Margaret Richek Goldberg v. Bank of America, N.A.
2017 U.S. App. LEXIS 1111
| 7th Cir. | 2017Background
- Richek (trustee) held a LaSalle custodial account with a "sweep" feature that automatically invested idle cash in mutual funds chosen by the customer.
- After Bank of America acquired LaSalle, customers learned some mutual funds paid "sweep" or reinvestment fees to the Bank that the Bank retained and did not credit to customers or disclose.
- Richek sued in Illinois state court on behalf of a class for breach of contract and breach of fiduciary duty, alleging the Bank retained undisclosed sweep fees in excess of contracted fees.
- The Bank removed the action to federal court under SLUSA (15 U.S.C. § 78bb(f)), which authorizes removal and requires dismissal of covered class actions alleging a material misrepresentation or omission "in connection with the purchase or sale of a covered security."
- The district court dismissed under SLUSA; the Seventh Circuit (per curiam) affirmed, holding the complaint alleged an omission in connection with purchases/sales of covered securities and so was removable and preempted. Judge Flaum concurred (longer analysis). Judge Hamilton dissented, arguing SLUSA should not preempt ordinary contract/fiduciary claims that do not require proof of misrepresentation or omission.
Issues
| Issue | Plaintiff's Argument (Richek) | Defendant's Argument (Bank) | Held |
|---|---|---|---|
| Whether the class action is removable/dismissible under SLUSA because it alleges a material misrepresentation or omission | Richek: Complaint asserts only state-law contract and fiduciary claims, not securities fraud; no required misrepresentation about price/quality/suitability | Bank: Retention and nondisclosure of sweep fees is an omission related to investments in mutual funds (covered securities), thus SLUSA applies | Held: SLUSA applies — complaint alleges a material omission connected to purchases/sales of covered securities; removal and dismissal proper (affirmed) |
| Whether the alleged omission was "in connection with" the purchase or sale of a covered security | Richek: Omission concerned fees, not price/quality/suitability; thus not "in connection with" securities transactions | Bank: Omitting fee disclosure concerning mutual fund sweeps is sufficiently connected to the funds (covered securities) | Held: Omission is "in connection with" the purchase/sale of covered securities (court follows Dabit and Holtz) |
| Whether pleading state-law contract/fiduciary claims insulates plaintiff from SLUSA when the same facts could support a federal securities claim | Richek: Framing as contract/fiduciary claims avoids SLUSA; no fraud/negligent misrepresentation element required to prove breach | Bank: If the state claim rests on an omission/misrepresentation tied to securities transactions, SLUSA preempts regardless of label | Held: If the claim rests on a material misrepresentation/omission that could be pursued under federal securities law, SLUSA preempts even if styled as contract or fiduciary claim (court follows Holtz/Brown) |
| Scope of SLUSA preemption (claim-by-claim or whole-action) | Richek: Even if some claims are preempted, at least contract claim should proceed | Bank: SLUSA supports dismissal of covered class actions; preemption can apply to claims that allege misrepresentations/omissions | Held: The panel did not definitively decide the circuitsplit; concurrence notes circuits differ, but here both fiduciary and contract claims implicated omissions so dismissal of the complaint was warranted |
Key Cases Cited
- Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006) (SLUSA covers state-law class actions that arise from securities transactions even when federal private right would not succeed)
- SEC v. Zandford, 535 U.S. 813 (2002) (material misrepresentations/omissions in securities transactions are actionable under federal securities laws)
- United States v. Naftalin, 441 U.S. 768 (1979) (omissions and misrepresentations in connection with securities transactions fall within federal securities law scope)
- Brown v. Calamos, 664 F.3d 123 (7th Cir. 2011) (interpretive approach to SLUSA; courts should police artful amendments and consider whether fraud allegations are implicated)
- Holtz v. JPMorgan Chase Bank, N.A., 846 F.3d 928 (7th Cir. 2017) (claims alleging secret side payments/steering into certain funds are within SLUSA when they rest on omissions tied to securities transactions)
- Freeman Inv’ts, L.P. v. Pacific Life Ins. Co., 704 F.3d 1110 (9th Cir. 2013) (SLUSA preemption depends on whether plaintiff must prove a misrepresentation/omission to prevail; contract claims that do not require fraud can proceed)
- LaSala v. Bordier et Cie, 519 F.3d 121 (3d Cir. 2008) (SLUSA does not preempt state claims where proof of misrepresentation/omission is inessential)
- In re Kingate Mgmt. Ltd. Litig., 784 F.3d 128 (2d Cir. 2015) (SLUSA preemption applied claim-by-claim; contract/fiduciary claims survive if they do not require proof of misrepresentations/omissions)