Danielle Santomenno v. John Hancock Life Insurance Co ( 2012 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 11-2520
____________
DANIELLE SANTOMENNO,
for the use and benefit of the John Hancock Trust and the
John Hancock Funds II; KAREN POLEY and BARBARA
POLEY, for the use and benefit of the John Hancock Funds
II; DANIELLE SANTOMENNO, KAREN POLEY and
BARBARA POLEY individually and on behalf of Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), employee benefit plans that held, or continue to
hold, group variable annuity contracts issued/sold by John
Hancock Life Insurance Life Insurance Company (U.S.A.),
and Participants and beneficiaries of all such ERISA covered
employee benefit plans; and DANIELLE SANTOMENNO
individually and on behalf of any person or entity that is a
party to, or has acquired rights under, an individual or group
variable annuity contract that was issued/sold by John
Hancock Life Insurance Company (U.S.A.) where the
underlying investment was a John Hancock proprietary fund
contained in the John Hancock Trust,
v.
JOHN HANCOCK LIFE INSURANCE COMPANY
(U.S.A.); JOHN HANCOCK INVESTMENT
MANAGEMENT SERVICES; JOHN HANCOCK FUNDS,
LLC; JOHN HANCOCK DISTRIBUTORS, LLC,
Danielle Santomenno, Karen Poley, Barbara Poley,
Participants
___________
On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil No. 2-10-cv-01655)
District Judge: Honorable William J. Martini
___________
Argued February 9, 2012
Before: SLOVITER and VANASKIE, Circuit Judges, and
POLLAK,* District Judge
(Opinion Filed: April 16, 2012)
Arnold C. Lakind, Esq. (ARGUED)
Robert L. Lakind, Esq.
Szaferman, Lakind, Blumstein & Blader, P.C.
101 Grovers Mill Road, Suite 200
Lawrenceville, NJ 08648
Counsel for Appellant
M. Patricia Smith, Solicitor of Labor (Did not enter an
appearance)
*
Honorable Louis H. Pollak, Senior Judge of the
United States District Court for the Eastern District of
Pennsylvania, sitting by designation.
2
Timothy D. Hauser, Associate Solicitor, Plan Benefits
Security Division (Did not enter an appearance)
Elizabeth Hopkins, Counsel for Appellate and Special
Litigation (Did not enter an appearance)
Robin S. Parry, Esq.
Nathaniel I. Spiller, Esq. (ARGUED)
U.S. Department of Labor
Office of the Solicitor, Plan Benefits Security Division
200 Constitution Ave., NW, Room N-4611
Washington, DC 20210
Counsel for Amicus Appellant
James O. Fleckner, Esq. (ARGUED)
Alison V. Douglass, Esq.
Daniel P. Condon, Esq.
Goodwin Procter LLP
Exchange Place
Boston, MA 02109
Brian J. McMahon, Esq.
Gibbons P.C.
One Gateway Center
Newark, NJ 07102
Counsel for Appellees
___________
OPINION OF THE COURT
___________
VANASKIE, Circuit Judge.
3
Danielle Santomenno, Karen Poley, and Barbara Poley
(collectively, ―Participants‖) brought suit against John
Hancock Life Insurance Company (U.S.A.) and its affiliates
(collectively, ―John Hancock‖) under the Employment
Retirement Income Security Act of 1974 (ERISA), 29 U.S.C.
§ 1001 et seq., and the Investment Company Act of 1940
(ICA), 15 U.S.C. § 80a-1 et seq., for allegedly charging their
retirement plans excessive fees on annuity insurance contracts
offered to plan participants. The District Court granted John
Hancock‘s motion to dismiss. It dismissed the ICA excessive
fee claims because only those maintaining an ownership
interest in the funds in question could sue under the derivative
suit provision enacted by Congress and the Participants are no
longer investors in the funds in question. As to the ERISA
claims, the District Court found that dismissal was warranted
because Participants failed to make a pre-suit demand upon
the plan trustees to take appropriate action and failed to join
the trustees as parties. We affirm the District Court‘s
judgment with regards to the ICA claims, but vacate and
remand on the ERISA counts.
I.
This action arises out of the administration of
employer-sponsored 401(k) benefit plans. The trustees of
these plans entered into group annuity contracts with John
Hancock. Participants brought this action on March 31, 2010.
The basis of Participants‘ complaint is that John Hancock
charged a variety of excessive fees in providing investment
services to these plans. Santomenno was a security holder in
the relevant funds from July 2008 through sometime in June
2010, K. Poley from July 2004 to sometime in January 2010,
and B. Poley from January 2009 to sometime in January
4
2010. Counts I through VII were brought under Section
502(a) of ERISA, 29 U.S.C. § 1132(a). Count VIII was
brought under Section 36(b) of the ICA, 15 U.S.C. § 80a-
35(b), and Count IX was brought under Section 47(b) of the
ICA, 15 U.S.C. § 80a-46(b).
John Hancock moved to dismiss under FED. R. CIV. P.
12(b)(6). Drawing upon the common law of trusts, the
District Court found that all of Participants‘ theories of
liability under ERISA were derivative and dismissed all seven
ERISA counts because Participants did not first make demand
upon the trustees of the plan and did not join the trustees in
the lawsuit. As the District Court explained:
In short, absent demand, or
allegations going to demand
futility, or some allegations,
which if proven, would establish
that the trustees improperly
refused to bring suit, it would
appear that the beneficiaries of an
ERISA plan cannot bring a claim
under Section 502. Likewise, any
such suit must join the plan's
trustees. Here, because there are
no such factual allegations and
because the trustees have not been
joined, dismissal of the ERISA
counts, counts I through VII,
would seem to be proper.
Santomenno ex rel. John Hancock Trust v. John Hancock Life
Ins. Co. (U.S.A.), No. 2-10-cv-01655, 2011 WL 2038769, at
5
*4 (D.N.J. May 23, 2011) (citing McMahon v. McDowell, 794
F.2d 100, 110 (3d Cir. 1986)).
The District Court dismissed Count VIII, brought
under section 36(b) of the ICA, because Participants no
longer owned any interest in John Hancock funds. The
District Court observed that ―continuous ownership
throughout the pendency of the litigation [is] an element of
statutory standing.‖ Id. at *5 (citing Siemers v. Wells Fargo
& Co., No. C 05-04518 WHA, 2007 WL 760750, *20 (N.D.
Cal. Mar. 9, 2007)). The District Court proceeded to dismiss
Count IX because, in its view, Section 47(b) of the ICA could
only provide relief to Participants if they could ―show[] a
violation of some other section of the Act.‖ Id. (quoting
Tarlov v. Paine Webber Cashfund, Inc., 559 F. Supp. 429,
438 (D. Conn. 1983)). Because Participants‘ Section 36(b)
claim had been dismissed in Count VIII, the District Court
reasoned that ―the Section 47(b) claim would seem to fail
also.‖ Id.
II.
The District Court had subject-matter jurisdiction
pursuant to Section 502(e) of ERISA, 29 U.S.C. § 1132(e),
and Section 44 of the ICA, 15 U.S.C. §80a-43. We have
appellate jurisdiction under 28 U.S.C. § 1291. Our review of
an order granting a motion to dismiss is plenary. Anspach ex
rel. Anspach v. City of Phila., Dep’t of Pub. Health, 503 F.3d
256, 260 (3d Cir. 2007). When reviewing a Rule 12(b)(6)
dismissal, we accept as true all well-pled factual allegations
in the complaint, and view them in the light most favorable to
the plaintiffs. Id.
6
A.
We begin by addressing the ICA issues. The first
question is whether continuous ownership of securities in the
fund in question during the pendency of litigation is required
for actions brought under Section 36(b) of the ICA. Section
36(b), in pertinent part, provides:
For the purposes of this
subsection, the investment adviser
of a registered investment
company shall be deemed to have
a fiduciary duty with respect to
the receipt of compensation for
services, or of payments of a
material nature, paid by such
registered investment company, or
by the security holders thereof, to
such investment adviser or any
affiliated person of such
investment adviser. An action
may be brought under this
subsection by the Commission, or
by a security holder of such
registered investment company on
behalf of such company, against
such investment adviser, or any
affiliated person of such
investment adviser, or any other
person enumerated in subsection
(a) of this section who has a
fiduciary duty concerning such
compensation or payments, for
7
breach of fiduciary duty in respect
of such compensation or
payments paid by such registered
investment company or by the
security holders thereof to such
investment adviser or person.
15 U.S.C. § 80a-35(b). A suit brought under Section 36(b) is
similar to a derivative action in that it is brought on behalf of
the investment company. Because the action is brought on
behalf of the company, ―any recovery obtained in a § 36(b)
action will go to the company rather than the plaintiff.‖ Daily
Income Fund, Inc. v. Fox, 464 U.S. 523, 535 n.11 (1984)
(citations omitted). Accordingly, ―[i]n this respect, a § 36(b)
action is undeniably ‗derivative‘ in the broad sense of that
word.‖ Id. (citations omitted).
In the context of derivative suits governed by FED. R.
CIV. P. 23.1, courts have imposed a requirement of
continuous ownership.1 This requirement:
1
FED. R. CIV. P. 23.1(a) provides:
This rule applies when one or
more shareholders or members of
a corporation or an
unincorporated association bring a
derivative action to enforce a right
that the corporation or association
may properly assert but has failed
to enforce. The derivative action
may not be maintained if it
appears that the plaintiff does not
8
[D]erives from the first sentence
of Rule 23.1, which refers to
actions ‗brought by one or more
shareholders to enforce a right of
a corporation. . . .‘ The rule's
provision that a ‗derivative action
may not be maintained if it
appears that the plaintiff does not
fairly and adequately represent the
interests of the shareholders . . .
similarly situated in enforcing the
right of the corporation . . . ,‘ has
served as an anchor for the
concept that ownership must
extend throughout the life of the
litigation.
Lewis v. Chiles, 719 F.2d 1044, 1047 n.1 (9th Cir. 1983)
(citations omitted).
Section 36(b) plainly requires that a party claiming a
breach of the fiduciary duty imposed by that legislative
provision be a security holder of the investment company at
the time the action is initiated. See, e.g., Dandorph v.
Fahnestock & Co., 462 F. Supp. 961, 965 (D. Conn. 1979).
Imposing a continuous ownership requirement throughout the
pendency of the litigation assures that the plaintiff will
fairly and adequately represent the
interests of shareholders or
members who are similarly
situated in enforcing the right of
the corporation or association.
9
adequately represent the interests of the security holders in
obtaining a recovery for the benefit of the company.
Participants assert that ―there is no basis upon which to
impose a continuing ownership requirement on an ICA §
36(b) claim.‖ (Appellant‘s Br. at 33.) (citations omitted).
Several arguments are advanced in support of Participants‘
position. First, citing two District Court decisions – In re
American Mutual Funds Fee Litigation, cv-04-05593, 2009
WL 8099820, at *1 (C.D. Cal. Jul. 14, 2009), and In re
Mutual Funds Investment Litigation, 519 F. Supp. 2d 580,
590 (D. Md. 2007) – Participants contend that FED. R. CIV. P.
23.1 does not apply to suits brought under Section 36(b).
Participants also attempt to distinguish Siemers, 2007 WL
760750, at *20, the primary case relied upon by the District
Court in dismissing the ICA section 36(b) claim. Participants
assert that ―[Siemers] is distinguishable because [that]
plaintiff did not have an interest in the investment fund when
he filed his complaint. Here, Plaintiff Danielle Santomenno
did, but the Poleys did not.‖ (Appellant‘s Br. at 35.)
Participants further offer a policy argument: ―the imposition
of a continuous-ownership requirement would effectively
deter a plaintiff, who wishes to mitigate damages by selling
his or her investment, from suing – a result at odds with the
salutary goals of the ICA.‖ (Appellant‘s Br. at 35.)
We disagree with Participants‘ contentions. First, we
note that In re Mutual Funds Investment Litigation, one of
two cases relied upon by Participants, did not concern the
continuous ownership question. Instead, the District Court in
that case addressed the contemporaneous ownership
requirement rather than the continuous ownership
requirement – the idea ―that, at the time of the alleged harm,
10
plaintiffs must have owned shares in the fund.‖ 519 F. Supp.
2d at 590 (emphasis added). There was no question in that
case that the plaintiffs continued to hold shares in one of the
mutual funds in question.2
This leaves Participants with In re American Mutual
Funds Fee Litigation, an opinion that goes against the weight
of authority on this topic,3 and is premised upon an overly
2
Notably, the District Court ruled that the plaintiffs
did not have standing to assert claims under Section 36(b) on
behalf of mutual funds in the same family of funds, i.e., funds
sharing a common investment advisor, because Section 36(b)
mandates that the plaintiff ―be a ‗security holder of‘ the entity
on whose behalf he seeks to bring suit.‖ 519 F. Supp. 2d at
589. Thus, to this extent, the District Court acknowledged the
derivative nature of a Section 36(b) claim. See also Kauffman
v. Dreyfus Fund, Inc., 434 F.2d 727, 735-36 (3d Cir. 1970) (a
shareholder of mutual funds who sues on behalf of those
funds cannot sue derivatively on behalf of other similarly
situated mutual funds because ―[s]tanding is justified only by
this proprietary interest created by the stockholder
relationship and the possible indirect benefits the nominal
plaintiff may acquire qua stockholder of the corporation
which is the real party in interest‖).
3
See, e.g., Siemers, 2007 WL 760750, at *20 (―For
Section 36(b) standing purposes, it is important that the fund
be continuously owned during the pendency of the action.‖);
In re Lord Abbett Mut. Funds Litig., 407 F. Supp. 2d 616, 633
(D.N.J. 2005) (plaintiffs cannot bring a Section 36(b) claim
―on behalf of Funds in which they have no ownership
interest‖ because such a claim is derivative, i.e., brought on
11
expansive reading of the Supreme Court‘s decision in Daily
Income Fund. The District Court in In re American Mutual
Funds Fee Litigation viewed Daily Income Fund as
dispensing with a continuous ownership standing requirement
because such a requirement was recognized in the context of
cases arising under FED. R. CIV. P. 23.1, and that rule does
not apply to Section 36(b) claims. Id. at *1. Daily Income
Fund, however, addressed only the pre-suit demand
requirement of a common derivative action to which Rule
23.1 applies, i.e., that before bringing suit a shareholder must
make demand upon the corporation‘s directors to take
appropriate action with respect to a right ―the corporation
could itself have enforced in court.‖ 464 U.S. at 529
(citations omitted). Because the right created by Section
36(b) could not be read as one belonging to the company
itself, the Court held that there was no basis for imposing a
pre-suit demand requirement. Id. at 542. Daily Income Fund
did not address the question of whether a securities holder
must maintain that status throughout the pendency of the
litigation.
Participants mistakenly assume that the root of the
continuous ownership requirement is Rule 23.1. Instead, the
prerequisite arises from the fact that Congress directed that
behalf of the Funds), partially vacated on other grounds, 463
F. Supp. 2d 505 (D.N.J. 2006); Brever v. Federated Equity
Mgmt. Co. of Pa., 233 F.R.D. 429, 431 (W.D. Pa. 2005)
(plaintiff who sold his shares after filing suit ―divested
himself of standing‖ to bring suit under Section 36(b)); In re
Franklin Mut. Funds Fee Litig., 388 F. Supp. 2d 451,468 n.13
(D.N.J. 2005) (plaintiffs may only bring a Section 36(b) claim
―against the . . . funds they owned‖).
12
only the Securities and Exchange Commission and securities
holders, acting on behalf of the investment company, could
bring an action to enforce the rights created by Section 36(b).
As the Court recognized in Daily Income Fund, any recovery
in an action brought under Section 36(b) belongs to the
investment company. 464 U.S. at 535 n.11. When a plaintiff
disposes of his or her holdings in the company, that plaintiff
no longer has a stake in the outcome of the litigation because
any recovery would inure to the benefit of existing securities
holders, not former ones. A continuous ownership
requirement gives effect to this ―undeniably ‗derivative‘‖
nature of a Section 36(b) claim. Id. Stated otherwise, a
continuous ownership requirement ―reflects a shareholder's
real interest in obtaining a recovery for the corporation which
increases the value of his holdings.‖ Chiles, 719 F.2d at 1047
(citing Lewis v. Knutson, 669 F.2d 230, 238 (5th Cir. 1983);
Schilling v. Belcher, 582 F.2d 995, 1002 (5th Cir. 1978)). As
Participants no longer own John Hancock funds, they lack
any real interest in securing a recovery.
Participants‘ policy argument – that a continuous
ownership requirement deters a plaintiff from mitigating
damages by preventing him or her from selling shares during
the pendency of litigation – is unconvincing. First, because
the recovery belongs to the company, not the security holder,
see Daily Income Fund, 464 U.S. at 535 n.11, it would not
seem appropriate to impose a duty to mitigate damages on
individual security holders. Moreover, it has long been
recognized that only those parties who would actually benefit
from a suit may continue to prosecute the action, a rationale
that we explicitly adopted in Kauffman:
13
Standing is justified only by this
proprietary interest created by the
stockholder relationship and the
possible indirect benefits the
nominal plaintiff may acquire qua
stockholder of the corporation
which is the real party in interest.
Without this relationship, there
can be no standing, ―no right in
himself to prosecute this suit.‖
434 F.2d at 735-36 (citations omitted).
Furthermore, we note that even if continuous
ownership were not a requirement of Section 36(b),
Participants‘ claim under that Section still fails. As observed
above, a plain reading of Section 36(b) indicates that
ownership when the suit is first filed is an indisputable
prerequisite. The Poleys‘ interests in the John Hancock funds
were terminated prior to the filing of the original complaint.
Therefore, they cannot be classified as ―security holder[s]‖
under Section 36(b). Santomenno, meanwhile, still owned
John Hancock funds when the case was first initiated, but no
longer had any interest in the funds when the Second
Amendment Complaint was filed on October 22, 2010. It is
the Second Amended Complaint that is the operative pleading
for standing purposes. As the Supreme Court observed in
Rockwell International Corp. v. United States, 549 U.S. 457
(2007):
The state of things and the
originally alleged state of things
are not synonymous;
14
demonstration that the original
allegations were false will defeat
jurisdiction. So also will the
withdrawal of those allegations,
unless they are replaced by others
that establish jurisdiction. Thus,
when a plaintiff files a complaint
in federal court and then
voluntarily amends the complaint,
courts look to the amended
complaint to determine
jurisdiction.
Id. at 473-74 (citations omitted). Even if we were to hold that
continuous ownership is not required by the statute,
Participants‘ Section 36(b) claim would fail because their
interests in the John Hancock funds were terminated prior to
the filing of the Second Amended Complaint. As a result,
they are not security holders entitled to bring an action on
behalf of the investment company. Accordingly, dismissal of
Participants‘ Section 36(b) claim was proper.
B.
The second ICA issue is whether Participants‘ claim
under Section 47(b) of the ICA survives a motion to dismiss.
Section 47(b), in pertinent part, provides that:
A contract that is made, or whose
performance involves, a violation
of [the ICA], or of any rule,
regulation, or order thereunder, is
unenforceable by either party . . .
15
unless a court finds that under the
circumstances enforcement would
produce a more equitable result
than nonenforcement and would
not be inconsistent with the
purposes of [the ICA].
15 U.S.C. § 80a-46(b)(1).
Participants argue that the District Court incorrectly
dismissed their Section 47(b) claim by erroneously believing
it was premised upon a breach of the fiduciary duty provision
of Section 36(b) of the ICA. Participants assert that the
Section 47(b) claim is not based upon a violation of Section
36(b), but is instead premised upon an alleged violation of
Section 26(f) of the ICA, 15 U.S.C. § 80a-26(f), which
requires that ―the fees and charges deducted under [a
registered separate account funding variable insurance
contract], in the aggregate, are reasonable in relation to the
services rendered, the expenses expected to be incurred, and
the risks assumed by the insurance company.‖ 15 U.S.C. §
80a-26(f)(2)(A). While conceding that Section 26(f) does not
establish a private cause of action, Participants contend that
―its standards are enforceable in an action brought under ICA
§ 47(b).‖ (Appellant‘s Br. at 38.)
Participants contend that because amendments made in
1980 to Section 47(b) ―substantially tracked‖ Section 215 of
the Investment Advisers Act of 1940 (IAA), 15 U.S.C. § 80b-
15, which had been ―previously construed by the Supreme
Court [in Transamerica Mortgage Advisors, Inc., v. Lewis,
444 U.S. 11, 19 (1979)] to provide a right of action,‖ Section
47(b) similarly creates a private right of action in their favor
16
to seek rescission and restitution. (Appellant‘s Reply Br. at
24.) Citing Alexander v. Sandoval, 532 U.S. 275 (2001),
Participants contend that the District Court should have read
Section 47(b) of the ICA as the Supreme Court read Section
215 of the IAA – as creating a private right of action: ―the
Court‘s reasoning . . . that similarly-worded statutes should be
similarly construed, especially when the statute at issue was
enacted after a provision is judicially construed, supports
Plaintiffs‘ position here.‖ (Appellant‘s Reply Br. at 24-25.)
Participants misread Sandoval, which made it clear
that only Congress could create private rights of action. 532
U.S. at 286 (―Like substantive federal law itself, private rights
of action to enforce federal law must be created by
Congress.‖). Congress empowered the Securities and
Exchange Commission to enforce all ICA provisions through
Section 42, see 15 U.S.C. § 80a-41, while creating an
exclusive private right of action in Section 36(b). In
Sandoval, the Court observed that ―[t]he express provision of
one method of enforcing a substantive rule suggests that
Congress intended to preclude others. . . .‖ 532 U.S. at 290
(citations omitted).
Unlike Section 36(b) of the ICA, the IAA construed in
Transamerica did not expressly provide for a private cause of
action. See 444 U.S. at 14. The Transamerica Court
observed that where the same statute contains private causes
of action in other sections (such as with the ICA),―it is highly
improbable that ‗Congress absentmindedly forgot to mention
an intended private action.‘‖ 444 U.S. at 20 (quoting Cannon
v. University of Chicago, 441 U.S. 677, 742 (1979) (Powell,
J., dissenting)). As the Court explained, ―it is an elemental
canon of statutory construction that where a statute expressly
17
provides a particular remedy or remedies, a court must be
chary of reading others into it.‖ Id. at 19. Thus, one reason
why a right of action exists in Section 215 of the IAA but not
Section 47(b) of the ICA is because ―Congress intended the
express right of action set forth in Section 36(b) [of the ICA]
to be exclusive; there was no similar exclusive, express right
of action in [the IAA].‖ Tarlov, 559 F. Supp. at 438.
Another reason not to imply the existence of a cause of
action under Section 47(b) to enforce the standards of Section
26(f) of the ICA is that Section 26(f) itself does not create
investor rights. Section 26(f) states that ―[i]t shall be
unlawful for any registered separate account funding variable
insurance contracts, or for the sponsoring insurance company
of such account, to sell any such contract . . . unless the fees
and charges deducted under the contract, in the aggregate, are
reasonable.‖ 15 U.S.C. § 80a-26(f)(2). As recognized in
Olmsted v. Pruco Life Insurance Co. of New Jersey, 283 F.3d
429 (2d Cir. 2002), this is not ―rights-creating language.‖ Id.
at 432. The focus of the section is on the insurance company,
not on the investors. This focus on the insurance companies
rather than the investors is precisely what the Supreme Court
meant in Sandoval when it observed that ―[s]tatutes that focus
on the person regulated rather than the individuals protected
create ‗no implication of an intent to confer rights on a
particular class of persons.‘‖ 532 U.S. at 289 (quoting
California v. Sierra Club, 451 U.S. 287, 294 (1981)). This
led the Second Circuit to conclude in Olmsted that ―[n]o
provision of the ICA explicitly provides for a private right of
action for violations of . . . § 26(f) . . . and so we must
presume that Congress did not intend one.‖ 283 F.3d at 432.
18
Furthermore, it is not clear that even the Transamerica
Court would have found a private right of action in Section
47(b) due to the differences in text and structure between the
ICA and the IAA. While Section 47(b) of the ICA does track
Section 215 of the IAA closely, there are important
differences between the two. While the latter states that
―[e]very contract made in violation of any provision of this
subchapter . . . shall be void,‖ 15 U.S.C. § 80b-15(b)
(emphasis added), the former stipulates that ―[a] contract that
is made, or whose performance involves, a violation of this
subchapter . . . is unenforceable.‖ 15 U.S.C. § 80a-46(b)
(emphasis added). This difference, while seemingly slight, is
significant. The Court specifically noted in Transamerica
that ―the legal consequences of voidness are typically not . . .
limited [to defensive use]. A person with the power to void a
contract ordinarily may resort to a court to have the contract
rescinded and to obtain restitution of consideration paid.‖
444 U.S. at 18 (citations omitted). The use of the term ―void‖
in § 215 prompted the Court to conclude that ―Congress . . .
intended that the customary legal incidents of voidness would
follow, including the availability of a suit for rescission or for
an injunction against continued operation of the contract, and
for restitution.‖ Id. at 19.
The use of the term ―unenforceable‖ in Section 47(b),
by way of contrast, carries no such legal implications.
Indeed, courts have held that the language of Section 47(b)
creates ―a remedy rather than a distinct cause of action or
basis of liability.‖ Stegall v. Ladner, 394 F. Supp. 2d 358,
378 (D. Mass 2005); see also Mutchka v. Harris, 373 F.
Supp. 2d 1021, 1027 (C.D. Cal. 2005).
19
In summary, neither the language nor the structure of
the ICA supports Participants‘ effort to insinuate their
excessive fees claim into Section 47(b). Such a claim is
cognizable under Section 36(b), but Participants lack standing
to sue under that provision. They cannot circumvent their
standing deficiency by resort to Section 47(b). Accordingly,
Participants‘ Section 47(b) claim was properly dismissed.
C.
We now turn to whether pre-suit demand and
mandatory joinder of trustees is required for Participants‘
claims brought under Sections 502(a)(2) and (a)(3) of ERISA.
The relevant sections state:
A civil action may be brought— .
..
(2) by the Secretary, or by a
participant, beneficiary or
fiduciary for appropriate relief
under section 1109 of this title;
(3) by a participant, beneficiary,
or fiduciary (A) to enjoin any act
or practice which violates any
provision of this subchapter or the
terms of the plan, or (B) to obtain
other appropriate equitable relief
(i) to redress such violations or
(ii) to enforce any provisions of
this subchapter or the terms of the
plan.
20
29 U.S.C. §§ 1132(a)(2), (a)(3).
The text is silent as to pre-suit demand and mandatory
joinder of trustees – in fact, no preconditions on a participant
or beneficiary‘s right to bring a civil action to remedy a
fiduciary breach are mentioned at all. This led the Supreme
Court to hold in Harris Trust & Savings Bank v. Salomon
Smith Barney, Inc., 530 U.S. 238 (2000), that Section
502(a)(3):
[A]dmits of no limit (aside from
the ―appropriate equitable relief‖
caveat) on the universe of
possible defendants. Indeed §
502(a)(3) makes no mention at all
of which parties may be proper
defendants – the focus, instead, is
on redressing the ―act or practice
which violates any provision of
[ERISA Title I].‖ Other
provisions of ERISA, by contrast,
expressly address who may be a
defendant.
Id. at 239 (quoting 29 U.S.C. § 1132(a)(3)) (citing 29 U.S.C.
§1109(a)). The text of Sections 502(a)(2) and 502(a)(3) thus
does not require joinder of trustees. Furthermore, no Court of
Appeals has found pre-suit demand a requirement for civil
actions brought under Sections 502(a)(2) or (a)(3). See, e.g.,
Katsaros v. Cody, 744 F.2d 270, 280 (2d Cir. 1984)
("[A]lthough common law may have required a prior demand
before bringing an action, Congress did not incorporate that
21
doctrine into the ERISA statute. The ERISA jurisdictional
statute, 29 U.S.C. § 1132(a)(3), contains no such condition
precedent to filing suit."); Licensed Div. Dist. No. 1
MEBA/NUM v. Defries, 943 F.2d 474, 479 (4th Cir. 1991)
(citing Katsaros for the proposition that no prior demand
requirement is incorporated into ERISA).
The District Court, relying on Diduck v. Kaszycki &
Sons Contractors, Inc., 874 F.2d 912 (2d Cir. 1989), and the
common law of trusts, held that pre-suit demand upon the
trustees and joinder of the trustees as parties were
prerequisites to Participants‘ ERISA claims. Diduck,
however, was decided under Section 502(g)(2) of ERISA, 29
U.S.C. § 1132(g)(2), not Sections 502(a)(2) and (a)(3), under
which Participants proceed. Indeed, the Second Circuit itself
has explained that its holding in Diduck is limited to claims
brought under Section 502(g)(2), which ―authorizes
fiduciaries, but no one else, to obtain unpaid contributions
pursuant to ERISA § 515, 29 U.S.C. § 1145, which requires
employers participating in multi-employer ERISA plans to
make obligatory contributions to the plans.‖ Coan v.
Kaufman, 457 F.3d 250, 258 (2d Cir. 2006). As the Second
Circuit explained:
Because section 502(g)(2) only
applies to suits by fiduciaries, it is
sensible to require plan
participants, if they may assert the
fiduciaries' right of action at all, to
follow Rule 23.1, which applies
when the appropriate plaintiff has
―failed to enforce a right which
may properly be asserted by it.‖
22
FED. R. CIV. P. 23.1. Section
502(a)(2), unlike section
502(g)(2), provides an express
right of action for participants –
presumably because the drafters
of ERISA did not think fiduciaries
could be relied upon to sue
themselves for breach of fiduciary
duty.
Id.
One reason for this lack of a demand requirement for
Section 502(a)(2) and (a)(3) claims is that the protective
purposes of ERISA would be subverted if the section
covering fiduciary breach required beneficiaries to ask
trustees to sue themselves. Accordingly, the District Court
erred in concluding that Section 502(g) claims are ―akin‖ to
Section 502(a) claims. Santomenno, 2011 WL 2038769, at
*3. ―Because plan participants are expressly authorized to
bring suit under section 502(a)(2), the situation here is not
controlled by Diduck.‖ Coan, 457 F.3d at 258.
In addition to the text, structure, and purpose of
ERISA, the legislative history of the statute also indicates that
Congress did not intend to impose obstacles such as pre-suit
demand or mandatory joinder of trustees with respect to
claims brought under Section 502(a):
The enforcement provisions have
been designed specifically to
provide both the Secretary [of
Labor] and participants and
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beneficiaries with broad remedies
for redressing or preventing
violations of the [Act] . . . . The
intent of the Committee is to
provide the full range of legal and
equitable remedies available in
both state and federal courts and
to remove jurisdictional and
procedural obstacles which in the
past appear to have hampered
effective enforcement of fiduciary
responsibilities under state law or
recovery of benefits due to
participants.
S. REP. NO. 93-127, at 3 (1973), reprinted in 1974
U.S.C.C.A.N. 4838, 4871. As we noted in Leuthner v. Blue
Cross & Blue Shield of Northeastern Pennsylvania, 454 F.3d
120 (3d Cir. 2006), ―ERISA's legislative history indicates that
Congress intended the federal courts to construe the statutory
standing requirements broadly in order to facilitate
enforcement of its remedial provisions.‖ Id. at 128.
In dismissing the ERISA counts, the District Court
relied on ―guidance from the common law of trusts.‖
Santomenno, 2011 WL 2038769 at *3. We believe this
reliance was misplaced, as the statute unambiguously allows
for beneficiaries or participants to bring suits against
fiduciaries without pre-suit demand or joinder of trustees.
The common law of trusts is not incorporated en masse into
ERISA. On the contrary, ―trust law will offer only a starting
point, after which courts must go on to ask whether, or to
what extent, the language of the statute, its structure, or its
24
purposes require departing from common-law trust
requirements.‖ Varity Corp. v. Howe, 516 U.S. 489, 497
(1996). As noted above, the language of the statute, the
legislative history, and the structure of this remedial
legislation compel the conclusion that neither a pre-suit
demand requirement nor joinder of the plan trustees is a
prerequisite to Participants‘ claims. Accordingly, the District
Court should not have dismissed Counts I through VII due to
the lack of a pre-suit demand upon the plan trustees and the
absence of the trustees as parties to this action.
III.
For the foregoing reasons, we affirm the District
Court‘s judgment on the ICA counts, but vacate the District
Court‘s dismissal of the ERISA claims and remand for further
proceedings.
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