Appeal from a judgment of the United States District Court for the Southern District of New York, Abraham D. Sofaer, J., dismissing, pursuant to Fed. R. Civ. P. 12(b) (6), shareholder's derivative suit. Stockholder claims (1) that mutual fund had been caused to pay administrative fees in violation of earlier settlement agreement; (2) that fund had paid excessive advisory and administrative fees in violation of § 36(b) of the Investment Company Act, 15 U.S.C. § 80a-35(b); and (3) that sale of controlling interest in investment adviser violated § 15(f) of the Investment Company Act, 15 U.S.C. § 80a-15(f).
Feinberg, Chief Judge, Van Graafeiland and Newman, Circuit Judges.
Plaintiff Richard Meyer, as custodian for Pamela Meyer, appeals from an order of the United States District Court for the Southern District of of New York, Abraham D. Sofaer, J., dismissing plaintiff's amended complaint against the Daily Cash Accumulation Fund, Inc. (the Fund), the Fund's investment adviser, Centennial Capital Corporation (Centennial), and various securities dealers that together owned all of the stock in Centennial (the brokerage defendants). The amended complaint challenges on several grounds the legality of a decision by the Fund to adopt a plan of distribution (the Plan), pursuant to Rule 12b-1, 17 C.F.R. § 270.12b-1 (1984), of the Securities and Exchange Commission (SEC). The plan authorizes the Fund to reimburse securities dealers, including the brokerage defendants, for "administrative and sales related costs in rendering distribution assistance to the Fund. For the reasons stated below we reverse the order dismissing the complaint and remand for further proceedings.
Taking a plaintiff-appellant's allegations as true, as we must for the purpose of this appeal, Wade v. Johnson Controls, Inc., 693 F.2d 19, 20 (2d Cir. 1982), the relevant facts are as follows. Appellant is a shareholder of the Fund, a money market mutual fund regulated by the Investment Company Act of 1940 (ICA or the Act), 15 U.S.C. § 80a-1 et seq. The Fund's shares are sold largely through the facilities and efforts of five brokerage firms, defendants-appellees Oppenheimer Management Corporation, Thomson McKinnon Securities, Inc., A.G. Edwards & Sons, Inc., Bateman Eichler, Hill Richards, Inc., and J.C. Bradford & Co.
At all relevant time, these five firms, either directly or in one case through a wholly owned subsidiary, owned all of the stock in the Fund's investment adviser, Centennial. Oppenheimer Management Corporation owned all of the stock of defendant-appellee Oppenheimer Asset management Corporation, which in turn owned a majority of the stock in Centennial. The other four brokerage firms owned the remainder of Centennial's stock. The remaining two defendants were also closely related to their co-defendants: Oppenheimer & Co. owned almost all of the stock of Oppenheimer Management Corporation, one of the brokerage defendants.
Centennial provides the Fund with investment advisory services in exchange for a fee that prior to 1980 was set at one-half of one percent of the Fund's net assets. In 1980, the plaintiff-appellant in this suit filed an action against the Fund, the investment adviser (Centennial was then called THE Management Group), the Oppenheimer defendants, A.G. Edwards and Thomson McKinnon. That suit, Meyer v. Oppenheimer M anagement Corp., 609 F.Supp. 380 (1984) ( Meyer I) alleged that the fee charged by the investment adviser pursuant to its agreement with the Fund was excessive and therefore that the non-Fund defendants had violated section 36(b) of the ICA, 15 U.S.C. § 80a-35(b), which provides that an investment adviser of a mutual fund has a "fiduciary duty with respect to the receipt of compensation." Meyer I was settled in 1981 when the parties agreed to a reduction of the adviser's compensation so that the advisory fee rate, as a percentage of assets, decreases as the Fund's assets increase. In the Stipulation of Settlement, the parties also agreed that the new advisory fee could not be increased without court approval for five years, and that Centennial would "perform and offer to continue to perform all of the investment advisory services specified or required by the terms of the Advisory Agreement currently in effect between Centennial and the Fund." At the time, both sides acknowledged that the brokerage defendants, which owned Centennial, also performed significant services for the Fund without compensation. The settlement, however, nowhere expressly provided that the brokerage defendants must continue to perform these services.
Judge Sofaer approved the settlement in Meyer I in August 1981, concluding that the proposed settlement was "fair, reasonable and adequate." In the spring of 1982, the Fund proposed and its shareholders adopted a Rule 12b-1 plan of distribution, which authorized the Fund to reimburse the brokerage defendants, among others, for administrative and sales-related costs incurred in rendering distribution assistance to the Fund.
Shortly thereafter, the plaintiff in Meyer I filed the present action, in which he makes the following claims" (1) The Plan violates the Meyer I settlement by authorizing payment for services that were intended under the settlement to be covered by the advisory fee; (2) The Plan's administrative fee, when coupled with the settlement's advisory fee, violates sections 36(b) and 48 of the ICA, 15 U.S.C. §§ 80a-35(b), 80a-47(a), because it is excessive and therefore represents a breach of the non-Fund defendant's fiduciary duty. According to the amended complaint, at the Fund's then current size the advisory fee fixed by the settlement would be approximately $18.5 million per year and the Plan's administrative fee would be approximately $10 million; (3) The Fund violated section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n (a), and section 20 of the ICA, 15 U.S.C. § 80a-20, because the proxy statement proposing the Plan failed to state that the advisory fee paid by the Fund to Centennial was intended to cover the expenses for which the Plan would reimburse brokers; (4) The sale of two of the Oppenheimer defendants, which resulted in a change in the control of Centennial, violated section 15(f) of the ICA, 15 U.S.C. § 80a-15(f), by placing an "unfair burden" on the Fund.
After appellant complied with the district court's ruling that he present his demand to the Fund's directors, and the board rejected the demand, the district court granted defendant-appellees' motion to dismiss under Fed. R. Civ. P. 12(b) (6). This appeal followed.
The overarching issue on this appeal is whether appellant's averments are sufficient to withstand appellees' motion to dismiss. Dismissal of a complaint for failure to state a claim is a "drastic step," Johnson Controls, supra, 693 F.2d at 22, which must not be taken "'unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974), quoting Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). With this admonition in mind, we turn to consider appellant's claims.
A. Breach of Settlement Claim
Appellant's first claim is implementation of the Plan, under which securities dealers are reimbursed for costs incurred in rendering administrative assistance to the Fund, deprived him of the benefits of the settlement in Meyer I. At the outset, appellees argue that this issue is not properly before us. They note that Judge Sofaer treated the breach of settlement claim as a motion to enforce the settlement in Meyer I. Because appellant failed to include explicit reference to Meyer I in his notice of appeal, appellees contend that we are without jurisdiction to consider this claim. Given our general practice of construing notices of appeal liberally, see LeSportsac, Inc. v. K Mart Corp., 754 F.2d 71, 80 (2d Cir. 1985), the close connection between this claim and that based on section 36(b) of the ICA, see Section II B, infra, and appellees' failure to show that they were "misled by the mistake," see LeSportsac, supra, 754 F.2d at 80; 9 J. Moore, B. Ward & J. Lucas, Moore's Federal Practice P 203.18, at 3-77 (2d ed. 1985), we conclude that this contention is without merit.
Judge Sofaer, interpreting the settlement agreement "within its four corners," United States v. Armour & Co., 402 U.S. 673, 682, 29 L. Ed. 2d 256, 91 S. Ct. 1752 (1971), concluded that the services paid for under the Plan are not those that Centennial obligated itself to render under the settlement agreement. In doing so, he rejected appellant's argument that statements made by both sides in support of the settlement establish that the fee agreed to in the settlement was meant to include payment for the services now paid for under the Plan. As appellees emphasize, Judge Sofaer presided over the settlement hearing and approved the settlement in Meyer I; he is therefore in a particularly good position to interpret the agreement's terms. Nevertheless, we are persuaded by appellant's contention that discovery might reveal at least some overlap between the settlement's advisory services and the Plan's administrative services, and hence that the settlement's was violated. Dismissal for failure to state a claim was not warranted.
Moreover, the approved settlement had two components: It specified what Centennial is obligated to continue to do to earn its fee, and it determined that the fee is "fair." Even if the district court was correct in its interpretation of Centennial's obligations, it failed to focus on whether, in light of the Plan, the fee set by the settlement remains "fair." The fairness of the $18.5 million fee was asserted by the owners of Centennial partly on the ground that the Fund was being spared certain expenses. In particular, their memorandum to the district court in support of the proposed settlement stated:
Centennial also provides a number of services to the Fund not normally provided by investment advisers. Chief among these services are the enormous share- holder servicing and transfer agency operations performed at cost by SSI. In addition, defendants Edwards and Thomson, whose customers represent approximately 80% of the Fund's beneficial shareholders, administer their own customers' accounts at a total savings to the Fund of between $2 million and $3 million per year . . . . Brokerage firms such as Edwards and Thomson also save the Fund "in excess of probably $50,000 a month in postage alone" by incorporating the Fund's monthly dividend statements in the account statement mailed to their own customers who shares in the Fund. (emphasis added in part).
SSI, referred to above, is a wholly owned subsidiary of the Oppenheimer companies. That the defendants told the district court that "Centennial" "provides" the shareholder service that are in fact performed by SSI is significant. The defendants viewed Centennial and the Oppenheimer companies as one entity to justify the fairness of the $18.5 million fee and now view them separately to justify entitlement to an additional $10 million. Moreover, if the $18.5 million paid to Centennial (and thereby to the broker owners of Centennial) was "fair" because the Fund did not have to pay for these additional services, then the figure might no longer be "fair" when the Fund does have to pay for them.
We realize that appellant framed his complaint to allege that the charges for administrative service violate the settlement, but we decline to hold him to that strict a reading of the complaint. His basic point, on this cause of action, is that he has been denied the benefits of the settlement. That would be true if either (a) the Fund must now pay for services that Centennial had agreed to perform under the statement, or (b) the settlement fee is no longer fair because it was predicated on the Fund's not having to pay for ...