EFS, Inc. v. Regions Bank (McLemore) , 682 F.3d 414 ( 2012 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 12a0172p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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JOHN C. MCLEMORE, Trustee,
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Plaintiff-Appellant (10-5480),
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Nos. 10-5480/5491
EFS, INC, et al.
Plaintiffs-Appellants (10-5491), ,>
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v.
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REGIONS BANK, as Successor in Interest by
Defendant-Appellee. -
Merger to AmSouth Bank,
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Appeals from the United States District Court
for the Middle District of Tennessee at Nashville.
Nos. 08-00021; 08-01003—Aleta Arthur Trauger, District Judge.
Argued: March 1, 2012
Decided and Filed: June 8, 2012
Before: MERRITT and COOK, Circuit Judges; and COX, District Judge.*
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COUNSEL
ARGUED: Robert M. Garfinkle, GARFINKLE, MCLEMORE & YOUNG, PLLC,
Nashville, Tennessee, H. Naill Falls, Jr., FALLS & VEACH, Nashville, Tennessee, for
Appellants. John R. Wingo, FROST BROWN TODD LLC, Nashville, Tennessee, for
Appellee. Leonard H. Gerson, UNITED STATES DEPARTMENT OF LABOR,
Washington, D.C., for Amicus Curiae. ON BRIEF: Robert M. Garfinkle, Phillip G.
Young, Jr., GARFINKLE, MCLEMORE & YOUNG, PLLC, Nashville, Tennessee, H.
Naill Falls Jr., FALLS & VEACH, Nashville, Tennessee, for Appellants. John R.
Wingo, FROST BROWN TODD LLC, Nashville, Tennessee, Matthew C.
Blickensderfer, FROST BROWN TODD LLC, Cincinnati, Ohio, for Appellee. Leonard
H. Gerson, UNITED STATES DEPARTMENT OF LABOR, Washington, D.C., for
Amicus Curiae.
*
The Honorable Sean F. Cox, United States District Judge for the Eastern District of Michigan,
sitting by designation.
1
Nos. 10-5480/5491 McLemore, et al. v. Regions Bank Page 2
COOK, J., delivered the opinion of the court, in which COX, D. J., joined.
MERRITT, J. (pp. 18–21), delivered a separate dissenting opinion.
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OPINION
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COOK, Circuit Judge. These consolidated appeals stem from the misconduct of
Barry Stokes, an investment advisor who purloined millions of dollars from the
employee-benefits plans that he managed. Stokes and his company, 1Point Solutions,
LLC (“1Point”), held the fiduciary accounts of the defrauded plans—along with Stokes’s
personal accounts—with Defendant-Appellant Regions Bank (“Regions”). Plaintiffs-
Appellants John McLemore, Stokes’s bankruptcy trustee (“the Trustee”), and several
former clients of 1Point (collectively, “EFS”) allege that Regions negligently or
knowingly allowed Stokes to steal from the fiduciary accounts held at Regions. The
Trustee sued Regions under the Employee Retirement Income Security Act (“ERISA”),
and both EFS and the Trustee brought state-law claims. In 2008, the district court
dismissed the Trustee’s ERISA claims. In 2010, the district court found that ERISA
preempted both plaintiffs’ state-law claims and granted judgment on the pleadings in
favor of Regions. The Trustee appeals the district court’s 2008 dismissal of its ERISA
claims, and both parties appeal the 2010 dismissal of their state-law claims. We
AFFIRM.
I.
Plaintiffs allege the following. Stokes served as the sole owner and operator of
1Point, which managed various employee-benefits plans and 401(k) retirement plans as
a third-party administrator (“TPA”). 1Point also acted as TPA for a number of flexible-
spending accounts, health-savings accounts, dependent-care accounts, and various other
“cafeteria plans,” all of which allow employees to set aside pre-tax income for qualifying
purposes. ERISA governed the majority of the plans that 1Point serviced.
Nos. 10-5480/5491 McLemore, et al. v. Regions Bank Page 3
From the outset, Stokes operated 1Point unlike an ordinary TPA. TPAs generally
provide record-keeping services and assist in transferring money, but do not themselves
handle money or securities. Stokes, however, directed clients to send funds to accounts
at Regions that he had opened in 1Point’s name. The accounts, which Stokes and 1Point
controlled, held substantial funds: in the accounts at Regions, plaintiffs estimate that
1Point’s 401(k) Plan clients deposited over $5.7 million and 1Point’s Cafeteria Plan
clients deposited $45 million.
Regions advised Stokes and 1Point to structure their accounts in a way that
facilitated Stokes’s fraud. Initially, 1Point intended to establish accounts for each client
under the client’s tax identification number. But to circumvent burdensome “know your
customer” rules, which require banks to verify the identities of their customers, Regions
insisted that 1Point open the accounts in its own name and simply provide them titles
referencing the account’s corresponding client. In this manner, 1Point opened over 58
accounts with Regions—bearing account names such as “1Point FSA Metro Government
Account”—in which it held client funds. Because the accounts bore 1Point’s name,
Stokes—owner and operator of 1Point—was able to transfer money among and out of
the accounts, a capability that later allowed him to embezzle customer funds.
Between 2002 and 2006, Stokes stole large sums from these accounts. In
furtherance of his criminal scheme, he (1) transferred money from client accounts to his
account at Regions, (2) withdrew hundreds of thousands of dollars from the 1Point
401(k) account in the form of cashier’s checks, (3) used client accounts to fund 1Point’s
operating expenses, and (4) transferred money between customer accounts to pay
overdraft fees and conceal his theft. Stokes briefly moved the 1Point accounts to Fifth
Third Bank in 2006, but the bank soon closed the accounts for improper activity.
Regions failed to exercise the same vigilance.
For the most part, Regions behaved like an ordinary depositary bank. It
facilitated 1Point’s withdrawals and transfers, received over $50 million in deposits for
plan accounts, and held plan assets. Regions also collected fees and analysis charges
from 1Point’s accounts, totaling more than $500,000 over the course of 1Point and
Nos. 10-5480/5491 McLemore, et al. v. Regions Bank Page 4
Regions’ relationship. As a depositary bank, Regions was subject to various
regulations—including provisions of the Bank Secrecy Act, 31 U.S.C. §§ 3513 et
seq.—aimed at preventing money laundering. Among other things, these regulations
required Regions to report large currency transactions, file suspicious-activity reports,
verify the identities of those opening accounts, and maintain automated computer
monitoring of accounts.
Regions failed to comply with these regulations. In 2004, the U.S. Financial
Crimes Enforcement Network assessed a $10 million fine against Regions and its
predecessor, AmSouth Bank, for their failure (1) to report suspicious activity in a timely
manner, (2) to develop an anti-money laundering program and implement anti-money
laundering policies, and (3) to respond to circumstances in which account holders used
Regions bank accounts to further schemes involving embezzlement and fraud. Pointing
to these failures in monitoring accounts and Stokes’s unusual account activity, plaintiffs
allege that Regions “knew or should have known” about Stokes’s misconduct.
In 2006, Stokes and 1Point filed for bankruptcy protection, and plaintiffs then
discovered Stokes’s theft. In August 2007, the Trustee filed this case against Regions
in bankruptcy court on behalf of the victimized plans for which he assumed fiduciary
status on behalf of Stokes and 1Point. In February 2008, the district court withdrew the
reference of the Trustee’s case to the bankruptcy court.
The Trustee accuses Regions of failing to take action in the face of Stokes’s
obvious criminal scheme. He alleges that 1Point’s transactions “triggered red flags” that
should have apprised Regions of its duty to investigate the transactions. In his
complaint, the Trustee points to a number of irregularities that alerted Regions to
Stokes’s theft—for example, commingling customer accounts and small, “odd dollar”
withdrawals from customer accounts. Based on these irregularities, the Trustee argues,
Regions “knew or should have known” about the misuse of the funds in 1Point’s
accounts. The Trustee’s original complaint asserted ERISA claims against Regions, both
in its capacity as a fiduciary and as a nonfiduciary, as well as state-law claims based on
negligence and aiding and abetting.
Nos. 10-5480/5491 McLemore, et al. v. Regions Bank Page 5
Regions moved to dismiss these claims under Federal Rule of Civil Procedure
12(b)(6). The district court granted the motion in part, finding that only the Trustee’s
negligence claims survived Regions’ motion. The court (1) found that ERISA provided
the Trustee standing to sue on behalf of the defrauded plans, but that (2) Regions failed
to qualify as an ERISA fiduciary; (3) dismissed the nonfiduciary claims against Regions;
(4) found that ERISA preempted the Trustee’s state-law claim that Regions aided and
abetted Stokes’s and 1Point’s breach of fiduciary duty; and (5) allowed the Trustee’s
state-law negligence claim to proceed.
A month after the court’s ruling, a number of 1Point’s former clients, including
EFS, Inc., brought suit against Regions. EFS’s factual allegations mirrored the
Trustee’s, and the district court consolidated the two lawsuits into one action. After the
consolidation, both EFS and the Trustee amended their complaints to include
recklessness, unjust enrichment, and violation of the Tennessee Consumer Protection
Act (“TCPA”). In addition, EFS brought several aiding-and-abetting claims.
Following plaintiffs’ amendments, Regions moved to dismiss the claims under
Federal Rule of Civil Procedure 12(c). The district court granted the motion, finding that
ERISA preempted the Trustee’s remaining state-law claims against Regions. For the
same reason, the court dismissed all of EFS’s claims against Regions, except several
brought by plaintiffs suing on behalf of non-ERISA plans.
II.
On appeal, the Trustee challenges the district court’s 2008 dismissal of its ERISA
claims under Federal Rule of Civil Procedure 12(b)(6); and both parties challenge the
district court’s 2010 grant of Regions’ motion for judgment on the pleadings dismissing
their state-law claims under Federal Rule of Civil Procedure 12(c). We address these
decisions in turn.
Nos. 10-5480/5491 McLemore, et al. v. Regions Bank Page 6
A. Whether the District Court Properly Dismissed the Trustee’s ERISA Claims
The Trustee first challenges the district court’s 2008 dismissal of his ERISA
claims, arguing that the court erred in holding that Regions fails to qualify as an ERISA
fiduciary. Regions agrees with the court’s conclusion on this point and offers an
alternate ground for affirming the court’s judgment: the Trustee lacked standing to
pursue claims on behalf of the defrauded plans. We review a dismissal under 12(b)(6)
de novo, construing the Trustee’s complaint in the light most favorable to him and
accepting the complaint’s factual allegations as true. See Carrier Corp. v. Outokumpu
Oyj, 673 F.3d 430, 444 (6th Cir. 2012).
1. Standing
We begin with the question whether the Trustee has standing to sue on behalf of
the defrauded plans. Regions contends that he does not, because the Trustee never
served as a fiduciary to the plan beneficiaries and because the doctrines of in pari delicto
and unclean hands bar suit. We reject both arguments, and find that the Trustee enjoys
standing to pursue his ERISA claims against Regions.
Citing In re Cannon, 277 F.3d 838 (6th Cir. 2002), Regions argues that the
Trustee cannot recover funds for the benefit of plan participants. The general rule is that
a bankruptcy trustee can bring any suit that the debtor could have pursued. Cannon
carves out an exception to this rule, however, holding that a bankruptcy trustee lacks
standing to bring a cause of action that does not belong to the debtor’s estate. See id. at
856; cf. Begier v. IRS, 496 U.S. 53, 59 (1990) (“[B]ecause the debtor does not own an
equitable interest in property he holds in trust for another, that interest is not ‘property
of the estate.’” (quoting 11 U.S.C. § 541(d))). Likewise, Regions submits, the Trustee
lacks standing to bring ERISA claims on behalf of the plans because the damages sought
would benefit only the ERISA beneficiaries—not 1Point’s estate. See 29 U.S.C.
§ 1109(a) (“Any person who is a fiduciary with respect to a plan who breaches any of
the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter
shall be personally liable to make good to such plan . . . .” (emphasis added)).
Nos. 10-5480/5491 McLemore, et al. v. Regions Bank Page 7
But this argument ignores the unique role of a trustee acting as an ERISA
fiduciary. The Trustee brings this suit in his role as an ERISA fiduciary, rather than his
role as a trustee to the debtor’s estate. This distinguishes the Trustee’s situation from
that of the bankruptcy trustee in Cannon. In Cannon, the assets that the debtor held in
trust did not form part of the debtor’s estate; for that reason, Cannon’s bankruptcy
trustee lacked statutory authority to pursue claims that benefitted the trust beneficiaries.
By contrast, the Trustee, acting as an ERISA fiduciary, holds such statutory
authority—not because the ERISA plans represent part of the debtor’s estate (they do
not, because the plan assets are held in trust), but because, by virtue of the Trustee’s
control over ERISA-plan funds, ERISA confers the Trustee with additional duties and
powers. See 29 U.S.C. § 1002(21)(A) (“[A] person is a fiduciary with respect to a plan
to the extent . . . he exercises . . . any authority or control respecting management or
disposition of its assets . . . .”). ERISA not only permits—but requires—a fiduciary to
remedy the known wrongs of a cofiduciary. See 29 U.S.C. § 1105(a)(3) (imposing
liability on fiduciaries for failure to exercise reasonable efforts to remedy known
breaches of other fiduciaries); id. § 1132(a)(2) (permitting fiduciaries to bring a civil
action under ERISA).
The Trustee’s complaint easily establishes his ERISA-fiduciary status. Under
ERISA, “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
exercises any authority or control respecting management or disposition of its assets.”
29 U.S.C. § 1002(21)(A)(i) (emphases added). Regions does not dispute that 1Point
served as a TPA for the plans at issue, or that Stokes and 1Point, as plan administrators,
wielded control of the plan assets deposited with Regions. Further, the Trustee pleads
that he acts as “successor fiduciary” for each of the ERISA plans for which 1Point or
Stokes acted as fiduciaries; that he exercises discretionary control over assets belonging
to the ERISA plans; that as fiduciary he must “make reasonable efforts” to remedy
known breaches of other fiduciaries; and that he brings the claim under 29 U.S.C.
§ 1132(a)(2), a provision that permits “a participant, beneficiary or fiduciary” to bring
Nos. 10-5480/5491 McLemore, et al. v. Regions Bank Page 8
a civil action for ERISA violations. Accepting these allegations, the Trustee falls within
ERISA’s definition of “fiduciary.” See 29 U.S.C. § 1002(21)(A).
The fact that the Trustee no longer controls the stolen assets does not disturb this
conclusion. Seizing on 29 U.S.C. § 1002(21)(A), Regions contends that even if the
Trustee served as an ERISA fiduciary, he occupied fiduciary status only “to the extent”
that he exercised control over plan assets. Regions argues that the Trustee cannot
control the funds that 1Point misappropriated, and concludes on that basis that the
Trustee fails to qualify as a fiduciary with respect to those funds. At bottom, this
argument amounts to a claim that the victim of a theft has no right to his stolen property
because he no longer possesses the property. We reject that conclusion, and find that the
Trustee remains a fiduciary with respect to the victimized plans because he has
sufficiently pleaded his authority to manage or dispose of all assets belonging to the
plans, notwithstanding his lack of control over the particular funds that Stokes stole from
plan accounts.
Regions’ remaining two arguments fare no better. First, Regions contends that
the district court, rather than the Trustee, controls the ERISA plans’ assets—a fact that
the Trustee disputes. Because we accept the Trustee’s factual allegations as true, this
argument fails. See Carrier Corp., 673 F.3d at 444.
Second, Regions faults the Trustee for failing to specify which plans deposited
their funds at Regions. But at this stage, the Trustee’s pleadings need only “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 (2009) (internal quotation and citation
omitted). For the purposes of pleading standing, we find it sufficient that the Trustee
describes the allegedly victimized plans, avers that he acts as successor fiduciary “for
each of the plans,” and explains the legal basis for his fiduciary relationship:
“exercis[ing] discretionary control over assets of plans subject to ERISA.”
Nos. 10-5480/5491 McLemore, et al. v. Regions Bank Page 9
2. Whether the Doctrines of In Pari Delicto and Unclean Hands Bar the Trustee’s
Claims
Regions further argues that the equitable doctrines of in pari delicto and unclean
hands—two doctrines that prevent culpable plaintiffs from bringing suit—bar the
Trustee’s claims. See, e.g., Pinter v. Dahl, 486 U.S. 622, 632 (1988). These defenses
may have barred the claims of Stokes and 1Point, had those two brought the claims
themselves. Because the Trustee steps into the shoes of Stokes and 1Point, Regions
argues, the doctrines should bar his claims as well.
Again, Regions misunderstands the Trustee’s role. The Trustee sues as an
ERISA fiduciary representing the plans’ interests, rather than as a bankruptcy trustee
suing to enlarge the debtor’s estate. Any funds that the Trustee recovers as an ERISA
fiduciary inure to the ERISA plans’ benefit, rather than to the benefit of the estate’s
creditors. For the purposes of the Trustee’s ERISA claim, therefore, he “steps into the
shoes” of the plans, rather than those of the criminal debtors. Though the doctrines may
bar suit where a bankruptcy trustee seeks to enlarge the estate of a wrongdoing debtor,
this case presents a different scenario: the Trustee’s claims exist between the victims of
the wrongdoing the plans and an alleged wrongdoer (Regions).
A review of the equitable purposes behind these defenses bolsters our conclusion
that they do not apply. As to equitable doctrines, courts limit the application of in pari
delicto and unclean hands to the equitable purposes that they serve. See Bateman
Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306-07 (1985). As the Bateman
Eichler Court observed, the common-law doctrine of in pari delicto serves the dual
purposes of (1) preventing courts from wasting their resources “mediating disputes
among wrongdoers” and (2) “deterring illegality.” 472 U.S. at 306.
Applying the doctrine here serves neither purpose. First, all concede that the
ERISA plans are innocent of any wrongdoing. Second, any recovery would benefit only
the defrauded plans, such that barring the claims serves no deterring function. See
29 U.S.C. § 1104(a)(1) (requiring an ERISA fiduciary to discharge duties “with respect
to a plan” for the exclusive purpose of providing benefits to plan participants and
Nos. 10-5480/5491 McLemore, et al. v. Regions Bank Page 10
beneficiaries). Third, because the Trustee brings the ERISA claim in his capacity as an
ERISA fiduciary, rather than as a bankruptcy trustee, he shares no blame for the debtor’s
wrongdoings unless he fails to “make[] reasonable efforts under the circumstances to
remedy” any known breaches of duty. See 29 U.S.C. § 1105(a)(3); see also id. § 1109(b)
(“No fiduciary shall be liable with respect to a breach of fiduciary duty under this
subchapter if such breach was committed before he became a fiduciary or after he ceased
to be a fiduciary.”). Accordingly, we find that the Trustee has standing to bring an
ERISA claim on behalf of the plans described in his complaint.
3. Whether Regions Bank Qualifies as an ERISA Fiduciary
Next, the Trustee challenges the district court’s conclusion that Regions did not
serve as a fiduciary to the victim plans. This question stands paramount, because ERISA
permits a plaintiff to obtain equitable relief and recover damages from fiduciaries who
breach their duties. See 29 U.S.C. §§ 1109, 1132(a)(2). Against nonfiduciaries,
however, only “appropriate equitable relief” is available. See 29 U.S.C. § 1132(a)(3).
Because, as the district court found, the Trustee seeks only damages, the fate of his
ERISA claims turns on whether Regions qualifies as a fiduciary.
We review a district court’s determination regarding ERISA-fiduciary status de
novo. Hamilton v. Carell, 243 F.3d 992, 997 (6th Cir. 2001); Briscoe v. Fine, 444 F.3d
478, 486 (6th Cir. 2006). Where the parties do not dispute the underlying facts, “a
party’s status as an ERISA fiduciary is purely a question of law.” Hamilton, 243 F.3d
at 997. Discerning no factual dispute, we reject the Trustee’s claim that the district
court’s ruling was premature.
We begin with ERISA’s description of those who qualify as fiduciaries:
[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 exercises any authority or control respecting
management or disposition of its assets . . . .
29 U.S.C. § 1002(21)(A). In the Trustee’s view, Regions qualified as a fiduciary by
exerting “authority or control respecting management of [plan] assets.” Id.Nos. 10-5480/5491 McLemore, et al. v. Regions Bank Page 11
Attempting to demonstrate Regions’ fiduciary status, the Trustee marshals a
number of allegations from his complaint purportedly describing Regions’ “authority or
control” over the ERISA-plan accounts. The allegations fall into five categories: that
Regions (1) knew that 1Point’s accounts held plan assets; (2) should have recognized
that 1Point managed these accounts differently than typical third-party administrators
of employee-benefits plans; (3) failed to comply with banking regulations that would
have uncovered Stokes’s scheme; (4) advised 1Point to structure its accounts in a way
that circumvented “know your customer” rules; and (5) withdrew over $500,000 in “fees
and analysis charges” from the plan funds.
The first three allegations miss the mark. Section 1002(21)(A)(i) directs us to
focus on the extent of Regions’ control over plan assets, rather than on what Regions
knew or should have known. And though the Trustee claims that Regions “exercised
authority or control over the management or disposition of funds in its custody,” the
factual allegations of his complaint fail to support that conclusion. In general, the
complaint alleges that Regions maintained accounts for 1Point, received deposits to
those accounts, and permitted Stokes and 1Point to transfer and withdraw money from
these accounts. Stokes and 1Point maintained the accounts and directed all account
activity. Regions merely held the funds on deposit. Custody of plan assets alone cannot
establish control sufficient to confer fiduciary status. See, e.g., Briscoe, 444 F.3d at 494(“Our reading of ERISA’s statutory definition will not extend fiduciary status to every
person who exercises mere possession, or custody over the plans’ assets.” (internal
quotation marks and citation omitted)); Chao v. Day, 436 F.3d 234, 237 (D.C. Cir.
2006).
The same goes for Regions’ advising 1Point and Stokes as to how it ought to
structure the banking aspects of its business. As with mere custody, advising on account
structuring offers no foothold for labeling Regions a fiduciary. All control of the
accounts remained with 1Point and Stokes.
That leaves the proposition that Regions’ withdrawal of about a half million
dollars in fees from 1Point plan accounts demonstrates control over plan assets. For
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support, the Trustee points to our decisions in Briscoe and Smith v. Provident Bank,
170 F.3d 609 (6th Cir. 1999), cases where we found ERISA-fiduciary status applicable
to a plan custodian exerting unilateral control over plan assets. In Briscoe, the TPA of
a company’s healthcare plan canceled its contract after financial difficulties rendered the
company unable to support the plan. 444 F.3d at 484. Upon terminating its relationship
with the company, the TPA wrote a check remitting the balance of the funds in the plan’s
account to the company—but retained for itself an “administrative fee” of several
thousand dollars. Id. at 484, 490. The court held that the “unilateral disposition of funds
held in an account over which it exerted control ma[de] [the TPA] a fiduciary to the
extent that it exercised such control upon the termination of its relationship.” Id. at
490; see also Briscoe v. Preferred Health Plan, Inc., 578 F.3d 481, 485-87 (6th Cir.
2009) (limiting the defendant’s liability in Briscoe to funds over which it exercised
control after terminating its agreement with the plaintiff). Similarly, in Smith a bank
transferred stock from the account of an ERISA plan without authorization after the
plaintiff removed the bank as trustee. 170 F.3d at 612-13.
Neither case supports the Trustee’s position here because both address the
control of plan assets after termination of the contractual relationship with the plans.
Here, the Trustee alleges only that “[Regions] regularly withdrew its fees and analysis
charges from the trust funds it held.” Nothing suggests that Regions did anything other
than collect contractually owed fees. Unlike the Briscoe plaintiff, the Trustee does not
allege that Regions unilaterally exercised any power to pay itself fees. Elsewhere in his
complaint, the Trustee challenges the amount of the fees as “unreasonable” and argues
that the fees constitute unjust enrichment because Regions received them as
compensation for its complicity in Stokes’s fraud. Neither contention undermines the
conclusion that Regions collected only routine fees authorized by its depositary
agreement with 1Point.
The Trustee fails to proffer—nor have we found—any case extending fiduciary
status to a bank under these circumstances. Construing the allegations in the light most
favorable to the Trustee, Regions’ withdrawal of routine contractual fees constitutes no
Nos. 10-5480/5491 McLemore, et al. v. Regions Bank Page 13
more an exercise of control than any other account holder’s request effectuated by a
depositary bank. Such transactions amount to “control respecting management or
disposition of [plan] assets,” 29 U.S.C. § 1002(21)(A), in only the hollowest sense of
“control.” See Pipefitters Local 636 v. Blue Cross & Blue Shield of Mich., 213 F. App’x
473, 477 (6th Cir. 2007) (holding that in order to overcome a motion to dismiss, a
plaintiff must allege that the defendant “exercised any authority or control over plan
assets, and that it performed more than a mere ministerial or contractually compelled
function in assessing [a] subsidy fee”); Seaway Food Town, Inc. v. Medical Mut. of
Ohio, 347 F.3d 610, 619 (6th Cir. 2003). We reject the Trustee’s argument that Regions’
collection of fees rendered it subject to liability as an ERISA fiduciary.
B. Whether the District Court Properly Dismissed Plaintiffs’ State-Law Claims
Both the Trustee and EFS appeal the district court’s dismissal of their state-law
claims against Regions, which alleged (1) negligence and recklessness, (2) unjust
enrichment, and (3) violation of Tennessee’s Consumer Protection Act.
These claims rest on a common set of allegations. Both plaintiffs allege that
Regions violated a “duty to monitor the accounts of 1Point.” They also accuse Regions
of violating its duty of reasonable care by failing to comply with various banking
regulations, arguing that proper compliance with these regulations would have
uncovered Stokes’s fraud.
Plaintiffs also accuse Regions of acting with greater culpability than mere
negligence. Both EFS and the Trustee allege that Regions knew that Stokes withdrew
money from fiduciary accounts for his personal benefit and nevertheless permitted the
illegal withdrawals. EFS’s complaint goes even further, alleging that Regions
“knowingly assisted 1Point Solutions in retaining clients it was defrauding.”
In dismissing plaintiffs’ state-law claims, the district court found that
Tennessee’s Uniform Fiduciaries Act (“UFA”) limited plaintiffs’ claims to allegations
of knowing or bad-faith conduct and that ERISA preempted any allegation that survived
the UFA’s bar. On appeal, plaintiffs challenge only the court’s conclusion regarding
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ERISA preemption. We review de novo a district court’s grant of judgment on the
pleadings under Rule 12(c), as well as a court’s conclusion that a federal statute
preempts a state-law claim. See Penny/Ohlmann/Nieman, Inc. v. Miami Valley Pension
Corp. (PONI), 399 F.3d 692, 697 (6th Cir. 2005); Nester v. Allegiance Healthcare Corp.,
315 F.3d 610, 613 (6th Cir. 2003).
The UFA shields depositary banks from liability arising from the actions of a
fiduciary depositor, unless the bank acts with “actual knowledge” of a breach or
“knowledge of such facts that its action . . . amounts to bad faith.” Tenn. Code Ann.
§§ 35-2-107, -109; see C-Wood Lumber Co. v. Wayne Cnty. Bank, 233 S.W.3d 263, 274
(Tenn. Ct. App. 2007). A claim that Regions acted in “bad faith,” then, turns on
showing that it knew facts strongly suggesting that 1Point and Stokes breached their
fiduciary duties. See C-Wood Lumber, 233 S.W.3d at 284 (construing “bad faith” to
mean “acting dishonestly”). After finding that the UFA displaced plaintiffs’ negligence
claims, the district court held that only plaintiffs’ allegations of “knowing” or “bad faith”
conduct survived. Plaintiffs do not quarrel with this conclusion.
What survives the UFA, ERISA preempts. Because ERISA provides a remedy
against nonfiduciaries who knowingly participate in a fiduciary’s violation of ERISA,
see 29 U.S.C. § 1132(a)(3), the district court found that ERISA preempted any
allegations of “knowing” or “bad faith” conduct that escaped the UFA’s bar. We agree.
ERISA preempts “any and all State laws insofar as they may now or hereafter
relate to any employee benefit plan” governed by ERISA. 29 U.S.C § 1144(a). “Both
the Supreme Court and this court have emphasized the broad scope of ERISA’s
‘expansive pre-emption provision[ ].’” Briscoe, 444 F.3d at 497 (alteration in original)
(quoting Aetna Health, Inc. v. Davila, 542 U.S. 200, 208 (2004)); see also Cromwell v.
Equicor-Equitable HCA Corp., 944 F.2d 1272, 1276 (6th Cir. 1991) (noting “that
virtually all state law claims relating to an employee benefit plan are preempted by
ERISA”).
To guide courts in determining whether a claim “relates to” a benefit plan, the
Sixth Circuit has identified three classes of state-law claims subject to ERISA
Nos. 10-5480/5491 McLemore, et al. v. Regions Bank Page 15
preemption: claims based on “state laws that (1) mandate employee benefit structures
or their administration; (2) provide alternative enforcement mechanisms; or (3) bind
employers or plan administrators to particular choices or preclude uniform
administrative practice, thereby functioning as a regulation of an ERISA plan itself.”
Briscoe, 444 F.3d at 497 (quoting PONI, 399 F.3d at 698). Plaintiffs’ state-law claims
fall within the second category.
Again, Briscoe guides our reasoning. In Briscoe, the court held that ERISA
preempted state-law claims of fraud, misrepresentation, and concealment based on a
nonfiduciary defendant’s alleged failure to disclose a healthcare plan’s financial
condition. 444 F.3d at 498. The court reasoned that “[a]ny duty to disclose the financial
condition of the plan that [the defendants] might have owed to the plan beneficiaries
arose not out of an independent source of law, but out of the existence and nature of the
plan itself.” Id. at 499. Accordingly, the court determined that the claims served as an
“alternative enforcement mechanism” and concluded that ERISA preempted the claims.
Id. at 500 (quoting PONI, 399 F.3d at 698).
ERISA forecloses plaintiffs’ state-law claims for the same reason. As the
defendant’s liability did in Briscoe, Regions’ liability turns on the existence of the plans
and the substance of ERISA. Key to our conclusion is the district court’s unchallenged
determination that the UFA bars plaintiffs’ claims to the extent that they rest on mere
negligence. What remains of plaintiffs’ claims are allegations that Regions (1) acted
with knowledge of Stokes’s and 1Point’s breach of fiduciary duty or (2) acted in bad
faith because it knew facts obviously suggestive of their breach. Proving these
allegations depends on a showing that Stokes and 1Point breached their fiduciary duty
and requires an examination of Regions’ knowledge of the breach. Like the claims in
Briscoe, these claims do not arise from an independent legal duty; rather, they derive
from the ERISA violations committed by Stokes and 1Point. By seeking to impose
liability on Regions for knowingly permitting Stokes and 1Point to breach their fiduciary
duties, plaintiffs’ state-law claims seek an “alternative enforcement mechanism” for the
legal duties imposed under ERISA.
Nos. 10-5480/5491 McLemore, et al. v. Regions Bank Page 16
In the absence of the UFA, we may have reached a different conclusion. ERISA
does not preempt garden-variety claims against nonfiduciaries providing professional
services to an ERISA plan based on breaches of professional responsibility. See, e.g.,
PONI, 399 F.3d at 703 (holding that a negligent misrepresentation claim against a “non-
fiduciary service provider” does not implicate ERISA, as it does not require a court to
evaluate whether the service provider violated the terms of an ERISA-governed plan).
But the UFA bars plaintiffs’ claims to the extent they rest on mere negligence, and the
remaining allegations stem from Stokes’s and 1Point’s ERISA-imposed duties, and not
from a legal duty independent of ERISA.
That ERISA provides its own, limited remedy against Regions for its alleged
conduct buttresses this conclusion. Under ERISA, a plan “participant, beneficiary, or
fiduciary” may seek an injunction against a nonfiduciary who knowingly participates in
a fiduciary’s violation of ERISA. See 29 U.S.C. § 1132(a)(3) (authorizing civil actions
for “appropriate equitable relief” to redress violations of ERISA Title I); Harris Trust
& Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 245 (2000) (holding that
§ 1132(a)(3) authorizes suits against nonfiduciaries). There is nevertheless powerful
incentive to recast a potential ERISA claim against a nonfiduciary as a state-law claim,
because ERISA holds only fiduciaries personally liable.
Plaintiffs’ unjust-enrichment claims exemplify such recasting. Previously, the
Trustee sought disgorgement of the bank fees—an equitable remedy—from Regions
under ERISA’s civil enforcement provision. See 29 U.S.C. § 1132(a)(3). The district
court dismissed the claim, finding that there were no “specifically identifiable” funds in
Regions’ possession, and that equitable relief was therefore unavailable. The claim then
reappeared in the Trustee’s amended complaints, transmogrified into a state-law claim
for unjust enrichment. Peering through the state-law disguise, the district court rejected
the claim as a “reframing of the previously dismissed ERISA claim.”
Against nonfiduciaries, ERISA confines plaintiffs to equitable relief. See
29 U.S.C. § 1132(a)(3). By styling their ERISA claim as a state-law claim, the plaintiffs
seek to hold Regions—a nonfiduciary—personally liable. The Supreme Court has
Nos. 10-5480/5491 McLemore, et al. v. Regions Bank Page 17
rejected such attempts to supplement the remedies available under ERISA: “[A]ny state-
law cause of action that duplicates, supplements or supplants the ERISA civil
enforcement remedy conflicts with the clear congressional intent to make the ERISA
remedy exclusive and is therefore pre-empted.” Aetna, 542 U.S. at 209.
Plaintiffs complain that this ruling leaves them without a remedy against
Regions. This might be true, but “the availability of a remedy under ERISA is not
relevant to the preemption analysis.” David P. Coldesina, D.D.S., P.C. v. Estate of
Simper, 407 F.3d 1126, 1139 (10th Cir. 2005). “As the Supreme Court recently
reiterated, ERISA’s remedial scheme evidences Congress’s policy choices and intent to
provide only the remedies it specified, and this court is not in a position to second-guess
Congress simply because the facts of a particular case might be sympathetic.” Id. (citing
Aetna, 542 U.S. at 209).
Because plaintiffs seek damages, there is simply no space between the UFA’s bar
and ERISA’s preemptive force through which their state-law claims can pass. To the
extent that plaintiffs’ claims stem from Regions’ negligence, the UFA bars them; to the
extent they arise from Regions’ knowledge of or bad-faith acquiescence in Stokes’
scheme, ERISA preempts them.
III.
For the above reasons, we AFFIRM the district court’s judgments.
Nos. 10-5480/5491 McLemore, et al. v. Regions Bank Page 18
____________
DISSENT
____________
MERRITT, Circuit Judge, dissenting. The law on ERISA preemption is in a state
of disarray, to say the least. See, e.g., New York State Conference of Blue Cross & Blue
Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 655 (1995) (“prior attempt to construe
the phrase ‘relate to’ does not give us much help drawing the line”); California Div. of
Labor Standards Enforcement v. Dillingham, 519 U.S. 316, 335 (1997) (Scalia
concurring) (“applying the ‘relate to’ provision according to its terms was a project
doomed to failure . . . everything is related to everything else”); AETNA Health, Inc., v.
Davila, 542 U.S. 200, 222 (2004) (Ginsburg concurring) (“I join the rising judicial
chorus urging that Congress and [this] Court revisit what is an unjust and increasingly
tangled ERISA regime”); Langbein, “What ERISA Means By ‘Equitable,’” 103 Colum.
L. Rev. 1317 (2003). I find no similar cases preempting banking laws protecting from
loss the deposits of customers, including ERISA customers, or regulating bank fees
charged to such customers. To the contrary, the Ninth Circuit concluded that Arizona
common law was not preempted in an action against Citibank “as a service provider
offering nonfiduciary custodial services” to ERISA participants. Arizona State
Carpenters’ Pension Trust Fund v. Citibank, 125 F.3d 715, 723 (9th Cir. 1997).
The ERISA clause on preemption barring remedies that “relate to any employee
benefit plan” is so broad and so lacking in specific meaning and application that we act
basically as a common law court in creating its meaning in individual cases. Therefore,
we should state the policies we are implementing and the congressional purpose behind
the statute that we are trying to serve. The policy on preemption found in many ERISA
cases emphasizes “the normal presumption against preemption” when we are dealing
with state “laws of general application,” De Buono v. NYSA-ILA Medical and Clinical
Services Fund, 520 U.S. 806, 811-14 (1997). Here we are dealing with common law
principles, equitable unjust enrichment principles, and a Tennessee statute of general
application.
Nos. 10-5480/5491 McLemore, et al. v. Regions Bank Page 19
The primary purpose of ERISA is to protect the individual who has a pension or
health plan from certain kinds of losses, i.e., “to increase the likelihood that participants
. . . will receive their full benefits.” 29 U.S.C. § 1001b(c). It is not to protect a
depository bank from general state laws concerning malfeasance in connection with the
bank’s handling of the bank accounts of participants. In this case, we have no idea
whether the bank is liable for misfeasance under state law. The case against the bank
has not been tried or the facts proved or the state law analyzed and applied. I dissent
because our court is using a doctrine of ERISA preemption not to protect the ERISA
participants but to shield the bank from any investigation of the claims against it. The
court has given the bank an immunity from general state law liability no matter what its
conduct, as though the bank has the status of a sovereign. Banks are important
institutions for our society and perform many valuable services, but they are not
sovereign and not entitled to be exempt from general laws.
Having found that Regions, acting only as a depository bank holding cash
deposits, does not meet the definition of an ERISA “fiduciary” under 29 U.S.C.
§ 1002(21)(A) — a decision with which I agree — the court then bars all state law
claims and appears to leave the plan participants without any legal remedy whatever,
common law or otherwise, when a depository bank causes a loss of ERISA participants’
deposits through reckless or willfully blind conduct or unjust enrichment.
The dismissals in both the Trustee’s and the participants’ cases were on the
pleadings under Fed. R. Civ. P. § 12(c) and based on the “doctrine of ERISA
preemption.” It may be that Regions is not liable for any misfeasance, but we should not
decide the case preemptively without even looking at the facts and law regarding the
bank’s possession and disposition of the participants’ deposits. We have bankruptcy and
supplementary jurisdiction of the Trustee’s claims, and diversity jurisdiction of the
investors’ claims, and therefore the normal duty to enforce state law.
Our court’s idea that state law remedies fail because they add or provide only “an
alternative enforcement mechanism” is strange, indeed, when the federal ERISA law
provides no “enforcement mechanism” whatever for damages against the misfeasance
Nos. 10-5480/5491 McLemore, et al. v. Regions Bank Page 20
of a depository bank that is not a fiduciary. There is nothing, no ERISA cause of action
for damages for the state claims to be “alternative” to. There is no ERISA purpose or
policy served by withdrawing the protection of state laws of general application. What
is the possible harm caused by the enforcement of state laws providing damages if a
bank recklessly allows its depositors’ money to be embezzled by a fiduciary?
Plaintiff’s unjust enrichment claim serves as a good example of the confusion
engendered by the preemption defense. We do not know whether the bank withdrew
$500,000 from the plaintiffs’ accounts properly or in cahoots with Stokes or in willful
blindness to his conduct. Should the bank have to restore some or all of the money
removed by the bank from the participants’ accounts? The general common law of
unjust enrichment goes back three centuries to the Chancery Court in 17th Century
England. The principles underlying unjust enrichment do not interfere with ERISA.
Tennessee ostensibly still goes by the old law of unjust enrichment explained by Lord
Mansfield in Moses v. MacFerlan, 2 Burr. 1005, 1012, 97 Eng. Rep. 676, 681 (K.B.
1760): “In one word, the gist of this kind of action is, that the defendant, upon the
circumstances of the case, is obliged by the ties of natural justice and equity to refund
the money.” I have no idea whether plaintiffs are entitled to restitution of the fees, or
some part of them, charged by the bank against their accounts because the record does
not reflect specifically what the facts are, nor has the Tennessee law as it applies in this
case been analyzed. But the bank is not entitled to prevail under the doctrine of ERISA
preemption without any analysis of Tennessee’s law of unjust enrichment. The fact that
§§ 1132(a) and (c) allows the Secretary of Labor to seek an injunction against violations
of a provision of ERISA should not preempt or displace the law of unjust enrichment
requiring a wrongdoer to restore benefits wrongfully obtained. If the defendant is
enriched as a result of a “known risk that the conduct in question violates” plaintiff’s
rights, the plaintiff may pursue an accounting. See RESTATEMENT (THIRD) OF
RESTITUTION § 51 (2011).
To foreclose unjust enrichment would leave those whom Congress intended to
protect worse off than before ERISA was enacted. ERISA does not require abrogation
Nos. 10-5480/5491 McLemore, et al. v. Regions Bank Page 21
of the law of unjust enrichment under these circumstances, and I would not adopt a
construction of preemption that perversely deprives the participants of rights they
previously possessed and that Congress intended to further protect when it federalized
the administration of pension and employee benefit plans in ERISA.