Richard Atkinson v. Morgan Asset Management, Inc.

Filing

OPINION and JUDGMENT filed: AFFIRMED, decision for publication pursuant to local rule 206. Danny J. Boggs, Deborah L. Cook (AUTHORING), Circuit Judges; James G. Carr, U.S. District Judge for the Northern District of Ohio.

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RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 11a0259p.06

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
X
RICHARD A. ATKINSON, MD, et al.,
Plaintiffs-Appellants, No. 09-6265
v.
>
,
MORGAN ASSET MANAGEMENT, INC., et al.,
Defendants-Appellees. N
Appeal from the United States District Court
for the Western District of Tennessee at Memphis.
No. 08-02694—Samuel H. Mays, Jr., District Judge.

Argued: December 10, 2010
Decided and Filed: September 8, 2011
Before: BOGGS and COOK, Circuit Judges; CARR, District Judge.*
_________________
COUNSEL
ARGUED: Vernon Jay Vander Weide, HEAD, SEIFERT & VANDER WEIDE, P.A.,
Minneapolis, Minnesota, for Appellants. David Bruce Tulchin, SULLIVAN &
CROMWELL LLP, New York, New York, Matthew M. Curley, BASS, BERRY &
SIMS, PLC, Nashville, Tennessee, Timothy A. Duffy, KIRKLAND & ELLIS LLP,
Chicago, Illinois, for Appellees. ON BRIEF: Vernon Jay Vander Weide, HEAD,
SEIFERT & VANDER WEIDE, P.A., Minneapolis, Minnesota, Jerome A. Broadhurst,
Charles D. Reaves, APPERSON CRUMP, Memphis, Tennessee, Richard A. Lockridge,
Gregg M. Fishbein, Matthew R. Salzwedel, LOCKRIDGE GRINDAL NAUEN P.L.L.P.,
Minneapolis, Minnesota, for Appellants. David Bruce Tulchin, David E. Swarts,
SULLIVAN & CROMWELL LLP, New York, New York, Matthew M. Curley, Michael
L. Dagley, Wade Brantley Phillips, Jr., Shayne R. Clinton, BASS, BERRY & SIMS,
PLC, Nashville, Tennessee, Jeffrey B. Maletta, David T. Case, Nicholas G. Terris,
Nicole A. Baker, K&L GATES, LLP, Washington, D.C., Timothy A. Duffy, Kristopher
Scott Ritter, KIRKLAND & ELLIS LLP, Chicago, Illinois, for Appellees.

*

The Honorable James G. Carr, United States District Judge for the Northern District of Ohio,
sitting by designation.

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_________________
OPINION
_________________
COOK, Circuit Judge. Mutual-fund shareholders brought a state-law class action
against various fund affiliates. The district court held that the Securities Litigation
Uniform Standards Act of 1998 (SLUSA), Pub. L. No. 105-353, 112 Stat. 3227, bars
Plaintiffs’ claims, and so do we.
I.
Plaintiffs held shares in three mutual funds issued by Morgan Keegan Select
Fund, Inc., an open-end investment company. See 15 U.S.C. § 80a-5(a)(1). The
company structured these shares as “redeemable securities,” entitling the holders to
redemption at any time for their “proportionate share of the issuer’s current net assets.”
See id. § 80a-2(a)(32).
Like most investments, Plaintiffs’ shares lost value between 2007 and 2008; but,
unlike most investors, Plaintiffs attributed their losses to fraud. They filed a class action
suit in state court against the funds’ advisers, officers, directors, distributor, auditor, and
affiliated trust company (collectively, Defendants), bringing thirteen state-law claims for
breach of contract, violations of the Maryland Securities Act, breach of fiduciary duty,
negligence, and negligent misrepresentation. The crux of Plaintiffs’ argument was that
Defendants took unjustified risks in allocating the funds’ assets and concealed these risks
from shareholders. Had Plaintiffs been aware of the funds’ mismanagement, they
claimed, they would have redeemed their shares before they dropped in value.
Defendants removed the state action to federal court under SLUSA, which
generally prohibits plaintiffs from using state-law class actions to vindicate fraud-based
securities claims. See 15 U.S.C. § 77p(b), (c), (f)(2)(A), (f)(3). Plaintiffs moved for
remand, arguing that their case comes within an exception to SLUSA and that, in any
event, most of their claims fall outside of SLUSA’s scope.

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Concluding that SLUSA precludes the action, the district court denied Plaintiffs’
motion for remand and dismissed their claims with prejudice.
II.
“SLUSA was not enacted in a vacuum.” Segal v. Fifth Third Bank, N.A., 581
F.3d 305, 308 (6th Cir. 2009), cert. denied, 130 S. Ct. 3326 (2010). Its story begins with
the enactment of the Private Securities Litigation Reform Act of 1995 (PSLRA), Pub.
L. No. 104-67, 109 Stat. 737, which sought to curb the “perceived abuses” of federal
class-action securities litigation by imposing various burdens on plaintiffs. Merrill
Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81–82 (2006). Facing
PSLRA’s hurdles, some plaintiffs began to skirt the federal forum by recasting their
claims under state law and filing them in state court. Id. at 82. Congress shut this statelaw back door by enacting SLUSA, which prevents “State private securities class action
lawsuits alleging fraud from being used to frustrate the objectives of [PSLRA].” Id.
(internal quotation marks and citation omitted).
SLUSA precludes claimants from filing class actions that (1) consist of more
than fifty prospective members; (2) assert state-law claims; (3) involve a nationally listed
security; and (4) allege “an untrue statement or omission of a material fact in connection
with the purchase or sale of” that security. 15 U.S.C. § 77p(b), (f)(2)(A), (f)(3); see also
Segal, 581 F.3d at 309.
Where, as here, defendants believe that SLUSA precludes the state-court class
action that names them, SLUSA authorizes removal to federal court in contemplation of
termination of the proceedings. 15 U.S.C. § 77p(c). A plaintiff’s subsequent motion to
remand that “claim[s] the action is not precluded” then poses “a jurisdictional issue,” and
the court has the “adjudicatory power . . . to determine its own jurisdiction to deal further
with the case.” Kircher v. Putnam Funds Trust, 547 U.S. 633, 643–44 (2006). If the
court finds that “the action is precluded [by SLUSA], neither the district court nor the
state court may entertain it, and the proper course is to dismiss.” Id. at 644.

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Plaintiffs challenge the district court’s denial of their motion to remand and
dismissal of their action, arguing that (a) their action falls into the so-called “first
Delaware carve-out,” one of SLUSA’s saving provisions; (b) regardless of the carve-out,
nine of their thirteen claims merit remand to state court because they lack fraud-based
allegations; and (c) even if SLUSA ends their case, the district court improperly
dismissed their claims with, instead of without, prejudice, based on the court’s holding
that amendment would be futile.
SLUSA preclusion being a jurisdictional issue, id., we review the district court’s
SLUSA-based dismissal de novo, see Dixon v. Ashcroft, 392 F.3d 212, 216 (6th Cir.
2004). But we give only abuse-of-discretion review to its decision to dismiss Plaintiffs’
claims with prejudice. See Brown v. Matauszak, 415 F. App’x 608, 611 (6th Cir. 2011).1
A.
Plaintiffs first contend that their entire action falls within a specific exemption
to SLUSA’s general reach. This exemption, known as the first Delaware carve-out,
preserves a class action otherwise facing SLUSA preclusion if it “involves . . . the
purchase or sale of securities by the issuer or an affiliate of the issuer exclusively from
or to holders of equity securities of the issuer.” 15 U.S.C. § 77p(d)(1)(B).
An initial plain-language difficulty looms large over Plaintiffs’ carve-out effort.
While they claim, as they must, that their action “involves . . . the purchase or sale of
securities,” id., it appears to involve no “purchase” or “sale” at all: Plaintiffs already
held their mutual-fund shares when Defendants’ alleged misconduct began, and they
argue only that Defendants deceived them into holding the shares too long.
To overcome this hurdle, Plaintiffs first set their sights on the term “purchase.”
They note that while SLUSA does not define this term, the securities acts that SLUSA
amended broadly construe “purchase” to include contracts to purchase securities, such
1

Where a district court denies a plaintiff leave to amend based on its determination that
amendment would be “futile,” we review the decision de novo. Inge v. Rock Fin. Corp., 281 F.3d 613,
625 (6th Cir. 2002). We are not, however, reviewing a denial of leave to amend; Plaintiffs never attempted
to recast their claims to avoid SLUSA’s reach. In any case, for reasons explained below, Plaintiffs’
challenge to the district court’s dismissal with prejudice fails under either standard.

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as options. See 15 U.S.C. §§ 77b(a)(3), 78c(a)(13). And they argue that we should
likewise construe the carve-out to apply to actions that “involve contracts to purchase
securities,” and that the funds’ obligation to redeem Plaintiffs’ shares amounts to an
ongoing contract to purchase them.
This contract-to-purchase argument ends where it begins. Even assuming that
Plaintiffs have entered a “contract to purchase,” the cases on which they rely confirm
that the relevant “purchase” under the carve-out is the acquisition of their “contract,” and
they allege no acquisition misconduct. See, e.g., Falkowski v. Imation Corp., 309 F.3d
1123, 1130 (9th Cir. 2002) (“[T]he granting of an option constitutes a ‘purchase or sale’
under SLUSA.” (emphasis added)), abrogated on other grounds by Kircher, 547 U.S.
at 633. These cases transform Plaintiffs not from holders into purchasers, but, at best,
into different types of holders—holders of “contracts to purchase.” And Plaintiffs
provide no authority for their actual argument: that a fund’s redemption obligation
under an already-acquired contract to purchase amounts to an indefinitely extending
“purchase” under the carve-out.
Turning next to the term “involves,” Plaintiffs argue that, even if they are mere
holders, their action still “involves the purchase or sale of securities.” 15 U.S.C.
§ 77p(d)(1)(B) (emphasis added). They point to SLUSA’s bar on actions alleging fraud
“in connection with the purchase or sale of a . . . security,” id. § 77p(b)(1) (emphasis
added), and correctly note that Dabit interpreted this to include holder claims, 547 U.S.
at 86–87. Plaintiffs maintain that the distinction between “in connection with,” as used
in 15 U.S.C. § 77p(b)(1), and “involves,” as used in its carve-out, amounts to an
“insignificant semantic difference”—if the former language includes their action, so
must the latter. And they point to a senate report that originally used the “in connection
with” terminology in lieu of the actually enacted “involves” as further evidence that
Congress intended to use them synonymously. See S. Rep. No. 105-182, at 6 (1998).
Yet the difference between these terms is quite significant, because “in
connection with” is a statutorily significant term of art. In deciding that mere holders
of securities brought claims “in connection with the purchase or sale of a . . . security,”

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Dabit viewed Congress’s inclusion of that term as dispositive. 547 U.S. at 85. The
Court noted that it had previously construed this term broadly, a construction that
“Congress can hardly have been unaware of . . . when it imported the key phrase—‘in
connection with the purchase or sale’—into SLUSA’s core provision.” Id. The carveout, however, does not include this critical term, and the language in the senate report
that Plaintiffs refer to suggests that its absence is no accident. Had Congress intended
the carve-out to extend to holder claims, Dabit demonstrates that it knew which language
to use.
Unable to stretch the carve-out’s language to encompass their action, Plaintiffs
contend that their position—that holders fall within the carve-out—is nonetheless more
consistent with congressional intent. They reiterate their faulty senate-report argument,
and direct us to Dabit’s mention that the existence of the carve-out “evinces
congressional sensitivity to state prerogatives in this field.” Id. at 87–88.
But Dabit’s carve-out whisper does not drown out its more important SLUSA
story. Congress enacted SLUSA to ensure that PSLRA’s standards govern fraud-based
class actions involving securities. See id. at 86–87. Consistent with this broad goal,
Dabit explained that “class actions brought by holders pose a special risk of vexatious
litigation,” and “[i]t would be odd, to say the least, if SLUSA exempted that particularly
troublesome subset of class actions from its pre-emptive sweep.” Id. at 86.
Plaintiffs’ construction of the carve-out invites us to pull the rug out from under
Dabit’s holding, creating an exemption for a large set of the very holder claims over
which Dabit extended SLUSA’s bar. Indeed, Plaintiffs ask us to shield from PSLRA’s
federal protections nearly every class action involving shareholders in open-end mutual
funds. In the absence of clear language, precedent, or policy supporting this exemption,
we decline to extend the carve-out so far.

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B.
Plaintiffs next argue that even if their action falls outside the carve-out, nine of
their thirteen claims lie beyond SLUSA’s scope because they allege no “untrue statement
or omission of a material fact.” See 15 U.S.C. § 77p(b)(1). We disagree.
Plaintiffs opened their complaint by alleging that Defendants “fail[ed] to provide
truthful and complete information about the Funds’ portfolios,” and the district court
properly concluded that each of the claims that followed included allegations of fraud.
The court pointed to Plaintiffs’ allegations in their breach-of-contract claims that
Defendants misrepresented assets, created prospectuses with misleading financial
information, and failed to disclose material information during audits. Atkinson v.
Morgan Asset Mgmt., Inc., 664 F. Supp. 2d 898, 906 (W.D. Tenn. 2009). It further
explained that Plaintiffs alleged in their fiduciary-duty claims that Defendants employed
false financial statements and less-than-full disclosures, and in their negligence claims
that Defendants withheld material facts. Id. at 907.
Relying on an extracircuit district court case, Xpedior Creditor Trust v. Credit
Suisse First Boston (USA) Inc., 341 F. Supp. 2d 258 (S.D.N.Y. 2004), Plaintiffs argue
that this was not enough. That their claims included fraud-based allegations is
irrelevant, Plaintiffs contend, because SLUSA bars only claims that require fraud as a
necessary element.

And because fraud allegations merely form “background

information” for their nine claims—and not necessary elements—Plaintiffs urge that
they must thus survive. Driving this point home, Plaintiffs point out that their claims
incorporate prior allegations “except to the extent any allegations . . . contain any facts
that are unnecessary . . . for purposes of stating” the claims.
But Plaintiffs reliance is misplaced, and their argument misguided, because the
law of this circuit is clear: “[SLUSA] does not ask whether the complaint makes
‘material’ or ‘dependent’ allegations of misrepresentation in connection with buying or
selling securities. It asks whether the complaint includes these types of allegations, pure
and simple.” Segal, 581 F.3d at 311. In deciding whether SLUSA applies, we review
“the substance of a complaint’s allegations,” and claimants cannot “avoid its application

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through artful pleading that removes the covered words . . . but leaves in the covered
concepts.” Id. at 310–11.
Applying Segal, SLUSA precludes Plaintiffs’ claims because they include
allegations of misrepresentations and omissions, “pure and simple.” See id. at 311. The
district court rightly analyzed “the allegations contained in the complaint,” and “not the
state-law label placed on the claim,” in concluding that “allegations of omissions or
other deceitful activity” pervaded each of Plaintiffs’ claims. Atkinson, 664 F. Supp. 2d
at 906–07. That the claims did not “depend” on these allegations is inapposite, as is
Plaintiffs’ “artful” disclaimer. See Segal, 581 F.3d. at 310–11.
Confronting this conclusion, Plaintiffs attempt to distinguish Segal as involving
an actual purchase of securities. Plaintiffs contend that, unlike the plaintiffs in Segal,
they make no allegations “in connection with” a securities transaction because they “do
not allege any actual purchases or sales as the factual predicate for any of their claims.”
But Plaintiffs forget the very Dabit rule that they attempted to import into their carve-out
argument:

SLUSA’s “in connection with” language includes holder claims like

Plaintiffs’. 547 U.S. at 85.
As the district court noted, our circuit has not yet addressed whether SLUSA
precludes an entire action, as opposed to specific claims, if the complaint contains any
covered allegations. See Atkinson, 664 F. Supp. 2d at 905–06. SLUSA’s plain language,
along with our precedent, suggests that it does. See 15 U.S.C. § 77p(b) (“No covered
class action . . . may be maintained in any . . . court by any private party alleging . . .
[fraud] . . . .” (emphasis added)); Segal, 581 F.3d at 309 (“Does the amended complaint
allege an ‘untrue statement’ or a ‘material omission’ of fact . . . . If either one is true,
SLUSA bars the complaint.” (emphasis added) (citation omitted)). But we need not
decide the issue here: because all of Plaintiffs’ claims include allegations of fraud,
SLUSA damns each one.

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C.
Last, Plaintiffs take issue with the district court’s dismissal with prejudice,
challenging its conclusion that “[a]ny effort at amendment would be futile because
allegations of omissions or other deceitful activity are irreparably interwoven throughout
[their] causes of action.” Atkinson, 664 F. Supp. 2d at 907. They could still dodge
SLUSA, they contend, by either removing the fraud allegations from their claims or
shaving their class to less than fifty plaintiffs.
As to the merits of Plaintiffs’ first argument, SLUSA cannot be tricked. See
Segal, 581 F.3d at 310–11. We agree with the district court that fraud-based concepts
invade each of Plaintiffs’ claims, making efforts at artful amendment futile.
We find Plaintiffs’ class-shaving argument equally unavailing: distilled to its
essence, we read the argument as positing that dismissal with prejudice is never
permitted in SLUSA cases because a class could always amend to sufficiently limit its
numbers. This is not how SLUSA works. Plaintiffs originally could have filed a class
action with up to forty-nine members without worry of SLUSA; but once a case is a
“covered class action,” or has more than fifty members, the action “may [not] be
maintained” if it is based on allegations of fraud. 15 U.S.C. § 77p(b); see also Segal,
581 F.3d at 312 (affirming dismissal with prejudice of class claims).
Even if we agreed with these arguments, the problem is that Plaintiffs failed to
raise them below. At no point did Plaintiffs move for leave to amend; nor did they
contend, in their remand motion, that the district court should dismiss their claims
without prejudice should it deem dismissal appropriate. Nor did they even move for
reconsideration after the dismissal with prejudice. Plaintiffs having failed to present the
issue of amendment, we discern no abuse of discretion in the district court’s decision to
dismiss their claims with prejudice. See CNH Am. LLC v. UAW, — F.3d —, 2011 WL
1833202, at *9 (6th Cir. May 16, 2011) (“[I]f a party does not file a motion to amend or
a proposed amended complaint, it is not an abuse of discretion for the district court to
dismiss the claims with prejudice.”); Sinay v. Lamson & Sessions Co., 948 F.2d 1037,

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1041–42 (6th Cir. 1991) (“[A] district court does not abuse its discretion in failing to
grant a party leave to amend where such leave is not sought.”).
Plaintiffs appear to counter this notion by arguing that they never had a fair shot
at seeking leave to amend. They contend that seeking post-judgment relief would have
been futile, and that they had no chance to request amendment prior to the court’s
dismissal, as “[t]he District Court dismissed this entire action with prejudice even though
Defendants never moved to dismiss the complaint.”

This sua sponte dismissal

blindsided Plaintiffs, they argue, because “the only motion pending before the District
Court was Plaintiffs’ motion to remand.”
But Plaintiffs misunderstand the SLUSA process. Once a SLUSA-covered action
is removed and a plaintiff moves to remand, a motion to dismiss becomes unnecessary
because, as we explained, remand itself poses a “jurisdictional issue.” Kircher, 547 U.S.
at 643–44. Though Plaintiffs may not have recognized that they faced dismissal on the
basis of their remand motion alone, this oversight does not affect our assessment of the
district court’s exercise of discretion in dismissing with prejudice. See CNH Am. LLC,
2011 WL 1833202, at *9.
III.
Though Plaintiffs attempt to force their state-law class action within the carveout and construct walls around their allegations of fraud, their complaint “meets the
relatively straightforward requirements” of SLUSA and warrants dismissal. See Segal,
581 F.3d at 312. Accordingly, we affirm.