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Mintz v. Baron

March 20, 2009

MEYER MINTZ AND MEIR SPEAR, PLAINTIFFS,
v.
RONALD BARON ET AL., DEFENDANTS, BARON GROWTH FUND, AND BARON SMALL CAP FUND, NOMINAL DEFENDANTS.



The opinion of the court was delivered by: Laura Taylor Swain, United States District Judge

MEMORANDUM OPINION AND ORDER

Plaintiffs Meyer Mintz and Meir Spear (collectively, "Plaintiffs") bring this derivative action on behalf of the Baron Growth Fund (the "Growth Fund") and the Baron Small Cap Fund (the "Small Cup Fund") (collectively, the "Funds") against Baron Capital, Inc. ("Baron Capital"), and the individual trustees of the Funds (the "trustees") (collectively, "Defendants"). Plaintiffs assert claims for breach of fiduciary duty under Section 36(b) of the Investment Company Act, 15 U.S.C. § 80a-35(b) ("ICA") against Baron Capital in connection with Baron Capital's receipt of allegedly excessive marketing and distribution expenses paid under Rule 12b-1 promulgated pursuant to the ICA, 17 C.F.R. § 270.12b-1 ("Rule 12b-1 fees") from September 12, 2003 (for the Growth Fund),*fn1 and from April 22, 2005 (for the Small Cap Fund) (Count I). On substantially the same grounds, Plaintiffs also assert claims for breach of fiduciary duty under Massachusetts state law against the trustees (Count II). The Court has jurisdiction of Plaintiffs' federal claim pursuant to 15 U.S.C. § 80a-35(b)(5) and supplemental jurisdiction of their state law fiduciary duty breach claim pursuant to 28 U.S.C. § 1367.

On September 19, 2006, the Court entered a Memorandum Opinion and Order granting in part Defendants' motion to dismiss the complaint, with leave for Plaintiffs to replead. (Docket Entry No. 15.) Defendant Baron Capital moved for reconsideration of the Court's decision (Docket Entry No. 16), and Plaintiffs filed their Amended Complaint shortly thereafter. (Docket Entry No. 18.) Defendants then filed a motion to dismiss the Amended Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. (Docket Entry No. 21.)

Baron Capital requests that its motion for reconsideration be consolidated for resolution with Defendants' motion to dismiss the Amended Complaint. (See Docket Entry No. 20.) Because the subsequently filed Amended Complaint moots reconsideration of the first motion to dismiss, and because the motion for reconsideration raises arguments relevant and similar to those in the motion to dismiss the Amended Complaint, that request is granted. The Court treats the consolidated filings as a motion to dismiss the Amended Complaint pursuant to Rule 12(b)(6).

The Court has considered thoroughly all of the parties' submissions and arguments. For the following reasons, Defendants' motion to dismiss the Amended Complaint is granted with leave to replead.

BACKGROUND

The Court presumes familiarity with the facts alleged in Plaintiff's original complaint as well as the Court's legal reasoning in granting Defendants' first motion to dismiss, all of which are set forth in Mintz v. Baron, No. 05 Civ. 4904 (LTS) (HBP), 2006 WL 2707338 (S.D.N.Y. Sept. 19, 2006) ("Mintz I"). In accordance with the Court's decision in Mintz I, the Amended Complaint pleads Counts I and II as derivative claims and does not bring a Section 36(b) claim against BAMCO, Inc., but the Amended Complaint does not otherwise differ substantially from the original complaint.

DISCUSSION

On a motion to dismiss a complaint, the Court accepts the factual allegations in the complaint as true, and draws all reasonable inferences in the plaintiff's favor. Roth v. Jennings, 489 F.3d 499, 501 (2d Cir. 2007). The complaint must plead "enough facts to state a claim to relief that is plausible on its face." Ruotolo v. City of New York, 514 F.3d 184, 188 (2d Cir. 2008) (quoting Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1974 (2007)). The Court reviews each Count separately.

Count I

An investment advisor or its affiliate violates the duty imposed by Section 36(b) if the fee charged is "so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining." Amron v. Morgan Stanley Investment Advisors Inc., 464 F.3d 338, 340 (2d Cir.2006) (quoting Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923, 928 (2d Cir. 1982)).

[C]courts consider six factors in applying this standard. These are: (1) the nature and quality of services provided to fund shareholders; (2) the profitability of the fund to the adviser-manager; (3) fall-out benefits; (4) economies of scale; (5) comparative fee structures; and (6) the independence and conscientiousness of the trustees.

Amron, 464 F.3d at 340 (citing Gartenberg 694 F.2d at 929-30). In Mintz I, the Court applied Gartenberg holistically and found that Plaintiffs' allegations were "sufficient, albeit barely so, to plead facts demonstrating that the Rule 12b-1 fees were disproportionate to the services rendered." Mintz I, 2006 WL 2707338, at *4.

Defendants' motion to dismiss the ICA aspect of the Amended Complaint relies principally on the Second Circuit's decision in Amron, which was issued shortly after Mintz I and which clarified that the Gartenberg factors are examined separately in determining whether a plaintiff has provided sufficient factual context for its allegation that the 12b-1 fee in question is so disproportionately large as to bear no reasonable relationship to the services and could not have been the product of arm's length bargaining. The Amron Court examined the allegations of the complaint in that case in light of each of the Gartenberg factors and, finding that the complaint alleged insufficient facts to sustain the cause of action, affirmed its dismissal. See Amron, 464 F.3d at 343-45. Post-Amron decisions in this District have similarly tested the specific factual allegations of section 36(b) complaints in relation to each of the Gartenberg factors. See Amron, 464 F.3d at 344 ("The standard, however, is not a simple balancing of the size of the fee against the adequacy of the services. The scope and demand of the fiduciary duty is contextual, turning on the six well-established factors . . . ."); see also In re Salomon Smith Barney Mut. Fund Fees Litig., No. 04 Civ. 4055 (PAC), 2007 WL 4326514, at *3 n.6 (S.D.N.Y. Dec. 3, 2007) ("In Amron, the Second Circuit resolved the debate . . . as to what degree of factual specificity is required for a ยง 36(b) claim to survive a motion to dismiss") (citing comparison of pre-Amron district court decisions which apparently used different standards to decide motions to dismiss Section 36(b) claims); In re Evergreen Mut. Funds Fee Litig., 240 F.R.D. 115, 121 (S.D.N.Y. 2007) (on a motion to reconsider pre-Amron decision granting motion to dismiss, noting that in Amron, "the Second Circuit ...


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