Pinkert v. Schwab Charitable Fund

• Decision Date: 17 June 2021
• Docket Number: Case No. 20-cv-07657-LB
• Court: U.S. District Court — Northern District of California
• Parties: PHILIP PINKERT, on behalf of himself and all others similarly situated, Plaintiff, v. SCHWAB CHARITABLE FUND, et al., Defendants.

PHILIP PINKERT,on behalf of himself and all others similarly situated, Plaintiff, v. SCHWAB CHARITABLE FUND, et al., Defendants.

Case No. 20-cv-07657-LB

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA San Francisco Division

June 17, 2021

ORDER GRANTING DEFENDANTS' MOTIONS TO DISMISS

Re: ECF Nos. 54, 55

INTRODUCTION

Schwab Charitable Fund is a nonprofit 501(c)(3) public charity that sponsors a donor-advised fund. The fund allows donors to make tax-deductible charitable donations to the fund and advise how the funds are invested (in investment pools selected by the fund) and distributed to charities. The plaintiff is a donor to the fund. The defendants are Schwab Charitable (and its board of directors and investment-oversight committee) and Charles Schwab & Co. The plaintiff objects to Schwab Charitable's choice of investment pools (because there are cheaper options available) and its payment of excessive fees for custodial and brokerage services to Charles Schwab (because Schwab Charitable could have negotiated better rates).¹ He sued — individually and on behalf of a putative class of all fund accountholders — (1) the charitable defendants for breach of fiduciary duty, (2) Charles Schwab for aiding and abetting the breach of fiduciary duty, and (3) all defendants for violating California's Unfair Competition Law by their acts.² The defendants moved to dismiss all claims primarily on the ground that — by contributing to the fund irrevocably in exchange for an immediate tax deduction — the plaintiff relinquished control of his assets, thus did not suffer a concrete injury from the conduct that he challenges, and lacks standing to sue under Article III of the U.S. Constitution and California law.³ The court dismisses the claims for lack of standing.

STATEMENT

Schwab Charitable sponsors a donor-advised fund. The Internal Revenue Code defines a donor-advised fund as "a fund or account (i) which is separately identified by reference to contributions of a donor or donors, (ii) which is owned and controlled by a sponsoring organization [here, Schwab Charitable], and (iii) with respect to which a donor . . . has . . . advisory privileges with respect to the distribution or investment of amounts held in such fund or account by reason of the donor's status as a donor."⁴ 26 U.S.C. § 4966(d)(2)(A). When a donor contributes to a donor-advised fund, the nonprofit sponsor of the fund (again, Schwab Charitable) takes legal title to the assets. Under the Internal Revenue Code, sponsors like Schwab Charitable maintain a donor's contributions in separately identified accounts, and donors can direct how the funds are invested (from specified investment options offered by the fund) and ultimately distributed to charitable organizations.⁵ Id.

A donor to a donor-advised fund may claim a tax deduction for the charitable donation that he makes to the fund if he makes a "completed gift" and "relinquishe[s] dominion and control over the donated property." Id. § 170(a), (c), (f)(18); Viralam v. Comm'r, 136 T.C. 151, 162 (2011).⁶ The fund, in other words, must have "exclusive legal control" over the donated assets. 26 U.S.C. § 170(f)(18)(B). Schwab Charitable advises its donors in writing that (1) their donations to the fund are "irrevocable and unconditional," (2) the donations are "subject to the exclusive legal authority and control of [the fund] as to their use and distribution," (3) donors cannot make donations subject to any material restrictions or conditions (such as reserving a right to control or direct distributions or "any other condition that prevents Schwab Charitable from exercising exclusive legal control over the use of contributed assets to further its exempt purposes"), and (4) "Schwab Charitable retains final authority over the distribution of all grants and may decline or modify a grant recommendation that is inconsistent with these Program Policies, or for any other reason."⁷ When a donor makes a contribution, Schwab Charitable provides the donor with a "contemporaneous written acknowledgment" that the fund has assumed "exclusive legal control over the assets contributed" so that the donor can claim a tax deduction for the charitable donation. 26 U.S.C. § 170(f)(18)(B).⁸

Schwab Charitable has a seven-person board of directors and an investment-oversight board (with at least three directors) that reviews and selects investment options.⁹ There are fourteen investment options (including five index funds, a money-market fund, and several asset-allocation pools).¹⁰ Consistent with tax regulations, donors can make non-binding recommendations about how funds can be invested in the fourteen investment options.¹¹ Id. § 4966(d)(2)(A). Schwab Charitable pays Charles Schwab & Co., which is legally independent from Schwab Charitable, fees for custodial and brokerage services that Charles Schwab provides for the donor-advised fund.¹²

The plaintiff alleges that there are cheaper alternatives available for the index funds and the money-market fund.¹³ (For example, Vanguard has a cheaper money-market fund.¹⁴) Also, investment funds have classes of shares that are more expensive for smaller investors with less bargaining power (akin to a retail price) and less expensive for institutional investors (a wholesale price). Schwab Charitable allegedly selected the retail shares of some funds when it could have qualified for the wholesale shares.¹⁵ In a similar vein, Schwab Charitable could have used its market power to negotiate better rates for the custodial and brokerage services that Charles Schwab provides it.¹⁶ The idea is that Schwab Charitable has benefited Charles Schwab to the detriment of the fund, leaving fewer dollars in donor accounts, including the plaintiff's account, that can be donated to charitable organizations.¹⁷

The plaintiff uses the funds in his account to "advance his own philanthropic goals, support organizations that are personally meaningful to him and his family, and to cultivate the family value of charitable giving. And because all donations are made under the Pinkert Family Trust name, each donation confers recognition from his community and peers."¹⁸

Schwab Charitable and Charles Schwab moved to dismiss the case.¹⁹ The court held a hearing on June 17, 2021. All parties consented to magistrate jurisdiction.²⁰

STANDARD OF REVIEW

A complaint must contain a short and plain statement of the ground for the court's jurisdiction. Fed. R. Civ. P. 8(a)(1). The plaintiff has the burden of establishing jurisdiction. Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994); Farmers Ins. Exch. v. Portage La Prairie Mut. Ins. Co., 907 F.2d 911, 912 (9th Cir. 1990). Standing pertains to the court's subject-matter jurisdiction and thus is raised in a Rule 12(b)(1) motion. Chandler v. State Farm Mut. Auto. Ins. Co., 598 F.3d 1115, 1121-22 (9th Cir. 2010).

A defendant's Rule 12(b)(1) jurisdictional attack can be facial or factual. White v. Lee, 227 F.3d 1214, 1242 (9th Cir. 2000). "A 'facial' attack asserts that a complaint's allegations are themselves insufficient to invoke jurisdiction, while a 'factual' attack asserts that the complaint's allegations, though adequate on their face to invoke jurisdiction, are untrue." Courthouse News Serv. v. Planet, 750 F.3d 776, 780 n.3 (9th Cir. 2014). This is a facial attack. The court thus "accept[s] all allegations of fact in the complaint as true and construe[s] them in the light most favorable to the plaintiffs." Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1139 (9th Cir. 2003).

Dismissal of a complaint without leave to amend should be granted only if the jurisdictional defect cannot be cured by amendment. Eminence Cap., LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003).

ANALYSIS

The defendants moved to dismiss primarily on the ground that the plaintiff lacks standing under Article III standing and California law because he gave up legal control of his assets. Because he ceded control of his assets, the plaintiff does not have Article III standing. He also does not have statutory standing under California law.

1. Article III Standing

"[T]he 'irreducible constitutional minimum' of standing consists of three elements." Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1547 (2016) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992)). "The plaintiff must have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision." Id. (citing Lujan, 504 U.S. at 560). "The plaintiff, as the party invoking federal jurisdiction, bears the burden of establishing these elements." Id. (citing FW/PBS, Inc. v. City of Dallas, 493 U.S. 215, 231 (1990)). "Where, as here, a case is at the pleading stage, the plaintiff must 'clearly allege facts demonstrating' each element." Id. (cleaned up) (quoting Warth v. Seldin, 422 U.S. 490, 518 (1975)). "[S]tanding in federal court is a question of federal law, not state law." Hollingsworth v. Perry, 570 U.S. 693, 715 (2013).

The defendants argue only that the plaintiff has not plausibly pleaded injury in fact.²¹ "To establish injury in fact, a plaintiff must show that he or she suffered 'an invasion of a legally protected interest' that is 'concrete and particularized' and 'actual or imminent, not conjectural or hypothetical.'" Spokeo, 136 S. Ct. at 1548 (quoting Lujan, 504 U.S. at 560). "For an injury to be 'particularized,' it 'must affect the plaintiff in a personal and individual way.'" Id. (quoting Lujan, 504 U.S. at 560 n.1). For an injury to be concrete, it "must be 'de facto'; that is, it must actually exist. . . . [and be] 'real,' and not 'abstract.'" Id. (citing dictionaries). "'Concrete' is not . . . necessarily synonymous with 'tangible.' Although tangible injuries are perhaps easier to recognize, . . . intangible injuries can nevertheless be concrete." Id. at 1549 (citations omitted).

The plaintiff lac...