J. PAUL OETKEN, United States District Judge.
Plaintiff Melissa Haley brings this putative class action against Defendant Teachers Insurance and Annuity Association of America ("TIAA"), alleging that TIAA engaged in prohibited transactions with the Washington University Retirement Savings Plan in violation of § 406 of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1106. After the Court dismissed several of the claims in an earlier complaint (Dkt. No. 28), Haley filed the operative First Amended Class Action Complaint (Dkt. No. 35). TIAA now moves to dismiss the operative complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), and to strike certain class allegations. (Dkt. No. 38.) For the reasons that follow, the motion to dismiss and the motion to strike are denied.
The Court assumes familiarity with this case, on the basis of the Court's Opinion addressing TIAA's prior motion to dismiss. See Haley v. Teachers Ins. & Annuity
Plaintiff Melissa Haley is an employee of Washington University ("WashU") and a participant in the Washington University Retirement Savings Plan ("the Plan"), an employee pension benefit plan regulated by ERISA. (Dkt. No. 35 ("Compl.") ¶¶ 1, 13.) The Plan offers participants the opportunity to take out a loan against a portion of their retirement accounts. (Compl. ¶ 31; Dkt. No. 35-1 at 2.) The Plan contracted with two outside vendors, Vanguard and Defendant TIAA, to administer these loans. (Compl. ¶ 45; Dkt. No. 35-1 at 3.).
For loans administered by TIAA, participants are required "to borrow from Defendant's general account rather than from the participant's own account." (Compl. ¶ 24.) Thus, participants must first "transfer 110% of the amount of the loan from the participant's plan account ... to one of Defendant's general account products," which "pay a fixed rate of interest." (Id.) The amount transferred to a general account product serves as the collateral securing the loan. (Id.) The participant then repays the loan to Defendant's general account, which also earns the interest paid on the loan. (Compl. ¶ 26.) TIAA retains for itself the difference, or "spread," between (a) the interest rate paid to participants with respect to the loan collateral and (b) the amounts earned by TIAA on investments from its general account and from interest paid by participants on the loans.
Between 2011 and 2015, Plaintiff took out four separate participant loans, which TIAA has administered. (Compl. ¶¶ 1, 14.) Plaintiff has fully repaid the first two loans, and she is in the process of repaying the two outstanding loans. (Compl. ¶ 14.)
Plaintiff filed this putative class action in February 2017, claiming that Defendant's administration of retirement loans to Plan participants (the "loan program") violates ERISA. (Dkt. No. 1.) Plaintiff alleged both that TIAA itself violated its duties as an ERISA fiduciary, and that TIAA is liable as a nonfiduciary for breaches by the Plan Administrator, WashU. (Dkt. No. 5 ¶¶ 48-80.) TIAA moved to dismiss for lack of subject matter jurisdiction and for failure to state a claim. (Dkt. No. 20.) On March 28, 2018, the Court granted the motion to dismiss in part, holding that Plaintiff had standing to bring this action, but that she had not plausibly alleged that TIAA qualified as an ERISA fiduciary. (Dkt. No. 28 at 6, 14.) With respect to Plaintiff's claims for equitable relief against TIAA as a non-fiduciary, the Court granted in part and denied in part the motion to dismiss, and granted Plaintiff leave to amend. (Id. at 18-23.)
TIAA moves to dismiss the Amended Complaint for failure to state a claim under Rule 12(b)(6).
Plaintiff attempts to bring such a claim here, alleging in Counts V through VII that TIAA is liable as a non-fiduciary for engaging in prohibited transactions through the administration of its participant loan program, in violation of § 406(a)(1)(B), (C), and (D). (Compl. ¶¶ 78-99.) TIAA seeks to dismiss these counts on two grounds: (1) Plaintiff's failure to adequately allege required elements of claims for non-fiduciary liability; and (2) Plaintiff's request for impermissible legal remedies. The Court addresses each in turn.
To survive a motion to dismiss for failure to state a claim under Rule 12(b)(6), "a complaint must contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d
Section 406(a)(1) provides in relevant part that, "[e]xcept as provided in [§ 408],"
29 U.S.C. § 1106(a)(1). Section 408(b) enumerates certain requirements in order for transactions to be statutorily exempt from the prohibitions in § 406. See 29 U.S.C. § 1108(b).
To prevail on a claim for a violation of § 406(a) against a non-fiduciary, "a plaintiff must prove all of the elements of a § 406(a) claim ..., including that a plan fiduciary had `actual or constructive knowledge of the facts' that give rise to the § 406(a) violation." Patrico, 2017 WL 2684065, at *4 (quoting Harris, 530 U.S. at 251, 120 S.Ct. 2180). A plaintiff must also demonstrate that the non-fiduciary defendant "had actual or constructive knowledge of the circumstances that rendered the transaction unlawful," which "involve a showing that the plan fiduciary, with actual or constructive knowledge of the facts satisfying the elements of a § 406(a) transaction, caused the plan to engage in the transaction." Harris, 530 U.S. at 251, 120 S.Ct. 2180 (emphasis omitted).
Before addressing whether Haley has plausibly alleged each of her claims, the Court must resolve a threshold disagreement between the parties about the elements of these claims and the framework for assessing them at the motion to dismiss stage. This disagreement has two facets: (1) which party bears the burden with regard to demonstrating that any § 408 exemptions are satisfied; and (2) what level of knowledge plaintiffs must allege as to a nonfiduciary participating in a prohibited transaction under § 406.
Haley takes the position that she need not "plead facts that refute Defendant['s] affirmative defenses that TIAA's loan program falls within a Section 408(b) exemption," because "such exemptions are affirmative defenses" that the Defendant "bears the burden of proving by a preponderance." (Dkt. No. 40 at 13-14; see also id. at 9 n.9.) TIAA counters that "an ERISA plaintiff has the burden of pleading all elements of a non-fiduciary claim," including that the § 408 exemptions are
District courts in this Circuit have repeatedly affirmed that the § 408 exemptions are considered "affirmative defenses that a defendant bears the burden of proving by a preponderance of the evidence if their applicability is in dispute." Sacerdote v. N.Y. Univ., No. 16 Civ. 6284, 2017 WL 3701482, at *4 (S.D.N.Y. Aug. 25, 2017); see Bekker v. Neuberger Berman Grp. LLC, No. 16 Civ. 6123, 2018 WL 4636841, at *8 (S.D.N.Y. Sept. 27, 2018); see also Henry v. Champlain Enters., Inc., 445 F.3d 610, 619 (2d Cir. 2006) (holding that the defendant "fiduciary bears the burden of proving by a preponderance of the evidence" that the § 408(e) exemption is satisfied).
TIAA argues, nonetheless, that although fiduciary defendants bear this burden because "they have a duty not to engage in self-interested transactions," a non-fiduciary defendant has "no such duty and, thus, no such burden." (Dkt. No. 41 at 2 n.3.) The Court disagrees.
TIAA identifies no cases that have squarely considered the issue and held that, inconsistent with the treatment of fiduciary defendants, the applicability of a § 408 exemption is not an affirmative defense for non-fiduciary defendants, and non-fiduciary defendants do not bear the ultimate burden of satisfying the exemption. Nor does the Court see any good justification for creating this distinction. Non-fiduciary defendants charged with knowing participation in prohibited transactions are equally well-suited to invoke a § 408 exemption to avoid liability. As to TIAA's argument that non-fiduciaries have no duty to avoid prohibited transactions, Harris established that non-fiduciaries have a duty "imposed by § 502(a)(3) itself" not to knowingly participate in violations of ERISA. Harris, 530 U.S. at 247, 120 S.Ct. 2180. Non-fiduciaries can thus invoke § 408 exemptions to demonstrate that this duty was not breached.
Additionally, it makes little sense to require a plaintiff to identify and refute each potentially applicable exemption in the complaint. First, there are over twenty discrete statutory exemptions that could apply to a prohibited transaction under § 406. See 29 U.S.C. § 1108(b)-(c). And the list expands greatly when one considers the additional administrative exemptions that the Secretary of Labor can exercise statutory authority to craft. See 29 U.S.C. § 1108(a).
Second, it is often the case that plaintiffs bring these prohibited transaction claims against both fiduciary and non-fiduciary defendants, see, e.g., Leber v. Citigroup, Inc., No. 07 Civ. 9329, 2010 WL 935442, at *9-11, *14 (S.D.N.Y. Mar. 16, 2010), or against an alleged-fiduciary defendant that a court later determines to be a non-fiduciary, see Haley, 2018 WL 1585673, at *8-9; Bekker, 2018 WL 4636841, at *11. It would be unnecessarily complicated and duplicative to require plaintiffs to bear the burden of alleging and proving the non-applicability of a § 408 exemption as to some defendants but not others; or to require plaintiffs to adequately plead the non-applicability prophylactically, in the event that they lose on the argument that defendant is a fiduciary.
The conclusion that fiduciary and non-fiduciary defendants should bear the same burden of demonstrating the applicability of a § 408 exemption is consistent with cases that have treated the exemptions as an affirmative defense. The justification for such treatment rests on a desire to "rightly place[ ] the burden on the party with access to the necessary information to demonstrate that the allegedly prohibited transaction is indeed permitted by the exemption."
Overall, defendants who are transferees in an alleged prohibited transaction are similarly situated to fiduciary defendants with respect to information relevant to § 408 exemptions, they have similar incentives to argue in favor of the applicability of § 408 exemptions, and it makes little administrative sense to impose different burdens on such defendants due to their non-fiduciary status. Accordingly, the Court concludes that the applicability of a § 408 exemption is an affirmative defense on which such non-fiduciary defendants bear the ultimate burden. As such, dismissal under Rule 12(b)(6) based on the application of a § 408 exemption is warranted only if it is "clear from the face of the Complaint or judicially noticed court filings that the Plan's use of proprietary funds falls within an available exemption." Moreno v. Deutsche Bank Ams. Holding Corp., No. 15 Civ. 9936, 2016 WL 5957307, at *6 (S.D.N.Y. Oct. 13, 2016).
The crux of TIAA's argument in support of its motion to dismiss is that Haley's complaint fails to allege the requisite knowledge. But in order to determine whether that is indeed the case, the Court must first establish the contours of the applicable knowledge requirement. TIAA contends that the complaint must include "non-conclusory allegations that WashU and TIAA knew not only that the transactions occurred, but also that the transactions were not exempt under 408(b)." (Dkt. No. 39 at 8.) Haley takes the contrasting position that a plaintiff need not allege awareness of the non-applicability of a § 408 exemption on the part of the fiduciary or non-fiduciary defendant. (Compl. at 27 n.6; see also Dkt. No. 41 at 2-3 (characterizing Haley's position on this point).) Haley has the better argument.
To determine the knowledge requirement for a § 406 non-fiduciary liability
Harris, 530 U.S. at 251, 120 S.Ct. 2180. Under its most natural reading, this language suggests that the non-fiduciary needs to know: (1) that the transferor is an ERISA plan fiduciary; (2) that the fiduciary caused the plan to engage in the transaction; (3) that the fiduciary had knowledge of the facts underlying the transaction that subjected it to § 406(a); and (4) any facts relevant to the transaction that bring it under § 406(a). Additionally, the fiduciary needs to know the facts underlying the transaction that bring it within the purview of § 406(a). But nothing in Harris requires the fiduciary transferor or the non-fiduciary transferee to have knowledge of the law, i.e., knowledge that the transaction violated ERISA. See Neil v. Zell, 753 F.Supp.2d 724, 731 (N.D. Ill. 2010) (interpreting Harris to mean that fiduciary and non-fiduciary defendants need only "actual or constructive knowledge of the deal's details").
Other district courts that have considered the matter have agreed that Harris does not require the fiduciary transferor to have knowledge that the transaction violated ERISA. See Teets v. Great-W. Life & Annuity Ins. Co., 286 F.Supp.3d 1192, 1208-09 (D. Colo. 2017) ("As to a plan fiduciary, `facts satisfying the elements of a 29 U.S.C. § 1106(a) transaction' seems plainly aimed at requiring only a knowledge of basic facts[.]" (brackets omitted)); Rozo, 344 F.Supp.3d at 1037-38. This approach is consistent with the knowledge requirement as it is expressed in the statute. See 29 U.S.C. § 1106(a)(1)(C) ("A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect ... furnishing of goods, services, or facilities between the plan and a party in interest," etc.).
However, at least two district courts have held that Harris requires the non-fiduciary transferee to have both "knowledge of the underlying facts," and "knowledge of their potential unlawfulness." Teets, 286 F.Supp.3d at 1208; see Rozo, 344 F.Supp.3d at 1037. For this conclusion, these cases rely on the language of Harris and the treatises it cites.
But the most natural reading of "actual or constructive knowledge of the circumstances that rendered the transaction unlawful" requires knowledge of the underlying factual circumstances relevant to lawfulness, not knowledge of the legal conclusion that the transaction was unlawful. Harris, 530 U.S. at 251, 120 S.Ct. 2180. Nothing about the phrase "circumstances that rendered the transaction unlawful" requires knowledge that the transaction was indeed unlawful under § 406(a), any more than "actual or constructive knowledge of the facts satisfying the elements of a § 406(a) transaction" requires knowledge that the transaction violated § 406(a). If the Supreme Court intended to require non-fiduciary defendants to have knowledge that the transaction they were engaged in violated ERISA, the Court could have used clear language to do so. But the standard as described in Harris—requiring knowledge
With respect to the treatises that some courts have relied on to support a different interpretation of Harris, the Court notes that Harris does not specifically rely on them in describing the applicable knowledge standard for non-fiduciary transferee defendants. See 530 U.S. at 250, 120 S.Ct. 2180. At any rate, Harris cites these treatises for the general principle that "when a trustee in breach of his fiduciary duty to the beneficiaries transfers trust property to a third person, the third person takes the property subject to the trust, unless he has purchased the property for value and without notice of the fiduciary's breach of duty." Id. Within that proposition, it is the concept of "notice" that is relevant to the non-fiduciary's requisite knowledge; and in laying out the knowledge standard for non-fiduciaries, the Court clarified what "notice" entails under these particular circumstances. To the extent that the common law of trusts required transferees to have some level of knowledge of a violation of law, Harris signaled that constructive notice of such a violation is achieved by "actual or constructive knowledge of the circumstances that rendered the transaction unlawful," including knowledge that "the plan fiduciary, with actual or constructive knowledge of the facts satisfying the elements of a § 406(a) transaction, caused the plan to engage in the transaction." Id. at 251, 120 S.Ct. 2180. The Court thus reads Harris to implement the common law of trusts, as reflected in the treatises, by delineating a knowledge requirement for non-fiduciaries that satisfies the requisite level of constructive notice.
The Court thus reads Harris to instruct that the fiduciary transferor and non-fiduciary transferee defendant must have knowledge of certain facts underlying the prohibited transaction, but need not have knowledge that the transaction violated ERISA, to be liable under § 406(a).
The Court has not found any precedent from the Second Circuit to contradict this reading of Harris. In Diduck v. Kaszycki & Sons Contractors, Inc., which predates Harris, the Second Circuit held that a non-fiduciary defendant can be liable for breach of a fiduciary duty under ERISA § 404, if plaintiffs can demonstrate "defendant's knowing participation in the breach." 974 F.2d 270, 281-82 (2d Cir. 1992), partial abrogation on other grounds recognized by Gerosa v. Savasta & Co., Inc., 329 F.3d 317 (2d Cir. 2003). Diduck defined the "relevant `knowledge' for liability to attach for knowingly participating in a fiduciary's breach of duty" as both "knowledge as to the primary violator's status as a fiduciary and knowledge that the primary's conduct contravenes a fiduciary duty." Id. at 282-83. The knowledge standard articulated in Diduck thus requires something akin to legal knowledge: knowledge that conduct violated a fiduciary duty.
Turning to relevant precedent from district courts in this Circuit: The Court has not found any cases that have squarely addressed the effect of Harris on the scienter requirements for § 406 claims against non-fiduciaries. Before Harris, one court held that in a § 406 knowing participation claim, "the nonfiduciary, like the fiduciary, must have known or should have known at least what actually occurred, if not [also] that it was prohibited." Gray, 45 F.Supp.2d at 329. And another court held that such claims had no scienter requirement for the non-fiduciary defendant. Liss v. Smith, 991 F.Supp. 278, 307 n.30 (S.D.N.Y. 1998) (reasoning that "knowledge with respect to the prohibited nature of the transactions is irrelevant" for non-fiduciary defendants, because such transactions are per se ERISA violations).
Additionally, at least two courts have assumed that plaintiffs must allege that both the fiduciary and non-fiduciary defendants knew the transaction was unlawful, specifically in the context of excessive compensation claims under § 406(a)(1)(C) and § 408(b)(2). See Allen v. Bank of Am. Corp., No. 15 Civ. 4285, 2016 WL 4446373, at *9 (S.D.N.Y. Aug. 23, 2016) ("To state a claim under § 406(a) ..., Plaintiffs must allege not only that the non-fiduciary defendants knew that they received excessive compensation, but also that the plan fiduciaries knew or should have known that the payment tendered to Defendants was unreasonable." (ellipsis in original) (brackets omitted) (quoting Laborers' Pension Fund v. Arnold, No. 00 Civ. 4113, 2001 WL 197634, at *8 (N.D. Ill. Feb. 27, 2001))); Patrico, 2017 WL 2684065, at *4 ("[T]he Complaint fails to allege that any ERISA fiduciary had actual or constructive knowledge that the fees paid ... are excessive."). But these courts did not expressly consider the consistency of such a scienter requirement with Harris.
Having surveyed this precedent, the Court sees no reason to depart from its reading of Harris. Accordingly, contrary to Defendant's argument, the Court holds that plaintiffs bringing § 406(a) knowing participation claims need not demonstrate that the fiduciary or the non-fiduciary defendant knew or should have known that the transaction at issue violated ERISA. In other words, to survive a motion to dismiss, plaintiffs need not plausibly allege that the fiduciary and non-fiduciaries involved knew that the transaction at issue was a "prohibited transaction" under § 406(a) that did not fall within an exemption under § 408(b).
This result is supported by the Court's conclusion above regarding the status of § 408 exemptions as an affirmative defense. Fiduciary and non-fiduciary defendants bear the ultimate burden of proving that their conduct was exempt from § 406 liability under § 408, and at the motion to dismiss stage a plaintiff need only allege sufficient facts in the complaint such that it is not clear that an exemption applies. It would be incongruous to require plaintiffs to allege sufficient facts only to put the application of a § 408 exemption in question at the motion to dismiss stage, but to simultaneously require plaintiffs to plausibly allege that defendants knew their conduct was not covered by an exemption. Declining to impose such a scienter requirement is thus consistent with the allocation of the ultimate burden of proving that an otherwise prohibited transaction is exempt, which lies with the defendants.
The Court's holding regarding the applicable knowledge requirement is also consistent with the nature of prohibited transactions under ERISA. "Congress enacted ERISA § 406(a)(1), which supplements the fiduciary's general duty of loyalty to the plan's beneficiaries, § 404(a), by categorically barring certain transactions deemed `likely to injure the pension plan.'" Harris, 530 U.S. at 241-42, 120 S.Ct. 2180 (quoting Comm'r v. Keystone Consol. Indus., Inc., 508 U.S. 152, 160, 113 S.Ct. 2006, 124 L.Ed.2d 71 (1993)); see also Henry v. Champlain Enters., Inc., 445 F.3d 610, 618 (2d Cir. 2006) ("Section 406 of ERISA supplements the general fiduciary obligations set forth in § 404 by prohibiting certain categories of transactions believed to pose a high risk of fiduciary self-dealing."). "Generally, § 406(a) concerns `commercial bargains that present a special risk of plan underfunding because they are struck with plan insiders, presumably not at arm's length.'" Patrico v. Voya Fin., Inc., No. 16 Civ. 7070, 2018 WL 1319028, at *6 (S.D.N.Y. Mar. 13, 2018) (quoting Lockheed Corp. v. Spink, 517 U.S. 882, 893, 116 S.Ct. 1783, 135 L.Ed.2d 153 (1996)). "The transactions covered by Section 406(a)(1) `are per se violations of ERISA regardless of the motivation which initiated the transaction, the prudence of the transaction, or the absence of any harm arising from the transaction.'" Gray, 45 F.Supp.2d at 326 (quoting Reich v. Polera Bldg. Corp., No. 95 Civ. 3205, 1996 WL 67172, *2 (S.D.N.Y. Feb. 15, 1996)).
Requiring plaintiffs to demonstrate that fiduciary transferors and non-fiduciary transferees knew their transaction violated ERISA would erect a significant barrier to the ability of plaintiffs in such cases to survive a motion to dismiss or ultimately prevail. This would impede plan beneficiaries in their efforts to police prohibited transactions between plan fiduciaries and plan servicers. Conversely, declining to impose a scienter requirement on fiduciaries and non-fiduciary defendants is consistent with the treatment of § 406 prohibited transactions as per se violations of ERISA which pose unique risks to the
TIAA raises two arguments against this result, which the Court finds unpersuasive. First, TIAA contends that these knowledge standards, coupled with the broad text of § 406(a), would impermissibly "force[ non-fiduciary transferees] into discovery in every single case." (Dkt. No. 41 at 3; see also Dkt. No. 39 at 8 n.6 (arguing that such a regime would cast too wide a net and be "an exceptionally poor way of identifying fiduciaries and non-fiduciaries engaged in malfeasance").) But this will not necessarily be true. Although plaintiffs have "no duty to negate the availability of [a] section 408(b)[ ] affirmative defense," and need not demonstrate that defendants knew the transaction violated § 406 or did not satisfy an exemption under § 408, courts "must still consider whether the facts alleged in the Complaint plainly establish [an] exemption's applicability." Bekker, 2018 WL 4636841, at *9 (emphasis omitted). If plaintiffs have alleged no facts that would bring the transaction outside the safe harbor of the exemptions, the claims must be dismissed. See Sacerdote, 2017 WL 3701482, at *13-14 (holding that although allegations satisfied broad language of § 406(a)(1)(C), they were insufficient to survive motion to dismiss); Cunningham v. Cornell Univ., No. 16 Civ. 6525, 2017 WL 4358769, at *10 (S.D.N.Y. Sept. 29, 2017) (same). Non-fiduciary defendants will still be able to rely on the lesser knowledge requirements established by Harris, and the existence of the § 408 safe harbor, to defeat claims that should not survive a motion to dismiss.
Second, TIAA contends that it would "expose non-fiduciaries to the same litigation risks and expenses as fiduciaries, which is the opposite of Congress's intent." (Dkt. No. 41 at 3.) But the Court's interpretation of Harris imposes a greater knowledge requirement on non-fiduciaries. Whereas plaintiffs must plausibly allege that a fiduciary transferor knew only the facts underlying the § 406 violation, plaintiffs must allege that the non-fiduciary transferee also knew those factual circumstances, in addition to the facts that the transferor was an ERISA fiduciary and caused the transaction with the knowledge of the underlying facts. And concerns that § 406 would impose too high a burden on the non-fiduciary defendants can be accommodated by "inform[ing] courts' determinations of what a transferee should (or should not) be expected to know when engaging in a transaction with a fiduciary." Harris, 530 U.S. at 253, 120 S.Ct. 2180.
In accordance with the nature of the § 408 exemptions and the knowledge requirements, as discussed above, plaintiffs must plausibly allege the following elements of a § 406(a) knowing participation claim against a non-fiduciary transferee to survive a motion to dismiss:
The Court will address whether Haley has sufficiently alleged facts to establish these elements in the Amended Complaint, for each of the three claims asserted under § 406(a)(1).
First, Haley contends that in causing the plan to lend money to plan participants through TIAA's loan program, WashU has violated ERISA § 406(a)(1)(B) and TIAA has knowingly participated in that violation. (Compl. ¶¶ 3-4, 78-85.)
Section 406(a)(1)(B) prohibits fiduciaries from causing a plan to engage in a transaction that "constitutes a direct or indirect... lending of money or other extension of credit between the plan and a party in interest." 29 U.S.C. § 1106(a)(1)(B).
Haley contends that TIAA's loan program is prohibited by § 406(a)(1)(B), and does not satisfy the § 408(b)(1) exemption because it does not bear a reasonable rate of interest, and the requirement that funds be transferred to TIAA to serve as collateral constitutes a precondition designed to benefit TIAA. (Dkt. No. 40 at 3.) In seeking dismissal of this claim, TIAA argues that Haley has not sufficiently alleged: (i) the elements of a § 406(a)(1)(B) violation; (ii) knowledge; and (iii) the inapplicability of the § 408(b)(1) exemption.
(i) TIAA argues that its loan program does not fall within § 406(a)(1)(B) because it involves the lending of money "between two different parties in interest," instead of "between the Plan and a party in interest." (Dkt. No. 39 at 17; Dkt. No. 41 at 4.) The Court rejects this argument as foreclosed by the statute on its face: Section 406(a)(1)(B) proscribes both direct and indirect loans from the plan to participants. Enlisting a service provider to administer loans, with funds from the plan, constitutes such an "indirect" loan subject to this prohibition.
(ii) The bulk of TIAA's argument on the § 406(a)(1)(B) claim is directed at knowledge. TIAA contends that Haley did not sufficiently allege that WashU or TIAA knew that the loan program was not exempt under § 408(b)(1). (Dkt. No. 39 at
(iii) Finally, TIAA argues that its loan program is exempt under § 408(b)(1). In support of this contention, TIAA notes that its loan program is structured similarly to other permissible participant loan programs. (Dkt. No. 39 at 16; id. at 10-15 (surveying history of collateralized loan programs and differences between 403 and 401(k) plans).) As TIAA observes, Plaintiff does not respond to this specific argument.
Additionally, TIAA argues that Haley does not plausibly allege that the interest rate TIAA receives for the loan was unreasonable. (Dkt. No. 39 at 17.) This is tantamount to an argument that the § 408(b)(1) exemption clearly applies on the face of the Amended Complaint.
As discussed above, dismissal under Rule 12(b)(6) of a § 406(a) claim is appropriate where a defendant raises a § 408 exemption "as an affirmative defense and it is clear from the face of the complaint, and matters of which the court may take judicial notice, that the plaintiff's claims are barred as a matter of law." Sewell v. Bernardin, 795 F.3d 337, 339 (2d Cir. 2015) (quoting Staehr v. Hartford Fin. Servs. Grp., 547 F.3d 406, 425 (2d Cir. 2008)). Dismissal of the § 406(a)(1)(B) claim is thus inappropriate unless it is clear on the face of the Complaint that the loans administered by TIAA "bear a reasonable rate of interest." 29 U.S.C. § 1108(b)(1).
Haley contends that the Plan "does not receive a reasonable rate of interest" from the participant loans because TIAA charged a "loan interest rate of 4.44%" to participants but only paid a rate of 3% to the Plan. (Dkt. No. 40 at 3.) As the relevant regulations explain, a loan "bear[s] a reasonable rate of interest if such loan provides the plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances." 29 C.F.R. § 2550.408b-1(e). It is not clear from the face of the Amended Complaint that the rate of return ultimately paid to the Plan—3%—is commensurate with rates charged for similar
For this reason, the Court cannot conclude that § 408(b)(1) clearly exempts TIAA's loan program from liability. Accordingly, because Haley has adequately alleged the application of § 406(a)(1)(B) and the requisite knowledge of the fiduciary and defendant non-fiduciary, TIAA's motion to dismiss the § 406(a)(1)(B) claim is denied.
Next, Haley claims that TIAA's loan program constitutes a service agreement between the Plan and an interested party, prohibited by ERISA § 406(a)(1)(C). (Compl. ¶¶ 6, 8, 94-99.) Section 406(a)(1)(C) prohibits transactions that constitute the direct or indirect "furnishing of goods, services, or facilities between the plan and a party in interest." 29 U.S.C. § 1106(a)(1)(C). Section 408(b)(2) exempts certain transactions from the prohibitions of § 406(a)(1)(C), where they comprise contracts "for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan," and where "no more than reasonable compensation is paid therefor." 29 U.S.C. § 1108(b)(2); see also 29 C.F.R. § 2550.408b-2. TIAA offers two grounds for dismissing this claim: (i) knowledge, and (ii) the application of the § 408(b)(2) exemption.
(i) As with the other claims, TIAA primarily argues that Haley does not sufficiently allege that WashU and TIAA knew that the loan program was not exempt under § 408(b)(2). (Dkt. No. 39 at 19-20.) Applying the proper knowledge standard discussed above, however, the Court concludes that the Amended Complaint plausibly alleges that TIAA knew that WashU was an ERISA fiduciary causing this transaction, and that both entities knew or should have known the underlying facts that bring their service agreement within the prohibition of § 406(a)(1)(C). (Compl. ¶¶ 8-10; 98.)
(ii) TIAA also argues that dismissal is required because the Amended Complaint alleges insufficient facts to demonstrate that the fees paid to TIAA for administering the loan program are unreasonably excessive. (Dkt. No. 39 at 20.) Haley responds, in part, that the structure of the TIAA loan program compared to Vanguard's loan program, and the nature of asset-based fees, supports the conclusion that TIAA received unreasonable compensation for administering its loan program. (Dkt. No. 40 at 16.) As TIAA observes, however, the Court already rejected these allegations in its March 28, 2018 Opinion as "insufficient to state a claim for knowingly excessive compensation." (Dkt. No. 28 at 19; see Dkt. No. 41 at 8.) The Court thus considers the two new allegations offered by Haley in the Amended Complaint to determine whether they move her excessive compensation claim over the line from possible to plausible.
First, the Amended Complaint characterizes TIAA's compensation in a new way; instead of the gap between the interest earned by TIAA on the loan and the interest rate TIAA pays on the collateral (Dkt. No. 5 ¶ 18), Haley now alleges that TIAA earns the larger difference between "the amount Defendant earns on investments in its general account and the amount that Defendant credits to participants on the posted collateral" (Compl. ¶¶ 27). Haley contends that the magnitude of this investment income earned—which is "materially more than the interest that Defendant pays the participant on the collateral securing
TIAA counters that the only allegations that it "earned greater interest than it paid to plan participants" are made "on information and belief," which are "inadequate to satisfy Twombly/Iqbal." (Dkt. No. 41 at 7-8; see also Compl. ¶¶ 26, 97.) The Court disagrees.
The Second Circuit has held that allegations made "on information and belief" satisfy the Twombly pleading threshold under certain circumstances. See Arista Records, LLC v. Doe 3, 604 F.3d 110, 120 (2d Cir. 2010); Negrete v. Citibank, N.A., 187 F.Supp.3d 454, 461 (S.D.N.Y. 2016). Such circumstances include when the facts pleaded are "peculiarly within the possession and control of the defendant or where the belief is based on factual information that makes the inference of culpability plausible." Arista, 604 F.3d at 120 (internal citation omitted). Here, the first exception applies: The investment income that TIAA earns on its general account is information uniquely within TIAA's possession. The Court will thus consider these allegations as supporting Haley's excessive compensation claim.
Second, Haley contends that TIAA's failure to disclose to WashU the total compensation TIAA received in administering the loan program—contrary to the applicable regulations, 29 C.F.R. § 2550.408b-2(c)(1) —supports the inference that those fees were excessive. (Dkt. No. 40 at 15-16.) And the Amended Complaint, after reviewing the relevant regulations, states that "[n]one of the Annual Returns for the Washington University Plan filed with the US Department of Labor on Form 5500 contain any information or disclosure that Defendant is receiving indirect compensation with respect to the loan program by keeping a portion of the interest on paid [sic] by plan participants on amounts borrowed from their own accounts." (Compl. ¶ 50.)
TIAA argues that this allegation does not support Haley's claim, because the Amended Complaint does not allege "that TIAA failed to comply with its regulatory disclosure requirements," and "TIAA has no responsibility for the Plan's Annual Returns." (Dkt. No. 41 at 8.) Again, the Court is unpersuaded. Haley alleges that WashU is not reporting on its annual return to the Department of Labor any indirect compensation that TIAA received through administering the loan program. (Compl. ¶ 50.) The reasonable inference from this allegation is that TIAA is either failing to disclose its indirect compensation to WashU,
Overall, the collective allegations in the Amended Complaint plausibly establish that the § 408(b)(2) safe harbor does not clearly exempt the conduct at issue. Accordingly, TIAA's motion to dismiss the excessive compensation claim is denied.
Finally, Haley claims that TIAA's loan program violates ERISA § 406(a)(1)(D). (Compl. ¶¶ 5, 8, 86-93.) Section 406(a)(1)(D) prohibits transactions that constitute a "transfer to, or use by or for the benefit of a party in interest, of any assets of the plan." 29 U.S.C. § 1106(a)(1)(D). Under the corresponding safe harbor, transfers of plan assets to service providers are exempt where, in connection with the transfer, "the plan receives no less, nor pays no more, than adequate consideration." Id. § 1108(b)(17)(A). "[I]n the case of an asset other than a security for which there is a generally recognized market," adequate consideration means "the fair market value of the asset as determined in good faith by a fiduciary or fiduciaries." Id. § 1108(b)(17)(B)(ii).
In the March 28, 2018 Opinion, the Court held that Haley "adequately alleged that the transfer of [plan] assets to a party in interest was a prohibited transaction under ERISA § 406(a)(1)(D)," and this claim thus survived TIAA's motion to dismiss. (Dkt. No. 28 at 21.) Nonetheless, TIAA argues that this claim is deficiently alleged in the Amended Complaint on three bases: (i) existence of a prohibited transaction under § 406(a)(1)(D); (ii) knowledge; (iii) inapplicability of § 408(b)(17). (Dkt. No. 39 at 21-22.)
(i) According to TIAA, its loan program does not constitute the "use" for its benefit of "plan assets" as a matter of law, because the loan collateral it is "using" does not constitute a "plan asset" under ERISA's guaranteed benefit policy exception, § 401(b)(2). (Dkt. No. 39 at 21.) But in making this argument TIAA is trying to cast Haley as asserting a "use" claim, rather than a "transfer" claim. (Dkt. No. 39 at 21 n.28; Dkt. No. 41 at 4-5.) This characterization is contrary to the Amended Complaint, which alleges both prohibited "transfer" and "use." (Compl. ¶ 90 ("Defendant's loan program on its face requires a transfer of plan assets, or use of plan assets by or for the benefit of Defendant, resulting from the mandatory transfer of plan assets from a borrowing participant's selected investment choices into Defendant's general account, which Defendant invests along with the other assets of its general account for its own benefit[.]").) And in her opposition brief, Haley disclaims any attempt to allege prohibited "use" under § 406(a)(1)(D), arguing that TIAA's argument regarding the status of the collateral was "irrelevant" to her allegations about the unlawful "transfer." (Dkt. No. 40 at 21-22.) Accordingly, the Court construes the Amended Complaint as alleging only a transfer in violation of § 406(a)(1)(D) and rejects TIAA's guaranteed benefit policy argument.
(ii) Again, TIAA argues that Haley was required to—and failed to—allege knowledge that the transfer was not exempt on the part of WashU and TIAA. (Dkt. No. 39 at 21.) But TIAA does not challenge whether WashU and TIAA knew of the facts underlying the transaction that brought it within the scope of § 406(a)(1)(D). Under the Court's formulation of this requirement, Haley has plausibly alleged the requisite knowledge to survive a motion to dismiss. (Compl. ¶¶ 8-10, 91-92.)
(iii) Finally, TIAA claims that the application of the exemption in ERISA § 408(b)(17) is clear from the face of the Amended Complaint, because "the Complaint lacks non-conclusory allegations that the Plan received less or paid more than adequate consideration in connection with
The Court concludes that is it not clear from the face of the Amended Complaint that the Plan received no less and paid no more than adequate consideration for TIAA's administration of participant loans. The complaint contains no allegations regarding the "the fair market value" of the service "as determined in good faith by" WashU. 29 U.S.C. § 1108(b)(17)(B)(ii). Instead, the complaint indicates that TIAA receives different levels of compensation for the same service due to the asset-based nature of its loan program (Compl. ¶ 97), which raises doubts regarding whether that compensation is always no more than "adequate."
Because the Court cannot determine at this stage that § 408(b)(17) exempts the loan program from liability—and Haley has adequately alleged the other elements of a § 40(a)(1)(D) claim—TIAA's motion to dismiss this claim is denied.
Finally, TIAA moves to dismiss Counts V through VII on the ground that the Amended Complaint seeks relief that is unavailable under ERISA. TIAA contends that this is a suit for legal relief— i.e., monetary damages—but ERISA permits only equitable relief from non-fiduciaries. (Dkt. No. 39 at 22-24.) Notably, however, TIAA's argument ignores the fact that the Court already rejected this argument in its previous Opinion. (Dkt. No. 28 at 14-17.) Reviewing the Amended Complaint, the Court sees no reason to revisit its ruling.
Admittedly, a change was made in the Amended Complaint that pertains to the issue of relief. Whereas the previous complaint specifically requested "disgorgement of the proceeds of the illegal arrangement" (Dkt. No. 5 ¶ 83), the Amended Complaint does not expressly request disgorgement by name. But this omission seems related to a mistake whereby Plaintiff claimed that "Defendant is liable under 29 U.S.C. § 1109(a) for losses ... resulting from the breaches of fiduciary duty alleged in this Count" (Compl. ¶¶ 85, 93, 99), even though § 1109(a) applies only to fiduciary defendants. (See Dkt. No. 40 at 22 (admitting to the "erroneous[ ]" citation).) Regardless, the content of § 1109(a) makes clear that what Plaintiff truly seeks is disgorgement. See 29 U.S.C. § 1109(a) (providing that fiduciaries "shall be personally liable to... restore to such plan any profits of such fiduciary which have been made through use of assets of the plan"). And Plaintiff's reply brief confirms the point. (See Dkt. No. 40 at 22.)
Accordingly, for the reasons stated in the Opinion of March 28, 2018, the Court rejects Defendant's contention that Counts V through VII must be dismissed for seeking legal relief unauthorized under ERISA.
Rule 12(f) states that a "court may strike from a pleading ... any redundant, immaterial, impertinent, or scandalous matter," and Rule 23(d)(1) empowers courts to "require that ... pleadings be amended to eliminate allegations about representation of absent persons." Fed. R. Civ. P. 12(f), 23(d)(1)(D). However, motions to strike class allegations are generally "viewed with disfavor and infrequently granted," In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig., 218 F.R.D. 76, 78 (S.D.N.Y. 2003), because they "require[ ] a reviewing court to preemptively terminate the class aspects of litigation, solely on the basis of what is alleged in the complaint, and before plaintiffs are permitted to complete the discovery to which they would otherwise be entitled on questions relevant to class certification," Blagman v. Apple Inc., No. 12 Civ. 5453, 2013 WL 2181709, at *2 (S.D.N.Y. May 20, 2013) (alterations omitted) (quoting Calibuso v. Bank of Am. Corp., 893 F.Supp.2d 374, 383 (E.D.N.Y. 2012)).
As a result, "[d]istrict courts frequently have deferred the Rule 23 determination until the class certification stage, after the development of a `more complete factual record.'" Emilio v. Sprint Spectrum L.P., 68 F.Supp.3d 509, 515 (S.D.N.Y. 2014) (quoting Mazzola v. Roomster Corp., 849 F.Supp.2d 395, 410 (S.D.N.Y. 2012)). An exception to this general rule exists when the motion to strike "addresses issues `separate and apart from the issues that will be decided on a class certification motion.'" Chen-Oster v. Goldman, Sachs & Co., 877 F.Supp.2d 113, 117 (S.D.N.Y. 2012) (quoting Rahman v. Smith & Wollensky Rest. Grp., Inc., No. 06 Civ. 6198, 2008 WL 161230, at *3 (S.D.N.Y. Jan. 16, 2008)). But, absent this exceptional circumstance, a motion to strike class allegations is generally "procedurally premature." Id.
Haley "seeks to certify, and to be appointed as representative of," a class comprising "[a]ll individual account retirement plans qualified under Code section 403(b) and serviced by Teacher Insurance and Annuity Association ("TIAA") that have offered the TIAA participant loan program at any time from February 5, 2011 through the date of judgment." (Compl. ¶ 52.)
TIAA argues that the Court should strike the Complaint's class action "allegations on behalf of plans and plan participants other than the WashU plan and its participants." (Dkt. No. 39 at 24.) Specifically, TIAA claims that striking these allegations is appropriate because the Amended Complaint fails to adequately allege the requisite knowledge on behalf of any other plan fiduciary or for TIAA with respect to
TIAA tries to present its objection to the class allegations as an issue "separate" from class certification, framing it as a challenge to whether the class allegations satisfy Twombly. (Dkt. No. 39 at 25; Dkt. No. 41 at 10.) But it essentially challenges whether other TIAA plans were "similarly situated" and whether participants in those plans were "harmed in a similar fashion," with Defendant and fiduciary possessing the requisite knowledge. (Dkt. No. 39 at 25.) Such arguments implicate typicality and whether common questions predominate for the class, and thus "rely upon the [Rule 23] factors that would be analyzed and addressed by this Court in the course of deciding a motion for class." Campbell v. Chadbourne & Parke LLP, No. 16 Civ. 6832, 2017 WL 2589389, at *4 (S.D.N.Y. June 14, 2017); see also Med. Soc'y of N.Y. v. UnitedHealth Grp. Inc., No. 16 Civ. 5265, 2018 WL 1773142, at *2 (S.D.N.Y. Apr. 12, 2018).
Accordingly, TIAA's motion to strike the class allegations is denied as premature.
For the foregoing reasons, TIAA's motion dismiss is DENIED, and TIAA's motion to strike is DENIED.
The Clerk of Court is directed to close the motion at Docket Number 38.
SO ORDERED.
In dismissing these claims in its previous Opinion, the Court held that "leave to amend would be futile." (Dkt. No. 28 at 22.) Seeing no reason to revisit that conclusion, the Court dismisses Counts I through III for the reasons stated in the Opinion of March 28, 2018.
Furthermore, TIAA is incorrect that Haley has "conceded" that the § 406(a)(1)(D) claim should be dismissed. Rather, Haley clearly defended this claim in its opposition brief. (Dkt. No. 40 at 21-22.) And because TIAA bears the ultimate burden of proving that § 408(b)(17) exempts its loan program from liability, the Court can look to the Amended Complaint and the arguments Haley offers regarding similar exemptions to assess whether § 408(b)(17) clearly applies here.
