Russell Knowles v. TD Ameritrade Holding Corp.
2f4th751
| 8th Cir. | 2021Background
- Knowles held a TD Ameritrade taxable brokerage account governed by a Service Agreement; he opted into an automated tax-loss harvesting tool (TLH Tool).
- The TLH Tool sells securities with unrealized losses over a 5% threshold and typically reinvests proceeds into replacement securities.
- On December 24, 2018 the TLH Tool sold a large portion of Knowles’s holdings but failed to reinvest, leaving ~35% of his account uninvested for 18 days and causing alleged losses exceeding $16,000.
- The reinvestment failure resulted from a systemic glitch: the TLH Tool toggled between only two pools of securities to avoid violating the IRS Wash Sale Rule, so when both pools hit losses there were no available replacements.
- Knowles sued on behalf of a class and individually for breach of contract and negligence; the district court dismissed with prejudice, finding SLUSA preemption of the class claims and that Knowles failed to state individual claims. The Eighth Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SLUSA preempts the proposed state-law class action | Knowles: claims are contract-based, not misrepresentation/omission, so SLUSA does not apply | TD Ameritrade: claims rest on omissions about TLH operation in connection with securities transactions, triggering SLUSA | Held: SLUSA preempts — allegations substantively rest on nondisclosure about TLH operations, not a genuine contract-interpretation dispute |
| Whether Knowles plausibly alleged breach of contract (individual claim) | Knowles: Agreement described TLH operation; TD failed to operate TLH as promised | TD Ameritrade: complaint fails to identify any specific contract term breached and contains only conclusory duties | Held: Dismissed — complaint did not identify a specific contract provision or factual allegations sufficient to give notice under Rule 8 |
| Whether negligence claim survives despite contract | Knowles: TD owed duties to design and manage TLH reasonably (including implied good faith) | TD Ameritrade: duties arise from contract; economic loss rule bars tort recovery for purely economic losses | Held: Dismissed — negligence claim barred by Nebraska economic loss rule because alleged duties derive from the contract |
| Whether dismissal with prejudice (no further amendment) was an abuse of discretion | Knowles: court should have allowed further amendment | TD Ameritrade: plaintiff already had multiple amendments and still failed to plead adequately | Held: Not an abuse — district court did not err in finding further amendment futile and dismissing with prejudice |
Key Cases Cited
- Zola v. TD Ameritrade, Inc., 889 F.3d 920 (8th Cir. 2018) (look to substance of allegations for SLUSA preemption)
- Dudek v. Prudential Sec., Inc., 295 F.3d 875 (8th Cir. 2002) (SLUSA preemption framework)
- Green v. Ameritrade, Inc., 279 F.3d 590 (8th Cir. 2002) (class actions based on purchase/sale tied to SLUSA removability)
- Freeman Invs., L.P. v. Pac. Life Ins. Co., 704 F.3d 1110 (9th Cir. 2013) (distinguishing genuine contract actions from claims that are effectively securities misrepresentations)
- Kurz v. Fidelity Mgmt. & Rsch. Co., 556 F.3d 639 (7th Cir. 2009) (promises about handling securities can implicate federal securities law)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility standard for pleadings)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility/Iqbal foundation)
- Inacom Corp. v. Sears, Roebuck & Co., 254 F.3d 683 (8th Cir. 2001) (Nebraska economic loss rule bars tort recovery for economic losses arising from contract breaches)
- Pet Quarters, Inc. v. Depository Tr. & Clearing Corp., 559 F.3d 772 (8th Cir. 2009) (district court may dismiss with prejudice when amendment would be futile)
- Glick v. W. Power Sports, Inc., 944 F.3d 714 (8th Cir. 2019) (standard of review for Rule 12(b)(6) dismissal)