Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-11-17187/USCOURTS-ca9-11-17187-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

NORTHSTAR FINANCIAL ADVISORS

INC., on behalf of itself and all others

similarly situated,

Plaintiff-Appellant,

v.

SCHWAB INVESTMENTS; MARIANN

BYERWALTER, DONALD F.

DORWARD, WILLIAM A. HASLER,

ROBERT G. HOLMES, GERALD B.

SMITH, DONALD R. STEPHENS,

MICHAEL W. WILSEY, CHARLES R.

SCHWAB, RANDALL W. MERK,

JOSEPH H. WENDER and JOHN F.

COGAN, as Trustees of Schwab

Investments; and Charles Schwab

Investment Management, Inc.,

Defendants-Appellees.

No. 11-17187

D.C. No.

5:08-cv-4119-

LHK

OPINION

Appeal from the United States District Court

for the Northern District of California

Lucy H. Koh, District Judge, Presiding

Argued and Submitted

May 17, 2013—San Francisco, California

Filed March 9, 2015

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2 NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

Before: Richard R. Clifton and Carlos T. Bea, Circuit

Judges, and Edward R. Korman, Senior District Judge.*

Opinion by Judge Korman;

Dissent by Judge Bea

SUMMARY**

Mutual Funds

The panel reversed in part and vacated in part the district

court’s dismissal of a shareholder class action on behalf of

investors who alleged that the managers of the Schwab Total

Bond Market Fund, a mutual fund, failed to adhere to the

Fund’s fundamental investment objectives of seeking to track

a particular index and not over-concentrating its investments

in any one industry. The Fund was created by Schwab

Investments (“Schwab Trust”), a “Massachusetts trust,” and

its investment adviser was Charles Schwab Investment

Management, Inc. (“Schwab Advisor”).

The named plaintiff was Northstar Financial Advisors,

Inc., a registered investment advisery and financial planning

firm that managed accounts on behalf of investors and had

over 200,000 shares of the Fund under its management. The

* The Honorable Edward R. Korman, Senior District Judge for the

United States District Court for the Eastern District of New York, sitting

by designation.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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NORTHSTAR FIN. ADVISORS V. SCHWAB INV. 3

panel held that Northstar had standing because it filed a

supplemental pleading under Federal Rule of Civil Procedure

15(d) after obtaining an assignment of claim from an investor

in the Fund.

The panel reversed the district court’s dismissal of breach

of contract claims. It held that the Fund shareholders’

adoption of the investment objectives added a structural

restriction on the power conferred on the Fund trustees that

could only be changed by a vote of the shareholders, and was

subsequently reflected in the Fund’s registration statements

and prospectuses, and thus created a contract between the

trustees and Fund investors.

Vacating the dismissal of fiduciary duty claims, the panel

held that the operative complaint stated a claim that the

Schwab defendants breached their fiduciary duties by failing

to ensure that the Fund was managed in accordance with the

fundamental investment objectives and by changing the

Fund’s fundamental investment objectives without obtaining

required shareholder authorization. The panel held that the

trustees owed a fiduciary duty to the shareholders, rather than

the Fund, and so Northstar was not required to proceed by

way of a derivative action.

The panel reversed the dismissal of a third-party

beneficiary breach of contract claim. It held that Northstar

adequately alleged that the investors were third-party

beneficiaries of the Investment Advisory and Administration

Agreement between Schwab Trust and Schwab Advisor.

The panel declined to address the effect of the Securities

Litigation Uniform StandardsAct on the various common law

causes of action. It remanded the case to the district court.

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4 NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

Dissenting, Judge Bea wrote that Northstar lacked

standing because, at the commencement of the action, it did

not own any fund shares, nor did it own any claims of others

who had suffered losses the defendants had allegedly caused.

COUNSEL

Robert C. Finkel (argued), Wolf Popper LLP, New York,

NewYork; Joseph J. Tabacco, Jr., Christopher T. Heffelinger,

and Anthony D. Phillips, Berman DeValerio, San Francisco,

California; Marc J. Gross, Greenbaum Rowe Smith & Davis

LLP, Roseland, New Jersey, for Plaintiff-Appellant.

Karin Kramer and Arthur M. Roberts, Quinn Emanuel

Urquhart &Sullivan,LLP, San Francisco, California; Richard

Schirtzer (argued), Susan R. Estrich, and B. Dylan Proctor,

Quinn Emanuel Urquhart & Sullivan, LLP, Los Angeles,

California, for Defendants-Appellees.

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NORTHSTAR FIN. ADVISORS V. SCHWAB INV. 5

OPINION

KORMAN, District Judge:

The Investment Company Act (“ICA”) establishes a

comprehensive federal regulatory framework applicable to

mutual funds. See 15 U.S.C. § 80a-1 et seq. More

specifically, it provides that a mutual fund’s registration

statement must recite all investment policies that can be

changed only by shareholder vote. 15 U.S.C. § 80a-8(b). 

Deviation from policies so designated violates § 13(a) of the

ICA. 15 U.S.C. § 80a-13(a)(3). This appeal arises out of a

class action on behalf of investors who allege that the

managers of the Schwab Total Bond Market Fund (“Fund”)

failed to adhere to two of the Fund’s fundamental investment

objectives; namely, that it seek to track a particular index and

that it not over-concentrate its investments in any one

industry. These objectives, which could only be changed by

a vote of the shareholders, were adopted by a shareholder

vote and subsequently incorporated in the Fund’s registration

statement and prospectuses.

On a previous interlocutory appeal, we rejected the

argument that this conduct gave rise to an implied private

right to enforce § 13(a) of the ICA. Northstar Fin. Advisors,

Inc. v. Schwab Invs., 615 F.3d 1106 (9th Cir. 2010). On this

appeal from an order granting a motion to dismiss a Third

Amended Complaint, the principal issues are whether the

investors have stated valid causes of action for breach of

contract, breach of fiduciary duty, and breach of an

agreement to which the investors claim to be third-party

beneficiaries.

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6 NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

BACKGROUND

Schwab Investments (“Schwab Trust”) is an investment

trust organized under Massachusetts law. Such a trust, which

is often referred to generically as a “Massachusetts trust,”

even when not created under Massachusetts law, is an

unincorporated business organization created by an

instrument of trust by which property is to be held and

managed by trustees for the benefit of persons who are or

become the holders of the beneficial interests in the trust

estate. See Hecht v. Malley, 265 U.S. 144, 146–47 (1924).1

Thus, the Schwab Trust’s Agreement and Declaration of

Trust states that “the Trustees hereby declare that they will

hold all cash, securities and other assets, which they may

from time to time acquire in any manner as Trustees

hereunder IN TRUST to manage and dispose of the same . . .

for the pro rata benefit of the holders from time to time of

Shares in this Trust.” Schwab Investments, Registration

Statement (Form N-1A), Agreement and Declaration of Trust

1 (Ex. 1) (Dec. 29, 1997) [hereinafter “Agreement and

Declaration of Trust”]. Such a “trust today is a preferred

form of organization for mutual funds and asset

securitization.” Dukeminier, Sitkoff & Lindgren, Wills,

Trusts, and Estates 556.

1

“Unlike the corporation of the late 1800s and early 1900s, the common

law business trust was only lightly regulated, so entrepreneurs used the

business trust to escape the comparatively much heavier regulation of the

corporate form. Using the business trust for this purpose was so

pronounced in Massachusetts, where corporate ownership of real estate

was prohibited, that the term Massachusetts trust became synonymous

with business trust.” Jesse Dukeminier, Robert H. Sitkoff & James

Lindgren, Wills, Trusts, and Estates 555–56 (8th ed. 2009).

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NORTHSTAR FIN. ADVISORS V. SCHWAB INV. 7

One of the significant features that distinguishes a

Massachusetts trust from the ordinary or private trust “lies in

the manner in which the trust relationship is created; investors

in a business trust enter into a voluntary, consensual, and

contractual relationship, whereas the beneficiaries of a

traditional private trust take their interests by gift from the

donor or settlor.” Herbert B. Chermside, Jr., Modern Status

of the Massachusetts or Business Trust, 88 A.L.R.3d 704, 720

(1978); see also Berry v. McCourt, 204 N.E.2d 235, 240

(Ohio Ct. App. 1965) (“By an underlying contract, or in the

provisions of a business trust instrument, or both, the parties

agree on the operations of the venture.”). Thus, the

Agreement and Declaration of Trust at issue here states at the

very outset that it was made “by the Trustees hereunder, and

by the holders of shares of beneficial interest to be issued

hereunder.” Agreement and Declaration of Trust 1. 

Moreover, it continues that “[e]very Shareholder by virtue of

having become a Shareholder shall be held to have expressly

assented and agreed to the terms hereof and to have become

a party hereto.” Agreement and Declaration of Trust 4.

Because this case involves the relationship between

investors and a mutual fund, the trust which created the fund

and the investment adviser which manages the fund, it is

helpful to have a clear understanding of the relationships

among these parties. We begin with a useful, if

oversimplified, description of a mutual fund:

T, an investment professional, approaches A,

B, C, and others like them and agrees to pool

certain of their assets in a common fund to be

managed by T. A, B, C, and the other

investors each receive tradable shares in the

fund in an amount proportional to their

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8 NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

investment. By structuring their collective

investment in this way, A, B, C, and the others

are able to take advantage of economies of

scale, obtain professional portfolio

management, and achieve a more diversified

portfolio than each could have individually. 

In managing the portfolio, T is subject to a

fiduciary obligation to A, B, C, and the other

investors in the fund.

Dukeminier, Sitkoff & Lindgren, Wills, Trusts, and Estates

556.

This simple description does not adequately discuss

perhaps the most important party to this arrangement,

namely, the investment adviser, whose “main role is to

supervise and manage the fund’s assets, including handling

the fund’s portfolio transactions.” Clifford E. Kirsch, An

Introduction to Mutual Funds, in Mutual Fund Regulation

§ 1:2.2 (Clifford E. Kirsch ed., 2d ed. 2005). The investment

adviser is not a mere employee, contractor, or consultant. 

Instead, it is “more often than not also the creator, sponsor,

and promoter of the mutual fund.” Charles E. Rounds, Jr. &

Charles E. Rounds, III, Loring and Rounds: A Trustee’s

Handbook 955–56 (2012 ed.); see also Kamen v. Kemper Fin.

Servs., Inc., 500 U.S. 90, 93 (1991) (Mutual funds “typically

are organized and underwritten by the same firm that serves

as the company’s ‘investment adviser.’”); Daily Income

Fund, Inc. v. Fox, 464 U.S. 523, 536 (1984) (Mutual funds

are “typically created and managed by a pre-existing external

organization known as an investment adviser.” (citing Burks

v. Lasker, 441 U.S. 471, 481 (1979))).

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NORTHSTAR FIN. ADVISORS V. SCHWAB INV. 9

Thus, while “[i]n theory, the [trust] is able to choose any

adviser it deems appropriate to invest the fund’s portfolio,

based on the adviser’s investing style, track record and fees,”

in practice, the investment adviser picked to manage the

portfolio is most often self-selected and unlikely to be

removed. John Shipman, So Who Owns Your Mutual Fund?,

Wall St. J., May 5, 2003, at R1, available at

http://online.wsj.com/news/articles/SB105207969873142900. 

Because “a typical fund is organized by its investment adviser

which provides it with almost all management services . . . ,

a mutual fund cannot, as a practical matter sever its

relationship with the adviser.” Burks, 441 U.S. at 481

(quoting S. Rep. No. 91-184, at 5 (1969), reprinted in 1970

U.S.C.C.A.N. 4897, 4901).

Consistent with this description of the structure of a

mutual fund and its relationship with its investment adviser,

the Schwab Trust selected Charles Schwab Investment

Management, Inc. (“Schwab Advisor”) as its investment

adviser. Indeed, Charles R. Schwab is alleged to have been

chairman and trustee of the Schwab Trust and a member of

the board of the Schwab Advisor. Third Am. Compl. ¶ 38. 

The latter is a subsidiary of the Charles Schwab Corporation,

of which Mr. Schwab has served as “CEO at various times,

including from 2004 through October 2008.” Third Am.

Compl. ¶ 36. Moreover, the complaint alleges that all

“[d]efendants and their affiliates held themselves out as one

Schwab entity[.]” Third Am. Compl. ¶ 167.

The mutual fund at issue here, one of several operated by

the Schwab Trust, is the Schwab Total Bond Market Fund. 

Reflecting the terms of a proxy statement proposed by the

Schwab Trust in 1997, and subsequently adopted by the

shareholders by majority vote, the prospectuses that the Fund

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10 NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

issued during the relevant period stated that the Fund was

“designed to offer high current income by tracking the

performance of the Lehman Brothers [U.S.] Aggregate Bond

Index [(“Lehman Index”)]” and was “intended for investors

seeking to fill the fixed income component of their asset

allocation plan.” Specifically, the Lehman Index included

“investment-grade government, corporate, mortgage-,

commercial mortgage- and asset-backed bonds that [were]

denominated in U.S. dollars and ha[d] maturities longer than

one year.” Northstar Fin. Advisors, Inc. v. Schwab Invs.,

609 F. Supp. 2d 938, 945 (N.D. Cal. 2009).2 Nevertheless,

the Fund is not itself an index fund and, according to the

Fund’s prospectus, it was “not required to invest any

percentage of its assets in the securities represented in the

[Lehman] Index.” Decl. of Kevin Calia in Support of Motion

to Dismiss Second Amended Class Action Complaint, Ex. A

at 14, Nov. 10, 2010.

The Fund disclosed in its registration statement, and

reiterated in prospectuses issued thereafter, that its policy of

tracking the Lehman Index was “fundamental,” which means

that it “cannot be changed without approval of the holders of

a majority of the outstanding voting securities (as defined in

the [ICA]).” Schwab Investments, Registration Statement 5,

14 (Form N-1A) (Jan. 16, 1998), Prospectus 10 (Form N-1A,

Part A) (Nov. 1, 1997, as amended Jan. 15, 1998); see also

2 The former Lehman Index is now known as the Barclays U.S.

Aggregate Bond Index. It currently “comprises a total of 8,286 bonds and

is worth nearly $17 trillion.” Carolyn Cui, Barclays Agg Had Modest

Origin, Wall St. J., Apr. 2, 2013, http://online.wsj.com/article/

SB10001424127887324883604578398880679949670.html. “[A]bout

$663 billion of institutional assets is invested in 270 U.S. core fixedincome portfolios, 75% of which are benchmarked against the Barclays

Agg Index.” Id.

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NORTHSTAR FIN. ADVISORS V. SCHWAB INV. 11

Michael Glazer, Prospectus Disclosure and Delivery

Requirements, in Mutual Fund Regulation § 4:3.6 (Clifford

E. Kirsch ed., 2d ed. 2005). The Fund was also precluded

from investing twenty-five percent or more of the Fund’s

total assets in any one industry, unless necessary to track the

Lehman Index. Schwab Investments, Registration Statement

41 (Form N-1A) (Jan. 16, 1998), Statement of Additional

Information 11 (Form N-1A, Part B) (Nov. 1, 1997, as

amended Jan. 15, 1998).

Northstar Financial Advisors, Inc. (“Northstar”) is a

registered investment advisery and financial planning firm

that manages discretionaryand non-discretionaryaccounts on

behalf of investors and had over 200,000 shares of the Fund

under its management. In August 2008, Northstar filed this

shareholder class action against the defendants, alleging that

they deviated from the Fund’s fundamental investment

policies and exposed the Fund and its shareholders to tens of

millions of dollars in losses.

Northstar has identified two classes of potential plaintiffs:

(1) a “Pre-Breach” class, consisting of those who purchased

shares of the Fund on or prior to August 31, 2007, and who

continued to hold their shares as of August 31, 2007, and

(2) a “Breach” class, consisting of those who purchased

shares of the Fund during the period September 1, 2007

through February 27, 2009. Northstar alleges that August 31,

2007 was the last day of the fiscal year preceding the one

during which the Fund first began deviating from its required

fundamental investment policies, and that on February 27,

2009, the Fund reverted back to the required policies.

This case has a lengthy and complicated procedural

history that includes the dismissal of successive amended

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12 NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

complaints for failure to state a cognizable cause of action. 

Specifically, the Third Amended Complaint, which is based

on the Fund’s unauthorized deviation from its fundamental

investment objectives, alleges five causes of action on behalf

of each of the two identified classes, for a total of ten claims:

breach of fiduciary duty against the Trustees3(counts one and

six); breach of fiduciaryduty against Schwab Advisor (counts

two and seven); aiding and abetting breach of fiduciary duty

against the Trustees (counts three and eight); aiding and

abetting breach of fiduciary duty against Schwab Advisor

(counts four and nine); breach of the Investment Advisory

and Administration Agreement (“IAA”) between Schwab

Trust and Schwab Advisor. The last cause of action is based

on the allegations that the investors are third-party

beneficiaries of the IAA. The Third Amended Complaint

also incorporates by reference a breach of contract cause of

action against the Schwab Trust that was alleged in the

Second Amended Complaint, but dismissedwith prejudice on

an earlier motion to dismiss. The incorporation by reference

was included to preserve Northstar’s right to appeal from the

dismissal of this cause of action with prejudice.

STANDARD OF REVIEW

We review de novo the district judge’s order granting a

motion to dismiss. Manzarek v. St. Paul Fire & Marine Ins.

Co., 519 F.3d 1025, 1030 (9th Cir. 2008). On a motion to

dismiss, “[w]e accept factual allegations in the complaint as

3

“Trustees” is a collective reference to the trustees of Schwab Trust:

defendants Mariann Byerwalter, Donald F. Dorward, William A. Hasler,

Robert G. Holmes, Gerald B. Smith, Donald R. Stephens, Michael W.

Wilsey, Charles R. Schwab, Randall W. Merk, Joseph H. Wender, and

John F. Cogan.

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NORTHSTAR FIN. ADVISORS V. SCHWAB INV. 13

true and construe the pleadings in the light most favorable to

the non-moving party.” Id. at 1031. “[W]e may consider

materials incorporated into the complaint or matters of public

record.” Coto Settlement v. Eisenberg, 593 F.3d 1031, 1038

(9th Cir. 2010). We may also consider “documents ‘whose

contents are alleged in a complaint and whose authenticity no

party questions, but which are not physically attached to the

[plaintiff’s] pleading.’” Knievel v. ESPN, 393 F.3d 1068,

1076 (9th Cir. 2005) (alteration in original) (quoting In re

Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir.

1999)); see also Ecological Rights Found. v. Pac. Gas &

Elec. Co., 713 F.3d 502, 511 (9th Cir. 2013). This is

sometimes referred to as the “incorporation by reference”

doctrine. Knievel, 393 F.3d at 1076; see also Lapidus v.

Hecht, 232 F.3d 679, 682 (9th Cir. 2000).

Among the documents we consider pursuant to that

doctrine are three sets of the Schwab Trust’s filings with the

Securities and Exchange Commission: (1) the Registration

Statement of December 29, 1997; (2) the Registration

Statement of January 16, 1998, which was filed with the

Prospectus and Statement of Additional Information of

November 1, 1997, as amended January 15, 1998; and (3) the

Prospectus and Statement of Additional Information of

November 15, 2004. While all of these documents are

referred to in the complaint, the entire content of each

document does not appear to be part of the record. 

Nevertheless, “[i]t is appropriate to take judicial notice of this

information, as it was made publicly available by [the SEC],

and neither party disputes the authenticity of the [documents]

or the accuracy of the information displayed therein.” 

Daniels-Hall v. Nat’l Educ. Ass’n, 629 F.3d 992, 998–99 (9th

Cir. 2010) (citing Fed. R. Evid. 201); see also Dreiling v. Am.

Express Co., 458 F.3d 942, 946 n.2 (9th Cir. 2006) (We “may

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14 NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

consider documents referred to in the complaint or anymatter

subject to judicial notice, such as SEC filings.”). Indeed,

defendants, who might otherwise be aggrieved by their use,

created and filed them with the SEC. Under these

circumstances, it is appropriate for us to consider them here. 

See 1Christopher B. Mueller & Laird C. Kirkpatrick, Federal

Evidence § 2:8 at 359–61 (4th ed. 2013).

DISCUSSION

I. Standing

We pause before addressing the merits to discuss the issue

of whether Northstar has standing. Northstar filed its initial

class action complaint on behalf of investors in the Fund on

August 28, 2008. Northstar owned no shares of the Fund, but

it brought the action in its own name, without obtaining an

assignment of claims from an investor in the Fund. 

Subsequently, in a comparable case brought by an asset

management firm, the Second Circuit held that “the minimum

requirement for injury-in-fact is that the plaintiff have legal

title to, or a proprietary interest in, the claim.” W.R. Huff

Asset Mgmt. Co. v. Deloitte & Touche LLP, 549 F.3d 100,

108 (2d Cir. 2008). On December 8, 2008, after W.R. Huff

was decided, Northstar obtained an assignment of claim from

a client-shareholder.

Defendants argue that because standing must be

determined at the time a complaint is filed, and because

Northstar did not obtain an assignment of claim until several

months after the original complaint was filed, the assignment

could not cure Northstar’s original lack of standing. The

district judge (Susan Illston, J.), to whom the case was then

assigned, dismissed Northstar’s complaint for lack of

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NORTHSTAR FIN. ADVISORS V. SCHWAB INV. 15

standing with a suggestion that this defect could be cured by

filing an amended complaint. Northstar Fin. Advisors, Inc. v.

Schwab Invs., 609 F. Supp. 2d 938, 942 (N.D. Cal. 2009). 

Northstar followed her suggestion. After Schwab renewed its

motion to dismiss the amended complaint, the district court

judge to whom the case had been reassigned (Lucy Koh, J.)

declined to order the dismissal of the complaint because to do

so would have “elevate[d] form over substance” and thus she

treated the prior order as granting plaintiff leave to file a

supplemental pleading under Rule 15(d) instead of an

amended complaint pursuant to Rule 15(a). Northstar Fin.

Advisors, Inc. v. Schwab Invs., 781 F. Supp. 2d 926, 932–33

(N.D. Cal. 2011). In so doing, she observed that, “[a]lthough

there is no published Ninth Circuit authority on this point,

courts in other circuits have found that parties may cure

standing deficiencies through supplemental pleadings.” Id.

at 933 (citing, inter alia, Travelers Ins. Co. v. 633 Third

Assoc., 973 F.2d 82, 87–88 (2d Cir. 1992)). We review this

ruling de novo, Renee v. Duncan, 686 F.3d 1002, 1010 (9th

Cir. 2012), and we agree with Judge Koh’s application of

Fed. R. Civ. P. 15(d).

Rule 15(d) permits a supplemental pleading to correct a

defective complaint and circumvents “the needless formality

and expense of instituting a new action when events

occurring after the original filing indicated a right to relief.” 

Wright, Miller, & Kane, Federal Practice and Procedure:

Civil 3d § 1505, pgs. 262–63. Moreover, “[e]ven though

[Rule 15(d)] is phrased in terms of correcting a deficient

statement of ‘claim’ or a ‘defense,’ a lack of subject-matter

jurisdiction should be treated like any other defect for

purposes of defining the proper scope of supplemental

pleading.” Id. at § 1507, pg. 273. Indeed, in Matthews v.

Diaz, 426 U.S. 67 (1976), the Supreme Court addressed the

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issue in a case in which an applicant for Medicare had failed

to file his application until after an amended complaint had

been filed joining him as an additional complainant in an asyet uncertified class action. In holding that this jurisdictional

defect could be cured by a supplemental pleading, the

Supreme Court observed:

Although 42 U.S.C. § 405(g) establishes filing

of an application as a nonwaivable condition

of jurisdiction, Espinosa satisfied this

condition while the case was pending in the

District Court. A supplemental complaint in

the District Court would have eliminated this

jurisdictional issue; since the record discloses,

both by affidavit and stipulation, that the

jurisdictional condition was satisfied, it is not

too late, even now, to supplement the

complaint to allege this fact.

Id. at 75 (internal citations omitted). This holding is

consistent with Rockwell Int’l Corp. v. United States, in

which the Supreme Court subsequently held that “when a

plaintiff files a complaint in federal court and then voluntarily

amends the complaint, courts look to the amended complaint

to determine jurisdiction.” 549 U.S. 457, 473–74 (2007).

We add here a brief discussion of the thoughtful holding

of the Court of Appeals for the Federal Circuit that

summarizes the case law addressing supplemental pleadings. 

There, “[a]s an initial matter, the parties dispute[d] whether

the allegations in [the plaintiff’s] Amended Complaint that

concern actions taken after the filing of the initial complaint

can be used to establish subject matter jurisdiction.” Prasco,

LLC v. Medicis Pharm. Corp., 537 F.3d 1329, 1337 (Fed. Cir.

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2008). Relying on Rule 15(d) and Matthews v. Diaz, the

Court of Appeals treated the complaint as a supplemental

complaint and held that it was sufficient to cure the original

complaint’s jurisdictional defect:

Thus, while “[l]ater events may not create

jurisdiction where none existed at the time of

filing,” the proper focus in determining

jurisdiction are “the facts existing at the time

the complaint under consideration was filed.” 

GAF Bldg. Materials Corp. v. Elk Corp.,

90 F.3d 479, 483 (Fed.Cir.1996) (emphasis

added) (quotingArrowhead Indus. Water, Inc.

v. Ecolochem Inc., 846 F.2d 731, 734 n. 2

(Fed. Cir. 1988)); see also Rockwell Int’l

Corp. v. United States, 549 U.S. 457,

127 S.Ct. 1397, 1409, 167 L.Ed.2d 190 (2007)

(“[W]hen a plaintiff files a complaint in

federal court and then voluntarily amends the

complaint, courts look to the amended

complaint to determine jurisdiction.”);

Connectu LLC v. Zuckerberg, 522 F.3d 82

(1st Cir. 2008). As the district court accepted

Prasco’s Amended Complaint, it is the

Amended Complaint that is currently under

consideration, and it is the facts alleged in this

complaint that form the basis for our review.

Id. See also Feldman v. Law Enforcement Assocs. Corp.,

752 F.3d 339, 347 (4th Cir. 2014) (“[W]e construe the present

complaint as a supplemental pleading under Rule 15(d),

thereby curing the defect which otherwise would have

deprived the district court of jurisdiction under Rule 15(c).”);

Black v. Sec’y of Health and Human Servs., 93 F.3d 781, 790

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(Fed. Cir. 1996) (“Nonetheless, a defect in the plaintiff’s

case, even a jurisdiction defect, can be cured by a

supplemental pleading under Rule 15(d) in appropriate

circumstances.”); United Partition Sys., Inc. v. United States,

59 Fed. Cl. 627, 644 (Fed. Cl. 2004) (“The Supreme Court

has interpreted Fed. R. Civ. P. 15(d) to permit supplemental

pleadings in which a plaintiff may correct a jurisdictional

defect in its complaint by informing the court of postcomplaint events.”).

Judge Koh’s holding is also consistent with the approach

to the Federal Rules of Civil Procedure taken by Judge Clark,

“the principal architect of the Federal Rules of Civil

Procedure.” Zahn v. International Paper Co., 414 U.S. 291,

297 (1973). Thus, in Hackner v. Guaranty Trust Co. of New

York, 117 F.2d 95 (2d Cir. 1941), the complaint was subject

to dismissal because the plaintiffs did not allege damages

sufficient to satisfy the minimum amount required to invoke

subject-matter jurisdiction on the basis of diversity of

citizenship. An amended complaint was then filed which

added a plaintiff, Eunice Eastman, whose alleged damages

were “well over the requirement.” Id. at 98. Speaking for the

Second Circuit, Judge Clark wrote that subject-matter

jurisdiction was proper notwithstanding the fact that it was

first established by the addition of Eastman as a plaintiff in

the amended complaint:

Since [Eastman] alleges grounds of suit in the

federal court, the only question is whether or

not she must begin a new suit again by

herself. Defendants’ claim that one cannot

amend a nonexistent action is purely formal,

in the light of the wide and flexible content

given to the concept of action under the new

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rules. Actually she has a claim for relief, an

action in that sense; as the Supreme Court has

pointed out, there is no particular magic in the

way it is instituted. So long as a defendant

has had service reasonably calculated to give

him actual notice of the proceedings, the

requirements of due process are satisfied. 

Hence no formidable obstacle to a

continuance of the suit appears here, whether

the matter is treated as one of amendment or

of power of the court to add or substitute

parties, Federal Rule 21, or of commencement

of a new action by filing a complaint with the

clerk, Rule 3. In any event we think this

action can continue with respect to Eastman

without the delay and expense of a new suit,

which at long last will merely bring the

parties to the point where they now are.

Id. (quotations and citations omitted); see also Fed. R. Civ. P.

1 (which provides that the Rules of Civil Procedure “should

be construed and administered to secure the just, speedy, and

inexpensive determination of every action and proceeding”).

Our dissenting colleague relies on Morongo Band of

Mission Indians v. California State Board of Equalization,

858 F.2d 1376 (9th Cir. 1988), for the proposition that “where

the district court does not have subject matter jurisdiction

over a matter at the time of filing, subsequent events do not

confer subject matter jurisdiction on the district court.” 

Dissent at 66–67. We find this argument inapposite because,

unlike the present case, Morongo did not involve a

supplemental pleading, much less one with allegations of

events that occurred after the commencement of the action.

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While Morongo does contain the broad statement that

“subject matter jurisdiction must exist as of the time the

action is commenced” and that a lack of subject-matter

jurisdiction at the outset cannot be cured subsequently, it is

now clear, if it was not then, that this rule is more nuanced

than the inflexibility suggested by its language—both as it

relates to curing jurisdictional defects through supplemental

pleadings, see, e.g., Matthews, 426 U.S. 67, and other

circumstances in which defects in subject-matter jurisdiction

were cured by the substitution, addition, or elimination of a

party, see, e.g. Newman-Green, Inc. v. Alfonzo-Larrain,

490 U.S. 826, 830 (1989); Mullaney v. Anderson, 342 U.S.

415 (1952); California Credit Union League v. City of

Anaheim, 190 F.3d 997, 1000 (9th Cir. 1999). Nevertheless,

we need not belabor this issue because, in order to decide this

case, it is enough to say that the rule as stated in Morongo

does not extend to supplemental pleadings filed pursuant to

Fed. R. Civ. P. 15(d).

The same is true of Righthaven LLC v. Hoehn, 716 F.3d

1166 (9th Cir. 2013), which the dissent relies on for the

“general principle that ‘jurisdiction is based on facts that exist

at the time of filing.’” Dissent at 66. Of course, a general

principle, which Righthaven observed was subject to at least

a few exceptions, is significantly different from the hard and

fast rule that the language in Morongo suggested. Indeed,

Righthaven acknowledged the possibility of additional

exceptions and left open the question of whether “permitting

standing based on a property interest acquired after filing”

should be added to the list of exceptions. Righthaven,

716 F.3d at 1171 (“We need not decide whether the

circumstances of this case call for a new exception to the

general rule, however, because Righthaven lacked standing

either way.”).

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Nor does the Supreme Court’s holding in Grupo Dataflux

v. Atlas Global Group, L.P., 541 U.S. 567 (2004), compel a

contrary result. There, diversity jurisdiction was lacking at

the time the lawsuit was commenced because the plaintiff

was a Texas-based limited partnership that included two

Mexican citizens as members and the defendant was a

Mexican corporation. Id. at 569. After a verdict was

rendered in favor of the plaintiff, the district court granted the

defendant’s motion to dismiss for lack of jurisdiction. Id. On

appeal, the plaintiff partnership argued that the Mexican

partners had left the partnership in a transaction

consummated the month before the trial began. Id. A sharply

divided Supreme Court held that this change in the

composition in the membership of the partnership was

insufficient to cure the initial jurisdictional defect. 

Specifically, it held that the time-of-filing rule “measures all

challenges to subject-matter jurisdiction premised upon

diversity of citizenship against the state of facts that existed

at the time of filing—whether the challenge be brought

shortly after filing, after trial, or even for the first time on

appeal.” Id. at 571. Moreover, notwithstanding significant

departures from the time-of-filing rule in diversity cases

where the parties have changed after the filing of the

complaint or on appeal, see Newman-Green, 490 U.S. at 830,

it declined to depart from this rule where the post-filing

change in circumstances “arose not from a change in the

parties to the action, but from the change in the citizenship of

a continuing party.” Grupo Dataflux, 541 U.S. at 575 (citing

Conolly v. Taylor, 27 U.S. 556 (1829)).

Nevertheless, we do not regard that holding as dispositive

here. First, the present case does not involve the issue of

diversity jurisdiction. See Connectu LLC v. Zuckerberg,

522 F.3d 82, 92 (1st Cir. 2008) (“While the Court [in Grupo

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Dataflux] relied upon the time-of-filing rule to thwart an

effort to manufacture diversity jurisdiction during the

pendency of an action, the decision operates exclusively in

the realm of diversity jurisdiction.”). More significantly,

unlike Grupo Dataflux, the present case involves the filing of

a supplemental pleading that became the operative pleading

in the case on which subject-matter jurisdiction must be

based.

Nor we do not see any consideration of policy that would

justify a rule, for which our dissenting colleague argues, that

a party such as Northstar must file a new complaint instead of

a supplemental pleading because of a post-complaint

assignment from a party that had standing. The dissent does

not dispute, nor can it, that the assignee of a cause of action

stands in the shoes of the assignor, Hoffeld v. United States,

186 U.S. 273, 276 (1902), and unquestionably has the same

standing to file a complaint that the assignor could have filed. 

Sprint Communications Co. v. APCC Services, 554 U.S. 269,

271 (2008). Indeed, the dissent concedes that “had Northstar

accepted the dismissal without prejudice and then filed a new

complaint after it obtained an assignment of rights, it would

have had standing and a personal stake in the outcome of this

litigation.” Dissent at 64 n.5 (emphasis in original).

A rule that would turn on the label attached to a pleading

is difficult for us to accept. As the Eleventh Circuit has

observed in a case in which an amended complaint contained

jurisdictional allegations that were based on post-complaint

events, “[e]xcept for the technical distinction between filing

a new complaint and filing an amended complaint, the case

would have been properly filed. . . . We therefore hold that

we have jurisdiction over this appeal and we will reach the

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merits.” M.G.B. Homes, Inc. v. Ameron Homes, Inc., 903

F.2d 1486 (11th Cir. 1990).

Perhaps reflecting sensitivity to having a case turn on the

technical distinction between a new complaint and a

supplemental pleading, the dissent suggests a policy reason

for the hypertechnical rule it advocates. Thus, it argues that

permitting a plaintiff to proceed by supplemental pleading

alleging a post-complaint assignment of the claim has adverse

practical effects. Dissent at 69. More specifically,

“[u]ninjured parties, particularly those in search of class

action lead plaintiff status, could sue first, then trawl for those

truly and timely injured. Today the majority green-lights

those who would race to the courthouse and bend Federal

Rules of Civil Procedure and Article III standing

requirements to gain an edge over other claimants who are

not as fleet of foot.” Id.

Under current law, however, the benefit that the dissent

suggests goes to the winner of the race to the courthouse does

not exist. Presumably, the dissent is referring to the fact that

counsel for the lead plaintiff becomes class counsel. In 2003,

however, Congress amended Fed. R. Civ. P. 23 to set out

discrete standards for the appointment of class counsel. Thus,

Rule 23(g) now provides that in appointing class counsel,

courts should consider: the work counsel has done in

identifying claims, counsel’s experience in such matters,

counsel’s knowledge of the applicable law, and the resources

that counsel will commit to representation. Fed. R. Civ. P.

23(g)(1)(A); Wright, Miller, & Kane, Federal Practice and

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Procedure: Civil 3d § 1802.3, pgs. 322–24.4 Under these

circumstances, it would be an abuse of discretion to appoint

an attorney as class counsel solely because he may have won

the race to the courthouse.

More significantly, the present case was not one in which

Northstar won a race to the courthouse and in which its

attorneys were appointed lead counsel for that reason. 

Indeed, by the time it obtained the assignment from Henry

Holz, over three months had passed since the complaint was

filed. This was more than enough time for a competing

plaintiff to file a complaint. No such complaint was filed. In

sum, whatever merit there may be to the dissent’s concern, it

is not present in this case and has been substantially

eliminated by the 2003 amendments to the Federal Rules of

Civil Procedure. Moreover, that a supplemental pleading can

only be filed with the permission of the district judge

provides additional protection against the misuse of the

pleading for strategic gamesmanship.

Thus, we agree that Judge Koh did not abuse her

discretion in permitting Northstar to file a supplemental

pleading after a post-complaint assignment from a party that

clearly had standing. See Northstar, 781 F. Supp. 2d at

931–33.

 

4

 Eight years before the amendment to Rule 23, although in a different

way, Congress eliminated the race to the courthouse in securities class

actions when it enacted the Private Litigation Securities Reform Act of

1995 (PLSRA). 15 U.S.C. § 77z-1(a)(3)(B)(iii); 15 U.S.C. § 78u4(a)(3)(B)(iii).

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II. Merits

Before we review each of Northstar’s claims, we give a

brief overview of the case, and explain how the various

claims relate to each other. We begin with the various

governing documents of the Fund to which we have already

made reference. The Agreement and Declaration of Trust,

and its bylaws, establish the Trust and govern its internal

affairs, and are governed by Massachusetts law. The Fund’s

prospectus is issued by the Schwab Advisor on behalf of the

Fund on an annual basis. The Statement of Additional

Information, or “SAI,” produced at the same time as the

prospectus, is made available to investors freely on demand,

although it does not need to be mailed to them automatically. 

See Glazer, Prospectus Disclosure and Delivery

Requirements, in Mutual Fund Regulation § 4:3.2 (citing Sec.

& Exch. Comm’n, Form N-1A at 7, available at

http://www.sec.gov/about/forms/formn-1a.pdf (last visited

Aug. 29, 2014)).

In 1997, a proxy statement was submitted to and approved

by the Fund’s investors. It included two relevant proposals

which we have already described in detail. Briefly, Proposal

2 stated that the Trust would “seek[] to track the investment

results of [the Lehman Index] through the use of an indexing

strategy.” Proposal 3 stated that the Trust would not invest

more than 25% of the Fund’s total assets in any industry. 

These fundamental investment objectives could be changed

only by shareholder vote. Subsequent registration statements

and prospectuses reflected these changes.

Northstar’s original complaint alleged four causes of

action arising from the Fund’s alleged violations of the

fundamental investment policies. First, Northstar claimed a

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private right of action under Section 13(a) of the Investment

Company Act. Second, Northstar alleged that all of the

defendants had breached their fiduciary duties to the

shareholders. Third, Northstar claimed that all of the

defendants had breached the contract between the investors

and the Fund, contained in the Fund’s prospectuses and its

1997 proxy statement. Finally, Northstar claimed that all of

the defendants had violated the implied covenant of good

faith and fair dealing.

On an interlocutoryappeal, we rejected Northstar’s theory

that it had a private right of action under the Investment

Company Act. Northstar Fin. Advisors, Inc. v. Schwab Invs.,

615 F.3d 1106 (9th Cir. 2010). Nevertheless, the district

judge had allowed Northstar to replead its state law claims,

specifying under which state’s law they were asserted and on

which documents they relied. Northstar Fin. Advisors, Inc.

v. Schwab Invs., 609 F. Supp. 2d 938, 945 (N.D. Cal. 2009).

Northstar then filed an amended complaint that left those

claims at risk of dismissal under the Securities Litigation

Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C.

§§ 77p, 78bb, because it contained allegations that suggested

that its claims were based on misrepresentations. SLUSA

bars certain state law class actions that allege “an untrue

statement or omission of a material fact [or] the use[] of any

manipulative or deceptive device or contrivance,”5

15 U.S.C.

 

5 The misrepresentation must also be “in connection with the purchase

or sale of a covered security.” There is no question that this class action

is “in connection with the purchase or sale” of a covered security, and the

district judge properly so concluded. Northstar, 781 F. Supp. 2d at 937;

see Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71,

86–87 (2006). As noted above, SLUSA does not apply if the action is

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§ 77p(b), unless the governing law is the law of the state that

has chartered or organized the entity issuing the securities. 

Id. § 77p(d)(1).

SLUSA operates “wherever deceptive statements or

conduct form the gravamen or essence of the claim.” 

Freeman Invs., LP v. Pac. Life Ins. Co., 704 F.3d 1110, 1115

(9th Cir. 2013). The district judge ruled that the “central

theme” of the Second Amended Complaint was that the

“defendants made misrepresentations about how investments

in the Fund would be managed.” Northstar, 781 F. Supp. 2d

at 934. In the district judge’s view, the crux of Northstar’s

case was that the defendants’ statements about how the

shareholders’ funds would be managed were false, or became

false when the Fund deviated from the index in 2007. Id. at

933–36. The district judge also noted that the Second

Amended Complaint contained one specific allegation that

the Trust gave a false explanation for why the Fund

underperformed its index in its May 2008 semi-annual report. 

Id. at 936; SAC ¶¶ 96–97. The district judge then dismissed

the contract claims, with prejudice, for failure to state a claim

on the ground that they were barred by SLUSA, and that they

failed to allege a contract between the shareholders and the

Fund. Northstar, 781 F. Supp. at 933–40. The district judge

also rejected Northstar’s breach of fiduciary duty causes of

action under SLUSA, but gave Northstar leave to replead

them under Massachusetts law. Id.

Northstar repled the fiduciary duty causes of action in its

Third Amended Complaint and also amended its allegations

in an effort to remove their supposed focus on

brought under the law of the state of the organizing entity. 15 U.S.C.

§ 77p(d).

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misrepresentations. Indeed, the Schwab defendants conceded

in their motion to dismiss the Third Amended Complaint that

“Northstar avoided SLUSA preemption for its fiduciary

breach claims by asserting them under Massachusetts law and

coming within the ‘Delaware carve-out’”—a term used to

describe an exception to SLUSA preemption if such a cause

of action is available under the law of the state that had

chartered or organized the entity issuing the securities. Def.

Mot. to Dismiss Third Am. Compl. 13 n.5; see 15 U.S.C.

§ 77p(d)(1); Madden v. Cowen &Co., 576 F.3d 957, 971 (9th

Cir. 2009). Nevertheless, the district judge held that the

fiduciary duty claims had to be brought derivatively, and

dismissed them. Northstar Fin. Advisors, Inc. v. Schwab

Invs., 807 F. Supp. 2d 871, 876–81 (N.D. Cal. 2011). The

district judge also held that Northstar could not assert a claim

as a third-party beneficiary of the Investment Advisory

Agreement. Id. at 881–84. Presumably because she had

dismissed the breach of contract cause of action in the Second

Amended Complaint with prejudice, she did not address

Northstar’s arguments as to these claims in the Third

Amended Complaint. Nor did the district judge decide

whether the allegations in the Third Amended Complaint

survived under SLUSA.

As we discuss in detail below, we reverse the district

court’s dismissal of the breach of contract claims for failure

to allege a contract between the shareholders and the Fund. 

We also reverse the district court’s dismissal of the fiduciary

duty and third-party beneficiary claims. We do not, however,

reach the question of whether any of Northstar’s claims are

barred by SLUSA. The district court has not yet had the need

to determine whether the allegations in the Third Amended

Complaint can survive under SLUSA, and should do so in the

first instance. See, e.g., Haskell v. Harris, 745 F.3d 1269,

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1271 (9th Cir. 2014) (“[W]e are a court of review, not first

view.”).

With this as a backdrop, we proceed to discuss the merits

of Northstar’s complaint.

A. Breach of Contract Claim

Northstar argues that, once the shareholders approved the

proposals regarding the fundamental investment objectives of

the Schwab Trust, which were described in the proxy

statement, the Schwab Trust was contractually obligated to

comply with them in managing the Fund. Moreover,

Northstar argues that the subsequent dissemination of the

fundamental investment objectives in the registration

statement and prospectuses formed a contract between the

Schwab Trust and the “existing investors [who] retained

shares and new investors [who] purchased shares in

consideration for Schwab’s contractual obligations.” 

Appellant’s Br. at 21; see also Appellant’s Reply Br. at 7 n.8.

The Restatement (Second) of Contracts provides that “[a]

promise may be stated in words either oral or written, or may

be inferred wholly or partly from conduct.” Restatement

(Second) of Contracts § 4 (1981). While contracts are often

spoken of as express or implied, “[t]he distinction involves

. . . no difference in legal effect, but lies merely in the mode

of manifesting assent.” Id. cmt. a. “Just as assent may be

manifested by words or other conduct, sometimes including

silence, so intention to make a promise may be manifested in

language or by implication from other circumstances,

including course of dealing or usage of trade or course of

performance.” Id. “The distinction between an express and

an implied contract, therefore, is of little importance, if it can

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be said to exist at all.” 1 Joseph M. Perillo, Corbin on

Contracts § 1.19 at 57 (rev. ed. 1993); see also 1 Richard A.

Lord, Williston on Contracts § 1:5 at 37–38 (4th ed. 2007)

(“An implied-in-fact contract requires proof of the same

elements necessary to evidence an express contract: mutual

assent or offer and acceptance, consideration, legal capacity

and a lawful subject matter.”).

While it is not necessary to characterize the contract here

as either express or implied, a particularly instructive

discussion of the concept of implied contracts, in

circumstances analogous to those present here, appears in

Trustees of Dartmouth College v. Woodward, 17 U.S.

(4 Wheat.) 518 (1819), one of the earliest cases applying

Article I, Section 10 of the Constitution, which provides that

“[n]o State shall . . . pass any . . . Law impairing the

Obligation of Contracts.” The case arose out of an effort by

the State of New Hampshire to alter the terms of a corporate

charter that had provided certain guarantees as to the structure

and governance of Dartmouth College. As Professor Tribe

succinctly describes it, the Supreme Court “held that New

Hampshire could not pack the Dartmouth College board of

trustees and alter its faculty so as to change the college into

a public institution in violation of its 1769 charter from

George III.” Laurence H. Tribe, American Constitutional

Law 614 (2d ed. 1988). Of particular relevance here is the

concurring opinion of Justice Story, who began his discussion

of this issue by describing the creation of the corporation and

the terms of its charter. Specifically, he observed:

The corporation was expressly created for the

purpose of distributing in perpetuity the

charitable donations of private benefactors. 

By the terms of the charter, the trustees, and

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their successors, in their corporate capacity,

were to receive, hold and exclusively manage

all the funds so contributed. The crown, then,

upon the face of the charter, pledged its faith

that the donations of private benefactors

should be perpetually devoted to their original

purposes, without any interference on its own

part, and should be for ever administered by

the trustees of the corporation, unless its

corporate franchises should be taken away by

due process of law.

Dartmouth College, 17 U.S. (4 Wheat.) at 689.

Justice Story then identified two implied contracts in this

circumstance. First, “there was an implied contract on the

part of the crown, with every benefactor, that if he would give

his money, it should be deemed a charity protected by the

charter, and be administered by the corporation, according to

the general law of the land. As, soon, then, as a donation was

made to the corporation, there was an implied contract . . .

that the crown would not revoke or alter the charter, or

change its administration, without the consent of the

corporation.” Id. Second, “[t]here was also an implied

contract between the corporation itself, and every benefactor,

upon a like consideration, that it would administer his bounty

according to the terms, and for the objects stipulated in the

charter.” Id. at 689–90.6

6

Justice Story’s opinion was a concurrence and was joined by Justice

Livingston. The opinion of the Court was written by Chief Justice

Marshall, who agreed that the charter constituted a contract. Id. at

643–44, 651.

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The fundamental investment objectives of the Schwab

Total Bond Market Fund can be analyzed in the same

manner. Indeed, when they were adopted by the

shareholders, they added a structural restriction on the power

conferred on the Trustees in the Agreement and Declaration

of Trust that can only be changed by a vote of the

shareholders. This created a “contract between the [Trustees

themselves], and every [investor]”—that the Schwab Trust

“would administer his [investment] according to the terms,

and for the objects stipulated in the” two restrictions adopted

by the shareholders of the Fund. Id. at 690–91. Significantly,

after the shareholders voted in favor of the proxy statement

that included these restrictions, they were subsequently

reflected in the Fund’s registration statements and

prospectuses. Thus, anyone who purchased shares in the

Fund after 1997, or held shares that he then owned, was

legally and contractually entitled to have his investment

managed in accordance with the proposals in the proxy

statement, unless the shareholders voted to permit otherwise.

The defendants argue that undertakings in SEC filings

themselves cannot reflect contractual obligations that can be

enforced in a suit for breach of contract. This argument

cannot be reconciled with Lapidus v. Hecht, 232 F.3d 679

(9th Cir. 2000), where the plaintiffs sought “to recover losses

sustained by the mutual funds as a result of short sales made

without shareholder approval, allegedly in violation of the

registration statement filed with the Securities and Exchange

Commission.” Id. at 680. Specifically, the defendant, a

Massachusetts business trust, had filed a “prospectus . . . with

the SEC [that] provided that the trust could engage in short

sales of securities with a value of up to 25% of the value of

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the mutual fund’s total assets.”7Id. at 681. The trust later

issued an amended prospectus which “authorized the trust to

enter into short sales of securities with a value of up to 40%

of the mutual fund’s total assets.” Id. Nevertheless, “[t]his

amendment to the short sales restriction was made without

shareholder approval” and, subsequently, “the mutual fund’s

short sale position had increased to 25–35% of the mutual

fund’s assets and the mutual fund suffered substantial losses.” 

Id.

On appeal, we addressed whether the plaintiffs could

bring their action for violations of the ICA directly against

the defendant or whether the action had to be brought

derivatively. We held that the Lapidus plaintiffs had

adequately alleged an injury “predicated upon a violation of

[the] shareholder’s voting rights,” id. at 683 (citing cases),

and that those “allegations are sufficient to satisfy the injury

requirement for a direct action under Massachusetts law,” id. 

Significantly, the violation held to be adequately alleged was

of the plaintiffs’ “contractual rights as shareholders to vote

on proposed changes to the short sale and senior security

restrictions.” Id. (emphasis added). These restrictions were

spelled out in the registration statement, id., and in the

“prospectus filed with the SEC,” id. at 681. Lapidus’s

holding is directly applicable here because Northstar’s breach

of contract cause of action rests on the deviation by

defendants from two fundamental investment objectives,

which required a shareholder vote to be changed, without first

7 A registration statement must “include[] the information required in a

Fund’s prospectus[.]” Sec. & Exch. Comm’n, Form N-1A at 7, available

at http://www.sec.gov/about/forms/formn-1a.pdf (last visited Aug. 29,

2013). Lapidus appears to use the terms “registration statement” and

“prospectus” interchangeably.

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obtaining shareholder approval. Until the fundamental

investment objectives were amended by shareholder vote, the

investors had a contractual right to have the Fund managed in

accordance with those objectives.8

McKesson HBOC, Inc. v. New York State Common

Retirement Fund, Inc., 339 F.3d 1087 (9th Cir. 2003), upon

which the district judge relied, does not support the

defendants’ argument. In that case:

McKesson HBOC [sued]its own shareholders

for unjust enrichment arising from a merger

between McKesson and HBO & Company

(“HBOC”). McKesson claim[ed] that the

former HBOC shareholders [we]re the

beneficiaries of a windfall triggered by

alleged accounting improprieties by HBOC. 

The shareholders, according to McKesson,

exchanged artificially inflated shares of

HBOC for fully-valued McKesson shares in

the merger transaction. McKesson [wanted]

to recover the excess value from the

shareholders.

Id. at 1089. McKesson sought recovery for unjust

enrichment, which was potentially available only if there was

no governing contract between the parties. Id. at 1089, 1091. 

While McKesson HBOC ultimately held that there was no

8 We rely on Lapidus at this juncture solely for its holding that

undertakings in SEC filings may give rise to an implied contractual

obligation. We discuss at pages 44 to 46 below, the effect of the holding

of Lapidus on whether an action for breach of contract and breach of

fiduciary duty may be brought directly.

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recovery for unjust enrichment, even if there were no

governing contract, it first addressed whether the Merger

Agreement or the relevant Proxy Statement/Prospectus

(“Prospectus”) was a contract that governed McKesson’s

claims against the shareholders.

First, McKesson HBOC held that “it is clear from the text

and the signatories to the agreement that the only parties to

the Merger Agreement were the corporations themselves.” 

Id. at 1091. Second, it held that “the Prospectus was not an

offer by McKesson to the HBOC shareholders to enter into a

bilateral contract separate and apart from the Merger

Agreement.” Id. at 1092. Specifically, McKesson HBOC

explained that, although the “Prospectus references the

Merger Agreement, advising shareholders that ‘[t]he merger

cannot be completed unless the stockholders of both

companies approve the merger agreement and the

transactions associated with it,’” such “references do not . . .

convert McKesson’s solicitation of the shareholders’ vote

into a contractual offer.” Id. Thus, McKesson HBOC

concluded that “the Prospectus did not serve as the basis for

a contract between McKesson and the shareholders.” Id. at

1093.

Significantly, McKesson HBOC distinguished the

scenario it addressed from a “tender offer situation, where the

courts have found a contract between the corporation and an

individual shareholder who tenders shares[.]” Id. at 1092; see

also 6A Fletcher Cyc. Corp. § 2841.10 at 358 (rev. ed. 2013)

(“A binding contract is created when the shareholder tenders

his or her securities in accordance with the terms of the

offer.”). Unlike a tender offer, “the shareholders [in

McKesson] did not tender their shares.” McKesson HBOC,

339 F.3d at 1092–93. Moreover, “shareholders who objected

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36 NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

to the merger could not separately opt out or contract out of

the merger. Individual shareholders were not in a position of

contracting with McKesson, and shareholder ratification did

not convert the Prospectus into a contract.” Id at 1093.

This case is clearly distinguishable from McKesson

HBOC. First, the parties to the contract at issue in this case

are the Trustees and the shareholders of the Fund. Second,

the breach of contract cause of action is predicated, in part, on

the approval of the fundamental investment objectives by the

shareholders. Once those objectives were adopted, they

significantly restricted the discretion which the Agreement

and Declaration of Trust conferred on the Schwab Trust to

manage the Fund. Moreover, the Fund’s registration

statement and prospectuses reflected the adoption of those

restrictions. The acquisition of the securities constituted an

acceptance of the offer.

Nor does In re Charles Schwab Corp. Securities

Litigation, No. C 08-01510 WHA, 2009 WL 1371409 (N.D.

Cal. May 15, 2009) [hereinafter “Charles Schwab”], on

which defendants rely, and which involved legal issues

comparable to this case, constitute persuasive authority to the

contrary. The district judge there first stated that “[t]he Ninth

Circuit has never addressed whether mutual fund disclosure

documents constitute a contract under these precise

circumstances.” Id. at *3. Nevertheless, as Lapidus makes

clear, this is not an accurate statement of Ninth Circuit law. 

See 232 F.3d at 683. Moreover, we do not find persuasive the

argument that Lapidus is distinguishable because it “did not

involve contract claims but rather statutory claims under the

[ICA.]” Charles Schwab, 2009 WL 1371409, at *5. The

plaintiffs’ ability in Lapidus to bring a direct action under the

ICA was based upon a breach of their “contractual rights as

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shareholders to vote on proposed changes to the short sale

and senior security restrictions[.]” Lapidus, 232 F.3d at 683. 

These contractual rights were derived from the registration

statement and the prospectus. Id. at 681, 683.

We find equally unpersuasive the argument that “the

prospectuses . . . here at issue are not contracts but rather are

mandatory regulatory disclosure documents.” Charles

Schwab, 2009 WL 1371409, at *3. The prospectus, which is

the primary selling document, offers to sell shares to

investors in a mutual fund which will invest the proceeds in

the manner described in the prospectus, unless shareholders

approve a proposal to do otherwise. Indeed, the Securities

and Exchange Commission urges investors to “request and

read the fund’s prospectus before making an investment

decision.” Mutual Fund Prospectus, Sec. & Exch. Comm’n,

http://www.sec.gov/answers/mfprospectustips.htm (last

visited Sept. 5, 2014). The mere fact that Congress has

chosen to ensure that investors are fully informed of the

fundamental investment objectives of mutual funds hardly

provides a license to ignore the objectives, enshrined by

shareholder approval, which a mutual fund has obligated

itself to pursue. Nor does it alter the fact that the purchase of

those shares constitutes an acceptance of the offer by the

investor. Indeed, as previously observed, this is precisely

how the shareholders became parties to the Agreement and

Declaration of Trust. Agreement and Declaration of Trust 4

(“Every Shareholder by virtue of having become a

Shareholder shall be held to have expressly assented and

agreed to the terms hereof and to have become a party

hereto.”).

Moreover, the district judge in Charles Schwab did not

cite any authority for his suggestion that a “mandatory

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regulatory disclosure document” cannot form the basis for an

implied contract. Lapidus holds otherwise and the district

judge in Charles Schwab acknowledged that, “in certain

circumstances prospectuses can constitute a contract.” 

Charles Schwab, 2009 WL 1371409, at *5. Indeed, even

before the enactment of the Securities Act of 1933, “the term

‘prospectus’ was well understood to refer to a document

soliciting the public to acquire securities from the issuer.” 

Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 575 (1995)

(citing Black’s Law Dictionary 959 (2d ed. 1910)).

In sum, we conclude that the mailing of the proxy

statement and the adoption of the two fundamental

investment policies after the shareholders voted to approve

them, and the annual representations by the Fund that it

would follow these policies are sufficient to form a contract

between the shareholders on the one hand and the Fund and

the Trust on the other. The Fund offered the shareholders the

right to invest on these terms, and the shareholders accepted

by so investing. The consideration for the contract was the

shareholders’ investment, or continued investment, in the

Fund, and the parties’ object was lawful. The conduct of the

parties thus fulfills all the requirements for a binding contract

under traditional common law principles. SeeLord, Williston

on Contracts § 1:5 at 37–38 (4th ed. 2007).

We are aware that Judge Koh held that, under the

particular circumstances of this case, Northstar failed to

successfully allege the formation and breach of a contract. 

781 F. Supp. 2d at 939. She reasoned that:

[A] September 1, 2006 Statement of

Additional Information was issued which

stated that the Fund would, from then on,

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cease to treat “mortgage-backed securities

issued by private lenders” as a separate

industry and therefore could invest more than

25% of the Fund’s assets in this area would

seem to defeat Plaintiffs’ contract claim. If

this became a term of the contract between

Plaintiffs and the Trust when investors held or

subsequently purchased shares, then the Trust

could not have breached this contract by overinvesting in MBS, as Plaintiffs claim.

Id. at 940.

We are not persuaded. Northstar alleged that the SAI’s

statement that “the funds have determined that mortgagebacked securities issued by private lenders are not part of any

industry for the purposes of the funds’ concentration

policies,” Northstar Fin. Advisors, Inc. v. Schwab Invs., No.

5:08-cv-04119-LHK (N.D. Cal.), Statement of Additional

Information (Sept. 1, 2006) at 8, Doc. No. 152-2, was an

improper attempt to circumvent the Fund’s concentration

policy that limited investment in one industry to 25% of its

assets because no vote was taken to approve it. This position

was supported by a complaint filed by the Securities and

Exchange Commission, which alleged “that the Schwab trust

deviated from its policy on concentration for the Schwab

Total Bond Market Fund . . . by deciding to not treat

mortgage-backed securities as an industry without

shareholder approval.” Appellees’ Br. 13 (citing SEC v.

Charles Schwab Inv. Mgmt. Inc., No. 11-cv-00136 (N.D.

Cal.), Compl. ¶¶ 24–28, Doc. No. 1).

Specifically, the SEC charged that before August 2006,

the 25% concentration policy stated that “[b]ased on

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40 NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

characteristics of mortgage-backed securities,[theTotalBond

Fund] has identified mortgage-backed securities issued by

private lenders and not guaranteed by the U.S. government

agencies or instrumentalities as a separate industry for

purposes of [the] fund’s concentration policy.” SEC v.

Charles Schwab Inv. Mgmt. Inc., No. 11-cv-00136 (N.D.

Cal.), Compl. ¶ 25, Doc. No. 1; see also Schwab Investments,

Statement of Additional Information (Form N-1A, Part B) 9

(Nov. 15, 2004). The position of the SEC was that, because

Schwab had identified mortgage-backed securities issued by

private lenders as an industry, “the Total Bond Fund could

not invest more than 25% of [its] assets in non-agency MBS

without obtaining shareholder approval under Section 13(a)”

of the ICA. SEC v. Charles Schwab Schwab Inv. Mgmt. Inc.,

No. 11-cv-00136 (N.D. Cal.), Compl. ¶ 25.

Judge Koh’s reliance on the September 1, 2006 SAI, even

if correct, overlooks the fact that the Fund’s concentration

policy was only one of the two fundamental investment

objectives from which the defendants could not depart

without shareholder approval. The primary violation was

“causing the Fund to deviate from its fundamental investment

objective to ‘seek to track the investment results’ of the

Lehman Brothers U.S. Aggregate Bond Index . . . ‘through

the use of an indexing strategy.’” The complaint then goes on

to allege that the “Fund also deviated from its stated

fundamental investment objective by investing more than

25% of its total assets in U.S. agency and non-agency

mortgage-backed securities and CMOs.”

The SAI did not provide any notice that the defendants

intended to depart from the first of the fundamental objectives

which obligated the Fund to “seek to track the investment

results” of the Lehman Index. Thus, even if Judge Koh was

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correct in her analysis with respect to the breach of the

second investment objective, as to which notice was provided

in the SAI, the complaint still sufficiently states a claim for

breach of contract. This is true with respect to those who

purchased before September 1, 2006 and held on to their

shares afterward, and those who purchased after that date.

Particularly as to those who purchased before September

1, 2006 and held onto their shares, we are not prepared to

assume that the SAI itself was sufficient to provide adequate

notice. An SAI, “affords the Fund an opportunity to expand

discussions of the matters described in the prospectus by

including additional information that the Fund believes may

be of interest to some investors.” Glazer, Prospectus

Disclosure and Delivery Requirements, in Mutual Fund

Regulation § 4:3.2 (quoting Sec. & Exch. Comm’n, Form N1A at 7, available at http://www.sec.gov/about/forms/formn1a.pdf (last visited Sept. 5, 2014)). “The SAI is not

automatically provided investors but must be available free of

charge upon request.” Id. Moreover, the SAI may be

specifically incorporated “by reference into the prospectus

without delivering the SAI with the prospectus.” Id.

§ 4:3.1[D]. While there may be sophisticated shareholders

who make the effort to ask for an SAI or read it with the care

necessary to digest the relevant parts of a long and

multifaceted document, we think it is reasonable to assume

that there are many ordinary shareholders who do not do so. 

Indeed, even if a mutual fund could alter a fundamental

investment objective by the vehicle of an SAI, it should

provide current shareholders with clear and unambiguous

notice of the alteration that it wishes to make.

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42 NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

B. Breach of Fiduciary Duty Claim

Northstar alleged that the Schwab defendants breached

their fiduciary duties by failing to ensure that the Fund was

managed in accordance with the fundamental investment

objectives and by changing the Fund’s fundamental

investment objectives without obtaining required shareholder

authorization. The district judge held that Northstar “failed

to successfully allege a breach of any duty owed directly to

Fund investors, and that these claims would have to be

asserted derivatively.” Northstar Fin. Advisors, Inc. v.

Schwab Invs., 807 F. Supp. 2d 871, 876 (N.D. Cal. 2011).

Defendants conceded at oral argument that the allegations

in the operative complaint are sufficient to state a cause of

action for breach of fiduciary duty. They argue, however,

that the Trustees did not owe a fiduciary duty to the

beneficiaries of the Schwab Trust—namely, the shareholders. 

Instead, they argue that because of the “close resemblance of

a mutual fund operated as a Massachusetts Business Trust to

a corporation,” the Trustees should be treated in the same

way as corporate directors, who “owe fiduciary duties to the

corporation rather than to its shareholders.” Appellees’ Br.

at 48. This argument provides the predicate for the claim that

Northstar was required to proceed by way of a derivative

action.

There are several deficiencies in this argument. First, it

simply ignores the plain terms of the Agreement and

Declaration of Trust.

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The document states expressly that:

the Trustees hereby declare that they will hold

all cash, securities and other assets, which

they may from time to time acquire in any

manner as Trustees hereunder IN TRUST to

manage and dispose of the same . . . for the

pro rata benefit of the holders from time to

time of Shares in this Trust.

Agreement and Declaration of Trust 1. We are not aware of

any Massachusetts case that holds that agreements of this

kind cannot be enforced directly by the beneficiaries of a

trust.

Second, the Supreme Judicial Court of Massachusetts has

held that “[i]t is axiomatic that the . . . trustees [stand] in a

fiduciary relationship to all the beneficiaries of the trust.” 

Fogelin v. Nordblom, 521 N.E.2d 1007, 1011 (Mass. 1988);

see also Dukeminier, Sitkoff & Lindgren, Wills, Trusts, and

Estates 556 (“In managing the portfolio, [the trustee] is

subject to a fiduciary obligation to” the investors in the

mutual fund); John H. Langbein, The Secret Life of the Trust:

The Trust as an Instrument of Commerce, 107 Yale L.J. 165,

166 (1997) (“The familiar standards of trust fiduciary law

protect trust beneficiaries of all sorts, regardless of whether

the trust implements a gift or a business deal (unless, of

course, the terms of the transaction expressly

contraindicate).”). While the Supreme Judicial Court of

Massachusetts has acknowledged similarities between

corporations and business trusts, it has held that business

trusts “are not corporations, nor are they entities apart from

the trustees.” Swartz v. Sher, 184 N.E.2d 51, 53 (1962). 

Under these circumstances, there is no logical basis for the

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argument that the trustees of a mutual fund organized as a

Massachusetts business trust owe a fiduciary duty to the trust,

rather than the shareholders, and that for this reason they are

limited to a derivative action on behalf of the trust.

Lapidus v. Hecht, 232 F.3d 679 (9th Cir. 2000), upon

which defendants rely, does not support their position. 

Lapidus involved two discrete claims of wrongdoing. The

first, which is comparable to the cause of action here, was

based on deviations from the investment objectives of the

mutual fund and the issuance of senior securities without

shareholder approval. Id. at 681 (citing 15 U.S.C. § 80a13(a)(2)–(3)). The second cause of action involved the

issuance of senior securities in violation of section 15 U.S.C.

§ 80a-18(f).

Lapidus first addressed the issue of whether a direct

action could be brought for the departure from the mutual

fund’s investment objectives and the issuance of senior

securities without shareholder approval. Lapidus, 232 F.3d

at 683. We held that, “[t]o bring a direct action under

Massachusetts law, a plaintiff must allege an injury distinct

from that suffered by shareholders generally or a wrong

involving one of his or her contractual rights, such as the

right to vote. Lapidus, 232 F.3d at 683 (emphasis added). 

We then went on to observe that the plaintiffs alleged

“violations of their contractual rights as shareholders to vote

on proposed changes to the short sale and senior security

restrictions.” Id. Such claims could be brought directly. Id.

Lapidus then addressed the second cause of action based

on “the allegedly improper issuance of senior securities,” id.

at 683, in violation of federal law, id. at 681 n.3. This action

could not be brought directly because it failed both parts of

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the disjunctive test. First, the injury was not distinct from the

injury to all shareholders holding the same series of stock

because the alleged improper “issuance of senior securities

. . . would be an injury to the trust generally.” Id. at 683. 

Second, the alleged improper issuance was “unconnected to

any violation of voting rights” or any other contractual right. 

Id.

The first prong of the test was applied with respect to both

causes of action in Lapidus, namely, that to bring a direct

action under Massachusetts/Delaware law, “a plaintiff must

allege an injury distinct from that suffered by shareholders

generally.” Id. We refer to “Massachusetts/Delaware” law

because Lapidus relied on two Delaware cases and one

Massachusetts case applying Delaware law for the

circumstances under which a direct action may be brought

“under Massachusetts law[.]” 232 F.3d at 683. The

Delaware law has since changed. Thus, in Tooley v.

Donaldson, Lufkin, &Jenrette, Inc., 845 A.2d 1031, 1036–39

(Del. 2004), the Supreme Court of Delaware rejected, as

“confusing,” the concept “that an action cannot be direct if all

stockholders are equally affected or unless the stockholder’s

injury is separate and distinct from that suffered by other

stockholders.” Id. at 1038–39.

Moreover, even if that prong survived the holding in

Tooley, a direct action in this case would be appropriate under

the second prong of the disjunctive test applied in Lapidus

because the plaintiffs allege “a wrong involving one of [their]

contractual rights as . . . shareholder[s].” 232 F.3d at 683. 

Northstar’s breach of contract cause of action rests on the

deviation by defendants from two fundamental investment

objectives, which required a shareholder vote change, without

first obtaining shareholder approval. The right to vote,

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however, is not the only contractual right at issue. Instead, it

is inextricably intertwined with the restrictions placed on the

power of the Trustees to invest the assets of the Fund. Until

the fundamental investment objectives were amended by

shareholder vote, the investors had a contractual right to have

the Fund managed in accordance with those objectives.

The third deficiency in defendants’ argument that this

action must be brought derivatively is that the distinction

between direct and derivative actions has little meaning in the

context of mutual funds, at least on the facts present here. A

publicly held corporation, in contrast to a mutual fund,

engages in a business, e.g., the buying and selling of widgets,

in which the accretion of share price is generally the byproduct of business success, and the depletion of share price

can be the by-product of either unsuccessful business

decisions or misconduct by fiduciaries. The particular facts

in the latter scenario will determine whether claims against

corporate officers are derivative or direct in nature (or both). 

See Tooley, 845 A.2d 1031. In a mutual fund, however, there

is no business other than acquiring investment instruments for

the purpose of increasing the net asset value “for the pro rata

benefit of the holders . . . of Shares in this Trust.” Agreement

and Declaration of Trust 1. Any decrease in a mutual fund’s

share price flows directly and immediately to the

shareholders. This is particularly true when such an injury

results from the failure to comply with a fund’s fundamental

investment objectives. Thus, such misconduct supports a

direct action.

There may be scenarios where a mutual fund trustee can

be sued only derivatively—for example, if he embezzles

assets held by the fund, the injury may be first to the mutual

fund and only secondarily to the investors in the fund. But

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that is not this case. Rather, this case alleges a failure to

follow trading restrictions, the very essence of the Fund’s

business, which, accepting the allegations as true, caused a

diminution in shareholder value. The claim supports a direct

action because the impact is directly on the investors in the

Fund and a recovery would not be dependent on

demonstrating an injury to the Schwab Trust. Cf. Tooley, 845

A.2d at 1039 (holding that a corporate stockholder who

brings a direct action “must demonstrate that the duty

breached was owed to the stockholder and that he or she can

prevail without showing an injury to the corporation”).

Even if we were to accept defendants’ attempt to

analogize the Fund to a publicly held corporation, their

argument that Northstar may only sue derivativelywould fail. 

Significantly, the Principles of Corporate Governance

promulgated by the American Law Institute (“ALI”)

recognize that in circumstances comparable to this case, a

direct action may be appropriate. Thus, in a comment to

§ 7.01, the section that is captioned “Direct and Derivative

Actions Distinguished,” the ALI observes:

In some instances, actions that essentially

involve the structural relationship of the

shareholder to the corporation (which thus

should be seen as direct actions) may also

give rise to a derivative action when the

corporation suffers or is threatened with a

loss. One example would be a case in which

a corporate official knowingly acts in a

manner that the certificate of incorporation

denied the official authority to do, thereby

violating both specific restraints imposed by

the shareholders and the official’s duty of

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care. In such cases, the plaintiff may opt to

plead either a direct or a derivative action, or

to bring both actions simultaneously, unless

the court finds that the plaintiff is unable to

provide fair and adequate representation

pursuant to § 7.02(a)(4) (Standing to

Commence and Maintain a Derivative

Action).

American Law Institute, Principles of Corporate Governance

§ 7.01, cmt. c (1994).9

The present case involves the same kind of structural

relationship of shareholders to the Schwab Trust that the

foregoing comment addresses. Of course, we deal here with

an agreement and declaration of trust rather than a certificate

of incorporation. The adoption by the shareholders of the

fundamental investment objectives of the Fund effectively

imposed a restraint on the structural relationship in the

9 The Chief Reporter’s foreword states that “Comments express the

views of the [American Law] Institute.” ALI, Principles of Corporate

Governance XXV. Section 7.01, to which this comment applies, has been

repeatedly cited with favor by the Supreme Court of Delaware. See

Tooley, 845 A.2d at 1036; Grimes v. Donald, 673 A.2d 1207 (Del. 1996),

overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del.

2000). Indeed, in Grimes, the Supreme Court of Delaware expressly cited

and applied the comment quoted above. Id. at 1213. While the present

case does not directly involve the application of Delaware law, Delaware

has been described aptly as “by far the most important corporate

jurisdiction[.]” Melvin Aron Eisenberg & James D. Cox, Corporations

and Other Business Organizations 1031 (10th ed. 2011). Indeed, as we

previously observed, in Lapidus we relied on two Delaware cases and one

Massachusetts case applying Delaware law for the circumstances under

which a direct action may be brought “under Massachusetts law[.]” 

232 F.3d at 683.

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Agreement and Declaration of Trust comparable to an

amendment of a certificate of incorporation. The allegations

in the complaint, although not in haec verba, are sufficient to

support an argument that the Trustees “violat[ed] both

specific restraints imposed by the shareholders and the

official[s’] duty of care.” ALI, Principles of Corporate

Governance § 7.01, cmt. c. Thus, even if the same rules that

apply to corporations are applied to the Schwab Trust, this is

the kind of case in which “the plaintiff may opt to plead either

a direct or a derivative action[.]” Id.

Moreover, there is another reason, directly rooted in

Massachusetts case law, which provides a basis for permitting

a direct action even against a corporation. While

Massachusetts cases generally preclude direct actions “where

corporate recovery for misdeeds by a corporate fiduciary is

available under traditional corporate law,” they contain the

significant caveat that “such recovery [must] provide[] a just

measure of relief to the complaining stockholder[.]” Crowley

v. Commc’ns for Hosps., Inc., 573 N.E.2d 996, 1004 (Mass.

App. Ct. 1991); see also Diamond v. Pappathanasi, 25 Mass.

L. Rptr. 500, 2009 WL 1539792, at *7 (Mass. Super. Ct.

2009) (“[S]hareholders may resort to a direct, personal action

against a miscreant fiduciary where . . . a corporate recovery

would not provide a just measure of relief to the complaining

shareholder.”). We have likewise acknowledged that, even

where corporate shareholders have been relegated to pursue

their claims in a derivative action, a direct action may be

appropriate to provide a remedy to shareholders who have

been injured and who would not recover under the traditional

rules governing derivative actions. See, e.g., Eagle v. Am.

Tel. & Tel. Co., 769 F.2d 541, 546 (9th Cir. 1985).

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This case is one in which a recovery by the Schwab Trust

“would not provide a just measure of relief to the

complaining shareholder.” Diamond, 2009 WL 1539792, at

*7. Any recovery in a derivative action would simply

increase the net asset value of the Fund at the time any

damages were recovered. Consequently, as defendants

conceded at oral argument, if a derivative suit is successfully

prosecuted, all current shareholders would participate in the

recovery by the Schwab Trust even if they were not

shareholders during the relevant time period, and injured

former shareholders would not necessarily participate in the

recovery at all.

Significantly, the remedy agreed to in an enforcement

action by the SEC avoids such “a[n] [un]just measure of relief

to the complaining [shareholders].” Crowley, 573 N.E.2d at

1004. The action, as we have previously observed, was based

on the allegation “that the Schwab Trust improperly deviated

from its policy on concentration for the [Fund] . . . by

deciding to not treat mortgage-backed securities as an

industry without shareholder approval.” Appellees’ Br. at 13

(citing SEC v. Charles Schwab Inv. Mgmt. Inc., No. 11-cv00136 (N.D. Cal.), Compl. ¶¶ 24–28, Doc. No. 1). A consent

judgment was entered requiring the Schwab Trust to disgorge

profits and prejudgment interest. Appellees’ Br. at 13–14

(citing SEC v. Charles Schwab Inv. Mgmt. Inc., No. 11-cv00136 (N.D. Cal.), Consent to Enter J. ¶ 2, Doc. No. 2). The

Schwab Trust, however, did not share in the recovery. 

Instead, the settlement proceeds were deposited by the

defendants into “a fund for distribution to adversely affected

investors, including investors in the [Fund.]” Appellees’ Br.

at 14 (citing SEC v. Charles Schwab Inv. Mgmt. Inc., No. 11-

cv-00136 (N.D. Cal.), Order Approving Distribution Plan

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with Modification, Doc. No. 37). This kind of remedy could

be obtained if this direct class action is successful.

Halebian v. Berv, 931 N.E.2d 986 (Mass. 2010), upon

which defendants rely, does not compel a contrary result. 

The defendants correctly argue that Halebian held, in an

appropriate case, a shareholder of a mutual fund may be

forced to resort to making a demand on the Trustees to file a

derivative action. Nevertheless, Halebian did not address the

circumstances under which such a course of action would be

required. Instead, it held that “the statute regulating

derivative actions [Mass. Gen. Laws ch. 156D, §§ 7.40–7.47]

applies to a shareholder bringing such a claim against a

corporation or a business trust.” Id. at 988 n.4. Because the

plaintiff had filed a derivative action, Halebian went on to

address the narrow issue of “whether the Legislature intended

that the provisions for dismissal under § 7.44 apply only to

derivative proceedings that are ‘commenced after rejection of

a demand,’ or to any derivative proceeding where a plaintiff

shareholder’s demand has been rejected by the corporation.” 

Id. at 989.

Moreover, the allegations in that case were quite unlike

the misconduct alleged here. In Halebian, the plaintiff

claimed that the trustees failed to engage in competitive

bidding in their selection of an investment adviser. Id. at 988. 

A derivative suit was arguably appropriate in the case

because the injury to the shareholders was the attenuated

result of an improper trust expenditure (the investment

adviser’s fee).

Nor are we persuaded by the policy arguments defendants

rely on to support treating this case as a derivative action. 

Defendants argue that “[b]yrequiring shareholders to demand

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52 NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

that a corporation bring a claim before filing a derivative

action, derivative action rules allow disinterested directors to

halt suits that are meritless or contrary to the corporation’s

interest and allow them to exercise their judgment and

oversee litigation in the best interest of the company.” 

Appellees’ Br. at 46–47 (citing Mass. Gen. Laws ch 156D,

§ 7.42; Daily Income Fund, 464 U.S. at 533; Halebian,

457 Mass. at 626). Moreover, they go on to argue that,

“applying derivative action rules in this context . . . ensures

that disinterested trustees remain primarily responsible for

management of a trust’s litigation.” Appellees’ Br. at 47. 

This argument is particularly unpersuasive in light of the

manner in which Massachusetts business trusts that operate

mutual funds conduct business. The Supreme Court has

recognized that mutual funds are “typically organized and

underwritten by the same firm that serves as the company’s

‘investment advisor.’” Kamen, 500 U.S. at 93. They are

essentially puppets of the investment adviser.

Moreover, although fund boards have been required to

include a percentage of independent directors, “the definition

of ‘independent’ is fairly loose when it comes to fund board

members[.]” Shipman, So Who Owns Your Mutual Fund?,

Wall St. J., May 5, 2003, at R1. As one commentator has

observed:

An independent director can’t be an employee

of the fund investment adviser or a member of

the immediate family of an employee. Other

restrictions also apply. But former employees

of the fund’s investment adviser or the

adviser’s affiliates are considered to be

independent when it comes to serving on a

fund board. So, for example, Joseph S.

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DiMartino, who was president of Dreyfus

Corp. for a dozen years before becoming

chairman of the fund boards for the Dreyfus

fund group, is considered an independent

director.

Id. Indeed, notwithstanding the requirement that a percentage

of the members of the mutual fund board be “independent”

from the adviser, Congress required that the shareholders of

the Fund annually approve the adviser contract. 15 U.S.C.

§ 80a-15. This requirement reflected the fact that the trustees

of a mutual fund “cannot seriously be expected to induce

arm’s-length bargaining. As the SEC long ago recognized,

any so-called independent directors would ‘obviously have to

be satisfactory to the dominating stockholders who are in a

position to continue to elect a responsive board.’” Fox,

692 F.2d at 259 (quoting In re Petroleum & Trading Corp.,

11 S.E.C. 389, 393 (1942)). Under these circumstances, it is

wrong to suggest that “applying derivative action rules in this

context . . . ensures that disinterested trustees remain

primarily responsible for management of a trust’s litigation.” 

Appellees’ Br. at 47. This is particularly true here because

one of the principal defendants, aside from the Trustees

themselves, is the Schwab Advisor.

There are, of course, other “reasons . . . commonly

advanced for distinguishing between a derivative action,

which is brought on the corporation’s behalf against either

corporate fiduciaries or third persons, and a direct action,

which is brought on a shareholder’s own behalf against either

corporate fiduciaries or the corporation itself.” Eisenberg &

Cox, Corporations and Other Business Organizations 1064. 

The first has been described as “theoretical: Since a

corporation is a legal person separate from its shareholders,

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an injury to the corporation is not an injury to its

shareholders. This proposition is somewhat dubious, because

every injury to a corporation must also have an impact,

however slight, on the shareholders as well.” Id. The other,

and more compelling, reasons of policy are summed up in

Watson v. Button as follows: “(1) to avoid a multiplicity of

suits by each injured shareholder, (2) to protect the corporate

creditors, and (3) to protect all the stockholders since a

corporate recovery benefits all equally.” 235 F.2d 235, 237

(9th Cir. 1956); see also Eisenberg & Cox, Corporations and

Other Business Organizations 1064. Significantly, two of

these three policy objectives, which defendants also put

forward here, are ameliorated by the very nature of the class

action, which is designed to avoid a multiplicity of suits by

shareholders and which contain procedural mechanisms to

ensure that all members of the class are treated equally. 

Moreover, to the extent that one of the reasons for favoring a

derivative suit is a concern for the protection of creditors, it

is enough to say here that the defendants do not argue that the

concern is at issue in this case.

C. Third-Party Beneficiary Breach of Contract Claims

The Schwab Trust entered into an agreement with the

Schwab Advisor to serve as its investment adviser and

administrator of the Fund. The Schwab Advisor expressly

agreed to “use the same skill and care in providing such

services as it would use in providing services to fiduciary

accounts if it had investment responsibilities for such

accounts.” The principal duty of the Schwab Advisor, as

prescribed in the IAA with the Schwab Trust, was to

“determine from time to time what securities and other

investments [would] be purchased, retained, or sold by the

[Fund].” This agreement with the Schwab Advisor was

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expressly approved by the shareholders of the Fund. 

Northstar alleges that the Schwab Advisor breached the IAA

by managing the Fund in a manner inconsistent with the

Fund’s fundamental investment objectives, and that the

shareholders may hold the Schwab Advisor liable for such a

breach as third-party beneficiaries of the IAA.

The IAA expressly states that it “shall be governed by the

laws of the State of California.” Under California Civil Code

§ 1559, a critical element of a third-party cause of action is a

showing that the contract was “made expressly for the benefit

of a third person.” The phrase, however, has been held not to

mean “exclusively,” Hartman Ranch Co. v. Associated Oil

Co., 73 P.2d 1163, 1170 (Cal. 1937), “solely,” Le Ballister v.

Redwood Theatres, Inc., 36 P.2d 827, 827 (Cal. Dist. Ct. App.

1934), or “primar[il]y,” Montgomery v. Dorn, 145 P. 148,

151 (Cal. Dist. Ct. App. 1914), for the benefit of a third

person. Similarly, the term has been construed not to require

that performance be rendered “directly” to the beneficiary,

Lucas v. Hamm, 364 P.2d 685, 688 (Cal. 1961), or that the

beneficiarybe specificallynamed or identified in the contract,

Garratt v. Baker, 56 P.2d 225, 226 (Cal. 1936).

“Consequently, its connotative meaning having been

destroyed by judicial interpretation, the term ‘expressly’ has

now come to mean merely the negative of ‘incidentally.’” 

Kay S. Bruce, Martinez v. Socoma Companies: Problems in

Determining Contract Beneficiaries’ Rights, 27 Hastings L.

J. 137, 149 (1975) (footnotes omitted). Indeed, the Supreme

Court of California has explicitly held that “[t]he effect of the

section is to exclude enforcement by persons who are only

incidentally or remotely benefited.” Lucas, 364 P.2d at 689;

see also Spinks v. Equity Residential Briarwood Apartments,

90 Cal. Rptr. 3d 453, 468 (Ct. App. 2009); Judith M. Kline &

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56 NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

Brent A. Olson, California Business Law Deskbook § 8:28

(2012).

Under these circumstances, the critical issue is

“‘[w]hether the third party is an intended beneficiary.’” 

Balsam v. Tucows Inc., 627 F.3d 1158, 1161 (9th Cir. 2010)

(quoting Prouty v. Gores Tech. Grp., 18 Cal. Rptr. 3d 178,

184 (Ct. App. 2004)). The resolution of this issue, in turn,

“‘involves construction of the intention of the parties,

gathered from reading the contract as a whole in light of the

circumstances under which it was entered.’” Id. (quoting

Prouty, 18 Cal. Rptr. 3d at 184); Restatement (Second) of

Contracts § 302, reporter’s note (“A court in determining the

parties’ intention should consider the circumstances

surrounding the transaction as well as the actual language of

the contract.” (citing cases)). “Insofar as intent to benefit a

third person is important in determining his right to bring an

action under a contract, it is sufficient that the promisor must

have understood that the promisee had such intent.” Lucas,

364 P.2d at 689.

Northstar has adequately alleged an “intent to benefit a

third person.” Northstar has also plausibly alleged that the

Schwab Advisor understood that it was the intent of the

Schwab Trust to benefit the shareholders of the Fund. 

Moreover, compelling evidence lending plausibility to the

third-party beneficiary cause of action, based on the premise

that the shareholders are intended beneficiaries of the IAA, is

that Congress has required “that the contract between the

adviser and the company be approved by a majority of the

company’s shareholders.” Kamen, 500 U.S. at 93 (citing

15 U.S.C. § 80a-15(a)); see also Navellier v. Sletten, 262 F.3d

923, 944 (9th Cir. 2001); David A. Sturms & Renee M.

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Hardt, Regulation of the Advisory Contract, in Mutual Fund

Regulation § 6:2.2 (Clifford E. Kirsch ed., 2d ed. 2005).

Thus, the agreement between the Schwab Trust and the

Schwab Advisor explicitly provides “that it has been

approved by a vote of a majority of the outstanding voting

securities of such Schwab Fund, in accordance with the

requirements under the [ICA].” This suffices to establish that

the shareholders have more than a “remote” relationship to

the contract between the Schwab Trust and the Schwab

Advisor. Rather, it indicates the direct relationship that the

shareholders have with the IAA and the fact that they are the

actual beneficiaries of the IAA. Indeed, as we have held, the

requirement for shareholder approval, which is imposed by

the ICA, “reflect[s] the judgment of Congress that

stockholders of the investment company have a substantial

interest in evaluating the new owners of an investment

manager.” Zell v. InterCapital Income Sec., Inc., 675 F.2d

1041, 1047 (9th Cir. 1982) (citing 15 U.S.C. § 80a-15(a)(4)).

The sufficiency of the complaint is also supported by a

number of California cases. Specifically,in Gilbert Financial

Corp. v. Steelform Contracting Co., 145 Cal. Rptr. 448 (Ct.

App. 1978), the plaintiff, a property owner, entered into a

contract with a general contractor for the construction of a

building. The general contractor subcontracted work to the

defendant. The California Court of Appeal held that the

plaintiff was an intended beneficiary of the subcontract

between the general contractor and the defendant, even

though the plaintiff was not specifically named. Id. at 450. 

Indeed, the allegations in the complaint demonstrated that the

subcontractor had, in effect, assumed the role of the general

contractor to provide construction services for the plaintiff,

such that the plaintiff was the “ultimate beneficiary” of the

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contract between the subcontractor and the general contractor. 

Id. at 451.

Applying the reasoning of Gilbert, the Fund’s

shareholders are comparable to the property owners, the

Schwab Trust is comparable to the general contractor, and the

Schwab Advisor is comparable to the subcontractor. The

Schwab Trust engaged the Schwab Advisor to manage and

operate the Fund in accordance with the fundamental

investment objectives that the shareholders had adopted. In

this situation, the Schwab Advisor’s management of the Fund

directly affected whether the Fund achieved its stated goal of

tracking the Lehman Index. Thus, the “ultimate beneficiary”

of the Schwab Advisor’s contractual duties were the

shareholders.

A more recent case, Spinks v. Equity Residential

Briarwood Apartments, 90 Cal. Rptr. 3d 453 (Ct. App. 2009),

is similarly analogous. In Spinks, an employer had contracted

with a landlord to provide housing for an employee. 

Sometime thereafter, the employer terminated the employee

and directed the landlord to change the locks on the

employee’s apartment, which the landlord did. The employee

brought suit against the landlord as a third-party beneficiary

of the contract between the employer and the landlord. The

California Court of Appeal held that the employee had

adequately alleged that she was an intended third-party

beneficiary. See id. at 475. In so holding, the court noted

that “the most basic aspect of [the landlord’s] performance is

its obligation to supply [the employer] with a place for its

staff to live.” Id. at 472. In the present case, “the most basic

aspect” of the Schwab Advisor’s performance—properly

managing the Fund—is for the benefit of the shareholders.

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Nor does the fact that the IAA contained an inurement

clause providing that it “shall be binding upon and shall inure

to the benefit of the parties hereto and their respective

successors,” preclude a third-party beneficiary action in the

context of this case. The defendants cite cases holding that,

because the parties specified one particular beneficiary in the

contract, other beneficiaries are excluded. These cases are

not dispositive. The cases upon which the defendants rely do

not speak to this issue or are not controlling. For instance,

Klamath Water Users Protective Ass’n v. Patterson, 204 F.3d

1206 (9th Cir. 1999), involved a governmental contract, not

a private contract. “Parties that benefit from a government

contract are generally assumed to be incidental beneficiaries,

and may not enforce the contract absent a clear intent to the

contrary.” Id. at 1211. Arista Films, Inc. Emp. Profit

Sharing Plan v. Gilford Sec., Inc., 51 Cal. Rptr. 2d 35 (Ct.

App. 1996), the only California case the defendants cite,

concerned an arbitration contract, where the “overwhelming

weight of authority” was against third-partyenforcement, and

which was governed by New York law, not California law. 

Id. at 38.

The other cases on which the defendants rely are all from

courts outside California and this circuit. At this stage in the

case—a motion to dismiss—we follow those courts that have

ruled that any weight that should be given to an inurement

clause is outweighed by the other evidence of the parties’

intent. E.g., Anwar v. Fairfield Greenwich Ltd., 728 F. Supp.

2d 372, 430 (S.D.N.Y. 2010); see also Solid Host, NL v.

Namecheap, Inc., 652 F. Supp. 2d 1092, 1119 (C.D. Cal

2009) (“Because they involve factual questions of intent,

third party beneficiary claims are often not appropriate for

resolution via motion to dismiss.”).

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Under California law, as the district judge recognized, a

plaintiff may be a third-party beneficiary of a contract if he

alleges that he is a member of a class named or referred to in

the contract, or if the contract discharges a contractual duty

owed to the plaintiff. Northstar, 781 F. Supp. 2d at 942–43. 

We hold, contrary to the district judge, that Northstar has

adequately alleged the existence of a contract between the

Trust and the investors. Northstar has also alleged that the

IAA was designed to discharge the Trust’s duties to the

shareholders under this contract. Therefore, Northstar’s

allegations that the shareholders are third-party beneficiaries

of the IAA survive the motion to dismiss.10

Therefore, we hold that Northstar’s allegations that the

shareholders are third-party beneficiaries of the IAA survive

the motion to dismiss.

CONCLUSION

To summarize:

1. We hold that by filing a supplemental pleading alleging

a post-complaint assignment from a party that clearly had

standing, Northstar has standing to prosecute this case.

2. We reverse the district judge’s dismissal of Northstar’s

breach of contract claim and hold that Northstar

 

10 The district judge found that the Fund investors were “not explicitly

mention[ed]” in the IAA. Northstar, 807 F. Supp. 2d at 884. This is

incorrect: under Section 3 of the IAA, the Schwab Advisor explicitly

contracted to “prepare the Trust’s Annual and Semi-Annual Reports to

Shareholders.” We do not, however, rest our conclusion that Northstar

has adequately alleged that the shareholders are third-party beneficiaries

of the IAA on this one reference.

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adequately alleged the formation of a contract between

the investors and the Schwab Trust.

3. We vacate the district judge’s dismissal of the fiduciary

duty claims and remand for the district judge to “address

the other arguments raised by the parties regarding

[Northstar’s] claims for breach of fiduciary duty[.]” 

Northstar, 807 F. Supp. 2d at 881.

4. We reverse the district judge’s dismissal of Northstar’s

third-party beneficiary breach of contract claim and hold

that Northstar adequately alleged that the investors are

third-party beneficiaries of the IAA.

5. We decline to address the effect of SLUSA on the various

common law causes of action. We leave that to the

district court in the first instance. 

REVERSED in part, VACATED in part, and

REMANDED.

BEA, Circuit Judge, dissenting:

When Northstar Financial Advisors, Inc. (“Northstar”)

commenced this action by filing its complaint, it did not own,

nor had it ever owned any Schwab Total Bond Market fund

(“Fund”) shares. Likewise, at the commencement of this

action, Northstar did not own any claims of anyone who had

owned any of such shares during the period when the

defendants are alleged improperly to have lowered the share

value of the Fund.

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Hence, when Northstar sued for damages on its own

behalf and for those of the class of share owners Northstar

sought to represent in this class action, Northstar itself had

not suffered any losses, nor did Northstar own any claims of

others who had suffered losses the defendants had allegedly

caused. Last, no other person who claimed to have been

injured by defendants joined Northstar as plaintiff.

Defendants moved to dismiss Northstar’s complaint for

lack of standing, because Northstar failed to allege it had

suffered an injury in fact.1 Northstar had no “case or

controversy” within the meaning of Article III of the

Constitution.2

The district court quite properly granted defendants’

motion and dismissed the complaint without prejudice,3but

1 A party seeking to invoke a federal court’s jurisdiction must

demonstrate three things: (1) an “injury in fact,” which is an invasion of

a legally protected interest that is “(a) concrete and particularized, and

(b) actual or imminent, not conjectural or hypothetical”; (2) a causal

relationship between the injury and the challenged conduct, such that the

injury can be fairly traced to the challenged action of the defendant and

not from the independent action of some third party not before the court;

and (3) a likelihood that the injury will be redressed by a favorable

decision. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61 (1992)

(internal quotations and citations omitted).

2 Cetacean Cmty. v. Bush, 386 F.3d 1169, 1174 (9th Cir. 2004) (“A suit

brought by a plaintiff without Article III standing is not a ‘case or

controversy,’ and an Article III federal court therefore lacks subject matter

jurisdiction over the suit.”).

3 An argument can be made that leave to amend was permissibly granted

because it was possible that the lack of allegations constituting standing

had been an oversight. However, even that argument is foreclosed in this

circuit. “If jurisdiction is lacking at the outset, [a] district court has no

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then quite misguidedly suggested that through an amended

complaint, Northstar could remedy its lack of standing by an

assignment of rights from a person who had been a Fund

shareholder during the period when defendants allegedly

injured the Fund’s shareholders. More than three months

later, Northstar found Henry Holz, a man who had indeed

owned Fund shares during the period in question. Holz could

claim injury in fact; he did have standing to sue. But for

reasons best known to himself, he chose neither to sue nor to

join Northstar’s action. Northstar procured an assignment of

Holz’s claims against defendants.

Northstar then filed an amended complaint that alleged

Holz’s assignment of claims to Northstar. Defendants again

moved to dismiss on the ground that Northstar still had not

alleged facts sufficient to establish Northstar’s standing to

sue, only to have the district court deny the motion upon an

original—but nonetheless erroneous—theory. The district

court noted that “in light of [the] previous holding that [an]

assignment [of claims] would cure the [Northstar’s] lack of

standing, and direction to the [Northstar] to file an amended

complaint based on the assignment, it would be unfair to

[Northstar] to punish them for relying on the [prior district

judge’s]specific instructions.” Northstar, 781 F. Supp. 2d at

power to do anything with the case except dismiss.” Morongo Band of

Mission Indians v. Cal. State Bd. of Equalization, 858 F.2d 1376, 1380

(9thCir. 1988) (internal quotations and citations omitted). Therefore, “[i]f

jurisdiction was lacking, then [a] court’s various orders, including that

granting leave to amend the complaint, were nullities.” Id. at 1381. This

circuit has recognized no exceptions to Morongo for the retroactive cure

of lack of standing through a supplemental pleading of post-complaint

events.

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932.4 Of course, if this notion of “unfairness” were the law,

parties benefitted by erroneous rulings of district courts and

who took action in reliance on such erroneous rulings could

not be made to give up those benefits.

Thankfully, there is no exception to the requirement of

standing based on earlier district court error.5

It is not

 

4

 By then the case was reassigned to another district court judge.

5

“Unfairness” based on reliance on an erroneous earlier district court

ruling might be grounds for certain relief, such as tolling of a deadline. 

See Smith v. Ratelle, 323 F.3d 813, 819 (9th Cir. 2003) (“[W]e have

recognized that a district court’s erroneous dismissal of a mixed habeas

petition is sufficiently extraordinary to justify equitable tolling.”). But

when a judge blows a call on standing, the error creates jurisdiction where

the law does not, and notions of “fairness” clash with constitutional

requirements. The requirement of standing ensures that courts “limit

federal jurisdiction to those cases in which an adversarial setting is

guaranteed by the parties’ ‘personal stake’ in the outcome of the

litigation.” LaDuke v. Nelson, 762 F.2d 1318, 1322–23 (9th Cir. 1985)

(citing Warth v. Seldin, 422 U.S. 490, 498 (1975)). Requiring that a

plaintiff have an actual injury in fact “tends to assure that the legal

questions presented to the court will be resolved, not in the rarified

atmosphere of a debating society, but in a concrete factual context

conducive to a realistic appreciation of the consequences of judicial

action.” Valley Forge Christian College v. Americans United for

Separation of Church and State, Inc., 454 U.S. 464, 472 (1982). Of

course, had Northstar accepted the dismissal without prejudice and then

filed a new complaint after it obtained an assignment of rights, it would

have had standing and a personal stake in the outcome of this litigation. 

The ease with which Northstar could have obtained standing makes its

actions puzzling at first blush. However, had Northstar so refiled, it would

also have risked its position as the first to have filed as representative of

a class of plaintiffs. Any perceived impracticality of requiring Northstar

to adhere to the most basic of our Constitution’s standing requirements

should not vitiate the need to do so. See Sprint Commc’ns. Co. L.P, v.

APCC Servs., 554 U.S. 269, 305 (2008) (Roberts, C.J., dissenting) (“The

Court chooses to elevate expediency above the strictures imposed by the

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“unfair” to lose a meritless point won earlier before an erring

judge. What is “unfair” is not to apply the correct law. Here,

both district court judges erred. Because Northstar failed to

allege facts sufficient to constitute standing to sue in its

complaint, the district court originally lacked subject matter

jurisdiction. See Cetacean Cmty. v. Bush, 386 F.3d 1169,

1174 (9th Cir. 2004). It was not even permissible to grant

leave to amend to see if the standing defect could somehow

be remedied. See Footnote 3, supra. But even if permissible,

an amendment to allege an assignment of rights which took

place over three months after the action was commenced was

useless to allege the standing Northstar needed to commence

the action in the first place. Morongo Band of Mission

Indians v. Cal. State Bd. of Equalization, 858 F.2d 1376,

1381 (9th Cir. 1988) (citing Mollan v. Torrance, 22 U.S. 537,

539 (1824) (jurisdiction “depends upon the state of things at

the time of the action brought”); Nuclear Eng’g Co. v. Scott,

660 F.2d 241, 248 (7th Cir. 1981) (“Jurisdictional questions

are answered by reference to the time of the filing of an

action . . . .”); Mobil Oil Corp. v. Kelley, 493 F.2d 784, 786

(5th Cir. 1974) (jurisdiction “is determined at the outset of the

suit”)). To determine federal court jurisdiction, “we look to

the original, rather than to the amended[] complaint.” Id.

The first district court judge did not have jurisdiction to

grant leave to amend, and the second judge could not—out of

considerations of “fairness”—allow an amendment or a

supplement to an original complaint of which the district

court had no subject matter jurisdiction.

Constitution. That is a tradeoff the Constitution does not allow. . . . [T]he

ease with which [plaintiff] can comply with the requirements of Article III

is not a reason to abandon our precedents; it is a reason to adhere to

them.”).

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The majority and the district court opinion examine the

law of other circuits “because there is no published Ninth

Circuit authority” as to whether “parties may cure standing

deficiencies through supplemental pleadings.” Northstar,

781 F. Supp. 2d at 933. In dicta,6this court reiterated the

general principle that “jurisdiction is based on facts that exist

at the time of filing” and noted that the “Supreme Court has

enunciated few exceptions to this general principle. . . . So

far, permitting standing based on a property interest acquired

after filing is not one of them.” Righthaven, LLC v. Hoehn,

716 F.3d 1166, 1171 (9th Cir. 2013).7

In any event, even if

this panel were not bound by the dicta of Righthaven,

Morongo is dispositive: where the district court does not have

subject matter jurisdiction over a matter at the time of filing,

subsequent events do not confer subject matter jurisdiction on

6 This court is bound by its own reasoned dicta. United States v.

Johnson, 256 F.3d 895, 914 (9th Cir.2001) (en banc). Righthaven’s dicta

fits this requirement.

7

In Righthaven, a media company and publisher, Stephens Media LLC,

assigned its right to sue for infringement of copyright to Righthaven LLC. 

716 F.3d 1166, 1168 (9th Cir. 2013). Righthaven then sued two website

operators for displaying content of which Stephens Media was the original

copyright owner. Id. Defendants filed motions to dismiss for lack of

standing, asserting that Righthaven did not have standing to sue because

Stephens Media had assigned only a bare right to sue. Under circuit law,

assignment of the bare right to sue without the transfer of an associated

exclusive right did not confer standing to sue on Righthaven. Id. at

1168–69. Before the district court ruled on the motions to dismiss,

Righthaven and Stephens Media executed a “clarification and

amendment” to the prior assignment that purported to convey all

ownership rights to Righthaven. Id. at 1169. The district court granted

the motions to dismiss. Id. On appeal, we affirmed because Righthaven

did not have standing to sue at the time of filing, and its subsequent

clarification and amendment did not include terms sufficient to convey an

exclusive copyright. Id. at 1171.

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the district court. The district court has jurisdiction only to

dismiss the complaint.8

Nevertheless, the majority cites to limited exceptions

where courts have allowed the cure of jurisdictional defects

other than standing through additional pleadings. In short,

the district court and the majority argue that if a supplemental

pleading can cure defects in the original complaint, and if that

supplemental pleading can be tacked onto the original

complaint, then Northstar would retroactively have standing

as of its original complaint, even though “subject-matter

jurisdiction depends on the state of things at the time of the

action brought.” Rockwell Intern. Corp. v. U.S., 549 U.S.

457, 473 (2007) (internal quotations and citation omitted). 

This argument misses one crucial point: “[t]he state of things

and the originally alleged state of things are not

synonymous.” Id. Therefore, even if our circuit allowed

supplemental pleadings to cure standing deficiencies, those

supplemental pleadings must allege facts necessary to

establish standing only as those facts existed at the time of the

original complaint. This is not a novel concept in our circuit. 

See Wilbur v. Locke, 423 F.3d 1101 (9th Cir. 2005),

abrogated on other grounds by Levin v. Commerce Energy,

Inc., 560 U.S. 413 (2010) (“[S]tanding is determined as of the

date of the filing of the complaint . . . . [t]he party invoking

the jurisdiction of the court cannot rely on events that

unfolded after the filing of the complaint to establish its

standing.”) (internal quotations and citation omitted). In

other words, even though “a party [may]serve a supplemental

pleading setting out any transaction, occurrence, or event that

 

8

 Rather than extend the length of this dissent, I recommend the reader

simply read the opinions in Morongo and Righthaven, should he have any

doubt as to their applicability.

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68 NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

happened after the date of the pleading to be supplemented,”

Fed. R. Civ. P. 15(d) (emphasis added), the facts which

establish a party’s standing must have existed when the

original complaint was filed. Thus a Fed. R. Civ. P. 15(d)

supplemental pleading cannot validly allege post-complaint

transactions to cure a lack of standing.

9,10

If all an uninjured party need do to get around pesky

Article III standing requirements is to file a complaint, then

ask for liberal leave to supplement under Fed. R. Civ. P.

15(d) to allege after-acquired rights of those who were timely

injured, the long-standing general rule which requires injury9 Of course, I do not dispute that plaintiffs may cure various

jurisdictional defects—other than standing—through additional pleadings

that allege relevant post-complaint events and conditions. The majority

cites to several such instances (none of which are decisions from our

circuit, and none of which allowed the retroactive cure of lack of

allegations of injury-in-fact through a supplemental pleading alleging a

post-complaint injury in fact). See e.g., Newman-Green Inc. v. AlfonzoLarrain, 490 U.S. 826, 831–38 (1989) (the Court held that an appellate

court may drop a non-diverse defendant—under Fed. R. Civ. P. 21—to

preserve diversity jurisdiction over the claims of a plaintiff who suffered

injury-in-fact before the original complaint was filed); Prasco, LLC v.

Medicis Pharm. Corp., 537 F.3d 1329, 1335–37 (Fed. Cir. 2008) (the

Federal Circuit cited its own precedent that allows courts to look at “facts

existing at the time the complaint under consideration was filed” (internal

quotations and citation omitted) (emphasis in original)).

10 Because I would dismiss for lack of standing, I—like the

majority—express no views as to whether the Securities Litigation

Uniform Standards Act would preempt Northstar’s claim. I also express

no views on the claims based on breach of contract, breach of fiduciary

obligations, or other claimed grounds of relief. See Righthaven, 716 F.3d

at 1773.

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NORTHSTAR FIN. ADVISORS V. SCHWAB INV. 69

in-fact at commencement of the action for standing to exist

quickly would lose all force. Uninjured parties, particularly

those in search of class action lead plaintiff status, could sue

first, then trawl for those truly and timely injured. Today the

majority green-lights those who would race to the courthouse

and bend Federal Rules of Civil Procedure and Article III

standing requirements to gain an edge over other claimants

who are not as fleet of foot. I respectfully dissent.

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