
Carfora v. Teachers Ins. Annuity Ass’n of Am., No. 21 Civ. 8384 (KPF), 2024 WL 2815980 (S.D.N.Y. May. 31, 2024) (Judge Katherine Polk Failla)
ERISA was designed to hold plan sponsors, administrators, and other fiduciaries to high standards in order to protect workers’ retirement and welfare benefits. ERISA has proved adaptable throughout its fifty-year history. As this case illustrates, with a bit of creativity its protective scheme can be applied in a multitude of ways in order to accomplish these goals. The plaintiffs here had to be imaginative in their effort to advance past the pleading stage, and were rewarded by the court.
This lawsuit is yet another chapter in the story of the alleged years-long scheme by defendant Teachers Insurance Annuity Association of America (TIAA) to enrich itself by driving ERISA-governed plan participants away from their plans and into TIAA-sponsored proprietary offerings through a behavior known as “cross-selling.”
According to the plaintiffs, in the mid-2010s TIAA recognized it was “rapidly losing revenue from its institutional retirement plan business, as those institutional clients moved their assets from TIAA to larger competitors” such as Vanguard and Fidelity.
To compensate for this revenue loss, TIAA devised a plan. It tripled its sales force, hiring hundreds of new advisors and sales representatives, and tied their employment, compensation, and bonuses to goals related to cross-selling TIAA’s individual advisory business, called “Portfolio Advisor.” Investors in Portfolio Advisor are required to pay various fees to TIAA in using the program.
Those fees added up. The scheme was remarkably successful and extremely lucrative for the company. In five short years TIAA’s annual revenues increased from $2.6 million in 2013 to $54 million in 2018.
Plaintiffs John Carfora, Sarah Putnam, and Juan Gonzales are university professors and researchers who are participants in benefit plans administered by TIAA. In their original class action complaint, filed in 2021, they alleged that TIAA breached its fiduciary duties under ERISA by misleading them and trying to convince them to roll their ERISA-governed assets into Portfolio Advisor.
According to plaintiffs, TIAA engaged in pernicious sales techniques. TIAA used a multi-step pitch process in which it cold-called participants to “offer free financial planning services, often describing the service as an included benefit of the plan.” In doing so, TIAA used information it had obtained through its administration of the participants’ ERISA-governed accounts. TIAA personnel allegedly held TIAA out as a “trusted” advisor, emphasized TIAA’s “non-profit heritage,” represented that they met fiduciary standards, and stated they were “objective” and “non-commissioned.”
Internally, TIAA allegedly called participants with large accounts “WHALES,” and its advisors were trained to discover “pain points” that would help them upsell the participants. In fact, plaintiffs alleged that TIAA’s training materials encouraged advisors to “Mak[e] the Client ‘Feel the Pain’” so they could “convince the client that he or she needed the high-touch services offered by Portfolio Advisor.”
Plaintiffs further alleged that TIAA instructed its advisors to engage in “hat-switching,” in which they would wear a “fiduciary hat when acting as an investment adviser representative and a non-fiduciary hat when acting as a registered broker-dealer representative.” These instructions were apparently (and understandably) confusing to both TIAA advisors and plan participants.
Plaintiffs contended that this arrangement also led to conflicts of interest, as advisors received bonuses based on asset growth and meeting sales goals, but did not receive bonuses based on keeping participants invested in their ERISA-governed plans or moving assets into self-directed IRAs.
To top it all off, plaintiffs alleged that Portfolio Advisor underperformed, thereby causing them to pay higher fees for results that were no better than if they had just stayed put in their ERISA investments.
There was only one catch: plaintiffs’ claims were based on the premise that when TIAA engaged in these alleged shenanigans it was acting in a fiduciary capacity under ERISA. In 2022, the district court rejected this premise in an order granting TIAA’s motion to dismiss. (This decision was Your ERISA Watch’s notable decision in our October 5, 2022 edition.)
In its order, the court fundamentally disagreed with the plaintiffs that TIAA was functioning as a fiduciary, either explicitly or functionally, when it solicited the rollovers: “TIAA’s pitch to plan members to roll assets out of their plans and into Portfolio Advisor necessarily did not create a fiduciary relationship.”
Plaintiffs retrenched and sought to find a workaround. They filed a motion for reconsideration in which they asked the court to reopen the case and allow them to amend their complaint to advance a new theory of liability. This theory would not be based on TIAA’s breach of fiduciary duty, but on its knowing participation in the plan sponsors’ breaches of fiduciary duties “by allowing TIAA’s affirmative and unchecked cross-selling on their watch.”
Remarkably, even though the district court noted that plaintiffs’ motion “faces numerous hurdles,” it ruled in an August 2023 order that plaintiffs cleared some of them. (We covered that ruling in our August 30, 2023 edition.) While the court refused to reconsider its decision that TIAA was not a fiduciary, it did allow plaintiffs to file an amended complaint advancing their new argument.
The operative complaint now alleges that the sponsors of plaintiffs’ benefit plans breached their fiduciary duty of prudence by failing to detect or address TIAA’s cross-selling activities. Separately, plaintiffs also aver that the sponsors should have investigated how much money TIAA was indirectly generating through its cross-selling strategy, and that they breached their duty to monitor administrative expenses and service provider compensation by not factoring in this significant source of revenue. As for TIAA, plaintiffs alleged that it, as the architect of the scheme, knowingly participated in these breaches.
Once again, TIAA moved to dismiss. It made two arguments: (1) plaintiffs could not establish that the plan sponsors breached any fiduciary duty in retaining TIAA as a service provider; and (2) plaintiffs failed to allege sufficient facts to establish that TIAA was a knowing participant in any such breach.
The court rejected the first argument, noting that “Plaintiffs have alleged a detailed account of conduct on the part of TIAA and to the detriment of plan participants that no prudent ERISA Plan Sponsor, acting solely in the interest of the participants, would have allowed to occur.” The court emphasized one plaintiff’s account of how he had been pressured by TIAA, and his allegations that “the issues associated with TIAA’s cross-selling were not specific to his case, but were in fact known across the industry as problematic practices by defined-contribution plan recordkeepers such as TIAA.”
TIAA contended that the complaint improperly focused on its conduct and was light on detail regarding the conduct of the plan sponsors, whose breaches were crucial in establishing TIAA’s liability. However, the court stated that “Plaintiffs’ theory of breach lies in the inaction of Plan Sponsors, such that this lack of detail is not necessarily fatal to Plaintiffs’ claims… Drawing all inferences in Plaintiffs’ favor, the Court finds that TIAA’s ability to engage in a multi-year campaign of cross-selling supports the implication that the Plan Sponsors failed to identify and address the problem,” which was sufficient to support the duty of prudence claim.
The court also found that plaintiffs had properly alleged that the plans breached their fiduciary duty to monitor TIAA. The court endorsed plaintiffs’ theory that “the 2,000% increase in TIAA’s cross-selling revenues over the relevant five-year period supports a reasonable inference that the Plan Sponsors failed to monitor TIAA’s fees, given that the increase far outstrips anything that TIAA would have seen in its ordinary course of business servicing ERISA plans.” Armed with this knowledge, the sponsors “should have recognized that growth in revenue and taken it into account when negotiating TIAA’s compensation as a recordkeeper.”
Instead, the plan sponsors allowed TIAA to “receive unreasonable compensation, because TIAA’s actual compensation included both its contractual fees and the increasingly large amount of indirect revenue derived from cross-selling.” In short, for the court it was “the sheer magnitude of the increase in revenue, coupled with the fact that TIAA’s cross-selling allegedly provided little benefit to the plans themselves,” that supported plaintiffs’ theory.
Indeed, the cross-selling “ostensibly burdened the plans it serviced by allegedly sowing confusion amongst plan members regarding the benefits of maintaining their assets in an ERISA plan, and ultimately incentivizing at least some plan members to roll assets out of the plan in favor of TIAA’s non-plan offering.”
The court then addressed TIAA’s second argument, which was that plaintiffs could not prove that TIAA was a knowing participant in any breach. Given the extensive allegations about TIAA’s conduct in the complaint, the court made short work of this contention: “Plaintiffs have alleged in great detail the systematic efforts on TIAA’s part to drive members from their ERISA plans and into TIAA-sponsored offerings, with little upside to those participants. Such allegations suffice to establish knowing participation for the purposes of a motion to dismiss.”
In the end, the court was satisfied that TIAA’s alleged actions, and the plan sponsors’ alleged inactions, together exposed TIAA to ERISA liability, even if it was not a fiduciary, because it had knowingly participated in breaches by the sponsors. Accordingly, the court denied TIAA’s motion in its entirety, and plaintiffs can now finally progress past the pleadings, three years after filing their original complaint.
Below is a summary of this past week’s notable ERISA decisions by subject matter and jurisdiction.
Breach of Fiduciary Duty
Eighth Circuit
Dionicio v. U.S. Bancorp, No. 23-CV-0026 (PJS/DLM), 2024 WL 2830693 (D. Minn. Jun. 4, 2024) (Judge Patrick J. Schiltz). Two participants of the U.S. Bank 401(k) employee benefit plan have sued the plan’s fiduciaries on behalf of a putative class under ERISA. On March 21, 2024, the court granted in part and denied in part U.S. Bank’s motion to dismiss for failure to state a claim. (A summary of that decision can be found in Your ERISA Watch’s March 27, 2024 edition.) In response, U.S. Bank filed a motion to certify the denial-in-part for interlocutory appeal to the Eighth Circuit Court of Appeals. Its motion was denied by the court in this order. The court stressed that motions for certification must be granted sparingly and only under exceptional circumstances. It stated concisely, “U.S. Bank has not come close to meeting its ‘heavy burden.’” The court held that U.S. Bank’s challenge to its plausibility determination did not implicate a controlling question of law for the purposes of certification under 28 U.S.C. § 1292(b). Further, the court was cautious not to establish a precedent where “the denial of any motion to dismiss would create an ‘exceptional’ case warranting immediate appeal.” More to the point, the court disagreed with U.S. Bank that there were differences over or questions about the applicable legal standards for a motion to dismiss a claim alleging breach of ERISA’s fiduciary duty of prudence. To the contrary, the court stated, “the applicable standards are well-settled.” Finally, the court held that certification would not materially advance the termination of litigation, and would likely have the reverse effect, accomplishing little more than slowing progress. Thus, the court concluded U.S. Bank failed to meet its burden of establishing that circumstances warranted interlocutory appeal and therefore denied the motion for certification.
Ninth Circuit
Nagy v. CEP Am., No. 23-cv-05648-RS, 2024 WL 2808648 (N.D. Cal. May. 30, 2024) (Judge Richard Seeborg). In this putative class action two participants of the Vituity 401(k) Profit Sharing Plan have sued the plan’s fiduciaries under ERISA. Plaintiffs allege several breach of fiduciary duty and prohibited transaction claims. According to the complaint, Vituity and its retirement benefit committee selected Schwab as plan recordkeeper and chose to invest in an unreasonably low-yield Schwab savings account because the company also uses Schwab to administer its defined benefit pension plan and Schwab offered it a no-fee deal on the pension plan if it made these decisions in the 401(k) plan. In other words, plaintiffs allege that the costs of the 401(k) plan were subsidizing the pension plan for Vituity’s benefit. Plaintiffs allege the plan paid per-participant per-year fees of approximately $250 to $450 to Schwab alone. Remarkably, these were not all of the fees the plan paid. In addition, plaintiffs challenge the fees Vituity collected for itself for administrative fees, which ranged from $236 to $411 per participant per year. Plaintiffs allege that all told the plan paid more than $600 per participant in annual administrative fees to Schwab and Vituity. (Your ERISA Watch believes that these alleged fees are the highest we have ever reported on.) Defendants moved to dismiss the complaint. They challenged the standing of one of the plaintiffs, as well as the sufficiency of the claims alleged. Defendants’ motion to dismiss was granted in part, without prejudice, and denied in part. The court began its discussion with defendants’ standing challenge. Vituity argued that one of the plaintiffs lacked Article III standing to assert his claims because he signed a waiver releasing his ability to bring ERISA claims against it. The court disagreed, and relied on Ninth Circuit authority holding that a plaintiff does not release Section 502(a)(2) claims brought on behalf of the plan by signing an individual release. Accordingly, the court held that the named plaintiff had standing to bring this action. The court then switched gears to evaluating the sufficiency of each of the claims. First, the court concluded that the complaint amply alleged that defendants plausibly breached their duty of prudence by paying excessive administrative fees to Schwab. “The complaint alleges Schwab offered ‘standard services typical of other recordkeepers’ despite receiving these higher fees, and that Vituity also provided (and charged for) services to the Plan that were, in theory, not provided by Schwab, demonstrating that the scope of services Schwab offered the Plan was limited.” The court clarified that plaintiffs “need not provide even more granular, micro-level ‘apples to apples’ comparisons, based on data to which they may not yet have access, in order to survive a motion to dismiss.” Therefore, defendants’ motion to dismiss the fiduciary breach claims relating to the excessive administrative fees paid to Schwab were denied. However, the court contrasted the Schwab fee ruling with its holdings regarding plaintiffs’ fee allegations pertaining to Vituity. “In comparison with the complaint’s allegations concerning administrative services provided by Schwab, Plaintiffs are less specific in alleging what administrative services Vituity provided the Plan… Plaintiffs do not plead sufficient facts to raise a plausible inference that the fees Vituity charged were excessive – or, for that matter, that there was anything out of the ordinary in Vituity providing administrative services to the Plan.” In order to state a plausible claim, the court advised plaintiffs that they needed to supply “some non-speculative basis for determining whether such administrative services were excessive.” Thus, the court dismissed the fiduciary breach claim relating to Vituity’s fees for failure to state a claim. Next, the court analyzed the fiduciary breach claims relating to the Schwab savings account. Plaintiffs claim that choosing this investment option for the plan was imprudent because of its predictably low rate of returns. In response, defendants rationalized their investment choice by highlighting the fact that it is insured by the Federal Deposit Insurance Corporation. The court stated that “determining what constitutes a reasonable rate of interest depends on the goals of a particular investment decision. That a money market fund may offer a lower rate of return compared to say, a stable value fund does not in itself raise a plausible inference of imprudence given the different risks each type of fund poses.” Here, the court concluded that the context of the allegations does not currently support a claim that is plausible on its face. FDIC insurance, the court found, could justify an investment decision for a fund offering such low returns. Without more, it said defendants’ selection of the Schwab savings account was not obviously or even plausibly imprudent. The dismissed claims were granted with leave to replead, should plaintiffs wish to overcome these identified defects. Finally, the court scrutinized the prohibited transaction claims. It held that under Ninth Circuit precedent both prohibited transaction claims should go forward, as defendants’ justifications under the statute’s exceptions constitute affirmative defenses. ERISA plaintiffs, the court explained, need not defeat affirmative defenses in their complaint in order to state prohibited transaction claims.
ERISA Preemption
Second Circuit
Park Ave. Podiatric Care, P.L.L.C. v. Cigna Health & Life Ins. Co., No. 23-1134-cv, __ F. App’x __, 2024 WL 2813721 (2d Cir. Jun. 3, 2024) (Before Circuit Judges Lee, Merriam, and Kahn). This dispute revolves around the underpayment of foot surgeries to an out-of-network healthcare provider, plaintiff-appellant Park Avenue Podiatric Care, P.L.L.C. The provider filed its complaint against Cigna Health & Life Insurance Company seeking the difference between the $197,350 in services it billed to the insurance company (based on a promise by Cigna to pay 80% of the customary rate) and the $7,199 Cigna actually paid. The district court determined that Park Avenue Podiatric’s New York state common law claims for breach of contract, unjust enrichment, and promissory estoppel, as well as its claim for violating New York’s Prompt Pay Law, were preempted by ERISA Section 514(a). The provider appealed the dismissal of its action. The Second Circuit affirmed in this unpublished decision. It held that the district court correctly determined that the assertions in Park Avenue Podiatric’s complaint make clear that the existence of the ERISA-governed healthcare plan is “a critical factor in establishing liability” against Cigna. For instance, the appeals court wrote that the provider explains “its entitlement to reimbursement [by relying] on the plan, alleging that ‘[n]ot all plans provide out-of-network benefits, but when they do Cigna determines the amount Cigna will allow for a covered service to an out-of-network provider.’ This assertion alone implies that [appellant] understood that if [the patient’s] ERISA-governed plan provides for out-of-network benefits, the extent of Cigna’s obligations to [it] would be defined by the plan’s terms.” Accordingly, the court of appeals agreed with the lower court that Cigna’s obligation and legal duty to pay arises from the ERISA plan, rendering the state law claims expressly preempted. Finally, the Second Circuit disagreed with Park Avenue Podiatric that the district court erred by incorporating the ERISA-governed plan into its complaint by reference. “Because the plan terms and effects were relied upon in [Park Avenue Podiatric’s] complaint, and integral to its adjudication, the district court did not err in considering the submitted portions of the plan.” For these reasons, the appeals court affirmed the judgment of the district court.
Eighth Circuit
Brown v. United Healthcare Corp., No. 1:24-cv-1025, 2024 WL 2819540 (W.D. Ark. Jun. 3, 2024) (Judge Susan O. Hickey). Following the death of her son, plaintiff Janice Brown filed a claim for life insurance benefits with her son’s employer-sponsored life insurance plan under which she was the named beneficiary. Her claim for benefits was denied by defendant United Healthcare Corporation. Ms. Brown administratively appealed the adverse benefit determination and then filed suit in Arkansas state court alleging one claim for breach of contract against United Healthcare for failure to pay the life insurance benefits. United removed the action to federal court and then moved to dismiss the state law claim as preempted by ERISA. Ms. Brown did not file a response to United’s motion to dismiss. In this action the court granted United’s motion, with prejudice. It concluded that Ms. Brown’s breach of contract claim was obviously preempted by ERISA. The court concluded that the life insurance policy is unquestionably an employee benefit plan governed by ERISA. Moreover, the court found that Ms. Brown’s breach of contract claim is expressly premised on the ERISA-governed plan and United Healthcare’s allegedly improper denial of Ms. Brown’s claim for benefits under the plan. Therefore, the court held that the state law claim “plainly ‘relates to’ the administration of an ERISA plan and is preempted by ERISA.” Accordingly, the court agreed with United that Ms. Brown failed to state a claim upon which relief can be granted and dismissed the complaint pursuant to Rule 12(b)(6).
Medical Benefit Claims
Ninth Circuit
N.C. v. Cross, No. 23-35381, __ F. App’x __, 2024 WL 2862586 (9th Cir. Jun. 6, 2024) (Before Circuit Judges Miller and Bumatay, and District Judge Richard D. Bennett). Mother and son N.C. and A.C. sued Premera Blue Cross under ERISA to challenge its denial of their claim for benefits related to A.C.’s 14-month stay at a residential treatment facility. On de novo review, the district court concluded on summary judgment that A.C.’s stay was “both clinically appropriate and adhered to the generally accepted standards of care,” and granted judgment in favor of the family, concluding they were entitled to coverage. Premera Blue Cross appealed, questioning the district court’s consideration of guidelines from the American Academy of Child and Adolescent Psychiatry. The Ninth Circuit saw no problem with this, as these guidelines were “part of the administrative record,” and therefore “fully within the district court’s discretion to consult.” Additionally, the appeals court noted that “generally accepted standards of medical practice” is an ambiguous term, and the district court was thus permitted to consider evidence outside the administrative record to interpret its meaning. Moreover, A.C.’s treating providers agreed that less intensive lower levels of care were ineffective and that continued residential treatment for A.C. was necessary. Finally, the appeals court focused on furthering the goal of protecting the reasonable expectations of the insured family. “Because the plan does not reference the InterQual criteria, let alone necessitate their application, it was reasonable for N.C. to expect that treatment deemed medically necessary by A.C.’s treating physicians would be covered under the plan.” Thus, the court of appeals concluded that the district court did not err in concluding that the treatment was medically necessary and covered by the plan, and accordingly affirmed its holdings.
W.H. v. Allegiance Benefit Plan Mgmt., No. CV 22-166-M-DWM, 2024 WL 2830792 (D. Mont. Jun. 4, 2024) (Judge Donald W. Malloy). Between November 2017 and September 2020 plaintiff Z.H. received mental health treatment at three inpatient facilities. During this period, Z.H. experienced severe symptoms of self-harm, including cutting and attempts at suicide, and went through the traumatic aftermath of sexual assault. Despite this background, her family’s claims for reimbursement of her inpatient treatment were denied by defendant Allegiance Benefit Plan Management Inc. Allegiance, as third-party claims administrator of the Health Benefit Plan for Employees of Kalispell Regional Healthcare, denied the claims, concluding that this level of treatment was not medically necessary. After exhausting the administrative appeals process, Z.H. and her father W.H. commenced this action against Allegiance and Kalispell Regional Healthcare asserting three causes of action under ERISA: wrongful denial of benefits, violation of the Mental Health Parity and Addiction Equity Act, and a claim for statutory penalties for failure to produce documents upon request. The parties filed cross-motions for summary judgment. Their motions were each granted in part and denied in part by the court in this decision. As an initial matter, the court spelled out that the plan unambiguously grants full discretionary authority to defendants and that the abuse of discretion review standard therefore applies. Under the highly deferential standard of review, the court upheld the benefit denials, although it agreed with plaintiffs that Allegiance ignored evidence that Z.H. engaged in self-harm. “Plaintiffs are correct that the record shows Z.H. had engaged in and threatened self-harm in the days and weeks leading up to her [treatment]… However, this fact is not dispositive. While Defendants’ medical reviewers rejected the idea that Z.H. was indeed suicidal or in danger of harming herself…a conclusion to the contrary would satisfy only the first prong of three necessary criteria under the Milliman Care Guideline.” Broadly, the court disagreed with plaintiffs that the denials were contingent on the suicidality/self-harm factor, “but rather the fact that a lower level of care was a safe option.” The court found that it was reasonable to read Z.H.’s medical records and conclude that substantial evidence supported a finding that an outpatient level of care was appropriate treatment for her. Further, the court was satisfied that defendants’ denial letters constituted a full and fair review under ERISA as they provided specific reasons for each denial and meaningfully responded to the family’s arguments on appeal. Thus, the court concluded that defendants had not abused their discretion in reaching the denials and accordingly granted summary judgment in favor of defendants on the wrongful denial of benefits claim. Next, the court held that defendants did not violate the Parity Act. “The Parity Act merely prohibits plan administrators from ‘employ[ing] different processes, strategies, or evidentiary standards’ to their medical necessity determinations… It does not prohibit different outcomes.” Here, the fact that the plan uses the Milliman Care Guidelines to establish medical necessity classifications and policies for both mental health and physical healthcare was evidence to the court that there was no disparity between the treatment of one and the treatment of the other. Accordingly, defendants were also granted judgment on the Parity Act claim. However, the decision ended with a silver lining for plaintiffs. Judgment was granted in their favor on their statutory penalties claim. The court agreed with plaintiffs that defendants violated the Parity Act’s statutory disclosure requirements by failing to produce a complete copy of the medical necessity criteria and copies of documents used to identify nonquantitative treatment limitations when these documents were specifically requested in writing by the family. “Comparing this request against the statute and the Parity Act Regulations, Defendants were required to provide Plaintiffs with the requested documents.” For this violation, the court ordered defendants to pay the family $110 per day from November 8, 2021, 30 days after the date of their written request, through the date this suit was filed, September 28, 2022, for a total of 294 days and $32,340. Finally, the court declined to rule on prejudgment interest, attorneys’ fees, or costs at this time.
Pleading Issues & Procedure
Second Circuit
Cunningham v. USI Ins. Servs., No. 21 Civ. 01819 (NSR), 2024 WL 2832924 (S.D.N.Y. Jun. 3, 2024) (Judge Nelson S. Roman). A participant of the USI 401(k) Plan, plaintiff Lauren Cunningham, initiated this putative class action against USI Insurance Services, LLC, its board of directors, and the plan committee, alleging defendants breached their fiduciary duties in their administration of the plan. The court previously dismissed Ms. Cunningham’s amended complaint and granted her leave to file a second amended complaint. She did so on February 6, 2024. Once again, defendants sought leave to file a motion to dismiss. The court granted defendants’ motion and pursuant to the briefing schedule their motion to dismiss was set to be fully briefed on June 3, 2024. In the interim, Ms. Cunningham filed a motion seeking a court order requiring defendants to produce the plan’s recordkeeping agreements to “complete the record,” or in the alternative, to convert the motion to dismiss into a motion for summary judgment. In this brief decision the court denied Ms. Cunningham’s motion. The court disagreed with Ms. Cunningham that defendants were required to produce these documents in order to create a complete and accurate record for the motion. “Having a ‘complete record,’ however, is immaterial to whether the Court should consider materials outside of the pleadings on a motion to dismiss. At this juncture, the relevant inquiry is whether Plaintiff incorporates the recordkeeping agreements by reference or relied on them in drafting the SAC. Plaintiff does neither.” Accordingly, the court stated that it may not take judicial notice of the recordkeeping agreements and may not consider them in deciding the motion to dismiss, and therefore declined to order defendants to produce them now. Nor did the court convert the motion to dismiss into one for summary judgment as it will not be considering matters outside of the pleadings. Ms. Cunningham’s requests were therefore denied.
Remedies
Sixth Circuit
Aldridge v. Regions Bank, No. 3:21-CV-00082-DCLC-DCP, 2024 WL 2819523 (E.D. Tenn. Jun. 3, 2024) (Judge Clifton L. Corker). Stories of private equity and corporate raiding are part of the zeitgeist of 2020s America. This action tells one of those tales. It is the story of the restaurant chain Ruby Tuesday, Inc. as told from the vantage point of its franchise managers and other highly compensated employees. Back in the early 1990s the company set up two top hat plans for its upper management, the Executive Supplemental Pension Plan and the Management Retirement Plan. These two plans had their assets in a tax-deferred irrevocable grantor trust which was invested in company-owned life insurance policies. The trust assets were treated as general assets of Ruby Tuesday and therefore subject to the claims of creditors of the company. Because of this trust arrangement the beneficiaries of the plans were vulnerable to the risk of losing their benefits in the event of the company’s bankruptcy, which is exactly what happened. First, in December 2017, Ruby Tuesday was bought by the private equity firm NRD Capital. Following the sale, Ruby Tuesday did not fully fund the trust. Nor did the trustee, defendant Regions Bank, take any action to enforce the employer’s obligation to do so. Through a series of events between 2019 and 2020, Ruby Tuesday’s board of directors terminated the plans, provided written notice to Regions Bank that it was insolvent, and filed for Chapter 11 bankruptcy. The bankruptcy court ordered Regions Bank to liquidate and transfer the trust assets to the bankruptcy estate. Because of what took place, the participants and beneficiaries of the two top hat plans allege they lost over $35 million in benefits. They initiated this action seeking to regain what they had lost. Originally, the 96 plaintiffs filed various state law causes of action, in addition to claims for relief under ERISA. The court narrowed the scope of the case, leaving only plaintiffs’ claim for equitable relief under ERISA Section 502(a)(3). The parties filed cross-motions for summary judgment on this one remaining claim. In this decision, the court granted judgment in favor of Regions Bank and denied plaintiffs’ cross-motion. Plaintiffs alleged “Regions violated its duties as Trustee by failing to adequately protect the Trust property for the benefit of the Plaintiffs as beneficiaries of the Trust, failing to inform the Plaintiff beneficiaries of the rights upon a Change of Control, failing to take action against [Ruby Tuesday] to enforce [its] obligations under the Trust, and failing to distribute the benefits to Participants upon the termination of the Plans.” To begin, the court noted that top-hat plans are exempt from ERISA’s fiduciary requirements. It stated that plaintiffs could not reassert their previously dismissed breach of fiduciary duty claim “under the guise of ERISA § 502(a)(3).” The court then said that even if it assumed plaintiffs demonstrated the bank violated the terms of the trust and the plans, “under principles of federal common law, the relief available under ERISA § 502(a)(3) is limited.” The court focused much of its discussion on the flaws in the equitable relief plaintiffs sought under Section 502(a)(3). Plaintiffs made clear they sought relief in the form of equitable surcharge equaling the amounts each individual would have been entitled to under the plan prior to Ruby Tuesday’s bankruptcy. “Plaintiffs’ ERISA claim, however, hits roadblocks at every turn.” The court was unmoved by plaintiffs’ classification of their relief as equitable. Rather, it viewed their requested relief as compensatory damages, and “money damages are, of course, the classic form of legal relief.” Despite characterizing their relief as equitable, the court concluded that plaintiffs were truly “seeking monetary compensation for the full amount of benefits they would have received under the Plans prior to [Ruby Tuesday’s] Chapter 11 bankruptcy.” Thus, the court did not feel this relief was appropriate or available under Section 502(a)(3). Finally, the court highlighted the undisputed fact that Regions does not possess the trust assets, as they were liquidated and transferred to the bankruptcy estate and then disbursed to Ruby Tuesday’s creditors. For these reasons, the court held that plaintiffs’ ERISA claim failed as a matter of law and thus granted judgment in favor of the trustee.
Withdrawal Liability & Unpaid Contributions
Sixth Circuit
Operating Engineers’ Local 324 Fringe Benefit Funds v. Rieth-Riley Constr. Co., No. 23-1699, __ F. App’x __, 2024 WL 2852006 (6th Cir. Jun. 5, 2024) (Before Circuit Judges Boggs, Kethledge, and Murphy). Plaintiffs-appellants are seven ERISA-governed fringe benefit funds. The funds brought suit against an employer, Rieth-Riley Construction Company, seeking a court order compelling an audit of records from Rieth-Riley related to contributions it paid to the funds pursuant to an expired collective bargaining agreement. In the end, the district court granted summary judgment in favor of Rieth-Riley. It concluded that the funds’ claims under ERISA and LMRA require an active contract and that here, none existed. The district court held “that the Funds had failed to plead a claim for pre-expiration records; and that the Funds’ claim for post-expiration records failed because Rieth-Riley and the Funds no longer had any agreement then.” The funds appealed. In this decision the Sixth Circuit affirmed. First, the court of appeals agreed with the lower court that the complaint said, “or at least strongly suggested – that Rieth-Riley’s ‘indebtedness’ began on August 1, 2019,” and that the funds therefore failed to frame their audit demand to include pre-expiration records relating to the employer’s contributions to the funds. “Here – given what the Complaint said and did not say – we agree with the district court that the Complaint did not state a claim for pre-expiration records.” Second, the Sixth Circuit found that there was not convincing evidence of an existing contract that obligated the employer to make contributions to the funds after the expiration of the collective bargaining agreement. In fact, the funds at first rejected Rieth-Riley’s contributions after the expiration of the collective bargaining agreement, and both the district court and the appeals court considered this strong evidence that even the funds themselves “thought no agreement existed then.” Both ERISA and LMRA require an active contract. Here, the funds could point to no source of an unexpired contract to which both parties mutually assented. “And suffice it to say that, though the record includes plenty of evidence that Rieth-Riley wanted to continue contracting, it includes zero evidence that the Funds or Local 324 did. The district court was correct to grant summary judgment on the Funds’ claim for an audit of post-expiration records.” Accordingly, the district court’s judgment was affirmed. Circuit Judge Danny Boggs dissented in part from the majority opinion. In Judge Boggs’ view, the funds adequately pleaded a claim to audit Rieth-Riley’s pre-termination contributions. Judge Boggs disagreed with his colleagues that the funds were required to attach the audit letter to their complaint in order to state a plausible claim. “The Complaint itself is not an audit request. Rather, it seeks to enforce a previously made audit request. And this previously made audit request (for the period before the CBA’s termination) arose as a contractual right for the Funds and obligation for Rieth-Riley. The majority appears not to dispute this. Further, Rieth-Riley does not dispute the content or authenticity of the letter. Nor does it dispute that it responded to the letter by producing some but not all of the requested documents. I do not see how a party can be unfairly surprised by a claim that references a document that the party not only received but answered.” Judge Boggs therefore respectfully dissented from the majority for faulting the funds for not attaching the document, and he therefore differed from the majority’s conclusion that the complaint never alleged a pre-termination indebtedness claim.