Luis et al v. RBC Capital Markets, LLC
MEMORANDUM OPINION AND ORDER denying 22 Motion to Dismiss. (Written Opinion) Signed by Judge Susan Richard Nelson on 09/18/2017. (SMD)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
GARY and CARYL LUIS, GARY A.
MENTZ, MICHAEL J. and MERRI L.
VITSE, individually and on behalf of
all others similarly situated,
Case No. 0:16-cv-03873 (SRN/DTS)
RBC CAPITAL MARKETS, LLC,
Daniel E. Gustafson, Daniel C. Hedlund, David A. Goodwin, and Eric S. Taubel,
Gustafson Gluek PLLC, 120 South Sixth Street, Suite 2600, Minneapolis, Minnesota
55402, Gregg Martin Fishbein and Vernon J. Vander Weide, Lockridge Grindal Nauen
PLLP, 100 Washington Avenue South, Suite 2200, Minneapolis, Minnesota 55401, Scott
D. Hirsch, Scarlett & Hirsch, P.A., 7301 West Palmetto Park Road, Suite 207a, Boca
Raton, Florida 33433, for Plaintiffs.
Alex J. Kaplan and Andrew W. Stern, Sidley Austin LLP, 787 Seventh Avenue, New
York, New York 10019, Clifford M. Greene and Sybil L. Dunlop, Greene Espel PLLP,
222 South Ninth Street, Suite 2200, Minneapolis, Minnesota 55402, for Defendant.
SUSAN RICHARD NELSON, United States District Judge
This action arises from a series of investments that Defendant RBC Capital Markets,
LLC (“RBC”) made for Plaintiffs, involving security instruments called reverse
controvertible notes, or RCNs. Before the Court is RBC’s Motion to Dismiss the Amended
Complaint [Doc. No. 22]. For the reasons set forth below, RBC’s motion is denied.
A. Previous Related Litigation
In a related previous action, a similar set of plaintiffs (which included current
plaintiffs Gary and Caryl Luis) filed a class-action Complaint pleading seven claims based
in Minnesota state law, including common law negligence, breach of fiduciary duty, and
breach of contract. These plaintiffs alleged that RBC engaged in a series of actions
designed to hide the true risk of these products from investors, while pushing them on
individuals who had expressly indicated an unwillingness to partake in options trading. Luis
v. RBC Capital Mkts., LLC, No. 16–cv–00175, 2016 WL 6022909, at *2 (D. Minn. Oct. 13,
RBC moved the Court to dismiss the Complaint, arguing that it was precluded under
the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), which precludes1
maintenance—in either federal or state court—of any “covered class action” based on state
law and alleging either (a) a “misrepresentation or omission of a material fact” in
connection with the purchase or sale of a covered security, or (b) the use or employment of
any “manipulative or deceptive device or contrivance” in connection with the purchase or
sale of a covered security. 15 U.S.C. § 78bb)f(1); see also 15 U.S.C. § 77p(b). This Court
granted RBC’s motion and dismissed the complaint without prejudice. Luis, 2016 WL
6022909, at *8.
Although SLUSA is frequently referred to as a preemption statute, it is more properly
labeled a preclusion statute, as it “does not itself displace state law with federal law but
makes some state-law claims nonactionable through the class-action device in federal as
well as state court.” Kircher v. Putnam Funds Tr., 547 U.S. 633, 636 n.1 (2006).
B. The Parties
Plaintiffs in this matter are five individuals who opened investment accounts with
RBC. (Am. Compl. [Doc. No. 18] ¶¶ 7-9.) They commenced this action on behalf of
themselves and the following putative class: “All persons and entities to whom Defendant
sold [RCNs] from January 1, 2008 to the present, whose written instructions to RBC did not
authorize selling put options.”2 (Id. at ¶ 22.)
Plaintiffs estimate that the putative class
may ultimately consist of “several thousand” individuals. (Id. at ¶ 25.)
Defendant RBC is a Minnesota limited liability company and a registered brokerdealer, which acted as the agent for the sale of the RCNs underlying this dispute. Luis, 2016
WL 6022909, at *1. RBC is a subsidiary of non-party Royal Bank of Canada, which issued
the RCNs. Id.
C. Plaintiffs’ Claim
Plaintiffs’ Amended Complaint makes a single claim for breach of contract. (Am.
Compl. ¶¶ 35-40.) Plaintiffs allege that each member of the putative class contracted with
RBC to give limited authority for trading in put options, which excluded “uncovered” or
“naked” put options like those embedded in RCNs. (Id. ¶¶ 2-4.) Plaintiffs either completed
an Options Agreement, authorizing trade in some options but not uncovered or naked put
RCNs are a form of bond, consisting of a high-yield, short-term note of the issuer
that is linked to the performance of an unrelated reference asset—generally a stock or basket
of stocks. Luis, 2016 WL 6022909, at *1. RCNs thus contain two components—a debt
instrument paying an above market interest rate (occasionally as high as 30%), and a
derivative, in the form of a put option, that gives the issuer the right to repay principal to the
investor in the form of a set amount of the underlying asset if the price of the underlying
asset dips below a predetermined price. Id. It is this underlying option that gives RCNs
options, or, if they did not complete the Options Agreement, they authorized no options
trading at all. (Id. at ¶ 4.) Despite these restrictions, Plaintiffs allege that RBC “caused
Plaintiffs and other putative class members to issue/sell” RCNs to Royal Bank of Canada,
RBC’s parent company, which then sold the RCNs in the private market. (Id. at ¶ 19.)
When the price of the reference assets for the RCNs fell below the predetermined value,
Plaintiffs were forced to purchase the reference stocks and lose the value of their original
notes. (Id. at ¶¶ 18-19.) Plaintiffs allege that they collectively lost nearly $280,000 on their
$327,126.49 investment in RCNs. (Id. at ¶¶ 7-9.)
D. RBC’s Motion
In its Motion to Dismiss, RBC argues that Plaintiffs’ Amended Complaint fails as a
matter of law because it is precluded by SLUSA. (Mem. in Supp. of Def’s. Mot. to Dismiss
the Am. Class Action Compl. [Doc. No. 24] (“Def’s. Mem.”) at 14-18.)3 In the alternative,
RBC asserts that Plaintiffs do not plead sufficient facts to “ ‘state a claim to relief that is
plausible on its face.’ ” (Def’s. Mem. at 21 (quoting Bell Atl. Corp. v. Twombly, 550 U.S.
544, 570 (2007).)
A. Standard of Review
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, dismissal is warranted
where a plaintiff “fail[s] to state a claim upon which relief can be granted.”
greater risk than a traditional bond, as an investor may ultimately lose all of his or her
principal investment and be left with only a depreciated asset in return. Id.
All references to page numbers in this Opinion are those assigned by the CM/ECF
evaluating a motion to dismiss under Rule 12(b)(6), the Court assumes the facts in the
complaint to be true and construes all reasonable inferences from those facts in the light
most favorable to the plaintiff. Morton v. Becker, 793 F.2d 185, 187 (8th Cir. 1986). While
ordinarily only the facts alleged in the complaint are considered in deciding a motion to
dismiss, “materials attached to the complaint as exhibits may be considered,” Id., as well as
public records, Levy v. Ohl, 477 F.3d 988, 991 (8th Cir. 2007).
RBC argues that Plaintiffs’ claim triggers SLUSA preclusion and therefore must be
dismissed. In the Court’s previous order in the related action, the Court outlined relevant
portions of the legislative history of SLUSA. See Luis, 2016 WL 6022909, at *3. In
essence, it appears that Congress passed SLUSA to close a loophole that allowed classaction litigants to avoid the heightened pleading standards for federal securities-fraud claims
by filing suits under state law. Id. (citing Merrill Lynch, Pierce, Fenner & Smith Inc. v.
Dabit, 547 U.S. 71, 82 (2006)).
In light of SLUSA's background, courts have interpreted its reach in an expansive
fashion. The Supreme Court has declared that its passage reinforces Congress’ resolve that
“[t]he magnitude of the federal interest in protecting the integrity and efficient operation of
the market for nationally traded securities cannot be overstated.” Dabit, 547 U.S. at 78.
Likewise, the Eighth Circuit has noted that “SLUSA should be read with the ‘presumption
that Congress envisioned a broad construction.’ ” Siepel v. Bank of Am., N.A., 526 F.3d
1122, 1127 (8th Cir. 2008) (quoting Dabit, 547 U.S. at 86). Thus, SLUSA has even been
read to “pre-empt[ ] state-law class-action claims for which federal law provides no private
remedy.” Dabit, 547 U.S. at 74. Taken together, these and other cases suggest that courts
should err on the side of finding in favor of preclusion under SLUSA when the issue is a
The Eighth Circuit has developed a four-factor test for determining when a claim is
precluded by SLUSA. Under this test, a party seeking to invoke SLUSA's application must
demonstrate the following: (1) the action is a “covered class action”; (2) the action purports
to be based on state law; (3) the action alleges that the defendant misrepresented or omitted
a material fact (or used or employed a manipulative or deceptive device or contrivance); and
(4) the action alleges that the defendant's misrepresentations or omissions of material fact
were made “in connection with the purchase or sale of a covered security.” See Sofonia v.
Principal Life Ins. Co., 465 F.3d 873, 876 (8th Cir. 2006); Green v. Ameritrade, Inc., 279
F.3d 590, 596 (8th Cir. 2002).
As in the previous related case, it is clear that the first two factors are met here. See
Luis, 2016 WL 6022909, at *3. Under SLUSA, a “covered class action” is essentially any
lawsuit “in which damages are sought on behalf of more than 50 people.” Dabit, 547 U.S.
at 83; see also 15 U.S.C. §§ 77p(f)(2)(A), 78bb(f)(5)(B)(i). Plaintiffs’ Amended Complaint
contends that the putative class may number “several thousand or more,” and they seek
damages on behalf of themselves and the putative class members. (Am. Compl. at ¶¶ 21,
25.) Thus, Plaintiffs’ action is a “covered class action” for SLUSA purposes. Likewise,
because Plaintiffs’ breach of contract claim sounds in Minnesota common law, this action
“purports to be based on state law.” Sofonia, 465 F.3d at 876.
Briefly jumping ahead, the fourth factor of the SLUSA test requires allegations that
RBC’s misrepresentations or omissions were made “in connection with the purchase or sale
of a covered security.” Sofonia, 465 F.3d at 876. In its previous order in the related case,
the Court concluded that RBC’s alleged wrongdoing met this requirement. Luis, 2016 WL
6022909, at *5-7. Here, the circumstances underlying that determination are no different.
The RCNs remain, under this Court’s interpretation, a “covered security,” see id., and
Plaintiffs do not currently dispute that RBC’s alleged breach of contract was “in connection
with” the purchase or sale of the RCNs. (See Pls’. Opp. to Def’s. Mot. to Dismiss [Doc. No.
32] (“Pls’. Mem.”).) Consequently, the Court’s SLUSA analysis turns on the third element:
whether Plaintiffs allege “that the defendant misrepresented or omitted a material fact (or
used or employed a manipulative or deceptive device or contrivance).” Sofonia, 465 F.3d at
In analyzing this requirement, the Eighth Circuit looks to the gravamen of the
plaintiff’s complaint. See Dudek v. Prudential Secs., Inc., 295 F.3d 875, 879 (8th Cir.
2002). Thus, a court does not “rely on the names of the causes of action that the plaintiff
alleges. Instead [it] look[s] at the substance of the allegations, based on a fair reading.
SLUSA preemption is based on the conduct alleged, not the words used to describe the
conduct.” Kutten v. Bank of Am., N.A., 530 F.3d 669, 670-71 (8th Cir. 2008) (citations
misrepresentations—such as those for breach of contract, breach of fiduciary duty, and
negligence—when, at bottom, the essence of the complaint was an allegation of fraud. See
id.; Dudek, 295 F.3d 875. In Kutten v. Bank of America, N.A., the plaintiffs filed a
complaint alleging, inter alia, breach of contract and breach of fiduciary duty arising from
Bank of America’s practice of steering trust assets into a mutual fund substantially owned
by the bank. 530 F.3d at 670. The plaintiffs stated that the bank breached its fiduciary duty
by failing to “disclos[e] . . . certain information” and “failing to be candid.” Id. at 671.
Seeing no relevant distinction between misrepresentation or omission and “failing to be
honest” or failing to disclose, the court affirmed the district court’s dismissal of the
The Eighth Circuit also affirmed a dismissal in Dudek v. Prudential Securities, Inc.,
in which the plaintiffs alleged that Prudential Securities improperly marketed tax-deferred
annuities to holders of accounts that already enjoyed tax-deferred status; the annuities thus
provided a redundant benefit in exchange for higher fees. 295 F.3d at 877. Though the
plaintiffs excised any mention of fraud, misrepresentation, and nondisclosure from their
second complaint, the court noted that “the fact allegations in the two complaints are
otherwise essentially the same. . . . [T]he essence of both complaints is the unlawful
marketing of tax-deferred annuities, either by misrepresenting their suitability for taxdeferred retirement plains, or by failing to disclose their unsuitability for such accounts.” Id.
But just as plaintiffs cannot avoid SLUSA through artful pleading, defendants may
not “recast contract claims as fraud claims by arguing that they ‘really’ involve deception or
misrepresentation.” Freeman Invs., L.P. v. Pac. Life Ins. Co., 704 F.3d 1110, 1116 (9th Cir.
2013); accord Holtz v. JPMorgan Chase Bank, N.A., 846 F.3d 928, 931 (7th Cir. 2017)
(stating that SLUSA will permit “genuine contract claims” to proceed, but affirming
dismissal because the plaintiff “does not point to any explicit [contract] term that the Bank
RBC argues that the gravamen of Plaintiffs’ claim is misrepresentation, because
“RBC is alleged to have falsely represented in an ‘Options Client Agreement and Approval
Form’ . . . that, if so instructed, RBC would not ‘cause’ Plaintiffs to invest funds in RCNs.”
(Def’s. Mem. at 15). But RBC’s forced reading of Plaintiffs’ claim collapses the distinction
between breach of contract and fraud. Cf. Mills v. Polar Molecular Corp., 12 F.3d 1170,
1176 (2d Cir. 1993) (“The failure to carry out a promise made in connection with a
securities transaction is normally a breach of contract. It does not constitute fraud unless,
when the promise was made, the defendant secretly intended not to perform or knew that he
could not perform.”). Under RBC’s reasoning, any breach of contract claim would contain
a misrepresentation, namely, that one party was misled to believe that the breaching party
would actually perform the terms of the contract. Such a characterization improperly reads
an intent to defraud into a cause of action that does not require it. Plaintiffs do not allege
that RBC secretly intended to breach the contract when it was formed, and nothing about
their allegations suggests that misrepresentation hides in the substance of the claim.
Accordingly, Plaintiffs’ claim is not based on “a misrepresentation or omission of a material
fact.” 15 U.S.C. § 78bb(f)(1)(A); see Sofonia, 465 F.3d at 876.
Nor does Plaintiffs’ claim involve “a manipulative or deceptive device or
contrivance.” 15 U.S.C. § 78bb(f)(1)(B); see Sofonia, 465 F.3d at 876. RBC asserts that
Plaintiffs characterize RCNs as deceptive devices, by alleging that they are typically tied
“ ‘to a volatile stock,’ ” which here exposed Plaintiffs to “ ‘substantial risk’ ” while RBC
was guaranteed to make a profit. (Def’s. Mem. at 18 (quoting Am. Compl. ¶¶ 6, 18).) But
Plaintiffs do not dispute that RBC disclosed the risks associated with the RCNs, and their
Amended Complaint does not allege otherwise. (See Pls’. Mem. at 22 (“Plaintiffs agree that
RBC disclosed all facets of the RCN in its prospectuses and marketing and promotional
materials concerning the embedded naked put options.”); Am. Compl. ¶¶ 1-6, 17-20.)
Further, investment companies are paid to facilitate investments with varying degrees of
risk. The mere fact that RBC was paid commissions for the sales of the high-risk RCNs
does not make its practices inherently deceptive.
In sum, Plaintiffs’ claim is distinct from those that have been precluded under
SLUSA: Plaintiffs allege a contract with a specific obligation on the part of RBC, and they
allege that RBC violated that obligation, breaching the contract. (Am. Compl. ¶¶ 35-40.)
Crucially, this obligation is not an amorphous “duty to be honest” like the one that doomed
the claims in Kutten and Dudek. Kutten, 530 F.3d at 671; Dudek, 295 F.3d at 879-80.
Rather, Plaintiffs allege a specific obligation that RBC not sell or purchase options without
Plaintiffs’ written authorization. (See Am. Compl. ¶¶ 4, 15, 37.) Accordingly, the Court
finds that the third factor of the SLUSA test for preemption has not been met.
For all of the foregoing reasons, the Court finds that Plaintiffs’ breach of contract
claim is not precluded by SLUSA.
C. Adequacy of Pleading
RBC asserts that Plaintiffs’ allegations “sound in fraud,” and that Plaintiffs must
therefore meet the heightened pleading standards of Fed. R. Civ. P. 9(b). (Def’s. Mem. at
21.) Federal Rule of Civil Procedure 9(b) states: “In alleging fraud or mistake, a party must
state with particularity the circumstances constituting fraud or mistake. Malice, intent,
knowledge, and other conditions of a person’s mind may be alleged generally.” But as the
Court discussed above, Plaintiffs’ claim does not allege fraud, either explicitly or implicitly.
Thus, Plaintiffs need only meet the pleading standard of Fed. R. Civ. P. 8(a)(2).
Under Rule 8(a)(2) of the Federal Rules of Civil Procedure, a complaint “must
contain . . . a short and plain statement of the claim showing that the pleader is entitled to
relief.” Although the complaint need not contain “detailed factual allegations,” it must
plead facts sufficient “to raise a right to relief above the speculative level.” Twombly, 550
U.S. at 555. Thus, to survive a motion to dismiss, the plaintiff’s “obligation to provide the
grounds of his entitlement to relief requires more than labels and conclusions.” Benton v.
Merrill Lynch & Co., Inc., 524 F.3d 866, 870 (8th Cir. 2008) (quotations and citation
omitted). Rather, the complaint “must contain sufficient factual matter, accepted as true, to
state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (quotation and citation omitted).
RBC argues that Plaintiffs fail to meet either the 9(b) or the 8(a)(2) pleading
standard, because the Amended Complaint does not “identify the RCNs they purchased,
specify any recommendations made (or the circumstances in which RBC ‘caused’ Plaintiffs
to purchase RCNs), instructions given, or the dates thereof.” (Def’s. Mem. at 21.) But as
noted at the hearing on the instant motion, the Amended Complaint alleges that the contract
with RBC prohibited the issuance of any RCNs without written authorization. (Hr’g Tr. of
June 23, 2017 [Doc. No. 38], at 13-14; see also Am. Compl. ¶ 4.) Plaintiffs’ allegations
sufficiently apprise RBC of the nature of the claim. To the extent that RBC requires
additional specificity, it presumably has access to its own transaction records and account
RBC further argues that Plaintiffs do not sufficiently allege the elements of a breach
of contract claim. (Def’s. Mem. at 22-25.) “In order to state a claim for breach of contract,
the plaintiff must show (1) formation of a contract, (2) performance by plaintiff of any
conditions precedent to his right to demand performance by the defendant, and (3) breach of
the contract by defendant.” Park Nicollet Clinic v. Hamann, 808 N.W.2d 828, 833 (Minn.
2011). RBC asserts that nothing in the Account Agreement or Options Agreement attached
to Plaintiffs’ Amended Complaint prohibits RBC from making investments in RCNs, and
that the section of the Options Agreement to which Plaintiffs refer was a nonbinding
“compliance approval.” (Def’s. Mem. at 22-23.) Further, RBC states that Plaintiffs did not
successfully plead that they performed all conditions precedent of the contract. (Id. at 2324.)
The Court disagrees. Plaintiffs sufficiently allege that: (1) they formed contracts
with RBC that indicated the instructions and authorizations necessary for RBC to buy or sell
options in Plaintiffs’ accounts; (2) Plaintiffs fully performed their contractual obligations by
paying RBC commissions or management fees; (3) RBC breached the parties’ contracts by
issuing naked put options without acquiring Plaintiffs’ written authorizations, as required by
the contracts; and (4) RBC’s actions caused Plaintiffs to suffer damages. (Am. Compl.
¶¶ 35-40.) Certainly, RBC construes the parties’ agreements differently, but Plaintiffs have
plausibly alleged the elements of a breach of contract claim under Minnesota laws. See
Park Nicollet, 808 N.W.2d at 833. To the extent that RBC contends that Plaintiffs fail to
plead the performance all conditions precedent, Plaintiffs’ allegations sufficiently
acknowledge their performance, (see Am. Compl. ¶ 38), and RBC is free to assert in its
Answer any alleged deficiencies in this regard.
Therefore, assuming the facts in the complaint to be true and drawing all reasonable
inferences from those facts in the light most favorable to Plaintiffs, as the Court is required
to do here, Morton, 793 F.2d at 187, the Court concludes that Plaintiffs’ factual allegations
sufficiently plead the elements of a breach of contract claim under Minnesota law.
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED THAT Defendant’s Motion to Dismiss [Doc. No. 22] is DENIED,
as detailed herein.
Dated: September 18, 2017
s/Susan Richard Nelson
SUSAN RICHARD NELSON
United States District Judge
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