Seventh Circuit Deepens Circuit Split On Issue Of How Courts Should Decide If SLUSA Preempts State Law Breach Of Contract Or Breach Of Fiduciary Duty Claims
On January 23, 2017, a panel of the U.S. Court of Appeals for the Seventh Circuit affirmed a district court’s decision to dismiss a proposed shareholder class action against Bank of America, N.A. and LaSalle Bank, N.A. (the “Bank”). Richek v. Bank of America, N.A. and LaSalle Bank, N.A., 2017 WL 279498 (7th Cir. Jan. 23, 2017). Plaintiffs alleged that the Bank was collecting a fee on their custodial accounts without informing customers, and, on this basis, brought a putative class action in state court alleging state law claims for breach of contract and breach of fiduciary duty. The Bank removed the suit to federal court and successfully argued that the Securities Litigation Uniform Standards Act (“SLUSA”) preempted their state law claims. The Seventh Circuit affirmed and held that SLUSA preempted the state law claims because they necessarily required consideration of whether there had been an omission in connection with the purchase or sale of a security based on plaintiffs’ claim that the Bank had not disclosed its collection of the fee. A dissenting opinion criticized the majority’s approach, noting that the panel’s reasoning deepened a split among the Circuits over how courts should apply SLUSA to class actions alleging breach of contract or breach of fiduciary duty claims, and that this split requires resolution by the Supreme Court.
Under SLUSA, “[n]o covered class action based upon the statutory or common law of any State” that alleges “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security” can “be maintained in any . . . Federal court by any private party.” 15 U.S.C. § 78bb(f)(1)(A). SLUSA thus precludes an action if: (i) the action is a “covered class action” (ii) based on state law, (iii) involving one or more “covered securities” (iv) that alleges either “a misrepresentation or omission of material fact,” (v) “in connection with the purchase or sale” of the security.
The primary issue addressed by the opinions was whether plaintiffs raised “misrepresentation or omission” claims. The per curiam opinion held that plaintiffs’ state law claims all “depend[ed] on the omission of a material fact” regarding the custodial account fees, and that this meant the claims were preempted by SLUSA because that sort of omission claim also could have been “pursued under federal securities law.” It made no difference to the analysis that such an omission claim would not succeed under the federal securities laws.
In a concurring opinion, Judge Flaum explained that this result would be reached under a “literalist” approach applied in the Sixth Circuit, which asks only whether the complaint can be read as alleging a misrepresentation or omission, or a “looser” approach applied in the Third Circuit, which asks whether proof of a misrepresentation or omission is or is not “essential.” While Judge Flaum declined to decide which of the two approaches is correct, he rejected the approach applied in the Ninth Circuit, which allows courts to dismiss suits as preempted only if they require proof of a misrepresentation or omission. In his dissent, Judge Hamilton endorsed the Ninth Circuit approach and further observed that, even under the Third Circuit approach, plaintiffs’ claims should not have been preempted because the plaintiffs only needed to show that a contract was breached and not that there had been a misrepresentation or omission.