United States District Court, W.D. Pennsylvania
JOHN BERNARD and WILLIAM BERNARD, individually and on behalf of all others similarly situated, Plaintiffs,
BNY MELLON, NATIONAL ASSOCIATION, Defendant.
REPORT AND RECOMOMENDATION
Cynthia Reed Eddy, Chief United States Magistrate Judge.
reasons stated herein, it is respectfully recommended that
Defendant's Motion to Dismiss (ECF No. 31) be denied.
Procedural History and Factual Allegations
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.
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.
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).
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). 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).
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.)
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.)
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 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).
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).
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 ...