Court Opinion

ID: 612519
Source: CourtListenerOpinion
Date Created: 2011-08-24 20:50:42+00
Date Added: 2024-06-11T17:50:20.316180
License: Public Domain

FILED
                           NOT FOR PUBLICATION                              AUG 24 2011

                                                                        MOLLY C. DWYER, CLERK
                    UNITED STATES COURT OF APPEALS                       U .S. C O U R T OF APPE ALS

                            FOR THE NINTH CIRCUIT

RODNEY T. JELINEK, as trustee of the             No. 10-55221
David L. Caplan Revocable Trust; et al.,
                                                 D.C. No. 2:04-cv-05593-GAF-
             Plaintiffs - Appellants,            RNB

  v.
                                                 MEMORANDUM *
CAPITAL RESEARCH AND
MANAGEMENT CO.; AMERICAN
FUNDS DISTRIBUTORS, INC.,

             Defendants - Appellees.

                    Appeal from the United States District Court
                       for the Central District of California
                     Gary A. Feess, District Judge, Presiding

                        Argued and Submitted June 10, 2011
                               Pasadena, California

Before: B. FLETCHER, and N.R. SMITH, Circuit Judges, and BREWSTER,
District Judge.**

        *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
       **
             The Honorable Rudi M. Brewster, Senior United States District Judge
for the Southern District of California, sitting by designation.
      Appellants appeal the district court’s judgment, following a bench trial,

holding that the mutual fund investors failed to prove the Appellees breached the

fiduciary duty imposed by § 36(b) of the Investment Company Act of 1940. 15

U.S.C. § 80a-35(b) (hereinafter “the Act”). We affirm in large part for the reasons

stated in the district court’s comprehensive order.1

      A. Issues of Law

      The district court carefully applied the authoritative legal standard to

determine if Appellees violated their fiduciary duty. The district court correctly

applied the factors set forth in Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694

F.2d 923 (2d Cir. 1982). Three months after the district court filed its order, the

United States Supreme Court adopted the Gartenberg legal standard. Jones v.

Harris Assocs. L.P., 130 S. Ct. 1418, 1430 (2010). Thus, we do not need to

remand the action for further proceedings in light of the recent Jones decision.

      1
       The district court issued a 24-page minute order setting forth its general
conclusions in a “Statement of Intended Decision.” Appellees then prepared
proposed findings of fact and conclusions of law, with citations to exhibits and trial
testimony; Appellants filed objections; and, finally, the district court issued a final
order. Thus, Appellants are mistaken when they claim the Appellees wrote the
order with the exception of the preamble. This is not a case in which a trial judge
“mechanically adopted” verbatim findings that had been written by the victor. Cf.
Indus. Bldg. Materials, Inc. v. Interchem. Corp., 437 F.2d 1336, 1339-40 (9th Cir.
1970).

                                          -2-
      The Act, Jones, and Gartenberg all require the court to calibrate the degree

of deference afforded the independent directors’ expertise based on the care and

conscientiousness with which they performed their duties. 15 U.S.C. § 80a-

35(b)(2) (“approval by the board of directors . . . shall be given such consideration

by the court as is deemed appropriate under all the circumstances”); Jones, 130 S.

Ct. at 1429; Gartenberg, 694 F.2d at 930. Here, the district court meticulously

applied the proper standard to the case. The district court criticized the

independent directors for “papering the file,” and, as a result, gave their approval

less deference than it would have given if they had diligently performed their

“watchdog” role. The district court’s findings are not internally inconsistent, but

instead reflect the district court’s correct conclusion that the lack of directors’

conscientiousness was “not sufficient to rebut the substantial evidence that overall

the conduct of the directors met the Gartenberg standard,” and that “based on the

entirety of the record before it, that the Unaffiliated Directors carefully and

diligently exercised their responsibility in approving the fees at issue.”

      The district court also properly evaluated the other relevant factors to

determine that Appellees’ fees were not “so disproportionately large” that they

bore “no reasonable relationship to services rendered.” Gartenberg, 694 F.2d at

928-30; accord Jones, 130 S. Ct. at 1426-27 & n.5.

                                           -3-
      We agree with Appellants, however, that the Act encompasses a claim that a

fiduciary may breach its duty by improperly using fees. The Act imposes a

fiduciary duty “with respect to the receipt of compensation for services, or of

payments of a material nature,” and permits a claim “concerning such

compensation or payments.” 15 U.S.C. § 80a-35(b). This language is broad

enough to permit a plaintiff to sue on a theory that fees were used for improper

purposes. See Forsythe v. Sun Life Fin., Inc., 417 F. Supp. 2d 100, 115-16 (D.

Mass. 2006); Siemers v. Wells Fargo & Co., 2006 WL 2355411 (N.D. Cal. 2006);

but see In Re Eaton Vance Mutual Funds Fee Litig., 380 F. Supp. 2d 222, 237

(S.D.N.Y. 2005), aff’d sub nom, Bellikoff v. Eaton Vance Corp., 481 F.3d 110,

117-18 (2d Cir. 2007).

      Here, however, Appellants did not attempt to show that Appellees misused

the fees or that the mutual funds did not benefit from the services provided by

those fees. Instead, Appellants relied on the theory that fees were used to promote

growth that was adversely affecting the mutual funds. The district court rejected

this theory. On the facts presented at trial, we affirm the district court’s conclusion

that Appellants did not prove a breach of fiduciary duty by improperly using fees.

      B. Issues of Fact

                                          -4-
      Appellants fail to show that any of the district court’s fact findings are

“clearly erroneous.” Fed. R. Civ. P. 52(a)(6); Anderson v. Bessemer City, 470 U.S.

564, 573-75 (1985); United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009)

(en banc). The district court thoroughly discussed the relevant factors and

carefully examined the voluminous documents, extensive testimony, and

conflicting expert opinions before making detailed and eminently plausible

findings of fact. The district court stated clear and coherent reasons for relying on

the testimony of Appellees’ expert witnesses as credible and persuasive. Beech

Aircraft Corp. v. United States, 51 F.3d 834, 838 (9th Cir. 1995).

      C. Discovery Issues

      Appellants challenge two discovery orders – the first by the district court

and the second by the magistrate judge – denying their motions to compel.

      “‘[B]road discretion is vested in the trial court to permit or deny discovery,

and its decision to deny discovery will not be disturbed except upon the clearest

showing that denial of discovery results in actual and substantial prejudice to the

complaining litigant.’” Hallett v. Morgan, 296 F.3d 732, 751 (9th Cir. 2002)

(citations omitted).

      While we might have handled the discovery request for information

regarding employee-level compensation and profit sharing data differently, the

                                          -5-
district court did not abuse its broad discretion. Moreover, Appellants have not

established prejudice from the denial of their motion to compel because they

sought evidence that would not have altered the outcome. Appellants had the

information on a macro-level, including the total sum of the fees collected, the

amount the investment advisor retained, and the amounts passed to the subsidiaries

and brokers. The result of the bench trial would have been the same if Appellants

had presented that same basic information in a different form, i.e., on the micro-

level of each individual’s compensation.

      As to the second discovery order, Appellants “forfeited [their] right to

appellate review of that order” because they did not file an objection to the

magistrate judge’s discovery ruling with the district judge as required by Federal

Rule of Civil Procedure 72(a). Simpson v. Lear Astronics Corp., 77 F.3d 1170,

1174 (9th Cir. 1996) (footnote omitted). In any event, the magistrate judge did not

abuse his broad discretion in denying the motion to compel Appellees’ outside

accountant, a non-party, to produce its work papers. Appellants had the raw data

from the Appellees and they did not allege the audit was improper.

      AFFIRMED.

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