Opinion
NOT TO BE PUBLISHED
Super. Ct. City & County of San Francisco No. 05-444516
Dondero, J.
Mary L. Richtenburg and C. Kathleen Sipes appeal the trial court’s order sustaining the demurrer of defendant Wells Fargo Bank (the Bank) without leave to amend. We affirm the court’s ruling on the demurrer, but modify the order to allow plaintiffs to amend their complaint solely to state a claim with respect to the Bank’s tax preparation fees.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
This is our third opinion in this matter. A substantial portion of this section is taken from our two prior opinions, as indicated by quotation marks: Wells Fargo Bank, N.A. v. Superior Court (2008) 159 Cal.App.4th 381 (Wells Fargo), and Richtenburg v. Wells Fargo Bank, N.A. (June 2, 2008, A119093) [nonpub. opn.] (Richtenburg).
“Mary L. Richtenburg and C. Kathleen Sipes [plaintiffs] are beneficiaries of personal trusts maintained by the Bank. They commenced the underlying action on behalf of themselves and the following class: ‘all persons (and their successors) who are or were beneficiaries or successor trustees of trusts whose principal and/or income is or was managed by Wells Fargo as a corporate trustee, in which trusts Wells Fargo collected fees, proceeds or similar compensation or benefits for services provided by affiliates of Wells Fargo in connection with Wells Fargo’s investment or management of trust assets, and/or collected fees, proceeds or similar compensation or benefits from third parties in connection with Wells Fargo’s investment or management of trust assets.’
“[In their second amended complaint (SAC), plaintiffs alleged] the Bank violated California law by: (1) investing trust assets in proprietary mutual funds in order to collect various fees for itself and its affiliates, including ‘investment and advisory’ fees; (2) investing trust assets in nonproprietary mutual funds from which the Bank and its affiliates receive undisclosed compensation; (3) implementing a ‘securities lending program’ by which it places trust assets in a common trust fund so that it can lend securities held in the fund to third parties, charge the third parties fees and interest, and ‘misappropriate’ from plaintiffs 40 percent of the fees and interest received; and (4) charging unreasonable fees for the preparation of tax returns. Plaintiffs allege[d] that by engaging in these acts, the Bank ha[d] violated its duties as trustee to avoid conflicts of interest, to make investments solely in the interests of the beneficiaries, and to charge only a disclosed trustee fee for administering the trust. Plaintiffs further allege[d] the Bank failed to provide full disclosure of its actions, including disclosure of payments received from its investments, the nature and extent of any conflicts of interests, and other material facts.
“The above allegations [were] incorporated into and realleged in all of the causes of action, ‘as though fully set forth [t]herein.’ The [SAC] allege[d] six causes of action: (1) breach of fiduciary duty; (2) concealment; (3) violation of the Consumers Legal Remedies Act (Civ. Code, § 1750 et seq.); (4) conversion; (5) violation of Business and Professions Code section 17200 et seq.; and (6) common count for misappropriation.
“The Bank filed a general demurrer to each of the six causes of action in the [SAC], asserting, among other things, that the entire action was preempted by [the Securities Litigation Uniform Standards Act of 1998 (Pub.L. No. 105-353 (Nov. 3, 1998) 112 Stat. 3227)] (SLUSA). After the trial court overruled the demurrer, the Bank filed a petition for a writ of mandate in this court, seeking a ruling that the action was preempted by SLUSA. We summarily denied the petition. The Bank petitioned to the Supreme Court, which granted review and transferred the matter back to this court with directions to issue an order to show cause why the relief sought by the Bank should not be granted. We did so, and set a date for filing a return.” (Wells Fargo, supra, 159 Cal.App.4th 381, 383–384.)
“On May 31, 2007, plaintiffs filed an application for an order to show cause for a preliminary injunction and temporary restraining order. In their application, they alleged that the Bank ‘is engaged in an ongoing course of conduct in which it falsely represents that it prepares the trusts’ tax returns and that it is ‘necessary’ to charge a $500 fee for this, while concealing the very facts that Probate Code § 16063(4) [sic] specifically requires it to disclose: that, in fact, it has hired an outside accounting firm, KPMG, to prepare the returns, that it has a close relationship with KPMG, and that KPMG actually charges a small fraction of the purportedly ‘necessary’ $500 fee for preparing the returns.’ Plaintiffs sought the injunction to prevent the Bank from raising this fee and from sending out fee schedules, account statements, or fee increase letters without the statutorily required disclosures. They also requested that the Bank be required to send out corrective disclosure notices to all putative class members.
“A notice sent by the Bank to Richtenburg on March 10, 2005, states: ‘To meet the demands of a changing financial environment and to ensure that we continue to provide you with the kind of service that you expect, it is necessary to charge the trust account with an annual fee associated with the preparation of the trust’s annual fiduciary income tax returns.’ The enclosed fee schedule sets this fee at $500 for irrevocable trusts.” (Richtenburg, supra, A119093, at p. 3, fn. 1.)
“On July 31, 2007, the trial court filed a thorough order denying the motion for a preliminary injunction. Plaintiffs filed a notice of appeal on August 21, 2007.
“On January 25, 2008, we granted the Bank’s writ petition and directed the superior court to vacate its order overruling the Bank’s demurrer and to issue a new and different order sustaining the demurrer with leave to amend. [Citation.] We held that SLUSA precluded the complaint insofar as it purported to assert a class action with respect to claims based on state law alleging misrepresentations or omissions in connection with the purchase or sale of securities. We noted, however, that the complaint could be amended to ‘(1) assert state claims for a group of fewer than 50 plaintiffs; or (2) exclude allegations that trigger SLUSA preclusion.’ [Citation.] We observed that the allegations regarding the Bank’s tax preparation fees were outside the scope of SLUSA.” (Richtenburg, supra, A119093, at p. 3.)
On August 1, 2008, the trial court filed its order vacating the previous order overruling the demurrer to the SAC, sustaining the demurrer with leave to amend, and denying the Bank’s motion to strike.
On August 5, 2008, plaintiffs filed their third amended complaint (TAC).
On September 12, 2008, the Bank filed a demurrer to the TAC.
On December 30, 2008, the trial court filed its order sustaining the Bank’s demurrer to the TAC without leave to amend.
On June 22, 2009, the trial court filed its order denying plaintiffs’ motion for reconsideration of its order sustaining the demurrer to the TAC. In so ruling, the court rejected both plaintiffs’ proposed 4th and 5th amended complaints.
The trial court’s order dismissing plaintiffs’ action with prejudice was filed on July 14, 2009. This appeal followed.
DISCUSSION
I. Standard of Review
As we observed in Wells Fargo: “When reviewing a demurrer, ‘appellate courts generally assume that all facts pleaded in the complaint are true.’ [Citation.] ‘We independently construe statutory law, as its interpretation is a question of law on which we are not bound by the trial court’s analysis.’ [Citation.]” (Wells Fargo, supra, 159 Cal.App.4th 381, 385–386.) We review the trial court’s refusal to grant leave to amend for abuse of discretion. (Hendy v. Losse (1991) 54 Cal.3d 723, 742.)
II. The TAC
The TAC restructures plaintiffs’ causes of action by dividing them into two parts. “Part One” is entitled “Common Trust Fund & Tax Preparation Claims.” “Part Two” is entitled “Mutual Fund Claims.” The TAC contains the same class action allegation as stated in the SAC, as well as a new second class action allegation attached to Part Two of the complaint. This second allegation states that the plaintiffs seek to represent “All persons (and their successors) who are or were beneficiaries of personal trusts whose principal and/or income is or was managed by the [Bank], as a corporate trustee, and assets of which the Bank invested in the Bank’s proprietary mutual funds or third party funds from which it receives benefits, from 1998 to the present.”
Part One sets forth six causes of action: (1) breach of fiduciary duty, (2) concealment, (3) violation of the Consumers Legal Remedies Act (Civ. Code, § 1750 et seq.), (4) conversion, (5) violation of Business and Professions Code section 17200 et seq., and (6) common count for misappropriation.
The SAC at issue in Wells Fargo alleged these same six causes of action. (Wells Fargo, supra, 159 Cal.App.4th 381, 384.)
Part Two contains four causes of action. This part is based on allegations that the Bank has invested trust funds in its own proprietary mutual funds or funds of third parties from which it receives fees and other benefits, in disregard of more appropriate nonaffiliated mutual funds. The four causes of action stated in this part are: (1) breach of fiduciary duty, (2) self dealing in violation of the fiduciary duties of loyalty and to avoid conflicts of interest, (3) unjust enrichment, and (4) violation of Business and Professions Code section 17200 et seq.
III. SLUSA
We described SLUSA as follows in Wells Fargo: “SLUSA provides in relevant part: ‘Limitations on remedies [¶] (1) Class action limitations [¶] No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging-[¶] (A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or [¶] (B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.’ [Citation.] Congress enacted SLUSA in response to the marginal success the Private Securities Litigation Reform Act of 1995 (PSLRA) had in achieving its goal of combating strike suits and securities class actions. [Citation.] In enacting PSLRA, Congress targeted ‘perceived abuses of the class-action vehicle in litigation involving nationally traded securities.’ [Citation.] However, ‘[r]ather than face the obstacles set in their path by [PSLRA], plaintiffs and their representatives began bringing class actions under state law..., ’ alleging violations of state statutory or common law. [Citation.] Subsequently, Congress passed SLUSA to prevent plaintiffs from frustrating the objectives of PSLRA. [Citation.]
“An action will be dismissed under SLUSA if it (1) is a ‘covered class action’; (2) is based on state law; (3) involves a ‘covered security’; and (4) alleges a ‘misrepresentation or omission of a material fact’ or use of ‘any manipulative or deceptive device... in connection with the purchase or sale of a covered security.’ [Citations.] A ‘covered class action’ is a lawsuit in which damages are sought on behalf of more than 50 people. [Citation.] A ‘covered security’ is one traded nationally and listed on a regulated national exchange. [Citation.] In determining whether an alleged misrepresentation or omission ‘coincides’ with a securities transaction, courts look at ‘the gravamen’-whether the complaint, as a whole, involves an untrue statement or substantive omission of a material fact, and whether that conduct coincides with a transaction involving a covered security. [Citation.] The court focuses on the substance of the claim, not the plaintiffs’ characterization of it. [Citation.]” (Wells Fargo, supra, 159 Cal.App.4th 381, 386.) We note the United States Supreme Court has construed SLUSA’s expansive language broadly. “A narrow reading of the statute would undercut the effectiveness of the 1995 Reform Act and thus run contrary to SLUSA’s stated purpose” of precluding state private securities class action lawsuits alleging fraud or misrepresentation. (Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit (2006) 547 U.S. 71, 86 (Dabit).) Consequently, the Supreme Court in Dabit adopted a “broad construction” of the term “ ‘in connection with’ ” when assessing state claims triggering SLUSA. (Dabit, supra, at pp. 86, 85.)
As we noted in Wells Fargo, “SLUSA is a preclusion provision because it does not displace state law with federal law, but makes some state law claims nonactionable through the class action device in both federal and state courts. [Citation.] Thus, once a court determines that SLUSA applies to a given state law action, the action cannot be maintained on a class basis in either state or federal court.” (Wells Fargo, supra, 159 Cal.App.4th 381, 385, fn. 2.)
IV. Is the TAC Precluded by SLUSA?
As in Wells Fargo, supra, 159 Cal.App.4th 381, 388, it is undisputed that the instant lawsuit is a “covered class action” that is based on state law. With respect to Part One, it is also undisputed that the conduct alleges a “misrepresentation or omission” of a material fact. With respect to Part Two, in addition to alleging a class action based on state law, it is undisputed that plaintiffs’ claims involve “covered securities.” Thus, three out of four elements of SLUSA preclusion are clearly satisfied within each of the TAC’s two sections.
Mutual funds are “covered securities” within the meaning of SLUSA. (Instituto de Prevision Militar v. Merrill Lynch (11th Cir. 2008) 546 F.3d 1340, 1351, fn. 2.)
In our prior opinion we noted that in evaluating whether SLUSA applies to a class action based on state law, “the key question is whether the gravamen involves a misrepresentation or omission in connection with the purchase or sale of mutual funds, ” a question that we answered in the affirmative with respect to the SAC. (Wells Fargo, supra, 159 Cal.App.4th 381, 388.) We noted the essence of the SAC was “that the Bank made misrepresentations and omitted material facts, including conflicts of interest and fees” and that the pleading was “replete with allegations that the Bank ‘failed to disclose’... details regarding fees and conflicts of interest, and that these omissions caused injury to plaintiffs.” (Ibid.) In the present appeal, plaintiffs claim that the TAC, unlike the SAC, does not trigger SLUSA preclusion because the revised complaint eliminates the allegations and claims that we previously found subject to preclusion.
A. Part Two of the TAC
We turn first to the four causes of action stated in Part Two of the TAC. As noted above, all the causes of action in Part Two are based on allegations that the Bank invested trust funds in its own proprietary mutual funds, or funds of third parties, in order to generate fees and other benefits for itself and in disregard of more appropriate nonaffiliated mutual funds. For example, the first cause of action alleges that the Bank harmed plaintiffs and other beneficiaries of personal trusts by breaching its fiduciary duty to make prudent investments, in violation of the Uniform Prudent Investor Act (Prob. Code, § 16045 et seq.). Specifically, plaintiffs claim the Bank invested trust funds in its own proprietary mutual funds, and/or in third party mutual funds that provide kick backs or other consideration to the Bank. In addition to depriving the beneficiaries of the best possible return on their investment, this practice also allegedly allowed the Bank to enrich itself further by imposing more fees on their accounts.
Probate Code section 16047, subdivision (a), provides: “A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.”
The second cause of action alleges that the Bank’s “continuing corporate policy and practices regarding the Mutual Fund Subclass as alleged above were and are a breach of the Bank[’s] fiduciary duties.” The third cause of action states that the Bank has unjustly enriched itself by retaining and investing the proceeds of their unjust enrichment and realized additional profits “which should all be returned to the trust accounts from which they were derived and/or to the beneficiaries of those accounts.” The fourth cause of action alleges that the Bank violated the Unfair Competition Law by violating “numerous statutes as well as federal banking regulations.”
In an attempt to comply with our holding in Wells Fargo, plaintiffs note that they have “moved all references to the mutual funds into a separate Part Two” that contains “new allegations and new causes of action exclusive to the mutual fund claims.” They also claim that the new Part Two withstands scrutiny because it “contains no allegations that the Bank made misrepresentations or omissions of material fact, or engaged in deceptive or manipulative conduct, as SLUSA expressly requires.” We are not persuaded.
In evaluating whether plaintiffs’ claims in Part Two are subject to SLUSA preclusion, we find the case of Segal v. Fifth Third Bank, N.A. (6th Cir. 2009) 581 F.3d 305 (Segal) to be instructive. In Segal, the named plaintiff represented a class of beneficiaries of trust accounts administered by a bank. (Id. at p. 308.) The complaint, like the TAC here, alleged that his bank had breached its fiduciary and contractual duties, in part by investing “fiduciary assets in proprietary (and often higher-fee) Fifth Third mutual funds rather than superior funds operated by [the bank’s] competitors.” (Ibid.) The plaintiff attempted to avoid the application of SLUSA by explicitly declaring in the complaint that “ ‘None of the causes of action stated herein are based upon any misrepresentation or failure to disclose material facts to plaintiffs....’ ” (Segal, supra, at p. 310.)
In finding the claim was precluded by SLUSA, the appellate court observed: “Courts may look to-they must look to-the substance of a complaint’s allegations in applying SLUSA. Otherwise, SLUSA enforcement would reduce to a formalistic search through the pages of the complaint for magic words-‘untrue statement, ’ ‘material omission, ’ ‘manipulative or deceptive device’-and nothing more. But a claimant can no more elude SLUSA’s prohibitions by editing out covered words from the complaint than by disclaiming their presence. For the same reason a claimant does not have the broader authority to disclaim the applicability of SLUSA to a complaint, he cannot avoid its application through artful pleading that removes the covered words from the complaint but leaves in the covered concepts. [Citations.]” (Segal, supra, 581 F.3d 305, 310–311.) The court also noted that allowing artful pleadings to proceed “would ‘frustrate the objectives’ of PSLRA and SLUSA, [citation], and re-open the ‘ “federal flight” loophole’ SLUSA sought to close. [Citation.] The question under SLUSA is not whether the complaint uses the prohibited words: ‘an untrue statement or omission of a material fact’ or a ‘manipulative or deceptive device or contrivance.’ It is whether the complaint covers the prohibited theories, no matter what words are used (or disclaimed) in explaining them. [Citations.]” (Id. at p. 311.)
Another case dealing with this issue is Siepel v. Bank of America, N.A. (8th Cir. 2008) 526 F.3d 1122. There the beneficiaries of trust accounts maintained a class action against the bank and its holding company, alleging, in part, that defendants breached fiduciary duties and realized unjust enrichment. Affirming the dismissal of these state law claims, the circuit court determined the particular state claims-by plaintiffs or someone else-need only “ ‘ “coincide” with a securities transaction’ ” to satisfy SLUSA preclusion. (Siepel, supra, at p. 1127, quoting Dabit, supra, 547 U.S. 71, 85.) Litigation of the trustees’ breach of fiduciary duties will encompass evidence of the bank’s alleged handling of the trust securities, satisfying Dabit’s preclusion standard that “ ‘the fraud alleged “coincide” with a securities transaction....’ ” (Siepel, supra, at p. 1127, quoting Dabit, supra, at p. 85.)
We find the Part Two of the present complaint to be indistinguishable from the complaint that was dismissed in Segal. The substance of the causes of action at issue here are the same, namely, that the banks invested trust assets in inferior mutual funds in order to secure profits for themselves at the expense of beneficiaries. Plaintiffs’ attempt to distinguish the present case from Segal is not persuasive. Citing to Proctor v. Vishay Intertechnology Inc. (9th Cir. 2009) 584 F.3d 1208 (Proctor), plaintiffs claim “the law is clear that SLUSA does not bar all claims for breach of fiduciary duty involving nationally traded securities, but only fraud claims.”
Citing to Norman v. Salomon Smith Barney, Inc. (S.D.N.Y. 2004) 350 F.Supp.2d 382, 386–387 (a pre-Dabit decision), plaintiffs claim federal courts are loath to recast complaints that allege breach of fiduciary duties into securities fraud actions. We note the complaint in Segal involved a claim for breach of fiduciary duty. Similarly, in Siepel v. Bank of America, N.A., supra, 526 F.3d 1122, 1124, the appellate court held SLUSA preempted state law claims that a trustee breached its fiduciary duty by failing to disclose conflicts of interest in its selection of nationally traded investment securities. We thus do not perceive any current trend in SLUSA jurisprudence to accord special treatment to claims for breach of fiduciary duty.
In Proctor, minority shareholders brought an action in the California courts against a corporation, the corporation’s majority shareholder, and the corporation’s auditor. The operative complaint contained three causes of action: (1) a derivative claimfor breach of fiduciary duty and waste of corporate assets, (2) a class action claim for breach of fiduciary duty, and (3) a class action claim for a “quasi-appraisal” pursuant to Delaware corporate law. (Proctor, supra, 584 F.3d 1208, 1221.) The appellate court characterized the complaint as stating claims for “looting.” (Id. at p. 1223.) Subsequently, the plaintiffs filed an amendment to this complaint which added specific facts as to false statements and acts of concealment allegedly committed by one of the defendants. (Id. at p. 1216.) On appeal, the circuit court held that, as a result of this amendment, the class actionclaim for breach of fiduciary duty was precluded by SLUSA. The court held the class action claim for a “quasi-appraisal” (the third alleged cause of action) was not precluded because that claim was not brought against the defendant that had allegedly made the false statements. (Proctor, supra, at pp. 1221–1223.) Thus, the court’s analysis did not turn on whether that claim was based in fraud.
Plaintiffs assert that their mutual fund claims in the TAC are equivalent to the claims of “looting” in the pre-amended Proctor complaint. We disagree. As the court in Proctor noted, citing to Segal, and to Rowinski v. Salomon Smith Barney Inc. (3rd Cir. 2005) 398 F.3d 294, 300 (Rowinski): “Misrepresentation need not be a specific element of the claim to fall within [SLUSA’s] preclusion.” (Proctor, supra, 584 F.3d 1208, 1222, fn. 12.) In Rowinski, a plaintiff alleged that a misrepresentation made in connection with a securities trade breached a contract. The court held that the plaintiff could not avoid SLUSA preemption by arguing that misrepresentation is not an element of a breach of contract action because, the court found, the misrepresentation was a “factual predicate” of the claim. (Rowinski, supra, at p. 300.)
Importantly, Rowinski also focused on the legal relationship pleaded in the plaintiffs’ complaint. It was a broker/investor relationship, the essence of which involved the trading in securities. If the purpose of the brokerage account involves the purchase and sale of securities, then the class of customers, i.e., plaintiffs alleging a breach of fiduciary duty, is almost certain to cover the purchasers or sellers of securities. (Rowinski, supra, 398 F.3d 294, 303.)
To distinguish Rowinski, plaintiffs rely heavily on another Third Circuit case: LaSala v. Bordier et Cie (3rd Cir. 2008) 519 F.3d 121 (LaSala). We note the panel which decided LaSala was not the same one which decided Rowinski. More importantly, in LaSala, the panel held that SLUSA did not apply to claims alleging violation of Swiss money-laundering law because SLUSA is explicitly limited to claims brought under “state” law. (LaSala, supra, at p. 139.) After reaching this conclusion, the court also noted that to the extent the complaint alleged misrepresentations in connection with the Swiss law claims, these misrepresentations were not “factual predicates, ” but rather “merely background details.” The justices in LaSala distinguished Rowinski by stating that in order to be a “factual predicate” to a legal claim “the fact of a misrepresentation must be one that gives rise to liability, not merely an extraneous detail.” (LaSala, supra, at p. 141.)
We observe the plaintiff in Segal cited to LaSala in conjunction with the same argument plaintiffs make here, an argument that the appellate court in Segal firmly rejected: “In his reply brief, Segal brings to our attention a decision from the Third Circuit that appears to provide some support for his position on this point. ‘While it may be unwise... to set out extraneous allegations of misrepresentations in a complaint, ’ the court says, ‘the inclusion of such extraneous allegations does not operate to require that the complaint must be dismissed under SLUSA.’ [Citing to LaSala, supra, 519 F.3d 121, 141.] But this language from LaSala is not only dicta-the court had already resolved the issues at hand-it also contradicts an earlier decision from the Third Circuit. In Rowinski, 398 F.3d at 300, the court held that whether an alleged misrepresentation is ‘an essential legal element’ is ‘immaterial under [SLUSA].’ We agree-with Rowinski, that is. The terms of SLUSA do not speak to ‘material, ’ ‘dependent’ or ‘extraneous’ allegations; they speak to covered allegations. A ‘broad’ interpretation of the Act leaves no room for this inquiry-a difficult one at that to implement-which is why we reject it and why (we presume) Rowinski rejected any such suggestion earlier.” (Segal, supra, 581 F.3d 305, 311–312.) We find the analysis in Segal to be persuasive.
Plaintiffs also rely on In re Charles Schwab Corp. Securities Litigation (N.D.Cal. 2009) 257 F.R.D. 534 (Schwab). In Schwab, a class action lawsuit was brought alleging that “defendants Charles Schwab Corporation and several affiliated entities and individuals violated federal securities laws and various state laws by misrepresenting the risk profile and assets” of a Schwab fund and “by improperly changing the fund’s investment policies.” (Id. at p. 542.) The state law claims asserted violations “arising from an allegedly unauthorized change of the fund’s concentration policy, which expressly limited concentration to 25 percent of assets in any single ‘industry.’ [The plaintiff alleged] that the violations occurred when the fund changed its concentration policy by ceasing to define mortgage-backed securities as an ‘industry, ’ without a shareholder vote, thereby permitting the fund to invest far more than 25 percent of its assets in mortgage-backed securities and other such assets. [The plaintiff alleged] that both a contract between Schwab and its investors, as well as the Investment Company Act, required the shareholder vote.” (Id. at p. 551, italics omitted.) The court noted that none of the claims were predicated on a misrepresentation because the plaintiff agreed Schwab had properly disclosed the change in its concentration policy. Instead, the plaintiff argued that “the change was nevertheless improper.” (Ibid.) The court found the state claims were not precluded by SLUSA because they were “not predicated upon a misrepresentation in connection with a securities transaction....” (Schwab, supra, at p. 551.)
We find the present case is factually distinguishable from Schwab. Here, the asserted claims of breach of fiduciary duty, self dealing, unjust enrichment, and violation of Business and Professions Code section 17200 et seq., are based on the same factual predicates: That the Bank selected investment options for the trusts that included its own mutual funds as well as funds with which it had revenue-sharing arrangements, and that it created “irreconcilable conflicts of interest” by selecting investment options, allowing it to “enrich itself at Plaintiffs’ expense... by increasing the overall amount of fees taken out of their trusts.” While Part Two of the TAC omits the allegation contained in the SAC that the Bank failed to provide full disclosure of its actions, including disclosure of payments received from its investments as well as the nature and extent of any conflicts of interest, it does allege that the Bank deprived beneficiaries of the right to receive prior notice of its investment decisions. Plaintiffs likewise allege the Bank failed to “document” information about certain mutual fund transactions, including information about the way in which the Bank handled its alleged conflict of interest-an express allegation that directly implicates the previous allegations in the SAC that the Bank failed to disclose material information about trust investments to beneficiaries and others. These allegations thus contrast with Schwab, in which the plaintiff readily agreed that the defendant properly disclosed the change to its concentration policy. (Schwab, supra, 257 F.R.D. 534, 551.)
Plaintiffs’ reliance on Beckett v. Mellon Investor Services LLC (9th Cir., May 14, 2009, No. 06-36044) 2009 WL 1336735 is similarly misplaced. While it may be possible to allege a breach of fiduciary class action claim that does not fall within SLUSA’s ambit, the allegations in the present complaint do.
In sum, at its core, Part Two of the TAC alleges that the Bank failed to disclose material facts or made misrepresentations in connection with the trust participants’ investment options selected by the Bank. Consistent with our prior opinion, we conclude the gravamen of Part Two of the TAC, “involves a misrepresentation or omission in connection with the purchase or sale of mutual funds” (Wells Fargo, supra, 159 Cal.App.4th 381, 388) within the meaning of SLUSA.
We further observe we do not review the TAC in a vacuum. It is established that “If a party files an amended complaint and attempts to avoid the defects of the original complaint by either omitting facts which made the previous complaint defective or by adding facts inconsistent with those of previous pleadings, the court may take judicial notice of prior pleadings and may disregard any inconsistent allegations.” (Colapinto v. County of Riverside (1991) 230 Cal.App.3d 147, 151.) This rule is consistent with the scrutiny that federal courts apply to complaints that implicate SLUSA: “SLUSA is ‘an express exception to the well-pleaded complaint rule.’ [Citation.] Even where plaintiffs attempt to conceal claims based on the misrepresentation or omission of material facts with state law labels, courts disregard such labels and dismiss the claims as preempted by SLUSA. [Citations.] Thus, the Court must focus on the substance of the allegations and be wary of efforts to circumvent SLUSA through artful pleading. [Citations.] When the gravamen of the complaint involves an untrue statement or substantive omission of a material fact, and when that conduct coincides with a transaction involving a covered security, SLUSA mandates dismissal.” (Kutten v. Bank of America, N.A. (E.D.Mo., Aug. 29, 2007, Civ. No. 06-0937 (PAM)) 2007 U.S.Dist. Lexis 63897 at pp. *10–*11, affirmed in Kutten v. Bank of America, N.A. (8th Cir. 2008) 530 F.3d 669.) We conclude the four counts in Part Two asserting claims of breach of fiduciary of duty, self-dealing, unjust enrichment, and violation of the Unfair Competition Law, fall within SLUSA’s ambit and therefore are subject to dismissal.
B. Part One of the TAC
Plaintiffs contend the tax preparation and common trust fund claims contained in Part One of the TAC are not precluded by SLUSA because they “do not allege any misconduct involving nationally traded securities.” Further, their opening brief repeatedly asserts that the Bank has “conceded” the claims in this part are not subject to SLUSA preclusion. In particular, they point to a footnote in Wells Fargo in which we stated: “Because the Bank does not appear to assert that plaintiffs’ allegations regarding the Bank’s ‘securities lending program’ involve a security transaction, we need not address whether those allegations also fall within the scope of SLUSA.” (Wells Fargo, supra, 159 Cal.App.4th 381, 388, fn. 4.) Not surprisingly, the Bank denies it has conceded the issue.
In connection with Part One, plaintiffs allege generally that the Bank violated California law in four respects: (1) by implementing a “securities lending” program by which it places trust assets in a common trust fund so that it can lend securities held in the fund to third parties, charge the third parties fees and interest, and “misappropriate” from plaintiffs up to 40 percent of the fees and interest received; (2) by investing trust assets in mutual funds from which the Bank and its affiliates receive undisclosed compensation; (3) by investing trust assets in mutual funds in order to collect various fees for itself and its affiliates, including “ ‘investment and advisory’ ” fees; and (4) by charging unreasonable fees for the preparation of tax returns. Plaintiffs allege that by engaging in these acts, the Bank has violated its duties as trustee to avoid conflicts of interest and to make investments solely in the interests of the beneficiaries. They further allege the Bank failed to provide full, candid disclosure of its actions, and has provided no accountings to the beneficiaries of investment trust assets.
These allegations are strikingly similar to the allegations of the SAC as we described in Wells Fargo, quoted above.
We agree with plaintiffs that their claims involving the Bank’s tax preparation fees are not precluded by SLUSA. There is nothing in the allegations concerning the preparation of tax returns, standing alone, that implicates transactions involving nationally traded securities. For example, the TAC alleges that the Bank “Charged fees for preparation of tax returns that are many times Wells Fargo’s actual costs, thus generating further fees in violation of trust law.”
We note, however, that both the tax return claims and the securities lending claims incorporate the general allegations set forth in Part One.
We disagree, however, with plaintiffs’ assertion that the “common trust fund claims” are not precluded by SLUSA. The TAC alleges that under its securities lending program, the Bank transferred ownership of certain securities held in the common trust funds to third parties and pledged collateral so that the third parties could sell the securities on the open market, use the securities to cover a short sale, or conduct a similar securities transaction. The TAC further alleges that, through the securities lending program, the Bank collected excessive and improper administrative fees and failed to properly disclose material information about its securities lending program to trust beneficiaries. Plaintiffs claim that their common trust fund claims “do not involve a covered security, and therefore provide no basis for SLUSA preclusion.”
The United States Supreme Court has read the “ ‘in connection with’ ” provision of SLUSA expansively: “[I]t is enough that the fraud alleged ‘coincide’ with a securities transaction” for SLUSA preemption to apply. (Dabit, supra, 547 U.S. 71, 85.) The “ ‘in connection with’ ” requirement of SLUSA is satisfied whenever the alleged misconduct coincides with a securities transaction, whether by the plaintiff or someone else. (See Dabit, supra, at pp. 84–86.)
As noted above, the general allegations in Part One include allegations that the Bank implemented a “securities lending” program and investing trust assets in “mutual funds” in a deceptive manner for illegitimate purposes. In describing the securities lending program, the complaint states that the Bank “lends securities purchased by trust beneficiaries to other financial institutions. The ‘borrower’ becomes the owner of the securities, and can sell them. The borrower must pay Wells Fargo a fee for the transaction and puts up collateral at a negotiated value if it sells the securities.” (Italics added.) Further the complaint alleges that the Bank “has not properly disclosed these side deals to Plaintiffs and the class.” Manifestly, these allegations involve the making of an untrue statement or omission of a material fact coinciding with the purchase or sale of a covered security.
Relying on Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, LLC (S.D.N.Y., Feb. 16, 2010, No. 05 Civ. 9016 (SAS)) 2010 U.S.Dist. Lexis 13766 (Pension Committee), plaintiffs claim in their reply brief that the common trust fund claims do not trigger SLUSA preclusion because common trust funds are exempt from federal securities laws. In Pension Committee, a group of investors had sued to recover losses stemming from the liquidation of two hedge funds in which they held shares. The plaintiffs asserted that the defendant bank had mislead them by overvaluing the funds. (Pension Committee, supra, at pp. *6–*7.) The bank argued the claim was precluded by SLUSA because a portion of the funds in question contained nationally traded securities. (Pension Committee, supra, at pp. *9–*10.) The district court found SLUSA preclusion did not apply to the state law claims, concluding “There are no grounds on which to justify applying Dabit to statements made by the [defendants] concerning uncovered hedge funds-even when a portion of the assets in those funds include covered securities. This outcome is required because the alleged fraud relates to those hedge funds rather than to the covered securities in the portfolios.” (Pension Committee, supra, at pp. *12–*13, italics omitted.)
As the Bank noted at oral argument, Pension Committee specifically found claims concerning direct investments in shares of hedge funds to be “distinguishable” from claims, such as the ones at issue here, challenging a trustee’s investment of assets deposited in trust accounts: “These cases [regarding trust accounts] are all distinguishable. In each case, the plaintiff deposited his or her money in a bank account-not a Fund in which shares are purchased-managed by a trustee who then made allegedly misleading statements regarding the trustee’s use of the plaintiff’s money to purchase, sell, or hold covered securities. The plaintiff did not purchase or hold shares in the trust accounts, rather, they merely made deposits into those accounts. The trustee (the bank) then invested the funds held in those accounts in covered securities. By contrast, the [defendants] made allegedly misleading statements in connection with plaintiffs’ purchase, sale, or holding of uncovered securities-namely shares of the Funds.” (Pension Committee, supra, Lexis 13766, at p. *16.)
The common trust fund claims allege that a trustee breached its duties by pooling assets deposited in trust accounts and loaning them out in connection with covered securities transactions. Thus, they allege the same type of investment vehicle found in Pension Committee to be distinguishable. The allegations in Part One of the TAC necessarily occurred in connection with the sale or purchase of securities. Additionally, unlike the hedge fund in Pension Committee, the common trust fund appears to consist entirely of funds invested in covered securities. We conclude the common trust fund claims are precluded by SLUSA.
We also agree with the Bank that Pension Committee adopts a narrow reading of the “ ‘in connection with’ ” language in Dabit, which arguably conflicts with many cases holding that SLUSA does apply to state law claims where plaintiffs allegedly held an interest in investment vehicles that invest in covered securities. (See, e.g., City of Chattanooga v. Hartford Life Ins. Co. (D.Conn., Dec. 22, 2009, 3:09-CV-516 (WWE)) 2009 U.S.Dist. Lexis 119930, *6–*7 [pension plan “separate accounts”]; Patenaude v. Equitable Life Assurance (9th Cir. 2002) 290 F.3d 1020) [variable annuity contracts].)
V. Failure to Allow Leave to Amend
In denying leave to amend, the trial court expressed the view that if part of the complaint is precluded, the entire complaint is precluded. We agree with plaintiffs that the TAC’s allegations involving the Bank’s tax preparation fees, standing alone, are not precluded by SLUSA. Subsequent to the court’s ruling, the federal Courts of Appeals, including the Ninth Circuit, have held that SLUSA does not require the dismissal of nonprecluded claims along with precluded claims. (Proctor, supra, 584 F.3d 1208, 1226–1228; see also In re Lord Abbett Mutual Funds Fee Litigation (3rd Cir. 2009) 553 F.3d 248, 255–256.) Because we conclude that plaintiffs must be allowed leave to amend their complaint to state their claims with respect to the tax preparation fees, we need not address their contention that the trial court erred in denying their motions for reconsideration under Code of Civil Procedure section 1008.
We also disagree with the Bank’s assertion that the “law of the case” as set forth in our Wells Fargo opinion, bars plaintiffs from amending their complaint to pursue their tax preparation claim. In our prior opinion, we recognized that the tax preparation claim did not trigger SLUSA preclusion. (See Wells Fargo, supra, 159 Cal.App.4th 381, 394.)
DISPOSITION
The order sustaining the Bank’s demurrer to the TAC is affirmed. However, the order is modified to allow plaintiffs leave to amend to state a claim with respect to the Bank’s tax preparation fees.
In Wells Fargo, we observed plaintiffs could alternately avoid SLUSA preclusion by amending their complaint to limit the size of the class to less than 50 individuals. Plaintiffs have not elected to limit the size of the class in any of their subsequent amended complaints. However, this option is still available to them should they elect to do so.
Parties to bear their own costs.
We concur: Margulies, Acting P. J., Richman, J.
Associate Justice of the Court of Appeal, First Appellate District, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.