[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________ FILED
U.S. COURT OF
APPEALS
No. 01-16424 ELEVENTH CIRCUIT
NOV 8, 2002
________________________
THOMAS K. KAHN
CLERK
D. C. Docket No. 01-00298-CV-M
CHARLES H. BEHLEN,
individually and on behalf of a
class of similarly situated persons
and entities,
Plaintiff-Appellant,
versus
MERRILL LYNCH,
PHOENIX INVESTMENT PARTNERS, LTD.,
Defendants-Appellees.
________________________
Appeal from the United States District Court
for the Southern District of Alabama
_________________________
(November 8, 2002)
Before WILSON, RONEY and ALARCON*, Circuit Judges.
_______________________
*Honorable Arthur L. Alarcon, U.S. Circuit Judge for the Ninth Circuit, sitting by
designation.
WILSON, Circuit Judge:
Charles H. Behlen, individually and on behalf of a class of similarly situated
individuals, appeals the district court’s denial of his motion to remand his case to
state court and its order dismissing his lawsuit. The district court determined that it
had removal and supplemental jurisdiction over the action and therefore denied the
motion to remand. The court further determined that the action was barred by the
Securities Litigation Uniform Standards Act of 1998 (SLUSA), 15 U.S.C. §§ 77p,
78bb. Thus, the court dismissed Behlen’s class-wide claims with prejudice and his
individual claims without prejudice. Because we determine that the action was
preempted by the SLUSA and subject to dismissal, we affirm.
BACKGROUND
From November 1999 to March 2000 Behlen purchased shares in a mutual
fund known as the Phoenix-Engemann Aggressive Growth Fund. Behlen
purchased the shares from Merrill Lynch & Co. and Phoenix Investment Partners,
Ltd. (the defendants). On March 15, 2001, Behlen filed a civil action in state court
seeking to recover money damages resulting from his purchase of those shares. In
his original complaint, which was styled as a class action, Behlen asserted various
state law claims, including claims for breach of contract, breach of implied
covenants and duties, breach of fiduciary duty, unjust enrichment, suppression,
2
misrepresentation, and negligence and/or wantonness. He alleged that the
defendants sold him and the class members Class B shares in the growth fund
when they were unknowingly eligible to purchase Class A shares. He further
alleged that the defendants sold them the wrong shares, because the Class B shares
were subject to higher fees and commissions than the Class A shares.
On April 27, 2001, the defendants removed the lawsuit from state court to
the United States District Court for the Southern District of Alabama, asserting that
the district court had subject matter jurisdiction over the case pursuant to the
SLUSA. Three days later, the defendants filed a motion to dismiss Behlen’s
complaint. Behlen subsequently filed an amended complaint, in which he asserted
the same state law claims, deleted the claims for misrepresentation and
suppression, and added claims for money had and received and for an accounting.
Behlen also removed all explicit references to any fraudulent activity by the
defendants. He argued that the SLUSA was no longer applicable to his claims and
filed a motion to remand the case to state court.
The district court ultimately denied Behlen’s motion to remand and granted
the defendants’ motion to dismiss the action, dismissing the class-wide claims with
prejudice and Behlen’s individual claims without prejudice. This appeal followed.
3
STANDARD OF REVIEW
We review the denial of a motion to remand de novo. Butero v. Royal
Maccabees Life Ins. Co., 174 F.3d 1207, 1211 (11th Cir. 1999). We also “review[]
de novo the dismissal of a complaint pursuant to [Federal Rule of Civil Procedure]
12(b)(6).” Oxford Asset Mgmt., Ltd. v. Jaharis, 297 F.3d 1182, 1187 (11th Cir.
2002).
DISCUSSION
I. Removal Jurisdiction
We first address whether the district court had removal jurisdiction over this
action. Although Behlen asserted only state law claims in his original complaint,
the defendants removed the case to the district court based upon their belief that
Behlen actually alleged violations of federal securities laws, which fell within the
scope of the SLUSA.
Generally, whether an action raises a federal question “is governed by the
‘well-pleaded complaint rule,’ which provides that federal 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 (1987). Thus, the
plaintiff is “the master of the claim . . . [and] may avoid federal jurisdiction by
exclusive reliance on state law.” Id. Furthermore, “a case may not be removed to
4
federal court on the basis of a federal defense, including the defense of pre-
emption, even if the defense is anticipated in the plaintiff’s complaint, and even if
both parties concede that the federal defense is the only question truly at issue.”
Id. at 393.
The Supreme Court, however, has recognized “an ‘independent corollary’ to
the well-pleaded complaint rule, known as the ‘complete pre-emption’ doctrine.”
Id. (citation omitted). The Court explained,
On occasion, the Court has concluded that the pre-emptive force of a
statute is so extraordinary that it converts an ordinary state common-
law complaint into one stating a federal claim for purposes of the
well-pleaded complaint rule. Once an area of state law has been
completely pre-empted, any claim purportedly based on that pre-
empted state law is considered, from its inception, a federal claim, and
therefore arises under federal law.
Id. (citation omitted) (internal quotation marks omitted).
Thus, whether a district court has removal jurisdiction over a state law case
alleging securities fraud depends upon whether the claims fall within the scope of
the SLUSA and are therefore preempted. In making this determination, it is
helpful to consider the SLUSA and its historical context.
Congress passed the Private Securities Litigation Reform Act of 1995
(PSLRA), which established uniform standards for class actions alleging securities
fraud. The procedural reforms enacted by the PSLRA were intended to prevent
5
plaintiffs from bringing “strike suits”1 in securities matters. H.R. Conf. Rep. No.
105-803, at 13 (1998) (discussing the PSLRA). Congress found that the high costs
of defending strike suits often forced defendants to settle meritless class actions.
H.R. Conf. Rep. No. 104-369, at 31 (1995), reprinted in 1995 U.S.C.C.A.N. 730,
730. The PSLRA addressed this problem by instituting heightened pleading
requirements for class actions alleging fraud in the sale or purchase of national
securities.2 Riley v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 292 F.3d 1334,
1
A strike suit is defined as “[a] suit . . . often based on no valid claim, brought either for
nuisance value or as leverage to obtain a favorable or inflated settlement.” Black’s Law
Dictionary 1448 (Bryan A. Garner ed., 7th ed. 1999).
2
Section 78u-4 provides in relevant part,
(1) Misleading statements and omissions
In any private action arising under this chapter in which the plaintiff alleges that the
defendant–
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order to make the statements
made, in the light of the circumstances in which they were made, not
misleading;
the complaint shall specify each statement alleged to have been misleading, the reason or
reasons why the statement is misleading, and, if an allegation regarding the statement or
omission is made on information and belief, the complaint shall state with particularity all
facts on which that belief is formed.
....
(3) Motion to dismiss; stay of discovery
(A) Dismissal for failure to meet pleading requirements
In any private action arising under this chapter, the court shall, on the motion
of any defendant, dismiss the complaint if the requirements of paragraphs (1) and
(2) are not met.
(B) Stay of discovery
In any private action arising under this chapter, all discovery and other
proceedings shall be stayed during the pendency of any motion to dismiss, unless
6
1340 (11th Cir.), cert. denied, 71 U.S.L.W. 3178 (U.S. Oct. 15, 2002) (No. 02-
378). The PSLRA also required a mandatory stay of discovery until the district
court could determine the legal sufficiency of the class action claims. See 15
U.S.C. § 78u-4(b)(3)(B).
By 1998, however, it became apparent to Congress that the objectives of the
PSLRA were being frustrated, because plaintiffs were evading its heightened
pleading requirements by bringing suit in state court rather than federal court.
Securities Litigation Uniform Standards Act of 1998, Pub. L. No. 105-353, §
2(2)–(3), 112 Stat. 3227, 3227; Lander v. Hartford Life & Annuity Ins. Co., 251
F.3d 101, 108 (2d Cir. 2001) (noting that “litigants were able to assert many of the
same causes of action, but avoid the heightened procedural requirements instituted
in federal court”). Congress thus resolved that
in order to prevent certain State private securities class action lawsuits
alleging fraud from being used to frustrate the objectives of the Private
Securities Litigation Reform Act of 1995, it is appropriate to enact
national standards for securities class action lawsuits involving
nationally traded securities, while preserving the appropriate
enforcement powers of State securities regulators and not changing the
current treatment of individual lawsuits.
the court finds upon the motion of any party that particularized discovery is
necessary to preserve evidence or to prevent undue prejudice to that party.
15 U.S.C. § 78u-4(b)(1), (3).
7
Pub. L. No. 105-353, § 2(5).
As a result, Congress passed the SLUSA, which amended the Securities Act
of 1933 and the Securities Exchange Act of 1934 and made federal court, with
limited exceptions, the sole venue for class actions alleging fraud in the purchase
and sale of covered securities.3 Riley, 292 F.3d at 1341. Congress further
mandated that such class actions would be governed by federal law rather than
state law. See H.R. Conf. Rep. No. 105-803, at 13. To that end, the SLUSA
preempts certain state law claims, allows for removal of state actions to federal
court, and requires immediate dismissal of “covered lawsuits.” Riley, 292 F.3d at
1341.
3
The SLUSA amended the 1933 Act to provide as follows:
(b) Class action limitations
No covered class action based upon the statutory or common
law of any State or subdivision thereof may be maintained in any
State or Federal court by any private party alleging–
(1) an untrue statement or omission of a material fact in
connection with the purchase or sale of a covered security; or
(2) that the defendant used or employed any manipulative or
deceptive device or contrivance in connection with the purchase or
sale of a covered security.
(c) Removal of covered class actions
Any covered class action brought in any State court involving a covered
security, as set forth in subsection (b), shall be removable to the Federal
district court for the district in which the action is pending, and shall be
subject to subsection (b).
15 U.S.C. § 77p(b)–(c). An identical amendment was made to the 1934 Act. See id. §
78bb(f)(1)–(2).
8
A party seeking to remove an action to federal court pursuant to the SLUSA
bears the burden of showing that “(1) the suit is a ‘covered class action,’ (2) the
plaintiffs’ claims are based on state law, (3) one or more ‘covered securities’ has
been purchased or sold, and (4) the defendant misrepresented or omitted a material
fact ‘in connection with the purchase or sale of such security.’” Id. at 1342
(emphasis omitted). The district court found that each of these requirements had
been met and that the action was therefore removable. Behlen, however, argues
that the case was not removable, because the action was not a “covered class
action” and the misconduct alleged in the complaint was not “in connection with”
the sale or purchase of a security.
A. “Covered Class Action”
Behlen argues that his case was not removable, because it was not a
“covered class action.” Behlen points to the statutory language of the SLUSA,
which provides that “[n]o covered class action based upon the statutory or
common law of any State or subdivision thereof may be maintained in any State
or Federal court by any private party.” 15 U.S.C. §§ 77p(b), 78bb(f)(1) (emphasis
added). Behlen contends that at the time of removal the case was not maintained
as a class action, because the state court had not determined whether the case
should proceed in a class-wide fashion.
9
We find no merit in Behlen’s argument and believe that it is based upon a
misreading of the statute. The SLUSA does not require that an action be
“maintained as a class action” before it can be removed; rather, it merely provides
that no class action falling within the scope of its coverage can be maintained in a
state or federal court, which means that dismissal of a “covered class action” is
required. Prager v. Knight/Trimark Group, Inc., 124 F. Supp. 2d 229, 231 (D.N.J.
2000).
The SLUSA defines a “covered class action” as
any single lawsuit in which . . . damages are sought on behalf of more
than 50 persons or prospective class members, and questions of law
or fact common to those persons or members of the prospective class,
without reference to issues of individualized reliance on an alleged
misstatement or omission, predominate over any questions affecting
only individual persons or members.
15 U.S.C. §§ 77p(f)(2)(A)(i)(I), 78bb(f)(5)(B)(i)(I) (emphasis added). We thus
believe that it is clear from the statutory language that prospective class actions are
removable to federal court even if the state court has not determined whether the
action should go forward as a class action. Were we to find that a class action must
be “maintained” as such before it is subject to removal under the SLUSA, we
essentially would require that the action be certified in state court before it could be
removed to federal court. Nothing in the statutory language of the SLUSA,
however, suggests that certification prior to removal is required. Indeed, requiring
10
certification prior to removal would frustrate the objectives of the SLUSA rather
than further them. The SLUSA’s provisions “were designed to enable securities
defendants to obtain early dismissal of frivolous class actions, and thereby avoid
the high expense of discovery.” Riley, 292 F.3d at 1341. Requiring certification
prior to removal would entail potentially lengthy and expensive pretrial practice
and discovery in state court, regardless of the merits of the action. We believe that
such a prospect is contrary to the stated objectives of the SLUSA.
B. “In Connection with”
Behlen next argues that the district court’s exercise of removal jurisdiction
over his case was improper, because the misconduct alleged in the complaint did
not occur “in connection with” the sale or purchase of securities.
The SLUSA does not define the phrase “in connection with the purchase or
sale of a covered security.” The Supreme Court has not had occasion to interpret
this phrase in the context of the SLUSA, but has interpreted the identical phrase as
it appears in Rule 10b-5, which implements section 10(b) of the 1934 Act.4 See
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737–38 (1975). Thus, in
4
Section 10(b) makes it “unlawful for any person . . . [t]o use or employ, in connection
with the purchase or sale of any security . . ., any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the [SEC] may prescribe.”
Securities Exchange Act of 1934 § 10(b), 15 U.S.C. § 78j(b). Rule 10b-5 prohibits the use of
“any device, scheme, or artifice to defraud” or any other “act, practice, or course of business”
that “operates . . . as a fraud or deceit.” 17 C.F.R. § 240.10b-5.
11
Riley, we looked to Blue Chip when we determined that Congress intended the
phrase “in connection with” to have the same meaning under the SLUSA that it has
under section 10b-5, because the SLUSA was enacted as an amendment to the
1933 and 1934 Acts. 292 F.3d at 1342–43; see also Green v. Ameritrade, Inc., 279
F.3d 590, 597 (8th Cir. 2002).
In Blue Chip, the Supreme Court held that there is no cause of action under
section 10b-5 unless a challenged misrepresentation or omission caused the
plaintiff to buy or sell a particular stock. 421 U.S. at 748–49. Based upon that
holding, the Eighth Circuit held in Green that the SLUSA did not preempt a state
law breach of contract claim where the plaintiff failed to allege that the defendants
made misrepresentations that caused them to buy a covered security. 279 F.3d at
598–99. Green filed a breach of contract action in state court, alleging that he
contracted with Ameritrade to receive “real time” stock quotes on Ameritrade’s
Web site, but the quotes listed on the site actually were not in real time. Id. at
593–94. The court found that Green did not allege in his amended complaint that
the delayed quotes caused him to buy or sell a covered security; rather, he merely
alleged that he contracted for a service, but did not receive the kind of information
for which he believed he was paying. Id. at 598–99.
12
In contrast to the plaintiff in Green, Behlen specifically alleged that the
defendants “negligently, recklessly or intentionally misrepresented the fact that
Plaintiff and the class would be sold Class A shares,” but “sold to them more
expensive Class B shares.” Additionally, he alleged that the defendants
“suppressed the true facts concerning the repeated sales to them of Class B Shares”
and “concealed and suppressed the illegality of their conduct . . . and continued to
sell them Class B shares.” It is clear that the crux of the complaint was that the
defendants either misrepresented or omitted crucial facts about the Class A and
Class B shares, thus causing him and the class to invest in inappropriate securities.
Behlen argues, however, that these wrongful acts were not made “in connection
with” the sale of securities, but merely were incidental to the sale of the securities.
We believe Behlen’s claims are similar to the claims asserted by the
plaintiffs in Dudek v. Prudential Securities, Inc., 295 F.3d 875 (8th Cir. 2002). In
that case, the plaintiffs filed a class action suit in state court alleging that the
defendants improperly marketed tax-deferred annuities to accounts that already
enjoyed tax-deferred status. Id. at 877. The plaintiffs argued that the annuities
were inappropriate investments, “because tax-deferred accounts did not need the
tax benefits, and therefore the extra fees and costs that tax-deferred annuities
entail[ed] were a waste of the investors’ money.” Id. The plaintiffs acknowledged
13
that the annuities at issue were “covered securities,” but argued that their claims
were not preempted by the SLUSA because they were based upon the defendants
excessive fees rather than misconduct “in connection with” the sale of securities.
Id. at 878. The Eighth Circuit rejected the plaintiffs’ argument that they did not
allege fraud, misrepresentation, or an omission of material fact; it agreed with the
district court that the gravamen of the plaintiffs’ complaint “involve[d] an untrue
statement or substantive omission of a material fact in connection with the
purchase or sale of a covered security.” Id. at 879 (internal quotation marks
omitted).
In the instant case, although Behlen argues that the excess fees and
commissions paid by the class members were incidental to the sale of the
securities, it seems certain that the very reason they were sold the Class B shares
was because those shares were subject to the excess fees and commissions. Thus,
the fees and commissions were not incidental to the sale of the securities, but were
an integral part of the transactions. To the extent that the defendants
misrepresented which shares would be sold to the class, those misrepresentations
were made “in connection with” the sale of the shares.5
5
In support of his argument, Behlen relies heavily upon SEC v. Zandford, 238 F.3d 559
(4th Cir. 2001), rev’d, __ U.S. __, 122 S. Ct. 1899 (2002). That decision was reversed, however,
by a unanimous Supreme Court. See Zandford, __ U.S. __, 122 S. Ct. 1899. The Court noted
that the SEC always has adopted a broad reading of the phrase “in connection with the purchase
14
Having determined that the action was a “covered class action” alleging
misrepresentation “in connection with” the sale of covered securities, we conclude
that the removal of the case pursuant to the SLUSA was proper. Furthermore, once
the case was removed to the district court, the SLUSA required that it be
dismissed.6
II. Remand
We now address whether the district court should have remanded the case to
state court after Behlen amended his complaint. Behlen argues that even if the
action was removable to district court, the court should have remanded the case
back to state court after he amended his complaint. Behlen admits that he amended
or sale of any security.” Id. at __, 122 S. Ct. at 1903. The Court stated, “While the statute must
not be construed so broadly as to convert every common-law fraud that happens to involve
securities into a violation of § 10(b), neither the SEC nor this Court has ever held that there must
be a misrepresentation about the value of a particular security in order to run afoul of the Act.”
Id. (citation omitted). The Court went on to state that the securities sales and the broker’s
fraudulent acts were not independent events, but, in fact, coincided with each other because each
sale was made to further the broker’s fraudulent scheme. Id. at __, 122 S. Ct. at 1904.
6
Behlen further argues that the district court erred in dismissing the class-wide claims
with prejudice. Behlen characterizes the district court’s dismissal of the class-wide claims as a
ruling that the class action could not be certified. The district court, however, did not determine
whether Behlen satisfied the certification requirements of Federal Rule of Civil Procedure 23.
The district court simply adhered to the text of §§ 77p and 78bb and determined that Behlen’s
class-wide claims were barred.
Because Behlen’s case was a “covered class action” asserting state law claims that fell
within the scope of the SLUSA, the district court had no choice but to dismiss the class-wide
claims. Furthermore, the claims were subject to dismissal with prejudice, because Behlen could
not recover on any state law claim alleging that he and the class were wrongfully induced to buy
the Class B shares.
15
the complaint to delete all claims and allegations that might be deemed to fall
within the scope of the SLUSA. Absent allegations of misrepresentation, he
argues, the complaint no longer contained allegations of the kind of misconduct
covered by federal securities laws. Behlen thus contends that the district court no
longer had subject matter jurisdiction over the case and should have remanded the
case to state court.
In Poore v. American-Amicable Life Insurance Co. of Texas, 218 F.3d 1287,
1290–91 (11th Cir. 2000), we joined our sister circuits in holding that if a district
court has subject matter jurisdiction over a diversity action at the time of removal,
subsequent acts do not divest the court of its jurisdiction over the action.
Accordingly, we held that even though the plaintiffs amended their complaint to
reduce the amount in controversy, the district court still retained diversity
jurisdiction over the action and “committed reversible error by remanding based on
Appellees’ post-removal amended complaint.” Id. at 1292.
In the instant case, the district court had federal question jurisdiction over
Behlen’s original complaint, because the claims therein were preempted by the
SLUSA. Pursuant to 28 U.S.C. § 1367(a), the court also had supplemental
jurisdiction over the remaining state law claims in the original complaint. The
court had discretion to retain jurisdiction over the state law claims even after
16
Behlen amended the complaint to remove any federal cause of action. See Porsche
Cars N. Am., Inc. v. Porsche.Net, 302 F.3d 248, 256 (4th Cir. 2002); Mauro v. S.
New England Telecomms., Inc., 208 F.3d 384, 388 (2d Cir. 2000) (per curiam).
Moreover, it was proper for the court to retain jurisdiction over Behlen’s amended
complaint, because, despite his removal of the allegations that would bring his
claims within the scope of the SLUSA, the amended complaint still presents a
federal question.
In the amended complaint, Behlen alleged that “Defendants wrongfully sold
Plaintiff and the Class, or wrongfully allowed Plaintiff and the Class to purchase,
Class B shares in a mutual fund which allowed Defendants to collect higher fees.”
Thus, Behlen alleged wrongful conduct “in connection with” the purchase of the
growth fund shares. He also implicitly alleged that the defendants failed to
disclose material facts about which class of shares was sold to him and the class.
Because Behlen alleged in the amended complaint that the defendants misstated or
omitted material facts “in connection with” the purchase and sale of the growth
fund shares, it, too, fell within the scope of the SLUSA and the district court did
not err when it denied Behlen’s motion to remand the case to state court.
CONCLUSION
17
Because Behlen’s action was a “covered class action” asserting state law
claims for misrepresentation and/or omission “in connection with” the purchase or
sale of covered securities, we find that it was preempted by the SLUSA and subject
to dismissal. We therefore find that the district court properly asserted removal
jurisdiction over the case, correctly denied Behlen’s motion to remand the case,
and did not err when it dismissed the class-wide claims with prejudice and the
individual claims without prejudice. The order of the district court, therefore, is
AFFIRMED.
18