United States District Court, D. Maine
THOMAS BALDWIN, Individually and On Behalf of All Others Similarly Situated, Plaintiff,
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, Defendant.
ORDER ON DEFENDANT'S MOTION TO DISMISS
LEVY CHIEF U.S. DISTRICT JUDGE.
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.
complaint alleges the following facts, which I treat as true
for purposes of evaluating the motion to dismiss.
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.
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taxes were due on money withdrawn from the New York 529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).
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.
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).
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).
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. 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.
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'”