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Banks v. Northern Trust Corp.

United States Court of Appeals, Ninth Circuit

July 5, 2019

Lindie L. Banks, individually and on behalf of all others similarly situated; Erica LeBlanc, Plaintiffs-Appellants,
v.
Northern Trust Corporation; Northern Trust Company, Defendants-Appellees.

          Argued and Submitted May 15, 2019 Pasadena, California

          Appeal from the United States District Court for the Central District of California No. 2:16-cv-09141-JFW-JC John F. Walter, District Judge, Presiding

          Brian J. Malloy (argued) and Thomas J. Brandi, The Brandi Law Firm, San Francisco, California; Derek G. Howard, Derek G. Howard Law Firm, Mill Valley, California; for Plaintiffs-Appellants.

          Craig C. Martin (argued), Brienne M. Letourneau, Amanda S. Amert, Daniel J. Weiss, and Craig C. Martin, Jenner & Block LLP, Chicago, Illinois; for Defendants-Appellees.

          Before: Jacqueline H. Nguyen and John B. Owens, Circuit Judges, and John Antoon II, [*] District Judge.

         SUMMARY [**]

         Securities Litigation Uniform Standards Act of 1998

         The panel reversed the district court's dismissal, as barred by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), of a putative class action brought against Northern Trust alleging violations of state law involving breaches of fiduciary duty by a trustee.

         SLUSA deprives a federal court of jurisdiction to hear certain state-law class actions.

         The panel held that SLUSA did not preclude plaintiffs' imprudent investment claims. Specifically, the panel held that SLUSA's "in connection" requirement did not preclude claims brought by an irrevocable trust beneficiary - who has no control over the trustee - alleging imprudent investments by that trustee. Here, the district court's dismissal relied entirely on its conclusion that Northern was an agent of the trusts' beneficiaries, a conclusion unsupported by the moving papers and First Amended Complaint.

         The panel held that the district court erred in dismissing plaintiffs' fee-related tax preparation and overcharging claims on SLUSA-preclusion grounds. The panel also held that plaintiffs' fee-related claims survive a Fed.R.Civ.P. 12(b)(6) motion to dismiss.

         Finally, the panel held that because plaintiffs' elder abuse claims and the claims against Northern's corporate parent were not precluded by SLUSA, and because the briefing provided no other basis for dismissal, the dismissal of those claims were reversed.

          OPINION

          OWENS, CIRCUIT JUDGE:

         Lindie Banks and her daughter Erica LeBlanc ("Banks"), hoping to represent a class of plaintiffs, appeal from the dismissal of their putative class action lawsuit against Northern Trust Company and Northern Trust Corporation ("Northern") for violations of state law involving breaches of fiduciary duty by a trustee. The district court interpreted the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") to bar the case from proceeding in federal court. We have jurisdiction under 28 U.S.C. § 1291, and we reverse and remand.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         Banks is the beneficiary of the irrevocable Lindstrom Trust, created under California law. As trustee, Northern has sole discretion on how to manage the trust's assets; Banks cannot participate in, direct, or be involved in those decisions.

         According to the First Amended Complaint ("FAC"), Northern invested the trust's assets in Northern's own affiliated "Funds Portfolio," rather than seeking superior investments outside its financial umbrella. This practice allegedly led to the trust suffering suboptimal returns, which would not have happened if Northern prioritized the interests of the trust beneficiaries (and not merely its own). Banks argues that favoring these inferior affiliated funds - over better-performing non-Northern funds - put money in the pockets of Northern, which thereby violated its duties of prudent investment and loyalty to Banks.

         The FAC also alleges that Northern, as part of an "undisclosed internal decision to create a new profit center," charged improper and excessive fees for "routine preparation of fiduciary tax returns" and failed to maintain records to justify these expenses. These new fees, which previously were "part of the base fee and a fundamental duty for a trustee," allegedly breached Northern's duty of prudent administration.

         In addition, the FAC alleges elder abuse and unfair competition claims under California law, both premised on the same factual allegations underlying the investment and fee-related claims.

         Northern filed a Rule 12(b)(6) motion to dismiss, contending that SLUSA prohibited these state-law claims from proceeding in federal court. Over Banks' objection, the district court agreed with Northern and dismissed the FAC without leave to amend. The court reasoned that the allegedly imprudent investments were in connection with the purchase or sale of covered securities and featured material misrepresentations or omissions. The court concluded that SLUSA precluded Banks from bringing state-law fiduciary duty claims as a class action in federal court.

         The district court dismissed the fee, elder law, and unfair competition claims without directly addressing them.

         II. DISCUSSION

         Although Northern moved to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), the parties now agree that Rule 12(b)(1) - lack of subject matter jurisdiction - is the proper rule to challenge a complaint under SLUSA. See Hampton v. Pac. Inv. Mgmt. Co., 869 F.3d 844, 846-47 (9th Cir. 2017) (holding that Rule 12(b)(1), and not Rule 12(b)(6), governs SLUSA motions to dismiss).

         We review de novo whether the district court should have dismissed this case under Rule 12(b)(1). See U.S. ex rel. Hartpence v. Kinetic Concepts, Inc., 792 F.3d 1121, 1126 (9th Cir. 2015) (en banc).

         A. SLUSA does not preclude Banks' imprudent ...


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