Northstar Financial Advisors, Inc., on behalf of itself and all others similarly situated, Plaintiff-Appellant,
Schwab Investments; Mariann Byerwaler; Donald F. Dorward; William A. Hasler; Robert G. Holmes; Gerald B. Smith; Donald R. Stephens; Michael W. Wilsey; Charles R. Schwab; Randall W. Merk; Joseph H. Wender; John F. Cogan; Charles Schwab Investment Management, Inc., Defendants-Appellees.
and Submitted October 11, 2017 San Francisco, California
from the United States District Court for the Northern
District No. 5:08-cv-04119-LHK of California Lucy H. Koh,
District Judge, Presiding
C. Finkel (argued), Wolf Popper LLP, New York, New York;
Joseph J. Tabacco Jr. and Christopher T. Heffelfinger, Berman
DeValerio, San Francisco, California; Marc J. Gross,
Greenbaum Rowe Smith & Davis LLP, Roseland, New Jersey;
Matthew L. Larrabee (argued), Joshua D.N. Hess, and Brian C.
Raphel, Dechert LLP, San Francisco, California; Richard A.
Schirtzer, Karin A. Kramer, and Arthur M. Roberts, Quinn
Emanuel Urquhart & Sullivan LLP, San Francisco,
California; for Defendants-Appellees.
Before: Sidney R. Thomas, Chief Judge, and Milan D. Smith,
Jr. and Kathleen M. O'Malley, [*] Circuit Judges.
panel (1) affirmed the district court's dismissal of
class claims brought under state law as precluded by the
Securities Litigation Uniform Standards Act and (2) reversed
the dismissal with prejudice and remanded to give plaintiff
the opportunity to amend its complaint.
panel held that SLUSA bars a plaintiff class from bringing
(1) a covered class action (2) based on state law claims (3)
alleging that the defendants made a misrepresentation or
omission or employed any manipulative or deceptive device (4)
in connection with the purchase or sale of (5) a covered
security. The central question is whether the complaint
describes conduct by the defendant that would be actionable
under the 1933 or 1934 Securities Acts. The court must
determine whether (1) the complaint's description of a
defendant's conduct involves conduct specified in SLUSA,
and (2) the alleged conduct will be part of the proofs in
support of the state cause of action. While a defendant's
conduct need not be an element of the state cause of action,
the conduct still must be a fact on which the proof of that
state cause of action depends.
complaint made allegations about the Schwab Total Bond Market
Fund. In 1997, shareholders approved proposals requiring the
Fund managers to seek to track a bond index and to invest no
more than 25% of the Fund's total assets in any one
industry. During the "Pre-Breach Period," the
Fund's investments performed in a manner substantially
consistent with the index. During the subsequent "Breach
Period," the Fund deviated from its fundamental
panel held that the Pre-Breach class claims depended on
allegations of misrepresentations or omissions and were
therefore barred by SLUSA. It was this conduct to which
plaintiff would point to prove its breach of contract and
breach of fiduciary duty claims. The panel held that Breach
class's claims similarly depended on allegations of
misrepresentations and were barred by SLUSA.
panel concluded that neither the Pre-Breach nor the Breach
class claims were saved by the Delaware carve-out, which
provides that class claims that would otherwise be barred by
SLUSA are not subject to dismissal if (1) they are based upon
the statutory or common law of the state in which the issuer
of the securities is organized, and (2) they constitute
"permissible actions" defined by SLUSA. The panel
concluded that the claims were based on the law of
Massachusetts, the state in which defendant was organized,
but the claims were not "permissible actions."
panel affirmed the district court's dismissal of all of
the class claims, but it held that the district court erred
in dismissing the claims with prejudice. The panel remanded
to give plaintiff the opportunity to amend its complaint.
in part and dissenting in part, Chief Judge Thomas wrote that
he dissented from the portion of the opinion addressing the
Pre-Breach claims. He wrote that those claims fell
comfortably within the category of state law claims outside
the ambit of SLUSA because proving them would not require
proof of a misrepresentation or omission of material fact.
O'MALLEY, Circuit Judge.
appeal, we consider whether the Securities Litigation Uniform
Standards Act ("SLUSA") precludes class claims
brought under state law by Northstar Financial Advisors, Inc.
("Northstar") against Schwab Investments, Charles
Schwab Investment Management, Inc., and the trustees of the
Schwab Trust (collectively, "defendants"). We
conclude that SLUSA precludes all of Northstar's claims,
and that the district court therefore correctly dismissed
them. The district court erred, however, in dismissing the
claims with prejudice. We therefore affirm in part, reverse
in part, and remand.
is a registered investment advisory and financial planning
firm that manages accounts on behalf of investors. During the
relevant time period, Northstar traded through Charles
Schwab's Institutional Advisor Platform, where it
purchased shares in the Schwab Total Bond Market Fund
("Fund") for its clients. The Schwab Trust
("Trust") is a Massachusetts Business Trust having
assets held by a group of trustees ("Trustees") who
manage and supervise the Fund's operations for the
benefit of its shareholders, the Trust's beneficiaries.
Charles Schwab Investment Management, Inc. ("Schwab
Advisor"), an investment advisory firm affiliated with
the Trust, has acted as the manager of, and investment
advisor to, the Trust in accordance with a June 1994
Investment Advisory Agreement ("IAA"). The Schwab
Advisor oversees the day-to-day operations of the Fund,
including selection of investments.
core allegations have remained the same across its five
complaints. In a July 1997 Proxy Statement ("1997 Proxy
Statement"), the Trustees sought a shareholder vote on
two proposals relevant to this appeal. Proposal No. 2 would
amend the Fund's fundamental investment objective to
track the investment results of the Lehman Brothers Aggregate
Bond Index ("Index"). Proposal No. 3 would change
the Fund's "fundamental investment policies and
investment restrictions" regarding the concentration of
investments to incorporate the SEC's interpretation of
"concentration" from the Investment Company Act of
1940 ("ICA"), which was and is 25% of the available
assets in a fund. A majority of Fund shareholders voted to
approve the proposals. As a result, the Trust was obligated
to "seek to track" the Index and to invest no more
than 25% of the Fund's total assets in any one industry.
August 1997 through August 2007-which Northstar refers to as
the "Pre-Breach period"-the Fund's investments
performed in a manner substantially consistent with the
Index. During this period, the Fund continuously offered its
shares to the public pursuant to annual prospectuses, which
affirmed to potential and current shareholders that the Trust
was following the fundamental investment objectives set forth
in the 1997 Proxy Statement.
August 2007 until February 2009-which Northstar refers to as
the "Breach period"-the Trust continued to
represent in Fund prospectuses and other public filings that
the Fund would be managed conservatively and passively, and
would be invested in the same securities as the Index,
pursuant to its fundamental investment objective. In or about
September 2007, however, the Trust caused the Fund to deviate
from its fundamental investment policies by investing in
collateralized mortgage obligations that were not part of the
Index, and by concentrating more than 25% of the Fund's
total assets in mortgage-backed securities and collateralized
mortgage obligations. The Fund deviated from its fundamental
investment policies until about the end of February 2009.
Fund shareholders suffered financial injury due to the
Fund's deviation, as the Fund underperformed the Index
during this time.
case has a lengthy procedural history that includes the
dismissal of successive amended complaints for failures to
state claims. In June 2015, Northstar filed its Fourth
Amended Complaint. In that complaint, Northstar asserted
claims on behalf of Fund shareholders who purchased shares
during the Breach period ("Breach class"), as well
as those who purchased shares during the Pre-Breach period
but held them during the Breach period ("Pre-Breach
class"). The complaint alleges fourteen causes of
action: seven pertaining to the Pre-Breach class, and seven
pertaining to the Breach class. With respect to each class,
Northstar alleged breach of fiduciary duties against both the
Trust and the Trustees; breach of fiduciary duty against the
Schwab Advisor; aiding and abetting breach of fiduciary duty
against the Trustees and the Schwab Advisor; breach of
contract as third-party beneficiary to the IAA against the
Schwab Advisor; breach of contract against the Trust; and
breach of the covenant of good faith and fair dealing against
the Schwab Advisor and the Trustees. Northstar alleged that
its claims, if barred by SLUSA, are nonetheless preserved by
the "Delaware carve-out."
district court granted in part and denied in part the
defendants' motion to dismiss. Northstar Fin.
Advisors Inc. v. Schwab Invs., 135 F. Supp. 3d 1059
(N.D. Cal. 2015). In particular, the court granted the motion
to dismiss, with prejudice, Northstar's claims for breach
of contract and breach of the covenant of good faith and fair
dealing, concluding that SLUSA barred those claims and that
they did not fall within the Delaware carve-out. The district
court also granted the motion to dismiss, with prejudice,
Northstar's breach of fiduciary duty claims "insofar
as these claims pertain to an alleged breach of fiduciary
duty by the Trust." Id. at 1089. The district
court reasoned that any such duties were owed by the
Trustees, rather than by the Trust itself. The district court
further granted the motion to dismiss, with prejudice,
Northstar's third-party beneficiary claims, breach of
contract claims, and breach of the covenant of good faith and
fair dealing claims, concluding that SLUSA also barred those
claims and that they did not fall within the Delaware
carve-out. Id. at 1080–89.
district court denied the motion to dismiss the remaining
claims, however, which alleged breaches of fiduciary duties
by the Trustees and the Schwab Advisor, and aiding and
abetting such breaches. Id. at 1077–80. The
district court reasoned that the defendants could not assert
a SLUSA defense to these claims in a Rule 12(b)(6) motion,
but that they could raise such a defense by filing a motion
for judgment on the pleadings. Id. at 1071. The
defendants subsequently moved for judgment on the pleadings,
arguing that the breach of fiduciary duty and aiding and
abetting claims were barred by SLUSA, and the district court
granted the motion. Northstar Fin. Advisors Inc. v.
Schwab Invs., No. 08-CV-04119-LHK, 2016 WL 706018 (N.D.
Cal. Feb. 23, 2016). This appeal timely followed.
review de novo a district court's order granting
a motion to dismiss, Proctor v. Vishay Intertechnology
Inc., 584 F.3d 1208, 1218 (9th Cir. 2009), as well as a
grant of a motion for judgment on the pleadings, Harris
v. Cty. of Orange, 682 F.3d 1126, 1131 (9th Cir. 2012).
In evaluating Northstar's claims, we "accept factual
allegations in the complaint as true and construe the
pleadings in the light most favorable to ...