Northstar Fin. Advisors Inc. v. Investments
| Decision Date | 23 February 2016 |
| Docket Number | Case No. 08-CV-04119-LHK |
| Court | U.S. District Court — Northern District of California |
| Parties | NORTHSTAR FINANCIAL ADVISORS INC., Plaintiff, v. SCHWAB INVESTMENTS, et al., Defendants. |
Plaintiff Northstar Financial Advisors, Inc. ("Northstar") brings this action against Schwab Investments, the Board of Trustees of Schwab Investments, and Charles Schwab Management, Inc. (collectively, "Defendants"). Before the Court is (1) Northstar's motion for leave to file a motion for reconsideration of this Court's October 5, 2015 Order; (2) Defendants' motion for judgment on the pleadings of Northstar's Fourth Amended Complaint; and (3) Northstar's motion for class certification. ECF No. 243 ("MFR"); ECF No. 249 ("MJP"); ECF No. 252 ("Class Cert. Mot."). The Court finds these motions suitable for decision without oral argument pursuant to Civil Local Rule 7-1(b) and thus vacates the motions hearings set for February 25, 2016, at 1:30 p.m., and April 21, 2016, at 1:30 p.m. Having considered the parties' submissions, the relevant law, and the record in this case, the Court DENIES Northstar's motion for reconsideration, GRANTS Defendants' motion for judgment on the pleadings, and DENIES AS MOOT Northstar's motion for class certification.
On August 28, 2008, Northstar filed its first complaint ("Original Complaint") in this putative class action on behalf of itself and all shareholders of the Schwab Total Bond Market Fund (the "Fund") at any time from August 31, 2007 to the present. ECF No. 1 ("Compl.") ¶ 1. Northstar is a registered investment advisory and financial planning firm that serves both institutional and individual clients. Id. ¶ 9. Northstar manages both discretionary and nondiscretionary accounts on behalf of investors in its role as an investment advisor. Id. Northstar traded through Charles Schwab's Institutional Advisor Platform, where it purchased shares in the Fund for its clients. Id. ¶¶ 11-12.
Although Northstar has filed five complaints, Northstar's core allegations have remained the same. Northstar alleges that Defendants deviated from the Fund's investment objective to track the Lehman Brothers U.S. Aggregate Bond Index (the "Lehman Index") in two ways. First, Northstar alleges that, starting around August 31, 2007, the Fund began investing in high risk non-U.S. agency collateralized mortgage obligations ("CMOs") that were not part of the Lehman Index and that were substantially more risky than the U.S. agency securities and other instruments that comprised the Lehman Index. See id. ¶ 3; ECF No. 214 ¶ 5. Second, Northstar alleges that, beginning around August 31, 2007, the Fund deviated from the Fund's investment objectives (which prohibited investing more than 25% of the Fund's assets in any one industry, unless such concentration was necessary to track the Lehman Index) by investing more than 25% of the Fund's assets in U.S. agency and non-agency mortgage-backed securities and CMOs. Compl. ¶ 4; ECF No. 214 ¶ 6. Northstar alleges that these actions exposed the Fund and Fundshareholders to tens of millions of dollars in losses due to a sustained decline in the value of non-agency mortgage-backed securities. According to Northstar, the Funds' deviation from its fundamental investment objectives caused the Fund to incur a negative return of 4.80% for the period of September 1, 2007 through February 27, 2009, compared to a positive return of 7.85% for the Lehman Index over this same period. ECF No. 214 ¶ 7.
Based on the allegations described above, Northstar asserted the following four causes of action against a number of Schwab-related entities1 in the Original Complaint: (1) violation of § 13(a) of the Investment Company Act of 1940 ("ICA"); (2) breach of fiduciary duty; (3) breach of contract; and (4) breach of the covenant of good faith and fair dealing. Compl. ¶¶ 85-99. Northstar's § 13(a) claim was asserted under federal law; Northstar's remaining causes of action were asserted under state law. On November 20, 2008, Defendants moved to dismiss the Original Complaint. ECF No. 33. U.S. District Judge Susan Illston, to whom this case was originally assigned, granted in part and denied in part Defendants' motion. See ECF No. 74 ("Northstar I").
First, Judge Illston found that Northstar did not have standing to bring suit because Northstar "only purchased shares for its clients and not for itself." Northstar I at 3. Judge Illston, however, granted Northstar leave to amend because Northstar could cure this deficiency by receiving an assignment of claims from one of Northstar's clients. Id. at 4. Second, Judge Illston found that there was an implied private right of action under § 13(a) of the ICA and that Northstarhad plausibly stated a cause of action for violation of shareholders' voting rights under this section. Northstar I at 7, 9-12. Finally, on Northstar's state law causes of action, Judge Illston dismissed Northstar's breach of fiduciary duty claim with leave to amend. Judge Illston instructed Northstar "to carefully examine whether each of the [D]efendants named in this claim can in fact be named in such a claim, and under which state's laws such a claim [may be] properly brought." Id. at 14-15. Because of the close relationship between Northstar's breach of fiduciary duty claim and Northstar's breach of contract claim, Judge Illston also dismissed with leave to amend Northstar's breach of contract claim. Id. at 15. Judge Illston denied Defendants' motion to dismiss Northstar's breach of the covenant of good faith and fair dealing claim. Id. at 15-16.
On March 2, 2009, Northstar filed its First Amended Complaint. On March 5, 2009, Defendants filed a motion seeking leave to file an interlocutory appeal in which Defendants would challenge Judge Illston's finding that Northstar could assert a private right of action under § 13(a) of the ICA. This motion was granted, ECF No. 108, and this action was stayed pending the outcome of Defendants' appeal. This case was stayed from April 27, 2009 through August 13, 2010. In the interim, this case was reassigned, first to U.S. District Judge Richard Seeborg, and then to the undersigned Judge. See ECF Nos. 115 & 117. On August 13, 2010, the Ninth Circuit reversed Judge Illston's order, and held that there is no private right of action under § 13(a). Northstar Fin. Advisors, Inc. v. Schwab Invs. ("Northstar II"), 615 F.3d 1106, 1122 (9th Cir. 2010).
In light of Northstar II, Northstar filed on September 28, 2010 its Second Amended Complaint ("SAC"), which did not include a § 13(a) claim. ECF No. 127 ("SAC"). In an attempt to address the standing issue identified by Judge Illston, Northstar also asserted anassignment of claims from Henry Holz, a Northstar client who had owned Fund shares as of August 31, 2007. See ¶ 15.
The SAC named Schwab Investments (the "Trust"), the members of the Board of Trustees of Schwab Investments (the "Trustees"),2 and Charles Schwab Investment Management, Inc. (the "Advisor") as Defendants.3 According to the SAC, the Trust is an investment trust organized under Massachusetts law that "consists of a series of mutual funds, including the Fund." SAC ¶ 16. The Trust is managed by the Trustees. Id. ¶¶ 19-20. Pursuant to a contractual agreement between the Trust and the Advisor, known as the Investment Advisory Agreement ("IAA"), the Advisor handles day-to-day oversight of the Fund. Id. ¶¶ 23, 154.
In the SAC, Northstar asserted the following causes of action: (1) breach of fiduciary duty against all Defendants; (2) breach of contract against the Trust; (3) breach of the covenant of good faith and fair dealing against the Trust and the Advisor; and (4) breach of contract as a third party beneficiary to the IAA against the Advisor.
This Court dismissed the SAC on March 2, 2011. See ECF No. 175 ("Northstar III"). The Court found all of Northstar's causes of action precluded by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") because all of Northstar's causes of action implicated a misrepresentation or omission of material fact that was made in connection with the purchase or sale of Fund shares. The Court stated that "the central theme . . . of Plaintiffs' claims is that [D]efendants made misrepresentations about how investments in the fund would be managed, that Plaintiffs purchased Fund shares relying on these misrepresentations, and that Plaintiffs were injured when these statements turned out to be false." Northstar III at 9.
In addition to dismissing Northstar's causes of action based on SLUSA preclusion, the Court found that Northstar had failed to sufficiently allege a breach of contract claim despite specific instructions from Judge Illston in Northstar I to "add more specific allegations regarding the language [Northstar] relies on to allege the formation of a contract, as well as each [D]efendants' involvement." Northstar I at 15. The Court thus dismissed with prejudice both Northstar's breach of contract claim and Northstar's related claim for breach of the covenant of good faith and fair dealing. Northstar III at 18-19.
Northstar's third party beneficiary claim was dismissed with leave to amend so that Northstar could "specify . . . what specific provisions of the Investment Advisor Agreement were allegedly breached, and how." Id. at 24.
Finally, with respect to Northstar's breach of fiduciary duty claim, the Court recognized that this claim could fall outside the scope of SLUSA preclusion through a statutory exception known as the Delaware carve-out. Accordingly, Northstar was granted leave to amend Northstar's breach of fiduciary duty claim in order to clarify whether this claim fell within...
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