Court Opinion

ID: 3005575
Source: CourtListenerOpinion
Date Created: 2015-09-29 20:01:02.749776+00
Date Added: 2024-06-11T11:39:18.313424
License: Public Domain

FILED
                            NOT FOR PUBLICATION
                                                                           SEP 29 2015
                    UNITED STATES COURT OF APPEALS                     MOLLY C. DWYER, CLERK
                                                                         U.S. COURT OF APPEALS

                            FOR THE NINTH CIRCUIT

    DONALD TURNER, on Behalf of the              No. 13-15742
    Davis New York Venture Fund,
                                                 4:08-cv-00421-AWT
              Plaintiff-Appellant,
                                                 MEMORANDUM*
     v.

    DAVIS SELECTED ADVISERS, LP and
    DAVIS DISTRIBUTORS, LLC,

              Defendants-Appellees.

                  On Appeal from the United States District Court
                            for the District of Arizona
                A. Wallace Tashima, Senior Circuit Judge, Presiding

                       Argued and Submitted June 10, 2015
                            San Francisco, California

Before: HAWKINS and WATFORD, Circuit Judges, and RAKOFF, Senior
District Judge.**

*
      This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
**
      The Honorable Jed S. Rakoff, Senior District Judge for the U.S. District
Court for the Southern District of New York, sitting by designation.
      Plaintiff-appellant Donald Turner appeals the judgment of the district court

dismissing his amended complaint brought under the Investment Company Act of

1940 (the “ICA”), and its denial of his motion to alter or amend the judgment. We

affirm.

      Turner holds Class A shares in the Davis New York Venture Fund (the

“Davis Fund” or the “Fund”), an open-end diversified mutual fund registered under

the ICA. Defendant-appellee Davis Selected Advisers, LP (“DSA”) is the Fund’s

investment adviser, and defendant-appellee Davis Distributors, LLC (“DD”) is a

broker-dealer and the “principal underwriter of the shares of the Fund.”

      According to the Amended Complaint, DSA and DD charge shareholders in

the Fund a number of different fees, three of which are the subject of Turner’s

amended complaint. First, all shareholders pay an advisory fee based on a

percentage of net assets (which decreases as the Fund grows in size) to compensate

DSA “for managing the portfolio of securities and for providing some of the back-

office support operations.” Second, DD collects from all shareholders a “service

fee” of .25% of the Davis Fund’s net assets under management to support “both

pre-sale and post-sale shareholder services.” Third, DD charges Class B, C and R

shares a “distribution fee” that varies from .5% to .75% of the Fund’s net assets

                                         -2-
and that is “mainly used to finance payments to dealers primarily as commissions

to compensate the individual stockbrokers for their sales activities.”1

      On July 28, 2008, Turner initiated this action in the United States District

Court for the District of Arizona, alleging that DSA and DD were in breach of the

“fiduciary duty with respect to the receipt of compensation for services” imposed

by § 36(b) of the ICA with respect to each of these three fees, see 15 U.S.C. § 80a-

35(b), and that appellees also violated § 47(b) and § 48(a) of the ICA, see id. §§

80a-46, 47.2 On May 31, 2011, the district court dismissed the Amended

Complaint with prejudice, and on March 19, 2013, the district court denied

Turner’s motion to amend the judgment and to allow Turner to file a second

amended complaint. This appeal followed.

      We review de novo a district court’s order granting a motion to dismiss for

failure to state claim. See Reid v. Johnson & Johnson, 780 F.3d 952, 958 (9th Cir.

2015). “[T]o face liability under § 36(b), an investment adviser must charge a fee

that is so disproportionately large that it bears no reasonable relationship to the

1
 Instead of paying an annual distribution fee, Class A shareholders pay “an initial
sales charge into the purchase price (approximately 4.75% of the offering price).”
2
 Sections 47(b) and 48(a) of the ICA respectively address the making of unlawful
contracts and control person liability. Turner effectively waived these claims when
he opted to challenge only the dismissal of his allegations under § 36(b).

                                          -3-
services rendered and could not have been the product of arm’s length bargaining.”

Jones v. Harris Associates L.P., 559 U.S. 335, 346 (2010). “[A] court’s evaluation

of an investment adviser’s fiduciary duty must take into account both procedure

and substance.” Id. at 351. With respect to procedure, the level of deference a court

affords to the decision of a mutual fund’s board of directors to approve a certain

fee depends on the robustness of the board’s process for reviewing that contract.

Where the process is deficient, a court must take a more rigorous look at the

substance of the fees extracted from the fund’s shareholders, and vice versa. See id.

As for substance, courts consider a number of factors to determine whether the fee

charged is excessive in light of the services rendered, including, but not limited to,

“(a) the nature and quality of services provided to fund shareholders; (b) the

profitability of the fund to the adviser-manager; (c) fall-out benefits; (d) economies

of scale; [and] (e) comparative fee structures.” Krinsk v. Fund Asset Mgmt., Inc.,

875 F.2d 404, 409 (2d Cir. 1989).

      At the outset, we note that the Amended Complaint affirmatively alleges that

the Fund’s board of directors had available to it the “data necessary to determine

whether” the advisory fees and 12b-1 fees charged were appropriate. Accordingly,

we “afford commensurate deference to the outcome of the [Davis Fund’s board’s]

                                          -4-
bargaining process.” See Jones, 559 U.S. at 351. Although Turner also alleges that

the board met only infrequently and that DSA controlled what information the

board possessed, the former assertion is insufficient, on its own, to establish that

the board’s “process was deficient” and the latter is irrelevant in light of Turner’s

concession that DSA provided the board with the relevant information.

      Turner’s allegations with respect to the substance of the advisory fee the

Davis Fund paid to DSA also fail. The majority of Turner’s allegations are

grounded in inapt comparisons. Turner alleges that the Davis Fund underperformed

the S&P 500 Total Return Index, but unlike an index fund, the Davis Fund is an

actively managed fund that, according to the Amended Complaint, pursued an

investment strategy focused on investing in “large companies with market

capitalizations of at least $10 billion.” To support a § 36(b) claim, allegations

pertaining to a fund’s performance must use mutual funds pursuing similar

investment strategies as comparators. Cf. Amron v. Morgan Stanley Inv. Advisors

Inc., 464 F.3d 338, 344 (2d Cir. 2006) (“In comparing AO Fund share returns to

gains and losses of the S & P 500 Index, the Yampolsky Complaint demonstrates

little, if anything, about the nature or quality of the specific services offered to AO

Fund customers.”). Likewise, Turner compares the size of DSA’s advisory fee to

                                           -5-
that of the fee extracted from other mutual funds, but he fails to allege that these

other funds’ advisers provided the same services or pursued a similar investment

strategy. As a result, these juxtapositions lend no support to Turner’s claim.

      Turner next alleges that DSA failed to pass along economies of scale to the

Fund’s shareholders. Yet other than a conclusory statement that “[a]s the Fund

grows larger, economies of scale occur for many Fund activities” and general

allegations about cost savings resulting from technology advances and deregulation

(neither of which may accurately be described as “economies of scale”), the

Amended Complaint’s only allegation pertaining to this issue is that the time and

cost of research devoted to whether to make a “particular investment in a particular

stock . . . remains the same regardless of whether the size of the investment would

be for millions of dollars or hundreds of millions of dollars.” This is far from

enough to save Turner’s claim from dismissal. The carefully worded allegation

does not actually assert that the amount of time and money that DSA spent

performing research remained the same as the fund increased in size, but only that

the cost of researching a “particular investment in a particular stock” stayed flat.

Further, the Amended Complaint offers no explanation of what percentage of

DSA’s work was spent researching specific investments. As a result, Turner’s

                                          -6-
allegations regarding economies of scale also fail to support an inference that the

advisory fee DSA charged bore no reasonable relationship to the services rendered.

See Jones, 559 U.S. at 346. We therefore affirm the district court’s dismissal of

Turner’s § 36(b) claim based on DSA’s advisory fee.

      Turner’s attack on the 12b-1 service fee that DD charges, which can

essentially be distilled to three allegations, is even less compelling. First, Turner

alleges that, because the service fee is used, in part, to grow the fund, the related

increase in the size of the advisory fee and transfer agent fees that DSA and DD

collect–fees paid for services such as “the processing of the sale and redemption of

Fund shares [and] maintenance of records”–constitute fall-out benefits.3 But an

increase in advisory and transfer fees will always be a byproduct of fees used to

grow a mutual fund, unless the efforts to grow the fund are unsuccessful. The mere

labeling of such fees as “fall-out benefits” therefore says nothing about whether the

service fee here fails to resemble what would be the product of arm’s-length

bargaining. Second, Turner alleges that some of the 12b-1 service fee was used to

pay for services that “[t]he broker-dealer is legally obligated to provide . . . under

3
 “Fall-out benefits” are “those collateral benefits that accrue to the adviser because
of its relationship with the mutual fund.” Jones, 559 U.S. at 344 n.5.

                                           -7-
the applicable statutes and New York Stock Exchange and NASD/FINRA

regulatory regimes.” A legal obligation to perform certain services, however, is not

an obligation to perform those services for free, and so we decline Turner’s

invitation to view a fee paid for such services as per se excessive. Third, Turner

compares the total 12b-1 fees DD charges to the fees charged to other funds.

Because the Amended Complaint does not explain what 12b-1 services were

provided to the other funds, these comparisons again fail to show that any fee is

excessive. Thus, we affirm the district court’s conclusion that Turner failed to

adequately allege that the 12b-1 service fee was so disproportionately large that it

bore no reasonable relation to the services rendered.

      Turner further argues that the service fees were unlawfully used for post-sale

shareholder services when 12b-1 fees must, according to Turner, be used to finance

activity primarily intended to result in the sale of shares. A claim challenging the

use, as opposed to the size, of a fee is not cognizable under § 36(b). “In order to

state a claim under § 36(b), one must allege excessive fees, rather than fees that

might simply be described as ‘improper.’” Bellikoff v. Eaton Vance Corp., 481
F.3d 110, 118 (2d Cir. 2007) (citing Gartenberg, 694 F.2d at 928); Gallus v.

Ameriprise Fin., Inc., 675 F.3d 1173, 1181-82 (8th Cir. 2012).

                                          -8-
      We also affirm the district court’s dismissal of Turner’s challenge to the

12b-1 distribution fees, though for a different reason. As stated above, the

Amended Complaint alleges that only Class B, C, and R shareholders are charged a

distribution fee. Thus, regardless of whether that distribution fee is excessive,

Turner has not suffered any injury from it, and he therefore lacks standing to

challenge it. See Oregon Advocacy Ctr. v. Mink, 322 F.3d 1101, 1108 (9th Cir.

2003); see also Gollust v. Mendell, 501 U.S. 115, 125 (1991). The district court

determined that Turner had standing because “each share class participates in the

same portfolio of assets” such that “excessive fees charged to one class will detract

from the overall pool and affect the value of other share classes.” This conclusion,

however, conflicts with Turner’s allegation that Class A shareholders are not

charged the distribution fee and with SEC regulations requiring that each share

class bear its own fees, see 17 C.F.R. § 270.18f-3(a)(1)(i), which Turner does not

allege appellees violated. Tellingly, though the Amended Complaint asserts that

the distribution fee is “in effect” paid out of the Fund’s assets, it never alleges that,

                                           -9-
as the district court suggested, the distribution fee itself lowered the value of Class

A shares or that it deprived Class A shares of growth from a missed investment.4

      As for Turner’s remaining causes of action, Turner has not offered any

argument with respect to the district court’s dismissal of the § 47(b) claim and he

concedes that the survival of the § 48(a) claim depends on his § 36(b) claim. We

therefore affirm the district court’s dismissal of these claims as well.

      Finally, we affirm the district court’s denial of Turner’s motion to amend the

judgment and to amend his complaint, which we review for abuse of discretion.

See Allstate Ins. Co. v. Herron, 634 F.3d 1101, 1111 (9th Cir. 2011). “[O]nce

judgment has been entered in a case, a motion to amend the complaint can only be

entertained if the judgment is first reopened under a motion brought under Rule 59

or 60.” Lindauer v. Rogers, 91 F.3d 1355, 1357 (9th Cir. 1996), as amended (Sept.

4, 1996). “[A] Rule 59(e) motion may be granted: (1) if such motion is necessary

to correct manifest errors of law or fact upon which the judgment rests; (2) if such

motion is necessary to present newly discovered or previously unavailable
4
 Turner additionally argues that the distribution fee was used to grow the Fund to
such a large size that the shareholders actually experienced “diseconomies of
scale.” As we held above, § 36(b) does not provide shareholders with a cause of
action to challenge an adviser’s business decisions simply because the adviser
collects a fee to support the activities carrying out those decisions. Hence, this
aspect of Turner’s amended complaint, even if he had standing to assert it, would
fail as well.

                                          -10-
evidence; (3) if such motion is necessary to prevent manifest injustice; or (4) if the

amendment is justified by an intervening change in controlling law.” Allstate, 634
F.3d at 1111.

      We first reject Turner’s suggestion that the Supreme Court’s decision in

Jones v. Harris and our non-precedential decision in Jelinek v. Capital Research &

Mgmt. Co., 448 F. App’x 716 (9th Cir. 2011) constituted changes in “controlling

law” that warranted reopening the judgment below. The Supreme Court handed

down Jones over a year before the district court issued its decision, and the parties

were required to brief the decision before the district court decided appellees’

motion. Thus, even if Jones changed the law, the time for Turner to move to amend

the complaint was during the intervening fourteen months before the district court

ruled on appellees’ motion. Although Jelinek was not decided until after the district

court ruled, it is plain that a memorandum disposition is not “controlling law” for

these purposes. See Ninth Circuit Rule 36-3(a).

      We also conclude that the district court did not abuse its discretion in

determining that reopening the judgment to allow Turner to amend the complaint

was not necessary to prevent a manifest injustice. Turner had already amended his

initial complaint once in response to appellees’ first motion to dismiss, and the

                                         -11-
second motion to dismiss had been pending for almost two years by the time the

district court decided it. He thus “had ample opportunity to file an amended

complaint with new allegations before the court issued its final judgment,” and

now has no excuse for failing to do so. Premo v. Martin, 119 F.3d 764, 772 (9th

Cir. 1997). This is especially true since the new allegations in the proposed second

amended complaint are based not on new evidence, but on information to which

Turner has had access from the inception of this suit. Royal Ins. Co. of Am. v. Sw.

Marine, 194 F.3d 1009, 1017 (9th Cir. 1999).

      AFFIRMED.

                                         -12-