The opinion of the court was delivered by: Debevoise, Senior District Judge.
In this action, plaintiffs claim that defendants failed to
disclose an allegedly improper advisory compensation arrangement
for managing seven closed-end investment companies. Defendants
jointly move for judgment on the pleadings pursuant to
Fed.R.Civ.P. 12(c) dismissing plaintiffs' state law claims for
breach of fiduciary duty and deceit on the ground that they are
preempted by Section 36(b) of the Investment Company Act of 1940,
15 U.S.C. § 80a-35(b) (the "ICA"). For the following reasons, the
motion will be granted.
BACKGROUND AND PROCEDURAL HISTORY
The factual background of this action was fully described in
this Court's February 23, 1998 opinion, reported as Green v.
Fund Asset Mgmt., L.P., 19 F. Supp.2d 227 (D.N.J. 1998). Only a
brief summary is required here.
Plaintiffs own common stock in seven leveraged, closed-end
investment companies, defendants MuniEnhanced Fund, Inc.,
MuniVest Fund II, Inc., MuniYield Fund, Inc., MuniYield Insured
Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Quality
Fund, Inc., and MuniYield Quality Fund II, Inc. (collectively,
the "Funds"). The Funds are managed by defendant Fund Asset
Management, L.P. ("FAM"), a subsidiary of defendant Merrill Lynch
Asset Management, L.P. ("MLAM"). The remaining defendants are
corporate affiliates of FAM and two individual FAM executives.
The Funds are closed-end investment companies that seek to
provide shareholders with income exempt from federal income taxes
by investing in tax-exempt municipal bonds. The Funds initially
offered shares of common stock, and invest the proceeds from the
common stock offerings in long-term tax-exempt municipal bonds.
In addition, the Funds seek to enhance the income to common
shareholders through the use of leverage. The Funds leverage by
issuing shares of preferred stock that pay dividends based upon
prevailing short-term interest rates and investing the proceeds
from the sales of the preferred stock offering in longer-term
obligations that, under normal market conditions, pay higher
rates. The spread between the dividends paid to the preferred
stockholders and the longer-term rates received by the Funds
provides holders of the common stock with a potentially higher
Each Fund pays FAM a fee for managing the Fund, pursuant to a
written investment advisory agreement. The fee is paid monthly at
an annual rate of .50 of 1% of the Fund's average weekly net
assets (i.e., the average weekly value of the total assets of the
Fund, less the sum of the accrued liabilities of the Fund and
accumulated dividends on the shares of preferred stock). Both the
Funds' use of leverage and the calculation of the advisory fees
are disclosed in the Funds' prospectuses.
In their initial Complaint, plaintiffs alleged that defendants
violated Sections 8(e), 34(b) and 36(a) and (b) of the ICA as
well as state law.*fn1 In Green, plaintiffs' claims under
Sections 8(a), 34(b) and 36(a) were dismissed as untimely. 19
F. Supp.2d at 230-33. This Court also held that, assuming
arguendo that those claims were timely, they were precluded by
Section 36(b), which provides shareholders of investment
companies with an express right of action to redress breaches of
fiduciary duty "with respect to the receipt of compensation for
services, or of payments of a material nature" by an "investment
adviser or any affiliated person of such investment adviser."
Id. at 233-34; 15 U.S.C. § 80a-35(b).*fn2 As explained in
19 F. Supp.2d at 233. In addition, this Court held that
determination of whether the Funds' fee arrangements violated
Section 36(b) required development of a factual record, and
therefore concluded that "[i]t would be inappropriate to dismiss
the Section 36(b) claim at this time." Id. at 235.
As a result, plaintiffs' surviving claims after Green are
their breach of fiduciary duty claim under Section 36(b) and
their state law claims for breach of fiduciary duty and
deceit.*fn3 Defendants' pending motion seeks judgment on the
pleadings pursuant to Fed.R.Civ.P. 12(c) dismissing plaintiffs'
state law claims on the ground that they are preempted by Section
STANDARD FOR JUDGMENT ON THE PLEADINGS
A motion for judgment on the pleadings under Fed.R.Civ.P. 12(c)
is the procedural vehicle to raise, after the close of the
pleadings, a defense of failure to state a claim upon which
relief can be granted. Turbe v. Government of the Virgin
Islands, 938 F.2d 427, 428 (3d Cir. 1991). When ruling on a Rule
12(c) motion, the court is required to view the facts presented
in the pleadings and the inferences to be drawn therefrom in the
light most favorable to the non-moving party. Id.; Institute for
Scientific Information v. Gordon and Breach, Science Publishers,
Inc., 931 F.2d 1002, 1004 (3d Cir. 1991). The movant must
establish that no material issue of fact remains to be resolved
and that he is entitled to judgment as a matter of law.
Institute for Scientific Information, 931 F.2d at 1005;
Jablonski v. Pan Am. World Airways. Inc., 863 F.2d 289, 290-91
(3d Cir. 1988); Society Hill Civic Ass'n v. Harris,
632 F.2d 1045, 1054 (3d Cir. 1980). In this fashion the court may ensure
that the rights of the nonmoving party are decided as fully and
fairly as if there had been a trial. Society Hill, 632 F.2d at
The standard for federal preemption was recently stated by the
Third Circuit Court ...