Kamen v. Kemper Financial Services, Inc.

• Decision Date: 02 February 1987
• Docket Number: No. 85 C 4587.,85 C 4587.
• Citation: 659 F. Supp. 1153
• Parties: Jill S. KAMEN, Plaintiff, v. KEMPER FINANCIAL SERVICES, INC., and Cash Equivalent Fund, Inc., Defendants.
• Court: U.S. District Court — Northern District of Illinois

659 F. Supp. 1153

Jill S. KAMEN, Plaintiff, v. KEMPER FINANCIAL SERVICES, INC., and Cash Equivalent Fund, Inc., Defendants.

No. 85 C 4587.

United States District Court, N.D. Illinois, E.D.

February 2, 1987.

Richard Meyer, Millberg, Weiss, Berchad, Specthrie & Lerach, New York City, Clifford E. Yuknis, Shefsky, Saitlin & Froelich, Ltd., Chicago, Ill., for plaintiff.

Joan M. Hall, Joel T. Pelz, Kristen E. Lehker, Jenner & Block, Charles F. Custer, Martin M. Ruken, Vedder, Price, Kaufman & Kammholz, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

NORDBERG, District Judge.

The plaintiff, Jill Kamen, is a shareholder in Cash Equivalent Fund, Inc. ("the Fund"), a money market mutual fund managed and administered by Kemper Financial Services, Inc. ("KFS"). Plaintiff instituted this shareholder's derivative action pursuant to the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq. ("ICA" or "the Act"), challenging the fees charged by KFS for managing and administering the Fund. She alleges that KFS solicited a misleading proxy in violation of § 20(a) of the Act, 15 U.S.C. § 80a-20(a), and that KFS' excessive fees constitute a breach of its fiduciary duty in violation of § 36(b) of the Act. 15 U.S.C. § 80a-35(b).¹ Defendants move to dismiss plaintiff's § 20(a) claims for failure to state a cause of action and for failure to make a demand on the Board of Directors as required by Fed.R.Civ.P. 23.1; and to strike plaintiff's jury demand. For the following reasons, the court grants the motions to dismiss and to strike the jury demand.

Factual Allegations

The facts, as alleged in the complaint,² are as follows. The Fund is a diversified open-end investment company registered with the Securities and Exchange Commission under the ICA. It invests in a range of short-term money market instruments with maturities of one year or less. The Fund commenced operations on March 16, 1979, and, as of April 23, 1985, its total assets were approximately $4.683 billion.

KFS has acted as the Fund's investment adviser, manager, primary administrator and underwriter since the Fund's inception. In exchange for its services, KFS receives monthly fees paid under two separate agreements. The investment management agreement provides for an investment management fee calculated at the annual rate of .22 of 1% of the first $500 million of the combined average daily net assets of the portfolios managed by KFS, .20 of 1% of the next $500 million, .175 of 1% of the next $1 billion, .16 of 1% of the next $1 billion and .15 of 1% of average daily net assets of such portfolios over $3 billion. The administration, shareholder services and distribution agreement ("administration agreement") provides for an annual fee, payable monthly, on a basis of .33% of the first $500 million of average daily net assets, .30% of the next $500 million, .275% of the next $1 billion, .265% of the next $1 billion, and .25% of average daily net assets over $3 billion.

The Fund has experienced tremendous success in attracting shareholder funds in the past several years, which has caused a significant increase in the total fees payable to KFS under the two separate agreements. For the fiscal year ended July 31, 1984, the Fund paid KFS nearly $20 million in fees.³

The essence of plaintiff's complaint is that these fees are excessive, given the nature of the Fund and the services performed by KFS. Plaintiff alleges that, unlike other mutual funds, the management of the assets of a money market fund "does not require the detailed analysis of industries nor of complex industrial companies and the concomitant retention of a large staff of highly paid and sophisticated securities analysts because the assets of the Fund are ... invested in a relatively concentrated manner in fixed income obligations maturing in one year or less." (Compl. ¶ 9).⁴ Despite the huge growth of the Fund and the manner in which it is serviced, the fee structure has remained the same since December 1, 1981, when the fees were increased by virtue of the administration agreement. According to Kamen, the increased compensation paid to KFS resulting from the enormous increase in Fund assets is disproportionate to the services rendered by it. These allegations form the basis of Kamen's excessive fee claim under § 36(b) of the Act, 15 U.S.C. § 80a-35(b).

Kamen also alleges that KFS violated § 20 of the ICA, 15 U.S.C. § 80a-20, which proscribes the solicitation of misleading proxies in connection with a security of a registered investment company.⁵ In addition to the Fund, KFS also acts as an investment manager to the Kemper Money Market Fund, Inc. ("MM"), a money market fund which is similar to the Fund in size, number of shareholders, and investment objective. MM and the Fund have some common directors, and require substantially the same services from KFS. According to Kamen, despite this similarity in size and objective, KFS exacts substantially greater fees from the Fund than it does from MM and many of its other clients.⁶

Kamen further alleges that, on or about September 12, 1984, KFS caused a proxy statement to be distributed to the shareholders for the annual meeting of shareholders scheduled for November 8, 1984. One of the purposes of the meeting was to obtain shareholder approval for the continuance of the investment management agreement with KFS. The proxy statement seeking shareholder approval of the investment management agreement compared the fees that KFS received from other investment companies to those paid by the Fund. Kamen alleges that, although the proxy correctly compared the services rendered to the Fund to those rendered to MM, it "misleadingly" described MM's fees as "a maximum fee of .50 of 1% of the first $215 billion, with lesser rates on additional assets." This "misleading" description gave the false impression that MM's fees were as high or higher than those paid by the Fund, when KFS knew that the opposite was actually true. The proxy solicitation was successful, and KFS obtained shareholder approval for continuation of its investment management agreement with the Fund.

As the above allegations clearly demonstrate, the thrust of Kamen's § 20(a) claim is that KFS disseminated misleading proxies in order to obtain continued shareholder approval for allegedly exorbitant fees. KFS' motion to dismiss concerns only the § 20(a) claims. It urges dismissal of this claim on two grounds: first, because Kamen failed to make a demand on the Fund's directors, as required by Fed.R.Civ.P. 23.1; and second, because § 36(b) of the Act provides the exclusive remedy for excessive fees. For the following reasons, the court finds that, although the complaint properly alleges a cause of action under § 20(a), it must be dismissed because Kamen failed to comply with the demand requirements of Rule 23.1.

Claims Under § 20 of ICA

KFS argues that ¶ 13 of the complaint, which alleges violations of § 20(a) of the ICA, 15 U.S.C. § 80a-20(a), must be dismissed because § 36(b) provides the exclusive remedy for shareholder claims alleging excessive fees. Section 20(a) of the ICA forbids the dissemination of misleading information in proxies solicited from mutual fund shareholders. Section 36(b) of the Act, which was passed in 1970,⁷ authorizes a shareholder's suit to recover excessive fees from a fund's investment adviser. Congress added this section in order to remedy the fact that the Act, as originally passed, failed to "provide any mechanism by which the fairness of management contracts between a fund and its adviser could be tested in court." S.Rep. No. 91-184, 91st Cong., 2d Sess., reprinted in 1970 U.S.Code Cong. & Admin.News 4897, 4901. Section 36(b) creates a fiduciary duty on the part of the adviser "with respect to compensation for services or other payments paid by the fund ... to the advisers," id., and authorizes shareholders to sue for breach of that fiduciary duty. See generally Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 104 S.Ct. 831, 78 L.Ed.2d 645 (1984).

Prior to the passage of § 36(b), the Second Circuit had recognized an implied cause of action under the ICA for misleading proxy statements. See Brown v. Bullock, 194 F.Supp. 207, 231-34 (S.D. N.Y.), aff'd, 294 F.2d 415, 420-21 (2d Cir.1961).⁸ It continued to recognize an implied cause of action for § 20(a) claims unrelated to allegations of excessive fees after the passage of the 1970 amendments. Tannenbaum v. Zeller, 552 F.2d 402 (2d Cir.), cert. denied, 434 U.S. 934, 98 S.Ct. 421, 54 L.Ed.2d 293 (1977); Galfand v. Chestnutt Corp., 545 F.2d 807 (2d Cir.1976); Rosenfeld v. E.R. Black, 445 F.2d 1337 (2d Cir. 1971). In Fogel v. Chestnutt Corp., 668 F.2d 100, 112 (2d Cir.1981), cert. denied, 459 U.S. 828, 103 S.Ct. 65, 74 L.Ed.2d 66 (1982), however, the court noted in dictum that § 36(b) may constitute a shareholder's exclusive remedy for his claims of excessive fees.

Although some district courts seized on the language in Fogel to disallow implied claims for excessive fees under the ICA,⁹ a recent decision has recognized a claim under § 20(a) of the ICA in a situation involving facts very similar to the case at bar. In Schuyt v. Rowe Price Prime Reserve Fund, Inc., 622 F.Supp. 169 (S.D.N.Y. 1985), the plaintiff-shareholder alleged that the management fee paid to the fund's adviser was excessive (36(b) claim) and that the defendants violated § 20(a) because the proxies soliciting shareholder approval of the management contract were misleading. The plaintiff sought repayment of the excessive fees under the § 36(b) claim, and sought profits and/or reimbursements for the amounts paid under the agreements obtained through the misleading proxy. Schuyt, 622 F.Supp. at 171. The defendants sought dismissal of the § 20(a) claim on the grounds that § 36(b) provided the exclusive remedy for plaintiffs' excessive fee claims.

The court rejected Rowe Price's argument that Schuyt's § 20(a) claim was "`an excessive fee...