Whittington et al v. Morgan Stanley Smith Barney et al

Filing 24

MEMORANDUM OF DECISION AND ORDER denying without prejudice 11 and 15 Motions to Dismiss; granting 13 Motion to Remand to State Court. (SEE ORDER FOR DETAILS). Signed by District Judge Martin Reidinger on 10/11/12. (nll)

THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
ASHEVILLE DIVISION
CIVIL CASE NO. 1:12cv112

LESLIE A. WHITTINGTON, TERRY
R. SLOAN, LINNEA J. DALLMAN,
JEFFREY D. EFIRD, MELISSA EFIRD,
JENNIFER F. GEORGE, PAMELA J.
HAWES, JANE S. JONES, QUEEN C.
MILLER, PATRICIA REAM, RICHARD
REAM, DOUGLAS WATKINS,
JEANNE WEST WATKINS, DAVID
WEST, MARY WEST, SANDRA
HOSKIN, CARROLL C. BRIDGES,
PHYLLIS RAE BRIDGES, HAROLD R.
PARRIS, WYLMA H. PARRIS, and
VICTORIA B. HENSON

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Plaintiffs,
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vs.
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MORGAN STANLEY SMITH BARNEY, )
WILLIAM KIMBROUGH, and
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HOMETRUST BANKING
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PARTNERSHIP f/k/a HOMETRUST
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BANK,
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Defendants.
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MEMORANDUM OF
DECISION AND ORDER

THIS MATTER is before the Court on the Plaintiffs’ Motion to Remand
[Doc. 13] and the Defendants’ Motions to Dismiss [Docs. 11, 15].

I.

FACTUAL AND PROCEDURAL BACKGROUND
On March 14, 2012, the Plaintiffs filed this action in the Buncombe

County General Court of Justice, Superior Court Division, against the
Defendants Morgan Stanley Smith Barney (“MSSB”) and HomeTrust Banking
Partnership f/k/a HomeTrust Bank (“HomeTrust”) asserting claims arising from
their investments in what proved to be a Ponzi scheme operated by James W.
Bailey through a company called Southern Financial Services. [Complaint,
Doc. 1-1]. On April 25, 2012, the Plaintiffs filed an Amended Complaint
adding MSSB employee William Kimbrough as a party defendant. [Amended
Complaint, Doc. 1-2]. In their Amended Complaint, the Plaintiffs allege that
the Defendants disregarded Mr. Bailey’s suspicious financial activities in
violation of their legal obligations as set forth by various federal statutes and
regulations as well as the common law of North Carolina, thereby allowing Mr.
Bailey to facilitate his fraudulent scheme through the bank accounts held by
the Defendants and thus furthering Plaintiffs’ losses, which they claim to be
in excess of $11 million. [Id.]. The Plaintiff asserts six causes of action under
North Carolina law against the Defendants in their Amended Complaint,
including claims for negligence and recklessness (Count One); negligence in
undertaking a special duty (Count Two); negligent and reckless supervision

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(Count Three); unjust enrichment (Count Four); violations of the North
Carolina Unfair and Deceptive Trade Practices Act, N.C. Gen. Stat. § 75-1.1,
et seq. (Count Five); and conversion (Count Six). [Id.].
On May 29, 2012, the Defendants filed a Notice of Removal, asserting
that this Court has original jurisdiction over this action in that the Plaintiffs
have alleged claims “arising under” the laws of the United States. [Notice of
Removal, Doc. 1]. The Defendants then moved to dismiss the Plaintiffs’
action pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.
[Motions to Dismiss, Docs. 11, 15].
The Plaintiffs move to remand this action to state court, arguing that
federal subject matter jurisdiction does not exist in this case. [Doc. 13]. The
Defendants have filed a Response opposing the Plaintiff’s Motion [Doc. 22],
to which the Plaintiffs have a filed a Reply [Doc. 23].
Having been fully briefed, this matter is now ripe for disposition.
II.

DISCUSSION
Because the Plaintiffs assert that the Court lacks subject matter

jurisdiction over the Plaintiffs’ claims, the Motion to Remand will be addressed
as a threshold matter.

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Except as otherwise provided by law, a defendant may remove a state
civil action to federal district court where the action is one “of which the district
courts of the United States have original jurisdiction.” 28 U.S.C. § 1441(a).
Among those cases of which the district courts have original jurisdiction are
civil cases “arising under the Constitution, laws, or treaties of the United
States.” 28 U.S.C. § 1331.
Removal jurisdiction is not favored, and thus the Court must “construe
it strictly in light of the federalism concerns inherent in that form of federal
jurisdiction.” In re Blackwater Sec. Consulting, LLC, 460 F.3d 576, 583 (4th
Cir. 2006). The burden is on the party seeking removal to demonstrate that
federal jurisdiction is proper. Mulcahey v. Columbia Organic Chems. Co., 29
F.3d 148, 151 (4th Cir. 1994).
“The presence or absence of [a] federal question is governed by the
‘well-pleaded complaint rule,’ which provides that federal question jurisdiction
exists only when a federal question is presented on the face of the plaintiff’s
properly pleaded complaint.” Caterpillar Inc. v. Williams, 482 U.S. 386, 392,
107 S.Ct. 2425, 2429, 96 L.Ed.2d 318 (1987). As a general rule, federal
question jurisdiction exists only if the complaint pleads a federal cause of
action. See Merrell Dow Pharms. Inc. v. Thompson, 478 U.S. 804, 808, 106

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S.Ct. 3229, 3232, 92 L.Ed.2d 650 (1986); Dixon v. Coburg Dairy, Inc., 369
F.3d 811, 816 (4th Cir. 2004). “In other words, the well-pleaded complaint
rule generally bars federal jurisdiction where a plaintiff’s complaint on its face
states only state law causes of action, even though issues of federal law may
be involved.” Fagin v. Gilmartin, No. 03-2631 (SRC), 2007 WL 419286, at *3
(D.N.J. Feb. 1, 2007).
If it is determined, however, that a federal cause of action is not present,
this does not necessarily end the inquiry.

In a “small class of cases” a

complaint asserting a state law cause of action may nevertheless “arise under
federal law” where “the case’s resolution depends on resolution of a federal
question sufficiently substantial to arise under federal law within the meaning
of 28 U.S.C. § 1331.” Ormet Corp. v. Ohio Power Co., 98 F.3d 799, 806 (4th
Cir. 1996). The “mere presence” of a federal issue, however, “does not
automatically confer federal-question jurisdiction.” Merrell Dow, 478 U.S. at
813, 106 S.Ct. at 3234. Rather, “federal jurisdiction demands not only a
contested federal issue, but a substantial one, indicating a serious federal
interest in claiming the advantages thought to be inherent in a federal forum.”
Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308, 313,
125 S.Ct. 2363, 2367, 162 L.Ed.2d 257 (2005). Even where a state claim

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involves a contested and substantial federal question, federal jurisdiction may
still be improper if the exercise of such would not be “consistent with
congressional judgment about the sound division of labor between state and
federal courts governing the application of § 1331.” Id. at 313-14, 125 S.Ct.
at 2367. Thus, the question to be resolved in determining whether to exercise
federal jurisdiction over a state-law claim is whether such claim “necessarily
raise[s] a stated federal issue, actually disputed and substantial, which a
federal forum may entertain without disturbing any congressionally approved
balance of federal and state responsibilities.” Id. at 314, 125 S.Ct. at 2368.
In accordance with Grable, the Court will first consider whether the
Plaintiffs’ Amended Complaint raises an “actually disputed and substantial”
issue of federal law. Id. On its face, the Plaintiffs’ Amended Complaint
asserts only claims under North Carolina state law.

The Defendants

nevertheless argue that these claims necessarily raise disputed and
substantial federal issues, as the Plaintiffs base these claims upon the breach
of duties allegedly owed to them under various federal statutes and
regulations, including the Bank Secrecy Act, 31 U.S.C. § 5318; the USA
Patriot Act of 2001, Pub. L. 107-56 (amending provisions of the Bank Secrecy
Act); federal criminal statutes applicable to money laundering; and regulations

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promulgated and enforced by the U.S. Department of Treasury’s Financial
Crimes Enforcement Network.

[Doc. 22].

The Defendants contend that

“[w]hether there are duties to Plaintiffs imposed upon Defendants by the
federal statutes and regulatory schemes is an actually disputed and
substantial issue in this case, necessarily invoking serious federal interests.”
[Id. at 11].
At the outset, the Court notes that none of the federal laws cited by the
Plaintiffs in their Amended Complaint provide for a private cause of action.
See AmSouth Bank v. Dale, 386 F.3d 763, 777 (6th Cir. 2004) (noting that
Bank Secrecy Act does not create a private right of action); Public Serv. Co.
of Oklahoma v. A Plus, Inc., No. CIV-10-651-D, 2011 WL 3329181, at *8
(W.D. Okla. Aug. 2, 2011) (noting that Bank Secrecy Act and its implementing
regulations “obligate banks to report certain customer activity to the
government but do not create a private cause of action”); Hanninen v.
Fedoravitch, 583 F.Supp.2d 322, 326 (D. Conn. 2008) (noting that Patriot Act
does not provide for private right of action); Dubai Islamic Bank v. Citibank,
N.A., 126 F.Supp.2d 659, 668 (S.D.N.Y. 2000) (stating that federal money
laundering statutes do not give rise to private right of action). While not
dispositive of the issue, Congress’s determination not to provide a private

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cause of action under a federal statute is evidence of “a congressional
conclusion that the presence of a claimed violation of the statute as an
element of a state cause of action is insufficiently ‘substantial’ to confer
federal question jurisdiction.” Merrell Dow, 478 U.S. at 814, 106 S.Ct. at
3235; Dale, 386 F.3d at 777 (“Because the Bank Secrecy Act does not create
a private right of action, the Receivers’ incorporation of its standards into a
state-law cause of action cannot transform their complaint into one that raises
a federal question.”).
The fact that the Plaintiffs rely in part on federal statutes and regulations
to define the scope of the Defendants’ duties under state law do not
necessarily render these claims as “arising under” federal law. Under North
Carolina law, the violation of a federal law may serve as a basis for a state law
negligence action. See Guyton v. FM Lending Servs., Inc., 199 N.C. App. 30,
40, 681 S.E.2d 465, 474 (2009) (noting that “utilizing federal statutes as the
basis for recognizing a state law duty is undoubtedly appropriate in some
instances”). “That a court may be called upon to evaluate the offending
conduct in light of what federal [banking] laws and regulations require does
not federalize the [Plaintiffs’] claims . . . .” Fagin, 2007 WL 419286, at *4; see
also Shawver v. Bradford Square Nursing, LLC, No. 3:08-13-DCR, 2008 WL

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2355803, at *5 (E.D. Ky. June 5, 2008) (“Although resolution of the Plaintiff’s
state law claims may require examination of federal law, the Court cannot
conclude that this case involves a federal issue that is substantial and
dispositive. While the Plaintiff has referenced federal Medicare and Medicaid
statutes and regulations, he has done so simply to establish the relevant
standard of care and to allege that the defendants breached that duty of
care.”); Pirie v. Broadview Multi-Care Ctr., No. 1:08 CV 1427, 2008 WL
2745977, at *2 (N.D. Ohio July 11, 2008) (noting that “references to federal
regulations [in the plaintiff’s complaint] are asserted in the context of an
applicable standard of care, not an independent cause of action”); SercyeMcCollum v. Ravenswood Hosp. Med. Ctr., 140 F.Supp.2d 944, 946 (N.D. Ill.
2001) (declining to find substantial federal question where plaintiff cited, inter
alia, federal Emergency Medical Treatment and Active Labor Act in order to
establish applicable standard of care for medical negligence claim under
Illinois state law). The focus of this action is not whether the Defendants
violated federal banking laws, but rather whether their conduct violated a duty
owed to the Plaintiffs under state law. Thus, “[t]he fact that a court may have
to look to federal law to evaluate whether Defendants’ alleged misconduct
violated their state law obligations does not, in this case, elevate the federal

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law aspect of the alleged misconduct into a substantial question of federal
law.” Fagin, 2007 WL 419286, at *6.
The Defendants argue that federal jurisdiction is particularly appropriate
in light of the Supreme Court’s decision in Grable. [Doc. 22 at 9-10]. Grable,
however, is readily distinguishable from the present case. In Grable, the
Internal Revenue Service (“IRS”) seized real property owned by the plaintiff
to satisfy a federal tax delinquency. Grable, 545 U.S. at 310, 125 S.Ct. at
2366. Following the tax sale, the plaintiff brought a state action against the
purchaser of the land to quiet title, claiming that the new purchaser’s title was
invalid because the IRS failed to give the plaintiff proper notice of the sale as
required by federal law.

Id. at 311, 125 S.Ct. at 2366.

The purchaser

removed the case to federal court on the grounds that the action required an
interpretation of federal tax law and thus presented a federal question
pursuant to section 1331. Id.
The Supreme Court concluded that the case warranted the exercise of
federal jurisdiction, as the plaintiff had premised its claim of superior title on
the failure of the IRS to provide him adequate notice as required by federal
law. Thus, the issue of whether the plaintiff had received proper notice within
the meaning of the federal statute was “an essential element of its quiet title

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claim,” and the interpretation of the federal statute was actually in dispute. Id.
at 315, 125 S.Ct. at 2368. Indeed, the Court noted that the interpretation of
the federal notice requirement “appear[ed] to be the only legal or factual issue
contested in the case.” Id. Noting that “[t]he meaning of the federal tax
provision is an important issue of federal law that sensibly belongs in a federal
court,” and citing the government’s interest in having a federal forum available
to vindicate its administrative actions, the Court concluded that a substantial
federal issue was presented warranting the exercise of federal jurisdiction. Id.
Unlike Grable, which involved the actions of the IRS and its compliance
with a federal statute, the present case was triggered by the conduct of private
actors and did not involve the action or decision of any federal agency. See
Empire Healthchoice Assurance, Inc. v. McVeigh, 547 U.S. 677, 700, 126
S.Ct. 2121, 2137, 165 L.Ed.2d 131 (2006) (explaining that Grable “centered
on the action of a federal agency (IRS) and its compatibility with a federal
statute”). Moreover, while Grable presented a sole contested issue of federal
law, the Plaintiffs’ claims in the present case raise numerous factual and legal
issues of both state and federal law. [See, e.g., Amended Complaint, Doc. 12 at ¶ 55 (alleging that “Defendants had a duty to monitor the accounts of Mr.
Bailey and Southern Financial . . . in accordance with the legal obligations set

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forth [in federal regulations and statutes cited] above and pursuant to the
common law of North Carolina”) (emphasis added)]. In Christianson v. Colt
Indus. Operating Corp., 486 U.S. 800, 108 S.Ct. 2166, 100 L.Ed.2d 811
(1988), the Supreme Court held that where federal law was essential to only
one of several alternative theories of relief, the invocation of federal law was
not sufficient to confer federal question jurisdiction. See id. at 810, 108 S.Ct.
at 2174; see also Mulcahey, 29 F.3d at 153 (“Christianson teaches us that, if
a claim is supported not only by a theory establishing federal subject matter
jurisdiction but also by an alternative theory which would not establish such
jurisdiction, then federal subject matter jurisdiction does not exist.”).1
Upon careful consideration of the Plaintiffs’ claims, and particularly the
legal and factual issues raised thereby, the Court concludes that the present
case “does not fit within the special and small category” of state law claims
presenting contested federal issues described by Grable. See Empire, 547

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In opposition to the Motion to Remand, the Defendants argue that the Plaintiffs’
state law theories are deficient because North Carolina courts do not recognize a state
law duty on the part of banks to non-customer third parties. Therefore, the Defendants
argue, the Court must retain jurisdiction because if the Plaintiffs have any right to
recover, such right arises under federal law. The Court need not, however, reach this
issue in order to determine whether federal question jurisdiction exists in this case. See
Wagner v. Regent Invs., Inc., 903 F.Supp. 966, 970 (E.D. Va. 1995) (“Having
determined that the complaint does not support federal jurisdiction, the court may not
then assess the merits of the defenses, factual or legal, in order to vest itself with the
power to hear the case.”). Whether the Plaintiffs are entitled to recover under state
common law is an issue for the North Carolina courts to decide.
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U.S. at 699, 126 S.Ct. at 2136. Further, even if such substantial issues of
federal law did exist, the exercise of federal jurisdiction in this case would
result in a significant transfer of state law claims to federal courts, thereby
disrupting the balance of federal and state judicial responsibilities. Even
where substantial federal issues are presented by state law claims, the Court
must decline to entertain a lawsuit if doing so would disturb the
“congressionally

approved

balance

of

federal

and

state

judicial

responsibilities.” Grable, 545 U.S. at 314, 125 S.Ct. at 2368.
III.

CONCLUSION
The Plaintiffs’ state law claims do not present issues of federal law that

are “actually disputed and substantial.” Further, even if such substantial
issues of federal law did exist, the exercise of federal jurisdiction in this case
would result in a significant transfer of state law claims to federal courts,
thereby disrupting the balance of federal and state judicial responsibilities.
For these reasons, the Court concludes that federal jurisdiction is lacking in
this case. Accordingly, the Plaintiffs’ Motion to Remand is granted. Because
this case is being remanded, the Court need not reach the merits of the
Defendants’ Motions to Dismiss.

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ORDER
IT IS, THEREFORE, ORDERED that the Plaintiffs’ Motion to Remand
[Doc. 13] is GRANTED, and this civil action is hereby REMANDED to the
Buncombe County General Court of Justice, Superior Court Division.
IT IS FURTHER ORDERED that the Defendants’ Motions to Dismiss
[Docs. 11, 15] are DENIED WITHOUT PREJUDICE.
IT IS SO ORDERED.
Signed: October 11, 2012

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