Northstar Fin. Advisors v. Schwab Inv.

Summarized by:

  • Court: 9th Circuit Court of Appeals Archives
  • Area(s) of Law: Contract Law
  • Date Filed: 03-09-2015
  • Case #: 11-17187
  • Judge(s)/Court Below: Senior District Judge Korman for the Court; Circuit Judge Clifton; Dissent by Circuit Judge Bea
  • Full Text Opinion

Adoption of a mutual fund’s fundamental investment objectives is sufficient to form a contract between shareholders and the fund itself, particularly when those objectives are subsequently incorporated into the fund’s registration statement and prospectuses.

In 2008, Northstar Financial Advisors (“Northstar”)—which managed investor accounts holding over 200,000 shares of the Schwab Total Bond Market Fund (“Fund”), and is the named plaintiff in a shareholder class action against Charles Schwab Investment Management, Inc. (“Schwab”)—filed a complaint alleging that Schwab failed to adhere to the Fund’s fundamental investment objectives (“objectives”) to track a specific index and to not over-concentrate investments in any one industry. The complaint further alleged that Schwab’s deviation from the Fund’s objectives had exposed the Fund and its shareholders to tens of millions of dollars in losses. The district court dismissed Northstar’s breach of contract claims, fiduciary duty claims, and third-party beneficiary breach of contract claims. On review, the Ninth Circuit held that Northstar had standing, despite not owning any shares of the Fund when it filed the complaint, because the claim had been assigned to Northstar by a client. The panel also held that Northstar had sufficiently established a contract between Schwab and the shareholders, reasoning that the incorporation of objectives in the Fund’s registration statement and prospectuses, and the subsequent dissemination thereof, constituted an offer acceptable by anyone who thereafter purchased or held shares. The panel additionally held that Northstar’s operative complaint adequately alleged that Schwab had breached its fiduciary duty to shareholders, not the Fund, when it failed to ensure that the Fund be managed according to the Fund’s objectives, and when it failed to get shareholder approval before changing the Fund’s objectives. Finally, the panel reversed the district court’s dismissal of Northstar’s third-party beneficiary breach of contract claim, holding that Northstar had sufficiently alleged that investors were third-party beneficiaries of the Investment Advisory and Administration Agreement between Schwab and Schwab Investments. REVERSED in part, VACATED in part, and REMANDED.

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