In March 2015, in Northstar Financial Advisors Inc. v. Schwab Investments, the United States Court of Appeals for the Ninth Circuit ruled that three novel state law claims were validly pled by a plaintiff seeking to represent a class of mutual fund shareholders. The state law claims alleged in this case were based on theories of breach of contract against the fund, breach of fiduciary duty against the trustees and adviser, and breach of the investment advisory agreement against the adviser. The Ninth Circuit’s decision became final on April 28, 2015, when the defendants’ motion for rehearing and for rehearing en banc was denied. On July 27, 2015, Schwab Investments and the other defendants filed a petition for writ of certiorari with the U.S. Supreme Court. On October 5, 2015, the court denied the petition.
The Northstar opinion could subject funds, directors/trustees and advisers to shareholder class actions under state law contract and fiduciary duties theories, without protections normally provided by the derivative demand requirements under the weight of existing authority. Moreover, because it would be binding on federal district courts in the Ninth Circuit, the decision is likely to make that circuit a magnet for shareholder litigation.