DECISION AND ORDER
Plaintiffs, a group of local school districts and school officials, sued the defendants, a group of investment banking firms as well as the CFO of one of those firms— James Zemlyak. Plaintiffs seek to recover losses allegedly caused by their investment of “$200 million into three Synthetic CDOs created and marketed by the defendants as a safe and secure method of funding plaintiffs’ ever-increasing ‘Other Post-Employment Benefits’ liabilities, without increasing the burden on school taxpayers.” D. 1-3, Complaint ¶ 25. Plaintiffs allege that defendants’ investment scheme caused them losses in excess of $150 million.
This action was originally filed in Milwaukee County Circuit Court. Two groups of defendants filed separate notices of removal. Defendants removed on the basis of diversity jurisdiction, 28 U.S.C. § 1332; the exclusive jurisdiction provision of the Securities Exchange Act, 15 U.S.C. § 78aa; and federal question jurisdiction, 28 U.S.C. § 1331. Once removed, the Court consolidated both actions into one case.
Now before the Court is plaintiffs’ timely motion for remand. Plaintiffs argue that the parties lack complete diversity because one of the defendants (James Zemlyak) is a citizen of Wisconsin. Plaintiffs also argue that none of the claims in their complaint present a federal question.
In opposition, defendants argue that the parties are completely diverse because Mr. Zemlyak is a citizen of Missouri. Defendants also argue that one of plaintiffs’ claims — a breach of contract, third party beneficiary claim — arises under the exclusive jurisdiction of the Exchange Act. Finally, defendants argue that this claim presents a federal question because it references and relies upon certain regulations enacted pursuant to the Exchange Act by the Financial Industry Regulatory Authority (FINRA).
For the reasons that follow, the Court finds that Zemlyak is a citizen of Wisconsin for jurisdictional purposes. The Court also finds that plaintiffs’ third party beneficiary claim does not arise under the exclusive jurisdiction of the Exchange Act and it does not present a substantial federal question. Therefore, plaintiffs’ motion for remand is granted.
BACKGROUND
Plaintiffs Kenosha Unified School District, Kimberly Area School District, School District of Waukesha, West AllisWest Milwaukee School District, and Whitefish Bay School District (collectively the School Districts) are the statutorily-authorized, publicly-funded territorial units for school administration for their respective municipalities located in and around Milwaukee County, Wisconsin.
Plaintiffs Joseph T. Mangi, Gary Kvasnica, Jason Demerath, and Kurt Wachholz are all natural persons and Trustees for the various School Districts involved in this lawsuit. All of these individuals are residents of Wisconsin, and all the Trusts for the various School Districts are validly formed and existing under the laws of the State of Wisconsin.
The remaining defendant is Mr. Zemlyak. Zemlyak worked for Robert W. Baird & Co. from April 1990 until February 1999. During this time, he rented an apartment in Milwaukee. In February 1999, Zemlyak became the Chief Financial Officer for Stifel Nicolaus in St. Louis. As a “C level” executive of Stifel Financial and Stifel Nicolaus, Mr. Zemlyak performs his numerous duties associated with those jobs from Stifel’s headquarters in St. Louis, Missouri. It is impractical for him to do his job from any location other than Stifel’s St. Louis headquarters. Stifel maintains 14 offices in Wisconsin, but Zemlyak has never maintained an office in Wisconsin, nor accomplished any appreciable work from any of Stifel’s Wisconsin offices.
Zemlyak rented an apartment in St. Louis and lived there until June 2002. In May 2002 he purchased a single-family house in Missouri (the “Laclede Avenue Property”). This house is approximately 2,000 square feet and contains three bedrooms and two-and-one-half baths. Zemlyak purchased the Laclede Avenue Property for $359,101. Zemlyak’s future wife (they were dating at the time) Eleni Sommerfeld helped him pick out the Laclede Avenue Property. It was purchased with the expectation that it would be their family home.
In August 2003, Jim and Eleni were married in St. Louis, Missouri. The State of Missouri issued the Zemlyaks’ marriage license and the service was performed pursuant to the laws of Missouri.
The Zemlyaks met in the 1990’s while Zemlyak worked for Robert W. Baird. At the time of their wedding, Eleni lived in New Berlin, Wisconsin with her two children from a previous marriage. Pursuant to a judgment of divorce, Mrs. Zemlyak has “joint legal custody” of those two children with her ex-husband. The divorce judgment requires that the children spend “fairly equal” time with both parents. The judgment also provides that for Mrs. Zemlyak to move from Wisconsin with her two children, she would likely need the consent of her ex-husband and/or the approval of the Court, based on the “best interest of the children.”
Before their marriage, Mr. Zemlyak planned to establish his family’s roots at the Laclede Avenue Property in St. Louis. However, Mrs. Zemlyak became ill approximately one month before the couple was married. Thereafter, she began extensive specialized treatment at the University Hospital in Madison, Wisconsin — an institution specifically recognized for its expertise in treating Mrs. Zemlyak’s type of illness. Because of the intervening medical situation, as well as the limitations on her ability to move with the two children from her prior marriage, Mrs. Zemlyak chose to remain in Wisconsin and continue treatment for her illness.
In 2003, Mr. Zemlyak acquired Eleni’s New Berlin residence.
1
He visited there
Zemlyak owns or co-owns with his wife four vehicles, all of which are registered and titled in Wisconsin. Of these four, two of the vehicle titles were issued in 2004, the year after Jim and Eleni were wed, including the one car Zemlyak owns independently. The other two vehicles were registered in 2007 and 2008.
In 2006, Jim and Eleni Zemlyak had a child of their own — John Zemlyak — who was born in Waukesha, Wisconsin. John Zemlyak lives (and has always lived) with his mother and two step-brothers at the Hawthorne Drive home. Since his son’s birth, Zemlyak increased the frequency of his trips back to Wisconsin from 75% of weekends to 90%. Unless they are traveling on vacation, the Zemlyak family spends every holiday in Wisconsin, celebrates the children’s birthdays there, and has rarely visited Missouri together over the past two years.
Mr. Zemlyak and his family worship in Elm Grove and the children attend school there. Zemlyak is also a member of the Western Racquet Club in Brookfield, Wisconsin. When applying for a membership at the club in 2006, Zemlyak listed the Hawthorne Drive Property as his “Home Address” and the Laclede Avenue Property in Missouri as his “Other Address.” In 2008, Zemlyak changed his club membership status from “Social Swim” to “Class A.” Zemlyak never sought Non-Resident status, which is less expensive and enjoys the same privileges as Class A membership.
Mr. Zemlyak registered to vote in St. Louis beginning with the 2000 election. Since 1999, Zemlyak pays taxes as a resident of Missouri and the City of St. Louis. Zemlyak’s tax filings in Wisconsin are as a non-resident. The sole address of Zemlyak’s FINRA license is that of Stifel’s office in St. Louis. Zemlyak’s primary banking relationship is in St. Louis with Stifel Bank & Trust. Zemlyak’s doctors, dentist and attorney are located in St. Louis. Zemlyak’s life insurance policy is located in St. Louis. Zemlyak’s birth certificate is located in St. Louis. Zemlyak receives his personal mail, including paychecks and personal bills, in St. Louis. Zemlyak and his wife joined the Basilica in St. Louis after marrying in 2003. Zemlyak is a member of the Missouri Athletic Club in St. Louis, where he incurs approximately $700 per month in charges, in addition to $300 in monthly dues. His use of the Western Racquet Club in Brookfield is infrequent, and the membership is primarily for the benefit of his children. Approx
For his part, Mr. Zemlyak intends that his family will ultimately join him in St. Louis, where he lives and works. He states that he has no intention to leave St. Louis.
ANALYSIS
I. Removal
The burden of establishing jurisdiction in a removal case rests on the party seeking removal.
See Tylka v. Gerber Products Co.,
Courts interpret the removal statutes narrowly with the implicit understanding that a plaintiff is free to choose his forum.
See Doe v. Allied-Signal, Inc.,
II. Diversity of citizenship
Federal courts “shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000 and is between citizens of different states.” § 1332(a)(1). For the Court to exercise jurisdiction under the diversity statute, there must be “complete diversity between all the plaintiffs and all the defendants.”
Kauth v. Hartford Ins. Co. of Ill.,
“‘Citizenship’ for purposes of § 1332 means domicile rather than residence.”
Denlinger v. Brennan,
For diversity purposes, domicile is
“a
state of mind which must be evaluated through the circumstantial evidence of a person’s manifested conduct.”
Sadat v. Mertes,
Courts entertain a presumption in favor of an individual’s old, established domicile.
See Texas v. Florida,
The parties agree that Zemlyak was a Missouri resident until some time in 2003. Therefore, the presumption in favor of an old, established domicile takes effect. To overcome this presumption, plaintiffs must produce “enough evidence substantiating a change to withstand a motion for summary judgment or judgment as a matter of law on the issue.”
McCann,
Considering all of the evidence pertaining to Mr. Zemlyak’s domicile, there is evidence pointing towards both Wisconsin and Missouri. While no one factor is determinative, “the residence of a married person’s spouse and children (if the couple has not separated) is given considerable weight.”
Nat’l Artists Mgmt. Co. v. Weaving,
Mr. Zemlyak’s stated intention that he wants to bring his family to Missouri is not enough to overcome the fact that his family lives in Wisconsin. Taking Mr. Zemlyak at his word, there is no evidence in the record suggesting that this will ever actually happen in the future, especially in light of his wife’s medical condition and the requirement to keep her children in Wisconsin. In any event, Mr. Zemlyak’s stated intent is irrelevant for jurisdictional purposes. All that matters is citizenship at the time of the lawsuit. So long as his family resides in Wisconsin, Mr. Zemlyak always has the intention of returning to his home in Wisconsin to be with his family. Mr. Zemlyak works in Missouri, but he works for the benefit of .his family and household in Wisconsin. The presence of Zemlyak’s family at a primary residence in Wisconsin' demonstrates that the “center of gravity” for his life is in Wisconsin.
See Galva Foundry Co. v. Heiden,
Mr. Zemlyak argues that his vehicle registrations in Wisconsin, his Wisconsin driver’s license, his mortgage loan application for the Wisconsin residence, and his racquet club membership in Wisconsin cannot be held against him because domicile or citizenship cannot be proved by estoppel.
See Galva Foundry,
The “main contemporary rationale” for allowing suit under the diversity jurisdiction “is to protect nonresidents from the possible prejudice that they might encounter in local courts.”
Galva Foundry,
This case proves the observation that in the age of “second homes and speedy transportation, picking out a single state to be an indiyidual’s domicile can be a diffi
Accordingly, the appropriate procedure in a removal case is to resolve all doubts in favor of remand and against the exercise of federal jurisdiction. Plaintiffs, after all, are entitled to their choice of forum and are considered masters of their own complaint. The presumption against the exercise of federal jurisdiction is all too necessary when the facts pertaining to domicile are in such apparent conflict. 4 Ultimately, defendants failed to meet their burden of demonstrating by a preponderance of the evidence that Zemlyak’s domicile is in Missouri.
III. Federal question
An action can be removed if the federal courts have “original jurisdiction founded on a claim or right arising under the Constitution, treaties or laws of the United States.” 28 U.S.C. § 1441(b). “The presence or absence of federal-question jurisdiction is governed by the ‘well-pleaded complaint rule,’ which provides that federal jurisdiction exists only when a federal question is presented on the face of the plaintiffs properly pleaded complaint.”
Caterpillar, Inc. v. Williams,
A. Exchange Act
Enacted in 1934, the Exchange Act is one of six federal securities acts. “While the [Exchange] Act provides for direct market oversight by the Securities Exchange Commission (SEC), the day-to-day trading activities of market professionals, like Defendants, are overseen by ‘self-regulatory organizations’ (SROs) such as the New York Stock Exchange (NYSE) or the National Association of Securities Dealers (NASD).”
Lippitt v. Raymond James Fin. Servs., Inc.,
One of plaintiffs’ claims is a breach of contract, third party beneficiary claim. Plaintiffs allege that “Stifel and RBC Global have contracted with self-regulatory organizations, including FINRA, to follow the regulations set forth to protect the investing public, including the Plaintiffs, but breached those agreements causing harm to the Plaintiffs, the intended beneficiary of such agreements.” Complaint, ¶ 160. Plaintiffs allege that “Stifel and RBC Global violated relevant rules, regulations, and customs of FINRA, including but not limited to: Rule 2110 (Standards of Commercial Honor and Principles of Trade); Rule 2120 (Use of Manipulative, Deceptive or Other Fraudulent Devices); Rule 2310 (Suitability of Recommendations to Customers), including IM-2310-2 (Fair Dealing with Customers); and Rule 3010 (Supervision of Registered Representatives).” Complaint, ¶ 161.
The relevant jurisdictional inquiry is whether plaintiffs’ claim was brought to “enforce any liability or duty
created
by” the Exchange Act or the FINRA rules cited in the complaint.
See Lippitt,
This case is distinguishable from cases where an SRO (like FINRA) is sued under state law.
See, e.g., DAlessio v. N.Y. Stock Exch.,
By contrast, defendants in this case are securities dealers who are members of FINRA. This was the relevant distinction in
Roskind,
because “[although the Exchange Act expressly requires that a self-regulatory organization comply with its own rules and that dealers comply with the Exchange Act,
it does not expressly require NASD members to comply with NASD rules nor does it recognize a right of action against a dealer for NASD violations.”
Defendants invoke the artful pleading doctrine, an exception to the well-pleaded complaint rule which “allows courts to look beyond a plaintiffs characterization of a claim to determine whether a claim truly arises under federal law.”
Collins v. Ralston Purina Co.,
In reality, complete preemption is a “federal jurisdiction doctrine” which permits “recharacterization of a plaintiffs state law claim as a federal claim so that removal is proper.”
Moran v. Rush Prudential HMO, Inc.,
B. Substantial federal question
Defendants also attempt to assert jurisdiction under the “substantial federal question” doctrine. Where state law creates the plaintiffs cause of action, there is no federal question jurisdiction unless “some substantial, disputed question of federal law is a necessary element ... of the well-pleaded state claim ...”
Franchise Tax Bd. v. Construction Laborers Vacation Trust,
Plaintiffs’ third-party beneficiary claim is predicated upon the alleged violation of various FINRA rules, regulations and customs. While these rules are enacted pursuant to the Exchange Act, they are
not
enacted directly by Congress or the SEC. FINRA is a private organization. Therefore, it is inaccurate to assume that the interpretation of these rules presents a substantial federal issue in the first instance. Reliance upon a violation of those rules to establish liability under state law does not provide a right to removal.
See, e.g., Ford,
However, even if plaintiffs’ third-party beneficiary claim presents a “contested and substantial federal question, the exercise of federal jurisdiction is subject to a possible veto.”
Grable
at 313,
28 U.S.C. § 1447(c) allows the Court to “require payment of just costs and any actual expenses, including attorney fees, incurred as a result of the removal.” Attorney fees may be awarded under § 1447(c) only when the removing party “lacked an objectively reasonable basis for seeking removal.”
Martin v. Franklin Capital Corp.,
NOW, THEREFORE, BASED ON THE FOREGOING, IT IS HEREBY ORDERED THAT:
1. Plaintiffs’ motion for remand [D. 13] is GRANTED;
2. Plaintiffs’ motion for costs and fees [D. 13] is DENIED; and
3. The Clerk of Court is directed to REMAND this matter to Milwaukee County Circuit Court.
SO ORDERED.
Notes
. He did so in exchange for a condominium located in New Berlin, Wisconsin that Zemlyak purchased in 2000 for investment purposes. Zemlyak never lived in the New Berlin condo.
. As noted, Zemlyak indicated on the mortgage application for the Hawthorne Drive Property that it would be the Zemlyaks’ primary residence. It is a federal crime to lie on a mortgage application. See 18 U.S.C. § 1014.
. The Stifel defendants, Zemlyak’s employer, are also unlikely to be prejudiced by litigation in state court because of their substantial presence in Wisconsin.
. Defendants imply that Zemlyak was fraudulently joined to defeat the exercise of federal jurisdiction. Defendants do not come close to proving fraudulent joinder.
See McNichols v. Johnson & Johnson,
. See http://www.finra.org/AboutFINRA/ index.htm (In July 2007, FINRA was created "through the consolidation of NASD and the member regulation, enforcement and arbitration of the New York Stock Exchange ...”).