Alexander Acosta v. City National Corporation , 922 F.3d 880 ( 2019 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
ALEXANDER ACOSTA, Secretary of No. 17-55421
Labor, United States Department of
Labor, D.C. No.
Plaintiff-Appellee, 2:15-cv-03084-
TJH-JC
v.
CITY NATIONAL CORPORATION; CITY OPINION
NATIONAL BANK; CITY NATIONAL
SECURITIES, INC.; MARIANNE
LAMUTT; CHRISTOPHER CAREY;
MICHAEL B. CAHILL; MICHAEL
NUNNELEE; RICHARD BYRD;
VERNON KOZLEN; KATE DWYER;
CITY NATIONAL CORPORATION
PROFIT SHARING PLAN,
Defendants-Appellants.
Appeal from the United States District Court
for the Central District of California
Terry Hatter, District Judge, Presiding
Argued and Submitted January 11, 2019
Pasadena, California
Filed April 23, 2019
2 ACOSTA V. CITY NAT’L CORP.
Before: A. Wallace Tashima and Paul J. Watford, Circuit
Judges, and Eduardo C. Robreno, * District Judge.
Opinion by Judge Robreno
SUMMARY **
Employee Retirement Income Security Act
The panel (1) affirmed the district court’s order granting
partial summary judgment in favor of the Secretary of Labor
and holding City National Corporation and other defendants
liable for self-dealing under ERISA; and (2) affirmed in part
and reversed in part the district court’s order granting
summary judgment as to damages.
City National Corporation maintained a defined-
contribution 401(k) employee profit-sharing plan and served
as the Plan’s sponsor, administrator, and one of its
fiduciaries. City National Bank, a subsidiary of City
National Corporation, was the Plan’s trustee and
recordkeeper as well as another of its trustees. For its
services as recordkeeper, City National Bank was
compensated by sharing a portion of mutual funds’ fees
charged to the Plan, and it did not maintain a system for
*
The Honorable Eduardo C. Robreno, United States District Judge
for the Eastern District of Pennsylvania, sitting by designation.
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
ACOSTA V. CITY NAT’L CORP. 3
tracking how much time its employees spent servicing the
Plan.
Affirming as to liability, the panel held that City National
Corporation engaged in prohibited self-dealing under
ERISA § 406(b) by setting and approving its own fees from
Plan assets for serving as its own recordkeeper. The panel
held that this conduct was not exempted under ERISA
§ 408(c)(2) as “reasonable compensation” for services
provided by a fiduciary such as recordkeeping services. The
panel held that the “reasonable compensation” exemption
does not apply to prohibited self-dealing, including where a
self-dealing fiduciary seeks the exemption for actual and
legitimate services rendered.
Affirming in part as to damages, the panel held that the
loss associated with a prohibited transaction is at least the
entire cost of the prohibited transaction. Where the fiduciary
has engaged in self-dealing, the entire cost is the total
amount of the illegal compensation that the fiduciary paid
itself. The district court allowed certain offsets, but City
National Corporation contended that additional offsets
should have been deducted from the damages award because
they were based on estimates of certain direct expenses such
as employee compensation and third-party expenses. The
panel held that City National Corporation did not meet its
burden of proof because the additional offsets were
effectively based on unreliable and insufficient evidence.
Reversing the district court’s award of prejudgment
interest, the panel held that the district court abused its
discretion by awarding interest on amounts that the Plan
never lost. The panel remanded for a recalculation of the
prejudgment interest portion of damages.
4 ACOSTA V. CITY NAT’L CORP.
COUNSEL
Robin Meadow (argued), Jonathan H. Eisenman, and
Edward L. Xanders, Greines Martin Stein & Richland LLP,
Los Angeles, California; Christopher Craig, Catalina
Vergara, and Brian D. Boyle, O’Melveny & Myers LLP, Los
Angeles, California; for Defendants-Appellants.
Jeffrey M. Hahn (argued), Senior Trial Attorney; Thomas
Tso, Counsel for Appellate and Special Litigation; G.
William Scott, Associate Solicitor for Plan Benefits
Security; Kate O’Scannlain, Solicitor of Labor; Office of the
Solicitor, United States Department of Labor, Washington,
D.C.; for Plaintiff-Appellee.
OPINION
ROBRENO, District Judge:
This case is about liability for self-dealing and breach of
fiduciary duties under the Employee Retirement Income
Security Act of 1974 (“ERISA”) and the corresponding
assessment of damages. Both issues—liability and
calculating damages—revolve around a compensation
scheme for an employee profit-sharing plan’s recordkeeper.
Specifically, the Department of Labor (the “DOL”) brought
this action under ERISA for breach of fiduciary duties and
self-dealing by City National Corporation along with various
of its subsidiaries and employees (collectively, “City
National”) in administering City National’s employee profit-
sharing plan. The district court first granted the DOL’s
motion for partial summary judgment as to liability as to
self-dealing and breach of fiduciary duties. In a separate
order, after reviewing cross-motions for summary judgment
ACOSTA V. CITY NAT’L CORP. 5
as to damages, the district court then granted the DOL’s
motion for summary judgment as to damages.
On appeal, City National argues that (1) it is not liable
for self-dealing 1 because it is exempted under § 408(c) of
ERISA or, in the alternative, that the self-dealing claim is
time-barred; (2) the district court erred in refusing to deduct
certain offsets from the damages award; and (3) the district
court abused its discretion in awarding prejudgment interest
on the damages award before deducting the unopposed
offsets.
The district court had jurisdiction pursuant to 28 U.S.C.
§ 1331 and 29 U.S.C. § 1132(e). We have jurisdiction
pursuant to 28 U.S.C. § 1291. For the reasons set forth
below, we affirm the district court’s order as to liability and
affirm in part, reverse in part, and remand as to damages.
I.
The basic facts of the case are not disputed. City National
Corporation maintains a defined-contribution 401(k)
employee profit-sharing plan (the “Plan”), which is subject
to Title I of ERISA, and serves as the Plan’s sponsor,
administrator, and one of its fiduciaries. City National Bank
(“CNB”), a subsidiary of City National Corporation, is the
Plan’s trustee and recordkeeper as well as another of its
fiduciaries.
CNB became the Plan’s recordkeeper on April 1, 2000,
pursuant to an agreement between the Plan and CNB. As
recordkeeper, CNB’s duties included generating participant
1
City National does not challenge the district court’s determination
of liability for breach of fiduciary duties for actions separate from self-
dealing.
6 ACOSTA V. CITY NAT’L CORP.
account statements, processing participant investments and
withdrawals, and processing contributions to the Plan.
None of the above-mentioned facts, however, creates a
real problem. Rather, the issue is the way in which CNB was
compensated by the Plan for its service as recordkeeper and
documented its expenses. CNB was compensated by sharing
a portion of the mutual funds’ fees charged to the Plan
through a process known as “revenue sharing,” which
occurred through a largely automated process from 2006 to
2011. During this time, CNB was not only the recordkeeper
for the Plan but also for over 200 other ERISA plans. In this
role, CNB did not maintain a system for tracking how much
time its employees specifically spent servicing the Plan. As
a result of this largely automated payment process and a lack
of records documenting direct expenses incurred in servicing
the Plan, CNB was without proof of what expenses were
actually incurred in servicing the Plan for any given month
between 2006 and 2011.
At various times, the City National Corporation Benefits
Committee, which met periodically to review the Plan’s fee
structure, considered that the service-provider fees might be
“high.” Each time the Benefits Committee reached this
conclusion it prospectively reduced the fees CNB charged
the Plan but never rebated any of the amounts previously
received by CNB.
In July 2009, the DOL first notified City National of its
investigation of possible ERISA violations by City National.
City National then retained Mercer Consulting (“Mercer”) to
conduct a review of the Plan. Mercer concluded that the fees
paid to CNB were higher than those reported in its survey of
comparably sized clients. Yet after receiving Mercer’s
report, City National did not retroactively rebate any
amounts previously paid by the Plan to CNB.
ACOSTA V. CITY NAT’L CORP. 7
The DOL filed a complaint on April 24, 2015, alleging,
among other claims, that CNB engaged in prohibited self-
dealing under ERISA § 406(b), 29 U.S.C. § 1106(b), when
CNB set and approved its own recordkeeping fees and
regularly accepted those fees as compensation for its
services. After the complaint was filed, City National
retained Basil Imburgia, a financial expert, to provide a
report demonstrating that CNB’s compensation never
exceeded the direct expenses incurred in serving the Plan.
This report, however, relied on an estimate of the direct
expenses for a given year using the following methodology:
the total amount of expenses CNB incurred servicing all of
its 200-plus plans multiplied by the ratio of the number of
participants in the Plan to the total number of participants
serviced by CNB across all plans.
Following discovery, the DOL moved for partial
summary judgment as to liability, which the district court
granted. Anticipating the question of damages, the district
court ordered an independent accounting of City National’s
Plan-related revenue. City National retained Evercore Trust
Company (“Evercore”) to conduct the court-ordered
accounting. Evercore determined that City National received
$4,647,090.27 in revenue sharing payments from 2006 to
2012 and then went on to calculate the Plan’s lost
opportunity costs, i.e., the money that the Plan would have
earned had the Plan, and not City National, received these
revenue sharing payments and invested the proceeds.
Evercore applied two alternative interest rates: (1) the rate of
return that the Plan experienced over the relevant time period
and (2) the DOL’s Voluntary Fiduciary Correction Program
(“VFCP”) interest rate, which is used when a fiduciary
voluntarily agrees to return amounts to a plan. Under the
Plan’s rate of return, the Plan’s total losses (including lost
8 ACOSTA V. CITY NAT’L CORP.
opportunity costs) were $8,185,596.13, and under the VFCP
rate, the Plan’s total losses were $6,061,101.19.
The district court granted the DOL’s motion for
summary judgment on damages. Specifically, in an order
dated February 8, 2017, the district court, relying on
Evercore’s report, awarded $7,367,382.13 in damages to the
DOL. This amount was based on a gross amount of
$8,185,596.13 less certain unopposed offsets. 2 The district
court reached this decision after considering and rejecting
City National’s arguments that the amount of damages
should either be nothing or $1,129,832.00 after applying the
VFCP rate and deducting various offsets for Plan expenses.
In making its decision, the district court reached the
following conclusions: (1) the VFCP rate of return is applied
when a breaching fiduciary voluntarily corrects its violations
rather than here when a fiduciary stops the breach after a
third party identifies it, and (2) the additional offsets for Plan
expenses were not proven as actually incurred but instead
were either based on estimates or were for expenses outside
the relevant time period.
City National appeals the grant of summary judgment
finding City National liable under ERISA § 406(b) for self-
dealing and the amount of damages and prejudgment
interest.
II.
We review a district court’s order granting a motion for
summary judgment de novo. Zetwick v. Cty. of Yolo,
2
These unopposed offsets included KPMG’s audit of the Plan for
Plan years 2006 to 2010, prospectus delivery fees, and previously
rebated mutual fund revenue compensated between November 24, 2008,
and December 14, 2011.
ACOSTA V. CITY NAT’L CORP. 9
850 F.3d 436, 440 (9th Cir. 2017). “Summary judgment is
appropriate when, viewing the evidence in the light most
favorable to the nonmoving party, there is no genuine
dispute as to any material fact.” Id. (internal citation and
quotation marks omitted). In reviewing cross-motions for
summary judgment, “each motion must be considered on its
own merits.” Fair Housing Council of Riverside Cty., Inc. v.
Riverside Two, 249 F.3d 1132, 1136 (9th Cir. 2001) (internal
citations, quotation marks, and alterations omitted).
An award of prejudgment interest is reviewed under an
abuse of discretion standard. In re Agric. Research & Tech.
Grp., Inc., 916 F.2d 528, 533 (9th Cir. 1990).
III.
City National’s challenge to the amount of damages only
needs to be considered if we find summary judgment on
liability was properly granted. Therefore, we turn first to
City National’s challenge regarding its liability.
A.
City National does not contest that it engaged in what is
typically prohibited self-dealing by setting and approving its
own fees from Plan assets for serving as its own
recordkeeper. Instead, City National contends that this
conduct is exempted under ERISA § 408(c)(2), 29 U.S.C.
§ 1108(c)(2), as “reasonable compensation” for services
provided by a fiduciary such as recordkeeping services. 3 We
reject this argument.
3
In the alternative, City National argues that the DOL’s claims are
untimely. We reject this argument and hold that the DOL’s claims were
timely in light of the five tolling agreements that the parties entered into
10 ACOSTA V. CITY NAT’L CORP.
We have previously held that the “reasonable
compensation” exemption does not apply to prohibited self-
dealing under ERISA § 406(b). Barboza v. Cal. Ass’n of
Prof. Firefighters, 799 F.3d 1257, 1269 (9th Cir. 2015);
Patelco Credit Union v. Sahni, 262 F.3d 897, 910–11 (9th
Cir. 2001).
City National argues, however, that the holdings in
Patelco and Barboza are limited to circumstances where the
fiduciary received kickbacks and transfers of plan assets to a
personal account or otherwise received compensation for
illegitimate services. We find this argument foreclosed by
circuit precedent. Although Patelco involved this type of
conduct by the fiduciary, Barboza did not. In fact, the
conduct in Barboza is very similar to the conduct in the
instant case—self-dealing through payments for otherwise
legitimate services. See Barboza, 799 F.3d at 1269 (“This
dispute centers on [the fiduciary’s] practice of paying its
own fees and expenses from the Plan’s assets held in the
Wells Fargo account.”). Moreover, even in Patelco, where
the fiduciary’s conduct was particularly egregious, in
considering other cases from across the country that
addressed the applicability of the “reasonable
compensation” exemption to fiduciary self-dealing, we
broadly held that “the reasonable compensation provision
does not apply to fiduciary self-dealing.” Patelco, 262 F.3d
at 911. Subsequently, in Barboza, we reaffirmed the broad
sweep of our holding in Patelco that the “exemption for
reasonable compensation under [§ 408(c)] does not apply
. . . to a fiduciary who engages in a prohibited transaction
under [§ 406(b)] by paying itself from the assets of a welfare
beginning in September 2011 and ending in February 2015 covering all
of the years for which the DOL seeks recompense for the Plan. See
29 U.S.C. § 1113(1)(A).
ACOSTA V. CITY NAT’L CORP. 11
benefit plan.” Barboza, 799 F.3d at 1269 (citing Patelco,
262 F.3d 897). “In other words, while a plan may pay a
fiduciary ‘reasonable compensation for services rendered’
under [section 408], the fiduciary may not engage in self-
dealing under [section 406(b)] by paying itself from plan
funds.” Id. (citing Patelco, 262 F.3d at 910–11). Simply put,
the holdings of Patelco and Barboza are not limited to fact
patterns where the fiduciary received compensation for
illegitimate services. Therefore, to the extent that there is any
doubt regarding the applicability of Patelco and Barboza to
cases where a self-dealing fiduciary seeks the reasonable
compensation exemption for actual and legitimate services
rendered, we remove that doubt today.
B.
Having established that City National engaged in
prohibited self-dealing and, therefore, that summary
judgment as to liability was properly granted, we next turn
to the issue of damages. Because the parties submitted cross-
motions for summary judgment as to damages, we must
consider each motion separately. Fair Housing Council,
249 F.3d at 1136. We note, however, that because the two
motions center around the same dispositive issue—whether
City National is entitled to additional offsets—and City
National has the same burden of proof under substantive law
in both motions, granting the DOL’s motion compels
denying City National’s motion.
When reviewing the DOL’s motion, our decision
“necessarily implicates the substantive evidentiary standard
of proof that would apply at the trial on the merits.”
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986).
It is City National’s burden here, as it would be at trial, to
demonstrate that it is entitled to the additional offsets. In
other words, whether opposing the DOL’s motion or
12 ACOSTA V. CITY NAT’L CORP.
supporting its own motion, City National bears the burden of
proving that it is entitled to the additional offsets.
Accordingly, we ask “whether reasonable jurors could find
by a preponderance of the evidence that [City National] is
entitled to a verdict—whether there is evidence upon which
a jury can properly proceed to find a verdict for the party
producing [the evidence], upon whom the onus of proof is
imposed.” Id. (internal citations, quotation marks, and
alterations omitted).
Under Ninth Circuit precedent, the loss associated with
a prohibited transaction is at least “the entire cost of the
prohibited transaction.” Kim v. Fujikawa, 871 F.2d 1427,
1431 (9th Cir. 1989). In cases where the fiduciary has
engaged in self-dealing, we have previously held that the
“entire cost” of the transaction is the total amount of the
illegal compensation that the fiduciary paid itself. See
Patelco, 262 F.3d at 911. In determining this amount, a court
“should resolve doubts in favor of the plaintiffs.” Kim,
871 F.2d at 1431 (quoting Leigh v. Engle, 727 F.2d 113,
138–39 (7th Cir. 1984)). Accordingly, citing Kim, the district
court correctly determined that the expenses were City
National’s burden to prove and any doubts related to
damages should be resolved in the DOL’s favor.
To be clear, the DOL did not oppose $818,214.00 in
offsets. At issue in this case are additional offsets that the
district court did not deduct from the damages award
because they were based on estimates of certain direct
expenses such as employee compensation and third-party
expenses. City National contends that had the district court
considered these expenses, it would have been clear that the
Plan never suffered a loss, that is, that CNB never received
more compensation than necessary for performing its
recordkeeping services. But City National has failed to meet
ACOSTA V. CITY NAT’L CORP. 13
its burden to show that it is entitled to these offsets because
these offsets are effectively based on unreliable and
insufficient evidence. We conclude that no reasonable jury
could find in favor of City National given the paucity of the
evidence demonstrating that the additional offsets represent
expenses actually incurred by CNB in servicing the Plan.
Below, we first discuss employee compensation before
turning to the third-party expenses.
1. Employee Compensation
In support of its argument that City National is not
entitled to any additional offsets, the DOL points to a Ninth
Circuit case where the fiduciary did not keep adequate
records of how much time employees spent providing
services to a specific plan, similar to the instant case. See
Kim, 871 F.2d at 1430–31. But the DOL slightly
mischaracterizes Kim. The Kim Court did not hold that
estimates could not be considered but rather that the
fiduciary had simply not presented sufficient evidence to
meet its burden of proof. Id.
Similarly, here, as the district court observed, aside from
the offsets unopposed by the DOL, City National failed to
provide evidence showing that its requested offsets were
actually incurred by CNB in servicing the Plan. See Perez v.
City Nat’l Corp., 176 F. Supp. 3d 945, 948 (C.D. Cal. 2016).
Instead, City National’s proposed offsets were based on
estimates or averages, which the district court found
insufficient “to raise a triable issue.” 4 Id. at 949. The issue,
4
Although not entirely clear, we read the district court’s
determination that there was no “triable issue” to mean both that there is
no genuine dispute as to any material fact and that the DOL is entitled to
judgment as a matter of law. See Fed. R. Civ. P. 56(a).
14 ACOSTA V. CITY NAT’L CORP.
in this case, however, can be significantly simplified: did
City National’s evidence of these offsets prove that the
expenses were incurred by the Plan? The answer is simply
“no.” Plainly put, no reasonable juror could find in City
National’s favor on this issue.
Because ERISA does not supply a method for proving
offsets, that method is supplied by federal common law. See
Salyers v. Metro. Life Ins. Co., 871 F.3d 934, 939 (9th Cir.
2017). “In developing a body of federal common law
governing employee benefit plans,” we have an “‘obligation’
to adopt a federal rule that ‘best comports with the interests
served by ERISA’s regulatory scheme.’” Id. (quoting PM
Grp. Life Ins. Co. v. W. Growers Assur. Trust, 953 F.2d 543,
546 (9th Cir. 1992)).
In this case, City National’s evidence of its expenses was
based on the Imburgia Report. Because City National
allocated employee salaries across hundreds of plans without
maintaining contemporaneous records of such employee
compensation, the report relied on after-the-fact estimates of
the allocation of employee compensation across all plans
serviced by CNB. Given that there were no
contemporaneous time records or other records reliably
demonstrating how much time employees spent servicing
the Plan, the figures provided in the report were simply a
rough estimate and did not satisfy City National’s burden of
proof. See Kim, 871 F.2d at 1431 (discussing that a
breaching fiduciary is entitled to offsets only if it can prove
that those offsets are for direct expenses benefitting the plan
and explaining that “[t]his is nothing more than application
of the principle that, once a breach of trust is established,
uncertainties in fixing damages will be resolved against the
wrongdoer”) (internal citation omitted).
ACOSTA V. CITY NAT’L CORP. 15
To be sure, contemporaneous records are not required in
all cases and are not necessarily the only way to determine
the amount of expenses incurred by the fiduciary. They are,
however, an important and reliable form of evidence for
documenting that the fiduciary only receives its actual
expenses. See U.S. Dep’t of Labor, Office of Pension and
Welfare Benefit Programs, Opinion No. 80-58A, 1980 WL
8955, at *2 (Oct. 1, 1980) (discussing why a per diem
reimbursement allowance is not allowed because such an
amount may be in excess of actual expenses). Additionally,
in its advisory opinion No. 93-06A, in a slightly different
context, the DOL addressed the importance of maintaining
adequate records of employee compensation. See generally
U.S. Dep’t of Labor, Office of Pension and Welfare Benefit
Programs, Opinion No. 93-06A, 1993 WL 97262 (Mar. 11,
1993). In Opinion No. 93-06A, the DOL explained that
employee salaries “may be a properly reimbursable expense
. . . if the expense would not, in fact, have been sustained had
the services not been provided, if it can be properly allocated
to the particular services provided, and if the expense does
not represent an allocable portion of overhead costs.” Id. at
*6. The DOL went on to explain that if the fiduciary provides
services to multiple plans, then the reimbursement of direct
expenses “requires that the parties maintain records adequate
to verify that the allocation methods employed properly
allocate expenses to the plans from which reimbursement is
obtained.” Id.In this case, during the relevant period, City National
provided services to multiple plans, and without adequate
records, the best the Imburgia Report could offer was
speculation that five or six employee positions would have
been eliminated but for their work on the Plan. Such an
estimate is hardly “adequate to verify that the allocation . . .
properly allocate[s] expenses . . . .” Id.16 ACOSTA V. CITY NAT’L CORP.
2. Other Expenses
City National also argues that the district court
improperly excluded certain rebates purportedly paid to the
Plan, certain third-party expenses, and revenue derived from
City National’s own proprietary mutual funds. But,
similarly, these offsets were either not shown as actually
incurred expenses or were incurred outside of the relevant
time period. Each is addressed in turn.
a. Rebates
The district court offset City National’s liability by
$538,902 in rebates that City National paid to the Plan. City
National, however, argues that the district court should have
offset its liability by an additional $290,000 in rebates. In its
opening brief in support of its motion for partial summary
judgment as to damages and its opposition to the DOL’s
motion, it relied on minutes of the Benefits Committee as
evidence that these rebates were indeed paid. Although this
evidence supports the contention that the Benefits
Committee approved the payments, it does not show that the
rebates were indeed paid.
In reply, City National provided certain trust account
statements as additional evidence that these rebates were
paid. The district court’s finding that it was not presented
with evidence proving that the expenses, including these
rebates, were actually incurred is correct. The trust account
statements provided by City National are part of a 500-page
package of exhibits offered in reply during the motion
practice on summary judgment. These statements were
produced by City National without a clear explanation as to
which exhibits supported which rebates. In the absence of
such explanation, i.e., matching the rebates to a specific
account, it was proper for the district court to conclude that
ACOSTA V. CITY NAT’L CORP. 17
the evidence was insufficient to show that the rebates were
actually paid.
b. Third-Party Direct Expenses
City National further argues that the district court
improperly excluded three different third-party
administrative expenses, all of which were allegedly
contemporaneously documented. Each is discussed in turn.
First, City National seeks an offset for $207,003 in
custodial fees retained by Fidelity. As with the employee
compensation, however, the evidence of this expense is the
Imburgia Report, which did not base this amount on any
evidence of actual payments made to Fidelity. Instead, the
amount is based on what these payments might or should
have been under the terms of City National’s agreement with
Fidelity. City National has also submitted spreadsheets
purporting to show these Fidelity payments, but these
spreadsheets were only submitted with City National’s reply
and lacked a clear explanation. More problematic, however,
is the fact that these spreadsheets suffer from other fatal
defects; they appear to be self-generated, may well have
undergone multiple iterations, and are without any
documentation or evidence to substantiate the numbers.
For City National to prove that it actually incurred
expenses by paying Fidelity custodial fees, City National
would have needed to produce reliable and sufficient
documentation such as a receipt, account statement, or other
document showing actual payments. Here, because the
evidence for the custodial fees was an unsubstantiated and
self-generated spreadsheet, the district court properly
excluded offsets for the custodial fees.
18 ACOSTA V. CITY NAT’L CORP.
Second, City National argues that the district court
improperly excluded $145,660 in printing and mailing costs.
Although City National submitted numerous invoices for
such services, the invoices did not specify which of the
hundreds of plans serviced by City National received the
printing and mailing services corresponding to the invoice.
Therefore, there was again insufficient evidence that the
expenses were actually incurred in servicing the Plan and,
even if so, that the invoices were actually paid.
Third, City National argues that the district court
improperly excluded a $32,500 offset for an audit of the Plan
by KPMG. But this audit, which is required by ERISA, did
not concern any of the Plan years in question (2006–2012)
but rather Plan year 2005. It makes no difference that City
National accounted for audit payments on a cash basis
because the expense was incurred in 2005, a year outside of
the relevant time. It is also irrelevant that City National did
not pay for this audit until 2006 or that the audit did not occur
until 2006.
c. Revenue
City National argues that the district court erroneously
included over $534,000 of revenue in the damages award
that is categorically exempt from § 406 under Prohibited
Transaction Exemption 77-3 (“PTE 77-3”).
Under PTE 77-3, § 406 does not apply when an
investment company offers its own mutual funds to its
employee profit-sharing plan if there are no commissions or
extraneous fees and “[a]ll other dealings between the plan
and the investment company . . . are on a basis no less
favorable to the plan than such dealings are with other
shareholders of the investment company.” 42 Fed. Reg.
18734, 18735 (Apr. 8, 1977).
ACOSTA V. CITY NAT’L CORP. 19
In this case, the fact that City National offered its own
mutual funds to the Plan does not mean that PTE 77-3
exempts the revenue from the damages award. Instead,
PTE 77-3 simply allows a plan to trade in in-house funds.
PTE 77-3 does not extend its safe harbor to instances where
a self-dealing fiduciary sets and receives a certain amount of
revenue from in-house funds as compensation for
recordkeeping services it provides to an employee profit-
sharing plan.
City National also points to a pre-regulatory notice to
argue that PTE 77-3 was intended to allow the fiduciary to
collect the entire expense ratio charged by the funds,
including customary investment advisory fees and any
administrative fees. See 41 Fed. Reg. 54080, 54081 (Dec. 10,
1976). But City National misunderstands the import of that
pre-regulatory notice. Although the notice explains that a
fiduciary may collect an investment advisory fee from the
mutual fund pursuant to an investment advisory agreement,
nowhere in the notice or in PTE 77-3 does it provide that the
fiduciary can also collect such a fee from the plan.
City National has, in its own words, described the
$534,000 at issue as “earmarked for shareholder servicing”
and has cited the recordkeeping agreement as the basis for
its receipt of revenue from the mutual funds. Therefore, from
the record before us, we conclude that City National is
simply seeking its recordkeeping fees, which cannot be
offset against the damages award in this case because they
were incurred through City National’s self-dealing.
3. City National’s Motion for Summary Judgment on
Damages
For the same reasons that we grant the DOL’s motion for
summary judgment on damages, we deny City National’s
20 ACOSTA V. CITY NAT’L CORP.
motion for summary judgment on damages. The two
motions center around the same dispositive issue—whether
City National is entitled to additional offsets. City National’s
burden on both motions is the same—to show entitlement to
the offsets. See Anderson, 477 U.S. at 252. Therefore, by
granting the DOL’s motion on this issue as City National
failed to carry its burden of proof under the substantive law,
we are compelled to deny City National’s motion for
summary judgment on the same issue.
C.
Although a summary judgment motion is reviewed de
novo, a district court’s award of prejudgment interest on
summary judgment is reviewed under an abuse of discretion
standard. In re Agric. Research & Tech. Grp., Inc., 916 F.2d
at 533. We have previously held that, in the ERISA context,
an award of prejudgment interest is “a question of fairness,
lying within the court’s sound discretion, to be answered by
balancing the equities.” Landwehr v. DuPree, 72 F.3d 726,
739 (9th Cir. 1995) (internal quotation marks omitted).
The essential point of prejudgment interest is to “ensure
that an injured party is fully compensated for its loss.” City
of Milwaukee v. Cement Div., Nat. Gypsum Co., 515 U.S.
189, 195 (1995). The loss in this case is the entire cost of the
transaction, that is, the illegal compensation plus the lost
opportunity cost. The unopposed offsets do not reflect losses
or illegal compensation. Accordingly, we find that the
district court abused its discretion by awarding interest on
amounts that the Plan never lost. In other words, the district
court calculated prejudgment interest on City National’s
liability for the gross amount of its recordkeeping
compensation rather than on its net compensation after the
unopposed offsets were deducted (i.e., the unopposed
revenue-sharing rebates and third-party expenses). In doing
ACOSTA V. CITY NAT’L CORP. 21
so, the district court effectively required City National to pay
interest on more than the entire cost of the transaction.
Therefore, we reverse the district court on this issue and
remand for a recalculation of the prejudgment interest
portion of damages.
IV.
We conclude that the district court’s grant of summary
judgment in favor of the DOL as to liability was proper
because the “reasonable compensation” exemption under
ERISA § 408(c)(2) does not apply to self-dealing by a
fiduciary. Therefore, we affirm the district court’s grant of
summary judgment as to liability.
We next conclude that the additional offsets City
National argues for were not sufficiently proven as “actually
incurred” or were outside of the relevant time period.
Because no reasonable jury could find in favor of City
National on its claim of entitlement to the additional offsets,
we affirm the district court’s grant of summary judgment in
favor of the DOL and against City National on this issue. For
the same reasons, we affirm the denial of City National’s
summary judgment motion on this issue. Finally, we
conclude that the district court abused its discretion by
awarding prejudgment interest before deducting the allowed
offsets. Therefore, we reverse and remand on the same issue
for a recalculation of damages as to prejudgment interest.
The parties shall bear their own costs on appeal.
AFFIRMED IN PART, REVERSED IN PART, and
REMANDED.