Second, a "case might still `arise under' the laws of the United States if a well-pleaded complaint established that plaintiffs' right to relief under state law requires resolution of a substantial question of federal law in dispute between the parties." Franchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1, 13, 103 S.Ct. 2841, 2848, 77 L.Ed.2d 420 (1983). Legg Mason invokes both these exceptions. See Amended notice of removal, ¶¶ 4(a), 4(b). I will address the arguments in turn.

Are Plaintiffs' State-Law Claims Completely Preempted by Federal Law?

"The complete preemption doctrine holds that `Congress may so completely preempt a particular area, that any civil complaint raising this select group of claims is necessarily federal in character.'" Railway Labor Executives Ass'n v. Pittsburgh & L.E.R.R., 858 F.2d 936, 939 (3d Cir.1988) (quoting Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 63-64, 107 S.Ct. 1542, 1546, 95 L.Ed.2d 55 (1987)). "In such cases, `any complaint that comes within the scope of the federal cause of action created by the federal statute necessarily "arises under" federal law' for purposes of removal based on federal question jurisdiction." Id. (quoting Franchise Tax Bd., 463 U.S. at 24, 103 S.Ct. 2841). Ordinary preemption, which governs whether federal or state substantive law controls an ostensibly state-law claim filed in either federal or state court, differs from complete preemption, which governs not only that question but also whether such a claim filed in state court is removable to federal court. Krashna v. Oliver Realty, Inc., 895 F.2d 111, 114 n. 3 (3d Cir.1990). Simply because a defendant may ultimately prove that a plaintiff's state-law claim is preempted under federal law (and therefore must be dismissed) does not establish that the claim is removable to federal court. Id. (citing Caterpillar Inc. v. Williams, 482 U.S. 386, 398, 107 S.Ct. 2425, 2432-33, 96 L.Ed.2d 318 (1987); Railway Labor, 858 F.2d at 941). This Court is keenly aware that complete preemption "operates in a very narrow area." Railway Labor, 858 F.2d at 942.

The Third Circuit has set out a two-part test to determine whether a state-law claim is completely preempted by federal law. First, the civil enforcement provision of the allegedly preemptive federal statute must "create a federal cause of action vindicating the same interest that the plaintiff's cause of action seeks to vindicate." Allstate Ins. Co. v. 65 Sec. Plan, 879 F.2d 90, 93 (3d Cir.1989) (citing Railway Labor, 858 F.2d at 942-43); accord Krashna, 895 F.2d at 114. Second, there must be "affirmative evidence of a congressional intent to permit removal despite the plaintiff's exclusive reliance on state law." Allstate, 879 F.2d at 93 (citing Railway Labor, 858 F.2d at 942-43); accord Krashna, 895 F.2d at 114.

Arguing that the first requirement is met here, Legg Mason contends that the civil enforcement provision found in 26 U.S.C. § 7426 vindicates the same interest that the plaintiffs seek to vindicate in their state-law claims — their interest in getting back their property. But section 7426 creates a cause of action against the federal government only, not against a third party who surrenders levied property. Because the plaintiffs in this case have chosen to sue the surrendering third party rather than the government, arguably section 7426 does not vindicate the same interest as does plaintiffs' state-law claims. Cf. Avco Corp. v. Aero Lodge No. 735, 390 U.S. 557, 560-61, 88 S.Ct. 1235, 1237-38, 20 L.Ed.2d 126 (1968) (holding that plaint...