                  FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

NORTHSTAR FINANCIAL ADVISORS               No. 11-17187
INC., on behalf of itself and all others
similarly situated,                           D.C. No.
                    Plaintiff-Appellant,   5:08-cv-4119-
                                               LHK
                  v.

SCHWAB INVESTMENTS; MARIANN                ORDER AND
BYERWALTER, DONALD F.                       AMENDED
DORWARD, WILLIAM A. HASLER,                  OPINION
ROBERT G. HOLMES, GERALD B.
SMITH, DONALD R. STEPHENS,
MICHAEL W. WILSEY, CHARLES R.
SCHWAB, RANDALL W. MERK,
JOSEPH H. WENDER and JOHN F.
COGAN, as Trustees of Schwab
Investments; and Charles Schwab
Investment Management, Inc.,
              Defendants-Appellees.


       Appeal from the United States District Court
         for the Northern District of California
         Lucy H. Koh, District Judge, Presiding

                 Argued and Submitted
        May 17, 2013—San Francisco, California

                  Filed March 9, 2015
                 Amended April 28, 2015
2        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

     Before: Richard R. Clifton and Carlos T. Bea, Circuit
    Judges, and Edward R. Korman, Senior District Judge.*

                             Order;
                    Opinion by Judge Korman;
                      Dissent by Judge Bea


                           SUMMARY**


                           Mutual Funds

    The panel reversed in part and vacated in part the district
court’s dismissal of a shareholder class action on behalf of
investors who alleged that the managers of the Schwab Total
Bond Market Fund, a mutual fund, failed to adhere to the
Fund’s fundamental investment objectives of seeking to track
a particular index and not over-concentrating its investments
in any one industry. The Fund was created by Schwab
Investments (“Schwab Trust”), a “Massachusetts trust,” and
its investment adviser was Charles Schwab Investment
Management, Inc. (“Schwab Advisor”).

    The named plaintiff was Northstar Financial Advisors,
Inc., a registered investment advisery and financial planning
firm that managed accounts on behalf of investors and had


    *
    The Honorable Edward R. Korman, Senior District Judge for the
United States District Court for the Eastern District of New York, sitting
by designation.
  **
     This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.               3

over 200,000 shares of the Fund under its management. The
panel held that Northstar had standing because it filed a
supplemental pleading under Federal Rule of Civil Procedure
15(d) after obtaining an assignment of claim from an investor
in the Fund.

    The panel reversed the district court’s dismissal of breach
of contract claims. It held that the Fund shareholders’
adoption of the investment objectives added a structural
restriction on the power conferred on the Fund trustees that
could only be changed by a vote of the shareholders, and was
subsequently reflected in the Fund’s registration statements
and prospectuses, and thus created a contract between the
trustees and Fund investors.

    Vacating the dismissal of fiduciary duty claims, the panel
held that the operative complaint stated a claim that the
Schwab defendants breached their fiduciary duties by failing
to ensure that the Fund was managed in accordance with the
fundamental investment objectives and by changing the
Fund’s fundamental investment objectives without obtaining
required shareholder authorization. The panel held that the
trustees owed a fiduciary duty to the shareholders, rather than
the Fund, and so Northstar was not required to proceed by
way of a derivative action.

   The panel reversed the dismissal of a third-party
beneficiary breach of contract claim. It held that Northstar
adequately alleged that the investors were third-party
beneficiaries of the Investment Advisory and Administration
Agreement between Schwab Trust and Schwab Advisor.
4       NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

    The panel declined to address the effect of the Securities
Litigation Uniform Standards Act on the various common law
causes of action. It remanded the case to the district court.

    Dissenting, Judge Bea wrote that Northstar lacked
standing because, at the commencement of the action, it did
not own any fund shares, nor did it own any claims of others
who had suffered losses the defendants had allegedly caused.


                        COUNSEL

Robert C. Finkel (argued), Wolf Popper LLP, New York,
New York; Joseph J. Tabacco, Jr., Christopher T. Heffelinger,
and Anthony D. Phillips, Berman DeValerio, San Francisco,
California; Marc J. Gross, Greenbaum Rowe Smith & Davis
LLP, Roseland, New Jersey, for Plaintiff-Appellant.

Karin Kramer and Arthur M. Roberts, Quinn Emanuel
Urquhart & Sullivan, LLP, San Francisco, California; Richard
Schirtzer (argued), Susan R. Estrich, and B. Dylan Proctor,
Quinn Emanuel Urquhart & Sullivan, LLP, Los Angeles,
California, for Defendants-Appellees.
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.              5

                          ORDER

    Judge Clifton and Judge Korman voted to deny the
petition for rehearing. Judge Bea voted to grant the petition.
The petition for rehearing is DENIED.

    The full court has been advised of the petition for
rehearing en banc and no judge of the court has requested a
vote on whether to rehear the matter en banc. Fed. R. App. P.
35. The petition for rehearing en banc, filed March 23, 2015,
is DENIED.

    The opinion filed March 9, 2015 is amended. The
sentence beginning immediately after the quote at the top of
page 53 currently reads as follows:

       Indeed, notwithstanding the requirement that
       a percentage of the members of the mutual
       fund board be “independent” from the adviser,
       Congress required that the shareholders of the
       Fund annually approve the adviser contract.
       15 U.S.C. § 80a-15.

The sentence is amended to read as follows:

       Indeed, notwithstanding the requirement that
       40 percent of the members of the mutual fund
       board be “independent” from the adviser,
       15 U.S.C. § 80a-10(a), Congress required that
       the shareholders of the Fund approve the
       initial contract for any adviser. 15 U.S.C.
       § 80a-15.
6       NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

No further petitions for rehearing following this amendment
may be filed.



                          OPINION

KORMAN, District Judge:

    The Investment Company Act (“ICA”) establishes a
comprehensive federal regulatory framework applicable to
mutual funds. See 15 U.S.C. § 80a-1 et seq. More
specifically, it provides that a mutual fund’s registration
statement must recite all investment policies that can be
changed only by shareholder vote. 15 U.S.C. § 80a-8(b).
Deviation from policies so designated violates § 13(a) of the
ICA. 15 U.S.C. § 80a-13(a)(3). This appeal arises out of a
class action on behalf of investors who allege that the
managers of the Schwab Total Bond Market Fund (“Fund”)
failed to adhere to two of the Fund’s fundamental investment
objectives; namely, that it seek to track a particular index and
that it not over-concentrate its investments in any one
industry. These objectives, which could only be changed by
a vote of the shareholders, were adopted by a shareholder
vote and subsequently incorporated in the Fund’s registration
statement and prospectuses.

    On a previous interlocutory appeal, we rejected the
argument that this conduct gave rise to an implied private
right to enforce § 13(a) of the ICA. Northstar Fin. Advisors,
Inc. v. Schwab Invs., 615 F.3d 1106 (9th Cir. 2010). On this
appeal from an order granting a motion to dismiss a Third
Amended Complaint, the principal issues are whether the
investors have stated valid causes of action for breach of
         NORTHSTAR FIN. ADVISORS V. SCHWAB INV.                        7

contract, breach of fiduciary duty, and breach of an
agreement to which the investors claim to be third-party
beneficiaries.

                         BACKGROUND

    Schwab Investments (“Schwab Trust”) is an investment
trust organized under Massachusetts law. Such a trust, which
is often referred to generically as a “Massachusetts trust,”
even when not created under Massachusetts law, is an
unincorporated business organization created by an
instrument of trust by which property is to be held and
managed by trustees for the benefit of persons who are or
become the holders of the beneficial interests in the trust
estate. See Hecht v. Malley, 265 U.S. 144, 146–47 (1924).1
Thus, the Schwab Trust’s Agreement and Declaration of
Trust states that “the Trustees hereby declare that they will
hold all cash, securities and other assets, which they may
from time to time acquire in any manner as Trustees
hereunder IN TRUST to manage and dispose of the same . . .
for the pro rata benefit of the holders from time to time of
Shares in this Trust.” Schwab Investments, Registration
Statement (Form N-1A), Agreement and Declaration of Trust
1 (Ex. 1) (Dec. 29, 1997) [hereinafter “Agreement and
Declaration of Trust”]. Such a “trust today is a preferred
form of organization for mutual funds and asset

 1
   “Unlike the corporation of the late 1800s and early 1900s, the common
law business trust was only lightly regulated, so entrepreneurs used the
business trust to escape the comparatively much heavier regulation of the
corporate form. Using the business trust for this purpose was so
pronounced in Massachusetts, where corporate ownership of real estate
was prohibited, that the term Massachusetts trust became synonymous
with business trust.” Jesse Dukeminier, Robert H. Sitkoff & James
Lindgren, Wills, Trusts, and Estates 555–56 (8th ed. 2009).
8       NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

securitization.” Dukeminier, Sitkoff & Lindgren, Wills,
Trusts, and Estates 556.

     One of the significant features that distinguishes a
Massachusetts trust from the ordinary or private trust “lies in
the manner in which the trust relationship is created; investors
in a business trust enter into a voluntary, consensual, and
contractual relationship, whereas the beneficiaries of a
traditional private trust take their interests by gift from the
donor or settlor.” Herbert B. Chermside, Jr., Modern Status
of the Massachusetts or Business Trust, 88 A.L.R.3d 704, 720
(1978); see also Berry v. McCourt, 204 N.E.2d 235, 240
(Ohio Ct. App. 1965) (“By an underlying contract, or in the
provisions of a business trust instrument, or both, the parties
agree on the operations of the venture.”). Thus, the
Agreement and Declaration of Trust at issue here states at the
very outset that it was made “by the Trustees hereunder, and
by the holders of shares of beneficial interest to be issued
hereunder.” Agreement and Declaration of Trust 1.
Moreover, it continues that “[e]very Shareholder by virtue of
having become a Shareholder shall be held to have expressly
assented and agreed to the terms hereof and to have become
a party hereto.” Agreement and Declaration of Trust 4.

    Because this case involves the relationship between
investors and a mutual fund, the trust which created the fund
and the investment adviser which manages the fund, it is
helpful to have a clear understanding of the relationships
among these parties.       We begin with a useful, if
oversimplified, description of a mutual fund:

       T, an investment professional, approaches A,
       B, C, and others like them and agrees to pool
       certain of their assets in a common fund to be
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.              9

       managed by T. A, B, C, and the other
       investors each receive tradable shares in the
       fund in an amount proportional to their
       investment. By structuring their collective
       investment in this way, A, B, C, and the others
       are able to take advantage of economies of
       scale, obtain professional portfolio
       management, and achieve a more diversified
       portfolio than each could have individually.
       In managing the portfolio, T is subject to a
       fiduciary obligation to A, B, C, and the other
       investors in the fund.

Dukeminier, Sitkoff & Lindgren, Wills, Trusts, and Estates
556.

    This simple description does not adequately discuss
perhaps the most important party to this arrangement,
namely, the investment adviser, whose “main role is to
supervise and manage the fund’s assets, including handling
the fund’s portfolio transactions.” Clifford E. Kirsch, An
Introduction to Mutual Funds, in Mutual Fund Regulation
§ 1:2.2 (Clifford E. Kirsch ed., 2d ed. 2005). The investment
adviser is not a mere employee, contractor, or consultant.
Instead, it is “more often than not also the creator, sponsor,
and promoter of the mutual fund.” Charles E. Rounds, Jr. &
Charles E. Rounds, III, Loring and Rounds: A Trustee’s
Handbook 955–56 (2012 ed.); see also Kamen v. Kemper Fin.
Servs., Inc., 500 U.S. 90, 93 (1991) (Mutual funds “typically
are organized and underwritten by the same firm that serves
as the company’s ‘investment adviser.’”); Daily Income
Fund, Inc. v. Fox, 464 U.S. 523, 536 (1984) (Mutual funds
are “typically created and managed by a pre-existing external
10      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

organization known as an investment adviser.” (citing Burks
v. Lasker, 441 U.S. 471, 481 (1979))).

    Thus, while “[i]n theory, the [trust] is able to choose any
adviser it deems appropriate to invest the fund’s portfolio,
based on the adviser’s investing style, track record and fees,”
in practice, the investment adviser picked to manage the
portfolio is most often self-selected and unlikely to be
removed. John Shipman, So Who Owns Your Mutual Fund?,
Wall St. J., May 5, 2003, at R1, available at
http://online.wsj.com/news/articles/SB105207969873142900.
Because “a typical fund is organized by its investment adviser
which provides it with almost all management services . . . ,
a mutual fund cannot, as a practical matter sever its
relationship with the adviser.” Burks, 441 U.S. at 481
(quoting S. Rep. No. 91-184, at 5 (1969), reprinted in 1970
U.S.C.C.A.N. 4897, 4901).

    Consistent with this description of the structure of a
mutual fund and its relationship with its investment adviser,
the Schwab Trust selected Charles Schwab Investment
Management, Inc. (“Schwab Advisor”) as its investment
adviser. Indeed, Charles R. Schwab is alleged to have been
chairman and trustee of the Schwab Trust and a member of
the board of the Schwab Advisor. Third Am. Compl. ¶ 38.
The latter is a subsidiary of the Charles Schwab Corporation,
of which Mr. Schwab has served as “CEO at various times,
including from 2004 through October 2008.” Third Am.
Compl. ¶ 36. Moreover, the complaint alleges that all
“[d]efendants and their affiliates held themselves out as one
Schwab entity[.]” Third Am. Compl. ¶ 167.

    The mutual fund at issue here, one of several operated by
the Schwab Trust, is the Schwab Total Bond Market Fund.
         NORTHSTAR FIN. ADVISORS V. SCHWAB INV.                      11

Reflecting the terms of a proxy statement proposed by the
Schwab Trust in 1997, and subsequently adopted by the
shareholders by majority vote, the prospectuses that the Fund
issued during the relevant period stated that the Fund was
“designed to offer high current income by tracking the
performance of the Lehman Brothers [U.S.] Aggregate Bond
Index [(“Lehman Index”)]” and was “intended for investors
seeking to fill the fixed income component of their asset
allocation plan.” Specifically, the Lehman Index included
“investment-grade government, corporate, mortgage-,
commercial mortgage- and asset-backed bonds that [were]
denominated in U.S. dollars and ha[d] maturities longer than
one year.” Northstar Fin. Advisors, Inc. v. Schwab Invs.,
609 F. Supp. 2d 938, 945 (N.D. Cal. 2009).2 Nevertheless,
the Fund is not itself an index fund and, according to the
Fund’s prospectus, it was “not required to invest any
percentage of its assets in the securities represented in the
[Lehman] Index.” Decl. of Kevin Calia in Support of Motion
to Dismiss Second Amended Class Action Complaint, Ex. A
at 14, Nov. 10, 2010.

    The Fund disclosed in its registration statement, and
reiterated in prospectuses issued thereafter, that its policy of
tracking the Lehman Index was “fundamental,” which means
that it “cannot be changed without approval of the holders of
a majority of the outstanding voting securities (as defined in

   2
     The former Lehman Index is now known as the Barclays U.S.
Aggregate Bond Index. It currently “comprises a total of 8,286 bonds and
is worth nearly $17 trillion.” Carolyn Cui, Barclays Agg Had Modest
Origin, Wall St. J., Apr. 2, 2013, http://online.wsj.com/article/
SB10001424127887324883604578398880679949670.html. “[A]bout
$663 billion of institutional assets is invested in 270 U.S. core fixed-
income portfolios, 75% of which are benchmarked against the Barclays
Agg Index.” Id.
12      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

the [ICA]).” Schwab Investments, Registration Statement 5,
14 (Form N-1A) (Jan. 16, 1998), Prospectus 10 (Form N-1A,
Part A) (Nov. 1, 1997, as amended Jan. 15, 1998); see also
Michael Glazer, Prospectus Disclosure and Delivery
Requirements, in Mutual Fund Regulation § 4:3.6 (Clifford
E. Kirsch ed., 2d ed. 2005). The Fund was also precluded
from investing twenty-five percent or more of the Fund’s
total assets in any one industry, unless necessary to track the
Lehman Index. Schwab Investments, Registration Statement
41 (Form N-1A) (Jan. 16, 1998), Statement of Additional
Information 11 (Form N-1A, Part B) (Nov. 1, 1997, as
amended Jan. 15, 1998).

    Northstar Financial Advisors, Inc. (“Northstar”) is a
registered investment advisery and financial planning firm
that manages discretionary and non-discretionary accounts on
behalf of investors and had over 200,000 shares of the Fund
under its management. In August 2008, Northstar filed this
shareholder class action against the defendants, alleging that
they deviated from the Fund’s fundamental investment
policies and exposed the Fund and its shareholders to tens of
millions of dollars in losses.

    Northstar has identified two classes of potential plaintiffs:
(1) a “Pre-Breach” class, consisting of those who purchased
shares of the Fund on or prior to August 31, 2007, and who
continued to hold their shares as of August 31, 2007, and
(2) a “Breach” class, consisting of those who purchased
shares of the Fund during the period September 1, 2007
through February 27, 2009. Northstar alleges that August 31,
2007 was the last day of the fiscal year preceding the one
during which the Fund first began deviating from its required
fundamental investment policies, and that on February 27,
2009, the Fund reverted back to the required policies.
         NORTHSTAR FIN. ADVISORS V. SCHWAB INV.                      13

    This case has a lengthy and complicated procedural
history that includes the dismissal of successive amended
complaints for failure to state a cognizable cause of action.
Specifically, the Third Amended Complaint, which is based
on the Fund’s unauthorized deviation from its fundamental
investment objectives, alleges five causes of action on behalf
of each of the two identified classes, for a total of ten claims:
breach of fiduciary duty against the Trustees3 (counts one and
six); breach of fiduciary duty against Schwab Advisor (counts
two and seven); aiding and abetting breach of fiduciary duty
against the Trustees (counts three and eight); aiding and
abetting breach of fiduciary duty against Schwab Advisor
(counts four and nine); breach of the Investment Advisory
and Administration Agreement (“IAA”) between Schwab
Trust and Schwab Advisor. The last cause of action is based
on the allegations that the investors are third-party
beneficiaries of the IAA. The Third Amended Complaint
also incorporates by reference a breach of contract cause of
action against the Schwab Trust that was alleged in the
Second Amended Complaint, but dismissed with prejudice on
an earlier motion to dismiss. The incorporation by reference
was included to preserve Northstar’s right to appeal from the
dismissal of this cause of action with prejudice.

                  STANDARD OF REVIEW

   We review de novo the district judge’s order granting a
motion to dismiss. Manzarek v. St. Paul Fire & Marine Ins.


  3
   “Trustees” is a collective reference to the trustees of Schwab Trust:
defendants Mariann Byerwalter, Donald F. Dorward, William A. Hasler,
Robert G. Holmes, Gerald B. Smith, Donald R. Stephens, Michael W.
Wilsey, Charles R. Schwab, Randall W. Merk, Joseph H. Wender, and
John F. Cogan.
14      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

Co., 519 F.3d 1025, 1030 (9th Cir. 2008). On a motion to
dismiss, “[w]e accept factual allegations in the complaint as
true and construe the pleadings in the light most favorable to
the non-moving party.” Id. at 1031. “[W]e may consider
materials incorporated into the complaint or matters of public
record.” Coto Settlement v. Eisenberg, 593 F.3d 1031, 1038
(9th Cir. 2010). We may also consider “documents ‘whose
contents are alleged in a complaint and whose authenticity no
party questions, but which are not physically attached to the
[plaintiff’s] pleading.’” Knievel v. ESPN, 393 F.3d 1068,
1076 (9th Cir. 2005) (alteration in original) (quoting In re
Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir.
1999)); see also Ecological Rights Found. v. Pac. Gas &
Elec. Co., 713 F.3d 502, 511 (9th Cir. 2013). This is
sometimes referred to as the “incorporation by reference”
doctrine. Knievel, 393 F.3d at 1076; see also Lapidus v.
Hecht, 232 F.3d 679, 682 (9th Cir. 2000).

    Among the documents we consider pursuant to that
doctrine are three sets of the Schwab Trust’s filings with the
Securities and Exchange Commission: (1) the Registration
Statement of December 29, 1997; (2) the Registration
Statement of January 16, 1998, which was filed with the
Prospectus and Statement of Additional Information of
November 1, 1997, as amended January 15, 1998; and (3) the
Prospectus and Statement of Additional Information of
November 15, 2004. While all of these documents are
referred to in the complaint, the entire content of each
document does not appear to be part of the record.
Nevertheless, “[i]t is appropriate to take judicial notice of this
information, as it was made publicly available by [the SEC],
and neither party disputes the authenticity of the [documents]
or the accuracy of the information displayed therein.”
Daniels-Hall v. Nat’l Educ. Ass’n, 629 F.3d 992, 998–99 (9th
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.              15

Cir. 2010) (citing Fed. R. Evid. 201); see also Dreiling v. Am.
Express Co., 458 F.3d 942, 946 n.2 (9th Cir. 2006) (We “may
consider documents referred to in the complaint or any matter
subject to judicial notice, such as SEC filings.”). Indeed,
defendants, who might otherwise be aggrieved by their use,
created and filed them with the SEC. Under these
circumstances, it is appropriate for us to consider them here.
See 1 Christopher B. Mueller & Laird C. Kirkpatrick, Federal
Evidence § 2:8 at 359–61 (4th ed. 2013).

                       DISCUSSION

I. Standing

     We pause before addressing the merits to discuss the issue
of whether Northstar has standing. Northstar filed its initial
class action complaint on behalf of investors in the Fund on
August 28, 2008. Northstar owned no shares of the Fund, but
it brought the action in its own name, without obtaining an
assignment of claims from an investor in the Fund.
Subsequently, in a comparable case brought by an asset
management firm, the Second Circuit held that “the minimum
requirement for injury-in-fact is that the plaintiff have legal
title to, or a proprietary interest in, the claim.” W.R. Huff
Asset Mgmt. Co. v. Deloitte & Touche LLP, 549 F.3d 100,
108 (2d Cir. 2008). On December 8, 2008, after W.R. Huff
was decided, Northstar obtained an assignment of claim from
a client-shareholder.

    Defendants argue that because standing must be
determined at the time a complaint is filed, and because
Northstar did not obtain an assignment of claim until several
months after the original complaint was filed, the assignment
could not cure Northstar’s original lack of standing. The
16      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

district judge (Susan Illston, J.), to whom the case was then
assigned, dismissed Northstar’s complaint for lack of
standing with a suggestion that this defect could be cured by
filing an amended complaint. Northstar Fin. Advisors, Inc. v.
Schwab Invs., 609 F. Supp. 2d 938, 942 (N.D. Cal. 2009).
Northstar followed her suggestion. After Schwab renewed its
motion to dismiss the amended complaint, the district court
judge to whom the case had been reassigned (Lucy Koh, J.)
declined to order the dismissal of the complaint because to do
so would have “elevate[d] form over substance” and thus she
treated the prior order as granting plaintiff leave to file a
supplemental pleading under Rule 15(d) instead of an
amended complaint pursuant to Rule 15(a). Northstar Fin.
Advisors, Inc. v. Schwab Invs., 781 F. Supp. 2d 926, 932–33
(N.D. Cal. 2011). In so doing, she observed that, “[a]lthough
there is no published Ninth Circuit authority on this point,
courts in other circuits have found that parties may cure
standing deficiencies through supplemental pleadings.” Id.
at 933 (citing, inter alia, Travelers Ins. Co. v. 633 Third
Assoc., 973 F.2d 82, 87–88 (2d Cir. 1992)). We review this
ruling de novo, Renee v. Duncan, 686 F.3d 1002, 1010 (9th
Cir. 2012), and we agree with Judge Koh’s application of
Fed. R. Civ. P. 15(d).

    Rule 15(d) permits a supplemental pleading to correct a
defective complaint and circumvents “the needless formality
and expense of instituting a new action when events
occurring after the original filing indicated a right to relief.”
Wright, Miller, & Kane, Federal Practice and Procedure:
Civil 3d § 1505, pgs. 262–63. Moreover, “[e]ven though
[Rule 15(d)] is phrased in terms of correcting a deficient
statement of ‘claim’ or a ‘defense,’ a lack of subject-matter
jurisdiction should be treated like any other defect for
purposes of defining the proper scope of supplemental
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.                17

pleading.” Id. at § 1507, pg. 273. Indeed, in Matthews v.
Diaz, 426 U.S. 67 (1976), the Supreme Court addressed the
issue in a case in which an applicant for Medicare had failed
to file his application until after an amended complaint had
been filed joining him as an additional complainant in an as-
yet uncertified class action. In holding that this jurisdictional
defect could be cured by a supplemental pleading, the
Supreme Court observed:

        Although 42 U.S.C. § 405(g) establishes filing
        of an application as a nonwaivable condition
        of jurisdiction, Espinosa satisfied this
        condition while the case was pending in the
        District Court. A supplemental complaint in
        the District Court would have eliminated this
        jurisdictional issue; since the record discloses,
        both by affidavit and stipulation, that the
        jurisdictional condition was satisfied, it is not
        too late, even now, to supplement the
        complaint to allege this fact.

Id. at 75 (internal citations omitted). This holding is
consistent with Rockwell Int’l Corp. v. United States, in
which the Supreme Court subsequently held that “when a
plaintiff files a complaint in federal court and then voluntarily
amends the complaint, courts look to the amended complaint
to determine jurisdiction.” 549 U.S. 457, 473–74 (2007).

    We add here a brief discussion of the thoughtful holding
of the Court of Appeals for the Federal Circuit that
summarizes the case law addressing supplemental pleadings.
There, “[a]s an initial matter, the parties dispute[d] whether
the allegations in [the plaintiff’s] Amended Complaint that
concern actions taken after the filing of the initial complaint
18      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

can be used to establish subject matter jurisdiction.” Prasco,
LLC v. Medicis Pharm. Corp., 537 F.3d 1329, 1337 (Fed. Cir.
2008). Relying on Rule 15(d) and Matthews v. Diaz, the
Court of Appeals treated the complaint as a supplemental
complaint and held that it was sufficient to cure the original
complaint’s jurisdictional defect:

       Thus, while “[l]ater events may not create
       jurisdiction where none existed at the time of
       filing,” the proper focus in determining
       jurisdiction are “the facts existing at the time
       the complaint under consideration was filed.”
       GAF Bldg. Materials Corp. v. Elk Corp.,
       90 F.3d 479, 483 (Fed.Cir.1996) (emphasis
       added) (quoting Arrowhead Indus. Water, Inc.
       v. Ecolochem Inc., 846 F.2d 731, 734 n. 2
       (Fed. Cir. 1988)); see also Rockwell Int’l
       Corp. v. United States, 549 U.S. 457,
       127 S.Ct. 1397, 1409, 167 L.Ed.2d 190 (2007)
       (“[W]hen a plaintiff files a complaint in
       federal court and then voluntarily amends the
       complaint, courts look to the amended
       complaint to determine jurisdiction.”);
       Connectu LLC v. Zuckerberg, 522 F.3d 82
       (1st Cir. 2008). As the district court accepted
       Prasco’s Amended Complaint, it is the
       Amended Complaint that is currently under
       consideration, and it is the facts alleged in this
       complaint that form the basis for our review.

Id. See also Feldman v. Law Enforcement Assocs. Corp.,
752 F.3d 339, 347 (4th Cir. 2014) (“[W]e construe the present
complaint as a supplemental pleading under Rule 15(d),
thereby curing the defect which otherwise would have
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.               19

deprived the district court of jurisdiction under Rule 15(c).”);
Black v. Sec’y of Health and Human Servs., 93 F.3d 781, 790
(Fed. Cir. 1996) (“Nonetheless, a defect in the plaintiff’s
case, even a jurisdiction defect, can be cured by a
supplemental pleading under Rule 15(d) in appropriate
circumstances.”); United Partition Sys., Inc. v. United States,
59 Fed. Cl. 627, 644 (Fed. Cl. 2004) (“The Supreme Court
has interpreted Fed. R. Civ. P. 15(d) to permit supplemental
pleadings in which a plaintiff may correct a jurisdictional
defect in its complaint by informing the court of post-
complaint events.”).

     Judge Koh’s holding is also consistent with the approach
to the Federal Rules of Civil Procedure taken by Judge Clark,
“the principal architect of the Federal Rules of Civil
Procedure.” Zahn v. International Paper Co., 414 U.S. 291,
297 (1973). Thus, in Hackner v. Guaranty Trust Co. of New
York, 117 F.2d 95 (2d Cir. 1941), the complaint was subject
to dismissal because the plaintiffs did not allege damages
sufficient to satisfy the minimum amount required to invoke
subject-matter jurisdiction on the basis of diversity of
citizenship. An amended complaint was then filed which
added a plaintiff, Eunice Eastman, whose alleged damages
were “well over the requirement.” Id. at 98. Speaking for the
Second Circuit, Judge Clark wrote that subject-matter
jurisdiction was proper notwithstanding the fact that it was
first established by the addition of Eastman as a plaintiff in
the amended complaint:

       Since [Eastman] alleges grounds of suit in the
       federal court, the only question is whether or
       not she must begin a new suit again by
       herself. Defendants’ claim that one cannot
       amend a nonexistent action is purely formal,
20      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

       in the light of the wide and flexible content
       given to the concept of action under the new
       rules. Actually she has a claim for relief, an
       action in that sense; as the Supreme Court has
       pointed out, there is no particular magic in the
       way it is instituted. So long as a defendant
       has had service reasonably calculated to give
       him actual notice of the proceedings, the
       requirements of due process are satisfied.
       Hence no formidable obstacle to a
       continuance of the suit appears here, whether
       the matter is treated as one of amendment or
       of power of the court to add or substitute
       parties, Federal Rule 21, or of commencement
       of a new action by filing a complaint with the
       clerk, Rule 3. In any event we think this
       action can continue with respect to Eastman
       without the delay and expense of a new suit,
       which at long last will merely bring the
       parties to the point where they now are.

Id. (quotations and citations omitted); see also Fed. R. Civ. P.
1 (which provides that the Rules of Civil Procedure “should
be construed and administered to secure the just, speedy, and
inexpensive determination of every action and proceeding”).

    Our dissenting colleague relies on Morongo Band of
Mission Indians v. California State Board of Equalization,
858 F.2d 1376 (9th Cir. 1988), for the proposition that “where
the district court does not have subject matter jurisdiction
over a matter at the time of filing, subsequent events do not
confer subject matter jurisdiction on the district court.”
Dissent at 67–68. We find this argument inapposite because,
unlike the present case, Morongo did not involve a
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.                 21

supplemental pleading, much less one with allegations of
events that occurred after the commencement of the action.

    While Morongo does contain the broad statement that
“subject matter jurisdiction must exist as of the time the
action is commenced” and that a lack of subject-matter
jurisdiction at the outset cannot be cured subsequently, it is
now clear, if it was not then, that this rule is more nuanced
than the inflexibility suggested by its language—both as it
relates to curing jurisdictional defects through supplemental
pleadings, see, e.g., Matthews, 426 U.S. 67, and other
circumstances in which defects in subject-matter jurisdiction
were cured by the substitution, addition, or elimination of a
party, see, e.g. Newman-Green, Inc. v. Alfonzo-Larrain,
490 U.S. 826, 830 (1989); Mullaney v. Anderson, 342 U.S.
415 (1952); California Credit Union League v. City of
Anaheim, 190 F.3d 997, 1000 (9th Cir. 1999). Nevertheless,
we need not belabor this issue because, in order to decide this
case, it is enough to say that the rule as stated in Morongo
does not extend to supplemental pleadings filed pursuant to
Fed. R. Civ. P. 15(d).

    The same is true of Righthaven LLC v. Hoehn, 716 F.3d
1166 (9th Cir. 2013), which the dissent relies on for the
“general principle that ‘jurisdiction is based on facts that exist
at the time of filing.’” Dissent at 67. Of course, a general
principle, which Righthaven observed was subject to at least
a few exceptions, is significantly different from the hard and
fast rule that the language in Morongo suggested. Indeed,
Righthaven acknowledged the possibility of additional
exceptions and left open the question of whether “permitting
standing based on a property interest acquired after filing”
should be added to the list of exceptions. Righthaven,
716 F.3d at 1171 (“We need not decide whether the
22      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

circumstances of this case call for a new exception to the
general rule, however, because Righthaven lacked standing
either way.”).

    Nor does the Supreme Court’s holding in Grupo Dataflux
v. Atlas Global Group, L.P., 541 U.S. 567 (2004), compel a
contrary result. There, diversity jurisdiction was lacking at
the time the lawsuit was commenced because the plaintiff
was a Texas-based limited partnership that included two
Mexican citizens as members and the defendant was a
Mexican corporation. Id. at 569. After a verdict was
rendered in favor of the plaintiff, the district court granted the
defendant’s motion to dismiss for lack of jurisdiction. Id. On
appeal, the plaintiff partnership argued that the Mexican
partners had left the partnership in a transaction
consummated the month before the trial began. Id. A sharply
divided Supreme Court held that this change in the
composition in the membership of the partnership was
insufficient to cure the initial jurisdictional defect.
Specifically, it held that the time-of-filing rule “measures all
challenges to subject-matter jurisdiction premised upon
diversity of citizenship against the state of facts that existed
at the time of filing—whether the challenge be brought
shortly after filing, after trial, or even for the first time on
appeal.” Id. at 571. Moreover, notwithstanding significant
departures from the time-of-filing rule in diversity cases
where the parties have changed after the filing of the
complaint or on appeal, see Newman-Green, 490 U.S. at 830,
it declined to depart from this rule where the post-filing
change in circumstances “arose not from a change in the
parties to the action, but from the change in the citizenship of
a continuing party.” Grupo Dataflux, 541 U.S. at 575 (citing
Conolly v. Taylor, 27 U.S. 556 (1829)).
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.               23

    Nevertheless, we do not regard that holding as dispositive
here. First, the present case does not involve the issue of
diversity jurisdiction. See Connectu LLC v. Zuckerberg,
522 F.3d 82, 92 (1st Cir. 2008) (“While the Court [in Grupo
Dataflux] relied upon the time-of-filing rule to thwart an
effort to manufacture diversity jurisdiction during the
pendency of an action, the decision operates exclusively in
the realm of diversity jurisdiction.”). More significantly,
unlike Grupo Dataflux, the present case involves the filing of
a supplemental pleading that became the operative pleading
in the case on which subject-matter jurisdiction must be
based.

     Nor we do not see any consideration of policy that would
justify a rule, for which our dissenting colleague argues, that
a party such as Northstar must file a new complaint instead of
a supplemental pleading because of a post-complaint
assignment from a party that had standing. The dissent does
not dispute, nor can it, that the assignee of a cause of action
stands in the shoes of the assignor, Hoffeld v. United States,
186 U.S. 273, 276 (1902), and unquestionably has the same
standing to file a complaint that the assignor could have filed.
Sprint Communications Co. v. APCC Services, 554 U.S. 269,
271 (2008). Indeed, the dissent concedes that “had Northstar
accepted the dismissal without prejudice and then filed a new
complaint after it obtained an assignment of rights, it would
have had standing and a personal stake in the outcome of this
litigation.” Dissent at 65 n.5 (emphasis in original).

    A rule that would turn on the label attached to a pleading
is difficult for us to accept. As the Eleventh Circuit has
observed in a case in which an amended complaint contained
jurisdictional allegations that were based on post-complaint
events, “[e]xcept for the technical distinction between filing
24      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

a new complaint and filing an amended complaint, the case
would have been properly filed. . . . We therefore hold that
we have jurisdiction over this appeal and we will reach the
merits.” M.G.B. Homes, Inc. v. Ameron Homes, Inc., 903
F.2d 1486 (11th Cir. 1990).

    Perhaps reflecting sensitivity to having a case turn on the
technical distinction between a new complaint and a
supplemental pleading, the dissent suggests a policy reason
for the hypertechnical rule it advocates. Thus, it argues that
permitting a plaintiff to proceed by supplemental pleading
alleging a post-complaint assignment of the claim has adverse
practical effects. Dissent at 70. More specifically,
“[u]ninjured parties, particularly those in search of class
action lead plaintiff status, could sue first, then trawl for those
truly and timely injured. Today the majority green-lights
those who would race to the courthouse and bend Federal
Rules of Civil Procedure and Article III standing
requirements to gain an edge over other claimants who are
not as fleet of foot.” Id.

    Under current law, however, the benefit that the dissent
suggests goes to the winner of the race to the courthouse does
not exist. Presumably, the dissent is referring to the fact that
counsel for the lead plaintiff becomes class counsel. In 2003,
however, Congress amended Fed. R. Civ. P. 23 to set out
discrete standards for the appointment of class counsel. Thus,
Rule 23(g) now provides that in appointing class counsel,
courts should consider: the work counsel has done in
identifying claims, counsel’s experience in such matters,
counsel’s knowledge of the applicable law, and the resources
that counsel will commit to representation. Fed. R. Civ. P.
23(g)(1)(A); Wright, Miller, & Kane, Federal Practice and
         NORTHSTAR FIN. ADVISORS V. SCHWAB INV.                     25

Procedure: Civil 3d § 1802.3, pgs. 322–24.4 Under these
circumstances, it would be an abuse of discretion to appoint
an attorney as class counsel solely because he may have won
the race to the courthouse.

    More significantly, the present case was not one in which
Northstar won a race to the courthouse and in which its
attorneys were appointed lead counsel for that reason.
Indeed, by the time it obtained the assignment from Henry
Holz, over three months had passed since the complaint was
filed. This was more than enough time for a competing
plaintiff to file a complaint. No such complaint was filed. In
sum, whatever merit there may be to the dissent’s concern, it
is not present in this case and has been substantially
eliminated by the 2003 amendments to the Federal Rules of
Civil Procedure. Moreover, that a supplemental pleading can
only be filed with the permission of the district judge
provides additional protection against the misuse of the
pleading for strategic gamesmanship.

    Thus, we agree that Judge Koh did not abuse her
discretion in permitting Northstar to file a supplemental
pleading after a post-complaint assignment from a party that
clearly had standing. See Northstar, 781 F. Supp. 2d at
931–33.




 4
   Eight years before the amendment to Rule 23, although in a different
way, Congress eliminated the race to the courthouse in securities class
actions when it enacted the Private Litigation Securities Reform Act of
1995 (PLSRA). 15 U.S.C. § 77z-1(a)(3)(B)(iii); 15 U.S.C. § 78u-
4(a)(3)(B)(iii).
26     NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

II. Merits

    Before we review each of Northstar’s claims, we give a
brief overview of the case, and explain how the various
claims relate to each other. We begin with the various
governing documents of the Fund to which we have already
made reference. The Agreement and Declaration of Trust,
and its bylaws, establish the Trust and govern its internal
affairs, and are governed by Massachusetts law. The Fund’s
prospectus is issued by the Schwab Advisor on behalf of the
Fund on an annual basis. The Statement of Additional
Information, or “SAI,” produced at the same time as the
prospectus, is made available to investors freely on demand,
although it does not need to be mailed to them automatically.
See Glazer, Prospectus Disclosure and Delivery
Requirements, in Mutual Fund Regulation § 4:3.2 (citing Sec.
& Exch. Comm’n, Form N-1A at 7, available at
http://www.sec.gov/about/forms/formn-1a.pdf (last visited
Aug. 29, 2014)).

    In 1997, a proxy statement was submitted to and approved
by the Fund’s investors. It included two relevant proposals
which we have already described in detail. Briefly, Proposal
2 stated that the Trust would “seek[] to track the investment
results of [the Lehman Index] through the use of an indexing
strategy.” Proposal 3 stated that the Trust would not invest
more than 25% of the Fund’s total assets in any industry.
These fundamental investment objectives could be changed
only by shareholder vote. Subsequent registration statements
and prospectuses reflected these changes.

    Northstar’s original complaint alleged four causes of
action arising from the Fund’s alleged violations of the
fundamental investment policies. First, Northstar claimed a
         NORTHSTAR FIN. ADVISORS V. SCHWAB INV.                        27

private right of action under Section 13(a) of the Investment
Company Act. Second, Northstar alleged that all of the
defendants had breached their fiduciary duties to the
shareholders. Third, Northstar claimed that all of the
defendants had breached the contract between the investors
and the Fund, contained in the Fund’s prospectuses and its
1997 proxy statement. Finally, Northstar claimed that all of
the defendants had violated the implied covenant of good
faith and fair dealing.

    On an interlocutory appeal, we rejected Northstar’s theory
that it had a private right of action under the Investment
Company Act. Northstar Fin. Advisors, Inc. v. Schwab Invs.,
615 F.3d 1106 (9th Cir. 2010). Nevertheless, the district
judge had allowed Northstar to replead its state law claims,
specifying under which state’s law they were asserted and on
which documents they relied. Northstar Fin. Advisors, Inc.
v. Schwab Invs., 609 F. Supp. 2d 938, 945 (N.D. Cal. 2009).

    Northstar then filed an amended complaint that left those
claims at risk of dismissal under the Securities Litigation
Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C.
§§ 77p, 78bb, because it contained allegations that suggested
that its claims were based on misrepresentations. SLUSA
bars certain state law class actions that allege “an untrue
statement or omission of a material fact [or] the use[] of any
manipulative or deceptive device or contrivance,”5 15 U.S.C.


  5
    The misrepresentation must also be “in connection with the purchase
or sale of a covered security.” There is no question that this class action
is “in connection with the purchase or sale” of a covered security, and the
district judge properly so concluded. Northstar, 781 F. Supp. 2d at 937;
see Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71,
86–87 (2006). As noted above, SLUSA does not apply if the action is
28       NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

§ 77p(b), unless the governing law is the law of the state that
has chartered or organized the entity issuing the securities.
Id. § 77p(d)(1).

    SLUSA operates “wherever deceptive statements or
conduct form the gravamen or essence of the claim.”
Freeman Invs., LP v. Pac. Life Ins. Co., 704 F.3d 1110, 1115
(9th Cir. 2013). The district judge ruled that the “central
theme” of the Second Amended Complaint was that the
“defendants made misrepresentations about how investments
in the Fund would be managed.” Northstar, 781 F. Supp. 2d
at 934. In the district judge’s view, the crux of Northstar’s
case was that the defendants’ statements about how the
shareholders’ funds would be managed were false, or became
false when the Fund deviated from the index in 2007. Id. at
933–36. The district judge also noted that the Second
Amended Complaint contained one specific allegation that
the Trust gave a false explanation for why the Fund
underperformed its index in its May 2008 semi-annual report.
Id. at 936; SAC ¶¶ 96–97. The district judge then dismissed
the contract claims, with prejudice, for failure to state a claim
on the ground that they were barred by SLUSA, and that they
failed to allege a contract between the shareholders and the
Fund. Northstar, 781 F. Supp. at 933–40. The district judge
also rejected Northstar’s breach of fiduciary duty causes of
action under SLUSA, but gave Northstar leave to replead
them under Massachusetts law. Id.

   Northstar repled the fiduciary duty causes of action in its
Third Amended Complaint and also amended its allegations
in an effort to remove their supposed focus on


brought under the law of the state of the organizing entity. 15 U.S.C.
§ 77p(d).
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.               29

misrepresentations. Indeed, the Schwab defendants conceded
in their motion to dismiss the Third Amended Complaint that
“Northstar avoided SLUSA preemption for its fiduciary
breach claims by asserting them under Massachusetts law and
coming within the ‘Delaware carve-out’”—a term used to
describe an exception to SLUSA preemption if such a cause
of action is available under the law of the state that had
chartered or organized the entity issuing the securities. Def.
Mot. to Dismiss Third Am. Compl. 13 n.5; see 15 U.S.C.
§ 77p(d)(1); Madden v. Cowen & Co., 576 F.3d 957, 971 (9th
Cir. 2009). Nevertheless, the district judge held that the
fiduciary duty claims had to be brought derivatively, and
dismissed them. Northstar Fin. Advisors, Inc. v. Schwab
Invs., 807 F. Supp. 2d 871, 876–81 (N.D. Cal. 2011). The
district judge also held that Northstar could not assert a claim
as a third-party beneficiary of the Investment Advisory
Agreement. Id. at 881–84. Presumably because she had
dismissed the breach of contract cause of action in the Second
Amended Complaint with prejudice, she did not address
Northstar’s arguments as to these claims in the Third
Amended Complaint. Nor did the district judge decide
whether the allegations in the Third Amended Complaint
survived under SLUSA.

     As we discuss in detail below, we reverse the district
court’s dismissal of the breach of contract claims for failure
to allege a contract between the shareholders and the Fund.
We also reverse the district court’s dismissal of the fiduciary
duty and third-party beneficiary claims. We do not, however,
reach the question of whether any of Northstar’s claims are
barred by SLUSA. The district court has not yet had the need
to determine whether the allegations in the Third Amended
Complaint can survive under SLUSA, and should do so in the
first instance. See, e.g., Haskell v. Harris, 745 F.3d 1269,
30      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

1271 (9th Cir. 2014) (“[W]e are a court of review, not first
view.”).

    With this as a backdrop, we proceed to discuss the merits
of Northstar’s complaint.

     A. Breach of Contract Claim

    Northstar argues that, once the shareholders approved the
proposals regarding the fundamental investment objectives of
the Schwab Trust, which were described in the proxy
statement, the Schwab Trust was contractually obligated to
comply with them in managing the Fund. Moreover,
Northstar argues that the subsequent dissemination of the
fundamental investment objectives in the registration
statement and prospectuses formed a contract between the
Schwab Trust and the “existing investors [who] retained
shares and new investors [who] purchased shares in
consideration for Schwab’s contractual obligations.”
Appellant’s Br. at 21; see also Appellant’s Reply Br. at 7 n.8.

      The Restatement (Second) of Contracts provides that “[a]
promise may be stated in words either oral or written, or may
be inferred wholly or partly from conduct.” Restatement
(Second) of Contracts § 4 (1981). While contracts are often
spoken of as express or implied, “[t]he distinction involves
. . . no difference in legal effect, but lies merely in the mode
of manifesting assent.” Id. cmt. a. “Just as assent may be
manifested by words or other conduct, sometimes including
silence, so intention to make a promise may be manifested in
language or by implication from other circumstances,
including course of dealing or usage of trade or course of
performance.” Id. “The distinction between an express and
an implied contract, therefore, is of little importance, if it can
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.               31

be said to exist at all.” 1 Joseph M. Perillo, Corbin on
Contracts § 1.19 at 57 (rev. ed. 1993); see also 1 Richard A.
Lord, Williston on Contracts § 1:5 at 37–38 (4th ed. 2007)
(“An implied-in-fact contract requires proof of the same
elements necessary to evidence an express contract: mutual
assent or offer and acceptance, consideration, legal capacity
and a lawful subject matter.”).

    While it is not necessary to characterize the contract here
as either express or implied, a particularly instructive
discussion of the concept of implied contracts, in
circumstances analogous to those present here, appears in
Trustees of Dartmouth College v. Woodward, 17 U.S.
(4 Wheat.) 518 (1819), one of the earliest cases applying
Article I, Section 10 of the Constitution, which provides that
“[n]o State shall . . . pass any . . . Law impairing the
Obligation of Contracts.” The case arose out of an effort by
the State of New Hampshire to alter the terms of a corporate
charter that had provided certain guarantees as to the structure
and governance of Dartmouth College. As Professor Tribe
succinctly describes it, the Supreme Court “held that New
Hampshire could not pack the Dartmouth College board of
trustees and alter its faculty so as to change the college into
a public institution in violation of its 1769 charter from
George III.” Laurence H. Tribe, American Constitutional
Law 614 (2d ed. 1988). Of particular relevance here is the
concurring opinion of Justice Story, who began his discussion
of this issue by describing the creation of the corporation and
the terms of its charter. Specifically, he observed:

       The corporation was expressly created for the
       purpose of distributing in perpetuity the
       charitable donations of private benefactors.
       By the terms of the charter, the trustees, and
32       NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

        their successors, in their corporate capacity,
        were to receive, hold and exclusively manage
        all the funds so contributed. The crown, then,
        upon the face of the charter, pledged its faith
        that the donations of private benefactors
        should be perpetually devoted to their original
        purposes, without any interference on its own
        part, and should be for ever administered by
        the trustees of the corporation, unless its
        corporate franchises should be taken away by
        due process of law.

Dartmouth College, 17 U.S. (4 Wheat.) at 689.

    Justice Story then identified two implied contracts in this
circumstance. First, “there was an implied contract on the
part of the crown, with every benefactor, that if he would give
his money, it should be deemed a charity protected by the
charter, and be administered by the corporation, according to
the general law of the land. As, soon, then, as a donation was
made to the corporation, there was an implied contract . . .
that the crown would not revoke or alter the charter, or
change its administration, without the consent of the
corporation.” Id. Second, “[t]here was also an implied
contract between the corporation itself, and every benefactor,
upon a like consideration, that it would administer his bounty
according to the terms, and for the objects stipulated in the
charter.” Id. at 689–90.6



  6
   Justice Story’s opinion was a concurrence and was joined by Justice
Livingston. The opinion of the Court was written by Chief Justice
Marshall, who agreed that the charter constituted a contract. Id. at
643–44, 651.
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.               33

    The fundamental investment objectives of the Schwab
Total Bond Market Fund can be analyzed in the same
manner.      Indeed, when they were adopted by the
shareholders, they added a structural restriction on the power
conferred on the Trustees in the Agreement and Declaration
of Trust that can only be changed by a vote of the
shareholders. This created a “contract between the [Trustees
themselves], and every [investor]”—that the Schwab Trust
“would administer his [investment] according to the terms,
and for the objects stipulated in the” two restrictions adopted
by the shareholders of the Fund. Id. at 690–91. Significantly,
after the shareholders voted in favor of the proxy statement
that included these restrictions, they were subsequently
reflected in the Fund’s registration statements and
prospectuses. Thus, anyone who purchased shares in the
Fund after 1997, or held shares that he then owned, was
legally and contractually entitled to have his investment
managed in accordance with the proposals in the proxy
statement, unless the shareholders voted to permit otherwise.

    The defendants argue that undertakings in SEC filings
themselves cannot reflect contractual obligations that can be
enforced in a suit for breach of contract. This argument
cannot be reconciled with Lapidus v. Hecht, 232 F.3d 679
(9th Cir. 2000), where the plaintiffs sought “to recover losses
sustained by the mutual funds as a result of short sales made
without shareholder approval, allegedly in violation of the
registration statement filed with the Securities and Exchange
Commission.” Id. at 680. Specifically, the defendant, a
Massachusetts business trust, had filed a “prospectus . . . with
the SEC [that] provided that the trust could engage in short
sales of securities with a value of up to 25% of the value of
34       NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

the mutual fund’s total assets.”7 Id. at 681. The trust later
issued an amended prospectus which “authorized the trust to
enter into short sales of securities with a value of up to 40%
of the mutual fund’s total assets.” Id. Nevertheless, “[t]his
amendment to the short sales restriction was made without
shareholder approval” and, subsequently, “the mutual fund’s
short sale position had increased to 25–35% of the mutual
fund’s assets and the mutual fund suffered substantial losses.”
Id.

    On appeal, we addressed whether the plaintiffs could
bring their action for violations of the ICA directly against
the defendant or whether the action had to be brought
derivatively. We held that the Lapidus plaintiffs had
adequately alleged an injury “predicated upon a violation of
[the] shareholder’s voting rights,” id. at 683 (citing cases),
and that those “allegations are sufficient to satisfy the injury
requirement for a direct action under Massachusetts law,” id.
Significantly, the violation held to be adequately alleged was
of the plaintiffs’ “contractual rights as shareholders to vote
on proposed changes to the short sale and senior security
restrictions.” Id. (emphasis added). These restrictions were
spelled out in the registration statement, id., and in the
“prospectus filed with the SEC,” id. at 681. Lapidus’s
holding is directly applicable here because Northstar’s breach
of contract cause of action rests on the deviation by
defendants from two fundamental investment objectives,
which required a shareholder vote to be changed, without first


 7
   A registration statement must “include[] the information required in a
Fund’s prospectus[.]” Sec. & Exch. Comm’n, Form N-1A at 7, available
at http://www.sec.gov/about/forms/formn-1a.pdf (last visited Aug. 29,
2013). Lapidus appears to use the terms “registration statement” and
“prospectus” interchangeably.
         NORTHSTAR FIN. ADVISORS V. SCHWAB INV.                      35

obtaining shareholder approval. Until the fundamental
investment objectives were amended by shareholder vote, the
investors had a contractual right to have the Fund managed in
accordance with those objectives.8

    McKesson HBOC, Inc. v. New York State Common
Retirement Fund, Inc., 339 F.3d 1087 (9th Cir. 2003), upon
which the district judge relied, does not support the
defendants’ argument. In that case:

         McKesson HBOC [sued] its own shareholders
         for unjust enrichment arising from a merger
         between McKesson and HBO & Company
         (“HBOC”). McKesson claim[ed] that the
         former HBOC shareholders [we]re the
         beneficiaries of a windfall triggered by
         alleged accounting improprieties by HBOC.
         The shareholders, according to McKesson,
         exchanged artificially inflated shares of
         HBOC for fully-valued McKesson shares in
         the merger transaction. McKesson [wanted]
         to recover the excess value from the
         shareholders.

Id. at 1089. McKesson sought recovery for unjust
enrichment, which was potentially available only if there was
no governing contract between the parties. Id. at 1089, 1091.
While McKesson HBOC ultimately held that there was no


   8
     We rely on Lapidus at this juncture solely for its holding that
undertakings in SEC filings may give rise to an implied contractual
obligation. We discuss at pages 45 to 47 below, the effect of the holding
of Lapidus on whether an action for breach of contract and breach of
fiduciary duty may be brought directly.
36      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

recovery for unjust enrichment, even if there were no
governing contract, it first addressed whether the Merger
Agreement or the relevant Proxy Statement/Prospectus
(“Prospectus”) was a contract that governed McKesson’s
claims against the shareholders.

    First, McKesson HBOC held that “it is clear from the text
and the signatories to the agreement that the only parties to
the Merger Agreement were the corporations themselves.”
Id. at 1091. Second, it held that “the Prospectus was not an
offer by McKesson to the HBOC shareholders to enter into a
bilateral contract separate and apart from the Merger
Agreement.” Id. at 1092. Specifically, McKesson HBOC
explained that, although the “Prospectus references the
Merger Agreement, advising shareholders that ‘[t]he merger
cannot be completed unless the stockholders of both
companies approve the merger agreement and the
transactions associated with it,’” such “references do not . . .
convert McKesson’s solicitation of the shareholders’ vote
into a contractual offer.” Id. Thus, McKesson HBOC
concluded that “the Prospectus did not serve as the basis for
a contract between McKesson and the shareholders.” Id. at
1093.

    Significantly, McKesson HBOC distinguished the
scenario it addressed from a “tender offer situation, where the
courts have found a contract between the corporation and an
individual shareholder who tenders shares[.]” Id. at 1092; see
also 6A Fletcher Cyc. Corp. § 2841.10 at 358 (rev. ed. 2013)
(“A binding contract is created when the shareholder tenders
his or her securities in accordance with the terms of the
offer.”). Unlike a tender offer, “the shareholders [in
McKesson] did not tender their shares.” McKesson HBOC,
339 F.3d at 1092–93. Moreover, “shareholders who objected
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.                37

to the merger could not separately opt out or contract out of
the merger. Individual shareholders were not in a position of
contracting with McKesson, and shareholder ratification did
not convert the Prospectus into a contract.” Id at 1093.

    This case is clearly distinguishable from McKesson
HBOC. First, the parties to the contract at issue in this case
are the Trustees and the shareholders of the Fund. Second,
the breach of contract cause of action is predicated, in part, on
the approval of the fundamental investment objectives by the
shareholders. Once those objectives were adopted, they
significantly restricted the discretion which the Agreement
and Declaration of Trust conferred on the Schwab Trust to
manage the Fund. Moreover, the Fund’s registration
statement and prospectuses reflected the adoption of those
restrictions. The acquisition of the securities constituted an
acceptance of the offer.

    Nor does In re Charles Schwab Corp. Securities
Litigation, No. C 08-01510 WHA, 2009 WL 1371409 (N.D.
Cal. May 15, 2009) [hereinafter “Charles Schwab”], on
which defendants rely, and which involved legal issues
comparable to this case, constitute persuasive authority to the
contrary. The district judge there first stated that “[t]he Ninth
Circuit has never addressed whether mutual fund disclosure
documents constitute a contract under these precise
circumstances.” Id. at *3. Nevertheless, as Lapidus makes
clear, this is not an accurate statement of Ninth Circuit law.
See 232 F.3d at 683. Moreover, we do not find persuasive the
argument that Lapidus is distinguishable because it “did not
involve contract claims but rather statutory claims under the
[ICA.]” Charles Schwab, 2009 WL 1371409, at *5. The
plaintiffs’ ability in Lapidus to bring a direct action under the
ICA was based upon a breach of their “contractual rights as
38      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

shareholders to vote on proposed changes to the short sale
and senior security restrictions[.]” Lapidus, 232 F.3d at 683.
These contractual rights were derived from the registration
statement and the prospectus. Id. at 681, 683.

    We find equally unpersuasive the argument that “the
prospectuses . . . here at issue are not contracts but rather are
mandatory regulatory disclosure documents.” Charles
Schwab, 2009 WL 1371409, at *3. The prospectus, which is
the primary selling document, offers to sell shares to
investors in a mutual fund which will invest the proceeds in
the manner described in the prospectus, unless shareholders
approve a proposal to do otherwise. Indeed, the Securities
and Exchange Commission urges investors to “request and
read the fund’s prospectus before making an investment
decision.” Mutual Fund Prospectus, Sec. & Exch. Comm’n,
http://www.sec.gov/answers/mfprospectustips.htm (last
visited Sept. 5, 2014). The mere fact that Congress has
chosen to ensure that investors are fully informed of the
fundamental investment objectives of mutual funds hardly
provides a license to ignore the objectives, enshrined by
shareholder approval, which a mutual fund has obligated
itself to pursue. Nor does it alter the fact that the purchase of
those shares constitutes an acceptance of the offer by the
investor. Indeed, as previously observed, this is precisely
how the shareholders became parties to the Agreement and
Declaration of Trust. Agreement and Declaration of Trust 4
(“Every Shareholder by virtue of having become a
Shareholder shall be held to have expressly assented and
agreed to the terms hereof and to have become a party
hereto.”).

    Moreover, the district judge in Charles Schwab did not
cite any authority for his suggestion that a “mandatory
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.                39

regulatory disclosure document” cannot form the basis for an
implied contract. Lapidus holds otherwise and the district
judge in Charles Schwab acknowledged that, “in certain
circumstances prospectuses can constitute a contract.”
Charles Schwab, 2009 WL 1371409, at *5. Indeed, even
before the enactment of the Securities Act of 1933, “the term
‘prospectus’ was well understood to refer to a document
soliciting the public to acquire securities from the issuer.”
Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 575 (1995)
(citing Black’s Law Dictionary 959 (2d ed. 1910)).

    In sum, we conclude that the mailing of the proxy
statement and the adoption of the two fundamental
investment policies after the shareholders voted to approve
them, and the annual representations by the Fund that it
would follow these policies are sufficient to form a contract
between the shareholders on the one hand and the Fund and
the Trust on the other. The Fund offered the shareholders the
right to invest on these terms, and the shareholders accepted
by so investing. The consideration for the contract was the
shareholders’ investment, or continued investment, in the
Fund, and the parties’ object was lawful. The conduct of the
parties thus fulfills all the requirements for a binding contract
under traditional common law principles. See Lord, Williston
on Contracts § 1:5 at 37–38 (4th ed. 2007).

    We are aware that Judge Koh held that, under the
particular circumstances of this case, Northstar failed to
successfully allege the formation and breach of a contract.
781 F. Supp. 2d at 939. She reasoned that:

        [A] September 1, 2006 Statement of
        Additional Information was issued which
        stated that the Fund would, from then on,
40      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

        cease to treat “mortgage-backed securities
        issued by private lenders” as a separate
        industry and therefore could invest more than
        25% of the Fund’s assets in this area would
        seem to defeat Plaintiffs’ contract claim. If
        this became a term of the contract between
        Plaintiffs and the Trust when investors held or
        subsequently purchased shares, then the Trust
        could not have breached this contract by over-
        investing in MBS, as Plaintiffs claim.

Id. at 940.

    We are not persuaded. Northstar alleged that the SAI’s
statement that “the funds have determined that mortgage-
backed securities issued by private lenders are not part of any
industry for the purposes of the funds’ concentration
policies,” Northstar Fin. Advisors, Inc. v. Schwab Invs., No.
5:08-cv-04119-LHK (N.D. Cal.), Statement of Additional
Information (Sept. 1, 2006) at 8, Doc. No. 152-2, was an
improper attempt to circumvent the Fund’s concentration
policy that limited investment in one industry to 25% of its
assets because no vote was taken to approve it. This position
was supported by a complaint filed by the Securities and
Exchange Commission, which alleged “that the Schwab trust
deviated from its policy on concentration for the Schwab
Total Bond Market Fund . . . by deciding to not treat
mortgage-backed securities as an industry without
shareholder approval.” Appellees’ Br. 13 (citing SEC v.
Charles Schwab Inv. Mgmt. Inc., No. 11-cv-00136 (N.D.
Cal.), Compl. ¶¶ 24–28, Doc. No. 1).

   Specifically, the SEC charged that before August 2006,
the 25% concentration policy stated that “[b]ased on
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.              41

characteristics of mortgage-backed securities, [the Total Bond
Fund] has identified mortgage-backed securities issued by
private lenders and not guaranteed by the U.S. government
agencies or instrumentalities as a separate industry for
purposes of [the] fund’s concentration policy.” SEC v.
Charles Schwab Inv. Mgmt. Inc., No. 11-cv-00136 (N.D.
Cal.), Compl. ¶ 25, Doc. No. 1; see also Schwab Investments,
Statement of Additional Information (Form N-1A, Part B) 9
(Nov. 15, 2004). The position of the SEC was that, because
Schwab had identified mortgage-backed securities issued by
private lenders as an industry, “the Total Bond Fund could
not invest more than 25% of [its] assets in non-agency MBS
without obtaining shareholder approval under Section 13(a)”
of the ICA. SEC v. Charles Schwab Schwab Inv. Mgmt. Inc.,
No. 11-cv-00136 (N.D. Cal.), Compl. ¶ 25.

    Judge Koh’s reliance on the September 1, 2006 SAI, even
if correct, overlooks the fact that the Fund’s concentration
policy was only one of the two fundamental investment
objectives from which the defendants could not depart
without shareholder approval. The primary violation was
“causing the Fund to deviate from its fundamental investment
objective to ‘seek to track the investment results’ of the
Lehman Brothers U.S. Aggregate Bond Index . . . ‘through
the use of an indexing strategy.’” The complaint then goes on
to allege that the “Fund also deviated from its stated
fundamental investment objective by investing more than
25% of its total assets in U.S. agency and non-agency
mortgage-backed securities and CMOs.”

    The SAI did not provide any notice that the defendants
intended to depart from the first of the fundamental objectives
which obligated the Fund to “seek to track the investment
results” of the Lehman Index. Thus, even if Judge Koh was
42      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

correct in her analysis with respect to the breach of the
second investment objective, as to which notice was provided
in the SAI, the complaint still sufficiently states a claim for
breach of contract. This is true with respect to those who
purchased before September 1, 2006 and held on to their
shares afterward, and those who purchased after that date.

    Particularly as to those who purchased before September
1, 2006 and held onto their shares, we are not prepared to
assume that the SAI itself was sufficient to provide adequate
notice. An SAI, “affords the Fund an opportunity to expand
discussions of the matters described in the prospectus by
including additional information that the Fund believes may
be of interest to some investors.” Glazer, Prospectus
Disclosure and Delivery Requirements, in Mutual Fund
Regulation § 4:3.2 (quoting Sec. & Exch. Comm’n, Form N-
1A at 7, available at http://www.sec.gov/about/forms/formn-
1a.pdf (last visited Sept. 5, 2014)). “The SAI is not
automatically provided investors but must be available free of
charge upon request.” Id. Moreover, the SAI may be
specifically incorporated “by reference into the prospectus
without delivering the SAI with the prospectus.” Id.
§ 4:3.1[D]. While there may be sophisticated shareholders
who make the effort to ask for an SAI or read it with the care
necessary to digest the relevant parts of a long and
multifaceted document, we think it is reasonable to assume
that there are many ordinary shareholders who do not do so.
Indeed, even if a mutual fund could alter a fundamental
investment objective by the vehicle of an SAI, it should
provide current shareholders with clear and unambiguous
notice of the alteration that it wishes to make.
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.             43

   B. Breach of Fiduciary Duty Claim

    Northstar alleged that the Schwab defendants breached
their fiduciary duties by failing to ensure that the Fund was
managed in accordance with the fundamental investment
objectives and by changing the Fund’s fundamental
investment objectives without obtaining required shareholder
authorization. The district judge held that Northstar “failed
to successfully allege a breach of any duty owed directly to
Fund investors, and that these claims would have to be
asserted derivatively.” Northstar Fin. Advisors, Inc. v.
Schwab Invs., 807 F. Supp. 2d 871, 876 (N.D. Cal. 2011).

    Defendants conceded at oral argument that the allegations
in the operative complaint are sufficient to state a cause of
action for breach of fiduciary duty. They argue, however,
that the Trustees did not owe a fiduciary duty to the
beneficiaries of the Schwab Trust—namely, the shareholders.
Instead, they argue that because of the “close resemblance of
a mutual fund operated as a Massachusetts Business Trust to
a corporation,” the Trustees should be treated in the same
way as corporate directors, who “owe fiduciary duties to the
corporation rather than to its shareholders.” Appellees’ Br.
at 48. This argument provides the predicate for the claim that
Northstar was required to proceed by way of a derivative
action.

   There are several deficiencies in this argument. First, it
simply ignores the plain terms of the Agreement and
Declaration of Trust.
44      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

     The document states expressly that:

        the Trustees hereby declare that they will hold
        all cash, securities and other assets, which
        they may from time to time acquire in any
        manner as Trustees hereunder IN TRUST to
        manage and dispose of the same . . . for the
        pro rata benefit of the holders from time to
        time of Shares in this Trust.

Agreement and Declaration of Trust 1. We are not aware of
any Massachusetts case that holds that agreements of this
kind cannot be enforced directly by the beneficiaries of a
trust.

    Second, the Supreme Judicial Court of Massachusetts has
held that “[i]t is axiomatic that the . . . trustees [stand] in a
fiduciary relationship to all the beneficiaries of the trust.”
Fogelin v. Nordblom, 521 N.E.2d 1007, 1011 (Mass. 1988);
see also Dukeminier, Sitkoff & Lindgren, Wills, Trusts, and
Estates 556 (“In managing the portfolio, [the trustee] is
subject to a fiduciary obligation to” the investors in the
mutual fund); John H. Langbein, The Secret Life of the Trust:
The Trust as an Instrument of Commerce, 107 Yale L.J. 165,
166 (1997) (“The familiar standards of trust fiduciary law
protect trust beneficiaries of all sorts, regardless of whether
the trust implements a gift or a business deal (unless, of
course, the terms of the transaction expressly
contraindicate).”). While the Supreme Judicial Court of
Massachusetts has acknowledged similarities between
corporations and business trusts, it has held that business
trusts “are not corporations, nor are they entities apart from
the trustees.” Swartz v. Sher, 184 N.E.2d 51, 53 (1962).
Under these circumstances, there is no logical basis for the
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.               45

argument that the trustees of a mutual fund organized as a
Massachusetts business trust owe a fiduciary duty to the trust,
rather than the shareholders, and that for this reason they are
limited to a derivative action on behalf of the trust.

     Lapidus v. Hecht, 232 F.3d 679 (9th Cir. 2000), upon
which defendants rely, does not support their position.
Lapidus involved two discrete claims of wrongdoing. The
first, which is comparable to the cause of action here, was
based on deviations from the investment objectives of the
mutual fund and the issuance of senior securities without
shareholder approval. Id. at 681 (citing 15 U.S.C. § 80a-
13(a)(2)–(3)). The second cause of action involved the
issuance of senior securities in violation of section 15 U.S.C.
§ 80a-18(f).

    Lapidus first addressed the issue of whether a direct
action could be brought for the departure from the mutual
fund’s investment objectives and the issuance of senior
securities without shareholder approval. Lapidus, 232 F.3d
at 683. We held that, “[t]o bring a direct action under
Massachusetts law, a plaintiff must allege an injury distinct
from that suffered by shareholders generally or a wrong
involving one of his or her contractual rights, such as the
right to vote. Lapidus, 232 F.3d at 683 (emphasis added).
We then went on to observe that the plaintiffs alleged
“violations of their contractual rights as shareholders to vote
on proposed changes to the short sale and senior security
restrictions.” Id. Such claims could be brought directly. Id.

    Lapidus then addressed the second cause of action based
on “the allegedly improper issuance of senior securities,” id.
at 683, in violation of federal law, id. at 681 n.3. This action
could not be brought directly because it failed both parts of
46      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

the disjunctive test. First, the injury was not distinct from the
injury to all shareholders holding the same series of stock
because the alleged improper “issuance of senior securities
. . . would be an injury to the trust generally.” Id. at 683.
Second, the alleged improper issuance was “unconnected to
any violation of voting rights” or any other contractual right.
Id.

    The first prong of the test was applied with respect to both
causes of action in Lapidus, namely, that to bring a direct
action under Massachusetts/Delaware law, “a plaintiff must
allege an injury distinct from that suffered by shareholders
generally.” Id. We refer to “Massachusetts/Delaware” law
because Lapidus relied on two Delaware cases and one
Massachusetts case applying Delaware law for the
circumstances under which a direct action may be brought
“under Massachusetts law[.]” 232 F.3d at 683. The
Delaware law has since changed. Thus, in Tooley v.
Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031, 1036–39
(Del. 2004), the Supreme Court of Delaware rejected, as
“confusing,” the concept “that an action cannot be direct if all
stockholders are equally affected or unless the stockholder’s
injury is separate and distinct from that suffered by other
stockholders.” Id. at 1038–39.

     Moreover, even if that prong survived the holding in
Tooley, a direct action in this case would be appropriate under
the second prong of the disjunctive test applied in Lapidus
because the plaintiffs allege “a wrong involving one of [their]
contractual rights as . . . shareholder[s].” 232 F.3d at 683.
Northstar’s breach of contract cause of action rests on the
deviation by defendants from two fundamental investment
objectives, which required a shareholder vote change, without
first obtaining shareholder approval. The right to vote,
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.               47

however, is not the only contractual right at issue. Instead, it
is inextricably intertwined with the restrictions placed on the
power of the Trustees to invest the assets of the Fund. Until
the fundamental investment objectives were amended by
shareholder vote, the investors had a contractual right to have
the Fund managed in accordance with those objectives.

    The third deficiency in defendants’ argument that this
action must be brought derivatively is that the distinction
between direct and derivative actions has little meaning in the
context of mutual funds, at least on the facts present here. A
publicly held corporation, in contrast to a mutual fund,
engages in a business, e.g., the buying and selling of widgets,
in which the accretion of share price is generally the by-
product of business success, and the depletion of share price
can be the by-product of either unsuccessful business
decisions or misconduct by fiduciaries. The particular facts
in the latter scenario will determine whether claims against
corporate officers are derivative or direct in nature (or both).
See Tooley, 845 A.2d 1031. In a mutual fund, however, there
is no business other than acquiring investment instruments for
the purpose of increasing the net asset value “for the pro rata
benefit of the holders . . . of Shares in this Trust.” Agreement
and Declaration of Trust 1. Any decrease in a mutual fund’s
share price flows directly and immediately to the
shareholders. This is particularly true when such an injury
results from the failure to comply with a fund’s fundamental
investment objectives. Thus, such misconduct supports a
direct action.

    There may be scenarios where a mutual fund trustee can
be sued only derivatively—for example, if he embezzles
assets held by the fund, the injury may be first to the mutual
fund and only secondarily to the investors in the fund. But
48     NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

that is not this case. Rather, this case alleges a failure to
follow trading restrictions, the very essence of the Fund’s
business, which, accepting the allegations as true, caused a
diminution in shareholder value. The claim supports a direct
action because the impact is directly on the investors in the
Fund and a recovery would not be dependent on
demonstrating an injury to the Schwab Trust. Cf. Tooley, 845
A.2d at 1039 (holding that a corporate stockholder who
brings a direct action “must demonstrate that the duty
breached was owed to the stockholder and that he or she can
prevail without showing an injury to the corporation”).

    Even if we were to accept defendants’ attempt to
analogize the Fund to a publicly held corporation, their
argument that Northstar may only sue derivatively would fail.
Significantly, the Principles of Corporate Governance
promulgated by the American Law Institute (“ALI”)
recognize that in circumstances comparable to this case, a
direct action may be appropriate. Thus, in a comment to
§ 7.01, the section that is captioned “Direct and Derivative
Actions Distinguished,” the ALI observes:

       In some instances, actions that essentially
       involve the structural relationship of the
       shareholder to the corporation (which thus
       should be seen as direct actions) may also
       give rise to a derivative action when the
       corporation suffers or is threatened with a
       loss. One example would be a case in which
       a corporate official knowingly acts in a
       manner that the certificate of incorporation
       denied the official authority to do, thereby
       violating both specific restraints imposed by
       the shareholders and the official’s duty of
         NORTHSTAR FIN. ADVISORS V. SCHWAB INV.                      49

         care. In such cases, the plaintiff may opt to
         plead either a direct or a derivative action, or
         to bring both actions simultaneously, unless
         the court finds that the plaintiff is unable to
         provide fair and adequate representation
         pursuant to § 7.02(a)(4) (Standing to
         Commence and Maintain a Derivative
         Action).

American Law Institute, Principles of Corporate Governance
§ 7.01, cmt. c (1994).9

    The present case involves the same kind of structural
relationship of shareholders to the Schwab Trust that the
foregoing comment addresses. Of course, we deal here with
an agreement and declaration of trust rather than a certificate
of incorporation. The adoption by the shareholders of the
fundamental investment objectives of the Fund effectively
imposed a restraint on the structural relationship in the


  9
     The Chief Reporter’s foreword states that “Comments express the
views of the [American Law] Institute.” ALI, Principles of Corporate
Governance XXV. Section 7.01, to which this comment applies, has been
repeatedly cited with favor by the Supreme Court of Delaware. See
Tooley, 845 A.2d at 1036; Grimes v. Donald, 673 A.2d 1207 (Del. 1996),
overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del.
2000). Indeed, in Grimes, the Supreme Court of Delaware expressly cited
and applied the comment quoted above. Id. at 1213. While the present
case does not directly involve the application of Delaware law, Delaware
has been described aptly as “by far the most important corporate
jurisdiction[.]” Melvin Aron Eisenberg & James D. Cox, Corporations
and Other Business Organizations 1031 (10th ed. 2011). Indeed, as we
previously observed, in Lapidus we relied on two Delaware cases and one
Massachusetts case applying Delaware law for the circumstances under
which a direct action may be brought “under Massachusetts law[.]”
232 F.3d at 683.
50      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

Agreement and Declaration of Trust comparable to an
amendment of a certificate of incorporation. The allegations
in the complaint, although not in haec verba, are sufficient to
support an argument that the Trustees “violat[ed] both
specific restraints imposed by the shareholders and the
official[s’] duty of care.” ALI, Principles of Corporate
Governance § 7.01, cmt. c. Thus, even if the same rules that
apply to corporations are applied to the Schwab Trust, this is
the kind of case in which “the plaintiff may opt to plead either
a direct or a derivative action[.]” Id.

    Moreover, there is another reason, directly rooted in
Massachusetts case law, which provides a basis for permitting
a direct action even against a corporation.             While
Massachusetts cases generally preclude direct actions “where
corporate recovery for misdeeds by a corporate fiduciary is
available under traditional corporate law,” they contain the
significant caveat that “such recovery [must] provide[] a just
measure of relief to the complaining stockholder[.]” Crowley
v. Commc’ns for Hosps., Inc., 573 N.E.2d 996, 1004 (Mass.
App. Ct. 1991); see also Diamond v. Pappathanasi, 25 Mass.
L. Rptr. 500, 2009 WL 1539792, at *7 (Mass. Super. Ct.
2009) (“[S]hareholders may resort to a direct, personal action
against a miscreant fiduciary where . . . a corporate recovery
would not provide a just measure of relief to the complaining
shareholder.”). We have likewise acknowledged that, even
where corporate shareholders have been relegated to pursue
their claims in a derivative action, a direct action may be
appropriate to provide a remedy to shareholders who have
been injured and who would not recover under the traditional
rules governing derivative actions. See, e.g., Eagle v. Am.
Tel. & Tel. Co., 769 F.2d 541, 546 (9th Cir. 1985).
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.              51

    This case is one in which a recovery by the Schwab Trust
“would not provide a just measure of relief to the
complaining shareholder.” Diamond, 2009 WL 1539792, at
*7. Any recovery in a derivative action would simply
increase the net asset value of the Fund at the time any
damages were recovered. Consequently, as defendants
conceded at oral argument, if a derivative suit is successfully
prosecuted, all current shareholders would participate in the
recovery by the Schwab Trust even if they were not
shareholders during the relevant time period, and injured
former shareholders would not necessarily participate in the
recovery at all.

     Significantly, the remedy agreed to in an enforcement
action by the SEC avoids such “a[n] [un]just measure of relief
to the complaining [shareholders].” Crowley, 573 N.E.2d at
1004. The action, as we have previously observed, was based
on the allegation “that the Schwab Trust improperly deviated
from its policy on concentration for the [Fund] . . . by
deciding to not treat mortgage-backed securities as an
industry without shareholder approval.” Appellees’ Br. at 13
(citing SEC v. Charles Schwab Inv. Mgmt. Inc., No. 11-cv-
00136 (N.D. Cal.), Compl. ¶¶ 24–28, Doc. No. 1). A consent
judgment was entered requiring the Schwab Trust to disgorge
profits and prejudgment interest. Appellees’ Br. at 13–14
(citing SEC v. Charles Schwab Inv. Mgmt. Inc., No. 11-cv-
00136 (N.D. Cal.), Consent to Enter J. ¶ 2, Doc. No. 2). The
Schwab Trust, however, did not share in the recovery.
Instead, the settlement proceeds were deposited by the
defendants into “a fund for distribution to adversely affected
investors, including investors in the [Fund.]” Appellees’ Br.
at 14 (citing SEC v. Charles Schwab Inv. Mgmt. Inc., No. 11-
cv-00136 (N.D. Cal.), Order Approving Distribution Plan
52      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

with Modification, Doc. No. 37). This kind of remedy could
be obtained if this direct class action is successful.

    Halebian v. Berv, 931 N.E.2d 986 (Mass. 2010), upon
which defendants rely, does not compel a contrary result.
The defendants correctly argue that Halebian held, in an
appropriate case, a shareholder of a mutual fund may be
forced to resort to making a demand on the Trustees to file a
derivative action. Nevertheless, Halebian did not address the
circumstances under which such a course of action would be
required. Instead, it held that “the statute regulating
derivative actions [Mass. Gen. Laws ch. 156D, §§ 7.40–7.47]
applies to a shareholder bringing such a claim against a
corporation or a business trust.” Id. at 988 n.4. Because the
plaintiff had filed a derivative action, Halebian went on to
address the narrow issue of “whether the Legislature intended
that the provisions for dismissal under § 7.44 apply only to
derivative proceedings that are ‘commenced after rejection of
a demand,’ or to any derivative proceeding where a plaintiff
shareholder’s demand has been rejected by the corporation.”
Id. at 989.

    Moreover, the allegations in that case were quite unlike
the misconduct alleged here. In Halebian, the plaintiff
claimed that the trustees failed to engage in competitive
bidding in their selection of an investment adviser. Id. at 988.
A derivative suit was arguably appropriate in the case
because the injury to the shareholders was the attenuated
result of an improper trust expenditure (the investment
adviser’s fee).

    Nor are we persuaded by the policy arguments defendants
rely on to support treating this case as a derivative action.
Defendants argue that “[b]y requiring shareholders to demand
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.               53

that a corporation bring a claim before filing a derivative
action, derivative action rules allow disinterested directors to
halt suits that are meritless or contrary to the corporation’s
interest and allow them to exercise their judgment and
oversee litigation in the best interest of the company.”
Appellees’ Br. at 46–47 (citing Mass. Gen. Laws ch 156D,
§ 7.42; Daily Income Fund, 464 U.S. at 533; Halebian,
457 Mass. at 626). Moreover, they go on to argue that,
“applying derivative action rules in this context . . . ensures
that disinterested trustees remain primarily responsible for
management of a trust’s litigation.” Appellees’ Br. at 47.
This argument is particularly unpersuasive in light of the
manner in which Massachusetts business trusts that operate
mutual funds conduct business. The Supreme Court has
recognized that mutual funds are “typically organized and
underwritten by the same firm that serves as the company’s
‘investment advisor.’” Kamen, 500 U.S. at 93. They are
essentially puppets of the investment adviser.

    Moreover, although fund boards have been required to
include a percentage of independent directors, “the definition
of ‘independent’ is fairly loose when it comes to fund board
members[.]” Shipman, So Who Owns Your Mutual Fund?,
Wall St. J., May 5, 2003, at R1. As one commentator has
observed:

       An independent director can’t be an employee
       of the fund investment adviser or a member of
       the immediate family of an employee. Other
       restrictions also apply. But former employees
       of the fund’s investment adviser or the
       adviser’s affiliates are considered to be
       independent when it comes to serving on a
       fund board. So, for example, Joseph S.
54      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

       DiMartino, who was president of Dreyfus
       Corp. for a dozen years before becoming
       chairman of the fund boards for the Dreyfus
       fund group, is considered an independent
       director.

Id. Indeed, notwithstanding the requirement that 40 percent
of the members of the mutual fund board be “independent”
from the adviser, 15 U.S.C. § 80a-10(a), Congress required
that the shareholders of the Fund approve the initial contract
for any adviser. 15 U.S.C. § 80a-15. This requirement
reflected the fact that the trustees of a mutual fund “cannot
seriously be expected to induce arm’s-length bargaining. As
the SEC long ago recognized, any so-called independent
directors would ‘obviously have to be satisfactory to the
dominating stockholders who are in a position to continue to
elect a responsive board.’” Fox, 692 F.2d at 259 (quoting In
re Petroleum & Trading Corp., 11 S.E.C. 389, 393 (1942)).
Under these circumstances, it is wrong to suggest that
“applying derivative action rules in this context . . . ensures
that disinterested trustees remain primarily responsible for
management of a trust’s litigation.” Appellees’ Br. at 47.
This is particularly true here because one of the principal
defendants, aside from the Trustees themselves, is the
Schwab Advisor.

   There are, of course, other “reasons . . . commonly
advanced for distinguishing between a derivative action,
which is brought on the corporation’s behalf against either
corporate fiduciaries or third persons, and a direct action,
which is brought on a shareholder’s own behalf against either
corporate fiduciaries or the corporation itself.” Eisenberg &
Cox, Corporations and Other Business Organizations 1064.
The first has been described as “theoretical: Since a
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.               55

corporation is a legal person separate from its shareholders,
an injury to the corporation is not an injury to its
shareholders. This proposition is somewhat dubious, because
every injury to a corporation must also have an impact,
however slight, on the shareholders as well.” Id. The other,
and more compelling, reasons of policy are summed up in
Watson v. Button as follows: “(1) to avoid a multiplicity of
suits by each injured shareholder, (2) to protect the corporate
creditors, and (3) to protect all the stockholders since a
corporate recovery benefits all equally.” 235 F.2d 235, 237
(9th Cir. 1956); see also Eisenberg & Cox, Corporations and
Other Business Organizations 1064. Significantly, two of
these three policy objectives, which defendants also put
forward here, are ameliorated by the very nature of the class
action, which is designed to avoid a multiplicity of suits by
shareholders and which contain procedural mechanisms to
ensure that all members of the class are treated equally.
Moreover, to the extent that one of the reasons for favoring a
derivative suit is a concern for the protection of creditors, it
is enough to say here that the defendants do not argue that the
concern is at issue in this case.

   C. Third-Party Beneficiary Breach of Contract Claims

    The Schwab Trust entered into an agreement with the
Schwab Advisor to serve as its investment adviser and
administrator of the Fund. The Schwab Advisor expressly
agreed to “use the same skill and care in providing such
services as it would use in providing services to fiduciary
accounts if it had investment responsibilities for such
accounts.” The principal duty of the Schwab Advisor, as
prescribed in the IAA with the Schwab Trust, was to
“determine from time to time what securities and other
investments [would] be purchased, retained, or sold by the
56      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

[Fund].” This agreement with the Schwab Advisor was
expressly approved by the shareholders of the Fund.
Northstar alleges that the Schwab Advisor breached the IAA
by managing the Fund in a manner inconsistent with the
Fund’s fundamental investment objectives, and that the
shareholders may hold the Schwab Advisor liable for such a
breach as third-party beneficiaries of the IAA.

    The IAA expressly states that it “shall be governed by the
laws of the State of California.” Under California Civil Code
§ 1559, a critical element of a third-party cause of action is a
showing that the contract was “made expressly for the benefit
of a third person.” The phrase, however, has been held not to
mean “exclusively,” Hartman Ranch Co. v. Associated Oil
Co., 73 P.2d 1163, 1170 (Cal. 1937), “solely,” Le Ballister v.
Redwood Theatres, Inc., 36 P.2d 827, 827 (Cal. Dist. Ct. App.
1934), or “primar[il]y,” Montgomery v. Dorn, 145 P. 148,
151 (Cal. Dist. Ct. App. 1914), for the benefit of a third
person. Similarly, the term has been construed not to require
that performance be rendered “directly” to the beneficiary,
Lucas v. Hamm, 364 P.2d 685, 688 (Cal. 1961), or that the
beneficiary be specifically named or identified in the contract,
Garratt v. Baker, 56 P.2d 225, 226 (Cal. 1936).

    “Consequently, its connotative meaning having been
destroyed by judicial interpretation, the term ‘expressly’ has
now come to mean merely the negative of ‘incidentally.’”
Kay S. Bruce, Martinez v. Socoma Companies: Problems in
Determining Contract Beneficiaries’ Rights, 27 Hastings L.
J. 137, 149 (1975) (footnotes omitted). Indeed, the Supreme
Court of California has explicitly held that “[t]he effect of the
section is to exclude enforcement by persons who are only
incidentally or remotely benefited.” Lucas, 364 P.2d at 689;
see also Spinks v. Equity Residential Briarwood Apartments,
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.               57

90 Cal. Rptr. 3d 453, 468 (Ct. App. 2009); Judith M. Kline &
Brent A. Olson, California Business Law Deskbook § 8:28
(2012).

    Under these circumstances, the critical issue is
“‘[w]hether the third party is an intended beneficiary.’”
Balsam v. Tucows Inc., 627 F.3d 1158, 1161 (9th Cir. 2010)
(quoting Prouty v. Gores Tech. Grp., 18 Cal. Rptr. 3d 178,
184 (Ct. App. 2004)). The resolution of this issue, in turn,
“‘involves construction of the intention of the parties,
gathered from reading the contract as a whole in light of the
circumstances under which it was entered.’” Id. (quoting
Prouty, 18 Cal. Rptr. 3d at 184); Restatement (Second) of
Contracts § 302, reporter’s note (“A court in determining the
parties’ intention should consider the circumstances
surrounding the transaction as well as the actual language of
the contract.” (citing cases)). “Insofar as intent to benefit a
third person is important in determining his right to bring an
action under a contract, it is sufficient that the promisor must
have understood that the promisee had such intent.” Lucas,
364 P.2d at 689.

    Northstar has adequately alleged an “intent to benefit a
third person.” Northstar has also plausibly alleged that the
Schwab Advisor understood that it was the intent of the
Schwab Trust to benefit the shareholders of the Fund.
Moreover, compelling evidence lending plausibility to the
third-party beneficiary cause of action, based on the premise
that the shareholders are intended beneficiaries of the IAA, is
that Congress has required “that the contract between the
adviser and the company be approved by a majority of the
company’s shareholders.” Kamen, 500 U.S. at 93 (citing
15 U.S.C. § 80a-15(a)); see also Navellier v. Sletten, 262 F.3d
923, 944 (9th Cir. 2001); David A. Sturms & Renee M.
58      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

Hardt, Regulation of the Advisory Contract, in Mutual Fund
Regulation § 6:2.2 (Clifford E. Kirsch ed., 2d ed. 2005).

    Thus, the agreement between the Schwab Trust and the
Schwab Advisor explicitly provides “that it has been
approved by a vote of a majority of the outstanding voting
securities of such Schwab Fund, in accordance with the
requirements under the [ICA].” This suffices to establish that
the shareholders have more than a “remote” relationship to
the contract between the Schwab Trust and the Schwab
Advisor. Rather, it indicates the direct relationship that the
shareholders have with the IAA and the fact that they are the
actual beneficiaries of the IAA. Indeed, as we have held, the
requirement for shareholder approval, which is imposed by
the ICA, “reflect[s] the judgment of Congress that
stockholders of the investment company have a substantial
interest in evaluating the new owners of an investment
manager.” Zell v. InterCapital Income Sec., Inc., 675 F.2d
1041, 1047 (9th Cir. 1982) (citing 15 U.S.C. § 80a-15(a)(4)).

    The sufficiency of the complaint is also supported by a
number of California cases. Specifically, in Gilbert Financial
Corp. v. Steelform Contracting Co., 145 Cal. Rptr. 448 (Ct.
App. 1978), the plaintiff, a property owner, entered into a
contract with a general contractor for the construction of a
building. The general contractor subcontracted work to the
defendant. The California Court of Appeal held that the
plaintiff was an intended beneficiary of the subcontract
between the general contractor and the defendant, even
though the plaintiff was not specifically named. Id. at 450.
Indeed, the allegations in the complaint demonstrated that the
subcontractor had, in effect, assumed the role of the general
contractor to provide construction services for the plaintiff,
such that the plaintiff was the “ultimate beneficiary” of the
        NORTHSTAR FIN. ADVISORS V. SCHWAB INV.               59

contract between the subcontractor and the general contractor.
Id. at 451.

    Applying the reasoning of Gilbert, the Fund’s
shareholders are comparable to the property owners, the
Schwab Trust is comparable to the general contractor, and the
Schwab Advisor is comparable to the subcontractor. The
Schwab Trust engaged the Schwab Advisor to manage and
operate the Fund in accordance with the fundamental
investment objectives that the shareholders had adopted. In
this situation, the Schwab Advisor’s management of the Fund
directly affected whether the Fund achieved its stated goal of
tracking the Lehman Index. Thus, the “ultimate beneficiary”
of the Schwab Advisor’s contractual duties were the
shareholders.

     A more recent case, Spinks v. Equity Residential
Briarwood Apartments, 90 Cal. Rptr. 3d 453 (Ct. App. 2009),
is similarly analogous. In Spinks, an employer had contracted
with a landlord to provide housing for an employee.
Sometime thereafter, the employer terminated the employee
and directed the landlord to change the locks on the
employee’s apartment, which the landlord did. The employee
brought suit against the landlord as a third-party beneficiary
of the contract between the employer and the landlord. The
California Court of Appeal held that the employee had
adequately alleged that she was an intended third-party
beneficiary. See id. at 475. In so holding, the court noted
that “the most basic aspect of [the landlord’s] performance is
its obligation to supply [the employer] with a place for its
staff to live.” Id. at 472. In the present case, “the most basic
aspect” of the Schwab Advisor’s performance—properly
managing the Fund—is for the benefit of the shareholders.
60      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

    Nor does the fact that the IAA contained an inurement
clause providing that it “shall be binding upon and shall inure
to the benefit of the parties hereto and their respective
successors,” preclude a third-party beneficiary action in the
context of this case. The defendants cite cases holding that,
because the parties specified one particular beneficiary in the
contract, other beneficiaries are excluded. These cases are
not dispositive. The cases upon which the defendants rely do
not speak to this issue or are not controlling. For instance,
Klamath Water Users Protective Ass’n v. Patterson, 204 F.3d
1206 (9th Cir. 1999), involved a governmental contract, not
a private contract. “Parties that benefit from a government
contract are generally assumed to be incidental beneficiaries,
and may not enforce the contract absent a clear intent to the
contrary.” Id. at 1211. Arista Films, Inc. Emp. Profit
Sharing Plan v. Gilford Sec., Inc., 51 Cal. Rptr. 2d 35 (Ct.
App. 1996), the only California case the defendants cite,
concerned an arbitration contract, where the “overwhelming
weight of authority” was against third-party enforcement, and
which was governed by New York law, not California law.
Id. at 38.

    The other cases on which the defendants rely are all from
courts outside California and this circuit. At this stage in the
case—a motion to dismiss—we follow those courts that have
ruled that any weight that should be given to an inurement
clause is outweighed by the other evidence of the parties’
intent. E.g., Anwar v. Fairfield Greenwich Ltd., 728 F. Supp.
2d 372, 430 (S.D.N.Y. 2010); see also Solid Host, NL v.
Namecheap, Inc., 652 F. Supp. 2d 1092, 1119 (C.D. Cal
2009) (“Because they involve factual questions of intent,
third party beneficiary claims are often not appropriate for
resolution via motion to dismiss.”).
          NORTHSTAR FIN. ADVISORS V. SCHWAB INV.                      61

    Under California law, as the district judge recognized, a
plaintiff may be a third-party beneficiary of a contract if he
alleges that he is a member of a class named or referred to in
the contract, or if the contract discharges a contractual duty
owed to the plaintiff. Northstar, 781 F. Supp. 2d at 942–43.
We hold, contrary to the district judge, that Northstar has
adequately alleged the existence of a contract between the
Trust and the investors. Northstar has also alleged that the
IAA was designed to discharge the Trust’s duties to the
shareholders under this contract. Therefore, Northstar’s
allegations that the shareholders are third-party beneficiaries
of the IAA survive the motion to dismiss.10

    Therefore, we hold that Northstar’s allegations that the
shareholders are third-party beneficiaries of the IAA survive
the motion to dismiss.

                          CONCLUSION

       To summarize:

1. We hold that by filing a supplemental pleading alleging
   a post-complaint assignment from a party that clearly had
   standing, Northstar has standing to prosecute this case.

2. We reverse the district judge’s dismissal of Northstar’s
   breach of contract claim and hold that Northstar

  10
     The district judge found that the Fund investors were “not explicitly
mention[ed]” in the IAA. Northstar, 807 F. Supp. 2d at 884. This is
incorrect: under Section 3 of the IAA, the Schwab Advisor explicitly
contracted to “prepare the Trust’s Annual and Semi-Annual Reports to
Shareholders.” We do not, however, rest our conclusion that Northstar
has adequately alleged that the shareholders are third-party beneficiaries
of the IAA on this one reference.
62      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

     adequately alleged the formation of a contract between
     the investors and the Schwab Trust.

3. We vacate the district judge’s dismissal of the fiduciary
   duty claims and remand for the district judge to “address
   the other arguments raised by the parties regarding
   [Northstar’s] claims for breach of fiduciary duty[.]”
   Northstar, 807 F. Supp. 2d at 881.

4. We reverse the district judge’s dismissal of Northstar’s
   third-party beneficiary breach of contract claim and hold
   that Northstar adequately alleged that the investors are
   third-party beneficiaries of the IAA.

5. We decline to address the effect of SLUSA on the various
   common law causes of action. We leave that to the
   district court in the first instance.

  REVERSED in part, VACATED in part, and
REMANDED.



BEA, Circuit Judge, dissenting:

    When Northstar Financial Advisors, Inc. (“Northstar”)
commenced this action by filing its complaint, it did not own,
nor had it ever owned any Schwab Total Bond Market fund
(“Fund”) shares. Likewise, at the commencement of this
action, Northstar did not own any claims of anyone who had
owned any of such shares during the period when the
defendants are alleged improperly to have lowered the share
value of the Fund.
         NORTHSTAR FIN. ADVISORS V. SCHWAB INV.                          63

    Hence, when Northstar sued for damages on its own
behalf and for those of the class of share owners Northstar
sought to represent in this class action, Northstar itself had
not suffered any losses, nor did Northstar own any claims of
others who had suffered losses the defendants had allegedly
caused. Last, no other person who claimed to have been
injured by defendants joined Northstar as plaintiff.

    Defendants moved to dismiss Northstar’s complaint for
lack of standing, because Northstar failed to allege it had
suffered an injury in fact.1 Northstar had no “case or
controversy” within the meaning of Article III of the
Constitution.2

   The district court quite properly granted defendants’
motion and dismissed the complaint without prejudice,3 but

     1
       A party seeking to invoke a federal court’s jurisdiction must
demonstrate three things: (1) an “injury in fact,” which is an invasion of
a legally protected interest that is “(a) concrete and particularized, and
(b) actual or imminent, not conjectural or hypothetical”; (2) a causal
relationship between the injury and the challenged conduct, such that the
injury can be fairly traced to the challenged action of the defendant and
not from the independent action of some third party not before the court;
and (3) a likelihood that the injury will be redressed by a favorable
decision. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61 (1992)
(internal quotations and citations omitted).
 2
   Cetacean Cmty. v. Bush, 386 F.3d 1169, 1174 (9th Cir. 2004) (“A suit
brought by a plaintiff without Article III standing is not a ‘case or
controversy,’ and an Article III federal court therefore lacks subject matter
jurisdiction over the suit.”).
 3
   An argument can be made that leave to amend was permissibly granted
because it was possible that the lack of allegations constituting standing
had been an oversight. However, even that argument is foreclosed in this
circuit. “If jurisdiction is lacking at the outset, [a] district court has no
64       NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

then quite misguidedly suggested that through an amended
complaint, Northstar could remedy its lack of standing by an
assignment of rights from a person who had been a Fund
shareholder during the period when defendants allegedly
injured the Fund’s shareholders. More than three months
later, Northstar found Henry Holz, a man who had indeed
owned Fund shares during the period in question. Holz could
claim injury in fact; he did have standing to sue. But for
reasons best known to himself, he chose neither to sue nor to
join Northstar’s action. Northstar procured an assignment of
Holz’s claims against defendants.

    Northstar then filed an amended complaint that alleged
Holz’s assignment of claims to Northstar. Defendants again
moved to dismiss on the ground that Northstar still had not
alleged facts sufficient to establish Northstar’s standing to
sue, only to have the district court deny the motion upon an
original—but nonetheless erroneous—theory. The district
court noted that “in light of [the] previous holding that [an]
assignment [of claims] would cure the [Northstar’s] lack of
standing, and direction to the [Northstar] to file an amended
complaint based on the assignment, it would be unfair to
[Northstar] to punish them for relying on the [prior district
judge’s] specific instructions.” Northstar, 781 F. Supp. 2d at




power to do anything with the case except dismiss.” Morongo Band of
Mission Indians v. Cal. State Bd. of Equalization, 858 F.2d 1376, 1380
(9th Cir. 1988) (internal quotations and citations omitted). Therefore, “[i]f
jurisdiction was lacking, then [a] court’s various orders, including that
granting leave to amend the complaint, were nullities.” Id. at 1381. This
circuit has recognized no exceptions to Morongo for the retroactive cure
of lack of standing through a supplemental pleading of post-complaint
events.
            NORTHSTAR FIN. ADVISORS V. SCHWAB INV.                       65

932.4 Of course, if this notion of “unfairness” were the law,
parties benefitted by erroneous rulings of district courts and
who took action in reliance on such erroneous rulings could
not be made to give up those benefits.

    Thankfully, there is no exception to the requirement of
standing based on earlier district court error.5 It is not

  4
      By then the case was reassigned to another district court judge.
  5
     “Unfairness” based on reliance on an erroneous earlier district court
ruling might be grounds for certain relief, such as tolling of a deadline.
See Smith v. Ratelle, 323 F.3d 813, 819 (9th Cir. 2003) (“[W]e have
recognized that a district court’s erroneous dismissal of a mixed habeas
petition is sufficiently extraordinary to justify equitable tolling.”). But
when a judge blows a call on standing, the error creates jurisdiction where
the law does not, and notions of “fairness” clash with constitutional
requirements. The requirement of standing ensures that courts “limit
federal jurisdiction to those cases in which an adversarial setting is
guaranteed by the parties’ ‘personal stake’ in the outcome of the
litigation.” LaDuke v. Nelson, 762 F.2d 1318, 1322–23 (9th Cir. 1985)
(citing Warth v. Seldin, 422 U.S. 490, 498 (1975)). Requiring that a
plaintiff have an actual injury in fact “tends to assure that the legal
questions presented to the court will be resolved, not in the rarified
atmosphere of a debating society, but in a concrete factual context
conducive to a realistic appreciation of the consequences of judicial
action.” Valley Forge Christian College v. Americans United for
Separation of Church and State, Inc., 454 U.S. 464, 472 (1982). Of
course, had Northstar accepted the dismissal without prejudice and then
filed a new complaint after it obtained an assignment of rights, it would
have had standing and a personal stake in the outcome of this litigation.
The ease with which Northstar could have obtained standing makes its
actions puzzling at first blush. However, had Northstar so refiled, it would
also have risked its position as the first to have filed as representative of
a class of plaintiffs. Any perceived impracticality of requiring Northstar
to adhere to the most basic of our Constitution’s standing requirements
should not vitiate the need to do so. See Sprint Commc’ns. Co. L.P, v.
APCC Servs., 554 U.S. 269, 305 (2008) (Roberts, C.J., dissenting) (“The
Court chooses to elevate expediency above the strictures imposed by the
66       NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

“unfair” to lose a meritless point won earlier before an erring
judge. What is “unfair” is not to apply the correct law. Here,
both district court judges erred. Because Northstar failed to
allege facts sufficient to constitute standing to sue in its
complaint, the district court originally lacked subject matter
jurisdiction. See Cetacean Cmty. v. Bush, 386 F.3d 1169,
1174 (9th Cir. 2004). It was not even permissible to grant
leave to amend to see if the standing defect could somehow
be remedied. See Footnote 3, supra. But even if permissible,
an amendment to allege an assignment of rights which took
place over three months after the action was commenced was
useless to allege the standing Northstar needed to commence
the action in the first place. Morongo Band of Mission
Indians v. Cal. State Bd. of Equalization, 858 F.2d 1376,
1381 (9th Cir. 1988) (citing Mollan v. Torrance, 22 U.S. 537,
539 (1824) (jurisdiction “depends upon the state of things at
the time of the action brought”); Nuclear Eng’g Co. v. Scott,
660 F.2d 241, 248 (7th Cir. 1981) (“Jurisdictional questions
are answered by reference to the time of the filing of an
action . . . .”); Mobil Oil Corp. v. Kelley, 493 F.2d 784, 786
(5th Cir. 1974) (jurisdiction “is determined at the outset of the
suit”)). To determine federal court jurisdiction, “we look to
the original, rather than to the amended[] complaint.” Id.

   The first district court judge did not have jurisdiction to
grant leave to amend, and the second judge could not—out of
considerations of “fairness”—allow an amendment or a
supplement to an original complaint of which the district
court had no subject matter jurisdiction.


Constitution. That is a tradeoff the Constitution does not allow. . . . [T]he
ease with which [plaintiff] can comply with the requirements of Article III
is not a reason to abandon our precedents; it is a reason to adhere to
them.”).
         NORTHSTAR FIN. ADVISORS V. SCHWAB INV.                       67

     The majority and the district court opinion examine the
law of other circuits “because there is no published Ninth
Circuit authority” as to whether “parties may cure standing
deficiencies through supplemental pleadings.” Northstar,
781 F. Supp. 2d at 933. In dicta,6 this court reiterated the
general principle that “jurisdiction is based on facts that exist
at the time of filing” and noted that the “Supreme Court has
enunciated few exceptions to this general principle. . . . So
far, permitting standing based on a property interest acquired
after filing is not one of them.” Righthaven, LLC v. Hoehn,
716 F.3d 1166, 1171 (9th Cir. 2013).7 In any event, even if
this panel were not bound by the dicta of Righthaven,
Morongo is dispositive: where the district court does not have
subject matter jurisdiction over a matter at the time of filing,
subsequent events do not confer subject matter jurisdiction on


   6
      This court is bound by its own reasoned dicta. United States v.
Johnson, 256 F.3d 895, 914 (9th Cir.2001) (en banc). Righthaven’s dicta
fits this requirement.
  7
    In Righthaven, a media company and publisher, Stephens Media LLC,
assigned its right to sue for infringement of copyright to Righthaven LLC.
716 F.3d 1166, 1168 (9th Cir. 2013). Righthaven then sued two website
operators for displaying content of which Stephens Media was the original
copyright owner. Id. Defendants filed motions to dismiss for lack of
standing, asserting that Righthaven did not have standing to sue because
Stephens Media had assigned only a bare right to sue. Under circuit law,
assignment of the bare right to sue without the transfer of an associated
exclusive right did not confer standing to sue on Righthaven. Id. at
1168–69. Before the district court ruled on the motions to dismiss,
Righthaven and Stephens Media executed a “clarification and
amendment” to the prior assignment that purported to convey all
ownership rights to Righthaven. Id. at 1169. The district court granted
the motions to dismiss. Id. On appeal, we affirmed because Righthaven
did not have standing to sue at the time of filing, and its subsequent
clarification and amendment did not include terms sufficient to convey an
exclusive copyright. Id. at 1171.
68       NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

the district court. The district court has jurisdiction only to
dismiss the complaint.8

    Nevertheless, the majority cites to limited exceptions
where courts have allowed the cure of jurisdictional defects
other than standing through additional pleadings. In short,
the district court and the majority argue that if a supplemental
pleading can cure defects in the original complaint, and if that
supplemental pleading can be tacked onto the original
complaint, then Northstar would retroactively have standing
as of its original complaint, even though “subject-matter
jurisdiction depends on the state of things at the time of the
action brought.” Rockwell Intern. Corp. v. U.S., 549 U.S.
457, 473 (2007) (internal quotations and citation omitted).
This argument misses one crucial point: “[t]he state of things
and the originally alleged state of things are not
synonymous.” Id. Therefore, even if our circuit allowed
supplemental pleadings to cure standing deficiencies, those
supplemental pleadings must allege facts necessary to
establish standing only as those facts existed at the time of the
original complaint. This is not a novel concept in our circuit.
See Wilbur v. Locke, 423 F.3d 1101 (9th Cir. 2005),
abrogated on other grounds by Levin v. Commerce Energy,
Inc., 560 U.S. 413 (2010) (“[S]tanding is determined as of the
date of the filing of the complaint . . . . [t]he party invoking
the jurisdiction of the court cannot rely on events that
unfolded after the filing of the complaint to establish its
standing.”) (internal quotations and citation omitted). In
other words, even though “a party [may] serve a supplemental
pleading setting out any transaction, occurrence, or event that


 8
   Rather than extend the length of this dissent, I recommend the reader
simply read the opinions in Morongo and Righthaven, should he have any
doubt as to their applicability.
         NORTHSTAR FIN. ADVISORS V. SCHWAB INV.                         69

happened after the date of the pleading to be supplemented,”
Fed. R. Civ. P. 15(d) (emphasis added), the facts which
establish a party’s standing must have existed when the
original complaint was filed. Thus a Fed. R. Civ. P. 15(d)
supplemental pleading cannot validly allege post-complaint
transactions to cure a lack of standing.9,10

    If all an uninjured party need do to get around pesky
Article III standing requirements is to file a complaint, then
ask for liberal leave to supplement under Fed. R. Civ. P.
15(d) to allege after-acquired rights of those who were timely
injured, the long-standing general rule which requires injury-




    9
       Of course, I do not dispute that plaintiffs may cure various
jurisdictional defects—other than standing—through additional pleadings
that allege relevant post-complaint events and conditions. The majority
cites to several such instances (none of which are decisions from our
circuit, and none of which allowed the retroactive cure of lack of
allegations of injury-in-fact through a supplemental pleading alleging a
post-complaint injury in fact). See e.g., Newman-Green Inc. v. Alfonzo-
Larrain, 490 U.S. 826, 831–38 (1989) (the Court held that an appellate
court may drop a non-diverse defendant—under Fed. R. Civ. P. 21—to
preserve diversity jurisdiction over the claims of a plaintiff who suffered
injury-in-fact before the original complaint was filed); Prasco, LLC v.
Medicis Pharm. Corp., 537 F.3d 1329, 1335–37 (Fed. Cir. 2008) (the
Federal Circuit cited its own precedent that allows courts to look at “facts
existing at the time the complaint under consideration was filed” (internal
quotations and citation omitted) (emphasis in original)).
    10
        Because I would dismiss for lack of standing, I—like the
majority—express no views as to whether the Securities Litigation
Uniform Standards Act would preempt Northstar’s claim. I also express
no views on the claims based on breach of contract, breach of fiduciary
obligations, or other claimed grounds of relief. See Righthaven, 716 F.3d
at 1773.
70      NORTHSTAR FIN. ADVISORS V. SCHWAB INV.

in-fact at commencement of the action for standing to exist
quickly would lose all force. Uninjured parties, particularly
those in search of class action lead plaintiff status, could sue
first, then trawl for those truly and timely injured. Today the
majority green-lights those who would race to the courthouse
and bend Federal Rules of Civil Procedure and Article III
standing requirements to gain an edge over other claimants
who are not as fleet of foot. I respectfully dissent.
