Blood v. Efficient Advisors, LLC et al
ORDER DISMISSING 7 Motion to Dismiss ; GRANTING 8 Motion to Remand to State Court; DISMISSING 15 Motion to Stay; DISMISSING 16 Motion for Extension of Time to File Response. IT IS FURTHER ORDERED that the Clerk shall REMAND the above-styled cause to the 353rd Judicial District Court of Travis County, Texas, for further proceedings Signed by Judge Sam Sparks. (dm)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
Case No. A-17-CA-406-SS
EFFICIENT ADVISORS, LLC; FIDUCIARY
SERVICES TROUP, and MARK KLEIN,
BE IT REMEMBERED on the 8th day of June 2017, the Court held a hearing in the above-styled
cause and the parties appeared in person or through counsel. Before the Court are Defendants Efficient
Advisors, LLC (EA) and Mark Klein (Klein)'s Motion to Dismiss Plaintiff's Complaint, or in the
Alternative, to Stay and to Compel Arbitration [#7], Plaintiff John Blood (Plaintiff)'s Response [#20] in
opposition, and EA and Klein's Reply [#26] in support; Plaintiff's Motion to Remand [#8], EA and
Klein's Response [#23] in opposition, and Plaintiff's Reply [#29] in support; as well as Plaintiffs Motion
to Stay Deadline to Respond to Defendants' Motion to Compel Arbitration [#15], EA and Klein's
Response [#22] in opposition, and EA and Klein's Motion for Extension of Time to File Response [#16].
Having reviewed the documents, the arguments of counsel, the relevant law, and the file as a whole, the
Court now enters the following opinion and orders.
This case arises out of a termination dispute. Starting in 2013, Plaintiff founded and operated
an investment advisory firm, Disciplined Wealth Strategies (DWS). Removal Notice [#1-2] (Am. Pet.)
¶ 9. On September 10,2015, Plaintiff and EA executed an Asset Contribution Agreement (Contribution
Agreement), merging DWS and EA. Id. ¶ 17. Simultaneously, Plaintiff and BA executed an Executive
Employment Agreement (Employment Agreement), which recognized and defined Plaintiff's role as
BA's chief executive officer (CEO) and chief investment officer (CIO). Id. ¶ 20. Klein is a co-founder
of EA. Id. ¶
12. Finally, Plaintiff, acting on behalf of DWS, executed a Second Amended and Restated
Operating Agreement of Efficient Advisors, LLC (Operating Agreement) with Fiduciary Services
Group, LLC (FSG). Id. ¶ 21. According to Plaintiff, FSG is a holding company that directly or
indirectly owns EA. Id. [#1-1] (Original Pet.) ¶ 12. The Contribution Agreement, Employment
Agreement, and Operating Agreement (collectively, Agreements) governed the relationship between
BA and Plaintiff.
Through a disputed series of events, the relationship between EA and Plaintiff soured. On
January 4, 2017, Klein called Plaintiff and informed him BA wanted to end the business relationship
between EA and DSW. Am. Pet. ¶ 23. EA then took actions to terminate Plaintiff's employment such
as disabling his access to email and informing clients Plaintiff had separated from EA. Id. EA and
Plaintiff were unable to come to terms on how to unwind the business ties between EA and DWS. Id.
On January 17, 2017, BA filed a Form U4 with the Texas State Securities Board (TSSB) on
behalf of Plaintiff. Id. ¶ 27. The Form U4 registered Plaintiff as an investment advisor representative
(JAR) of BA. Id. Officially titled "Uniform Application for Securities Industry Regulation, Form U4
is a form created by the Financial Industry Regulatory Authority (F1NRA),a non-governmental agency
authorized by Congress to regulate the securities industry, and approved by the Securities Exchange
Commission (SEC). Resp. Mot. Remand [#23] at 3. TSSB adopted the Form U4 and requires JARs to
complete it. Id.
On February 10, 2017, Plaintiff's attorney sent a demand letter to BA requesting EA buy out
Plaintiff's interest in BA pursuant to the Operating Agreement. Id. ¶ 24. Seven days later, BA sent
Plaintiff a termination letter summarizing the reasons supporting his termination for cause as of January
31, 2017. Id. ¶ 25. Plaintiff claims EA sent the termination letter to avoid obligations under the
Employment Agreement and the Operating Agreement. Id. ¶ 26.
On March 2, 2017, EA filed a Form U5 with the TSSB, indicating Plaintiff had been discharged
on January 31,2017, and Defendants were reviewing potential violations of investment-related statutes
and rules by Plaintiff. Id. ¶ 30. Like the Form U4, the Form U5 was promulgated by FINRA, approved
by the SEC, and adopted by TSSB. Resp. Mot. Remand [#23] at 3. Plaintiff claims BA improperly
submitted the Forms U4 and US, misrepresenting Plaintiff's employment and termination with EA.
Plaintiff initially filed this lawsuit in state court against BA, FSG, and Klein (collectively
Defendants). See Am. Pet. Plaintiff asserts claims for (1) fraudulent inducement into the Contribution
Agreement; (2) statutory fraud concerning the Contribution Agreement; (3) negligent misrepresentation
concerning the Contribution Agreement; (4) breach of the Employment Agreement; (5) tortious
interference with prospective relations; and (6) defamation. Id. ¶1J27-3 8.
With FSG's consent, EA and Klien removed this case to federal court in May 2017, claiming
federal question jurisdiction. Removal Notice [#11 ¶1. In particular, Defendants assert federal question
jurisdiction because Plaintiff's claims depend on the interpretation of FINRA and SEC rules and
regulations in light of the use of the Forms U4 and US. Id. ¶ 4-5.
"Federal courts are courts of limited jurisdiction." Kokkonen v. Guardian Life Ins. Co. ofAm.,
511 U.S. 375, 377 (1994) (emphasis added). Consequently, federal courts possess only power
authorized by United States Constitution and federal statutes, and that power cannot be expanded by
judicial decree. Id. (citations omitted). A cause of action is presumed to remain outside of limited
federal jurisdiction until the party asserting jurisdiction establishes the contrary. Id. (citations omitted).
In general, a defendant may remove a civil action if a federal court would have had original
jurisdiction over one or more of the plaintiff's claims. See 28 U.S.C.
1441(a). District courts have
"original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United
States." 28 U.S.C. § 1331. "The well-pleaded-complaint rule has long governed whether a case 'arises
under' federal law for purposes of § 1331." Holmes Grp., Inc.
Vornado Air Circulation Sys., 535 U.S.
826, 830 (2002). Under this rule, a case "arises under" federal law
if "a well-pleaded complaint
establishes either that federal law creates the cause of action or that the plaintiff's right to relief
necessarily depends on resolution of a substantial question of federal law." Franchise Tax. Bd. of Cal.
Constr. Laborers Vacation Tr. for S. Cal., 463 U.S. 1, 27-28. Moreover, the federal question "must
be disclosed upon the face of the complaint, unaided by the answer.
." Gully v. First Nat '1 Bank, 299
U.S. 109, 112 (1936). "[T]he complaint itself will not avail as a basis ofjurisdiction in so far as it goes
beyond a statement of the plaintiff's cause of action and anticipates or replies to a probable defense."
Id. at 113. The corollary is that a federal defense alone is not a basis for federal jurisdiction. Rivet v.
Regions Bank ofLa., 522 U.S. 470, 475 (1998).
Plaintiff claims this Court does not have federal question jurisdiction under 28 U.S.C.
Mot. Remand [#10] at 6-8. Further, because Defendants lacked "an objectively reasonable basis for
seeking removal," Plaintiff argues it is entitled to "just costs and.
fees, incurred as a result of the removal" under 28 U.S.C.
actual expenses, including attorney
The Court first looks to the Plaintiff' s complaint to determine whether "federal law creates the
cause of action or.
the plaintiff's right to relief necessarily depends on resolution of a substantial
question of federal law."
Franchise Tax. Bd. of Cal.,
463 U.S. at 27-28. Although Plaintiff asserts
several claims, Defendants only argue Plaintiff's claims for tortious interference with prospective
relations and defamation require "extensive reference to and interpretation of federal laws and
regulations." Resp. Mot. Remand [#23] at 9. However, no element of these claims arises under federal
Further, Plaintiff's right to relief does not depend on the resolution of a substantial question of
law. According to Defendants, whether Plaintiff was injured or defamed by EA's filing of the Forms
U4 and U5 "depends on interpreting federal securities regulations, as embodied in FINRA and the
SEC's terms and definitions.. . ." Resp. Mot. Remand [#23] at 12. But Plaintiff's tortious interference
and defamation claims are state tort claims based on statements Defendants included in filings
submitted to the TSSB, a state authority. In essence, Defendants contend because FINRA had a role in
drafting the Forms U4 and U5 and the SEC approved these forms, Plaintiff's claims contain a
substantial question of federal law. The Court disagrees. The use of forms created by a federal
organization and adopted by a state entity does not raise a question under the Constitution or laws of
the United States. Moreover, as other courts have held, a breach of FINRA rules does not present a
question arising under federal law. See Apollo Prop. Partners, LLC v. Newedge Fin., Inc., No. CIV.A.
H-08-1803, 2009 WL 778108, at *2 (S.D. Tex. Mar. 20, 2009) (citing cases holding a breach of
FINRA's rules and those of its predecessor, National Association of Securities Dealers, Inc. (NASD),
do not provide a basis for federal question jurisdiction).
Defendants also argue they were required to register Plaintiff via the Form U4 and thus
Plaintiffs claims depend on the interpretation of federal law. Notice Removal [#11 ¶ 5. This argument
amounts to a defense, which cannot confer federal jurisdiction. Vaden v. Discover Bank, 556 U.S. 49,
60 (2009) ("Federal jurisdiction cannot be predicated on an actual or anticipated defense.
In addition, Defendants cite three cases in arguing Plaintiffs alleged injuries from filing the
Forms U4 and U5 require interpretation of a federal right. See Resp. Mot. Remand [#231 at 13-15. Yet,
the cases Defendants cite do not support their argument. See id. (citing Kouromihelakis v. Hartford Fire
Ins. Co., 48 F. Supp. 3d 175, 178 (D. Conn. 2014) (possessing federal question jurisdiction under the
Family Medical Leave Act (FMLA) and the Americans with Disabilities Act (ADA)); also citing
Johnson v. Charles Schwab & Co., No. 09-CV-8 1479,2010 WL 678126, at * 1 (S.D. Fla. Feb. 25,2010)
(exercising diversity jurisdiction); and citing Whitaker
Wells Fargo Advisors, LLC, No.
3:11CV380-HEH, 2011 WL 4565430, at *1 (E.D. Va. Sept. 29, 2011) (employing diversity
jurisdiction). There is no allegation a federal statute such as the FMLA or ADA applies here, and there
is no claim the Court has diversity jurisdiction.
Finally, at the hearing, Defendants argued this Court should compel this case to arbitration
without jurisdiction, claiming this Court is one of inherent power. To the contrary, this Court is one of
limited jurisdiction and a "district court still must have jurisdiction to compel arbitration." Lower
Colorado River Auth.
Papalote Creek II, LLC., No. 16-50317, 2017 WL 2366421, at *4 (5th Cir.
May 31, 2017).
In sum, Defendants failed to establish federal question subject matter jurisdiction. Therefore,
the Court REMAND S this case to state court.
Costs and Attorney's Fees
In remanding the case, the Court "may require payment of just costs and any actual expenses,
including attorney fees, incurred as a result of the removal." 28 U.S.C.
1447(c). "Absent unusual
circumstances, courts may award attorney's fees under § 1447(c) only where the removing party lacked
an objectively reasonable basis for seeking removal." Martin v. Franklin Capital Corp., 546 U.S. 132,
141 (2005). The
Supreme Court in Martin explained, "[t]he appropriate test for awarding fees under
1447(c) should recognize the desire to deter removals sought for the purpose of prolonging litigation
and imposing costs on the opposing party, while not undermining Congress' basic decision to afford
defendants a right to remove as a general matter, when the statutory criteria are satisfied." Id. at 140.
As illustrated above, there was no objectively reasonable basis for the removal of this case.
Plaintiffs causes of action do not involve or depend upon the resolution of a federal question. The use
of forms created by a federal organization and adopted by a state entity does not raise a question under
the Constitution or laws of the United States. Defendants' argument EA was required to complete the
Forms U4 and U5 amounts to a defense, which does not confer federal jurisdiction. Finally, Defendants
do not identify any authority indicating Forms U4 and U5 require interpretation of a federal right.
Thus, after considering the declaration submitted by Plaintiffs counsel, the Court AWARDS
Plaintiff $1,500.00 in attorneys' fees in addition to costs. See Mot. Remand [#1] Ex.
Because this Court lacks subject matter jurisdiction and grants Plaintiffs motion for remand,
the Court DISMISSES all other pending motions.
IT IS ORDERED that Plaintiff John Blood's Motion to Remand [#8] is GRANTED;
IT IS FURTHER ORDERED that Defendants Efficient Advisors, LLC and Mark
Klein's Motion to Dismiss Plaintiffs Complaint, or in the Alternative, to Stay and to Compel
Arbitration [#7], Plaintiff John Bloods's Motion to Stay Deadline to Respond to Defendants'
Motion to Compel Arbitration [#15], and Defendants Efficient Advisors, LLC and Mark Klein's
Motion for Extension of Time to File Response [#16] are DISMISSED;
IT IS FURTHER ORDERED that the Clerk shall REMAND the above-styled cause to
the 353rd Judicial District Court of Travis County, Texas, for further proceedings;
IT IS FiNALLY ORDERED, ADJUDGED, and DECREED that the removing parties
Defendants Efficient Advisors, LLC and Mark Klein shall pay to Plaintiff John Blood the sum
of ONE THOUSAND FIVE HUNDRED DOLLARS ($ 1,500.00) in attorneys' fees plus costs
under 28 U.S.C.
SIGNED this the
1447(c), for which let execution issue.
day of June 2017.
UNITED STATES DISTRICT JUDGE
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?