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Bernard v. BNY Mellon, N.A.

United States District Court, W.D. Pennsylvania

April 25, 2019

JOHN BERNARD and WILLIAM BERNARD, individually and on behalf of all others similarly situated, Plaintiffs,
v.
BNY MELLON, NATIONAL ASSOCIATION, Defendant.

          REPORT AND RECOMOMENDATION

          Cynthia Reed Eddy, Chief United States Magistrate Judge.

         I. Recommendation

         For the reasons stated herein, it is respectfully recommended that Defendant's Motion to Dismiss (ECF No. 31) be denied.

         II. Report

         A. Procedural History and Factual Allegations

         Plaintiffs John and William Bernard (“Plaintiffs”), beneficiaries of the Van Valzah trust (“the trust”), bring this action against BNY Mellon, National Association (“BNY Mellon”), trustee of the trust.

         Plaintiffs filed their initial complaint on June 15, 2018 (ECF No. 1). BNY Mellon filed its first motion to dismiss on August 13, 2018 (ECF No. 12), and then Plaintiffs filed a First Amended Complaint (“FAC”) (ECF No. 17), the operative pleading, on September 6, 2018. The first motion to dismiss was then dismissed as moot. (ECF No. 18). BNY Mellon filed the now-pending motion to dismiss on October 4, 2018 (ECF No. 31) with brief in support, and the matter has been fully briefed and is ripe for disposition.

         The allegations in the FAC are as follows. The Plaintiffs are citizens of Louisiana. (FAC ¶ 3). BNY Mellon is a national banking association with its principal place of business in Pittsburgh, Pennsylvania. (FAC ¶ 4). The trust was established by agreement dated November 17, 1954, between Aglae Van Valzah, (an ancestor of Plaintiffs) as Grantor and The Bank of New York as Trustee. The trust's assets have been in trust continuously with The Bank of New York and its corporate successor BNY Mellon ever since its creation. (FAC ¶ 3). The trust is governed by the law of New York. (FAC ¶ 7).

         As beneficiaries, the Plaintiffs have no control over how BNY Mellon invests the assets of the trust. (FAC ¶¶ 1, 3, 8). BNY Mellon is a fiduciary and under the law of New York must act as a prudent investor of discretion and intelligence having special investment skills. (FAC ¶¶ 1, 9, citing New York Prudent Investor Act, NY EPTL § 11-2.3). BNY Mellon invested more than 95 percent of the trust's assets in mutual funds managed by The Dreyfus Corporation (“Dreyfus”), a corporate affiliate of BNY Mellon. (FAC ¶ 1).[1] Dreyfus has had a dismal record over the past 20 years. (FAC. ¶¶ 1, 17-19). A prudent investor of discretion and intelligence having special investment skills would not entrust money to a firm as low-ranking as Dreyfus instead of one or more of the dozens of firms whose funds have performed much better. (FAC ¶ 17). Of the large money management firms (those that have been among the 100 largest firms throughout the last 20 years), Dreyfus ranks 58th out of 59 in the performance of its mutual funds over that time. (FAC ¶ 19). The market has taken note of the poor record of Dreyfus's funds because Dreyfus's share of the mutual fund market has fallen by 70% in the last 20 years and by 90% in the last 33 years. (FAC ¶ 20). The employees of Dreyfus who manage its funds (portfolio managers) have much less of their own money invested in those funds (and therefore less “skin in the game”) than do employees of other large asset management firms. For example, only 7.3 percent of the assets that Dreyfus manages are funds in which at least one of its employees has invested at least one million dollars; among the other top 100 management firms, 39.2 percent of assets are in such funds. (FAC ¶ 21). Funds in which at least one employee has invested one million dollars or more tend to perform better than others. (FAC ¶ 21).

         Within most categories of financial assets, there are dozens or hundreds of mutual funds to choose from. (See FAC ¶¶ 25, 27). When considering which of those funds to buy shares in, a prudent investor of discretion and intelligence having special investment skills considers it a “red flag” that a fund has consistently performed poorly in the past, that is, over both the previous three years and the previous five years. (FAC ¶ 22.) It is also a red flag that a fund is less than three years old. (FAC ¶ 23.) A prudent investor will not buy shares in funds that show these red flags. And if a prudent investor owns shares in a fund that previously performed well but has performed poorly over both the last three and the last five years, the investor will sell those shares. (FAC ¶ 22.)

         Most of the Dreyfus funds in which BNY Mellon invested trust assets, including assets of the Van Valzah trust, showed red flags when BNY Mellon invested trust money in those funds or left trust money invested in them. (FAC ¶¶ 24, 27.) There was no need for BNY Mellon to invest trust assets in red-flagged funds because other funds that did not show red flags were available in the same categories of assets. (FAC ¶¶ 25, 28.)

         Notably, Plaintiffs do not allege that BNY Mellon committed fraud, engaged in any manipulative or deceptive scheme, or made untrue or misleading statements; rather, it is alleged BNY Mellon invested trust assets imprudently. (FAC ¶ 29.)

         In sum, in the TAC Plaintiffs allege a single claim for relief: BNY Mellon violated its fiduciary duties and its duties under the New York Prudent Investor Act, N.Y. EPTL § 11-2.3(b)(2) and (6) by investing the assets of the Van Valzah trust (or leaving those assets invested) in any funds managed by Dreyfus and in its red-flagged funds in particular, rather than in funds in the same categories of assets that were managed by better-performing management firms and that did not show red flags because, in doing so, BNY Mellon did not exercise such care, skill, caution, and diligence in investing and managing the assets of the Van Valzah trust as would customarily be exercised by prudent investors of discretion and intelligence having special investment skills. (FAC ¶ 43).

         Although we make no recommendation as to the propriety of the class action itself, the class allegations include the following proposed nationwide class:

All beneficiaries of trusts of which BNY Mellon (a) is or was a trustee, (b) has or had discretion to invest assets, and (c) invested any assets, or left any assets invested, in mutual funds managed by The Dreyfus Corporation. Excluded from the class are BNY Mellon and its corporate parent and affiliates; the directors, officers, employees, and agents of any of them; and the United States Government.

(FAC ¶ 30).

         We have jurisdiction under 28 U.S.C. § 1332(d)(2)(A). The matter in controversy exceeds $5, 000, 000, and this is a class action in which members of the class of plaintiffs are citizens of states other than Pennsylvania, the ...


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