Mutchka v. Harris
| Decision Date | 08 June 2005 |
| Docket Number | No. SACV0534JVSANX.,SACV0534JVSANX. |
| Citation | 373 F.Supp.2d 1021 |
| Parties | Charles MUTCHKA, et al, Plaintiffs, v. Brent R. HARRIS, et al, Defendant. |
| Court | U.S. District Court — Central District of California |
Patrick A. DeBlase, Paul R. Kiesel, William L. Larson, Kiesel Boucher & Larson, Beverly Hills, CA, for Plaintiffs.
Gidon M. Caine, Dechert Law Firm, Palo Alto, CA, Robert A. Skinner, Ropes & Gray, Boston, MA, Mohan Vijay Phansalkar, Mohan Phansalkar Law Offices, Newport Beach, CA, James T. Canfield, Mark D. Rowland, Ropes & Gray, Palo Alto, CA, Tamar S. Tal, Ropes & Gray, New York, NY, for Defendants.
Defendants have filed the instant motion to dismiss Charles Mutchka and Pauline Mutchka's (collectively, "the Mutchkas") Complaint. For the reasons set forth below, the motion is granted in full.
The Mutchkas have filed this action, on behalf of themselves and others similarly situated, against the advisors, trustees, and affiliates of the Alianz Family of Mutual Funds (collectively, "Defendants").1 The Complaint asserts that Defendants failed to ensure that the PIMCO funds participated in securities class actions for which they were eligible.
The following five causes of action are alleged: (1) violation of § 36(a) of the Investment Company Act of 1940 ("ICA")2; (2) violation of § 36(b) of the ICA; (3) violation of § 47(b) of the ICA; (4) breach of fiduciary duty; and (5) negligence. Defendants, through the instant motion, seek to dismiss all five claims.
A motion to dismiss will not be granted unless it appears that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). In resolving a Rule 12(b)(6) motion, the Court must construe the complaint in the light most favorable to the plaintiff and must accept all well-pleaded factual allegations as true. Cahill v. Liberty Mutual Ins. Co., 80 F.3d 336, 337-38 (9th Cir.1996). The Court must also accept as true all reasonable inferences to be drawn from the material allegations in the complaint. Pareto v. F.D.I.C., 139 F.3d 696, 699 (9th Cir.1998).
Preliminarily, Defendants argue that the Mutchkas do not have standing to bring this action because the Complaint does not allege that the specific funds owned by the Mutchkas were eligible for class action settlement proceeds. (Mot., pp. 19-20.) The Mutchkas, however, argue that they are investors in the NFJ Small-Cap Value Fund, which is a mutual fund within a series of funds issued by Allianz Funds Trust ("Allianz"). (Opp'n, p. 5.) According to the Mutchkas, "every fund investing in equity securities in the PIMCO mutual fund family is part of [Allianz]." (Id.) Therefore, the Mutchkas conclude, they have individual standing to pursue claims against every equity fund in the PIMCO Fund Family. (Id.)
Defendants assert that even if the Mutchkas have standing to bring this action on behalf of NFJ Small-Cap Value Fund shareholders, they have no standing to assert claims on behalf of shareholders of other funds. (Mot., p. 20.) The Mutchkas respond by asserting that Defendants essentially are arguing that they should not be certified as class representatives, an issue that is premature and irrelevant for purposes of a motion to dismiss. (Opp'n, pp. 5-7.) According to the Mutchkas, the only relevant issue at the pleadings stage is Article III standing, not whether the they are proper class representatives under Rule 23. (Id., pp. 6-7.) The Court agrees.
As with every attack raised on a Rule 12(b)(6) motion, the Court is guided by the facts pled in assessing standing. Broadly, there are three categories of defendants: PIMCO, the ultimate parent organization for the family of funds;3 the management companies which act as investment advisors and have "the responsibility for the day-to-day management of the" funds;4 and the individual defendants who are members of the "Board of Directors for the Funds ... [which] oversee the management of the Funds."5 Although greater clarity would be preferable, the Complaint can be read to plead that PIMCO the investment advisors, and the individual defendants played a role in each of the funds.6
Defendants premise their standing argument on the fact that the Mutchka's only owned shares in one fund. At least on standing grounds, there is no basis for precluding the Mutchkas' from asserting claims against the defendants on the basis that they managed funds other than the one in which the Mutchkas invested. Fallick v. Nationwide Mutual Ins. Co., 162 F.3d 410, 422-24 (6th Cir.1998). They have pled facts which establish an actual controversy and injury with respect to each defendant, and that is sufficient for standing. Whether the Mutchkas can represent the holders of other funds on a class basis is a question to be addressed if and when they attempt to certify such a class. (Id. at 423.)
The present case is to be distinguished from the situation where only a subset of the defendants played a role in the management of the fund in which the Mutchkas invested. If a defendant played no role in the management of their fund, there is a substantial question whether there is standing even if the defendant played an analogous role in some other funds. See La Mar v. H & B Novelty & Loan Co., 489 F.2d 461, 464 (9th Cir.1973). The Ninth Circuit has explained that "[s]tanding is a jurisdictional element that must be satisfied prior to class certification." Lee v. State of Or., 107 F.3d 1382, 1390 (9th Cir.1997) (quotation marks omitted). The court in Henry v. Circus Circus Casinos, Inc., 223 F.R.D. 541 (D.Nev.2004), recognized that "a plaintiff who lacks Article III standing to sue a defendant may not establish standing `through the back door of a class action.'" Id. at 544 (quoting Allee v. Medrano, 416 U.S. 802, 828-29, 94 S.Ct. 2191, 40 L.Ed.2d 566 (Burger, C.J., concurring in part and dissenting in part)).
The Court rejects the Defendants' standing attack at the pleading stage.
Section 36(b) of the ICA provides that "the investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by such registered investment company, or by the security holders thereof, to such investment adviser ...." 15 U.S.C. § 80a-35(b). Claims under this section may be brought "by the [Securities and Exchange] Commission, or by a security holder of such registered investment company on behalf of such company...." Id.
Defendants move to dismiss the Mutchkas' claim under Section 36(b) for two reasons: (1) the claim must be brought derivatively, and the Mutchkas have not made demand or argued that it is excused; and (2) even if the claim can be brought directly, the Mutchkas fail to state a claim because "the allegations have virtually nothing to do with the advisory fees." (Mot., pp. 5-10, 14-16.)
Turning initially to Defendants' second argument, Section 36(b) is clear that it provides a cause of action only for a breach of fiduciary duty "with respect to the receipt of compensation for services." 15 U.S.C. § 80a-35(b) (emphasis supplied). Indeed, "Section 36(b) is sharply focused on the question of whether the fees themselves were excessive ...." Migdal v. Rowe Price-Fleming Int'l, Inc., 248 F.3d 321, 328 (4th Cir.2001). The Mutchkas do not dispute the limited nature of a claim under Section 36(b), but argue that, as a result of Defendants' alleged breach of their general fiduciary duties, "any and all compensation [they] received for their services to fund shareholders is excessive." (Opp'n, p. 20) (emphasis in original). To support this argument, the Mutchkas rely on Krantz v. Prudential Invs. Mgmt. L.L.C., 77 F.Supp.2d 559 (D.N.J.1999), which states that "receipt of compensation while breaching a fiduciary duty violates Section 36(b). ..." Id. at 565.
The Court does not believe that Section 36(b) is meant to be interpreted as broadly as the Mutchkas posit. If it were, then a claim always would be tenable under Section 36(b) whenever an investment advisor breached any fiduciary duty. That, however, is not the purpose of 36(b). As many circuits have recognized, Section 36(b) is limited in scope and only is meant to provide a cause of action against investment advisors who charge excessive fees. See, e.g., Kamen v. Kemper Fin. Servs., 908 F.2d 1338, 1339-40 (7th Cir.1990) (rev'd on other grounds, 500 U.S. 90, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991)); Migdal, 248 F.3d at 328. To conclude that any fee is excessive merely because investment advisors allegedly have breached some other fiduciary duty is inconsistent with the meaning of the statute and thus is rejected by the Court.
However, even if the scope of Section 36(b) can be extended to provide a cause of action against investment advisors who breach any fiduciary duty, the Mutchkas' claim still must fail because it has not been brought derivatively. The plain language of Section 36(b) provides that a claim may only be brought by the SEC or "by a security holder of such registered investment company on behalf of such company ...." 15 U.S.C. § 80a-35(b) (emphasis added); Olmsted v. Pruco Life Ins. Co. of New Jersey, 283 F.3d 429, 433 (2d Cir.2002) (). Furthermore, to the extent that state law governs the issue of shareholder standing,7 Massachusetts law8 is in accord and requires claims for breach of a fiduciary duty to be brought derivatively. Jernberg v. Mann, 358 F.3d 131, 135 (1st Cir.2004) (); See Cigal v. Leader Dev. Corp., 408 Mass....
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