Rosen v. Prudential Retirement Insurance and Annuity Company ( 2017 )


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  • 17-0239-cv
    Rosen v. Prudential Retirement Insurance and Annuity Company
    UNITED STATES COURT OF APPEALS
    FOR THE SECOND CIRCUIT
    SUMMARY ORDER
    RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED
    ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE
    PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A
    DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN
    ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST
    SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
    At a stated term of the United States Court of Appeals
    for the Second Circuit, held at the Thurgood Marshall United
    States Courthouse, 40 Foley Square, in the City of New York,
    on the 11th day of October, two thousand seventeen.
    PRESENT: DENNIS JACOBS,
    JOSÉ A. CABRANES
    RICHARD C. WESLEY,
    Circuit Judges.
    - - - - - - - - - - - - - - - - - - - -X
    Richard A. Rosen,
    Plaintiff-Appellant,
    -v.-                                               17-0239-cv
    Prudential Retirement Insurance and
    Annuity Company,
    Defendants-Appellees.
    - - - - - - - - - - - - - - - - - - - -X
    FOR APPELLANT:                        James E. Miller
    Laurie Rubinow, Nathan C.
    Zipperian
    Shepherd, Finkelman, Miller &
    Shah, LLP, Chester, Connecticut
    1
    Monique Olivier
    Duckworth Peters
    Lebowitz Olivier LLP, San
    Francisco, California
    FOR APPELLEES:             James T. Shearin
    Pullman & Comley, Bridgeport,
    Connecticut
    Catherine M.A. Carroll
    Kevin M. Lamb
    Wilmer Cutler Pickering Hale and
    Dorr LLP, Washington, DC
    Appeal from a judgment of the United States District
    Court for the District of Connecticut(Bolden, J.).
    UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED
    AND DECREED that the judgment of the district court be
    AFFIRMED.
    Richard Rosen appeals from the judgment of the United
    States District Court for the District of Connecticut,
    dismissing his ERISA complaint alleging breach of fiduciary
    duty by the sponsor and administrator, service provider, and
    investment advisor of the employer retirement plan in which
    Rosen participates. We assume the parties’ familiarity with
    the underlying facts, the procedural history, and the issues
    presented for review.
    Ferguson Enterprises (“Ferguson”), with the aid of
    investment advisor CapFinancial Partners LLC
    (“CapFinancial”), selected Prudential Bank & Trust FSB and
    Prudential Retirement Insurance and Annuity Company
    (together “Prudential”) as the service provider for its
    401(k) plan (the “Plan”). Before appointing Prudential,
    Ferguson and CapFinancial had agreed on the investment menu
    and the terms that govern the management of Plan assets, and
    arranged that Prudential would be compensated by fees paid
    directly from the plans it manages or indirectly through
    revenue-sharing arrangements entered into between Prudential
    and the mutual funds.
    Two investment vehicles are at issue.
    !    Prudential and Ferguson established the Ferguson
    Enterprises, Inc. Retirement Savings Plan Trust
    2
    (the “Trust”) by entering into the Trust
    Agreement, which provides that Prudential is the
    “directed trustee” responsible for holding,
    managing, and investing the Trust “in accordance
    with the directions of” Ferguson, and that
    Prudential “shall take no action except pursuant
    to directions received by it from [Ferguson], and
    shall have no duty to determine any facts or the
    propriety of any action taken or omitted by it in
    good faith pursuant to instructions from
    [Ferguson].”
    !    Prudential also entered into Group Annuity
    Contracts (“GACs”) with the Plan to establish the
    “Separate Accounts,” independent investment
    options offered by the service provider that pool
    and reinvest assets from multiple plans. See,
    e.g., Leimkuehler v. Am. United Life Ins. Co., 
    713 F.3d 905
    , 908-09 (7th Cir. 2013). Ferguson
    selects the Separate Accounts it will make
    available to the Plan, but under the Separate
    Account E Rider, Prudential has the power and sole
    discretion to “invest [Separate Account] assets in
    any investment that [it] deems to be permissible
    under applicable law.”
    Richard Rosen is a former employee of Ferguson who
    participates in the Plan. He alleges that Prudential
    engaged in prohibited transactions and breached its
    fiduciary duties in violation of the Employee Retirement
    Investment Savings Act (“ERISA”), 
    29 U.S.C. § 1104
    (a), by
    receiving revenue-sharing payments from certain investment
    options. Prudential moved to dismiss the complaint on the
    ground that it was not acting in an ERISA fiduciary capacity
    when it received any such payments. See 
    29 U.S.C. § 1002
    (21)(A) (defining “fiduciary”). In granting the motion,
    the district court ruled that while Prudential may qualify
    as a fiduciary with respect to the Separate Accounts, Rosen
    failed to adequately plead a breach of fiduciary duty in his
    Amended Complaint.
    We review de novo the grant of a motion to dismiss.
    McCarthy v. Dun & Bradstreet Corp., 
    482 F.3d 184
    , 191 (2d
    Cir. 2007). In doing so “we accept as true all factual
    statements alleged in the complaint and draw all reasonable
    inferences in favor of the non-moving party.” 
    Id.
     We “may
    affirm on any basis for which there is sufficient support in
    3
    the record, including grounds not relied on by the district
    court.” Lotes Co., Ltd. v. Hon Hai Precision Indus. Co.,
    
    753 F.3d 395
    , 413 (2d Cir. 2014)(internal quotation marks
    omitted).
    The “threshold question” in every case alleging breach
    of fiduciary duty is whether the service provider “was
    acting as a fiduciary . . . when taking the action subject
    to [the] complaint.” Pegram v. Herdrich, 
    530 U.S. 211
    , 226
    (2000). “[A] person is a fiduciary with respect to a plan
    to the extent (i) he exercises any discretionary authority
    or discretionary control respecting management of such plan
    or ... (iii) he has any discretionary authority or
    discretionary responsibility in the administration of such
    plan.” 
    29 U.S.C. § 1002
    (21)(A)(i),(iii). “Subsection one
    imposes fiduciary status on those who exercise discretionary
    authority, regardless of whether such authority was ever
    granted”; “[s]ubsection three describes those individuals
    who have actually been granted discretionary authority,
    regardless of whether such authority is ever exercised.”
    Bouboulis v. Transp. Workers Union of Am., 
    442 F.3d 55
    , 63
    (2d Cir. 2006)(internal quotation marks omitted); Frommert
    v. Conkright, 
    433 F.3d 254
    , 271 (2d Cir. 2006) (an entity is
    an ERISA fiduciary only to the extent that it “exercises ...
    or has discretionary authority” over a plan’s management or
    administration).
    The ERISA definition is “functional,” so we look to the
    actual discretionary authority held by the purported
    fiduciary rather than its particular label or title.
    LoPresti v. Terwilliger, 
    126 F.3d 34
    , 40 (2d Cir. 1997). In
    the context of ERISA service providers, fiduciary status
    attaches to the party empowered to make unilateral changes
    to the investment menu by its contractual arrangement with
    the plan. See Healthcare Strategies, Inc. v. ING Life Ins.
    & Annuity Co., 
    961 F. Supp. 2d 393
    , 397-400 (D. Conn. 2013).
    The initial, pre-contractual design of the investment menu
    is not considered discretionary authority with respect to a
    plan under ERISA. See F.H. Krear & Co. v. Nineteen Named
    Trs., 
    810 F.2d 1250
    , 1259 (2d Cir. 1987); Pegram, 
    530 U.S. at 225-26
    .
    Prudential is considered a fiduciary only to the extent
    that it exercises or possesses discretionary authority in
    relation to a plan. Pegram, 
    530 U.S. at 225
    . Prudential
    may therefore act in a fiduciary capacity with respect to
    certain aspects of the plan and not others.
    4
    The Trust. Prudential is not a fiduciary in its role
    as directed trustee of the Trust assets. That agreement
    specifically withholds from Prudential the sort of
    discretionary responsibilities that create fiduciary status
    under Section 1002(21)(A). See J. App’x at 22 (directing
    Prudential to “take no action except pursuant to directions
    received by it from” Ferguson); id. at 23 (Prudential “shall
    have no duty or responsibility to determine the
    appropriateness of any plan investment, or to cause such
    investments to be changed”). The employer, Ferguson,
    retains final contractual authority over any changes to the
    funds available to the Trust. See Zang v. Paychex, Inc.,
    
    728 F. Supp. 2d 261
    , 271 (W.D.N.Y. 2010) (service provider
    not a fiduciary because contract gave employer final say and
    veto over changes to fund allocation). Prudential does not
    exercise or possess discretionary authority when it makes or
    changes investments pursuant to Ferguson’s instructions.
    
    Id. at 269
    . Nor does Prudential’s legal title to Trust
    assets or its managerial ownership of them create the
    independent discretion that is the touchstone of an ERISA
    fiduciary analysis. See Beddall v. State St. Bank & Tr.
    Co., 
    137 F.3d 12
    , 18 (1st Cir. 1998) (“mere exercise of
    physical control generally ... is insufficient to confer
    fiduciary status”).
    The Separate Accounts. By contrast, Prudential
    possesses at least some discretionary authority over
    investments made in the Separate Accounts. See JA-139
    (“[Prudential] will invest and reinvest Separate Account E
    assets at its sole discretion”); 
    29 U.S.C. § 1002
    (21)(A)(iii). Prudential argues that it did not receive
    revenue-sharing payments from any Separate Account
    investments, and therefore could not have been “acting as a
    fiduciary . . . when taking the action subject to [the]
    complaint.” Pegram, 
    530 U.S. at 226
    ; see also McCaffree
    Fin. Corp. v. Principal Life Ins. Co., 
    65 F. Supp. 3d 653
    ,
    676 (S.D. Iowa 2014)(declining to find service provider a
    fiduciary despite possession of discretionary authority
    because alleged excessive fees did not arise out of
    administration of separate accounts). However, district
    court opinions in our circuit have held that the mere
    possession of the discretion to make substantive changes to
    investments within an account, even if such discretion is
    never exercised, can transform Prudential into a fiduciary
    with respect to those specific accounts. See Healthcare
    Strategies, 961 F. Supp. 2d at 397, 399-400; Haddock v.
    5
    Nationwide Fin. Servs., Inc., 
    262 F.R.D. 97
    , 122-25 (D.
    Conn. 2009); Bouboulis, 
    442 F.3d at 63-65
    .1
    In any event, the Amended Complaint fails because it
    does not allege a breach with respect to the Separate
    Accounts. In order to survive a motion to dismiss, Rosen
    must plausibly allege that Prudential engaged in conduct
    constituting a breach of an ERISA fiduciary duty while
    acting within its capacity as plan fiduciary. 
    29 U.S.C. § 1104
    (a); Gearren v. The McGraw-Hill Comp., Inc., 
    660 F.3d 605
     (2d Cir. 2011)(per curiam). “A claim has facial
    plausibility when the plaintiff pleads factual content that
    allows the court to draw a reasonable inference that the
    defendant is liable for the misconduct alleged.” Ashcroft
    v. Iqbal, 
    556 U.S. 662
    , 678 (2009) (internal citations
    omitted). Plausibility requires “more than a sheer
    possibility that a defendant has acted unlawfully,” and
    “mere conclusory statements” do not suffice. 
    Id.
    The prohibited transactions alleged in the Amended
    Complaint are the receipt of consideration in the form of
    revenue-sharing payments. Fee-sharing arrangements between
    service providers and third party managers “do not in-and-of
    -themselves create a violation” of ERISA. Skin Pathology
    Assocs., Inc. v. Morgan Stanley & Co., Inc., 
    27 F. Supp. 3d 371
    , 378 (S.D.N.Y. 2014). The Amended Complaint rehearses
    the statutory definitions of prohibited transactions and
    attaches them to allegations of unlawful revenue-sharing,
    but such “threadbare recitals of the elements of a cause of
    action, supported by mere conclusory statements, do not
    suffice.” Harris v. Mills, 
    572 F.3d 66
    , 72 (2d Cir.
    2009)(internal quotation marks omitted). Rosen does not
    allege that Prudential received payments from the Separate
    Accounts without Ferguson’s consent or knowledge, and does
    not distinguish between ordinary compensation for services
    in the form of revenue-sharing payments and illicit
    kickbacks.
    1
    We recognize that cases in other circuits cited by
    Prudential imposed additional requirements for fiduciary
    status, but we are not bound by their decisions. See
    Leimkuehler, 713 F.3d at 913; Santomenno ex rel John Hancock
    Tr. v. John Hancock Life Ins. Co., 
    768 F.3d 284
     (3d Cir.
    2014)(plaintiff must establish a “nexus” between the alleged
    basis for fiduciary responsibility and the wrongdoing
    alleged in the complaint); McCaffree Fin. Corp., 
    65 F. Supp. 3d 653
    .
    6
    Rosen’s allegations of a breach of the duties of
    prudence and loyalty fare no better under our pleading
    standard. Rosen adduces no facts to show that a prudent
    fiduciary would have acted differently in managing the
    Separate Accounts. Amgen, Inc. v. Harris, 
    136 S. Ct. 758
    ,
    759-60 (2016). He alleges that Prudential may hold a
    financial interest adverse to plan participants when it
    agrees to receive indirect payments from fund managers. But
    such an arrangement, when disclosed and agreed upon by the
    employer, is not per se improper. See Healthcare
    Strategies, 961 F. Supp. 2d at 399; Harris Trust and Sav.
    Bank v. John Hancock Mut. Life Ins. Co., 
    302 F.3d 18
    , 28-29
    (2d Cir. 2002) (a service provider who adheres to the
    agreed-upon terms of an employee retirement plan is not
    bound to deviate from those terms against its own interests
    simply because doing so could result in more gains to plan
    participants). Even assuming Prudential could have been
    paid less, an allegation that a service provider failed to
    offer a lower fee investment option does not plausibly state
    a claim for breach of the duty of prudence. Hecker v. Deere
    & Co., 
    556 F.3d 575
    , 586 (7th Cir. 2009); Tibble v. Edison
    Int’l, 
    729 F.3d 1110
    , 1135 (9th Cir. 2013).
    Lastly, the Amended Complaint does not identify any
    breaches of Prudential’s duty of loyalty. It alleges that
    Prudential did not act “for the exclusive purpose of”
    providing benefits to participants. J. App’x at 62. But
    this theory simply tweaks Rosen’s other claims to sound in
    disloyalty; to allege Prudential receives a benefit is the
    same as to suggest it maintains financial incentives
    separate from plan participants. These recycled allegations
    cannot meet our pleading standard, which demands that to
    “state a loyalty-based claim under [ERISA], a plaintiff must
    do more than simply recast purported breaches of the duty of
    prudence as disloyal acts”. Sacerdote v. NYU, No. 16-cv-
    6284 (KBF), 
    2017 WL 3701482
    , at *5 (S.D.N.Y. Aug. 25, 2017).
    Most importantly, the loyalty-based allegations that the
    revenue-sharing payments were “fraudulently and deceptively
    concealed” are contradicted by documents incorporated into
    the Amended Complaint. J. App’x at 54-55. Rosen’s protests
    that the disclosures were convoluted or unclear are not
    legally cognizable arguments. See Brown v. Owens Corning
    Inv. Review Comm., 
    622 F.3d 564
    , 571 (6th Cir. 2010)(“Actual
    knowledge does not require proof that the individual
    Plaintiffs actually saw or read the documents that disclosed
    the allegedly harmful investments”)(internal citations
    omitted).
    7
    For the foregoing reasons, and finding no merit in
    Rosen’s other arguments, we hereby AFFIRM the judgment of
    the district court.
    FOR THE COURT:
    CATHERINE O’HAGAN WOLFE, CLERK
    8