Galvin v. Scottrade, Inc.

United States District Court

District of Massachusetts

)

Enforcement Section of the )

Massachusetts Securities )

Division of the Office of the )

Secretary of the Commonwealth, )

) Civil Action No.

Plaintiff, ) 18-10508-NMG

)

v. )

)

Scottrade, Inc., )

)

Defendant. )

)

MEMORANDUM & ORDER

GORTON, J.

This is a dispute between the Enforcement Section of the

Massachusetts Securities Division of the Office of the Secretary

of the Commonwealth (“the Enforcement Section” or “plaintiff”)

and Scottrade, Inc., a Massachusetts registered broker-dealer

(“Scottrade” or “defendant”). Plaintiff alleges that Scottrade

violated its internal policy by hosting incentivized sales

contests, thus violating state law. Scottrade responds that the

Enforcement Section is merely attempting to enforce federal

standards that were set forth in the now-vacated “Fiduciary

Rule.” After plaintiff filed an administrative complaint with

the Securities Division, defendant removed the action to this

Court. Pending before the Court is plaintiff’s motion to

remand.

I. Background

The Secretary of the Commonwealth of Massachusetts, William

F. Galvin, is responsible for administrating the Massachusetts

Securities Act, M.G.L. c. 110A, and “may employ such assistants

and others employees as are required . . . for the

administration and enforcement” of the Act. M.G.L. c. 9, § 10A.

Pursuant to that latter provision, the Secretary established the

Securities Division of the Office of the Secretary of the

Commonwealth to

administer and enforce [the Securities Act,] M.G.L. c. 110A

and [the regulations promulgated thereunder], 950 C.M.R.

10.00 through 14.413.

950 C.M.R. § 14.406(A)(1).

In February, 2018, the Enforcement Section filed an

administrative complaint against Scottrade with the Securities

Division. “In anticipation of its obligations under the

upcoming Fiduciary Rule,” the Enforcement Division alleges,

Scottrade added an Impartial Conduct Standards section to its

Brokerage and Investment Advisor Compliance Manual that

provides:

The firm does not use or rely upon quotas, appraisals,

performance or personnel actions, bonuses, contests,

special awards, differential compensation or other actions

or incentives that are intended or reasonably expected to

cause associates to make recommendations that are not in

the best interest of Retirement Account clients or

prospective Retirement Account clients.

Because Scottrade held sales contests between June and July

2017 (“the Q3 sales contest”) and between August and September,

2017 (“the Q4 sales contest”), the Enforcement Division claims,

Scottrade violated its own internal policies regarding the

Fiduciary Rule, thereby failing to act in good faith to

comply with the Fiduciary Rule.

The Enforcement Section alleges that Scottrade’s conduct 1)

constitutes “unethical or dishonest conduct or practices” in the

securities business, in violation of M.G.L. c. 110A, §

204(a)(2)(G), and 2) demonstrates that Scottrade “failed

reasonably to supervise agents, investment adviser

representatives or other employees”, in violation of M.G.L. c.

110A § 204(a)(2)(J).

The “Fiduciary Rule” to which the complaint refers is a

group of seven rules that expand the “investment advice

fiduciary” definition in the Employee Retirement Income Security

Act of 1974 (“ERISA”), codified as amended at 29 U.S.C. § 1001

et seq., and the Internal Revenue Code, 26 U.S.C. § 4975. The

Fiduciary Rule regulates financial service providers, such as

Scottrade, that provide services to holders of Individual

Retirement Accounts (“IRAs”). One such regulation is the “Best

Interest Contract Exemption”, which permits investment advice

fiduciaries to avoid prohibited transaction penalties if they

enter into contracts with clients that, inter alia, affirm their

fiduciary status and incorporate “Impartial Conduct Standards”,

including duties of loyalty and prudence. See 81 Fed. Reg. 21002

(Apr. 8, 2016), corrected at 81 Fed. Reg. 44773 (July 11, 2016),

and amended by 82 Fed. Reg. 16902 (Apr. 7, 2017).

Various business groups have challenged the Rule, alleging

that 1) it was inconsistent with the governing statute, 2) the

DOL lacked authority to regulate the affected servicers and

providers, 3) the DOL imposed legally unauthorized contract

terms, 4) the Rule violated the First Amendment and 5) the Rule

was arbitrary and capricious. See Chamber of Commerce of United

States of Am. v. United States Dep’t of Labor, 885 F.3d 360, 363

(5th Cir. 2018). In March, 2018, the United States Court of

Appeals for the Fifth Circuit (“the Fifth Circuit”) held that

the Rule conflicted with the text of ERISA, was “unreasonable”

under Chevron, U.S.A., Inc. v. N.R.D.C., Inc., 467 U.S. 837

(1984), and was an “arbitrary and capricious agency action” in

violation of the Administrative Procedure Act, 5 U.S.C. § 706.

That court “vacate[d] the Fiduciary Rule in toto”. Id. at 388.

Scottrade simultaneously removed this administrative action

to the United States District Court for the District of

Massachusetts. It asserts that this Court has federal question

jurisdiction because the matter “arises under and is governed by

ERISA”. Pending before the Court is plaintiff’s motion to

remand the case to the Enforcement Section of the Massachusetts

Securities Division.

II. Status of Fifth Circuit vacatur

As a preliminary matter, the Court notes that Scottrade

proceeds under the assumption that the decision of the Fifth

Circuit vacating the Fiduciary Rule binds this Court. At oral

argument, its counsel posited that

if a federal appellate court vacates an order, it isn’t

that it existed and no longer exists; it’s as if it never

existed at all. . . . I don’t know that there’s a contrary

view, frankly.

That opinion is itself contrary to

the traditional conception that a judge does not so much

strike down an unconstitutional law as refuse to apply it.

Samuel Bray, Multiple Chancellors: Reforming the National

Injunction, 131 Harv. L. Rev. 417, 451 (2017).

As articulated in Marbury v. Madison, 5 U.S. 137, 178

(1803), a court determines “which of [] conflicting rules

governs the case.” Cf. United States v. Raines, 362 U.S. 17, 21

(1960) (“This Court, as is the case with all federal courts, has

no jurisdiction to pronounce any statute . . . void, . . .

except as it is called upon to adjudge the legal rights of

litigants in actual controversies.”) (citation and internal

quotation marks omitted). There is disagreement with respect to

when nationwide injunctions are appropriate. Compare Nat’l

Mining Ass’n v. U.S. Army Corps of Eng’rs, 145 F.3d 1399, 1409

(D.C. Cir. 1998) (“[W]hen a reviewing court determines that

agency regulations are unlawful, the ordinary result is that the

rules are vacated—not that their application to the individual

petitioners is proscribed.”) (citation omitted) with City & Cty.

of San Francisco v. Trump, No. 17-17478, 2018 WL 3637911, at *13

(9th Cir. Aug. 1, 2018) (describing nationwide injunctions as

necessary only in “exceptional cases”). Nationwide injunctions

have been criticized as a matter of doctrine and policy. See

Trump v. Hawaii, 138 S. Ct. 2392, 2429 (2018) (Thomas, J.,

concurring) (“[U]niversal injunctions are legally and

historically dubious.) and Arizona v. Evans, 514 U.S. 1, 23 n.1

(1995) (Ginsburg, J., dissenting) (“[W]hen frontier legal

problems are presented, periods of ‘percolation’ in, and diverse

opinions from, state and federal appellate courts may yield a

better informed and more enduring final pronouncement by this

Court.”).

As the following analysis may demonstrate, whether or not

the Fifth Circuit has vacated the Fiduciary Rule on a nationwide

and universal basis is not dispositive of this motion. The

statement of that court that it vacates “the Fiduciary Rule in

toto” appears immediately after it explains that the

“comprehensive regulatory package is plainly not amendable to

severance.” See Chamber of Commerce, 885 F.3d at 388. Thus, “in

toto” presumably refers to how much of the Fiduciary Rule was

being vacated, i.e. all of it, and not that the Court was

invoking nationwide and universal relief. There is no explicit

statement that the Court expected its judgment to apply

nationwide and therefore defendant’s contention that the Fifth

Circuit decision binds this Court is tenuous at best.

III. Motion to remand

Plaintiff asserts that neither the complete preemption nor

substantial federal question exception to the well-pleaded

complaint rule applies and, as a result, federal question

jurisdiction does not exist and removal was improper. Removal

was also purportedly unwarranted because the administrative

complaint was not initially brought in a state court which is a

prerequisite for removal.

Defendant responds that federal question jurisdiction

exists because ERISA completely preempts the plaintiff’s claims

and resolution of the state law claims necessarily involves

consideration of a substantial issue of federal law. Scottrade

contends, moreover, that the action was brought in the

equivalent of a state court under the relevant controlling

authority, thus satisfying the removal statute.

District courts “have original jurisdiction of all civil

actions arising under” the laws of the United States. 28 U.S.C.

§ 1331. All cases removed from state court shall be remanded if

at “any time before final judgment it appears that the district

court lacks subject matter jurisdiction.” 28 U.S.C. § 1447(c).

The removal statute is to be strictly construed and defendants

have the burden of demonstrating the existence of federal

jurisdiction. Danca v. Private Health Care Sys., Inc., 185 F.3d

1, 4 (1st Cir. 1999).

A “cause of action arises under federal law only when the

plaintiff's well-pleaded complaint” raises an issue of federal

law. Metro. Life Ins. Co. v. Taylor, 481 U.S. 58, 63 (1987)

(citing Gully v. First National Bank, 299 U.S. 109 (1936))

(additional citation omitted). By requiring that the federal

question be stated on the face of the complaint, the well-

pleaded complaint rule “envisions that the plaintiff is master

of his complaint and that a case cannot be removed” if the

allegations in the complaint are premised only on local law.

Lopez-Munoz v. Triple-S Salud, Inc., 754 F.3d 1, 4 (1st Cir.

2014) (quoting Negrón–Fuentes v. UPS Supply Chain Solutions, 532

F.3d 1, 6 (1st Cir.2008)) (internal quotation marks omitted).

There are two common exceptions to the well-pleaded

complaint rule.

First, under the federal ingredient doctrine, a well-pled

complaint arises under the laws of the United States if a state

law cause of action “requires resolution of a substantial

question of federal law” in dispute between the parties.

Franchise Tax Bd. of State of Cal. v. Constr. Laborers Vacation

Tr. for S. California, 463 U.S. 1, 13 (1983). The First Circuit

Court of Appeals (“First Circuit”) has cautioned that the

doctrine “endures in principle but should be applied with

caution and various qualifications.” Almond v. Capital

Properties, Inc., 212 F.3d 20, 23 (1st Cir. 2000).

Second, under the “artful pleading” or “complete

preemption” doctrine, if a court concludes that a plaintiff has

attempted to defeat removal by omitting necessary federal

questions, “it may uphold removal even though no federal

question appears on the face” of the complaint. Rivet v. Regions

Bank of Louisiana, 522 U.S. 470, 475 (1998). When such federal

claims come dressed in state law clothing, “the district court

can simply recharacterize them to reveal their true basis.”

Negron-Fuentes, 532 F.3d at 6.

Scottrade submits that the administrative complaint

encompasses both exceptions and that the causes of action

therefore “arise under” the laws of the United States.

A. Federal Ingredient

The Enforcement Section contends that federal ingredient

jurisdiction does not exist because analysis of the federal

Fiduciary Rule is unnecessary to determine whether Scottrade

violated the Massachusetts Securities Act. Scottrade rejoins

that this case is of “central concern” to ERISA, such that

resolving the claims here would involve resolution of a

substantial issue of federal law.

Federal ingredient jurisdiction is “controversial” and

should be applied sparingly. Almond, 212 F.3d at 23. It is

appropriate where the face of a complaint reveals a federal

issue that is

(1) necessarily raised, (2) actually disputed, (3)

substantial, and (4) capable of resolution in a federal

court without disrupting the federal-state balance of

power.

Municipality of Mayaguez v. Corporacion Para el Desarrollo

del Oeste, Inc., 726 F.3d 8, 13 (1st Cir. 2013) (quoting Gunn v.

Minton, 568 U.S. 251, 258 (2013)).

No federal issue is necessarily raised from the face of

plaintiff’s administrative complaint. That complaint alleges

two claims under Massachusetts state law: 1) that Scottrade

“engaged in [] unethical or dishonest conduct or practices” in

violation of M.G.L. c. 110A, § 204(a)(2)(G) and 2) that

Scottrade “failed reasonably to supervise agents, investment

adviser representative or other employees” in violation of

M.G.L. c. 110A, § 204(a)(2)(J).

A court could resolve both claims without any analysis of

the DOL Fiduciary Rule. It is true that Scottrade adopted its

Impartial Conduct policy in response to the Fiduciary Rule but

this Court need not interpret the Fiduciary Rule nor rule on its

validity to determine whether Scottrade violated that policy.

The Enforcement Section regularly brings actions under

§ 204 when companies fail to comply with their internal

policies. See, e.g., In re Merrill Lynch, Pierce, Fenner & Smith

Inc., 2016 WL 6567103, at *7 (Mass. Sec. Div. 2016) (alleging

that respondent violated § 204 by “failing to comply with its

internal policies and procedures regarding prior approval of

internal-use material”); In re Revere Securities LLC et al.,

2016 WL 6567104, at *3 (Mass. Sec. Div. 2016) (alleging that

broker-dealer violated § 204 by “violating [the employer’s]

written policies and procedures”).

The same is true where companies fail to supervise their

employees reasonably. See In re SII Investments, Inc., 2017 WL

4455949, at *2 (Mass. Sec. Div. 2017) (alleging that respondent

committed “regulatory violations that were at odds with [its]

own internal policies and procedures”). Because a court can

determine whether Scottrade violated its own policies or

reasonably supervised its employees without assessing the DOL

Fiduciary Rule, no federal issue is “necessarily raised”. One &

Ken Valley Hous. Grp. v. Me. State Hous. Auth., 716 F.3d 218,

224 (1st Cir. 2013). Accordingly, federal ingredient

jurisdiction is not present in this case.

B. Complete preemption

The Enforcement Section avers that complete preemption is

improper because ERISA’s preemption provisions do not apply to

IRAs and because it, as a state agency, would not have standing

to sue under that statute. Scottrade responds that ERISA’s

preemption provisions do apply to the retirement accounts at

issue in this case and that a functional analysis of the

administrative warrants preemption.

ERISA contains an exclusive civil enforcement provision at

§ 502(a), 29 U.S.C. § 1132(a), which provides a private cause of

action for participants or beneficiaries of ERISA plans. See

Hamilton v. Partners Healthcare Sys., Inc., 209 F. Supp. 3d 397,

412 (D. Mass. 2016). Among other things, § 502(a) entitles a

beneficiary to bring actions to recover benefits due to him or

her under the terms of a plan, to enforce “rights under the

terms of the plan, or to clarify [] rights to future benefits.”

In Metro. Life Ins. Co. v. Taylor, 481 U.S. 58 (1987), the

United States Supreme Court held that state actions that fall

within the scope of § 502(a) are completely preempted by that

provision and are removable to federal court. Id. at 62 (finding

plaintiff’s common law contract and tort claims for denial of

medical care, where coverage was available as a result of an

ERISA-regulated benefit plan, pre-empted by § 502(a)). More

recently, the Supreme Court has explained that the

integrated enforcement mechanism, ERISA § 502(a), 29 U.S.C.

§ 1132(a), is a distinctive feature of ERISA, and essential

to accomplish Congress’ purpose of creating a comprehensive

statute for the regulation of employee benefit plans.

Aetna Health Inc. v. Davila, 542 U.S. 200, 208 (2004).

As a result, § 502(a) of ERISA allows for the conversion of

state law complaints into federal claims that are completely

preempted and removable to federal court. Id. at 209.

In Davila, the Supreme Court explained that a cause of

action is completely preempted under ERISA

if an individual, at some point in time, could have brought

his claim under ERISA § 502(a)(1)(B), and [] there is no

other independent legal duty that is implicated by a

defendant's actions . . . .

Id. at 210.

1. Application to IRAs

The Enforcement Section contends that its current action is

not removable because ERISA’s preemption provisions do not apply

to IRAs. That contention is unavailing. Many IRAs are subject

to Title 1 of ERISA because they fall within the definition of

employee benefit plans and are subject to ERISA preemption. See,

e.g., Cline v. Industrial Maintenance Engineering & Contracting

Co., 200 F.3d 1223, 1230 (9th Cir. 2000). Thus, the

administrative complaint filed in this case encompasses

retirement accounts that are not IRAs and are subject to

§ 502(a) preemption. Indeed, plaintiff equivocated on this

point in its reply brief and conceded the issue at the hearing

on this motion.

2. Complete preemption under Davila

The Enforcement Section’s second, and more plausible,

argument is that its claim cannot be preempted under § 502(a)

because it is not entitled to sue under ERISA. Defendant

rejoins that plaintiff relies on out-of-date and inapposite case

law.

Relying on the rule of In re Pharm. Indus. Average

Wholesale Price Litig., 309 F. Supp. 2d 165 (D. Mass. 2004)

(“Wholesale Price”), the Enforcement Section contends that a

claim is only preempted under ERISA if plaintiff has

standing to sue under Section 502(a) . . . [and]

plaintiffs’ claim falls within the scope of an ERISA

provision that plaintiffs can enforce via § 502(a).

Id. at 173.

Defendant responds that Davila, decided after the District of

Massachusetts opinion in Wholesale Price, established a test in

which only the claims, not the litigant, are relevant.

This Court agrees with the Enforcement Section that Davila

established a multi-part test in which the adjudicating forum

considers both the type of entity bringing the claim and the

substance of the claim itself. In Davila, the Supreme Court

concluded that

if an individual, at some point in time, could have brought

his claim under ERISA § 502(a)(1)(B), and where there is no

other independent legal duty that is implicated by a

defendant's actions, then the individual’s cause of action

is completely pre-empted by ERISA § 502(a)(1)(B).

Davila, 542 U.S. at 210; accord New Jersey Carpenters & the

Trustees Thereof v. Tishman Const. Corp. of New Jersey, 760 F.3d

297, 303 (3d Cir. 2014) (applying Davila to § 502(a) generally).

The Second Circuit Court of Appeals (“Second Circuit”) has

separated this test into multiple “prongs”. Under the first

prong, concerning whether an individual can bring a claim under

§ 502(a), that court requires the forum to consider

whether the plaintiff is the type of party that can bring a

claim pursuant to § 502(a)(1)(B); and second, [] whether

the actual claim that the plaintiff asserts can be

construed as a colorable claim for benefits pursuant to

§ 502(a)(1)(B).

Montefiore Med. Ctr. v. Teamsters Local 272, 642 F.3d 321, 328

(2d Cir. 2011) (citing Marin Gen. Hosp. v. Modesto & Empire

Traction Co., 581 F.3d 941, 948 (9th Cir. 2009)). Other Circuit

Courts of Appeal that have addressed the question have employed

the multi-prong approach which this Court now adopts. See, e.g.,

DB Healthcare, LLC v. Blue Cross Blue Shield of Arizona, Inc.,

852 F.3d 868, 878 (9th Cir. 2017) (“Claims are preempted by

ERISA only if two conditions are met: (1) the litigant could

have brought the claim under ERISA's civil enforcement

provision, and (2) the claims have no basis in an independent

legal duty.”) (quoting Davila, 542 U.S. at 210); New Jersey

Carpenters & the Trustees Thereof v. Tishman Const. Corp. of New

Jersey, 760 F.3d 297, 303 (3d Cir. 2014) (“We have held that a

claim is completely preempted, and thus removable, under ERISA

§ 502(a) only if: (1) the plaintiff could have brought the claim

under § 502(a); and (2) no other independent legal duty supports

the plaintiff's claim.”) (citing Pascack Valley Hosp. Inc. v.

Local 464A UFCW Welfare Reimbursement Plan, 388 F.3d 393, 400

(3d Cir. 2004)).

At first blush, it may appear that complete preemption

depends entirely upon the claims asserted and not the party

asserting them. The brief analysis in Negron-Fuentes v. UPS

Supply Chain Sols., 532 F.3d 1, 7 (1st Cir. 2008), for instance,

makes no mention of the plaintiff’s statutory standing. That

decision held that an action is removable if any of a

plaintiff’s claims

are in substance duplicated or supplanted by the ERISA

cause of action (in which case removal based on complete

preemption is proper) or instead whether all are directed

at violation of a legal duty . . . independent of ERISA or

the plan terms, thus defeating removal.

Id. at 7 (quoting Davila, 542 U.S. at 210) (internal quotation

marks and citation omitted).

It is not surprising, however, that Negron made no mention

of the plaintiff’s ERISA standing because the plaintiff there

was the prototype of a party who can sue under ERISA. The

defendant in that case argued that § 502(a) completely preempted

the action because the claim sought “ERISA benefits from an

ERISA plan on behalf of an ERISA plan participant.” See id. at 7

n.4. The reason that removability depended upon the substance

of the plaintiff’s claims was that, as a “participant in an

employee benefit plan governed by ERISA”, see id. at 6, he was

“an individual . . . [who] could have brought his claim under

ERISA § 502(a)(1)(B).” Davila, 542 U.S. at 210; 29 U.S.C. §

1132(a)(1) (“A civil action may be brought by a participant or

beneficiary . . . .”).

In the present case, by contrast, the Enforcement Section

is not “an individual . . . [who] could have brought his claim

under” § 502(a). See Franchise Tax Bd. of State of Cal. v.

Constr. Laborers Vacation Tr. for S. California, 463 U.S. 1, 27

(1983) (concluding that suit by state tax agency does not “arise

under” § 502 where plaintiff was not an enumerated party

entitled to seek relief under that section). “ERISA carefully

enumerates the parties entitled to seek relief”, see id., and

state agencies are not such parties. Because plaintiff could

not have brought its claims under § 502(a), its causes of action

are not pre-empted by ERISA.

Scottrade agrees that the Enforcement Section “does not

have standing to sue under ERISA.” Nonetheless, it contends,

this Court still has subject matter jurisdiction. That

contention, however, puts the cart before the horse. Given that

no federal ingredient jurisdiction exists, this Court possesses

subject matter jurisdiction only if one of plaintiff’s claims is

completely preempted. Because complete preemption under ERISA

requires that “the plaintiff is the type of party that can bring

a claim”, see Montefiore, 642 F.3d at 328, this Court has

subject matter jurisdiction only if the Enforcement Section can

bring a claim under ERISA. It cannot and thus jurisdiction is

lacking.

In a last gasp, defendant suggests that the issue in this

case is of such central importance to ERISA that this Court

should re-characterize the complaint as a federal common law

action. The Court declines that invitation. Courts are

cautioned to be “careful not to allow federal common law to

rewrite ERISA’s carefully crafted statutory scheme.” State St.

Bank & Tr. Co. v. Denman Tire Corp., 240 F.3d 83, 89 (1st Cir.

2001). Accordingly, a common law claim is appropriate only “if

necessary to fill in interstitially or otherwise effectuate the

statutory pattern enacted in large by Congress.” Bollman Hat Co.

v. Root, 112 F.3d 113, 118 (3d Cir. 1997) (internal quotation

omitted). Examples of such common law claims include

identifying the standard of judicial review of a plan

administrator’s decisions, see Firestone Tire & Rubber Co. v.

Bruch, 489 U.S. 101, 111-12 (1989), or permitting a claim for

restitution for funds misallocated from one ERISA plan to

another. See State St. Bank, 240 F.3d at 89. The present case

bears no resemblance to such limited exercises of common law

authority. Scottrade correctly notes that this Court possesses

the requisite authority cites no case law supporting its

application here.

Because, the Enforcement Section is not the kind of party

that can bring a claim pursuant to § 502(a), ERISA does not

completely preempt either claim in the administrative complaint

and neither claim “arises under” ERISA. This Court lacks

subject matter jurisdiction and plaintiff’s motion to remand

will be allowed.

C. State court

Plaintiff submits that removal also was unauthorized

because the Enforcement Section’s administrative complaint was

not initially brought in a state court. Defendant retorts that,

under the First Circuit’s functional approach to the removal

statute, the Securities Division is sufficiently similar to a

state court to justify removal in this case.

The removal statute provides that, as a general matter,

any civil action brought in a State court of which the

district courts of the United States have original

jurisdiction, may be removed by the defendant . . . .

28 U.S.C. 1441(a).

Notwithstanding the text of that statute, this circuit has

explained that a state administrative “board may . . . be a

court for removal purposes.” Volkswagen de Puerto Rico, Inc. v.

Puerto Rico Labor Relations Bd., 454 F.2d 38, 44 (1st Cir.

1972). In Volkswagen, the First Circuit adopted a functional

approach to removal, which focuses on

a number of relevant factors, including the Board's

procedures and enforcement powers, the locus of traditional

jurisdiction over breaches of contract, and the respective

state and federal interests in the subject matter and in

the provision of a forum.

Id. at 44.

The First Circuit has not yet applied the Volkswagen

factors in a subsequent case and more recent caselaw in other

circuits has rejected the functional approach. See Porter Tr. v.

Rural Water Sewer & Solid Waste Mgmt. Dist. No. 1, 607 F.3d

1251, 1254 (10th Cir. 2010) (“[I]n light of the plain language

of § 1441, which permits removal only from a ‘state court,’ we

do not find their legal reasoning persuasive.”); Oregon Bureau

of Labor & Indus. ex rel. Richardson v. U.S. W. Commc’ns, Inc.,

288 F.3d 414, 418 (9th Cir. 2002) (“The functional test goes

beyond the language of the statute, because the functional test

is a judicially-developed analysis that neither appears in, nor

is necessarily implied by, the statutory language.”). The

Enforcement Section contends that the functional test should be

abandoned, or, at least, limited to the labor context. As both

parties correctly note, however, that test is binding on this

Court and therefore guides its analysis.

1. Agency Functions and Powers

Under the first prong of the Volkswagen test the court

evaluates whether the state agency exercises powers and utilizes

procedures that are sufficiently judicial in nature to

constitute a “state court” for removal purposes.

There is no doubt that the Securities Division conducts

adjudicatory proceedings. Respondents receive fair notice of

the proceeding and the charges against them. M.G.L. c. 30A, §

11(1). A record of the proceedings is kept. Id. § 11(6); 950

M.C.R. § 10.09(m),(o). Evidence is offered, received and

evaluated. M.G.L. c. 30A, § 11(2),(4); 950 M.C.R. § 10.09(h),

(i). A respondent has a right to counsel, 950 M.C.R. §

10.03(a), and the right to call witnesses and submit rebuttal

evidence. M.G.L. c. 30A, § 11(3). The proceeding culminates in

a reasoned decision, M.G.L. 30A, § 11(8); 950 M.C.R. § 10.09(p),

subject to a right to judicial review in the superior court,

M.G.L. c. 30A, § 14; id. c. 110A, § 411(a).

Courts applying the functional test have, however, found

non-adjudicatory powers to be even more significant than

judicatory powers. Whelchel v. Regus Mgmt. Grp., LLC, 914 F.

Supp. 2d 83, 86 (D. Mass. 2012) (citation omitted) (holding that

the Massachusetts Commission Against Discrimination was not a

court for the purposes of the removal statute). By statute, the

Secretary performs prosecutorial and investigatory functions

including administering and enforcing the Massachusetts

Securities Act, see M.G.L. c. 9, § 10A; id. c. 110A, § 406(a),

instituting proceedings, see id. c. 110A, § 407(d), and

determining whether grounds exist to believe that “any person

has violated . . . any provision of” the Act. See id. § 407(a).

The First Circuit Court of Appeals (“First Circuit”) has held

that the Secretary exercises a dual adjudicatory-prosecutorial

role and is protected by prosecutorial immunity for proceedings

in the Securities provision where “he was performing

prosecutorial functions.” Goldstein v. Galvin, 719 F.3d 16, 26

(1st Cir. 2013). Indeed, that Court observed that the

[a]cts that collectively comprise the pursuit of an

enforcement action fit snugly within the realm of

traditional prosecutorial functions.

Id. (citing Butz v. Economou, 438 U.S. 478, 516 (1978)).

In the rare instances in which removal from a state agency

has been granted, “federal courts have emphasized that the

agency was considered judicial under state law.” Whelchel, 914

F. Supp. 2d at 87 (D. Mass. 2012); see also Volkswagen, 454 F.2d

at 44 n.9 (“We note that the Puerto Rico Supreme Court has

recently referred to the Board’s function as a quasi-judicial

one.”) (citation omitted). Defendant has not provided, and this

Court is unaware of, any such pronouncement about the Securities

Division from the Massachusetts courts. Indeed, Goldstein, the

most analogous case Scottrade cites for this proposition, holds

that the Secretary’s “dual status as one who performs both

adjudicatory and prosecutorial functions” does not deprive him

of an otherwise applicable immunity defense. Goldstein, 719 F.3d

at 28.

Of equal importance to the first prong, the Securities

Division does not conduct proceedings between third parties. Cf.

Ins. Com’r of Puerto Rico v. Doral Ins. Agency, Inc., No. CIV

05-2230CCC, 2006 WL 3196472, at *2 (D.P.R. Nov. 2, 2006)

(concluding that Puerto Rico Office of the Insurance

Commissioner satisfied the first Volkswagen prong because, inter

alia, “the hearings held at the OIC are inter partes”). The

Volkswagen court emphasized that the “threshold characteristic

of a civil action in a state court [is] that it is inter

partes.” Volkswagen, 454 F.2d at 44 (quoting Commissioners of

Road Imp. District, etc. v. St. Louis S. W. Ry. Co., 257 U.S.

547, 559 (1922) (internal quotation marks omitted). The

Securities Division does not and cannot hear claims brought

between third parties and thus lacks that “threshold

characteristic” of a state court.

Although the Securities Division possesses many court-like

powers, on balance, it does not function as a court for removal

purposes in this case.

The other Volkswagen factors do not revive Scottrade’s

theory.

2. Traditional jurisdiction over the subject matter

Scottrade insists that the administrative complaint is an

ERISA action in “state law clothing” and that the federal courts

are the proper forum for ERISA claims.

As this Court has already observed, the claims in this

action can be resolved without reference to federal law. The

Enforcement Section commences adjudicatory proceedings in the

Securities Division by filing “a Notice of Adjudicatory

Proceeding and an Administrative Complaint.” 950 C.M.R.

§ 10.06(a). Whereas the Volkswagen court discerned that courts

have been the traditional forum for breaches of contract, see

Volkswagen, 454 F.2d at 44, an administrative action alleging

violation of the Massachusetts Securities Act is traditionally

adjudicated in the Securities Division. Cf. New Hampshire Bureau

of Sec. Regulation, 2015 WL 4642837 at *3.

Thus, the second Volkswagen factor favors remand.

3. Federal and state interests

Defendant, reiterating that plaintiff is simply attempting

to “enforce compliance with the standards of the federal

fiduciary rule,” submits that the federal interest in regulating

employee benefit plans is great.

Removal may be appropriate where ERISA expressly preempts a

state law claim. See, e.g., Nationwide Mut. Ins. v. N.H. Dept.

of Labor, No. 07–CV–241–PB, 2007 WL 2695387 (D.N.H. Sept. 12,

2007). Here, however, the Court has determined that plaintiff’s

claims for violations of the Massachusetts Securities Act are

not preempted. States have a significant interest in applying a

statute in the forum it has established for that purpose.

Darling’s v. Chrysler Grp., LLC, 57 F. Supp. 3d 68, 74-75 (D.

Me. 2014). The Secretary established the Securities Division

(by leave of the Legislature) to administer and enforce the

Massachusetts Securities Act. See 950 C.M.R. § 14.406(A)(1).

Accordingly, the third Volkswagen prong also favors

plaintiff.

4. Analogous case law

District Courts within the First Circuit faced with the

removal question involving agencies similar to the Securities

Division have recognized that removal is inappropriate. Thus,

the Massachusetts Commission Against Discrimination was deemed

not court-like because its non-adjudicatory powers were more

significant than its adjudicatory powers and because the agency

was not considered judicial under state law. See Whelchel, 914

F. Supp. 2d at 86-88. Likewise, the New Hampshire Bureau of

Securities Regulation was deemed not court-like because the

proceeding was not inter partes and the agency “appears to be

more administrative than judicial.” New Hampshire Bureau of Sec.

Regulation, 2015 WL 4642837, at *3. Both analyses apply with

equal force to the Securities Division.

The Massachusetts Securities Division is not a court for

the purposes of the removal statute. That conclusion, standing

alone, compels this Court to allow plaintiff’s motion to remand.

ORDER

For the foregoing reasons, plaintiff’s motion for remand

(Docket No. 10) is ALLOWED.

So ordered.

/s/ Nathaniel M. Gorton_____

Nathaniel M. Gorton

United States District Judge

Dated August 16, 2018