Navellier v. Sletten
| Decision Date | 27 August 2001 |
| Docket Number | PLAINTIFFS-APPELLANTS,DEFENDANT-APPELLAN,99-17061,AND,Nos. 99-17059,DEFENDANTS-APPELLEES,PLAINTIFFS-APPELLEES,s. 99-17059 |
| Citation | 262 F.3d 923 |
| Parties | (9th Cir. 2001) LOUIS G. NAVELLIER, AN INDIVIDUAL AND TRUSTEE AND SHAREHOLDER OF THE NAVELLIER SERIES FUND (RECENTLY RENAMED THE MFS SERIES TRUST); ROSEMARY J. MCLACHLAN; MARTIN BILLETT; WILLIAM RAUTENBERG; FAITH C. RAUTENBERG; MARK SCHULZ; GAIL SULLIVAN; THOMAS SULLIVAN,, v. KENNETH SLETTEN, AN INDIVIDUAL AND TRUSTEE OF THE NAVELLIER SERIES FUND (RECENTLY RENAMED THE MFS SERIES TRUST); DONALD SIMON, ET AL., LOUIS G. NAVELLIER, AN INDIVIDUAL AND TRUSTEE AND SHAREHOLDER OF THE NAVELLIER SERIES FUND (RECENTLY RENAMED THE MFS SERIES TRUST); ROSEMARY J. MCLACHLAN; MARTIN BILLETT; WILLIAM RAUTENBERG; FAITH C. RAUTENBERG; MARK SCHULZ; GAIL SULLIVAN; THOMAS SULLIVAN,, v. KENNETH SLETTEN, AN INDIVIDUAL AND TRUSTEE OF THE NAVELLIER SERIES FUND (RECENTLY RENAMED THE MFS SERIES TRUST); DONALD SIMON, ET AL., DEFENDANTS, And ARNOLD SCOTT; ROY ADAMS; MASSACHUSETTS FINANCIAL SERVICES, ROSEMARY J. MCLACHLAN, ET AL.; LOUIS G. NAVELLIER, AN INDIVIDUAL AND TRUSTEE AND SHAREHOLDER OF THE NAVELLIER SERIES FUND (RECENTLY RENAMED THE MFS SERIES TRUST); MARTIN BILLETT; WILLIAM RAUTENBERG; FAITH C. RAUTENBERG; MARK SCHULZ; GAIL SULLIVAN; THOMAS SULLIVAN,, v. KENNETH SLETTEN, AN INDIVIDUAL AND TRUSTEE OF THE NAVELLIER SERIES FUND (RECENTLY RENAMED THE MFS SERIES TRUST),DONALD SIMON, DEFENDANT. , and 99-17388 |
| Court | U.S. Court of Appeals — Ninth Circuit |
Samuel Kornhauser, San Francisco, California, for the plaintiffs-appellants.
Ralph C. Alldredge, Emeryville, California, Jonathan C. Dickey, Gibson, Dunn & Crutcher, Palo Alto, California, Jacquelyn J. Garman, San Francisco, California, Vincent P. Finigan, Jr., Brobeck, Phleger, & Harrison, San Francisco, California, for the defendants-appellees.
Christopher Paik, Securities and Exchange Commission, Washington, D.C., for the amicus curiae.
Appeal from the United States District Court for the Northern District of California; William H. Orrick, Jr., District Judge, Presiding. D.C. No. CV-97-01258-WHO.
Before: William C. Canby, Jr., Michael Daly Hawkins, and Ronald M. Gould, Circuit Judges.
OPINION
This appeal follows an Investment Company Act of 1940 ("ICA") action seeking to impose personal liability on the independent trustees of a mutual fund for the non-renewal of an investment advisory contract. After a fourteen-day trial, the jury determined that the independent trustees acted within their discretion under the business judgment rule in replacing the investment adviser.
Plaintiffs-Appellants are: (1) shareholders and former shareholders of the Navellier Series Fund ("Fund"); (2) the original investment adviser of the Fund, Navellier Management, Inc. ("NMI"); and (3) Louis Navellier, an interested trustee of the Fund (collectively, "appellants"). Defendants-Appellees are: (1) three former independent trustees of the Fund -Donald Simon, Kenneth Sletten, and Lawrence Bianchi (collectively, "independent trustees"); (2) Roy Adams, counsel for the independent trustees; (3) Massachusetts Financial Services ("MFS") former investment adviser of the Fund; and (4) Arnold Scott, former trustee of the MFS Series Trust (collectively, "appellees").
Appellants challenge the district court proceedings on numerous grounds, complaining about pre-trial, trial, and post-trial rulings. Sletten cross-appeals both an imposition of sanctions against him and his counsel, and the dismissal of his counterclaim for breach of contract. We reject all of appellants' many claims, uphold the jury verdict exonerating the independent trustees, and affirm the judgment of the district court against appellants. On Sletten's cross-appeal, we affirm dismissal of his counterclaim but grant limited relief, holding that the district court abused its discretion in affirming the imposition of sanctions against cross-appellant Sletten and his counsel.
On May 15, 1993, Navellier organized the Fund as a Delaware business trust that would invest in an open-ended investment company or mutual fund. Navellier and one of his employees, Jack Drinkwater,1 served as interested trustees, while Simon, Sletten, and Bianchi served as independent trustees.2 Sam Kornhauser, Navellier's attorney, was hired as Fund counsel.3
On the day the Fund was organized, the Fund entered into an investment advisory agreement with NMI. Under this agreement, NMI provided investment advice and managed the Fund's assets. The initial term of the investment advisory contract was two years, annually renewable if approved by a majority of the independent trustees.
In January 1995, the independent trustees sought independent counsel. In October 1995, they hired Adams, an experienced mutual fund attorney, as independent counsel. Adams advised the independent trustees that, to fulfill their fiduciary obligations to the shareholders of the Fund, it was necessary to obtain certain financial information about NMI in order to conduct their annual review of the investment advisory agreement. Adams also told the independent trustees that he had concern about Kornhauser's abilities. Adams expressed the opinion that Kornhauser should not continue as counsel for the Fund while he remained counsel for NMI, Navellier, and Navellier's other businesses.
At a board of trustees' meeting on April 26, 1996, Navellier presented a motion to the trustees of the Fund to merge the Fund into the Navellier Performance Funds. This merger would have been a tax-free reorganization. The assets of the Fund would have been transferred to a portfolio of the Navellier Performance Funds in exchange for the shares of the Navellier Performance Funds. The merger would have terminated the independent trustees' positions.
The independent trustees deferred consideration of Navellier's merger proposal because they concluded that"further consideration would be premature given that the disinterested Trustees did not have any advance notice or information as to the relative merits of the proposal." The next order of business for the meeting was the annual review of the investment advisory agreement. The independent trustees expressed frustration at being asked to review and approve the investment advisory agreement without having received requested information from Kornhauser or NMI. The independent trustees then voiced their concern as to whether Kornhauser should continue as counsel to the Fund. A contentious discussion ensued, after which Navellier threatened to terminate his relationship with the Fund and left the meeting. The independent trustees then voted to remove Kornhauser as counsel to the Fund.
The independent trustees conditioned their future consideration of the merger proposal on review of certain information concerning the finances of Navellier and his companies. After Navellier refused to provide this information, the independent trustees contacted the Securities and Exchange Commission ("SEC") in an effort to compel Navellier to produce the information. This effort to obtain the SEC's assistance in compelling this information did not succeed. Thereafter, the independent trustees decided to put Navellier's proposed merger to a shareholder vote by way of a proxy prepared by NMI.
Pending resolution of the merger proposal, the independent trustees held a board of trustees meeting on March 13, 1997, and voted not to renew NMI's investment advisory contract, which was scheduled to expire by its terms on March 15, 1997. The independent trustees also voted to hire MFS as the Fund's investment adviser. MFS conditioned its agreement to become investment administrator on assurances that the current trustees would not continue as trustees after the vote of the Fund's shareholders.
Navellier and Alpers filed a complaint on April 9, 1997, seeking to enjoin the independent trustees from removing them as interested trustees. Navellier also requested injunctive relief to block the investment advisory agreement with MFS so NMI could regain its former position as investment adviser.
On April 10, 1997, the independent trustees voted to remove Navellier and Alpers from their positions as interested trustees. According to appellants, the independent trustees undertook this allegedly wrongful act to entrench themselves more completely, to neutralize opposition to their upcoming proxy, and to ratify their decision to hire MFS. The independent trustees then eliminated the two positions formerly held by Navellier and Alpers, reducing the trustees of the Fund.
On May 23, 1997, after the reorganization of the board of trustees, a shareholder vote was held to determine whether MFS should continue as investment adviser to the Fund. The proposal to retain MFS failed, receiving less than the required two-thirds vote of shareholders. Navellier refused to return to the Fund unless the independent trustees released him from liability and agreed to resign as trustees. The independent trustees signed a release, returned management of the Fund to NMI, and resigned.
On February 24, 1998, appellants filed a first amended class action complaint. The amended complaint alleged the following claims: (1) breach of fiduciary duty under the ICA and Delaware law against the independent trustees, MFS, and Scott; (2) breach of fiduciary duty and negligence under California law against Adams; and (3) waste and intentional interference with prospective economic advantage against all defendants. The independent trustees answered and filed a counterclaim for indemnity. Sletten also filed a separate counterclaim for breach...
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