Segal v. Fifth Third Bank, N.A.

• Decision Date: 17 September 2009
• Docket Number: No. 08-3576.,08-3576.
• Parties: Daniel J. SEGAL, on behalf of himself, his minor children and all others similarly situated, Plaintiff-Appellant, v. FIFTH THIRD BANK, N.A., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

581 F.3d 305

Daniel J. SEGAL, on behalf of himself, his minor children and all others similarly situated, Plaintiff-Appellant, v. FIFTH THIRD BANK, N.A., et al., Defendants-Appellees.

No. 08-3576.

United States Court of Appeals, Sixth Circuit.

Argued: June 11, 2009.

Decided and Filed: September 17, 2009.

ARGUED: David A.P. Brower, Law Office, New York, New York, for Appellant. Patrick F. Fischer, Keating Muething & Klekamp PLL, Cincinnati, Ohio, for Appellees. ON BRIEF: David A.P. Brower, Law Office, New York, New York, for Appellant. Patrick F. Fischer, Joseph M. Callow, Jr., Rachael A. Rowe, Brian P. Muething, Keating Muething & Klekamp PLL, Cincinnati, Ohio, for Appellees.

Before SUTTON and GRIFFIN, Circuit Judges; LIOI, District Judge.^*

OPINION

SUTTON, Circuit Judge.

Daniel Segal challenges the district court's dismissal of this class action, premised on state-law claims of breach of fiduciary duty and breach of contract, against Fifth Third Bank and its holding company, Fifth Third Bancorp. Because the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), Pub.L. No. 105-353, 112 Stat. 3227, bars Segal's claims, we affirm.

I.

Segal is a beneficiary of trust accounts formerly administered by Fifth Third. In 2007, he sued the Bank on behalf of himself, his children and "all beneficiaries of trust, estate, or other fiduciary accounts for which the Bank ... acted as a ... corporate fiduciary at any time from March 1, 2001 to the present." Am. Compl. ¶ 57. Fifth Third, the complaint alleges, breached its fiduciary and contractual duties to the class in three ways: (1) It invested fiduciary assets in proprietary (and often higher-fee) Fifth Third mutual funds rather than superior funds operated by the Bank's competitors; (2) it promised trust beneficiaries that their fiduciary accounts would receive "individualized" management and breached that agreement by providing standardized and largely automated management, Am. Compl. ¶ 87, often by "relatively inexperienced" and "low-level" employees, Am. Compl. ¶¶ 35(e), 47; and (3) it invested too many of the funds' assets in low-yielding investments in order to cover the accounts' near-term tax liabilities.

Relying on SLUSA, which prohibits individuals from filing class actions involving fifty or more people seeking to vindicate state-law securities-related claims, the district court granted Fifth Third's motion to dismiss for failure to state a claim. This appeal followed.

II.

We give fresh review to a district court's order to dismiss a claim under Civil Rule 12(b)(6). Mitchell v. McNeil, 487 F.3d 374, 376 (6th Cir.2007). We must accept all allegations in the complaint as true. Id. And we must determine whether the allegations plausibly state a claim for relief. Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009).

SLUSA was not enacted in a vacuum. In 1995, Congress passed the Private Securities Litigation Reform Act (PSLRA), Pub.L. No. 104-67, 109 Stat. 737, which curbed "perceived abuses" of federal class-action securities litigation by imposing special requirements and obstacles on claimants filing such actions. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 81, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006); see also 15 U.S.C. §§ 77z-1, 78u-4. After PSLRA became law, some claimants responded by "avoid[ing] the federal forum altogether," bringing "class actions under state law, often in state court" instead. Dabit, 547 U.S. at 82, 126 S.Ct. 1503.

That apparently was not what Congress had in mind. In 1998, it sought to close the gap in coverage by enacting SLUSA. To "prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of" PLSRA, Dabit, 547 U.S. at 82, 126 S.Ct. 1503 (quoting SLUSA, § 2), SLUSA expressly prohibits certain state law class actions:

(1) Class action limitations.

No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging—

(A) an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security; or

(B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.

15 U.S.C. § 77p(b); accord id. § 78bb(f)(1). SLUSA prohibits a claimant from filing a class action when four things are true: (1) the class action is "covered," which means it involves more than fifty members; (2) the claims are based on state law; (3) the action involves a "covered security," which means a nationally listed security; and (4) the complaint alleges "an untrue statement or omission of a material fact in connection with" buying or selling a covered security or a "manipulative or deceptive device or contrivance in connection with" buying or selling a covered security. 15 U.S.C. § 77p(b); accord id. § 78bb(f)(1); see also In re Enron Corp. Sec., 535 F.3d 325, 338-39 (5th Cir. 2008).

The Supreme Court has construed the Act's expansive language broadly. Dabit, 547 U.S. at 85-86, 126 S.Ct. 1503. A former Merrill Lynch stock broker, Dabit filed a state-law class-action securities claim alleging that his employer fraudulently manipulated stock prices, causing him, other brokers and their clients to hold onto overvalued stocks. See id. at 75, 126 S.Ct. 1503. "A narrow reading of the statute," the Court concluded, would fail to respect "ordinary principles of statutory construction," would "undercut the effectiveness" of PSLRA and would "run contrary to SLUSA's stated purpose." Id. at 86, 126 S.Ct. 1503. In holding that the Act barred Dabit's claim, the Court thus "presum[ed] that Congress envisioned a broad construction" of SLUSA's preclusive reach. Id.

Today's parties share some common ground. They agree that this action involves (1) a "covered class action" because it includes more than fifty class members, (2) state-law claims and (3) "covered securities," namely the proprietary Fifth Third mutual funds. See 15 U.S.C. §§ 78bb(f)(5), 77p(f). That leaves the last question: Does the amended complaint allege an "untrue statement" or a "material omission" of fact "in connection with the purchase or sale" of Fifth Third mutual funds or allege that the Bank used a "manipulative or deceptive device or contrivance in connection with the purchase or sale" of Fifth Third mutual funds? See 15 U.S.C. §§ 78bb(f)(1), 77p(b). If either one is true, SLUSA bars the complaint.

Segal's amended complaint alleges misrepresentations, material omissions and manipulation. Consider: it alleges that Fifth Third failed to inform trust beneficiaries that their trust accounts would be invested in proprietary mutual funds; that the Bank carried out a "planned corporate scheme" that was "intended to (and did) lure grantors, testators, and others to designate [Fifth Third as trustee]," Am. Compl. ¶¶ 25, 29; that the Bank purported to "provide planning `advice' under the guise that the advice was customized when, in fact, it [was] not," Am. Compl. ¶ 35; that the Bank "did not deal honestly, ethically, fairly, and/or in good faith" with the class, Am. Compl. ¶ 6; that the Bank intentionally and "knowingly overcharged" its trust clients, Am. Compl. ¶ 75; and that the Bank's policies amounted to a "scheme." Am. Compl. ¶¶ 25, 29, 38-39, 49-51, 59, 64, 66-67, 70, 75, 84. The complaint incorporates each allegation and makes them applicable to all counts of the complaint.

The amended complaint also alleges that Fifth Third made misrepresentations to the trust beneficiaries and otherwise manipulated them "in connection with" the sale of Fifth Third mutual funds, a conclusion that follows from Dabit. See U.S. Mortgage, Inc. v. Saxton, 494 F.3d 833, 844 (9th Cir.2007). The "in connection with" clause, Dabit held, has the same meaning as the same words used in § 10(b) of the Securities Exchange Act of 1934 and Rule 10(b)(5). See Dabit, 547 U.S. at 85-86, 126 S.Ct. 1503; see also 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5(c). Before the passage of SLUSA, courts had construed the "in connection with" clause "flexibly," not "technically and restrictively," S.E.C. v. Zandford, 535 U.S. 813, 819, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002) (internal quotation marks omitted), requiring only that "the fraud alleged coincide with a securities transaction—whether by the plaintiff or by someone else," Dabit, 547 U.S. at 85, 126 S.Ct. 1503 (internal quotation marks omitted). Because Congress could "hardly have been unaware" of this broad construction when it chose to use the same phrase in SLUSA, Dabit held that the same meaning applies to both sets of laws. 547 U.S. at 85, 126 S.Ct. 1503; see Siepel v. Bank of America, 526 F.3d 1122, 1127 (8th Cir.2008); Saxton, 494 F.3d at 844.

The amended complaint satisfies this modest requirement. All of Segal's counts—breach of fiduciary duty, unjust enrichment, breach of contract—revolve around Fifth Third's decision to buy mutual fund shares. Segal's allegations do not merely "coincide" with securities transactions; they depend on them. Cf. Siepel, 526 F.3d at 1124 (concluding that SLUSA prohibits "state-law claims that a trustee breached its fiduciary duty by failing to disclose conflicts of interest in its selection of nationally-traded investment securities"). Under these circumstances, the district court properly concluded that SLUSA requires the dismissal of this complaint.

Segal first quarrels with the district court on the ground that it failed to respect the following disclaimer in his amended complaint: "None of the causes of action stated herein are based upon any misrepresentation or failure to disclose material facts to plaintiff...." Am. Compl. ¶ 2. How, Segal says, can he be tagged with alleging what he expressly disclaimed?

It is not that simple. Courts may look to—they must look to—the substance of a...