Wednesday, January 25, 2017

Divided appellate panel: nondisclosure of bank fees claim preempted by SLUSA

By Amanda Maine, J.D.

A divided panel of the Seventh Circuit Court of Appeals sided with the lower court and Bank of America in holding that certain banking fees charged but not disclosed amounted to an omission of material fact, and therefore the plaintiff’s state law claims of breach of contract and fiduciary duty were preempted by SLUSA and must be brought in federal court (Goldberg v. Bank of America, N.A., January 17, 2017, per curiam).

Lawsuit. The plaintiff, a trust representing the customer, maintained an account at LaSalle bank, which was later acquired by Bank of America. LaSalle invested (“swept”) cash balances at the end of the day into a mutual fund the plaintiff had selected from a list provided by LaSalle. Eventually, the plaintiff learned that LaSalle had been accepting reinvestment (“sweep”) fees from the mutual funds based on the average daily invested balance LaSalle had “swept” from his custodian account. After the Bank of America acquisition, the plaintiff was notified that the fee was going to be eliminated. The plaintiff had been unaware of the fee and sued LaSalle and Bank of America (“the Bank”) for breach of contract and breach of fiduciary duty. The complaint alleged that some mutual funds paid the bank a fee based on the balances it transferred without notifying customers that it was retaining them, the economic equivalent of a secret fee.

The Bank removed the suit to federal court under the Securities Litigation Uniform Standards Act (SLUSA), which seeks to prevent plaintiffs from avoiding the Private Securities Litigation Reform Act’s stringent pleading standards by bringing federal securities law claims as state law claims. According to the Bank, the plaintiff’s claim depends on the omission of a material fact; i.e., the secret fee. As such, SLUSA requires removal from state court to federal court, the Bank argued. The district court sided with the Bank, and the plaintiff appealed.

Appellate decision. According to the per curiam decision of the Seventh Circuit, the complaint alleged an omission of a material fact in connection with the purchase or sale of a covered security. It rejected the plaintiff’s argument that SLUSA did not apply because the Bank’s omission does not involve the “price, quality, or suitability” of a security. The opinion stated that omissions in connection with securities transactions are forbidden by the Exchange Act, regardless of whether that omission concerns the security’s price, quality, or suitability. The court affirmed the lower court’s decision.

Concurrence. Judge Flaum penned a concurring opinion in which he outlined different approaches taken by the Sixth, Third, and Ninth Circuit regarding dismissing complaints under SLUSA. He concluded that under the Sixth Circuit’s “literalist” approach, the plaintiff’s fiduciary claim triggers SLUSA preemption because the bank failed to disclose a fee that, if disclosed, would “give pause” to potential investors. Pointing to language in the original complaint, which alleged that the Bank “steered” clients’ money to mutual funds that agreed to pay the fees, SLUSA preemption is also triggered under the Third Circuit’s “looser” approach.

Regarding the Ninth Circuit’s approach, Judge Flaum noted that the Seventh Circuit has expressed concern with it because a plaintiff may simply reassert SLUSA-triggering language later upon returning to state court, again highlighting the “steered” language in the plaintiff’s original complaint.

However, the concurrence said that the question of whether SLUSA preempts the plaintiff’s entire complaint or just the individual claim has not been decided at this juncture. The plaintiff’s breach of contract claim includes an alleged material omission, and thus triggers SLUSA preemption, according to Judge Flaum.

Dissent. In a lengthy dissent, Judge Hamilton outlined his disagreements with his colleagues. According to Judge Hamilton, the plaintiff’s claim alleged a breach of contract because the Bank spelled out the fees it would charge, and the Bank breached that contract by charging additional fees. This claim can be proved without having to show any misrepresentation of material fact. He described the majority’s characterization of a breach of contract claim as one of omission of material fact as “reverse alchemy” that “turns gold into lead.”

Judge Hamilton noted that the question of how a court should apply SLUSA to state law claims for breaches of contract and fiduciary duty has produced a three- or four-way split in the federal circuit courts. In his opinion, the Second and the Ninth Circuit, which have held that a class action claim is barred by SLUSA only if the claim requires proof of a misrepresentation or omission of material fact, take the correct approach. He opined that the standard adopted by his colleagues is a new standard where virtually any breach of contract claim can be preempted.

The case is No. 11-2989.

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