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GREEN v. FUND ASSET MANAGEMENT

June 14, 1999

JACK GREEN, INDIVIDUALLY AND AS TRUSTEE, LAWRENCE P. BELDEN, TRUSTEE, AND STANLEY SIMON, TRUSTEE, PLAINTIFFS,
v.
FUND ASSET MANAGEMENT, L.P., MERRILL LYNCH ASSET MANAGEMENT, L.P., MERRILL LYNCH & CO., INC., MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, PRINCETON SERVICES, INC., ARTHUR ZEIKEL, TERRY K. GLENN, 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., DEFENDANTS.



The opinion of the court was delivered by: Debevoise, Senior District Judge.

OPINION

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 yield.

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 Green:

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 36(b).

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 1054.

ANALYSIS

The standard for federal preemption was recently stated by the Third Circuit Court ...


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