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Baldwin v. Lynch

United States District Court, D. Maine

August 27, 2019

THOMAS BALDWIN, Individually and On Behalf of All Others Similarly Situated, Plaintiff,
v.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, Defendant.

          ORDER ON DEFENDANT'S MOTION TO DISMISS

          JON D. LEVY CHIEF U.S. DISTRICT JUDGE.

         Thomas Baldwin alleges that Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) misrepresented the tax consequences of investing money into a 529 college savings plan that it manages on behalf of the Finance Authority of Maine. Baldwin brings this class action individually and on behalf of all persons and entities who enrolled in the Maine program through Merrill Lynch's website and were then required to pay New York state income tax on the income associated with their accounts, but who expected to receive the same tax advantages as participants in the equivalent New York program. Baldwin asserts claims under the Maine Unfair Trade Practices Act (the “Maine UTPA”), 5 M.R.S.A § 205-A et seq. (Westlaw through Ch. 505 of 2019 1st Reg. Sess. of 129th Leg.), and for negligent misrepresentation. Merrill Lynch seeks the dismissal of Baldwin's complaint under Fed.R.Civ.P. 12(b)(6) (ECF No. 10), arguing that the Securities Litigation Uniform Standards Act, 15 U.S.C.A. § 78bb(f) (West 2019) (the “SLUSA”) requires any class action alleging misrepresentation in connection with the purchase or sale of covered securities to be brought under federal law, which Baldwin has not done. For the reasons that follow, I deny the motion.

         I. FACTUAL BACKGROUND

         The complaint alleges the following facts, which I treat as true for purposes of evaluating the motion to dismiss.

         Baldwin, a New York resident, opened a Maine 529 college savings plan managed by Merrill Lynch in September 2013. A 529 college savings plan is a tax-advantaged account designed to encourage saving for future college costs which is sponsored by a state, state agency or an eligible educational institution. See 26 U.S.C.A. § 529(b)(1) (West 2019). Maine's 529 college savings plan is known as the Maine College Savings Program or the NextGen College Investing Plan (the “Maine 529 Program”). Merrill Lynch is the program manager for the Maine 529 Program and is responsible for its day-to-day operations and marketing.

         New York also has a 529 college savings program. Investments in the New York 529 Program grow deferred from federal and state income taxes, and as of tax year 2017, no federal or state taxes were due on money withdrawn from the New York 529 Program plans if the money was used to pay qualified education expenses. The complaint asserts that New York income taxpayers enrolled in the New York 529 Program can deduct up to $5, 000 ($10, 000 if married and filing jointly) annually from their New York state taxable income. See N.Y. Tax Law § 612(c)(32) (Westlaw through L.2019, Ch. 144).

         Baldwin alleges that Merrill Lynch misleadingly and deceptively marketed its Maine 529 Program as providing the same state tax advantages for New York state income taxpayers as those provided by New York's 529 Program. Baldwin enrolled in the Maine 529 Program with that understanding, but it turned out that he was ineligible for the New York state tax deductions to which New York taxpayers enrolled in New York's 529 Program were entitled. Baldwin alleges that based on his reliance on information provided by Merrill Lynch, he incurred civil penalties for unpaid New York state taxes after he failed to report the tax liability he owed on his New York tax return. His complaint is brought on behalf of a class consisting of “[a]ll persons and entities who paid New York state income taxes and enrolled in the Maine 529 Program through Merrill Lynch's websites expecting to receive the same tax benefits as New York 529 Program participants.” ECF No. 1-2 ¶ 46.

         II. LEGAL ANALYSIS

         To withstand Merrill Lynch's 12(b)(6) motion to dismiss, Baldwin's complaint “must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “Merely reciting elements of a claim will not do, . . . [n]or will alleging facts that are too meager, vague, or conclusory to remove the possibility of relief from the realm of conjecture.” Lydon v. Local 103, Int'l Bhd. of Elec. Workers, 770 F.3d 48, 53 (1st Cir. 2014) (internal citation and quotation marks omitted). The question is whether, after isolating and ignoring legal labels and conclusions and drawing all reasonable inferences in the pleader's favor, the complaint's well-pled facts “plausibly narrate a claim for relief.” Schatz v. Republican State Leadership Comm., 669 F.3d 50, 55 (1st Cir. 2012).

         Merrill Lynch argues that Baldwin's complaint must be dismissed because the SLUSA requires that any class action alleging misrepresentation in connection with the purchase or sale of covered securities be brought under federal law, and Baldwin's complaint asserts only state law claims. Congress enacted the SLUSA to prevent plaintiffs from diverting securities class actions from federal courts to state courts to circumvent the heightened pleading requirements imposed on federal securities-fraud suits. See Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81-82 (2006); see also 15 U.S.C.A. § 78u-4(b); 17 C.F.R. § 240.10b-5 (West 2019). The SLUSA reads, in relevant part:

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-(A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or (B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.

15 U.S.C.A. § 78bb(f)(1).

         Four elements must be satisfied for the SLUSA to apply: “There must be (i) a covered class action, (ii) based on state law, (iii) alleging fraud or misrepresentation in connection with the purchase or sale of, (iv) a covered security.” Hidalgo-Vélez v. San Juan Asset Mgmt., Inc., 758 F.3d 98, 104 (1st Cir. 2014). It is undisputed that Baldwin's suit is a covered class action alleging fraud or misrepresentation in violation of Maine law and thus satisfies the first two elements.[1] Thus, my focus is on whether the misrepresentations alleged in the complaint were made in “connection with” the purchase or sale of a “covered security” as contemplated by the third and fourth elements. The most common types of covered securities are those traded nationally and listed on a regulated national exchange and those issued by an investment company registered under the Investment Company Act of 1940, 15 U.S.C.A. § 80a-1 et seq. See Hidalgo-Vélez, 758 F.3d at 105.

         Baldwin argues that the SLUSA does not require dismissal of the complaint because the misrepresentations it alleges were not made in connection with the purchase of covered securities, but were instead made in connection with his and the class members' decisions to invest in the Maine 529 Program, which Merrill Lynch concedes is not itself a covered security. See ECF No. 12 at 2. Baldwin contends that even if most of the funds invested by him and other class members into the Maine 529 Program were ultimately used to purchase covered securities, those purchases were made by Merrill Lynch, and not by the investors in the Maine 529 Program. Therefore, Merrill Lynch's “fraudulent misrepresentation[s] or omission[s]” were not “made ‘in connection with' . . . a ‘purchase or sale of a covered security'” ...


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