Court Opinion

ID: 8916017
Source: CourtListenerOpinion
Date Created: 2022-11-27 05:04:23.813862+00
Date Added: 2024-06-11T17:08:59.728550
License: Public Domain

GIBBONS, Circuit Judge,
dissenting.
This is an appeal from a judgment dismissing a multi-count complaint by a shareholder of a money market fund for failure to comply with the demand requirement of Rule 23.1 of the Federal Rules of Civil Procedure.1 I agree with the majority that the district court properly dismissed all causes of action pleaded in the complaint except that based upon section 36(b) of the Investment Company Act of 19402 (ICA). As to that claim I would reverse.
I.
Plaintiff Melvyn I. Weiss, custodian for his son, Gary M. Weiss, is a shareholder of the Temporary Investment Fund, Inc. (Fund), a no-load, open end, diversified investment company, or “money market fund.” In 1980, Weiss brought a shareholder’s derivative suit against the Fund, the Provident Institutional Management Corp. (Provident), which acts as the Fund’s investment adviser, Shearson Loeb Rhoades, Inc. (Shearson), the Fund’s underwriter which also performs administrative duties for the Fund, and seven directors of the Fund. Weiss alleges that Provident and Shearson breached their fiduciary duties under section 36(b) of the ICA by receiving excessive and unreasonable compensation for management services. Weiss further alleges that the various defendants participated in or acquiesced in various breaches of fiduciary obligations owed the Fund and in violations of the Securities Exchange Act of 1934,3 the Banking Act of 1933,4 the ICA5 and the common law. The complaint acknowledges that no demand was made on the directors of the Fund to bring a similar action but alleges that such a demand would be futile. The district court, however, concluded that the plaintiff’s failure to make such a demand pursuant to Rule 23.1 was fatal to the action, and dismissed it.6 Subsequently, Weiss filed a motion for reargument requesting that the court grant him leave to file an amended complaint after making a demand on the directors. He also asked the court to reconsider its determination of non-compliance with Rule 23.1. The district court refused to reconsider, or to grant leave to make a demand.
II.
Rule 23.1 of the Federal Rules of Civil Procedure specifies several pleading requirements “[i]n a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it ...” Fed.R.Civ.P. 23.1. Among those requirements is that of pleading that a demand has been made on the directors to enforce a right which the corporation may properly assert.7 Rule 23.1 finds its genesis in Equity Rule 94, 104 U.S. IX (Jan. 23, *9451882), which adopted as an Equity Rule the Supreme Court’s holding in Hawes v. Oakland, 104 U.S. 450, 26 L.Ed. 827 (1881).8 The Court in Hawes stated that
before the shareholder is permitted in his own name to institute and conduct a litigation which usually belongs to the corporation, he should show to the satisfaction of the court that he has exhausted all the means within his reach to obtain, within the corporation itself, the redress of his grievances, or action in conformity to his wishes. He must make an earnest, not a simulated effort, with the managing body of the corporation, to induce remedial action on their part, and this must be made apparent to the court.
104 U.S. at 460-61. This judicially-created demand requirement has survived with slight modification in Rule 23.1. Hawes was decided, and Equity Rule 94 was promulgated, during the regime of Swift v. Tyson, 41 U.S. (1 Pet.) 1, 10 L.Ed. 865 (1842), when federal courts were free to establish their own equitable remedial jurisprudence. See Judiciary Act of 1789, ch. 20, § 11, 1 Stat. 926; Process Act of May 8, 1792, ch. 36, § 2,1 Stat. 276 (1850). There was, therefore, no need to decide whether Equity Rule 94, with its demand requirement, was substantive law or merely a procedural provision.
Two developments changed that indifference. One was the 1938 merger of law and equity. The other was the Supreme Court’s decision in Guaranty Trust Co. v. York, 326 U.S. 99, 65 S.Ct. 1464, 89 L.Ed. 2079 (1945), applying the Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), choice of law to prevent the application of a federal equitable remedial rule in a diversity case. In light of that holding, the procedural or substantive character of the demand requirement of Rule 23.1 becomes important.
It is clear that Congress did not deal with the Erie choice of law question with respect to Rule 23.1. The Federal Rules of Civil Procedure were promulgated by the Supreme Court on December 20, 1937 and reported to Congress on January 3, 1938. Erie v. Tompkins was argued to the Court on January 31, 1938, and was decided in April 1938. Congress adjourned on June 16, 1938 and the Rules took effect September 16, 1938. That chronology of events makes it. highly unlikely that Congress examined the remedial versus procedural aspects of the demand clause in Rule 23.1. The origins of Rule 23.1 are of little help, since, as indicated above, the question in 1882 of whether Rule 23.1 was procedural or substantive need not have been asked. We are left, therefore, with the task of construing a Federal Rule of Civil Procedure in such a manner as to ensure its validity in actions involving state law claims. See, e.g., Hanna v. Plumer, 380 U.S. 460, 85 S.Ct. 1136, 14 L.Ed.2d 8 (1965).
This court has held that a plaintiff-shareholder’s obligation to make a demand on the corporate directors before pursuing a derivative claim is inextricably linked to the state law business judgment rule. Cramer v. GTE Corp., 582 F.2d 259, 274 (3d Cir. 1978), cert. denied, 439 U.S. 1129, 99 S.Ct. 1048, 59 L.Ed.2d 90 (1979). “Once the shareholder has made a demand upon the directors, the directors are then able to determine whether in their opinion a suit on behalf of the corporation would comport with the best interests of the corporation.” Id. at 275. The directors can pursue remedies alternative to litigation, can terminate meritless causes of action, and can determine whether litigation cost and other adverse effects on business relationships with potential defendants would outweigh any potential recovery from the lawsuit. The directors’ decision to allow suit or not is *946insulated from judicial review by the business judgment rule. The rule is a substantive one, intended to enforce the elected management’s responsibility for operating the corporation, while insulating it from liability for good faith mistakes made while performing its duties. See Briggs v. Spaulding, 141 U.S. 132, 146-148, 11 S.Ct. 924, 928-29, 35 L.Ed. 662 (1891).
Subsequent to our decision in Cramer v. GTE Corp., 582 F.2d 259, the Supreme Court had occasion to make explicit what was implicit in the Cramer discussion; that the substantive business judgment rule is a rule of state, not federal law. In Burks v. Lasker, 441 U.S. 471, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979), the Court considered whether state or federal law governs the power of a corporation’s directors to terminate a derivative suit, and ruled:
We hold today that federal courts should apply state law governing the authority of independent directors to discontinue derivative suits to the extent such law is consistent with the policies of the [federal statutes relied upon].
Id. at 486, 99 S.Ct. at 1841.
It is clear, then, that the business judgment rule which Rule 23.1 enforces is not a product of federal substantive law. If the rule is to be considered valid under Erie, it must now be regarded as the procedural means whereby federal courts ensure that the underlying substantive state law business judgment rule is implemented. The Rule 23.1 demand requirement is, therefore, a procedural device that since Erie is animated by the existence of an underlying substantive content. As a necessary corollary, if it is determined that for a given cause of action the directors do not have the substantive power under the relevant law to prevent or to terminate the derivative action, then the demand requirement of Rule 23.1 is not activated since its application would serve no meaningful purpose. A fortiori, if the cause of action is one which the corporation could not bring on its own behalf, Rule 23.1 cannot apply. This is plain from the text of the rule, and would be required as a matter of choice of law in any event.
The issue, thus, is the choice of law to be made in determining whether the underlying cause of action admits to the application of a state law business judgment rule which a Rule 23.1 demand would effectuate. In diversity cases or for pendent state law claims, the relevant substantive law is constitutionally mandated to be state law and, hence, a Rule 23.1 demand requirement is always triggered by the state business judgment rule. In non-diversity cases, Erie is of no relevance with respect to the elements of the cause of action. Yet as the Supreme Court makes clear in Burks v. Lasker, 441 U.S. 471, 99 S.Ct. 1831, 60 L.Ed.2d 404, federal courts ordinarily look to state corporate law for the existence of an applicable business judgment rule. The federal courts’ adoption of state corporate law when deciding the scope of the corporate directors’ powers to terminate or to prevent derivative suits is merely a rule of statutory construction. It is based on a judicial determination that Congress in creating federal causes of action does so against a background of state corporate law to which federal courts must refer even though the cause of action is based on federal law. See Burks v. Lasker, 441 U.S. at 478-79, 99 S.Ct. at 1837; see also Johnson v. Railway Express Agency, 421 U.S. 454, 465, 95 S.Ct. 1716, 1722, 44 L.Ed.2d 295 (1975). That general proposition is qualified, however, by the requirement that the state may not contravene the policies of the federal law with respect to which the business judgment question arises. See, e.g., Burks v. Lasker, 441 U.S. at 478-79, 99 S.Ct. at 1837. The demand requirement under Rule 23.1 is applicable even to federal causes of action because the state law business judgment rule applies unless the relevant federal law preempts exercise of business judgment. A demand is required only if the corporation may assert the cause of action relied upon, and the substantive law giving rise to the cause of action permits the directors to terminate it in the exercise of their business judgment.
III.
For all causes of action asserted by Weiss except that under section 36(b) of the ICA, *947a demand is required because they depend on state law, or on non-preemptive federal law, and the directors may exercise business judgment to take over or to terminate the claim. Of course, the business judgment rule is inapplicable, as a matter of state law, where the directors’ judgment is not in good faith, is the product of self-dealing or • is made under the influence of persons suspected of wrongdoing. Moreover, the directors’ discretion is not unbounded, and courts may examine their action to determine whether it is within the permissible bounds of that discretion.
Weiss urges that for all counts a demand on the Fund directors should be excused as futile. Like the majority, I am unconvinced. We previously stated that:
The Supreme Court and, following it, the Courts of Appeals have repeatedly stated and applied the doctrine that a stockholder’s derivative action, whether involving corporate refusal to bring anti-trust suits or some other controversial decision concerning the conduct of corporate affairs, can be maintained only if the stockholder shall allege and prove that the directors of the corporation are personally involved or interested in the alleged wrongdoing in a way calculated to impair their exercise of business judgment on behalf of the corporation, or that their refusal to sue reflects bad faith or breach of trust in some other way.
Landy v. FDIC, 486 F.2d 139, 149 (3d Cir. 1973), cert. denied, 416 U.S. 960, 94 S.Ct. 1979, 40 L.Ed.2d 312 (1974), quoting Ash v. International Business Machines, Inc., 353 F.2d 491, 493 (3d Cir.1965), cert. denied, 384 U.S. 927, 86 S.Ct., 1446, 16 L.Ed.2d 531 (1966). Weiss’ allegations do not, however, state with particularity reasons why the directors would not be able properly to make the choice whether to sue. “Instead of being ‘a statement of appropriate and convincing facts’ that a demand would have been futile, [plaintiff’s allegations constitute] merely a vague, conclusory statement.” Landy v. FDIC, 486 F.2d at 148 (citation omitted). Thus I agree that the district court did not err in dismissing those state law and federal law claims as to which the state law business judgment rule clearly applies.
IV.
Whether Rule 23.1 applies to a claim asserted under section 36(b) of the ICA depends on (1) whether such a claim is one belonging to the corporation, and (2) if it is, whether it is one as to which the state law business judgment rule may as a matter of federal substantive law apply. Section 36(b) is part of a group of amendments, enacted in 1970, to the Investment Company Act of 1940. Congress decided that mutual funds deserved special regulation because:
Mutual funds, with rare exception, are not operated by their own employees. Most funds are formed, sold, and managed by external organizations, that are separately owned and operated. These separate organizations are usually called investment advisers. The advisers select the funds’ investments and operate their businesses. For these services they receive management or advisory fees.
Because of the unique structure of this industry the relationship between mutual funds and their investment adviser is not the same as that usually existing between buyers and sellers or in conventional corporate relationships. Since a typical fund is organized by its investment adviser which provides it with almost all management services and because its shares are bought by investors who rely on that service, a mutual fund cannot, as a practical matter sever its relationship with the adviser. Therefore, the forces of arm’s-length bargaining do not work in the mutual fund industry in the same manner as they do in other sectors of the American economy.
S.Rep. No. 184, 91st Cong., 2d Sess. 5, reprinted in 1970 U.S.Code Cong. & Ad.News 4897, 4901.
The primary method by which Congress sought to control the peculiar problems of *948mutual funds was the requirement that at least forty percent of fund directors be independent. These “unaffiliated” directors are given the main burden of supervising the management and the finances of the fund. See Burks v. Lasker, 441 U.S. at 482-83, 99 S.Ct. at 1839-40. In certain areas of the funds’ dealings, however, Congress did not leave matters to final resolution by the unaffiliated directors. Rather, it mandated alternative forms of regulation. One area of special concern is the compensation paid by a mutual fund to its adviser. The Senate Report vividly points up that concern:
In the case of management fees, the committee believes that the unique structure of mutual funds has made it difficult for the courts to apply traditional fiduciary standards in considering questions concerning management fees.
Therefore your committee has adopted the basic principle that, in view of the potential conflicts of interest involved in the setting of these fees, there should be effective means for the courts to act where mutual fund shareholders or the SEC believe there has been a breach of fiduciary duty. This bill would make it clear that, as a matter of Federal law, the investment adviser or mutual fund management company has a fiduciary duty with respect to mutual fund shareholders. It provides an effective method whereby the courts can determine whether there has been a breach of this duty by the adviser or by certain other persons with respect to their compensation from the fund.
S.Rep. No. 184, 91st Cong., 2d Sess. 2, reprinted in 1970 U.S.Code Cong. & Ad.News 4897, 4898 (emphasis added). Referring to what is now section 36(b), the Senate Report observes:
This section is not intended to authorize a court to substitute its business judgment for that of the mutual fund’s board of directors in the area of management fees. It does, however, authorize the court to determine whether the investment adviser has committed a breach of fiduciary duty in determining or receiving the fee.
>Je >fs sfc % s}c #
Directors of the fund, including the independent directors, have an important role in the management fee area. A responsible determination regarding the management fee by the directors including a majority of disinterested directors is not to be ignored. While the ultimate responsibility for the decision in determining whether the fiduciary duty has been breached rests with the court, approval of the management fee by the directors and shareholder ratification is to be given such weight as the court deems appropriate in the circumstances of a particular case.
* * * j}c s}:
Under this proposed legislation either the SEC or a shareholder may sue in court on a complaint that a mutual fund's management fees involve a breach of fiduciary duty.
Id. at 4902-03 (emphasis added). This report plainly discloses that while the court must afford deference to the views of fund directors, the ultimate responsibility for deciding whether the fees are so high as to be regarded as a breach of fiduciary duty is judicial. Nowhere in the legislative history of section 36 is there any suggestion that fund directors — even unaffiliated directors — can seek such a judicial determination. Only the SEC and shareholders are indicated. With that illuminating legislative history in mind we turn to the statute as enacted.
Prior to 1970, section 36 of the ICA authorized the SEC to seek an injunction barring persons in a fiduciary relationship to a fund from acting in such capacity if they were in the five years prior to the action guilty of “gross misconduct or gross abuse of trust.” Investment Companies Act of 1940, Pub.L. No. 76-768, § 36, 54 Stat. 841 (1940). No other relief was authorized. In 1970 section 36 was amended to eliminate the “gross misconduct or gross abuse of trust” standard so as to authorize an SEC suit if the fiduciary “has engaged ... or is about to engage in any act or practice con*949stituting a breach of fiduciary duty involving personal misconduct in respect of any registered investment company.... ” 15 U.S.C. § 80a-35(a) (1976). The relief available in an SEC suit was also enlarged so as to permit not only orders barring future participation as a fiduciary, but also “such injunctive or other relief against such person as may be reasonable in the circumstances .... ”
At the same time an entirely new remedy, dealing specifically with adviser compensation, was added in a new subsection 36(b).9 It authorizes an action “by the Commission, or by a security holder of such registered investment company, against such investment adviser, ... for breach of a fiduciary duty in respect of ... compensation. ...” 15 U.S.C. § 80a-35(b) (1976).
There are several significant features to the 1970 amendment to section 36. In the 1940 Act, the section dealt only with SEC enforcement, and the sole remedy was to bar the offender from the investment company industry. Section 36 created no cause of action, express or implied, in favor of a fund. The 1970 amendments both carried forward and broadened the SEC enforcement powers in section 36(a). Plainly the “other relief” available under that section would include an accounting which would inure to the benefit of a defrauded fund— not to the SEC. Yet there is no suggestion that the fund could plead a cause of action for the same relief which would be available under section 36(a) in an action by the SEC. As Judge Tyler observed:
section 36(a) of the Investment Company Act, 15 U.S.C. § 80a-35(a), authorizes the *950SEC to bring actions against certain individuals or companies for breaches of fiduciary duty involving personal misconduct. Section 36(a), however, authorizes an action by the SEC, not by private individuals. Although this should not be read to prohibit suits by individuals when other sections of the Investment Company Act are violated, when only a general breach of fiduciary duty is alleged, a private suit should more properly be brought in state court.
Monheit v. Carter, 376 F.Supp. 334, 342 (S.D.N.Y.1974). A section 36(a) action by the SEC may be considered “derivative” in the sense that it may right a wrong committed against a fund, and may even obtain relief in favor of a fund, but it certainly is not “derivative” in the sense that the section 36(a) cause of action belongs to the fund in the first instance. It is only to such a cause of action that Rule 23.1 has any application.
Turning to the new cause of action created in section 36(b) with respect to adviser compensation, we cannot, in determining legislative intention, overlook the significant fact that Congress chose to house it not in a separate provision, but as an amendment to a section which from the beginning dealt with public rather than private enforcement. While subsection 36(b) does not say in as many words “a state law business judgment rule cannot terminate an action under this section,” permitting the directors of a fund to exercise business judgment in order to prevent an SEC action would be inconsistent with the provision that
[i]n any such action approval by the board of directors of such investment company of such compensation or payments ... and ratification or approval of such compensation or payments . .. shall be given such consideration by the court as is deemed appropriate under all the circumstances.
15 U.S.C. § 80a-35(b)(2) (1976). Whereas under the typical state law business judgment rule the disinterested directors’ decision exercised in good faith binds the court, under section 36(b) the court must make an independent judgment. Moreover, no distinction is made, in this respect, between an action brought by the SEC and one brought by a shareholder. It seems to me, therefore, that by creating the SEC cause of action and the shareholder action in the same sentence, and housing both in a section of the ICA which historically dealt with public rather than private enforcement, Congress disclosed a rather clear intention that the stockholder action be a variety of private attorney general action, i.e., outside the control of the fund’s directors. That intention is strongly confirmed by the excerpts from the Senate Report quoted above. It is confirmed, moreover, by the absence of any provision in section 36(a) or (b) for a cause of action by the fund itself.
The majority concludes, despite the absence of any provision in section 36 for a suit by the fund, that the cause of action does belong to the fund, and thus falls within the terms of Rule 23.1. To affirm, the majority must make this assertion, for if the security holders’ cause of action is not one which the fund could assert, it is not derivative, at least not in the sense of Rule 23.1. The majority, however, points to no legislative history suggesting that the fund can bring a section 36(b) suit. I do not believe the omission of a provision for suits by the fund itself was inadvertent. If the fund were authorized to sue, a litigated or, more significantly, a consent judgment would raise serious questions of the preclusive effect of the judgment on any subsequent action by the SEC or a shareholder.10 The most likely interpretation is that Congress intended to create a cause of action solely by the SEC, or by a shareholder acting in a private attorney general capacity, so as to preclude consent judgments entered into by the fund and which might have the effect of precluding the judicial review of director judgment mandated by 15 U.S.C. § 80a-35(b)(2). Such an intention is suggested by legislative history indi*951eating that one of the reasons for expressly allowing suit to be brought by either the SEC or a security holder was the congressional assessment that the fund directors could not effectively deal with adviser compensation. The Senate Report stated that the 1970 amendments to the ICA were predicated on the SEC’s 1966 report and recommendations on investment companies. “Public Policy Implication of Investment Company Growth,” Report of the Committee on Interstate and Foreign Commerce, H.R.Rep. No. 2337, 89th Cong., 2d Sess. (1966). In that report, the SEC indicated its judgment that:
The unaffiliated directors, as the only potentially disinterested persons in the management of most investment companies, can and should play an active role in representing the interests of shareholders not only in connection with management compensation but in other areas where the interests of the professional managers may not coincide with those of the company and its public investors. Strengthening the voice of truly disinterested directors in investment company affairs is important to the protection of public shareholders. But even a requirement that all of the directors of an externally managed investment company be persons unaffiliated with the company’s adviser-underwriter would not be an effective check on advisory fees and other forms of management compensation.
The unaffiliated directors are not in a position to bargain on an equal footing with the adviser on matters of such crucial importance to it. They are not free, as a practical matter, to terminate established management relationships when differences arise over the advisory fees or other compensation. This reflects, in large part, the adviser-underwriter permeation of investment company activities to an extent that makes rupture of the existing relationships a difficult and complex step for most companies. For these reasons, arm’s-length bargaining between the unaffiliated directors and the managers on these matters is a wholly unrealistic alternative.
Id. at 148 (emphasis supplied). It seems unlikely that Congress intended that the unaffiliated directors, by bringing and settling a section 36(b) suit, could accomplish the very result that the SEC regarded as an unrealistic alternative. Thus I do not believe that section 36(b) grants “a right which may properly be asserted by [the fund].” Fed.R.Civ.P. 23.1.
Even if, contrary to its plain language and probable purpose, section 36(b) were to be construed as creating “a right which may properly be asserted by [the fund],” id., there would still remain the question whether the disinterested directors of the fund may, in the exercise of business judgment, prevent a judicial examination, sought by the SEC or a security holder, of advisers fees. Other aspects of the section support a negative answer. There is a one year period of limitation. 15 U.S.C. § 80a-35(b)(3). Such a short period suggests that intervention by fund directors was not contemplated, for if a claim were to be delayed until the directors were notified and were given a chance to consider the advisability of a given action, the statutory period would quickly run out. By adjusting fees prospectively, while delaying the decision on whether to sue for fees already paid, fund managers could significantly reduce recovery. The normal delays incident to corporate decision-making are incompatible with a one year period of limitátion, and director involvement therefore must have been discounted by Congress. Another aspect suggesting the inapplicability of the business judgment rule to section 36(b) is the circumscribed nature of a 36(b) cause of action. Recovery is limited to actual damages capped by the total compensation paid. Recovery can only be had from the recipients of compensation, and liability cannot be the predicate for an injunction severing an investment adviser from a fund. These limitations on the section 36(b) remedy minimize the intrusion by the section upon the directors’ responsibility to operate the fund, and suggest the absence of any serious erosion of the management responsibility conferred by state law.
*952I conclude, therefore, that the Rule 23.1 demand requirement does not apply to a section 36(b) action, because the section does not provide “a right which may properly be asserted by [the fund]”, and because even assuming such a right, section 36(b)(2) preempts any state law business judgment rule which would be furthered by the demand requirement.
This interpretation of section 36(b) has been anticipated by the Supreme Court. In Burks v. Lasker, 441 U.S. at 484, 99 S.Ct. at 1840, the Court stated that:
[w]hen Congress ... intended] to prevent board action from cutting off derivative suits, it said so expressly. Section 36(b), ..., 15 U.S.C. § 80a-35(b)(2), added to the [Investment Company] Act in 1970, performs precisely this function for derivative suits charging breach of fiduciary duty with respect to adviser’s fees.
The holding in Burks v. Lasker that the state law business judgment rule permits independent directors to terminate derivative suits based on federal statutes so long as the rule is consistent with the policies of the federal statutes in issue, puts the quoted statement in context. The application of business judgment to terminate a section 36(b) suit is inconsistent with the policy of that section. The majority treats the statement of the Burks Court as mere dictum which this court can disregard. If it is dictum, it is dictum of the most compelling sort. The quoted passage was not a passing reference, but was integrally tied to the Court’s holding and reasoning. The Court supported its position about fund directors’ power to terminate other derivative actions by pointing to section 36(b) as an example of Congress, in clear terms, preventing director veto. The Burks reasoning depends, therefore, on the quoted dictum with respect to section 36(b) and it cannot be disregarded by this intermediate court.
The Court of Appeals for the Second Circuit, which in matters relating to the federal securities law carries particular authority, confronted with the identical problem, reached the same conclusion with respect to section 36(b) as I reach. Moreover it concluded, as I do, that Rule 23.1 is inapplicable because, as Burks v. Lasker teaches, it is designed to implement the business judgment rule only in cases where directors can control a lawsuit. Fox v. Reich & Tang, Inc. and Daily Income Fund, Inc., 692 F.2d 250 (2d Cir.1982).
Despite the unambiguous statement in Burks v. Lasker that section 36(b) is an instance in which Congress has precluded the application of any state law business judgment rule, the Court of Appeals for the First Circuit recently affirmed the dismissal of a section 36(b) action for failure to plead compliance with the demand requirement of Rule 23.1. Grossman v. Johnson, 674 F.2d 115 (1st Cir.1982). With deference, I am not persuaded by that court’s interpretation of the statute, its treatment of the legislative history, or its reading of Burks v. Lasker. Thus while the Grossman v. Johnson opinion supports the defendants, I would not follow it. I find particularly unpersuasive the Grossman court’s treatment of 15 U.S.C. § 80a-35(b)(2) (1976). While acknowledging that the section “can easily be read to give the court, rather than the directors, the ultimate power to decide the propriety of the fees,” it reasoned that a demand would not be futile, because the directors’ “decision to side with the complainant (entirely or in part) would have important consequences, and even their knowledgeable disagreement with the demand might be deemed worthy by the court of grave consideration under § 36(b)(2).” 674 F.2d at 121. Section 36(b)(2) explicitly directs the court to give the directors’ views “such consideration ... as is deemed appropriate under all the circumstances.” 15 U.S.C. § 80a-35(b)(2) (1976). Obviously those views can be made known during the course of the lawsuit. But the court’s obligation to take the directors’ views into account does not, even under the Grossman court’s analysis permit the directors to terminate or to prohibit the security holders’ action. Thus the demand which that court required served no purpose but to delay judicial inquiry and to insulate more payments to the investment adviser from such judicial review by operation of the short *953statute of limitations in section 36(b)(3). Since the directors’ business judgment is to be considered relevant to a section 36(b) claim only to the limited extent that the court must take the directors’ views into account, any state law business judgment rule is clearly supplanted. What must be reconciled is section 36(b)(2) and Rule 23.1. No federal policy suggests itself which would support a mechanistic application of the demand requirement when the only purpose to be served is to give the directors an opportunity to make their views known to the court. That can be done in an appropriate pleading.
The majority’s analysis, relying on Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975), is as flawed as that of the Gross-man court. It must be noted that the Cort v. Ash test for implying causes of action in favor of parties not mentioned in a federal statute has been significantly contradicted by subsequent cases such as Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 639, 101 S.Ct. 2061, 2066, 68 L.Ed.2d 500 (1981), and Middlesex County Sewerage Auth. v. National Sea Clammers Ass’n, 453 U.S. 1, 13, 101 S.Ct. 2615, 2622, 69 L.Ed.2d 435 (1981). We must look for a clear indication of congressional intent to afford such a cause of action. Neither the statutory language nor its legislative history contains any such indication of an intent to permit an investment fund to control a section 36(b) claim and thereby insulate it from judicial review. Indeed, as I have outlined above, a contrary intent is the most likely.
Finally, the majority’s reliance on Merrill Lynch, Pierce, Fenner & Smith v. Curran, - U.S -, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982), is an extreme misinterpretation of that authority. The Curran case found a congressional intention, when amending the Commodity Exchange Act by the Commodity Futures Trading Act of 1974, to recognize that prior to the amendment lower federal courts had implied causes of action from the former although it did not expressly provide for them. No cause of action had been implied for the entirely new cause of action created in section 36(b) because that cause of action did not exist at the time Congress last spoke. The suggestion that the Curran analysis applies because a fund could bring a common law action against an adviser for corporate waste demonstrates confusion about the nature of the problem which the Curran Court addressed. Common law causes of action are not “implied” from federal statutes. They exist as a matter of state law. Moreover, the suggestion ignores the clear intention, in section 36(b), to create a right to recover overcharges which could not be recovered under the state common law of waste.
V.
Since the governing federal law does not permit direct control over section 36(b) actions, it supplants the applicable state law business judgment rule. No section 36(b) policy would be advanced by applying the demand requirement of Rule 23.1 to section 36(b) actions. Absent an underlying substantive rule of law which the pleading requirements of Rule 23.1 would advance, their application serves no useful purpose. The trial court erred, therefore, in dismissing the complaint for failure to plead that a demand had been made on the directors. The judgment appealed from should be affirmed insofar as it dismissed all claims other than that predicated on section 36(b), but reversed insofar as it dismissed that claim.11 Thus I dissent from the judgment of this court insofar as it affirms the dismissal of the section 36(b) claim.

. The district court’s opinion is reported. Weiss v. Temporary Investment Fund, Inc., 516 F.Supp. 665 (D.Del.1981). Plaintiff also appeals from the court’s denial of his subsequent motion for leave to comply with Rule 23.1 and to file an amended complaint. 520 F.Supp. 1098 (D.Del.1981).

. 15 U.S.C. § 80a-35(b) (1976).

. Specifically section 14(a), 15 U.S.C. § 78n(a) (1976), and Rule 14a-9, 17 C.F.R. § 240 (1977), adopted thereunder.

. Specifically sections 16 and 21, 12 U.S.C. §§ 24 & 378(a) (1976).

. Specifically sections 20(a), 1(b)(2), 15(a) and 15(b), 15 U.S.C. §§ 80a-l — 80a-52.

. The court also dismissed the complaint as to defendant Robertson for insufficient service of process on him. Plaintiff does not challenge that ruling on appeal, so we leave the court’s judgment in that respect undisturbed.

. The demand requirement of Rule 23.1 reads:
The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for his failure to obtain the action or for not making the effort.
Fed.R.Civ.P. 23.1.

. Rule 23.1 was promulgated in 1966. It substantially restated prior Rule 23(b) adopted in 1937 which in turn was a transcription of Equity Rule 27. Equity Rule 27, established in 1912, was itself a slight modification of Equity Rule 94 adopted in 1882. The demand requirement of Equity Rule 94 read:
[the complaint] must also set forth with particularity the efforts of the plaintiff to secure such action as he desires on the part of the managing directors or trustees, and, if necessary, of the shareholders, and the causes of his failure to obtain such action.
104 U.S. at X.

. Section 36(b) reads:
For the purposes of this subsection, the investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by such registered investment company or by the security holders thereof, to such investment adviser or any affiliated person of such investment adviser. An action may be brought under this subsection by the Commission, or by a security holder of such registered investment company on behalf of such company, against such investment adviser, or any affiliated person of such investment adviser, or any other person enumerated in subsection (a) of this section who has a fiduciary duty concerning such compensation or payments, for breach of fiduciary duty in respect of such compensátion or payments paid by such registered investment company or by the security holders thereof to such investment adviser or person. With respect to any such action the following provisions shall apply:
(1) It shall not be necessary to allege or prove that any defendant engaged in personal misconduct, and the plaintiff shall have the burden of proving a breach of fiduciary duty.
(2) In any such action approval by the board of directors of such investment company of such compensation or payments, or of contracts or other arrangements providing for such compensation or payments, and ratification or approval of such compensation or payments, or of contracts or other arrangements providing for such compensation or payments, by the shareholders of such investment company, shall be given such consideration by the court as is deemed appropriate under all the circumstances.
(3) No such action shall be brought or maintained against any person other than the recipient of such compensation or payments, and no damages or other relief shall be granted against any person other than the recipient of such compensation or payments. No award of damages shall be recoverable for any period prior to one year before the action was instituted. Any award of damages against such recipient shall be limited to the actual damages resulting from the breach of fiduciary duty and shall in no event exceed the amount of compensation or payments received from such investment company, or the security holders thereof, by such recipient.
(4) This subsection shall not apply to compensation or payments made in connection with transactions subject to section 80a-17 of this title, or rules, regulations, or orders thereunder, or to sales loans for the acquisition of any security issued by a registered investment company.
(5) Any action pursuant to this subsection may be brought only in an appropriate district court of the United States.
(6) No finding by a court with respect to a breach of fiduciary duty under this subsection shall be made a basis (A) for a finding of a violation of this subchapter for the purposes of sections 80a-9 and 80a-48 of this title, section 78 o of this title, or section 80b-3 of this title, or (B) for an injunction to prohibit any person from serving in any of the capacities enumerated in subsection (a) of this section.
15 U.S.C. § 80a-35(b) (1976).

. See 13 Fletcher Cyc. Corp. § 6043 (Permanent Ed.) and cases cited therein.

. I also agree that the district court did not abuse its discretion by denying plaintiff leave to make subsequent demand on the directors and to replead.