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,
Appellants
___________
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)
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
___________
*
Honorable Louis H. Pollak, Senior Judge of the United States District Court for
the Eastern District of Pennsylvania, sitting by designation.
2
OPINION OF THE COURT
___________
VANASKIE, Circuit Judge.
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
3
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
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 *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]
4
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.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:
5
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 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 fairly and adequately represent the interests
6
[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 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
of shareholders or members who are similarly situated in
enforcing the right of the corporation or association.
7
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, 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
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‖).
8
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 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.
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 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‖).
9
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 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
10
from a suit may continue to prosecute the action, a rationale that we explicitly adopted in
Kauffman:
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; 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.
11
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 . . . 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
12
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 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
13
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 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
14
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.
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,
15
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).
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) Persons empowered to bring a civil action
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
16
(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.
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 doctrine into the ERISA statute. The ERISA
17
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.‖ 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.18
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
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.
19
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 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.
20