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Susan Appert, Individually and On Behalf of All Others Similarly v. Morgan Stanley Deanwitter

March 8, 2012


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 08 CV 7130-David H. Coar, Judge.

The opinion of the court was delivered by: Tinder, Circuit Judge.


Before WOOD, TINDER, and HAMILTON,Circuit Judges.

Morgan Stanley entered into agreements with its customers that set a fee for handling, postage, and insurance (HPI) for mailing trade confirmation slips after each purchase or sale of securities. Plaintiff, Susan Appert, filed this breach of con-tract action in state court seeking class certification and recovery of these fees charged to customers from 1998 through the present. Morgan Stanley removed the action to federal court asserting jurisdiction pursuant to the Class Action Fairness Act of 2005 (CAFA), 28 U.S.C. § 1332(d), or alternatively, the Securities Litigation Uni-form Standards Act (SLUSA), 15 U.S.C. § 78p(b) and (c) and § 78bb(f), and moved for dismissal. The district court granted Morgan Stanley's motion, but allowed Appert leave to file an amended complaint. Appert amended her breach of contract claim and also brought a related claim for unjust enrichment. She alleges that Morgan Stanley breached the Client Account Agreement (Agreement) by charging an HPI fee that bore no relationship and was grossly disproportionate to Morgan Stanley's actual transaction costs. Morgan Stanley again moved for dismissal, arguing that SLUSA barred Appert's suit or, alternatively, that Appert failed to state a claim for relief. The district court agreed and dismissed Appert's amended complaint.

As an initial matter, we must satisfy ourselves that jurisdiction is secure. We find, relying on Feinman v. Dean Witter Reynolds, Inc., 84 F.3d 539 (2d Cir. 1996), that SLUSA doesn't apply because any alleged misrepresentation (though pled as a breach of contract we assume for purposes of this discussion that Appert's claim is for misrepresentation) that the stated HPI fee was tied to actual costs was not material to investors' decisions to buy or sell securities. Morgan Stanley, however, met its burden of showing that CAFA's general jurisdictional requirements were met, see 28 U.S.C.§ 1332(d)(2), and Appert has not shown that the securities exception to CAFA jurisdiction applies. See 28 U.S.C. §§ 1332(d)(9) (subject matter jurisdiction) and 1453(d) (removal).

We affirm the district court's order dismissing Appert's amended complaint. The language in the Agreement doesn't suggest that the HPI fee represents Morgan Stanley's actual costs, and it was not reasonable to read this into the agreement. Nor did Morgan Stanley have an implied duty under applicable New York law to charge a fee that was reasonably proportionate to actual costs where it notified customers in advance of the charges and they were free to decide whether to continue business with Morgan Stanley. We also affirm dismissal of Appert's unjust enrichment claim because this dispute is governed by the express terms of the Agreement.

I. Facts

Morgan Stanley is a financial services firm that offers brokerage and investment advisory services. Appert had an investment account with Morgan Stanley from 1999 through 2005 and, under their Agreement, Morgan Stanley charged her (and other putative class members) an HPI fee of $2.35 per transaction. The Agreement stated: "Other miscellaneous account fees and charges include: handling, postage and insurance (HPI) at $2.35 per transaction . . . ." Appert alleged that the purpose of the fee was to cover the cost of producing and delivering trade confirmation slips that broker-dealers are required to provide customers after securities transactions. Morgan Stanley had expressly described the fee as a "[p]rocessing fee associated with the production and delivery of certain trade confirmations." The Agreement provided that "[i]n special circumstances, additional fees and charges may apply . . . . All fees are subject to change, and you will be notified in the event of any changes." It further provided that "[i]t is the client's responsibility to seek immediate clarification about entries that the client does not clearly understand."

In 2002, Morgan Stanley raised the HPI fee from $2.35 to $5.00, and again in 2005 to $5.25. There is no dispute that Morgan Stanley informed its customers of these increases as required by the Agreement. Morgan Stanley withdrew the fee directly from funds Appert maintained in her Morgan Stanley account before her receipt of each confirmation. Morgan Stanley did not disclose the actual costs incurred for HPI with regard to any transaction.

Appert attached to her initial complaint a trade confirmation slip from Morgan Stanley dated April 2004 setting forth the fee; on the back it defines various "charges and fees" and states that the HPI fee "[r]epresents charges for handling, insurance and postage, if any." Some of the fees listed on the confirmation slip specifically indicate that they were "pass through" charges. The HPI fee, however, doesn't indicate that it was a "pass through" charge.

Appert alleges that Morgan Stanley charged the fee without regard to (1) whether any insurance was applicable to the transaction; (2) the actual amount of postage used; (3) whether multiple confirmations were sent in a single mailing; (4) whether the production and handling of the confirmation required human intervention or was computer generated; or (5) the actual cost of delivering the confirmation. The fee, Appert alleges, is substantially less than Morgan Stanley's actual costs for HPI in producing and delivering the trade confirmations. As of 2002, the average total cost to produce and deliver the physical confirmation was approximately 42 cents per confirmation. The handling component was outsourced to a third party vendor and, as of 2002, cost approximately 9 cents per confirmation. The average postage cost for mailing the confirmation, as of 2002, was less than 30 cents, which later increased to 36 cents. Appert also alleges that there was no applicable insurance for the delivery of the trade confirmations.

Appert's initial class action complaint alleged breach of contract based on the incorporation of NASD and NASDAQ Stock Market rules. The district court dismissed that complaint finding no private right of action under these exchange rules and that even if she stated a claim, it was precluded by SLUSA. Appert filed an amended class action complaint setting forth the allegations above, but instead of basing the breach of contract claim on the incorporation of NASD and NASDAQ Stock Market rules, she alleges that by charging more than its costs associated with the creation and delivery of the trade confirmation slips, Morgan Stanley breached its agreement with her and the class she seeks to represent. Appert further alleges that the HPI fee was not objectively material to Appert's or any class members' investment decisions and was not incurred in connection with a securities transaction. She also brought a related claim for unjust enrichment.

To support her allegations, Appert attaches to her amended complaint a series of internal email communications where Morgan Stanley personnel discussed Morgan Stanley's expected profits from the HPI fees. The following email exchange took place:

George Rosenberger: Initial estimates are that each "Regular" trade confirmation currently costs us $0.41. In June, when the postal increase takes effect, they will cost us $0.435 ($0.025) each. We are having a call with Vestcom tomorrow to con-firm all of our unit costs.

Sandra Motusesky: Wow, are we saying then that the rest of the cost we charge above that 43 cents is all profit? Is this cost just postage or "handling" too?

George Rosenberger: Sandy, That is the postage and handling charge from Vestcom. Subtract that amount from the $2.35, soon to be $5.00, is all profit.

Morgan Stanley moved to dismiss the amended complaint and the district court granted the motion, reasoning that Appert failed to state a breach of contract claim because the Agreement set forth a fixed fee for HPI and Morgan Stanley charged that fee. The Agreement, the court found, didn't require Morgan Stanley to charge a fee that related to its actual costs. Further, the court concluded that because Appert's Agreement was "not silent, unclear, or ambiguous" as to how much Morgan Stanley could charge for HPI fees, her unjust enrichment claim fails. The court also explained that "[i]f the processing fee was material to Appert's securities transaction, then her suit is preempted by SLUSA for the reasons set forth [in the court's dismissal of the original complaint]. If the fee was immaterial to the agreement between the parties, Appert is left without legal recourse." Appert appeals dismissal of her initial and amended complaints.

II. Subject Matter Jurisdiction

Before diving into the merits, we must first address subject matter jurisdiction. We begin with SLUSA. Congress enacted SLUSA in response to the marginal success that the Private Securities Litigation Reform Act of 1995 (Reform Act) had in achieving its goal of preventing strike suits in securities class action litigation. See Pub. L. No. 105-353 §§ 2(1)-(5). Under the Reform Act, litigants would avoid the statute's enhanced controls over securities class actions by filing their actions in state courts, alleging violations of state statutory or common law. See Merrill Lynch, Pierce, Fenner & Smith v. Dabit, 547 U.S. 71, 81-82 ...

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