Northstar Financial Advisors, Inc. v. Schwab Investments
807 F. Supp. 2d 871
N.D. Cal.2011Background
- Northstar filed a class action alleging mutual fund mismanagement by Schwab defendants.
- Plaintiff claimed the Fund deviated from its Lehman Index tracking objective by holding high-risk CMOs and exceeding 25% industry concentration.
- Case history: prior rulings allowed some amendments; Ninth Circuit later held no private 13(a) claim under SLUSA carve-out; case dismissed and reassigned.
- Second amended complaint asserted fiduciary duty, contract, and third-party beneficiary theories, alleging damages from diminished Fund value.
- Court granted motion to dismiss Third Amended Complaint, finding claims derivative and precluded by Massachusetts law; third-party beneficiary theory rejected.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether fiduciary duties run directly to investors. | Northstar argues direct fiduciary duties exist. | Defendants contend duties run to the fund, not individuals. | Fiduciary claims are derivative; not direct. |
| Whether aiding and abetting fiduciary breaches survive. | Aiding and abetting claims should stand if underlying breaches exist. | Without a direct underlying breach, aiding claims fail. | Aiding and abetting claims dismissed with prejudice. |
| Whether Fund investors are third-party beneficiaries of the Investment Advisory Agreement (IAA). | Investors are intended beneficiaries of the IAA. | Investors are not expressly or constructively named beneficiaries. | Investors not third-party beneficiaries; claims dismissed with prejudice. |
| Whether MA demand requirements bar derivative claims brought without demand. | Northstar could amend to plead demand futility. | Massachusetts law requires a written demand with no futility exception. | Derivative fiduciary claims dismissed with prejudice for failure to meet demand. |
Key Cases Cited
- Fogelin v. Nordblom, 402 Mass. 218 (Mass. 1988) (trustees' duty not to favor one class over another; limits on direct claims against trustees)
- In re Great N. Iron Ore Props., 263 N.W.2d 610 (Minn. 1978) (fiduciary duties toward trust beneficiaries; limits on direct shareholder claims)
- Hamilton v. Allen, 396 F. Supp. 2d 545 (E.D. Pa. 2005) (diminution in fund value typically not direct; often derivative)
- Forsythe v. Sun Life Fin., Inc., 417 F. Supp. 2d 100 (D. Mass. 2006) (under Massachusetts law, harms to the shareholder from fund injury are derivative)
- Lapidus v. Hecht, 232 F.3d 679 (9th Cir. 2000) (injury must be distinct; voting-right contract claims may be direct)