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Glen Lewy 1990 Trust v. Investment Advisors

September 3, 2002

GLEN LEWY 1990 TRUST, BY ITS TRUSTEES CHERYL LEWY AND JANICE WINTER, ON BEHALF OF THE CLASS DESCRIBED IN THE AMENDED COMPLAINT, APPELLANTS,
v.
INVESTMENT ADVISORS, INC., ET AL., RESPONDENTS.



Hennepin County District Court File No. CT0017047

Considered and decided by Lansing, Presiding Judge, Kalitowski, Judge, and Schumacher, Judge.

SYLLABUS BY THE COURT

I. Certification of a class under Minnesota Rule of Civil Procedure 23 is proper when the class satisfies the mandatory requirements of numerosity, commonality, typicality, and adequacy of representation, and if common questions of law and fact predominate to make a class action the superior method for fairly and efficiently resolving the controversy.

II. When common questions of law and fact predominate on the cause of damages, individual variations on the amount of damages will not preclude class certification.

The opinion of the court was delivered by: Lansing, Judge

Affirmed in part, reversed in part, and remanded

OPINION

The trustees of a family trust moved for class certification in their breach-of-fiduciary-duty action against a mutual fund management company and its principals. The district court denied certification. The trustees appeal, arguing that the undisputed facts establish that they have met the certification requirements in Minn. R. Civ. P. 23 and that the district court abused its discretion in denying their motion to amend the complaint to include unchallenged factual clarifications. We affirm the denial of the amendment as within the district court's discretion, but, because the facts establish the requirements necessary for certification under rule 23, we reverse and remand for certification of the class.

FACTS

Cheryl Lewy and Janice Winter, trustees for the Glen Lewy 1990 Trust, filed a class action complaint against Investment Advisors, Inc., and six of IAI's principals (collectively IAI). The trustees alleged that IAI breached its fiduciary duties by failing to disclose planned distribution of unusually large short-term capital gains to shareholders who had shares in IAI's Emerging Growth Fund (fund). The trustees also alleged that IAI, by withholding disclosure of the unusually large capital-gains distribution, communicated false and misleading information to shareholders to obtain approval of the lucrative sale of its management rights to another mutual fund company.

The trustees first invested assets in IAI's Emerging Growth Fund in 1993. IAI's prospectus stated that the fund objective was long-term capital appreciation. The trust's total investment in the fund equaled $210,000. From 1993 to 2000, the fund made capital-gains distributions to shareholders twice a year. From 1993 to 1995 and from 1997 to 1998, the fund distributed only long-term capital gains. During 1996, the fund distributed nominal short-term capital gains once and long-term capital gains once. During 1999, the fund distributed nominal short-term capital gains in June and again in December. But during 2000, the fund distributed both long-term and the unusually large short-term capital gains in June and again in September. By September 15, 2000, the trust's investment was worth $699,715.18.

The fund's general pattern was to recognize long-term capital gains and then distribute them to shareholders, who would incur tax liability on the capital gains. In the fiscal year ending March 31, 2000, however, the fund recognized unusually large short-term gains and decided to distribute half the capital gains in June 2000 but defer distribution of the other half until September 2000. The decision to defer distribution of half the gains was not explicitly communicated to shareholders when the June distribution was made.

In June 2000, IAI negotiated an agreement with Federated, another mutual fund manager, to sell IAI's mutual fund business under a proposed plan of reorganization and termination, subject to approval by shareholders. In July 2000, IAI sent its shareholders a prospectus describing the proposal. The prospectus correctly stated that the sale would not result in tax liability for the shareholders but failed to address the capital-gains distribution coming in September. The fund's shareholders approved the transaction, and IAI completed the sale on September 15, 2000, for an undisclosed price measured by the value of the IAI funds together with contingent payments. Following the sale the fund was transferred into the Federated Aggressive Growth Fund. Immediately prior to the closing of the sale, the fund distributed the short-term capital gains.

In December 2000, the trustees brought this action alleging that IAI breached its fiduciary duties by failing to disclose the unusually large short-term capital gains in advance of distribution and by communicating false and misleading information in the prospectus that described the proposed transaction with Federated. The trustees claim that, had they known of the upcoming distribution, they would have redeemed their shares and been able to obtain more favorable long-term capital-gains treatment.

After filing the action, the trustees requested supplemental discovery to obtain documents sufficient to identify the fund's shareholders as members of a proposed class. The district court denied that request and instead ordered IAI to produce documents that disclosed only the number and type of shareholders in the fund.

Following discovery, the trustees moved for class certification and to amend their complaint to include factual allegations that are largely undisputed. IAI moved for summary judgment on the merits. The district court determined that the trustees had established the necessary prima facie case to withstand summary judgment on their individual claim, but denied the trustees' class-certification motion, and also denied the trustees' motion to amend their complaint. The trustees and IAI negotiated a stipulation under which IAI paid the full amount of the trustees' claim, but the trustees retained the right to appeal the denial of class certification.

In this appeal from the final judgment the trustees challenge three separate rulings: the denial of class certification, the denial of their motion to amend their complaint, and the limitation of discovery to preclude them from obtaining the names and account information of the fund's shareholders.

ISSUES

I. Did the trustees establish the requirements for class certification under Minn. R. Civ. P. 23?

II. Did the district court abuse its discretion by denying the trustees' motion to add unchallenged ...


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