Patricia Holtz v. J.P. Morgan Chase Bank, N.A.
2017 U.S. App. LEXIS 1112
| 7th Cir. | 2017Background
- JPMorgan Chase (the Bank) offered portfolio management and sponsored mutual funds; customers invested believing the Bank would act in their best interests.
- Holtz sued on behalf of a class, alleging the Bank incentivized advisers to favor the Bank’s funds (higher fees/lower returns), breaching contract and fiduciary duties.
- Case filed as a class action in federal court; SLUSA (15 U.S.C. §78bb(f)) applies to covered class actions involving securities and requires dismissal of claims alleging material misrepresentations or omissions "in connection with" purchase or sale of a covered security.
- District court dismissed under SLUSA, reasoning Holtz’s claims depend on nondisclosure of the Bank’s incentive structure and thus alleged an omission tied to securities transactions.
- Holtz argued her claims were pure state-law contract/fiduciary claims not dependent on misrepresentation/omission or scienter; the Seventh Circuit rejected that framing and affirmed dismissal.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SLUSA bars Holtz’s state-law class claims | Holtz: claims are contract/fiduciary duties independent of disclosure; no securities omission theory | Bank: claims rest on concealment of adviser incentives and thus allege material omission tied to securities | SLUSA bars the class action—claims depend on nondisclosure of material facts and are "in connection with" securities transactions |
| Whether omitting scienter/reliance avoids SLUSA | Holtz: by not pleading scienter or reliance, suit is not a federal securities action | Bank: substance controls over artful pleading; omission-based claims covered regardless of scienter pleading | Omission-based claims cannot evade SLUSA by omitting scienter; Dabit and circuit precedent control |
| Whether omissions were "in connection with" purchase/sale of covered securities | Holtz: omissions relate to internal incentives, not to a securities transaction | Bank: incentives influenced fund recommendations and investors’ purchase decisions | Omissions occurred in connection with investment decisions; therefore within SLUSA’s scope |
| Whether Holtz can pursue individual (non-class) state-law claims | Holtz sought class remedy for broad relief | Bank: SLUSA only disables covered class actions; individual suits remain available | Holtz may pursue individual (or small-group) state-law claims (under 50 plaintiffs) but not a covered class action; regulatory and state enforcement options remain |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (pleading scienter standard for securities fraud)
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (scienter requirement in private securities fraud actions)
- Dabit v. Merrill Lynch, Pierce, Fenner & Smith Inc., 547 U.S. 71 (SLUSA prevents artful pleading to evade federal securities limits)
- Wharf (Holdings) Ltd. v. United Int’l Holdings, Inc., 532 U.S. 588 (concealed intent not to keep a promise about a securities transaction constitutes securities fraud)
- Northwest, Inc. v. Ginsberg, 134 S. Ct. 1422 (state-law duties that enlarge contractual obligations can be preempted)
- SEC v. Zandford, 535 U.S. 813 ("in connection with" satisfied when broker acts as investor’s agent)
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (materiality standard for omissions)
- Brown v. Calamos, 664 F.3d 123 (7th Cir.) (plaintiff cannot avoid SLUSA by omitting scienter/recharacterizing securities claims)
- Kircher v. Putnam Funds Trust, 403 F.3d 478 (7th Cir.) (characterization of prospectus-based promises and federal preemption issues)