CHRISTINE M. ARGUELLO, District Judge.
This matter is before the Court on the following motions filed by Defendants
Having reviewed the various briefs and relevant case law and heard the parties' arguments, the Court GRANTS Defendants' Motion to Dismiss All Claims As to All Defendants (Doc. # 78), GRANTS the Motion to Dismiss Defendant Fiserv, Inc. (Doc. # 80), and GRANTS Defendants' Motion to Dismiss All Claims Based on SLUSA (Doc. # 79). Additionally, Defendants' Motion for Reconsideration of Order Regarding Election of Arbitration Rights (Doc. # 111) is DENIED AS MOOT.
Plaintiffs filed their initial class action complaint on April 2, 2009. (Doc. # 1.) The complaint was amended on April 22, 2009. (Doc. # 4.) On June 30, 2009, the instant action was consolidated with two other actions involving common questions of law and fact, 09-cv-01222-CMA-CBS and 09-cv-01356-CMA-CBS (the "Consolidation Order"). (Doc. # 28.) Pursuant to the Consolidation Order, an amended consolidated class action complaint was filed on November 6, 2009. (Doc. # 65.) The complaint was again amended on November 10, 2009 (the "Complaint"). (Doc. # 69.) Plaintiffs assert that this Court has original jurisdiction over all claims, including state claims, pursuant to the Class Action Fairness Act of 2005 and 28 U.S.C. § 1332(d)(2)(A).
This putative class action concerns allegations of various holders of self-directed individual retirement accounts ("IRAs")
The various IRA Agreements contain clearly-stated and explicit provisions that indemnify the Trustee Defendants from liability resulting from any claims arising from the accounts at issue. These IRA Agreements also clearly state that the Plaintiff investors are solely responsible for making investment decisions in connection with their funds and that the Trustee Defendants will not provide any investment advice. The pertinent provisions of the various IRA Agreements
Plaintiffs contend that the Defendants owed, and failed to fulfill, certain duties as fiduciaries/trustees of Plaintiffs' IRAs, which duties included the duty to hold, preserve, and keep safe the trust's res, and to avoid commingling of the trust res with other assets. (Complaint, Doc. # 69, ¶¶ 9, 10.) Plaintiffs assert that these duties
(1) turned the trust assets over to a third party (Bernard Madoff), rather than hold the assets in trust (Doc. # 81-3, at 12);
(2a) failed to verify whether and how Bernard Madoff continued to hold the assets;
(2b) failed to take steps consistent with the investment industry's customs and standards such as keeping track, maintaining custody over, and keeping safe the trust assets;
(2c) failed to maintain title to the (non-existent) assets;
(3) knew from prior experience with other questionable funds the importance of holding and preserving trust assets;
(4) enabled Madoff's theft of the assets, due to their lack of oversight;
(5) were engaged in a "quid pro quo" arrangement with Madoff, which caused them to disregard various red flags concerning Madoff's fraudulent activities; and
(6) received information about the questionable nature of Madoff's operations. (Complaint, Doc. # 69, ¶¶ 11, 14, 20, 21, 62(a)-(c), 169(a)-(d), 174-81).
Plaintiffs assert the following 32 claims against Defendants:
In reviewing a Rule 12(b)(6) motion to dismiss for failure to state a claim, a court "accept[s] all the well-pleaded allegations of the complaint as true" and "construe[s] them in the light most favorable to the plaintiff." David v. City & County of Denver, 101 F.3d 1344, 1352 (10th Cir.1996). The Court must decide "whether the complaint contains `enough facts to state a claim to relief that is plausible on its face.'" Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 563, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). "The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that" the alleged claim might have occurred. Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1950, 173 L.Ed.2d 868 (2009) (citation and quotation marks omitted). "[T]he complaint must give the court reason to believe that this plaintiff has a reasonable likelihood of
In evaluating the plausibility of a given claim, the Court "need not accept conclusory allegations" without supporting factual averments. S. Disposal, Inc. v. Tex. Waste Mgmt., 161 F.3d 1259, 1262 (10th Cir.1998). "[T]he tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal, 129 S.Ct. at 1949.
In evaluating a Rule 12(b)(6) motion to dismiss, courts may consider not only the complaint itself, but also documents incorporated into the complaint by reference. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007); TMJ Implants, Inc. v. Aetna, Inc., 498 F.3d 1175, 1180 (10th Cir. 2007). Although the various IRA Agreements were not attached to the Complaint, they are referred to in the Complaint, they are central to Plaintiffs' claims, and their authenticity is not in dispute. As such, this court may consider the various IRA Agreements. Alvarado v. KOB-TV, L.L.C., 493 F.3d 1210, 1215 (10th Cir.2007) (internal quotation omitted).
In the Complaint, Plaintiffs have not made any specific allegations against Fiserv, Inc. Rather, Plaintiffs refer generally to all defendants, including Fiserv, Inc., as "Trustee Defendants" or the "Fiserv Defendants" and lodge general allegations against such defendants, including the following, as examples:
Defendant Fiserv, Inc. contends that it must be dismissed from this action because:
In response, Plaintiffs present three main arguments. First, they assert that Fiserv, Inc. has been doing business under or through Fiserv's Investment Support Services ("FISS"), which they contend is either a trade name or an unincorporated division of Fiserv, Inc., and is the custodian for Plaintiffs' IRAs. Second, Plaintiffs contend that "Fiserv Inc. is properly named as the extant legal Defendant for one or more discontinued or alienated subsidiaries." (Doc. # 90 at 98, citing H & H Distribs., Inc. v. BBC Int'l, Inc., 812 P.2d 659, 663 (Colo.Ct.App.1990) (parent company would be liable for subsidiary's breach of contract where one was an instrumentality of the other).) Third, Plaintiffs state that they have alleged an aiding and abetting claim against Fiserv, Inc.
For the following reasons, the Court finds that Plaintiffs have failed to state a claim against Fiserv, Inc. First, pursuant to a September 19, 2006 filing with the Colorado Secretary of State, Fiserv Investment Support Services ("FISS") is the trade name for Fiserv Trust Company,
Second, Plaintiffs have failed to allege that Fiserv, Inc. was a party to any of the at-issue Agreements. A "parent company has a separate corporate existence and is treated separately from the subsidiary in the absence of circumstances justifying disregard of the corporate entity." Benton v. Cameco Corp., 375 F.3d 1070, 1081 (10th Cir.2004) (quoting Quarles v. Fuqua Indus., 504 F.2d 1358, 1362 (10th Cir.1974)). Further, "[i]t is a general principle of corporate law deeply ingrained in our economic and legal systems that a parent corporation ... is not liable for the acts of its subsidiary[.]" United States v. Bestfoods, 524 U.S. 51, 61, 118 S.Ct. 1876, 141 L.Ed.2d 43 (1998) (internal quotations omitted). A disregard for the corporate entity and piercing the corporate veil is warranted when "the corporate structure is used so improperly that the continued recognition of the corporation as a separate legal entity would be unfair[.]" Micciche v. Billings, 727 P.2d 367, 372-73 (Colo.1986). In the instant case, Plaintiffs have not alleged any facts that support piercing the corporate veil. Accordingly, the Court finds no basis to conclude that Fiserv, Inc. should be held liable for the contracts entered into by its subsidiaries.
Third, Plaintiffs have not alleged any facts demonstrating that Fiserv, Inc. aided and abetted the other Defendants. Although
Accordingly, the Court finds that the Plaintiffs have failed to allege sufficient facts to support any cause of action against Defendant Fiserv, Inc. Merely because Fiserv, Inc. is the parent corporation of the other Defendants does not make it liable for its subsidiaries' alleged conduct. As such, the Court GRANTS Defendant Fiserv, Inc.'s Motion to Dismiss and dismisses, without prejudice, all claims against Fiserv, Inc.
As noted above, Plaintiffs have asserted "federal common law" claims against Defendants for breach of contract (Claims 1 and 21), ordinary and gross negligence (Claims 2 and 22), breach of fiduciary duty (Claims 3 and 23), aiding and abetting breach of fiduciary duty under federal law (Claims 4 and 24), and unjust enrichment and restitution (Claims 5 and 25). Plaintiffs have also asserted a claim for "Implied Right of Action Under Federal Law, Including Section 408 of the Internal Revenue Code" (Claim 31). Finally, Plaintiffs have asserted a breach of fiduciary duty claim under ERISA (Claim 32). For the reasons discussed below, the Court grants Defendants' Motion to Dismiss these claims.
"Federal common law" is
Atherton v. F.D.I.C., 519 U.S. 213, 218-19, 117 S.Ct. 666, 136 L.Ed.2d 656 (1997) (internal quotations and citations omitted) (emphasis added); see also Boyle v. United Techs. Corp., 487 U.S. 500, 507, 108 S.Ct. 2510, 101 L.Ed.2d 442 (1988) (state law will be displaced where a significant conflict between federal policy or interests and state law exists or application of state law would frustrate federal law's specific objectives); Tex. Indus., Inc. v. Radcliff
Plaintiffs premise their request that the Court create federal common law on two grounds: (1) the IRA Agreements' incorporation by reference of section 408 of the Internal Revenue Code,
Plaintiffs contend that their federal common law claims stem, in part, from 26 U.S.C. § 408. However, the Court finds that section 408 does not create a federal common law for three reasons: (1) an implied cause of action is a matter of legislative intention and the tax code lacks any wording that creates a private right of action against errant fiduciaries of pension and individual retirement accounts, (2) fiduciary duty claims traditionally fall under state law, and (3) section 408 does not impose a specific duty of care requiring an IRA custodian to prevent a customer from making unwise investment decisions or to exceed the agreed-upon duties set forth in the IRA Agreements.
A number of courts have considered and rejected the argument that an implied private cause of action exists under 26 U.S.C. § 408. As an example, the Southern District of Texas considered this issue in Scionti v. First Trust Corp., No. H-95-5493, 1999 U.S. Dist. LEXIS 23253 (S.D. Tex. June 24, 1999) (unpublished). After looking at other courts' decisions, the Scionti court came to the conclusion that "no private cause of action for an alleged breach of the tax code" exists. Id. at *63. The Southern District of New York came to the same conclusion noting that "the Supreme Court has made it abundantly clear that the existence of an implied cause of action is a matter of legislative intention." Sirna v. Prudential Secs., Inc. No. 95-cv-8422, 1997 WL 53194, at *3 (S.D.N.Y.1997) (unpublished). The court further noted that "[s]ection 408 of the Code does no more than establish a framework whereby individuals may obtain favorable tax treatment [for their retirement savings]," and "there is nothing in the wording or effect of the statute to suggest that Congress intended to create, via the tax code, a private right of action against errant fiduciaries." Id.
The Court finds persuasive the aforementioned decisions. Additionally, parties cannot create, or ask the Courts to create, federal common law through incorporation of federal law into their contract, especially where, as here, the at-issue law does not create a private cause of action. See Hines v. Fiserv, Inc., No. 8:08-cv-2569, 2010 WL 1249838, at *2-*3 (M.D.Fla. Mar. 25, 2010) (unpublished). In the instant
For these reasons, the Court finds that the incorporation by reference of section 408 into the underlying IRA Agreements does not create any federal common law claims. Additionally, because no implied private right of action exists under section 408, Plaintiffs' thirty-first claim for an implied right of action under federal law fails.
Plaintiffs ask the Court to create federal common law to promote ERISA's policy against exculpatory clauses under 29 U.S.C. § 1110(a). However, ERISA does not govern the underlying IRA Agreements because they are not employer-sponsored; rather, they are maintained by Plaintiffs. See 29 C.F.R. § 2510.3-2(d)(1) ("the terms `employee pension benefit plan' and `pension plan' shall not include an individual retirement account described in section 408(a) of the [Internal Revenue] Code."); Charles Schwab & Co., Inc. v. Debickero, 593 F.3d 916, 919 (9th Cir.2010) (IRA plan that lacked any employer oversight or any ongoing employer commitment is outside ERISA's scope); Sirna v. Prudential Secs., Inc., No. 95 CIV 8422, 1997 WL 53194, at *1 (S.D.N.Y. Feb. 10, 1997) (unpublished) (noting that ERISA excludes IRAs); see also Russell v. Chase Inv. Servs. Corp., No. 09-cv-360, 2010 WL 419938, at *2-*4 (N.D.Okla. Jan. 28, 2010) (unpublished) (dispute between beneficiaries and trustee of an IRA is not subject to ERISA). Thus, to the extent that ERISA promotes a public policy against exculpatory clauses, such public policy does not apply to Plaintiffs' IRA Agreements. See Metz v. Indep. Trust Corp., 994 F.2d 395, 399 (7th Cir.1993) (rejecting similar public policy argument where at-issue IRA Agreements were not governed by ERISA).
Because Plaintiffs' IRA Agreements fall outside the scope of ERISA and no private right of action exists under section 408, this dispute is distinguishable from Plaintiffs' cited cases, in which courts found preemption of state law in favor of federal policies or interests. See, e.g., Boyle v. United Tech. Corp., 487 U.S. 500, 508, 108 S.Ct. 2510, 101 L.Ed.2d 442 (1988) (preempting state defamation law in favor of federal privilege in light of the federal government's overriding interest in promoting its effective functioning where defamation claims arose from statements made in the course of a federal official's duties); Int'l Ass'n Machinists v. Cent. Airlines, Inc., 372 U.S. 682, 687-692, 83 S.Ct. 956, 10 L.Ed.2d 67 (1963) (finding preemption of state contract law where suit implicated the federal government's interest in minimizing interruptions to the nation's transportation system caused by strikes or other labor disputes and achieving uniformity in the resolution of such disputes); Snider v. Circle K Corp., 923 F.2d 1404, 1407 (10th Cir.1991) (creating federal common law in employment agreement dispute where discrimination claims implicated an act of Congress, namely Title VII).
Plaintiffs also assert that the creation of federal common law is necessary to remedy a conflict between state law and federal law, as articulated in section 408 of the Internal Revenue Code. However, the circumstances of the instant case do not support the creation of federal common law. "Conflict preemption requires that the state law materially impede
Plaintiffs contend that a significant federal interest over IRAs arises from the Internal Revenue Service's approval of a model IRA custodial agreement, namely Form 5305-A and, therefore, federal law trumps state law. However, this basis for creation of federal law also fails.
The model agreement explicitly provides that state law governs, at least in part, the relationship between the IRA account holder and account administrator and that the parties might choose to limit each others' duties and responsibilities through exculpatory provisions. In particular, the specific instructions for Article VIII of Form 5305-A, provides:
(IRS Form 5305-A, available at http:// www.irs.gov/pub/irs-pdf/f5305a.pdf (last visited March 16, 2011) (emphasis added)).
Additionally, this action does not involve the authority and duties of the United States as sovereign and is not of an interest or international nature such as to render inapplicable state law. Rather, the instant dispute concerns the rights and obligations of private parties. Accordingly, any federal interest is "highly abstract." Wallis v. Pan Am. Petroleum Corp., 384 U.S. 63, 70-71, 86 S.Ct. 1301, 16 L.Ed.2d 369 (1966) (declining to create federal common law). Therefore, the Court grants Defendants' Omnibus Motion to Dismiss to the extent it seeks dismissal of Plaintiffs' claims premised on federal common law, namely Claims 1 & 21 (breach of contract); Claims 2 & 22 (ordinary and gross negligence); Claims 3 & 23 (breach of fiduciary duty); Claims 4 & 24 (aiding and abetting breach of fiduciary duty); Claims 5 & 25 (unjust enrichment); and Claim 31 for an implied right of action under federal law, including section 408 of the Internal Revenue Code.
Plaintiffs have asserted a claim for Breach of Fiduciary Duty Under ERISA (Claim 32). Dismissal of Claim 32 is warranted for two reasons. First, Plaintiffs have not alleged that their IRAs involve employee pension benefit plans or that they are "participants" or "beneficiaries"
Accordingly, Defendants' Omnibus Motion to Dismiss Plaintiffs' claim for Breach of Fiduciary Duty Under ERISA (Count 32) is granted. To the extent that non-named plaintiffs may be ERISA beneficiaries, such plaintiffs would not be proper class members in the instant litigation because they would not be similarly-situated with the plaintiffs who are not ERISA beneficiaries.
In support of their negligence claims, Plaintiffs allege that Defendants' "extreme departures from the standards of ordinary care also violate[d] state common law prohibitions against negligence, and constitute[d] gross negligence." (See, e.g., Doc. # 69, ¶ 113.) In particular, Plaintiffs contend that Defendants "negligently failed to preserve, to retain control over, to hold, to safe-keep the Trust res which each [c]lass member entrusted to Defendants," and failed to provide accurate account statements and investigate red flags. (See, e.g., Doc. # 69, ¶¶ 87, 124, 133, 140, and 141.) Similarly, in support of their breach of fiduciary duty claims, Plaintiffs point to the aforementioned conduct, as well as to Defendants' purportedly extreme departures from the standards of ordinary care and duties of good faith, extreme candor, loyalty, honesty, and fair dealing. (Id., ¶¶ 93, 205.)
In order to state an actionable negligence claim, a plaintiff must establish four elements: duty, breach, harm, and causation. Vigil v. Franklin, 103 P.3d 322, 333 (Colo.2004) (citing Smith v. City and County of Denver, 726 P.2d 1125, 1127 (Colo.1986)). "If the court concludes as a matter of law that no duty existed, a negligence action cannot be maintained." Id. Likewise, in order to state an actionable claim for breach of fiduciary duty, a plaintiff must allege that a fiduciary duty existed, the defendant breached that duty, and the breach was the proximate cause of damages. Aller v. Law Office of Carole C. Schriefer, 140 P.3d 23, 26 (Colo.Ct.App. 2005).
As previously discussed, Plaintiffs have failed to identify any duties that exist independent of the IRA Agreements, and Plaintiffs' IRA Agreements fall outside the scope of section 408 of the Internal Revenue Code. Additionally, the Colorado Revised Statutes do not govern Plaintiffs' IRAs. See Colo.Rev.Stat. § 15-10-201(56) ("`Trust' excludes ... security arrangements[.]"); Id. at § 15-10-201(46) ("`Security' includes any note; stock; treasury stock; bond; debenture; evidence of indebtedness... any interest or instrument commonly known as security ... or any warrant or right to subscribe to or purchase, any of the items enumerated in this subsection"). Accordingly, the Court finds
Plaintiffs contend that the exculpatory provisions are void as against public policy under Colorado law because (1) the services Defendants provided involved critical contractual and fiduciary duties owed to the public, (2) the nature of the service — holding Americans' retirement savings — counsels against enforcing such exculpatory clauses, and (3) the contracts are one-sided form contracts, drafted entirely by "Fiserv," and were not bargained for at arms' length. (Doc. # 90 at 29.)
However, the Tenth Circuit considered and rejected similar public policy arguments in Allison v. Bank One-Denver, 289 F.3d 1223 (10th Cir.2002). In that decision, the Tenth Circuit, applying the following four-factor test, upheld the validity of an indemnity provision contained within IRA-related custodial agreements and authorizations:
289 F.3d at 1240 (citing Jones v. Dressel, 623 P.2d 370, 376 (Colo.1981) (internal quotation omitted)). "A duty to the public contemplates a party engaged in performing a service of great importance to the public, which is often a matter of
In the instant case, many choices exist for consumers, such as Plaintiffs, who seek IRA services. Although the at-issue services may be of great importance to the public, the availability of choice in the market with respect to the person or entity to perform such service supports a finding that the exculpatory provisions should not be rendered void as against public policy. Although Plaintiffs allege that "Madoff required
Because Plaintiffs have not alleged any facts indicating that the IRA Agreements were unfairly entered into such that the exculpatory provisions should not be upheld, Defendants' Omnibus Motion to Dismiss is GRANTED to the extent it seeks dismissal of Plaintiffs' state law claims for breach of fiduciary duty (Claims 8, 13, 18, and 28) and negligence (Claims 7, 12, 17, and 27).
The elements of aiding and abetting a breach of fiduciary duty are: (1) breach of a fiduciary duty owed to a plaintiff, (2) a defendant's knowing participation in the breach, and (3) damages. Nelson v. Elway, 971 P.2d 245, 250 (Colo.Ct.App. 1998).
In support of the aiding and abetting claim, Plaintiffs broadly allege that each Defendant: (1) knew of the breaches of fiduciary duty, (2) materially assisted same; (3) aided and abetted such breaches of fiduciary duty under federal common law; and (4) had knowledge of the failure to provide the required reports and materially assisted such failure. (Compl., Doc. # 69, ¶¶ 137, 155; see also ¶¶ 194, 208.) To the extent that Plaintiffs lodge any specific factual allegations in support of the aiding and abetting claim, such allegations are asserted against Defendants who have been dismissed from this action, namely TD Ameritrade Online Holding Corporation and Robert Beriault Holdings, Inc. (See Compl., Doc. # 69, ¶¶ 100-103, 104-105, 118-120.)
Based on the fact that such allegations were lodged against the dismissed Defendants and the allegations against the remaining Defendants are otherwise vague, the Court finds that Plaintiffs' aiding and abetting allegations fail to satisfy the pleading requirements set forth in Twombly and Fed.R.Civ.P. 12(b)(6) and, therefore, should be dismissed without prejudice. Accordingly, Defendants' Omnibus Motion to Dismiss is GRANTED to the extent it seeks dismissal of Plaintiffs' aiding and abetting breach of fiduciary duty claims under state law (Claims 9, 14, 19, and 29).
In support of their breach of contract claims, Plaintiffs allege that Defendants breached their duties to hold any securities or other property in the trust, to exercise control over and preserve and maintain the trust assets, to avoid commingling of trust assets with other property except in a common trust fund or a common investment fund, and to furnish annual reports that accurately set forth statements of the assets held in trust at the end of each calendar year. (Complaint, Doc. # 69, ¶¶ 109-111; 123-128; 142-146; 198-200.)
In order to state an actionable claim for breach of contract, a plaintiff must allege (1) the existence of a contract, (2) performance by the plaintiff or some justification for non-performance, (3) the defendant's failure to perform the contract, and (4) resulting damages to the plaintiff. W. Distrib. Co. v. Diodosio, 841 P.2d 1053, 1058 (Colo.1992). In the instant case, no dispute exists regarding the IRA Agreements'
The Court finds that Defendants have fulfilled all their obligations as delineated in the Agreements: they provided account statements that contained the information from BMIS, which they had no obligation to verify or audit; at Plaintiffs' direction, they transferred assets to BMIS; and they had no contractual obligation to prevent Madoff or BMIS from commingling Plaintiffs' assets. See Fraternity Fund, Ltd. v. Beacon Hill Asset Mgmt. LLC, 376 F.Supp.2d 443, 447-48 (S.D.N.Y.2005) (granting motion to dismiss because fund administrator did not have any obligation to calculate or verify independently the value of securities reported to it); Beddall v. State St. Bank & Trust Co., 137 F.3d 12, 20-21, n. 3 (1st Cir.1998) (holding that a trustee had no duty to value investment account assets under the express terms of the trustee's contract).
Plaintiffs' claims also fail to the extent they are premised on a failure to exercise control over, preserve and maintain, and avoid commingling of the trust assets. Plaintiffs complain that Defendants lost control over their assets when they were directed to Madoff for investment purposes. However, Defendants transferred such assets, at the express direction of Plaintiffs. Further, Plaintiffs admit that the assets were not commingled until after Defendants transferred them to Madoff. (See Doc. # 69, ¶ 20) ("[U]pon receipt of the assets, the third party (Madoff) immediately commingled and took them").
Accordingly, Defendants' Omnibus Motion to Dismiss is GRANTED to the extent it seeks dismissal of Plaintiffs' breach of contract claims under state law (Claims 6, 11, 16, and 26).
In support of the unjust enrichment claims under state law (Claims 10, 15, 20, and 30), Plaintiffs contend that Defendants' "conduct [ ] requires them to make restitution as well as pay back their unjust enrichment under State law." (Doc. # 69, ¶¶ 122, 140, 158, 211). Plaintiffs contend that Defendants' unjust enrichment claims concern extra-contractual benefits and, therefore, are excepted from the general rule that a party cannot recover for unjust enrichment when an express contract covers the same subject matter. Alternatively, Plaintiffs assert that unjust enrichment claims are appropriate in the event that the entire IRA Agreements are invalidated and rendered unenforceable. (August 9 Motion Hearing Transcript, Doc. # 110 at 110:18-111:9.)
For the following reasons, the Court finds that Plaintiffs' unjust enrichment claims should be dismissed. First, Plaintiffs have an enforceable contract with Defendants; the at-issue agreements have not been invalidated and the provisions thereof are enforceable, thus precluding a claim for unjust enrichment. See Bedard v. Martin, 100 P.3d 584, 591-92 (Colo.Ct.App.2004) (finding that written contract for sale of property precluded unjust enrichment claim brought by buyer of land against seller, after buyer discovered that seller did not actually own the purchased property); Interbank Invs., LLC v. Eagle River Water and Sanitation
Second, under Colorado law, a plaintiff seeking recovery for unjust enrichment must prove: (1) at the plaintiff's expense (2) the defendant received a benefit (3) under circumstances that would make it unjust for the defendant to retain the benefit without paying. Salzman v. Bachrach, 996 P.2d 1263, 1265-66 (Colo. 2000) (citing DCB Constr. Co. v. Central City Dev. Co., 965 P.2d 115, 119-20 (Colo. 1998)). In the instant case, the asserted quasi-contract through which Defendants allegedly received benefits was purportedly between Madoff and Defendants, not Plaintiffs and Defendants. To the extent that Plaintiffs contend that the moneys Madoff paid Defendants came from Plaintiffs' investment assets, this basis for Plaintiffs' unjust enrichment claim is tangential and tenuously connects Plaintiffs to Defendants' extra-contractual benefit. See In re Bayou Hedge Funds Inv. Litig., 472 F.Supp.2d 528, 531-32 (S.D.N.Y.2007) (finding unjust enrichment claim deficient to the extent that it was premised on the defendant's use of the plaintiff's misappropriated funds to pay legal fees to a third party). Thus, the Court finds Plaintiffs' unjust enrichment claim deficient because Plaintiffs fail to allege, beyond vague and conclusory allegations, that the named Defendants directly received a benefit at Plaintiffs' expense.
Accordingly, Defendants' Omnibus Motion to Dismiss is GRANTED to the extent it seeks dismissal of Plaintiffs' unjust enrichment claims under state law (Claims 10, 15, 20, and 30).
Defendants ask the Court to dismiss this class action, without prejudice, because they contend that Plaintiffs' state law claims are barred under the Securities Litigation Uniform Standards Act of 1998 (SLUSA), 15 U.S.C. § 78bb(f). In support of this request, Defendants assert that:
As such, Defendants assert that Plaintiffs should be required to re-file a properly pled federal securities fraud class action or to pursue their claims in individual actions.
§ 78bb(f) of SLUSA states:
As set forth in § 78bb(f)(5)(B), a "covered class action" means —
SLUSA is not a preemption statute, i.e., it does not preempt any state cause of action nor does it displace state law. Rather, it denies plaintiffs the right to use the class-action device to vindicate certain claims. Merrill Lynch, Pierce, Fenner, & Smith, Inc. v. Dabit, 547 U.S. 71, 87, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006); Anderson v. Merrill Lynch Pierce Fenner & Smith, Inc., 521 F.3d 1278, 1281 (10th Cir.2008).
For SLUSA to apply, the transaction underlying the fraud claim need not be an actual securities transaction. Rather, it is enough that the fraud alleged "coincide" with a securities transaction. "The requisite showing ... is deception in connection with the purchase or sale of any security, not deception of an identifiable purchaser or seller." Dabit, 547 U.S. at 85, 126 S.Ct. 1503 (citing United States v. O'Hagan, 521 U.S. 642, 658, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997)) (internal quotations omitted); see also Instituto de Prevision Militar v. Merrill Lynch, 546 F.3d 1340, 1348-51 (11th Cir.2008) (finding that fraud allegations coincided with a securities transaction even though the gravamen of the complaint was that certain defendants, by their actions or inactions aided and abetted another entity's theft of the plaintiff's funds). "A narrow reading of the statute would undercut the effectiveness of the [1995 Securities Litigation Reform Act]
There is no dispute that this action meets the first and second SLUSA criteria: Plaintiffs' claims are based upon the statutory or common law of Colorado, and the prospective class action seeks damages on behalf of more than 800 prospective class members. Thus, the Court need only address whether this action meets the third and fourth SLUSA criteria, i.e., whether the action concerns covered securities and misrepresentations of a material fact in connection with the purchase or sale of covered securities.
Under SLUSA, a "covered security" is a security that is
15 U.S.C. § 77p(f)(3).
Courts applying SLUSA generally have interpreted the "in connection" element broadly and have looked to the "essence" of a state law claim to avoid circumvention of the statute by artful drafting. Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294 (3d Cir.2005). In Rowinski, the court articulated the following four guideposts
Id. at 302 (cited and discussed in Backus v. Conn. Cmty. Bank, N.A., No. 3:09-cv-1256, 2009 WL 5184360, at *7-*8 (D.Conn. Dec. 23, 2009) (unpublished)).
Plaintiffs assert that SLUSA does not apply to their claims because the at-issue account statements did not concern covered securities; rather, they argue that the account statements concerned treasuries and cash, which were falsely reported to be in Plaintiffs' accounts. (Doc. # 89 at 10.)
Viewing the fraudulent scheme as a whole, the Court finds that Defendants' alleged conduct is connected to Madoff's execution of a Ponzi scheme tied to the purported purchase and sale of securities. See Levinson, 2009 WL 5184363, at *7 ("In determining whether misrepresentations coincided with the purchase or sale of securities, courts consider the allegedly fraudulent scheme as a whole."). Further, as alleged, the parties' relationship served the purpose of trading securities. See Ajjarapu v. AE Biofuels, Inc., 728 F.Supp.2d 1154, 1168-69 (D.Colo. July 23, 2010) (noting that courts have found that the at-issue conduct is in connection with a sale of securities where the parties' relationship was such that it would necessarily involve trading in securities); Rowinski, 398 F.3d at 302; Backus v. Conn. Cmty. Bank, N.A., No. 3:09-cv-1256, 2009 WL 5184360, at *8 (D.Conn. Dec. 23, 2009) (unpublished) (finding that the "in connection" prong was satisfied because "[t]he custodian agreement governing the parties' dealings states that the relationship was created for the purpose of investment in securities"); Dommert v. Raymond James Fin. Servs., No. 1:06-cv-102, 2007 WL 1018234, at *11 (E.D.Tex. Mar. 29, 2007) (unpublished) (finding that when "the purpose of the investment agreements was to utilize [the plaintiff's] assets and expand upon those assets, presumably with the purchase and sale of securities, the `in connection with' prong [is] met").
In the instant case, the following allegations in Plaintiffs' Complaint demonstrate that Plaintiffs' state law claims concern covered securities:
Plaintiffs allege that Defendants issued account statements that misstated/ misrepresented the value of Plaintiffs' IRAs and misrepresented the safety of their investments, among other failures. Plaintiffs also allege Defendants served as the exclusive channel for the investment of IRA funds with Madoff, and Defendants selected Madoff to execute large volumes of lucrative stock trades, including 22% of trades listed on the New York Stock Exchange. (Doc. # 88 at 49; see also Doc. # 90 at 31.) In essence, Plaintiffs' complaint is that Defendants allowed or enabled Madoff to continue with his Ponzi scheme, which depleted Plaintiffs' funds and, therefore, prevented Plaintiffs from directing Defendants to remove their funds from Madoff's control.
In the instant case, Plaintiffs repeatedly allege that Defendants failed to fulfill their "obligations of good faith, fair dealing, loyalty, due care, extreme candor, and honesty," as trustee of Plaintiffs' IRA funds. (Doc. # 69, ¶¶ 92, 116, 133, 151, 190, 205.) Without using the words "misrepresentation" or "omission," Plaintiffs allege that Defendants misled them as to the investments made, failed to disclose the existence of conflicts of interest, and forwarded, without independently verifying, Madoff's inaccurate investment reports.
"The question under SLUSA is not whether the complaint uses the prohibited words: `an untrue statement or omission of a material fact' or a `manipulative or deceptive device or contrivance.' It is whether the complaint covers the prohibited theories, no matter what words are used (or disclaimed) in explaining them." Segal v. Fifth Third Bank, N.A., 581 F.3d 305, 311 (6th Cir.2009) (citing Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294, 300 (2d Cir.2005); Dudek v. Prudential
Plaintiffs' pleading tactics are similar to those at issue in Segal v. Fifth Third Bank, 581 F.3d 305, 311 (6th Cir.2009) cert. denied, ___ U.S. ___, 130 S.Ct. 3326, 176 L.Ed.2d 1221 (2010), in which the plaintiff, although disclaiming any allegation of misrepresentation or failure to disclose material facts, specifically alleged that "[t]he gravamen of this Complaint is that the defendants did not deal honestly, ethically, fairly, and/or in good faith with Fifth Third's Beneficiaries." The Sixth Circuit, nonetheless, found that SLUSA applied to preclude the plaintiffs' claims because the plaintiff's complaint sounded in misrepresentation. Id. at 311-12; see also Merrill Lynch, Pierce, Fenner, & Smith, Inc. v. Dabit, 547 U.S. 71, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006) (finding SLUSA barred state law claims premised on the defendants' allegedly knowing dissemination of misleading corporation and stock valuation research); Romano v. Kazacos, 609 F.3d 512, 521, 524 (2d Cir.2010) (affirming lower court's application of SLUSA where the complaint concerned the defendants' communication of inaccurate, incomplete, or erroneous information, which acts caused the plaintiffs to make certain investment choices); Siepel v. Bank of America, N.A., 526 F.3d 1122, 1124 (8th Cir.2008) (upholding the district court's application of SLUSA because the claims concerned misrepresentations and omissions in connection with the purchase or sale of securities); Anderson v. Merrill Lynch Pierce Fenner & Smith, Inc., 521 F.3d 1278, 1283-84 (10th Cir.2008) (affirming district court's application of SLUSA where the plaintiff's allegations concerning the defendant's misrepresentations or omissions, through stock value manipulation, were central to the complaint); Instituto De Prevision Militar v. Merrill Lynch, 546 F.3d 1340, 1350-52 (11th Cir. 2008) (finding SLUSA barred state law claims where the plaintiffs alleged, and later incorporated by reference into each count, that the defendants were liable because they had knowledge of, but failed to protect the plaintiffs from, a third party's fraudulent acts); Barron v. Igolnikov, No. 09-4471, 2010 WL 882890, at *5 (S.D.N.Y. Mar. 10, 2010) (unpublished) (applying SLUSA where the allegations against feeder fund concerned the fund's failures to provide accurate account statements and ignoring certain "red flag warnings" about Madoff); Backus v. Conn. Cmty. Bank, No. 3:09-cv-1256, 2009 WL 5184360, at *7-*11 (D.Conn. Dec.23, 2009) (unpublished) (finding SLUSA barred state law claims premised on the defendant's alleged misrepresentations concerning its fulfillment of its custodial role and its knowing misrepresentations, which misrepresentations "coincide[d]" with Madoff's Ponzi scheme); Levinson v. PSCC Servs., Inc., No. 09-cv-00269, 2009 WL 5184363, at *12-14 (D.Conn. Dec. 23, 2009) (unpublished) (applying SLUSA where allegations against the defendants, custodians of retirement accounts, concerned the defendants' disregard of several "red flags" concerning
Accordingly, the Court finds that SLUSA bars the corresponding state law claims. The Court also finds that any asserted non-fraud based state law claims are also preempted by SLUSA if, as in the instant case, they incorporate by reference all preceding allegations in the complaint concerning misrepresentations, including misrepresentations in account statements. See Levinson, 2009 WL 5184363, at *13 (collecting cases). Accordingly, IT IS ORDERED THAT Defendants' Motion to Dismiss All Claims Based on SLUSA (Doc. # 79) is GRANTED.
Defendants contend that, because seven of the eight named Plaintiffs opened their IRAs prior to 2003,
The Court finds that factual issues exist as to when Plaintiffs first learned, or reasonably should have learned, of their injury, and whether factors exist that support equitable tolling. Accordingly, Defendants' Omnibus Motion to Dismiss is DENIED to the extent it seeks dismissal of Plaintiffs' breach of contract claims on statute of limitations grounds.
Accordingly, based on the foregoing, IT IS ORDERED THAT:
(Doc. # 81-2 at 5) (emphasis added).
(Doc. # 81-3 at 5) (emphasis added).
Subject to Section 7.2 [re appointment of agent], the
Neither the Trustee nor the Sponsor shall be liable for the acts or omissions of the Participant or his agent.
The Participant or the Participant's authorized agent shall direct the Trustee with regard to the investment of any cash in the Account. In the event such instructions are not received by the Trustee, the Participant shall be deemed to have directed the Trustee, which may include a savings instrument of the Trustee.
The Trustee shall not follow a direction to invest the Trust
The Trustee as trustee of the Trust assets entrusted to it under the Plan shall not commingle the Trust with any other property it holds except in a common trust fund or common investment fund.
(f) To furnish or cause to be furnished to the Participant an annual calendar year
The Participant ... agrees to indemnify and hold harmless the Trustee and Sponsor (hereinafter, "Trustee") from and against all losses, expenses, settlement payments, or judgment incurred by, or entered against the Trustee as the result of any threatened or asserted claim against the Trustee that pertains in any way to: (1) the Trustee's activities with the Participant; (2) the Participant's investments; and/or (3) a situation or matter associated with this Trust or Plan ...
Any provision of this Plan and Trust Agreement, or of a Participant's Adoption Agreement, shall be wholly invalid if it is inconsistent, in whole or in part, with the Code Section 408(a) of the regulations under [the Internal Revenue Code, 26 U.S.C. § 408]. This Plan shall be governed by and construed, administered, and enforced according to the laws of the State of Colorado except to the extent preempted by Federal law.
(Doc. # 81-3 at 12-13) (emphasis added).
"... [T]he assets of the IRA will be invested only in accordance with directions from the Participant or his duly authorized agent. First Trust Corporation does not offer investment advice to the Participant."
(Doc. # 81-3 at 19.)
The Trustee and Sponsor ("Trustee")
The Account Owner ...
(Doc. # 81-4 at 9.) (Emphasis added.)
"... Any discrepancies should be documented in writing and sent to us within 90 days of the date of this statement. If the notice of discrepancies is not received in that time, FTC shall be relieved of any and all liability for the accuracy of the data reported in the statement."
"... Please note that the
"
(Doc. # 81-5 at 28.) (Emphasis added.)
