Opinion
Civil Action No. 23-12138-MJJ
2024-01-19
INSIGHT SECURITIES, INC., Plaintiff, v. STATE STREET BANK AND TRUST CO., Defendant.
Michael R. Stanley, Demeo LLP, Boston, MA, for Plaintiff. Matthew W. Costello, Nixon Peabody LLP, Boston, MA, John T. Ruskusky, Nixon Peabody LLP, Chicago, IL, for Defendant.
Michael R. Stanley, Demeo LLP, Boston, MA, for Plaintiff.
Matthew W. Costello, Nixon Peabody LLP, Boston, MA, John T. Ruskusky, Nixon Peabody LLP, Chicago, IL, for Defendant.
MEMORANDUM OF DECISION
JOUN, United States District Judge
On August 21, 2023, Plaintiff Insight Securities, Inc. ("Insight") brought suit in Suffolk Superior Court against State Street Bank and Trust Co. ("State Street") for various claims relating to fraudulent transfers, allegedly facilitated by State Street, that detrimentally affected Insight's accountholders. On September 19, 2023, State Street removed the case to this Court. [Doc. No. 1]. On October 10, 2023, Insight moved to remand this action to state court for lack of subject matter jurisdiction. [Doc. No. 12]. For the reasons below, Insight's motion is GRANTED.
I. BACKGROUND
I only recount the facts necessary to decide this motion. Insight is a "broker/dealer" of securities. [Doc. No. 1-3, at ¶ 2]. Insight alleges that Fernando Haberer, ("Mr. Haberer") employee and agent of Biscayne Capital, SA, ("Biscayne") was operating a Ponzi scheme in 2017 and 2018 via Biscayne and the investment advisory companies Total Advisors, LLC ("Total Advisors") and Pro Advisors, LLC ("Pro Advisors") using "various worthless securities issued by Biscayne." [Id. at ¶¶ 56, 60]. Insight further alleges that, in late 2017, it informed Total Advisors and Pro Advisors, that accounts carried by Insight "that employed Total or Pro as investment advisor, needed to be transferred elsewhere" by January 1, 2018. [Id. at ¶ 74]. On that date, all of Insight's accounts introduced by the two companies were placed on a "liquidation only basis." [Id. at ¶ 75]. Beginning in March 2018, Mr. Haberer forged multiple requests from clients over which Total Advisors or Pro Advisors had trading authority to non-existent accounts at Deutsche Bank Trust Company Americas ("DBTCA"). [Id. at ¶¶ 76-106]. Simultaneously, Mr. Haberer informed DBTCA that his accounts at DBTCA would be receiving the securities transferred from Insight's clients. [Id.]. State Street facilitated these transfers. [Id.].
The transfers were possible, Insight alleges, because State Street had a policy of treating third-party transfers of securities (transfers between two different parties)
as if they were "same-name" transfers (transfers between the same party). [Id. at ¶¶ 41-50]. Because of State Street's scheme, Insight's records showed transfers from its clients' accounts at Insight to its clients' (non-existent) accounts at DBTCA, while DBTCA's records showed transfers from Mr. Haberer's (non-existent) accounts at Insight to his account at DBTCA. [Id. at ¶¶ 107-08]. Because Insight had no reason to believe that its clients securities were transferred to a third-party account, Insight alleges it had no reason to suspect the transfers were fraudulent. [Id. at ¶ 108].
The fraudulent nature of the transfers was discovered in May 2018, prompting Insight to alert the authorities. [Id. at ¶¶ 109-10]. Insight tried to reclaim the money from DBTCA, initiating arbitration, while its customers, who had been defrauded, initiated arbitration against it. [Id. at ¶¶ 111-14]. State Street refused to participate in the arbitration or provide discovery. [Id. at ¶¶ 115-18]. In July of 2022, during arbitration, Insight received documents that revealed the scheme described above. [Id. at ¶ 121]. In January 2023, Insight also issued State Street a reclamation letter, but received no response. [Id. at ¶ 123]. Insight then brought this suit.
II. STANDARD OF REVIEW
"[R]emoval statutes are strictly construed, and defendants have the burden of showing the federal court's jurisdiction." Danca v. Priv. Health Care Sys., Inc., 185 F.3d 1, 4 (1st Cir. 1999). In determining whether I have jurisdiction, my "inquiry is cabined by the notice of removal." Lopez-Munoz v. Triple-S Salud, Inc., 754 F.3d 1, 4 (1st Cir. 2014). This analysis does not pass on the merits of the case. Ortiz-Bonilla v. Federacion de Ajedrez de P.R., Inc., 734 F.3d 28 (1st Cir. 2013).
State Street cites a variety of cases for the proposition that federal jurisdiction only requires a "colorable" federal claim. See, e.g., Ne. Erectors Assoc. v. Sec'y of Labor, 62 F.3d 37, 39 n.1 (1st Cir. 1995). However, none of cases cited deal with embedded federal questions. The embedded federal question doctrine does not hinge on whether the embedded federal claim is "colorable;" nor is such a standard consistent with the case law.
III. DISCUSSION
In its notice of removal, State Street relies on federal question jurisdiction to assert jurisdiction. 28 U.S.C. § 1331. State Street concedes there are no federal causes of action on the face of the complaint, the typical grounds for federal question jurisdiction. Rhode Island v. Shell Oil Prod. Co., L.L.C., 35 F.4th 44, 51 (1st Cir. 2022). Instead, State Street argues there are "embedded" federal questions in Counts II, IV, and V, the Negligence and Conspiracy claims (also referred to as "federal ingredient" jurisdiction). Federal ingredient jurisdiction involves "[a] very rare class [of suits] that (1) necessarily raise a federal issue that is (2) truly disputed and (3) substantial and that (4) a federal court can decide without upsetting the balance between state and federal judiciaries." Id. at 56 (citing Gunn v. Minton, 568 U.S. 251, 258, 133 S.Ct. 1059, 185 L.Ed.2d 72 (2013)). The First Circuit has warned that courts should apply this doctrine with caution. Rossello-Gonzalez v. Calderon-Serra, 398 F.3d 1, 12 (1st Cir. 2004). "A federal court that exercises federal
Occasionally, courts have eschewed the four-factor test for a totality of the circumstances test. See, e.g., One & Ken Valley Hous. Grp. v. Maine State Hous. Auth., 716 F.3d 218, 224-25 (1st Cir. 2013). The First Circuit recently held that this is an application of the substantiality prong. Tyngsboro Sports II Solar, LLC v. Nat'l Grid USA Serv. Co., Inc., 88 F.4th 58, 68 (1st Cir. 2023).
question jurisdiction over a single claim may also assert supplemental jurisdiction over all state-law claims that arise from the same nucleus of operative facts." Ortiz-Bonilla, 734 F.3d at 35 (citation omitted). Here, it is the substantiality prong on which the assertion of subject jurisdiction fails.
A. Substantiality
As the First Circuit recently held, "[t]he substantiality inquiry turns on whether the resolution of the suit would measurably affect the federal government." Tyngsboro Sports II Solar, LLC v. Nat'l Grid USA Serv. Co., Inc., 88 F.4th 58, 67 (1st Cir. 2023) (emphasis added). A court must look at the "totality of the circumstances" Tyngsboro, 88 F.4th at 68. Although there are no "bright-line rule[s]" that can replace a "sensitive judgment[ ] about congressional intent, judicial power, and the federal system," the First Circuit has identified two broad paradigms. Grable & Sons Metal Products, Inc. v. Darue Engineering & Mfg., 545 U.S. 308, 317, 125 S.Ct. 2363, 162 L.Ed.2d 257 (2005). Factbound cases are often not substantial, whereas suits that raise "pure issue[s] of law" are often considered substantial. Tyngsboro, 88 F.4th at 68. In other words, substantiality is usually met where the core issue is a purely legal dispute over the meaning of a federal statute. Id. (citing Grable, 545 U.S. at 315, 125 S.Ct. 2363). The substantiality prong is not usually met where the dispute turns on the application of a federal statute to particular facts. Tyngsboro, 88 F. 4th at 68 (citing Gunn, 568 U.S. at 261, 133 S.Ct. 1059).
State Street incorrectly argues that substantiality can be met either if the issue was substantial to the federal system or if it was substantial within the complaint. Gunn, 568 U.S. at 260, 133 S.Ct. 1059 ("it is not enough that the federal issue be significant to the particular parties in the immediate suit; that will always be true when the state claim necessarily raise[s] a disputed federal issue.") (citation omitted). Furthermore, even assuming all the counts identified by State Street necessarily raise issues of federal law, the questions in this case are completely factbound. The federal questions allegedly raised in every count are identical: whether State Street's conduct in treating third-party transfers as same-name transfers violated "the requirements of the BSA, the Federal Reserve Board's Regulations, and other AML rules and regulations." [Doc. No. 1-3, at ¶ 158]. At a motion hearing, State Street did not take the position that the applicable federal statutes or regulations are unconstitutional or unenforceable. Significantly, State Street could not identify with any precision any disagreements with Insight over the meaning of federal statutes and regulations. Instead, inasmuch a federal issue is raised, it is whether State Street's conduct violated them. That is solidly in the Gunn paradigm of applying federal standards to specific facts to resolve a primarily private dispute.
I do not merit State Street's suggestion that the meaning of federal statutes and regulations would require the testimony of federal officials.
State Street also argues that the alleged conduct facilitated "money laundering, bribery, and fraud," which are "important to the federal government and its functions." State Street's conclusory argument is not enough to carry its burden. Indeed, in Grable the Supreme Court reaffirmed its previous holdings that the mere use of a federal law to provide a standard of care in a state tort suit is not enough, without more, to create federal jurisdiction. 545 U.S. at 318-19, 125 S.Ct. 2363. Any violation
of a federal statute or regulation can be "important," in some sense, to the federal government; however, State Street fails to identify how this case will implicate the federal system. There is no argument that any of the counts require an investigation of money laundering, bribery, or fraud that would interfere with or usurp the role of federal investigators. Such language referenced in the complaint is only utilized to stress the importance of the duties State Street allegedly violated.
Nor is this a case where the defendant is a state actor (or quasi-state actor) and the dispute implicates uniquely federal interests. The First Circuit has held that whether an agency of Rhode Island complied with "federally sanctioned interstate compacts" was a substantial federal issue. R.I. Fishermen's All., Inc. v. R.I. Dep't Of Env't Mgmt., 585 F.3d 42, 51 (1st Cir. 2009). In that case, the First Circuit also noted that the scheme was developed by the federal government to ensure interstate uniformity. Id. Similarly, one of the Second Circuit cases State Street cites concerns whether a New York state agency was complying with its federally-created duty to enforce and monitor compliance with federal law. D'Alessio v. New York Stock Exch., Inc., 258 F.3d 93, 104 (2d Cir. 2001). To the extent there is language in D'Alessio that suggests that a complaint "rooted in violations of federal law" meets the substantiality test, 258 F.3d at 101, that language conflicts with later-decided Gunn and is not persuasive. The other Second Circuit case cited by State Street concerns a dispute as to whether NASDAQ violated its federally created duty to uphold a "fair and orderly market." See NASDAQ OMX Grp., Inc. v. UBS Sec., LLC, 770 F.3d 1010, 1023-29 (2d Cir. 2014); see also id. at 1027-28 (noting that stock exchanges have "quasi-governmental" powers). Again, to the extent NASDAQ contains language emphasizing the importance of federal claims in the complaint, id. at 1029, that language is unpersuasive given Gunn. Here, while there is no question that financial institutions are heavily regulated, State Street does not occupy the same position as the Rhode Island Department of Environmental Management, or the New York Stock Exchange, or NASDAQ. The dispute here is not over whether it is meeting a federally-created enforcement duty, but merely whether it complied with federal law. A ruling in this case will not reverberate across the federal system as it would in those cases. It will decide the liability of two corporations in a private dispute.
Finally, State Street argues the substantiality prong is met when an intricate federal regulatory scheme is used as the basis of a civil claim. Cf. D'Alessio, 258 F.3d at 103-04. To the contrary, in the First Circuit, "compliance with an intricate and detailed set of federal regulatory requirements" is not enough, without more, to "warrant federal-question jurisdiction." Municipality of Mayaguez v. Corporacion Para el Desarrollo del Oeste, Inc., 726 F.3d 8, 17 (1st Cir. 2013). Municipality of San Juan v. Corporacion Para El Fomento Economico De La Ciudad Capital, 415 F.3d 145 (1st Cir. 2005) ("COFECC") specifically abrogated the holding in COFECC concerning embedded federal question jurisdiction. 726 F.3d at 17. Although Mayaguez concerns a contract, rather than a tort, the First Circuit holding remains that the mere existence of an intricate federal regulatory background is not enough to justify federal jurisdiction. State Street has not sufficiently demonstrated that the regulatory scheme would be interfered with to proceed in state court as required by Mayaguez.
The approach by the First Circuit in Mayaguez is different than the approach
taken by other courts. See, e.g., Johnson v. UMB Bank, N.A., No. 10-cv-00654, 2010 WL 3119419, at *2 (W.D. Mo. Aug. 5, 2010). But Mayaguez is binding in this Circuit, and Johnson is not. State Street emphasizes repeatedly that the parties are financial institutions, but never explains why the existing First Circuit case law would not apply to financial institutions with equal strength. And out-of-circuit courts have come to similar conclusions, at least with regard to the Banking Secrecy Act. See, e.g., Marchak v. JPMorgan Chase & Co., No. 15-cv-4297ILGMDG, 2016 WL 3911926, at *6 (E.D.N.Y. July 15, 2016) ("The BSA does not provide a private right of action, and the government does not have any interest in the outcome of tort litigation between private parties. The federal issues raised by this case, if any, would involve a fact-specific application of the regulations that does not implicate the validity of the regulations themselves, or have any other broader effect on federal interests.") (citation omitted). Significantly, the absence of a private right of action is relevant, if not dispositive. Grable, 545 U.S. at 318, 125 S.Ct. 2363. The parties agree that there is no federal right of action. Given the analysis above, that absence further buttresses the conclusion that the dispute here is not substantial to the federal system. Ultimately, State Street has not met its burden of showing that "the resolution of this suit would measurably affect the federal government." Tyngsboro, 88 F.4th at 67.
As Insight points out, the Seventh Circuit case cited by State Street concerns a jurisdictional statute, not the Embedded Federal Question doctrine. Citadel Sec., LLC v. Chicago Bd. Options Exch., Inc., 808 F.3d 694, 701-02 (7th Cir. 2015).
B. Fees
I will not award fees. "[C]ourts may award attorney's fees under § 1447(c) only where the removing party lacked an objectively reasonable basis for seeking removal." Martin v. Franklin Cap. Corp., 546 U.S. 132, 141, 126 S.Ct. 704, 163 L.Ed.2d 547 (2005). Nevertheless, "district courts retain discretion to consider whether unusual circumstances warrant a departure," such as "a plaintiff's ... failure to disclose facts necessary to determine jurisdiction." Id.
Insight argues the Court should award attorney's fees and costs because State Street did not have an objectively reasonable basis to remove the case to federal court. I acknowledge that State Street's inclusion of outdated case law and the omission of Mayaguez and Tyngsboro are troubling given their importance to the case. Litigants should prioritize First Circuit precedent and the lower courts that apply it when briefing in this District. However, despite these omissions, I note that Insight miscited its own Complaint and State Street's Notice of Removal in moving for remand. In its initial memorandum, Insight claims Count IV is a Conspiracy to Commit an Illegal Act or to commit conversion. [Docket No. 13, at 5]. In its reply, Insight recharacterized Count IV as a Conspiracy by Coercion. [Docket No. 21, at 2-3]. Additionally, in its memorandum, Insight omits any discussion of Count V of the Complaint, which is labeled "Civil Conspiracy to Commit an Illegal Act." [Doc. No. 1-3]. Count V reads "State Street and DBTCA conspired to avoid the requirements of the BSA, the Federal Reserve Board's Regulations, and other AML rules and regulations by employing a system designed to transform on the records of DBTCA, third-party DTC transfers directed to DBTCA as same name transfers sent
See, e.g., Fleming v. Dane, 304 Mass. 46, 50, 22 N.E.2d 609 (1939).
to DBTCS by its customers." [Doc. No. 1-3, at ¶ 158]. Although ultimately refuted, an initial reading of such language could lead State Street to believe that Insight raised a federal question in its Complaint. Finally, Insight miscites State Street's Notice of Removal, arguing extensively about Count VI, its M.G.L. c. 93A claim, which State Street did not allege included an embedded federal question. [Docket No. 13, at 5-6]. These omissions and miscites suggest an attempt to obscure central issues concerning this motion. It would be inequitable to reward such conduct with fees.
IV. CONCLUSION
For the reasons above, the motion to remand is GRANTED.
SO ORDERED.