Northstar Financial Advisors Inc. v. Schwab Investments
135 F. Supp. 3d 1059
N.D. Cal.2015Background
- Northstar (an investment advisor) sued Schwab entities over the Schwab Total Bond Market Fund, alleging defendants deviated from the Fund’s stated objective to track the Lehman U.S. Aggregate Bond Index beginning around Aug. 31, 2007, concentrating assets in risky CMOs and causing losses.
- Procedural history: Northstar filed multiple complaints and appeals; Ninth Circuit in Northstar V reversed portions of earlier dismissals, holding shareholders could have contract and fiduciary claims and that plaintiffs may be third‑party beneficiaries to the Investment Advisory Agreement (IAA).
- Northstar’s Fourth Amended Complaint asserts parallel claims for two classes (Pre‑Breach and Breach): fiduciary duty (Trust, Trustees, Advisor), aiding and abetting, third‑party beneficiary to the IAA, breach of contract (Trust), and breach of the covenant of good faith and fair dealing.
- Defendants moved to dismiss principally on SLUSA preclusion grounds and additional defenses (absence of fiduciary duty, statute of limitations, exculpatory clause, choice of law).
- This order: court bars certain contract/derivative‑style claims as SLUSA‑precluded or otherwise deficient, dismisses fiduciary claims against the Trust with prejudice, but allows fiduciary and aiding/abetting claims against the Trustees and the Advisor to proceed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SLUSA precludes fiduciary claims against Trustees/Advisor | Northstar: claims are state law fiduciary/contract claims, not securities fraud; some claims fall within Delaware carve‑out or otherwise escape SLUSA | Schwab: SLUSA bars class actions alleging misrepresentations/omissions in connection with purchase/sale of covered securities; defenses previously raised | Court: Defendants are foreclosed from asserting SLUSA on fiduciary claims they abandoned in an earlier Rule 12(b)(6) motion; therefore court did not decide SLUSA on those fiduciary claims (motion to dismiss denied as to Trustees and Advisor fiduciary claims). |
| Whether the Trust (entity) owes fiduciary duties to shareholders | Northstar: Trust is aligned/controlled with Trustees and thus owes duties | Schwab: fiduciary duties are owed by Trustees/Advisor who manage the Trust, not by the Trust entity itself | Court: Trust does not owe fiduciary duties to shareholders; fiduciary claims against the Trust dismissed with prejudice. |
| Whether Trustees and Advisor owed and breached fiduciary duties | Northstar: Trustees and Advisor breached duty of care and monitoring by deviating from fund objectives and failing to monitor | Schwab: either no duty or only contractual duties; conduct at most negligent; some defenses barred | Court: Ninth Circuit precedent supports direct fiduciary duties by Trustees and relationship to Advisor; FAC sufficiently alleges breach and monitoring failures; fiduciary claims against Trustees and Advisor survive. |
| Aiding and abetting liability (Trustees/Advisor) | Northstar: close working relationship and overlapping responsibilities show knowledge and active participation | Schwab: allegations inadequate to show knowing participation | Court: FAC and incorporated exhibits raise factual inferences of knowing, active participation; aiding and abetting claims survive. |
| Third‑party beneficiary to the IAA & breach of contract claims (Trust) — SLUSA and choice of law | Northstar: shareholders intended beneficiaries of IAA and Trust contract; seek relief under state law; IAA governed by California law | Schwab: SLUSA precludes these state-law contract claims; Delaware carve‑out inapplicable because choice‑of‑law and organizational states differ; breach-of-contract claims are ‘‘holder’’ not ‘‘voter’’ claims | Court: Third‑party beneficiary claims to IAA (governed by California law) are SLUSA‑precluded; breach of contract claims against the Trust (Massachusetts law under internal‑affairs doctrine) are holder claims and SLUSA‑precluded; both dismissed with prejudice. |
| Statute of limitations & exculpatory clause as to Trustees | Schwab: claims accrued Aug. 31, 2007 so Massachusetts 3‑year limitations bar claims added later; or Trustees are exculpated absent gross negligence, bad faith, willful malfeasance | Northstar: accrual requires actual knowledge of repudiation; alleged facts show discovery after Aug–Sep 2007; FAC pleads willful/gross conduct | Court: accrual requires actual knowledge (Lattuca); factual record does not establish earlier actual knowledge—statute of limitations defense fails. FAC alleges facts sufficient to plead willful/bad faith/gross negligence for purposes of exculpatory clause—defense rejected at pleading stage. |
Key Cases Cited
- Northstar Fin. Advisors, Inc. v. Schwab Invs., 779 F.3d 1036 (9th Cir. 2015) (Ninth Circuit decision reversing/vacating parts of earlier dismissals and recognizing contractual/fiduciary theories)
- Tibble v. Edison Int’l, 135 S. Ct. 1823 (U.S. 2015) (trustees’ continuing duty to monitor investments discussed)
- Freeman Invs., L.P. v. Pac. Life Ins. Co., 704 F.3d 1110 (9th Cir. 2013) (SLUSA applies where deceptive statements or conduct form the gravamen; look to substance over form)
- Dabit v. Merrill Lynch, 547 U.S. 71 (U.S. 2006) (SLUSA’s broad construction and congressional intent explained)
- Lattuca v. Robsham, 442 Mass. 205 (Mass. 2004) (accrual for trustee breach requires actual knowledge of repudiation)
- Spinner v. Nutt, 417 Mass. 549 (Mass. 1994) (elements for aiding and abetting breach of fiduciary duty under Massachusetts law)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (pleading standard requiring plausible factual allegations)