904 F.3d 821
9th Cir.2018Background
- Northstar, an investment adviser, purchased shares in the Schwab Total Bond Market Fund (the Fund) for clients; the Fund was governed by the Schwab Trust and managed by Charles Schwab Investment Management under a 1994 IAA.
- In a 1997 proxy, shareholders approved amendments making the Fund’s objective to "seek to track" the Lehman Brothers Aggregate Bond Index and limiting concentration to 25% per industry.
- From Aug 2007–Feb 2009 (the "Breach Period"), Northstar alleges the Fund invested in non-Index CMOs and concentrated >25% in mortgage-related securities while prospectuses continued to reaffirm the 1997 objectives.
- Northstar sued on behalf of two classes: purchasers during the Breach Period (Breach class) and purchasers before but who held through the Breach Period (Pre‑Breach class), asserting contract, fiduciary-duty, aiding-and-abetting, third-party-beneficiary, and good-faith claims under Massachusetts and California law.
- Defendants moved to dismiss; the district court dismissed all claims (some initially survived then were dismissed on a Rule 12(c) motion) and entered dismissal with prejudice. Northstar appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SLUSA bars Northstar’s state-law class claims because they ‘‘allege a misrepresentation or omission’’. | Northstar argued claims are garden‑variety contract/fiduciary claims not dependent on a securities misrepresentation; some claims governed by Massachusetts/California law and some fall within the Delaware (issuer-state) carve‑out. | Defendants argued complaints’ substance depends on alleged misrepresentations/omissions (repeated prospectus statements during the Breach Period) and thus fall within SLUSA preclusion. | Court: SLUSA precludes both Pre‑Breach and Breach class claims because the complaints’ gravamen depends on misrepresentations/omissions; dismissal affirmed as to substance. |
| Whether the Delaware (issuer-state) carve‑out preserves Northstar’s claims. | Northstar contended most claims arise under Massachusetts law (issuer’s state) and thus fit the carve‑out. | Defendants contended the statutory carve‑out applies narrowly to communications about shareholder voting and related actions, which Northstar’s allegations do not involve. | Court: Carve‑out does not apply—the alleged communications did not "concern decisions... with respect to voting"; carve‑out fails. |
| Proper procedural vehicle and remedy when SLUSA applies. | Northstar argued dismissal with prejudice was improper; should be permitted to amend. | Defendants defended dismissal on merits. | Court: SLUSA deprives federal court jurisdiction over barred state-law class claims (Rule 12(b)(1) issue); dismissals should be without prejudice and plaintiffs may be granted leave to amend. |
| Scope of SLUSA inquiry—whether courts look beyond pleading labels to the complaint’s substance. | Northstar (and concurrence/dissent) urged narrower test: SLUSA applies only if misrepresentation is essential element/factual predicate of the state claim. | Defendants and majority urged broader test: SLUSA looks to the gravamen/substance; if proofs will depend on misrepresentations/omissions, SLUSA applies regardless of labels. | Court: Adopted the broader substance/gravamen test: if alleged conduct is one that would be actionable under the federal securities laws and will be part of the proofs, SLUSA bars the class claim. |
Key Cases Cited
- Merrill Lynch, Pierce, Fenner & Co. v. Dabit, 547 U.S. 71 (2006) (SLUSA must be construed broadly; holder claims fall within reach)
- Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018) (SLUSA does not strip state courts of 1933 Act jurisdiction; noted not inconsistent with this case)
- Freeman Invs., L.P. v. Pacific Life Ins. Co., 704 F.3d 1110 (9th Cir. 2013) (SLUSA inquiry looks to gravamen/substance of allegations)
- In re Kingate Mgmt. Ltd. Litig., 784 F.3d 128 (2d Cir. 2015) (SLUSA bars claims when deceptive statements form the gravamen and will be part of proofs)
- Segal v. Fifth Third Bank, N.A., 581 F.3d 305 (6th Cir. 2009) (courts must look to substance of complaint; artful pleading cannot evade SLUSA)
- Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294 (3d Cir. 2005) (preemption turns on whether SLUSA prerequisites are alleged in one form or another)
- Fleming v. Charles Schwab Corp., 878 F.3d 1146 (9th Cir. 2017) (substance over form; contract claims can be precluded if they rest on deceptive practices actionable under securities law)
- Holtz v. JPMorgan Chase Bank, N.A., 846 F.3d 928 (7th Cir. 2017) (allowing contract labels would frustrate SLUSA; look to complaint’s substance)
- Zola v. TD Ameritrade, Inc., 889 F.3d 920 (8th Cir. 2018) (SLUSA applies where gravamen involves misrepresentation/omission in connection with purchase/sale of covered security)