Hemphill v. Pershing, LLC
MEMORANDUM AND ORDER granting 20 Motion to Dismiss for Lack of Jurisdiction. Signed by Chief District Judge Julie A Robinson on 7/25/17. (kao)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
Case No. 16-2557-JAR-GLR
MEMORANDUM AND ORDER
Plaintiff brings this action alleging jurisdiction under the Class Action Fairness Act
(“CAFA”), 28 U.S.C. § 1332(d), on behalf of herself and other investors who owned taxdeferred brokerage accounts that earned more than $1000 of unrelated business taxable income
in 2014. The Complaint alleges that Plaintiff and other putative class members incurred more
than $5,000,000 in damages as a result of Defendant Pershing LLC’s (“Pershing”) failure to
timely file Internal Revenue Service (“IRS”) Form 990-T filings for the relevant accounts. This
matter is before the Court on Defendant’s Motion to Dismiss for Lack of Subject Matter
Jurisdiction under Fed. R. Civ. P. 12(b)(1) (Doc. 20). Plaintiff was permitted to conduct
discovery on the jurisdictional issues,1 and supplemental briefs were submitted.2 For the reasons
explained in detail below, the Court grants Defendant’s motion and dismisses the case without
Defendant moves to dismiss under Fed. R. Civ. P. 12(b)(1) for lack of subject matter
jurisdiction. Federal courts are courts of limited jurisdiction and, as such, must have a statutory
Docs. 27, 30.
or constitutional basis to exercise jurisdiction.3 A court lacking jurisdiction must dismiss the
case, regardless of the stage of the proceeding, when it becomes apparent that jurisdiction is
lacking.4 The party who seeks to invoke federal jurisdiction bears the burden of establishing that
such jurisdiction is proper.5 Mere conclusory allegations of jurisdiction are not enough.6
Generally, a Rule 12(b)(1) motion takes one of two forms: a facial attack or a factual
attack. “First, a facial attack on the complaint’s allegations as to subject matter jurisdiction
questions the sufficiency of the complaint. In reviewing a facial attack on the complaint, a
district court must accept the allegations in the complaint as true.”7 “Second, a party may go
beyond allegations contained in the complaint and challenge the facts upon which subject matter
jurisdiction depends. When reviewing a factual attack on subject matter jurisdiction, a district
court may not presume the truthfulness of the complaint’s factual allegations. A court has wide
discretion to allow affidavits, other documents, and a limited evidentiary hearing to resolve
disputed jurisdictional facts under Rule 12(b)(1).”8 Here, Defendant brings a factual attack on
the Complaint, urging that the maximum possible amount at issue in this case is far less than the
statutory minimum of $5,000,000.
The Complaint asserts claims against Pershing for breach of fiduciary duty and
negligence, and seeks actual damages in the form of penalties and interest charged as well as fees
Montoya v. Chao, 296 F.3d 952, 955 (10th Cir. 2002); see United States v. Hardage, 58 F.3d 569, 574
(10th Cir. 1995) (“Federal courts have limited jurisdiction, and they are not omnipotent. They draw their
jurisdiction from the powers specifically granted by Congress, and the Constitution, Article III, Section 2, Clause 1.”
(internal citations omitted)).
Laughlin v. Kmart Corp., 50 F.3d 871, 873 (10th Cir. 1995).
Montoya, 296 F.3d at 955.
United States ex rel. Hafter, D.O. v. Spectrum Emergency Care, Inc., 190 F.3d 1156, 1160 (10th Cir.
Holt v. United States, 46 F.3d 1000, 1002 (10th Cir. 1995) (citation omitted).
Id. at 1003 (citation omitted).
collected by Pershing for preparation of the tax returns. The proposed class is defined as all
Retirement Account owners/holders for which Pershing was or is the custodian or similar
fiduciary role over the Retirement Accounts invested in Kinder Morgan limited partnerships
during 2014, for which Pershing failed to timely file a Form 990-T filing for the year 2014. The
putative class consists of approximately 5,052 Retirement Accounts.
In support of its motion to dismiss, Pershing submitted an affidavit from its Vice
President, Amy E. Pirone, who avers as follows: Pershing is the largest securities clearing firm
in the United States, providing brokerage execution, clearance, and other investment products
and services to financial firms, including brokerage firms. The brokerage firms that utilize
Pershing’s clearing services are commonly referred to as “introducing firms.”9 Pershing acts as
the custodian for its introducing firms’ clients’ tax-deferred accounts, including Individual
Retirement Accounts (“IRA”), Simplified Employee Pension Plans, Savings Incentive Match
Plans for Employees, Roth IRAs and Coverdell Educational Savings Accounts.10
An IRS form 990-T filing (“990T-Return”) is required for tax-deferred accounts invested
in limited partnerships that earned $1000 or more of unrelated business taxable income (“UBTI”)
during the prior year.11 As custodian, or as servicing agent of the custodian, Pershing is
responsible for completing and filing a 990T-Return on behalf of tax-deferred accounts that meet
In 2014, Plaintiff and other putative class members maintained tax-deferred accounts at
Pershing’s introducing firms, for which Pershing was the custodian or servicing agent of the
Pirone Decl., Doc. 21, Ex. 1 ¶ 4.
Id. ¶ 5.
Id. ¶ 6.
Id. ¶ 7.
custodian (the “Retirement Accounts”).13 The Retirement Accounts were invested in Kinder
Morgan limited partnerships that earned $1000 or more of UBTI during 2014, and thus required
that 990T-Returns be filed.14 Pershing was responsible for filing a 990T-Return for each of the
Retirement Accounts.15 Pershing did not file the 990T-Returns for the Retirement Accounts by
the April 15, 2015 deadline. Ultimately, Pershing filed 990T-Returns for 5,052 Retirement
Pershing charged a fee for most of the 990T-Returns it filed on behalf of the Retirement
Accounts (collectively, the “Tax Return Fees”).17 Pershing assessed Tax Return Fees against
4,278 Retirement Accounts.18 The total Tax Return Fees charged to the Retirement Accounts
Of the 5,052 Retirement Accounts for which a 990T-Return was filed, 2,222 Retirement
Accounts incurred taxable UBTI in 2014.20 In addition to reporting the required tax payment for
these Retirement Accounts, the 990T-Returns that Pershing filed reflected estimated penalties for
late filing, late payment and underpayment of estimated taxes, as well as interest on the amount
due from April 15, 2015 until the tax returns were filed (collectively, the “Gross Tax-Related
Liabilities”).21 The total Gross Tax-Related Liabilities for the 2,222 Retirement Accounts is
Id. ¶ 8.
Id. ¶ 9.
Id. ¶ 10.
Id. ¶ 11.
Id. ¶ 12.
Id. ¶ 13.
Id. ¶ 16.
$2,535,561.22 As of January 30, 2017, the IRS has refunded approximately $1,740,246 of the
Gross Tax-Related Liabilities to the Retirement Accounts.23 Subtracting the amount refunded
from the Gross Tax-Related Liabilities reduced these Liabilities to approximately $795,315 (the
“Net Tax-Related Liabilities”).24 It is anticipated that the Net Tax-Related Liabilities will be
further reduced once the IRS completes the refund and abatement process.25
After Plaintiff objected that the calculations reflected in the Pirone Declaration were not
supported by documentation, Pershing produced to Plaintiff a page from the 990T-Return for
each of the 2,222 Retirement Accounts that incurred a Tax-Related Liability in 2014.26 A second
Pirone Declaration was filed, attesting to the 2,222 documents and stating that the remaining
2,830 Retirement Accounts for which 990T-Returns were filed for the tax year 2014 did not earn
Plaintiff seeks to invoke the Court’s subject matter jurisdiction under CAFA. Under
CAFA, a federal district court has subject matter jurisdiction when a proposed class has more
than 100 members, there is diversity of citizenship between any member of the class and any
defendant, and the amount in controversy exceeds the sum or value of $5,000,000 exclusive of
interest or costs.28 This amount represents the aggregate claims of all putative members.29 The
only question here is whether the amount in controversy exceeded $5,000,000 when the lawsuit
Id. ¶ 17.
Id. ¶ 18.
Id. ¶ 19.
Second Pirone Decl., Doc. 30-1, Docs. 31, 31, Ex. A, pp. 1–2222.
28 U.S.C. § 1332(d)(2) and (5)(B); Standard Fire Ins. Co. v. Knowles, 133 S. Ct. 1345, 1348 (2013).
The Court accepts the plaintiff’s amount-in-controversy allegation if it is made in good
faith.30 To dismiss for lack of jurisdiction on this basis, “[i]t must appear to a legal certainty that
the claim is really for less than the jurisdictional amount to justify dismissal.”31 Because
Plaintiff has the burden of establishing jurisdiction, she “must show that it does not appear to a
legal certainty that [she] cannot recover the jurisdictional amount.”32 Once “allegations of
jurisdictional facts are challenged, plaintiff must support them by competent proof, including
amendments or affidavits, if necessary.”33 The legal certainty standard is “very strict,” and will
generally be met only when the recoverable amount is limited by law or contract, or when there
is an obvious abuse of federal court jurisdiction.34 In the absence of a legal certainty to the
contrary, courts generally rely on the amount sought in the complaint.35
The Complaint asserts claims of breach of fiduciary duty and negligence, and seeks
actual damages in the form of penalties and interest charged as well as and fee collected by
Pershing for preparation of the tax returns. Plaintiff asserts generally that based on 5,052
putative class members, she need only allege that each class member has an average of
approximately $1000 in total actual damages.
Pershing challenges Plaintiff’s allegation of jurisdiction, and calculates the amount in
controversy as far less than the requisite $5,000,000. Specifically, Pershing argues that the
Dart Cherokee Basin Operating Co. v. Owens, 135 S. Ct. 547, 553 (2014) (discussing dispute over
amount in controversy in CAFA case on motion to remand).
Watson v. Blankinship, 20 F.3d 383, 386 (10th Cir. 1994) (citing St. Paul Mercury Indem. Co. v. Red
Cab Co., 303 U.S. 283, 288 (1938)).
Woodmen of World Life Ins. Soc’y v. Manganaro, 342 F.3d 1213, 1216 (10th Cir. 2003) (citations and
Salazar v. Furr’s, Inc., 629 F. Supp. 1403, 1407 (D.N.M. 1996) (citing McNutt v. Gen. Motors
Acceptance Corp., 298 U.S. 178, 189 (1936)).
Id. at 1216–17.
maximum amount in controversy is the Gross Tax Related Liabilities ($2,535,561) plus the Tax
Return Fees ($721,100), which equals $3,256,661.36 In support, Pershing attaches the 990TReturn for each of the 2,222 Retirement Accounts that incurred a Tax-Related Liability in 2014.
Pershing states that the remaining 2,830 Retirement Accounts for which 990T-Returns were filed
for tax year 2014 did not earn taxable UBTI or incur taxes, penalties, or interest.37 Thus,
Pershing submitted evidence showing more than half of the putative class did not incur actual
damages beyond the fee paid to Pershing, resulting in an amount in controversy approximately
$1.7 million short of the requisite $5 million.
Plaintiff takes issue with the 990T-Returns, arguing that they do not show the full extent
of penalties and are incomplete. Review of the 990T-Returns Pershing submitted reflects the
total penalties and interests assessed by the IRS, resulting in the Tax Liability calculation for the
2,222 Retirement Accounts. In support, Plaintiff argues that she was charged additional interest
of $35.70, or 1% of her total tax bill, for her tax payment that was five months late, as reflected
in the IRS transcript for her account. Assuming Plaintiff is correct, and there is similar late
payment interest charged on all 2,222 Retirement Accounts that incurred tax liability, this raises
total damages by a mere 1%, which does not reasonably approach the $1.7 million gap.
Plaintiff further complains that she has not been provided refund information, so she does
not know whether the IRS refunded all putative class members the amount of the penalty.
Pershing’s calculation of the maximum amount, however, excludes more than $1,700,000 that
the IRS has rebated to the Retirements Accounts, so the amount of rebates is not relevant.
Pershing contends the actual amount in controversy is the Net Tax Related Liabilities, or $795,314.54,
which continues to decline as the IRS refunds penalties and/or interest to the Retirement Accounts. Of course, the
relevant time frame for calculating the amount in controversy is when the lawsuit is filed, and many of these rebates
are ongoing and occurred after the case was filed in August 2016.
Second Pirone Decl., Doc. 30-1.
Plaintiff next argues that because Pershing admits the class has over 5000 members and
each member has actual damages including fees and expenses incurred, tax penalties and
interest, the amount in controversy requirement “should easily be met.” Pershing makes no such
admission, however, and submits that the 2,830 Retirement Accounts that did not owe UBTI tax
in 2014 incurred no Related Tax Liabilities. Further, Pershing included all of the Tax Return
Fees in its maximum amount calculation. Nevertheless, Plaintiff contends that Pershing should
provide the 990T-Returns for all putative class members, arguing there are other damages the
Retirement Accounts may have incurred:
[A]ll of these clients are subject to the [UBTI]. They may have no UBTI due
if their UBTI income is less than $1,000 but they are still subject to the UBTI
regime. Additionally, if they have other IRAs they can only use the $1000
UBTI exemption once. It is not known whether these individuals used their
exemption elsewhere without inquiring about this issue.38
As Pershing notes, each Retirement Account is its own separate taxpaying entity; UBTI tax is
charged to that Account, not to the account holder, and each account has its own $1000 limit.39
Thus, the Court agrees that such speculative, inchoate, and unrealized harm cannot be included
in the amount in controversy calculation.40
Finally, Plaintiff requests additional time to depose Ms. Pirone and for production of the
2,830 990T-Returns that incurred no Tax Return Liability. The court enjoys wide discretion in
determining whether jurisdictional discovery is warranted.41 Refusal to grant discovery when a
Rule 12(b)(1) motion raises factual issues constitutes an abuse of discretion if denial of the
Doc. 27 at 2.
See https://www.irs.gov/pub/irs-pdf/i990t.pdf at 2 (“Each account of a type listed above is treated as a
separate trust for unrelated business income tax purposes (even if there is a single owner or beneficiary for multiple
accounts).”) (IRS instructions to Form 990-T) (accessed July 24, 2017).
Holt v. United States, 46 F.3d 1000, 1003 (10th Cir. 1995) (explaining, once challenged, plaintiff must
provide evidence beyond allegations to support amount in controversy).
First Magnus Fin. Corp. v. Star Equity Funding, LLC, No. 06-2426-JWL, 2007 WL 635312, at *10 (D.
Kan. Feb. 27, 2007).
discovery request results in prejudice to the litigant.42 Prejudice is present “‘if either the
pertinent jurisdictional facts are controverted or a more satisfactory showing of the facts is
necessary.’”43 A request for jurisdictional discovery must be supported by more than a mere
“hunch that it might yield jurisdictionally relevant facts.”44
Here, Plaintiff requested jurisdictional discovery in her first response to Pershing’s
motion to dismiss, arguing that Pirone’s unsupported affidavit was insufficient to defeat subject
matter jurisdiction.45 The parties jointly moved to modify the scheduling order to accommodate
Plaintiff’s request for jurisdictional discovery.46 Pershing produced the 2,222 source documents
for the Gross Tax-Related Liabilities, and Pirone executed a second affidavit attaching those
documents and averring that the other 2,830 Retirement Accounts did not earn taxable UBTI or
incur taxes, penalties, or interest.47 Plaintiff has not submitted any evidence that controverts the
facts set forth in either Pirone affidavit. In fact, Plaintiff has not submitted any evidence at all in
support of the amount in controversy. Plaintiff has not offered an explanation why she did not
depose Pirone or request the additional 990T-Returns during the time allotted, nor has Plaintiff
“stated that it has any reason to believe that the statements in [defendant’s] affidavit[ ] are
untrue.”48 In the absence of any material and relevant evidence from Plaintiff to support her
assertion of jurisdiction, the Court is not prepared to authorize what would amount to a fishing
Sizova v. Nat. Inst. of Standards & Tech., 282 F.3d 1320, 1326 (10th Cir. 2002) (citations omitted).
Proud Veterans, LLC v. Ben-Menashe, No. 12-cv-1126-JAR, 2012 WL 6681888, at *1 (D. Kan. Dec. 21,
2012) (quoting Health Grades, Inc. v. Decatur Mem’l Hosp., 120 F. App’x 586, 589 (10th Cir. 2006) (citing Sizova,
282 F.3d at 1326)).
Breakthrough Mgmt. Grp. v. Chukchansi Gold Casino & Resort, 629 F.3d 1173, 1190 (10th Cir. 2010)
(quoting Boschetto v. Hansing, 529 F.3d 1011, 1020 (9th Cir. 2008)).
Doc. 24. The first declaration attached a spreadsheet summarizing the Gross Tax-Related Liabilities.
Doc. 30-1, Ex. A.
First Magnus, 2007 WL 635312, at *10.
expedition in an effort to establish damages that were not incurred by the majority of the putative
class. Accordingly, the Court, in its discretion, denies Plaintiff’s request for additional
For all of the foregoing reasons, the Court finds that a reasonable estimate of the amount
in controversy at the time the lawsuit was filed is $ 3,256,661, as substantiated by sworn
testimony and production of the 2,222 990T-Returns. Plaintiff has neither rebutted this evidence
nor identified any additional damages that could have been incurred by members of the putative
class that would account for the $1,700,000 deficit. Because Plaintiff has not satisfied her
burden that it is not a legal certainty that the class will not recover more than $5,000,000, this
Court does not have subject matter jurisdiction over this case.
IT IS THEREFORE ORDERED BY THE COURT that Defendant’s Motion to
Dismiss for Lack of Subject Matter Jurisdiction (Doc. 20) is GRANTED without prejudice.
IT IS SO ORDERED.
Dated: July 25, 2017
S/ Julie A. Robinson
JULIE A. ROBINSON
CHIEF UNITED STATES DISTRICT JUDGE
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