Harris v. Koenig ( 2009 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
______________________________
WILLIAM S. HARRIS, et al., :
:
Plaintiffs, :
:
v. : Civil Action No. 02-618 (GK)
:
JAMES E. KOENIG, et al., :
:
Defendants. :
______________________________:
MEMORANDUM OPINION
Plaintiffs, William S. Harris, Reginald E. Howard, and Peter
M. Thornton, Sr., are former employees of Waste Management
Holdings, Inc. (“Old Waste” or “the Company”)1 and participants in
the Waste Management Profit Sharing and Savings Plan (“Old Waste
Plan” or “Plan”). They bring this action under the Employee
Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C.
§§ 1001, et seq., on behalf of the approximately 30,000 Plan
participants seeking to recoup losses suffered by the Plan related
to the purchase of Old Waste common stock (“Company Stock”) between
January 1, 1990 and July 15, 2002 at prices “artificially inflated”
by material undisclosed information about Old Waste’s “true
financial condition.” Third Am. Compl. ¶ 1. Plaintiffs allege
three separate claims periods –- (1) January 1, 1990 through
1
“At all relevant times, Old Waste operated in the District
of Columbia and provided, through its subsidiaries, integrated
solid waste and hazardous waste management services, energy
recovery services, and environmental technologies, engineering and
consulting services.” Third Am. Compl. ¶ 20.
February 24, 1998 (“First Claim Period”); (2) July 15, 1999 through
December 1, 1999 (“Second Claim Period”); and (3) February 7, 2002
through July 15, 2002 (“Third Claim Period”) -- and separate ERISA
violations during each of those periods. Id.Defendants are the “Old Waste Fiduciaries,” which include Old
Waste (the Plan’s sponsor); the Old Waste executives who allegedly
administered the Old Waste Plan, including the Waste Management,
Inc. Profit Sharing and Savings Plan Investment Committee (“Old
Waste Investment Committee”); the individual Trustee Members of the
Old Waste Investment Committee;2 the Waste Management, Inc. Profit
Sharing and Savings Plan Administrative Committee (“Old Waste
Administrative Committee”); the individual Trustee Members of the
Old Waste Administrative Committee;3 the Old Waste Board of
2
The individual Trustee Members of the Old Waste Investment
Committee include James E. Koenig, Herbert A. Getz, Bruce D.
Tobecksen, Joseph M. Holsten, Edward C. Kalebich, Thomas R. Frank,
and Peter H. Huizenga.
3
The individual Trustee Members of the Old Waste
Administrative Committee include J. Steven Bergerson, William P.
Hulligan, John J. Machota, and D.P. Payne.
2
Directors; the individual Members of the Old Waste Board of
Directors;4 and DOES 1-15.5
Defendants are also the “New Waste Fiduciaries,” which include
the Waste Management Retirement Savings Plan (“New Waste Plan”);
and the New Waste executives who allegedly administered the New
Waste Plan, including the Investment Committee of the Waste
Management Retirement Savings Plan (“New Waste Investment
Committee”); the individual Trustee Members of the New Waste
Investment Committee;6 the State Street Bank and Trust Company
(“State Street”); and DOES 16-30.7
This matter is before the Court on Defendants’ Omnibus Motion
to Dismiss the Third Amended Complaint [#186] (“Defs.’ Omnibus
Mot.”) and State Street Bank and Trust Company’s Motion to Dismiss
4
The individual Members of the Old Waste Board of Directors
include Dean L. Buntrock, Phillip B. Rooney, Robert S. Miller, John
C. Pope, James R. Peterson, H. Jesse Arnelle, James Edwards, Donald
F. Flynn, Roderick M. Hills, Steven G. Rothmeier, Alexander B.
Trowbridge, Peer Pederson, Jerry E. Dempsey, Howard H. Baker, Jr.,
Dr. Pastora San Juan Cafferty, and Paul M. Montrone.
5
DOES 1-15 are fiduciaries of the Old Waste Plan whose exact
identities will, according to Plaintiffs, be ascertained through
discovery.
6
The individual Trustee Members of the New Waste Investment
Committee include Patricia McCann, Susan J. Piller, Ron Jones, Bob
Simpson, and Don Chappel.
7
DOES 16-30 are fiduciaries of the New Waste Plan whose exact
identities will, according to Plaintiffs, be ascertained through
discovery.
3
the Third Amended Complaint [#183] (“State Street’s Mot.”).8 Upon
consideration of the Motions, Oppositions, Replies, and the entire
record herein, and for the reasons stated below, Defendants’
Omnibus Motion to Dismiss is granted in part and denied in part and
State Street’s Motion to Dismiss is denied.
I. BACKGROUND9
A. Factual History
The Old Waste Plan is an “individual account” or “defined
contribution” employee pension plan. See Defs.’ Ex. 22 (1999
Summary Plan Description) at 25. An individual account or defined
contribution plan is “one where employees and employers may
contribute to the plan, and the employer’s contribution is fixed
and the employee receives whatever level of benefits the amount
contributed on his behalf will provide.” Hughes Aircraft Co. v.
Jacobson, 525 U.S. 432, 439 (1999) (internal quotations omitted).
See 29 U.S.C. § 1002(34) (an individual account or defined
contribution plan “provides for an individual account for each
8
State Street joined in the Omnibus Motion, in part, and
filed its own separate Motion presenting additional grounds for
dismissal.
9
For purposes of ruling on a motion to dismiss, the factual
allegations of the complaint must be presumed true and liberally
construed in favor of the plaintiff. Shear v. Nat’l Rifle Ass’n of
Am., 606 F.2d 1251, 1253 (D.C. Cir. 1979). Therefore, the facts
set forth herein are taken from Plaintiffs’ Third Amended Complaint
or from the undisputed facts presented in the parties’ briefs.
4
participant and for benefits based solely upon the amount
contributed to the participant’s account”).
Old Waste Plan participants may invest in any of the Plan’s
ten investment options, including the Waste Management Inc., Stock
Fund which is invested primarily in Company Stock (“Stock Fund”) as
well as cash. See Defs.’ Omnibus Mot., Ex. 22 (1999 Summary Plan
Description at 3, 11). See Third Am. Compl. ¶ 40.
On January 16, 1998, Old Waste and Waste Services, Inc.,
merged to become New Waste. On January 1, 1999, the Old Waste Plan
was merged with the USA Waste Services, Inc. Employee’s Savings
Plan to become the Waste Management Retirement Savings Plan (“New
Waste Plan”). On the same date, State Street was appointed to
serve as the Trustee of the New Waste Plan. Effective February 1,
1999, the New Waste Investment Committee appointed State Street to
serve as the Investment Manager for Company Stock assets. See
Third Am. Compl. ¶¶ 47, 50. Pursuant to the terms of the
Investment Manager Agreement between State Street and the New Waste
Investment Committee, State Street had “full discretionary
authority to manage Company Stock assets.” Id. ¶ 50.
The State Street appointments were made after the July 24,
1998 filing of the Complaint in the Illinois Securities Litigation,
discussed infra.
5
1. The Illinois Securities Litigation
On October 10, 1997, Old Waste announced in a press release
that the prior reports of its earnings from continuing operations
for the third quarter of 1996 were overstated. See id. ¶ 88. It
also cautioned “that earnings for the third quarter of 1997 were
expected to be below analysts’ expectations and that [Old Waste’s]
fourth Quarter 1997 results might be reduced by a charge to income
that could be material to its results of operations for the year.”
See id.
By December 18, 1997, various purchasers of Old Waste
securities had filed fourteen securities fraud class actions in the
United States District Court for the Northern District of Illinois
(“Illinois district court”) alleging, in relevant part, that Old
Waste, certain of its officers and directors and its auditor,
Arthur Andersen, LLP, had violated Section 10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and
Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5. See In re
Waste Mgmt., Inc. Sec. Litig., CA 97-7709 (N.D. Ill.) (“Illinois
Securities Litigation”).
On February 24, 1998, Old Waste announced that it was
restating its financial statements for 1991 and prior periods,
including the periods 1992 through 1996, and the first three
quarters of 1997 (“Restatement”). It also admitted that prior to
1992 and continuing through the first three quarters of 1997, it
6
had materially overstated its reported income by $1.43 billion.
See Third Am. Compl. ¶ 89.
On July 24, 1998, the Illinois Securities Litigation
plaintiffs filed a consolidated amended complaint claiming that the
Old Waste Fiduciaries “had engaged in potential breaches of
fiduciary obligations with respect to the Old Waste Plan by causing
it to acquire shares of Old Waste Stock between January 1, 1990
[and] February 24, 1998, when they knew that such stock was not a
prudent Plan investment because its price exceeded fair market
value.” Id. ¶ 110.
As already noted, on January 1, 1999, State Street Bank was
appointed Trustee of the New Waste Plan, after its merger with the
Old Waste Plan, and on February 1, 1999, State Street was appointed
Investment Manager for Company Stock assets.
On July 15, 1999, the Illinois district court entered a
Preliminary Approval Order approving a proposed settlement and
provisionally certifying a class, for settlement purposes only, of
all persons (other than defendants and their affiliates) who had
acquired Company Stock between November 3, 1994 and February 24,
1998. See id. ¶ 111. Pursuant to the Preliminary Approval Order,
“a Notice of Pendency and Proposed Settlement of Class Action,
dated July 20, 1999 (the ‘Illinois Notice’), was sent to [all]
members of the [Illinois settlement class], including the Plan and
its fiduciaries.” Id. The Illinois Notice described the scope of
7
the release that would be given by members of the Illinois
settlement class in exchange for the settlement consideration, and
advised class members of their right to object to or opt out of the
proposed settlement by September 2, 1999. See id.On September 17, 1999, the Illinois district court entered a
Final Judgment and Order of Dismissal endorsing the proposed
settlement (“Illinois Securities Settlement”). See id. ¶ 116.
2. The Texas Securities Litigation
On July 6, 1999, New Waste “issued a press release reporting
a $250 million projected revenue shortfall for the second quarter
of 1999 and sharply lower earnings.” Id. ¶ 102. On November 9,
1999, after a subsequent review of its books and records, New Waste
announced after-tax charges and adjustments of $1.23 billion. See
id. ¶ 105.
On July 7, 1999, the first of over thirty securities class
action complaints was filed against New Waste and certain of its
officers and directors in In re Waste Mgmt., Inc. Sec. Litig., H-
99-2183 (S.D. Texas), in the United States District Court for the
Southern District of Texas (“Texas district court”) (“Texas
Securities Litigation”). See id. ¶ 125. According to Plaintiffs,
the complaint placed State Street on notice that “senior management
of New Waste had engaged in alleged securities violations in
connection with the [July 1998] Merger as a result of public
representations they made regarding New Waste’s competitive
8
position, its cash flow from operations and the successful
integration of Old Waste and USA Waste.” Id. ¶ 125.
On July 14, 2000, the plaintiffs in the Texas Securities
Litigation filed their amended consolidated class action complaint.
According to Plaintiffs, that filing placed State Street on notice
that former Old Waste fiduciaries had engaged in potential breaches
of fiduciary duties with respect to the Old Waste Plan including
“concealing from other Old Waste Plan Committees and participants
the fact that Old Waste had not done adequate due diligence of the
proposed corporate Merger, [had] not conduct[ed] a prudency review
of the proposed Merger themselves, and caus[ed] the Plan to
acquiesce in the Merger, which was not in the best interest[s] of
the Plan and its participants.” Id. ¶ 127.
On February 7, 2002, the Texas district court entered a
Preliminary Approval Order approving a proposed settlement, and
provisionally certifying a class, for settlement purposes only, of
all persons (other than defendants and their affiliates) who had
acquired Company Stock between June 11, 1998 and November 9, 1999.
See id. ¶ 128. Pursuant to the Preliminary Approval Order, “a
Notice of Proposed Class Action Settlement (the ‘Texas Notice’) was
sent to members of the [Texas settlement class], including the Plan
and its fiduciaries[.]” Id. The Texas Notice described the scope
of the release that would be given by members of the Texas
settlement class in exchange for the settlement consideration,
9
advised class members of their right to object to or opt out of the
proposed settlement by April 19, 2002. It also required a class
member to submit a Proof of Claim and Release on or before July 15,
2002 in order for a class member to participate in the settlement.
See id.On April 29, 2002, the Texas district court entered a Final
Judgment and Order endorsing the proposed settlement (“Texas
Securities Settlement”). On July 15, 2002, State Street submitted
a Proof of Claim and Release on behalf of the Plan. See id. ¶ 140.
B. The ERISA Litigation in the District of Columbia
On April 1, 2002, Plaintiffs filed the instant action in this
Court.
1. The Illinois Motion to Enforce
On June 7, 2002, Old Waste filed a motion to enforce the
Illinois Securities Settlement in the Illinois district court. In
the motion, it argued that Plaintiffs in the instant action were
barred from prosecuting any ERISA claims relating to or arising out
of Old Waste’s February 24, 1998 Restatement because (1) the Old
Waste Plan had released all claims relating to the Restatement on
behalf of itself and Plan participants; and (2) the Old Waste Plan
and its participants were barred by the Illinois Securities
Settlement from asserting any released claims in this or any other
action. See Defs.’ Omnibus Mot. Ex. 11. On December 3, 2002, this
Court granted Defendants’ motion for a stay of proceedings in the
10
instant action pending a ruling by the Illinois district court on
their motion to enforce.
On March 11, 2003, the Illinois district court denied
Defendants’ motion to enforce on the ground that the alleged class
period in the instant action spans a broader period than the
November 3, 1994 through February 24, 1998 period at issue in the
Illinois Securities Litigation. It explained that although it
could have interpreted and applied the relevant terms of the Old
Waste Plan “in order to determine whether a release from liability
for securities law violations encompasses potential ERISA
liability,” its resolution of that matter would not relieve this
Court of its obligation to make that same assessment, “because the
time span of the D.C. suit exceeds that covered by” the Illinois
Securities Settlement. Defs.’ Omnibus Mot., Ex. 12 at 2-3.
2. The Texas Settlement Proceedings
On April 19, 2002, Plaintiff Harris, who was not a member of
the Texas settlement class, objected to the proposed settlement of
the Texas Securities Litigation on the ground that the New Waste
Plan’s decision to participate in the settlement constituted a
breach of ERISA-imposed duties. On April 29, 2002, Harris filed a
motion to intervene, which the Texas district court denied. See
Defs.’ Ex. 14. Following the Texas district court’s approval of
the Texas Securities Settlement, Harris filed a Federal Rule of
Civil Procedure 59(e) motion to alter or amend the judgment.
11
Thereafter, “counsel for Lead Plaintiff and counsel for
Harris, after arm’s-length negotiations regarding issues relating
to Harris’s objection, . . . reached a Stipulation of Settlement
Modifying Plan of Allocation,” which the Texas district court
approved (“Texas Amending Order”). Defs.’ Omnibus Mot., Ex. 16 at
4. Under the Texas Amending Order, the original Plan of Allocation
entered in connection with the Texas Securities Settlement was
modified “so that $4.5 million (less Harris’s Counsel’s attorneys
fees, costs and expenses) [was] set aside from the Net Settlement
Fund and . . . allocated to the Waste Management Retirement Savings
Plan [the New Waste Plan], such allocation being in addition to the
approximately $2 million that the participants of the Plan would
otherwise be entitled to receive under the Plan of Allocation.”
Id. at 5-6.
3. Plaintiffs’ Claims in the Instant Litigation
On April 26, 2002, Plaintiffs in the instant action filed
their First Amended Complaint. On October 24, 2003, they filed
their Second Amended Complaint. On November 12, 2003, they filed
their Substitute Second Amended Complaint. On February 7, 2005,
they filed their Third (and final) Amended Complaint.
The conduct alleged in the first five Counts of the Third
Amended Complaint occurred during the First Claim Period (January
1, 1990 through February 24, 1998) and arose out of alleged
accounting irregularities engaged in by the Old Waste Fiduciaries.
12
According to Plaintiffs, during the First Claim Period, the Old
Waste Fiduciaries caused or allowed the Old Waste Plan to acquire
approximately $128 million worth of unit shares in the Stock Fund,
which is invested primarily in Company Stock. They argue that the
Old Waste Fiduciaries “knew or should have known that [Company
Stock] was an imprudent pension plan investment because the Old
Waste Fiduciaries participated in, knew of, or should have known of
Old Waste’s massive and widespread accounting irregularities during
the First Claim Period, which caused [Company Stock] to be
significantly overvalued. When the full extent of Old Waste’s
earnings misstatements was revealed, the Plan lost tens of millions
of dollars on its investment in the Stock Fund.” Pls.’ Opp’n to
Defs.’ Omnibus Mot. at 3-4.
In Count I, Plaintiffs claim that the Old Waste Investment
Committee and its individual Trustee Members breached their
fiduciary duties of loyalty and prudence under ERISA Section 404,
29 U.S.C. § 1104, by (1) failing to conduct an adequate fiduciary
review to determine whether the Stock Fund was a prudent
investment; (2) causing the Old Waste Plan to maintain the Stock
Fund as a Plan investment when they knew the unit shares were
inflated in value and not a prudent investment; (3) causing the Old
Waste Plan to make new investments in unit shares of the Stock Fund
when they knew the unit shares were inflated in value and not a
prudent investment; and (4) failing to take steps to prevent losses
13
in the Stock Fund resulting from the investment of Plan
participants’ contributions to the Stock Fund.
In Count II, Plaintiffs claim that the Old Waste
Administrative Committee and its individual Trustee Members
breached their fiduciary duty of loyalty under ERISA Section 404 by
(1) failing to adequately inform Plan participants of the true
risks of investing in the Stock Fund; (2) conveying inaccurate
information about the risks associated with investing in the Stock
Fund; (3) concealing from Plan participants facts regarding Old
Waste’s true financial condition; and (4) failing to disclose to
Plan participants that purchases of unit shares in the Stock Fund
and of Company Stock by the Stock Fund were at inflated prices.
In Count III, Plaintiffs allege that, to the extent Old Waste,
the Old Waste Committees, and their individual Trustee Members
contributed shares of Company Stock to the Old Waste Plan which
were artificially inflated in value, the Plan acquired such shares
for more than fair market value, and therefore, such contributions
constituted prohibited exchanges of stock between the Plan and Old
Waste, a party in interest with respect to the Plan, in violation
of ERISA Section 406(a)(1)(A), 29 U.S.C. § 1106(a)(1)(A).
In Count IV, Plaintiffs maintain that Old Waste, the Old Waste
Board of Directors, and its individual Members breached their
fiduciary duties of loyalty and prudence under ERISA Section 404 by
(1) failing to adequately monitor the performance of the Old Waste
14
Committees; (2) failing to prevent the Old Waste Investment
Committee from offering the Stock Fund as an investment option when
they knew or should have known that it was not a prudent investment
because Old Waste’s financial statements did not report Old Waste’s
true financial condition; (3) failing to prevent the Old Waste Plan
from engaging in prohibited transactions under ERISA involving
Company Stock and unit shares of the Stock Fund; and (4) failing to
provide the individual Trustee Members of the Old Waste Committees
with accurate information regarding Old Waste’s accounting
irregularities.
In Count V, Plaintiffs contend that the Old Waste Fiduciaries
further breached their fiduciary obligations under ERISA
Sections 405(a)(2) and (3), 29 U.S.C. §§ 1105(a)(2) and (3), by
enabling their co-fiduciaries to commit violations of ERISA as
described in Counts I-IV and, with knowledge of such breaches,
failing to make reasonable efforts to remedy them.
The next four Counts (VI-IX) of the Third Amended Complaint
allege fiduciary breaches occurring in the Second Claim Period
(July 15, 1999 through December 1, 1999) against Old Waste and the
New Waste Fiduciaries, which include State Street. According to
Plaintiffs, during the Second Claim Period, these Defendants
“caused or permitted the Old Waste Plan to participate in the
settlement of a securities class action in Illinois federal court
that, according to Defendants, released all of the Plan’s claims,
15
including ERISA claims, arising from acquisitions of [Company
Stock] during part of the First Claim Period. In so doing, Old
Waste and the New Waste Fiduciaries breached their duties of
loyalty and prudence and engaged in a prohibited transaction under
ERISA by failing to conduct an adequate review and evaluation of
the fairness of the Illinois settlement to the Old Waste Plan in
light of the Plan’s unique ERISA claims and the fact that the vast
majority of the Plan’s purchase transactions in the [Stock Fund]
were not open-market transactions covered by the securities
claims.” Pls.’ Opp’n to Defs.’ Omnibus Mot. at 3.
In Count VI, Plaintiffs claim that State Street breached its
fiduciary duties of loyalty and prudence under ERISA Section 404 by
failing to adequately investigate and preserve the fiduciary breach
claims alleged in Counts I through V. According to Plaintiffs,
“[i]nstead of protecting those potential ERISA claims, which might
have been asserted against the former fiduciaries of the Plan,
State Street Bank caused the claims to be released in the Illinois
Securities Litigation without investigating the value or viability
of those claims, without determining whether the settlement was
fair to the Plan and without obtaining consideration for the
release of the Plan’s unique ERISA claims.” Pls.’ Opp’n to State
Street’s Mot. at 15.
In Count VII, Plaintiffs allege that Old Waste and State
Street, by approving the Plan’s participation in the Illinois
16
Securities Settlement, caused the New Waste Plan to engage in a
prohibited exchange with Old Waste of securities and ERISA claims
that the Plan had against Old Waste and its officers and directors,
all of whom were parties in interest with respect to the Plan, in
violation of ERISA Section 406(a)(1)(A). They claim that Old Waste
is also liable for this violation because it was the party in
interest which engaged in the prohibited exchange with the pension
plan it sponsored.
In Count VIII, Plaintiffs claim that the New Waste Investment
Committee and its individual Trustee Members breached their
fiduciary duties of prudence and loyalty under ERISA Section 404 by
failing to adequately monitor the performance of State Street in
connection with its decision to have the Plan participate in the
Illinois Securities Settlement.
In Count IX, Plaintiffs contend that State Street, Old Waste,
the New Waste Investment Committee, and its individual Trustee
Members further breached their fiduciary obligations under ERISA
Sections 405(a)(2) and (3) by enabling their co-fiduciaries to
commit violations of ERISA as described in Counts VI-VIII and, with
knowledge of such breaches, failing to make reasonable efforts to
remedy such breaches.
In Count X of the Third Amended Complaint, Plaintiffs allege
fiduciary breaches occurring in the Third Claim Period (February 7,
2002 through July 15, 2002) against State Street. According to
17
Plaintiffs, State Street breached its fiduciary duty of care and
loyalty under ERISA Section 404 by approving the Plan’s
participation in the Texas Securities Settlement. According to
Plaintiffs, State Street failed to conduct an adequate review of
potential fiduciary breach claims that might have been asserted
against the Old Waste Fiduciaries and released such claims in the
Texas Securities Settlement without obtaining adequate
consideration.
Plaintiffs seek (1) certification of this action as a class
action; (2) judgment in their favor for breach of fiduciary duty
and/or co-fiduciary breach of duty against all Defendants; (3) an
order requiring Defendants to restore to the New Waste Plan all
losses occasioned by their breach of fiduciary duty and/or co-
fiduciary breach of duty; (4) an order for appropriate relief to
correct the prohibited transactions Defendants engaged in; (5) an
order for appropriate relief to enjoin the acts and practices of
Defendants alleged herein which violate ERISA; and (6) reasonable
attorneys’ fees and costs.
On March 31, 2005, Defendants filed the instant Omnibus Motion
to Dismiss. On that same day, State Street filed the instant
Motion to Dismiss.
II. STANDARD OF REVIEW
“A motion to dismiss for failure to state a claim upon which
relief can be granted is generally viewed with disfavor and rarely
18
granted. For the purposes of such a motion, the factual
allegations of the complaint must be taken as true, and any
ambiguities or doubts concerning the sufficiency of the claim must
be resolved in favor of the pleader.” Doe v. United States Dep’t
of Justice, 753 F.2d 1092, 1102 (D.C. Cir. 1985) (internal
citations omitted) (emphasis in original).
To survive a motion to dismiss, a plaintiff need only plead
“enough facts to state a claim to relief that is plausible on its
face” and to “nudge[] [his or her] claims across the line from
conceivable to plausible.” Bell Atl. Corp. v. Twombly, __ U.S. __,
127 S. Ct. 1955, 1974 (2007). “[O]nce a claim has been stated
adequately, it may be supported by showing any set of facts
consistent with the allegations in the complaint.” Id. at 1969.
Under the standard set out in Twombly, a “court deciding a
motion to dismiss must not make any judgment about the probability
of the plaintiff’s success . . . must assume all the allegations in
the complaint are true (even if doubtful in fact) . . . [and] must
give the plaintiff the benefit of all reasonable inferences derived
from the facts alleged.” Aktieselskabet AF 21. November 2001 v.
Fame Jeans Inc., 525 F.3d 8, 17 (D.C. Cir. 2008) (internal
quotation marks and citations omitted).
19
III. ANALYSIS
A. Plaintiffs Have Stated a Valid Claim under ERISA Section
502(a)(2) for Plan-Wide Relief
Plaintiffs’ Third Amended Complaint states that this action
was brought “pursuant to § 502(a)(2) and (3) of ERISA, 29 U.S.C.
§ 1132(a)(2) and (3) to obtain appropriate relief on behalf of the
plan,” Third Am. Compl. ¶ 17, and seeks a judgment that will
“restore to the New Waste Plan all losses occasioned by
[Defendants’] breaches of fiduciary duties.” Id. ¶ 211(3).
Defendants contend that, despite Plaintiffs’ contrary claims,
this suit concerns individualized relief for the particularized
harm suffered by a subset of Plan participants and does not seek to
vindicate the rights or interests of the Plan as a whole. See
Defs.’ Omnibus Mot. at 42. Defendants specifically cite to
Plaintiffs’ request for relief to be “allocated to the accounts of
participants of the Old Waste Plan who invested in Company Stock
during the Class Period.” Third Am. Compl. ¶ 30. According to
Defendants, “[b]ecause [Plaintiffs] seek relief only on behalf of
those participants who elected to invest in the Stock Fund, and
because Plaintiffs’ requested relief would result in no benefit for
those Plan participants who did not elect to invest in the Stock
Fund, Plaintiffs are not seeking Plan-wide relief. Accordingly,
ERISA § 502(a)(2) provides them with no basis to bring their
claims.” Defs.’ Omnibus Mot. at 46.
20
ERISA Section 502(a)(2) provides that “[a] civil action may be
brought . . . by the Secretary, or by a participant, beneficiary or
fiduciary for appropriate relief under section 1109 of this title
[ERISA Section 409].” 29 U.S.C. § 1132(a)(2). ERISA Section 409
states, in relevant part, that a fiduciary who breaches ERISA
duties is “personally liable to make good to such plan any losses
to the plan resulting from each such breach[.]” 29 U.S.C.
§ 1109(a). In Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134(1985), the Supreme Court interpreted the language of Section 409
to permit only those actions in which the sought-after recovery
benefits the plan as a whole, as distinguished from those which
benefit an individual beneficiary.10 Therefore, any recovery for
a violation of Sections 409 and 502(a)(2) “must be on behalf of the
plan as a whole, rather than inuring to individual beneficiaries.”
Horan v. Kaiser Steel Ret. Plan, 947 F.2d 1412, 1418 (9th Cir.
1991) (citing Russell, 473 U.S. at 140); Plumb v. Fluid Pump Serv.,
Inc., 124 F.3d 849, 863 (7th Cir. 1997) (same); see Kuper v.
Iovenko, 66 F.3d 1447, 1452-53 (6th Cir. 1995) (same); Drinkwater
v. Metro. Life Ins. Co., 846 F.2d 821, 825 (1st Cir. 1988) (same).
10
See Russell, 473 U.S. at 140 (“[R]ecovery for a violation
of § 409 inures to the benefit of the plan as a whole.”); id. at
142 (“A fair contextual reading of the statute makes it abundantly
clear that its draftsmen were primarily concerned . . . with
remedies that would protect the entire plan, rather than with the
rights of an individual beneficiary.”); see also Varity Corp. v.
Howe, 516 U.S. 489, 515 (1996) (noting that plaintiff could not
proceed under ERISA Section 502(a)(2) because “that provision, tied
to § 409, does not provide a remedy for individual beneficiaries”).
21
For the following reasons, the Court concludes that Plaintiffs
are suing on behalf of the Plan as a whole, and thus meet the
requirements of ERISA Sections 409 and 502(a)(2). First, the
entire Plan is in fact impacted by the alleged fiduciary and co-
fiduciary breaches because all Plan beneficiaries have Company
Stock. Plan beneficiaries acquire their assets either through
their individual investments in the Stock Fund or through the
Company’s matching contributions, which consist primarily of
Company Stock. Second, most of the Plan’s assets are composed of
Company Stock. Defendants allegedly retained Company Stock as an
investment alternative even though they knew that the Company’s
financial status was not accurately reflected in its financial
statements.11 Thus, all Plan members would benefit if Plaintiffs
11
Defendants cite Milofsky v. Am. Airlines, Inc., 404 F.3d
338 (5th Cir. 2005) and In re Schering-Plough Corp. ERISA
Litig.,387 F. Supp. 2d 392 (D.N.J. 2004) in support of their claim
that Plaintiffs are seeking individual relief, rather than relief
on behalf of the Plan. Both cases are distinguishable. In
Milofsky, the plaintiffs did not seek relief on behalf of the plan,
and there was no indication that the entire plan was impacted. In
this case, Old Waste made matching contributions in the Stock Fund
on behalf of every participant in the Old Waste Plan. See In re
Syncor ERISA Litig., 351 F.Supp.2d 970, 990 (C.D. Cal. 2004)
(distinguishing Milofsky on this ground); In re Enron Corp. Sec.,
Derivative & ERISA Litig., 228 F.R.D. 541, 557-58 (S.D. Tex. 2005)
(distinguishing Milofsky and finding that, under circumstances
similar to those of the instant case, the relief sought would
benefit the plan). As to In re Schering-Plough Corp., the company,
unlike Old Waste, did not make matching contributions to its plan
in the form of company stock. See In re Schering-Plough Corp.
ERISA Litig., 387 F. Supp. 2d at 400 (noting that this is
“critical” in assessing whether the relief sought would benefit the
plan).
22
succeed on this claim.
Accordingly, Plaintiffs have stated a valid claim under ERISA
Section 502(a)(2) for Plan-wide relief.12
B. Plaintiffs’ First Period Claims (Counts I-V) Are Time-
Barred under ERISA Section 413
Defendants move to dismiss Counts I - V of Plaintiffs’ Third
Amended Complaint on the ground that Plaintiffs’ First Period
claims, which are alleged to have occurred between January 1, 1990
and February 24, 1998, are time-barred. The limitation period for
ERISA breach of fiduciary duty claims is governed by ERISA Section
413, 29 U.S.C. § 1113, which provides, in pertinent part:
No action may be commenced under this subchapter with
respect to a fiduciary’s breach of any responsibility,
duty, or obligation under this part, or with respect to
a violation of this part, after the earlier of
(1) six years after (A) the date of the last action
which constituted a part of the breach or
violation, or (B) in the case of an omission, the
latest date on which the fiduciary could have cured
the breach or violation, or
(2) three years after the earliest date on which the
plaintiff had actual knowledge of the breach or
violation;
except that in the case of fraud or concealment, such
action may be commenced not later than six years after
the date of discovery of such breach or violation.
12
Because the instant action may be brought to recover Plan
losses under ERISA Section 502(a)(2), it is unnecessary for the
Court to address Defendants’ argument that ERISA Section 502(a)(3)
provides no basis for Plaintiffs to obtain the relief they seek.
23
1. ERISA’s three-year limitations period applies to
Plaintiffs’ First Period claims because Plaintiffs
had “actual knowledge of the breach or violation”
Defendants argue that all of Plaintiffs’ First Period claims
are time-barred under ERISA’s three-year limitations period because
Plaintiffs had “actual knowledge of the breach or violation” as of
February 24, 1998 (i.e., more than three years before they filed
the instant action on April 1, 2002). In support of this claim,
Defendants point out that Plaintiffs have acknowledged that “[t]he
full extent of Old Waste’s financial problems” was revealed on
February 24, 1998 “at which time Old Waste issued a press release
reporting [its] financial results for the fourth quarter and full
year 1997, which disclosed special charges and adjustments to
expenses in the fourth quarter, and restatements of prior period
earnings for 1992 through 1996 and the first three quarters of
1997.” Third Am. Compl. ¶ 89.
There is substantial case law from other circuits discussing
the precise meaning of the phrase “actual knowledge” in Section
413(2).13 While all the circuits differ somewhat in their detailed
13
In Fink v. National Savings & Trust Co., 772 F.2d 951,
956-58 (D.C. Cir. 1985), our Court of Appeals considered an earlier
and substantially different version of ERISA Section 413. More
recently, two judges in this District have had an opportunity to
address the issue of “actual knowledge” under the present statute.
See Walker v. Pharmaceutical Research and Manufacturers of America,
461 F. Supp.2d 52, 59-60 (D.D.C. 2006); Larson v. Northrop Corp.,
1992 WL 24970, *4 (D.D.C. Mar. 30, 1992), rev’d on other grounds,
21 F.3d 1164 (D.C. Cir. 1994).
24
analyses of the phrase,14 the Court concludes that the facts alleged
in this case clearly establish, under any of the definitions of
“actual knowledge,” that Plaintiff did in fact have “actual
knowledge” of sufficient facts to establish the existence of a
violation of ERISA more than three years before they filed the
instant action on April 1, 2002.
In the instant case, as Defendants correctly point out, as of
February 24, 1998, the day Old Waste publicly announced its
restatement of prior period earnings, Plaintiffs “had actual
14
For example, in the Third and Fifth Circuits, “‘actual
knowledge of a breach or violation’ requires that a plaintiff have
actual knowledge of all material facts necessary to understand that
some claim exists[.]” Gluck v. Unisys Corp., 960 F.2d 1168, 1177
(3d Cir. 1992); see Reich v. Lancaster, 55 F.3d 1034, 1057 (5th
Cir. 1995) (adopting and applying the Third Circuit’s definition of
“actual knowledge”). Under this approach, sometimes referred to as
the “legal claims” approach, it must be established that a
plaintiff actually knew not only of the events that occurred but
also that those events supported a claim of breach of fiduciary
duty or violation under ERISA.
In the Sixth, Seventh, Ninth, and Eleventh Circuits, “actual
knowledge” requires knowledge only of the underlying facts that
form the basis for the claim. Under this approach, sometimes
referred to as the “underlying facts” approach, “[t]he relevant
knowledge for triggering the statute of limitations is knowledge of
the facts or transaction that constituted the alleged violation.
Consequently, it is not necessary for a potential plaintiff to have
knowledge of every last detail of a transaction, or knowledge of
its illegality.” Martin v. Consultants & Adm’rs, Inc., 966 F.2d
1078, 1086 (7th Cir. 1992) (emphasis in original); see Wright v.
Heyne, 349 F.3d 321, 330 (6th Cir. 2003) (“‘actual knowledge’
requires only knowledge of all the relevant facts, not that the
facts establish a cognizable legal claim under ERISA”) (internal
citations omitted); Blanton v. Anzalone, 760 F.2d 989, 992 (9th
Cir. 1985) (same); Brock v. Nellis, 809 F.2d 753, 755 (11th Cir.
1987) (same).
25
knowledge of all of the essential facts necessary to bring their
First Period claims.” Defs.’ Omnibus Mot. at 28. As of that date,
Plaintiffs knew that “(a) they had acquired their shares of
[Company Stock] through the Plan; (b) the price at which they had
acquired their stock allegedly had been ‘artificially inflated’ by
material undisclosed information about the Company’s ‘true
financial condition’ and widespread ‘accounting irregularities;’
(c) Plan fiduciaries either had failed to discover or to disclose
such information to participants prior to February 24, 1998; and
(d) [they] allegedly were damaged by the non-disclosures.” Id. at
28-29. As Plaintiffs themselves admit, “[b]ased upon the
information set out in the restated financial statements,” it was
clear that “the shares of Company Stock acquired by the predecessor
Old Waste Plan between 1990 [and] February 24, 1998, had been
acquired by the Old Waste Plan Committees and the Individual Old
Waste Plan Trustees at inflated prices exceeding fair market
value.” Third Am. Compl. ¶ 109.
Plaintiffs’ First Period claims are, therefore, time-barred
under ERISA’s three-year limitations period because Plaintiffs had
“actual knowledge of the breach or violation” more than three years
before they filed the instant action on April 1, 2002.15
15
Since the Court concludes that Plaintiffs’ First Period
claims are subject to ERISA’s three-year limitations period because
Plaintiffs had “actual knowledge of the breach or violation,” it is
unnecessary to address Defendants’ alternative argument that those
(continued...)
26
2. Plaintiffs’ allegations of “fraud or concealment”
are insufficient to invoke ERISA’s six-year
limitations period
Plaintiffs claim that even if their First Period claims are
time-barred under ERISA’s three-year limitations period, that
limitation period is tolled in cases such as this “where Plaintiffs
have alleged ‘fraudulent concealment.’” Pls.’ Opp’n to Defs.’
Omnibus Mot. at 53. “[T]he fraudulent concealment doctrine . . .
requires that the defendant engage in active concealment –- it must
undertake some ‘trick or contrivance’ to ‘exclude suspicion and
prevent inquiry.’ Such concealment must rise to something ‘more
than merely a failure to disclose.’” Larson, 21 F.3d at 1174(emphasis in original) (quoting Shaefer v. Arkansas Med. Soc’y and
Tr. of the Arkansas Med. Soc’y Pension Trust, 853 F.2d 1487, 1491
(8th Cir. 1988) (internal citation omitted)). See Shaefer, 853 F.2d
at 1492 (“failure to investigate adequately and relay warnings
. . . does not rise to the level of active concealment, which is
more than merely a failure to disclose”) (citing Hobson v. Wilson,
737 F.2d 1, 33-34 & nn.102-03 (D.C. Cir. 1982)); Martin, 966 F.2d
at 1094 (“Concealment by mere silence is not enough.”) (internal
quotation omitted).
15
(...continued)
claims which are based on alleged breaches of fiduciary duty that
occurred prior to April 1, 1996 are time-barred under ERISA’s six-
year limitations period.
27
Plaintiffs have failed to show fraud or concealment sufficient
to invoke ERISA’s six-year limitations period because they have
pointed to no evidence showing that Defendants actively concealed
“the true financial condition of the company as well as the fact
that unit shares in the Stock Fund were inflated in value and no
longer a prudent investment option for participants.” Pls.’ Opp’n
to Defs.’ Omnibus Mot. at 54 (internal citations omitted).
Plaintiffs claim that Defendants “fail[ed] to disclose
information regarding Old Waste’s true financial condition[,]” id.
at 55, and “affirmatively misrepresented to participants the true
value of their investments in the Stock Fund each time they
provided participants with an account statement[] and thereby
deflected suspicion and inquiries from participants regarding the
fiduciaries’ breaches alleged in the First Claim Period.” Id.
As Defendants point out, however, “[b]ecause the Company
initiated an investigation of the alleged ‘accounting
irregularities’ and then, on February 24, 1998, publicly announced
its restatement of prior period earnings and its reasons for the
restatement, Plaintiffs have no basis to suggest that Plan
fiduciaries ‘took affirmative steps to hide [their] breach[es]’
until the limitations period had run.” Defs.’ Omnibus Reply at 8
(quoting Kurz v. Philadelphia Elec. Co., 96 F.3d 1544, 1552 (3d
Cir. 1996)).
28
In addition, “allegations of fraudulent concealment . . . must
meet the requirements of Fed. R. Civ. P. 9(b).”16 Larson, 21 F.3d
at 1173 (internal citations omitted). Rule 9(b) does not permit a
plaintiff to rely, as do Plaintiffs in the instant case, on “wholly
conclusory allegations of fraud, or contentions that [D]efendants
‘knew or should have known’ facts that were supposedly
misrepresented or not disclosed. Rather, it requires a plaintiff
accusing a defendant of fraud to set forth specific facts that will
support the accusation.” Bender v. Rocky Mountain Drilling
Assocs., 648 F.Supp. 330, 336 (D.D.C. 1986) (internal citation
omitted); see Third Am. Compl. ¶¶ 79-87, 108-113, 129, 147, 166.
Thus, for the foregoing reasons, Plaintiffs’ allegations of
“fraud or concealment” are insufficient to invoke ERISA’s six-year
limitations period.17
16
Rule 9(b) requires that “in all averments of fraud ...
the circumstances constituting fraud . . . shall be stated with
particularity.” Fed. R. Civ. P. 9(b).
17
Since the Court has concluded that Plaintiffs’
allegations of “fraud or concealment” are insufficient to invoke
ERISA’s six-year limitations period, and thus that Plaintiffs’
First Period claims are time-barred under ERISA Section 413, it is
unnecessary for the Court to address Defendants’ argument that
Plaintiffs are estopped by the Illinois Securities Settlement from
raising ERISA-based claims that arose during the Illinois
Securities Litigation period (November 3, 1994 through February 24,
1998).
29
C. Plaintiffs Have Stated Viable Second Period Claims
(Counts VI - IX)
1. Plaintiffs’ Second Period claims are not improper
collateral attacks on the fairness and adequacy of
the Illinois Securities Settlement
Defendants argue that Plaintiffs’ Second Period claims “must
be dismissed as improper collateral attacks on the fairness of the
Illinois Settlement and the adequacy of class representation.”
Defs.’ Omnibus Mot. at 30. According to Defendants, “Judge
Andersen adopted a variety of procedures designed to protect the
rights of unnamed class members –- including those of the Plan and,
by extension, Plan participants -– and then made express findings
regarding their adequacy.” Id. at 31 (internal citations omitted).
As Plaintiffs point out, however, at this early stage of the
case, “[t]here are at the very least factual disputes as to whether
Plaintiffs and other Plan participants were represented adequately
by either the lead plaintiffs or the Plan fiduciaries and received
adequate notice that valuable ERISA claims were being released in
the Illinois settlement.”18 Pls.’ Opp’n to Defs.’ Omnibus Mot. at
18
Defendants argue that “the sweeping language of the
Illinois Settlement demonstrates an absolute intent to settle and
release all disputes that were or might have been raised in
connection with the transactions, acts, and omissions related to
that litigation . . . . This, of course, includes any and all
ERISA claims that could have been brought by the Plan against
Defendants here.” Defs.’ Omnibus Reply at 12. The Illinois
Securities Settlement, however, referenced neither the Plan, nor
any ERISA claims. See Defs.’ Ex. 6.
30
49. Moreover, there are factual and legal disputes “as to whether
the release even applies to Plaintiffs’ ERISA claims.” Id. at 51.
Thus, as Plaintiffs correctly argue, “[e]ven if Defendants
could shoulder their burden of establishing this affirmative
defense of release, they cannot do so through [the instant] motion
to dismiss. Defendants must plead, and attempt to prove, after a
full record has been made, that they were entitled to involuntarily
release Plaintiffs’ claims.” Id. at 53 (internal citation
omitted).
2. Count VI states a valid claim for relief against
State Street for failing to investigate and
preserve its potential ERISA claims in the Illinois
Securities Litigation in violation of ERISA
Section 404
In Count VI, Plaintiffs allege that State Street breached its
fiduciary duty under ERISA Section 404 because it did not act
prudently during settlement of the Illinois Securities Litigation.
Specifically, Plaintiffs claim that State Street breached its
fiduciary duties of loyalty and prudence by failing to adequately
investigate and preserve the fiduciary breach of claims alleged in
Counts I through V. Plaintiffs argue that State Street failed to
protect potential ERISA claims by releasing them “without
investigating the value or viability of those claims, without
determining whether the settlement was fair to the Plan and without
obtaining consideration for release of the Plan’s unique ERISA
claims.” Pls.’ Opp’n to State Street’s Mot. at 15.
31
The duties of loyalty and prudence mandated in Section 404(a)
of ERISA include the “duty to take reasonable steps to realize on
claims held in trust.” Donovan v. Bryans, 566 F. Supp. 1258, 1262
(E.D. Pa. 1983). When, as in this case, a plan has potential
claims against a third party, the “trustees have a duty to
investigate the relevant facts, to explore alternative courses of
action and, if in the best interests of the plan participants, to
bring suit . . . .” McMahon v. McDowell, 794 F.2d 100, 112 (3d
Cir. 1986).
Once State Street learned that Plan fiduciaries had caused the
Plan to acquire Old Waste stock at inflated prices and were trying
to obtain a release of all the Plan’s claims against them without
payment of any consideration, State Street had a duty to
investigate whether there was any merit to the Plan’s potential
ERISA claims. Depending on the result of that investigation, State
Street then had the duty to pursue one of three courses of action:
do nothing, object to the proposed settlement unless the Plan was
given adequate consideration for release of those potential ERISA
claims, or opt out of the Illinois Securities Litigation and file
a separate ERISA action.
32
Plaintiffs allege that State Street did no investigation of
any kind and therefore had no basis on which to take no action when
it learned of the proposed settlement.19
In its Motion to Dismiss, State Street argues that these
“potential” ERISA claims “are on their face weak” and have no
“merit” because the Plan’s acquisition of Old Waste stock
“implicated issues of plan design rather than fiduciary discretion”
for which the Old Waste Defendants could not be sued. State Street
Mot. at 5. However, as noted, infra, in Section III.C.4, State
Street, as Trustee, had a duty under Section 404(a) of ERISA to
ignore the terms of the Plan document if it knew that investment in
19
The Department of Labor (“DOL”), in a ruling allowing
fiduciaries to enter into settlements of plan claims against plan
sponsors in securities class action litigation, where prudent,
emphasized that the “fiduciary’s decisions in authorizing a
[securities] settlement are subject to the fiduciary responsibility
provisions” under § 404(a) of ERISA . . . and require that such a
decision be arrived at through a “prudent decision-making process”
(see Prohibited Transaction Exemption 2003-39; Class Exemption for
the Release of Claims and Extensions of Credit in Connection with
Litigation, 68 Fed. Reg. 75,632 (Dec. 31, 2003) (“PTE 2003-39") at
75,635. That decision includes consideration of: (i) whether the
“plan may [under ERISA] have another avenue of recovery not
available to other shareholders,” id. at 75,637, (ii) the “legal
effect that a settlement agreement may have on all claims
[including potential ERISA claims] that might be brought on behalf
of the plan,” id., (iii) “the value of these additional claims,”
id. at 75,638, and (iv) “whether additional relief may be available
for the ERISA claims before agreeing to a broad release,” id. at
75,637. Moreover, if after considering these factors the fiduciary
determines that the settlement is not fair to the plan, the
fiduciary should object to the settlement and, if possible, opt
out. Id. at 75,635-36.
33
unit shares of the Stock Fund were no longer a prudent investment.20
Finally, State Street asks for a ruling on the merits that its
actions were not imprudent because the Complaint’s allegations do
not establish a “causal connection” between its actions and any
loss. In Section III.E., infra, the Court notes that it is not
Plaintiffs’ burden to plead causation, once they prove a breach of
fiduciary duty by Defendants. See Chao v. Trust Fund Advisors,
2004 WL 444029, at *6 (D.D.C. Jan. 20, 2004). Moreover, any
“causal connection between breach and loss, like breach itself, is
a fact-intensive inquiry . . .” to be decided at trial. Roth v.
Sawyer-Cleator Lumber Co., 16 F.3d 915, 919 (8th Cir. 1994).
20
In language that is particularly applicable to this case,
the Department cautioned that,
a fiduciary should understand, in advance of signing, the
legal effect that a settlement agreement may have on all
claims that might be brought by or on behalf of the plan.
. . . It is not uncommon for the same transactions to
give rise to both ERISA and securities fraud claims. The
plan, and by extension, the participants and
beneficiaries of the plan, are entitled to the same
recovery as other shareholders in the securities fraud
settlement. However, the participants and beneficiaries
may have another avenue of recovery not available to
other shareholders. They are authorized, under ERISA,
. . . to bring suit to make the plan whole for all losses
caused by a breach of fiduciary duty. . . . [P]lan
fiduciaries should consider whether additional relief may
be available for the ERISA claims before agreeing to a
broad release.
PTE 2003-39, 68 Fed. Reg. 75,632.
34
For all these reasons, the Court concludes that Count VI
states a valid cause of action against State Street for failing to
adequately investigate and protect its potential ERISA claims in
the Illinois Securities Ligitation.
3. Count VII states a valid claim for relief against
State Street and Old Waste for engaging in a
prohibited transaction in violation of ERISA
Section 406
In Count VII, Plaintiffs allege that Old Waste and State
Street, by approving the Old Waste Plan’s participation in the
Illinois Securities Settlement, caused the New Waste Plan to engage
in a prohibited exchange with Old Waste of securities and ERISA
claims that the Old Waste Plan had against Old Waste and its
officers and directors, all of whom were parties in interest with
respect to the Plan, in violation of ERISA Section 406(a)(1)(A).
Plaintiffs claim that Old Waste is also liable for this violation
because it was the party in interest that engaged in the prohibited
exchange (the release of a chose in action) with the Old Waste
pension Plan it sponsored.
ERISA Section 406(a)(1) “categorically bar[s] certain
transactions deemed likely to injure the pension plan.” Harris
Trust & Sav. Bank. v. Salomon Smith Barney, Inc., 530 U.S. 238, 242
(2000) (internal quotation omitted). It provides, in relevant
part, that “[a] fiduciary with respect to a plan shall not cause
the plan to engage in a transaction, if he knows or should know
that such transaction constitutes a direct or indirect . . .
35
exchange . . . of any property between the plan and a party in
interest.” 29 U.S.C. § 1106(a)(1)(A).
Defendants move to dismiss Count VII on two grounds. First,
they claim that their participation in the Illinois Securities
Settlement is not a prohibited transaction. See Defs.’ Omnibus
Mot. at 37. Specifically, they argue that “[i]t is indisputable
that the Plan’s original decision to offer [Company Stock] as an
investment option under the Plan is not prohibited by ERISA § 407
and § 408(e). See 29 U.S.C. §§ 1107, 1108(e). The same statutory
framework that permits investment in ‘qualifying employer
securities,’ and that exempts a plan’s acquisition of such
securities for ‘adequate consideration,’ necessarily includes the
authority to settle claims relating to such investments.” Id. at
38.
Defendants seek to rely on a DoL Advisory Opinion Letter, No.
95-26A, 1995 WL 614557. However, it does not support their
position. According to the DoL Advisory Opinion, “the settlement
of [a] lawsuit would be an exchange of property (a chose in action)
between such Plans and parties in interest as described in section
406(a)(1)(A).” DoL Opinion Letter at 2. Thus, as Plaintiffs
contend, it is a prohibited exchange of property under ERISA
Section 406 for State Street, a Plan fiduciary, to enter into the
Illinois Securities Settlement on behalf of the New Waste Plan
against Old Waste, the Plan sponsor and a party in interest, unless
36
the transaction is exempted from the proscriptions of ERISA Section
406.
Second, Defendants claim that, even if the Court finds that
their participation in the Illinois Securities Settlement is a
prohibited transaction, such participation is retroactively
exempted from ERISA’s restrictions on prohibited transactions by
PTE 2003-39, 68 Fed. Reg. 75,632.
To qualify for PTE 2003-39, Defendants must show, among other
things, that before approving the settlement, the Plan fiduciaries
engaged in a “prudent decision-making process” which included
considering “whether additional relief may be available for the
ERISA claims before agreeing to a broad release.” Id. at 75,636,
75,637. Defendants also must show that “the settlement is
reasonable in light of the plan’s likelihood of full recovery, the
risks and costs of litigation, and the value of claims foregone,”
id. at 75,636, 75,639, and that “the terms and conditions of the
transaction are no less favorable to the plan than comparable arms-
length terms and conditions that would have been agreed to by
unrelated parties under similar circumstances.” Id. at 75,639.
Plaintiffs respond that Defendants are not covered by PTE
2003-39 because the challenged settlement is not reasonable. To
meet this reasonableness standard, Defendants must show that before
approving the challenged settlement, the Plan fiduciaries
“consider[ed] whether additional relief may be available for the
37
ERISA claims[.]” Id. at 75,637. If, as Plaintiffs allege in the
Third Amended Complaint, State Street approved the challenged
settlement without giving proper consideration to “the availability
of additional relief,” the settlement is not reasonable and PTE
2003-39 does not retroactively exempt the transaction from the
proscriptions of ERISA Section 406. These factual issues can only
be resolved at trial after full discovery.
Defendants also rely on the “fairness” findings by Judge
Anderson in the Illinois Securities Litigation to demonstrate that
the Plan’s participation in that settlement was not a prohibited
transaction under ERISA Section 406(a)(1)(A). All his findings
related to the fairness and reasonableness of the settlement as to
the members of the securities class, and as to their claims under
the securities laws. As Plaintiffs accurately note, he made no
findings as to members of any ERISA class, or ERISA claims which
were supposedly being released in the Settlement Agreement on
behalf of the members of the securities class.
Thus, for the foregoing reasons, Count VII states a valid
claim for relief against State Street and Old Waste for engaging in
a prohibited transaction in violation of ERISA Section 406.
4. Plaintiffs’ Second Period claims against State
Street state valid claims for relief
State Street argues that Plaintiffs fail to allege that it
acted imprudently to the detriment of the Plan in connection with
the Illinois Securities Settlement, and thus, that Plaintiffs’
38
Second Period claims should be dismissed. Specifically, State
Street claims that “the ‘potential’ ERISA claims that plaintiffs
fault [it] for releasing in the Illinois Settlement were not viable
to begin with” because “all of the allegations about company stock
in the Plan implicate issues of plan design rather than fiduciary
discretion, and none of the defendants named in Counts 1-5 can
properly be sued for breach of ERISA fiduciary duties in connection
with investments in company stock funds during the First Claim
Period.” State Street’s Mot. at 5, 6.
According to State Street, the decision of the Old Waste
Fiduciaries to offer the Stock Fund as an investment option does
not implicate fiduciary duties because the Plan required the
establishment and maintenance of the Stock Fund and precluded the
elimination of that Fund. See Defs.’ Omnibus Mot. at 56 (citing
Defs.’ Omnibus Mot., Ex. 21, §§ 5.2(b)(i), 9.3(b)(i)).
However, this does “‘not ipso facto relieve [Defendants] of
their fiduciary obligations.’” In re Polaroid Erisa Litig., 362
F.Supp.2d 461, 474 (S.D.N.Y. 2005) (quoting Rankin v. Rots, 278
F. Supp. 2d 853, 879 (E.D. Mich. 2003)). The Old Waste Fiduciaries
had discretionary authority over the Stock Fund. “By force of
statute, [the Old Waste Fiduciaries] had the fiduciary
responsibility to disregard the Plan and eliminate [the Stock Fund]
if the circumstances warranted.” In re Polaroid Erisa Litig., 362
F.Supp.2d at 474 (citing 29 U.S.C. § 1104(a)(1)(D)). As such, to
39
the extent the Stock Fund was an imprudent investment, as alleged
by Plaintiffs, the Old Waste Fiduciaries possessed the authority as
a matter of law to exclude the Stock Fund as an investment option,
regardless of the Plan’s dictates. See id. at 474-75.
In addition, the Plan does not require that the assets in the
Stock Fund be invested exclusively in Company Stock. Rather, it
provides that the Stock Fund is to “consist primarily of shares of
common stock of the Company,” Defs.’ Omnibus Mot., Ex. 21,
§ 5.2(b)(i) (emphasis added). It also provides that the Stock Fund
“shall be invested at the discretion of the Investment Committee.”
Id. § 5.2(a). Such language allows the Old Waste Fiduciaries
considerable discretion regarding the extent to which the Stock
Fund is invested in Company Stock. See In re Enron Corp. Sec.,
Derivative & ERISA Litig., 284 F. Supp. 2d 511, 670 (S.D. Tex.
2003) (“‘primarily’ means ‘for the most part,’ not ‘all,’ and []
the leeway provides the plan fiduciaries with considerable
discretion”); In re Sprint Corp. ERISA Litig., 388 F. Supp. 2d
1207, 1220 (D. Kan. 2004) (same); In re McKesson HBOC, Inc., ERISA
Litig., 2002 WL 31431588, at *4-5 (N.D. Cal.) (same).
Moreover, the fact that the Plan document directed the Old
Waste Fiduciaries to invest “primarily” in Company Stock did not
require them to continue to invest in such stock if they knew it
40
was no longer a prudent investment, as alleged by Plaintiffs.21 See
29 U.S.C. § 1104(a)(1)(D) (a fiduciary may only follow plan terms
to the extent that the terms are consistent with ERISA). See also
Cokenour v. Household Int’l, Inc., 2004 WL 725973, at *5 (N.D.
Ill.) (“No section in ERISA [can] be read to require fiduciaries to
make investments for a plan if the fiduciary has information that
shows that the investment is a poor one.”); Hill v. Bellsouth
21
Defendants claim that Plaintiffs fail to plead facts
sufficient to rebut the so-called ESOP presumption (Employee Stock
Ownership Plan presumption) articulated in Moench v. Robertson, 62
F.3d 553, 571 (3d Cir. 1995) and adopted by Kuper, 66 F.3d at 1459,
that an ESOP fiduciary is entitled to a presumption that its
decision to remain invested in company stock was reasonable. See
State Street’s Reply at 8.
Even if our Circuit were to adopt the ESOP presumption, which
it has not, its application at the motion to dismiss stage would be
premature. See In re Enron Corp. Sec., Derivative & ERISA Litig.,
284 F. Supp. 2d at 534, n.3 (“[a] determination as to whether an
ESOP fiduciary breached its fiduciary duty should not be made on a
motion to dismiss, but only after discovery develops a factual
record”); Stein v. Smith, 270 F.Supp.2d 157, 171-72 (D. Mass. 2003)
(plaintiffs need not plead facts rebutting the ESOP presumption);
In re Xcel Energy, Inc. Sec., Derivative & ERISA Litig., 312
F.Supp.2d 1165, 1180 (D. Minn. 2004) (declining to apply ESOP
presumption on a motion to dismiss); In re Elect. Data Sys. Corp.
ERISA Litig., 305 F.Supp.2d 658, 670 (E.D. Tex. 2004) (same); Pa.
Fed’n v. Norfolk S. Corp. Thoroughbred Ret. Inv. Plan, 2004 WL
228685 at *7 (E.D. Pa.) (same); Rankin, 278 F.Supp.2d at 879)
(declining to rely on the ESOP presumption because whether the
defendants breached their fiduciary obligations required the
development of the facts of the case, and plaintiff stated a claim
in that respect); In re Ikon Office Solutions, Inc. Sec. Litig., 86
F.Supp.2d 481, 492 (E.D. Pa. 2000) (denying motion to dismiss
because “it would be premature to dismiss [the complaint] without
giving plaintiffs an opportunity to overcome the presumption”); see
also Swierkiewicz v. Sorema N.A., 534 U.S. 506, 510-14 (2002)
(presumptions are evidentiary standards that should not be applied
to motions to dismiss).
41
Corp., 313 F. Supp. 2d 1361, 1367 (N.D. Ga. 2004) (same) (citing
Herman v. NationsBank Trust Co., 126 F.3d 1354, 1369 (11th Cir.
1997); In re Enron Corp. Sec., Derivative & ERISA Litig., 284
F.Supp.2d at 549; Moench, 62 F.3d at 567 (defendants were required
to exercise discretionary judgment as to investment decisions and
such decisions were subject to ERISA’s fiduciary standards because
the plan directed only that funds would be invested ‘primarily’ in
the employer’s stock); Kuper, 66 F.3d at 1457 (same); Cent. States,
Southeast and Southwest Areas Pension Fund v. Cent. Transp., Inc.,
472 U.S. 559, 568 (1985) (“trust documents cannot excuse trustees
from their duties under ERISA”).
State Street also claims that “plaintiffs allege no facts from
which it is possible to infer that the Illinois settlement did not
adequately and fairly compensate the Plan” and that, therefore, the
Plan has not suffered “any meaningful prejudice.” State Street’s
Mot. at 6, 7. As discussed supra, however, PTE 2003-39 requires
Defendants to show that, among other things, before approving the
settlement, the Old Waste Fiduciaries engaged in a “prudent
decision-making process” which included considering “whether
additional relief may be available for the ERISA claims before
agreeing to a broad release.” PTE 2003-39 at 75,636, 75,637. In
light of PTE 2003-39, Plaintiffs are correct that if, as alleged in
the Third Amended Complaint, State Street approved a broad release
in the Illinois Securities Litigation which included ERISA claims
42
without giving proper consideration to “whether additional relief
may be available for the ERISA claims,” it clearly breached its
fiduciary obligations under ERISA and Plaintiffs’ Second Period
claims against State Street state valid claims for relief.
5. Count VIII states a valid cause of action against
New Waste Investment Committee and its individual
members for failing to adequately monitor State
Street’s decision to participate in the Illinois
Securities Litigation
In Count VIII, Plaintiffs contend that the New Waste Plan
Investment Committee and its individual members violated Section
404(a)(1)(A) and (B) of ERISA, 29 U.S.C. § 1104(a)(1)(A) and (B),
by failing to “discharge their duties with respect to the [New
Waste] Plan solely in the interest of the participants and their
beneficiaries and for the exclusive purpose of providing benefits
to participants and their beneficiaries and defraying reasonable
expenses of administering the Plan and with the care, skill,
prudence and diligence” that a “prudent man . . . would use.”
Third Am. Compl. ¶ 188.
Specifically, Plaintiffs allege that because the New Waste
Plan Investment Committee and its individual members appointed
State Street to be the Trustee of that Plan and the Investment
Manager of the Stock Plan, they possessed a duty to “periodically
review [State Street’s] performance.” Pls.’ Opp’n to Defs. Omnibus
Mot. at 33-34. They further allege that the New Waste Plan
Investment Committee and its individual members failed to discharge
43
this duty because they did not “adequately monitor” State Street in
its decision to have the New Waste Plan participate in the
settlement of the Illinois Securities Litigation. Third Am. Compl.
¶ 188.
Plaintiffs state that the New Waste Plan Investment Committee
and its individual members “knew or should have known that State
Street Bank’s actions in this regard constituted an ERISA-
prohibited transaction, breached fiduciary duties, and were not in
the Plan’s interest.” Id. Plaintiffs state that the New Waste
Plan Investment Committee and its individual members “failed to
undertake any review or oversight of State Street’s conduct or
decision-making” in the Illinois Securities Litigation. Pls.’
Opp’n to Defs.’ Omnibus Mot. at 34 (emphasis in original).
While not denying this factual allegation, Defendants argue
that it is an “improper collateral attack[] on the fairness of the
Illinois Settlement and the adequacy of class representation.”
Defs.’ Omnibus Mot. at 30. They argue that Judge Andersen employed
the proper “safeguards” in approving of the settlement as fair and
adequate. Id. at 31. Specifically, he “adopted a variety of
procedures designed to protect the rights of unnamed class members
. . . and then made express findings regarding their adequacy.”
Id.22 He also determined that “a full opportunity had been offered
22
It should be noted that Judge Anderson found the
Settlement to be fair and reasonable to “shareholders.”
44
to members of the Class to object to the proposed Settlement, to
participate in the hearing thereon, or to opt out.” Id. (quoting
Defs.’ Omnibus Mot., Ex. 6, ¶ 15.
Finally, they argue that the New Waste Plan Investment
Committee and its individual members “acted prudently by recusing
themselves from matters related to the litigation and settlement of
the Illinois Securities Litigation.” Defs.’ Omnibus Mot. at 34.
They point out that Plaintiffs have not argued that the recusal
decision was “imprudent or unreasonable.” Defs.’ Omnibus Reply at
32.
As Plaintiffs correctly state, the “monitoring duties of
appointing fiduciaries under ERISA . . . are well established in
the case law.” Pls.’ Opp’n to Defs.’ Omnibus Mot. at 20. “The
power to appoint and remove trustees carries with it the
concomitant duty to monitor those trustees’ performance.” Liss v.
Smith, 991 F. Supp. 278, 311 (S.D.N.Y. 1998); Chao, 2004 WL 444029,
at *4 (“a fiduciary ‘had a duty to monitor performance with
reasonable diligence’”) (quoting Whitfield v. Cohen, 682 F. Supp.
188, 196 (S.D.N.Y. 1998)); see also Baker v. Kingsley, 387 F.3d
649, 663-64 (7th Cir. 2004) (discussing the duty to monitor); In re
Ford Motor Co. ERISA Litigation, 590 F. Supp. 2d 883, 919
(E.D.Mich. 2008) (finding that the Complaint adequately stated a
claim for breach of the “fiduciary duty to monitor”).
Defendants do not argue that neither New Waste Plan Investment
45
Committee nor its individual members had a duty to monitor its
appointees. Instead, they argue that the settlement was fair and
adequate, and even if it was not, the duty to monitor yields in the
face of a fiduciary’s obligation to be independent. While
Defendants properly cite to Leigh v. Engle, 727 F.2d 113, 125, 132
(7th Cir. 1984), to support their claim that it may sometimes be
prudent for a fiduciary to “step aside” in order to preserve its
independence in the face of a potential conflict of interest, they
provide no case law to support their assertion that the duty to
monitor must yield to the obligation to be independent.
As noted, supra, in Sections III.C.1-3, Plaintiffs have stated
valid claims for relief with regard to the Illinois Securities
Settlement. At this stage of the litigation, there are factual
disputes about whether the Settlement was fair and adequate.
Moreover, the question of what the prudent course of action
was in this particular case is a factual one. At this early stage
of the litigation, it is not proper to speculate about whether
prudence required recusal or more intensive monitoring. As noted,
supra, in Section III.C.1, 2, and 3, such factual issues can only
be resolved at trial after full discovery.
For all these reasons, the Court concludes that Count VIII
states a valid cause of action against New Waste Plan Investment
Committee and its individual members for failing to adequately
monitor State Street’s decision to participate in the Illinois
46
Securities Settlement.
6. Count IX states a valid claim for co-fiduciary
breach
In Count IX, Plaintiffs contend that State Street, Old Waste,
the New Waste Investment Committee and its individual Trustee
Members further breached their fiduciary obligations under ERISA
Sections 405(a)(2) and (3) by enabling their co-fiduciaries to
commit violations of ERISA as described in Counts VI-VIII and, with
knowledge of such breaches, failing to make reasonable efforts to
remedy such breaches.
Defendants move to dismiss Count IX on four grounds. First,
they claim that because Plaintiffs “have failed to allege any
principal breaches of fiduciary responsibility by any of the
Defendants[,] . . . there can be no collateral claims of co-
fiduciary liability.” Defs.’ Omnibus Mot. at 62. The Court,
however, has already determined that the primary breaches alleged
against Defendants in Counts VI-VIII should not be dismissed.
Second, Defendants claim that, “[i]n connection with the
Illinois Securities Settlement, the [Old Waste] Plan released any
claim it could have raised, whether known or unknown, relating
directly or indirectly to ‘any alleged act, misrepresentation, or
omission occurring on or before February 24, 1998[,] regarding the
financial condition, results of operations, financial statements,
press releases, public filings, or other public disclosures of’ Old
Waste Management.” Defs.’ Omnibus Mot. at 63 (internal citations
47
omitted). According to Defendants, “[t]his includes any claim of
co-fiduciary liability that the Plan might have asserted against
[them] in this action.” Id.
However, neither the New Waste Plan Investment Committee nor
State Street were among the settling Defendants or “Released
Parties” in the Illinois Securities Settlement. See Defs.’ Omnibus
Mot., Ex. 5, ¶ 2(l) (defining “Released Parties” as “each and every
one of the following: [Old Waste] and all of its predecessors and
present and former parents, subsidiaries, affiliates, directors,
officers, employees, agents, attorneys, advisors, and
representatives; Arthur Andersen & Co., Arthur Andersen LLP, all of
their affiliated entities, and all of the present and former
partners, employees, agents, attorneys, advisors, and
representatives of Arthur Andersen & Co., Arthur Andersen LLP or
any of their affiliated entities.”), and ¶ 2(q) (defining “Settling
Defendants” as “[Old Waste] and Arthur Andersen, LLP”). Thus,
neither the New Waste Plan Investment Committee nor State Street is
bound by the Illinois Securities Settlement.
Third, Defendants maintain that because the Illinois
Securities Settlement provided fair compensation for the harms
alleged, they breached no duties in permitting the Plan to
participate in that Settlement, and Plaintiffs’ co-fiduciary
liability claims should be dismissed. In support of this argument,
Defendants point to the Illinois district court’s finding that the
48
Settlement was “‘in all respects fair, reasonable, and adequate to
each of the Settling Parties and each Member’ of the Illinois
Settlement Class, including the Plan.” Defs.’ Omnibus Mot. at 63
(internal quotation omitted).
As discussed supra, however, the Illinois district court
expressly declined to determine whether the Plan’s fiduciaries
properly accepted the Settlement because the two lawsuits covered
different time periods. Moreover, at this early stage of the case,
there are, at the very least, factual disputes as to whether
Plaintiffs and other Plan participants were represented adequately
in the Illinois litigation by either the lead plaintiffs or the
Plan fiduciaries and whether they received adequate notice that
ERISA claims were being released in the Settlement. Thus,
Defendants cannot prevail on the affirmative defense of release
through the instant Motion to Dismiss.
Fourth, Defendants argue that “ERISA § 405(a)(3) requires a
co-fiduciary’s actual knowledge of the principal breach.
Consequently, allegations such as those raised here -– that a
fiduciary ‘should have known’ –- are insufficient, and claims of
‘actual knowledge’ are belied by the allegations in Plaintiffs’ own
Complaint.” Defs.’ Omnibus Mot. at 64 (internal citations
omitted).
Under ERISA Section 405(a)(3), a co-fiduciary is liable for
the other fiduciary’s breach of fiduciary duty when: “(1) the
49
co-fiduciary has actual knowledge of the other fiduciary’s breach;
(2) the co-fiduciary failed to make reasonable efforts to remedy
the other fiduciary’s breach; and (3) damages resulted therefrom.”23
In re Sprint Corp. ERISA Litig., 388 F. Supp. 2d at 1220 (internal
citations omitted). In this case, Section 405(a)(3) is satisfied
insofar as Plaintiffs allege that State Street, Old Waste, the New
Waste Investment Committee, and its individual Trustee Members did
have actual knowledge of breaches of fiduciary duties by the other
Defendants, yet failed to make reasonable efforts to remedy those
other Defendants’ breaches of fiduciary duties. See Third Am.
Compl. ¶ 192.
Accordingly, for all the foregoing reasons, Count IX states a
valid claim for co-fiduciary liability against State Street, Old
Waste, the New Waste Investment Committee, and its individual
Trustee Members.
D. Count X States a Valid Claim for Fiduciary Breach against
State Street
Count X of the Third Amended Complaint alleges fiduciary
breaches occurring during the Third Claim Period (February 7, 2002
through July 15, 2002) against State Street. According to
Plaintiffs, State Street failed to conduct an adequate review of
potential fiduciary breach claims that might have been asserted
23
An additional necessary predicate for co-fiduciary
liability under this subsection is that another fiduciary have
committed a breach of fiduciary duty.
50
against the Old Waste Fiduciaries and released such claims in the
Texas Securities Settlement without obtaining adequate
consideration.
State Street moves to dismiss Count X on three grounds.
First, it argues that this Count is barred by the Texas Securities
Settlement. Specifically, State Street points out that “plaintiff
Harris, represented by the same counsel appearing for all
plaintiffs in this case, appeared in the Texas Securities
Litigation and objected to the adequacy of the settlement
specifically for Plan participants holding potential ERISA claims.
Plaintiff Harris and his lawyers ultimately reached a settlement
with the lead plaintiffs, pursuant to which the recovery for plan
participants was changed (to get the settlement concluded without
further delay) and pursuant to which Harris withdrew his objection
with prejudice.” State Street’s Mot. at 8 (emphasis in original).
According to State Street, “[h]aving withdrawn an objection to the
settlement in Texas, plaintiffs cannot now be heard to argue that
the final version of the Texas Settlement was not adequate for Plan
participants and that they can now sue State Street for not
pursuing claims that plaintiffs raised in Texas and then
abandoned.” Id.As Plaintiffs correctly point out, however, State Street was
not a party to the Texas Securities Settlement. See Defs.’ Omnibus
Mot., Ex. 8, ¶ A.3 (defining “Releases” as “Waste Management and
51
all of its predecessors and present and former parents,
subsidiaries and affiliates, and each of their respective past and
present directors, officers, employees, partners, principals,
agents, attorneys, advisors, consultants, representatives,
accountants and auditors (including without limitation Arthur
Andersen LLP and PricewaterhouseCoopers LLP), and the Individual
Defendants and each of their heirs, executors, administrators and
assigns.”). Thus, the Texas Securities Settlement cannot bind
Plaintiffs as to claims against State Street because it was a non-
party to the Settlement and the litigation.24
Second, State Street maintains that “the obvious and
dispositive problem with plaintiffs’ alleged ‘potential’ ERISA
claim[s] is that actions by corporate officers in the evaluation
and pursuit of a corporate merger are not fiduciary acts for which
a claim may be made under ERISA.” State Street’s Mot. at 9
(internal citations omitted). It argues, therefore, that the
decisions it made in connection with the Merger are not subject to
24
Plaintiffs also argue that because “Plaintiff Harris may
have effectuated a partial recovery from Old Waste in the Texas
securities settlement does not prevent him from continuing to
pursue the allegations in Count Ten to restore to the Old Waste
Plan additional losses resulting from the acts and omissions of
State Street, which is jointly and severally liable along with
other fiduciaries of the Plan for its breaches.” Pls.’ Opp’n to
State Street’s Mot. at 27-28. As State Street points out, however,
“the fiduciary breach alleged against State Street, about released
claims, is distinct from the alleged fiduciary breaches by the
other defendants. Because State Street and the released parties
did different things, their exposure to liability could in no sense
be ‘joint and several.’” State Street’s Reply at 16 n.8.
52
ERISA’s fiduciary requirements.
As discussed, infra, however, “[i]t is typically premature to
determine a defendant’s fiduciary status at the motion to dismiss
stage of the proceedings.” In re Elec. Data Sys. Corp. “ERISA”
Litig., 305 F.Supp.2d at 665. In the instant case, it is not hard
to imagine a set of facts that would justify a conclusion that
State Street was performing fiduciary functions when it made
decisions in connection with the July 1998 Merger. Accordingly,
State Street’s argument regarding its fiduciary status is premature
and, therefore, unpersuasive.
Third, State Street argues that the finding of the Texas
district court in the Texas Securities Litigation that “substantial
due diligence was performed . . . on behalf of Old Waste before the
merger,” Defs.’ Omnibus Mot., Ex. G at 183, “completely
undermine[s] the factual basis of liability asserted against State
Street -- that viable ERISA claims about due diligence should have
been apparent to State Street and were imprudently released, and
that the Plan thereby suffered loss in the Texas settlement.”
State Street’s Reply at 15.
As Plaintiffs point out, however, the Texas district court’s
finding was directed exclusively at the question of whether the
allegations in the Texas Securities Litigation were adequate to
“raise a strong inference of scienter to support claims of
fraudulent misrepresentation” under the Public Securities
53
Litigation Reform Act. Defs.’ Ex. G at 184. That finding did “not
even address, much less conclusively establish, that the Plan did
not have viable potential causes of action under ERISA not
available to the plaintiffs in the Texas Securities Litigation
against the Old Waste Fiduciaries for not conducting a prudency
review of the proposed Merger or for causing the Plan to acquiesce
in a Merger that was not in the best interest of the Plan and its
participants, as Plaintiffs allege.” Pls.’ Opp. to State Street’s
Mot. at 30 (internal quotations omitted).
Accordingly, for all the foregoing reasons, the Court
concludes that Count X states a valid claim for fiduciary breach
against State Street.
E. Plaintiffs Need Not Show an Identifiable Loss Resulting
Directly from State Street’s Allegedly Imprudent Actions
State Street moves to dismiss Counts VI - X on the ground that
Plaintiffs have failed to plead facts which, if proven, would
properly support a conclusion that the Plan incurred a loss as a
result of its decision to secure recoveries by participating in the
Illinois and Texas Securities Settlements. See State Street’s Mot.
at 3-4. As this Court has previously held, however, Plaintiffs
need not plead causation. See Chao v. Trust Fund Advisors, 2004 WL
444029, at *6 (“[O]nce [Plaintiffs] ha[ve] proven a breach of
fiduciary duty and a prima facie case of loss to the plan,
Defendants must then prove that the loss was not caused by their
breach of fiduciary duty.”) (citing Martin v. Feilin, 965 F.2d 660,
54
671 (8th Cir. 1992), and Whitfield v. Lindemann, 853 F.2d 1298,
1304-05 (5th Cir. 1988)); Roth v. Sawyer-Cleator Lumber Co., 16
F.3d 915, 917 (8th Cir. 1994) (same); In re Enron Corp. Sec.,
Derivative & ERISA Litig., 284 F.Supp.2d at 579-80 (same), and
cases cited therein.
Accordingly, because Plaintiffs have pled both fiduciary
breach and injury, the Court will not dismiss Counts VI-X on the
ground that they have failed to show an identifiable loss resulting
directly from State Street’s allegedly imprudent actions.25
F. It Is Premature for the Court to Rule as a Matter of Law
Whether Old Waste Acted in a Fiduciary Capacity in Taking
the Actions at Issue in This Case
Defendants argue that Plaintiffs’ First and Second Period
fiduciary and co-fiduciary breach claims against Old Waste fail
because Plaintiffs cannot show that Old Waste acted in a fiduciary
capacity in taking the actions at issue in this case.
Specifically, Defendants claim that “[t]he Plan documents []
demonstrate that [Old Waste] is not the Plan’s named fiduciary, nor
does the Plan allocate to [Old Waste] any fiduciary duties.
Rather, at all times pertinent to the allegations raised in the
Complaint, the Plan[] provide[s] for an Administrative Committee
25
Defendants cite Dura Pharm., Inc. v. Broudo, 544 U.S. 336(2005) in support of their argument that Counts VI - X should be
dismissed on the ground that Plaintiffs cannot show that State
Street directly caused a loss to the Plan. Dura Pharm., Inc. is,
however, inapposite, because it relates to the Securities Exchange
Act of 1934, not ERISA.
55
and an Investment Committee, and specifically identifie[s] the
duties and responsibilities of each. [In addition,] [t]he Plan
allocate[s] to [Old Waste] no authority or duty to appoint, remove,
or monitor members of those Committees.” Id. Plaintiffs contend
that “[a]lthough Old Waste was not named as a fiduciary in the
governing plan documents, . . . Old Waste functioned as a fiduciary
and . . . is liable under the principles of respondeat superior in
any event.” Pls.’ Opp’n to Defs.’ Omnibus Mot. at 23.
“It cannot be seriously disputed that, under ERISA, [Old
Waste] . . . is subject to ERISA’s fiduciary standards only when it
acts in a fiduciary capacity.” Sys. Council EM-3 v. AT&T Corp.,
159 F.3d 1376, 1379 (D.C. Cir. 1998) (internal citation omitted).
“[W]hether [a party] is an ERISA fiduciary turns upon whether [that
party] has discretionary authority or responsibility in the
administration of a plan or regarding the disposition of plan
assets.” Int’l Bhd. of Painters and Allied Trades Union and Indus.
Pension Fund v. Duval, 925 F.Supp. 815, 828 (D.D.C. 1996) (citing
29 U.S.C. § 1002(21)(A).26 “Mere influence over a fiduciary’s
26
Under ERISA, a party is a fiduciary
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,
(ii) he renders investment advice for a fee or other
compensation, direct or indirect, with respect to any
moneys or other property of such plan, or has any
authority or responsibility to do so, or (iii) he has any
(continued...)
56
decisions regarding a plan is not enough to constitute
discretionary control, triggering ERISA liability.” Int’l Bhd. of
Painters and Allied Trades Union and Indus. Pension Fund, 925
F.Supp. at 828 (citing Fink, 772 F.2d at 958).
“Whether a [party] is a fiduciary is a fact-bound inquiry
depending upon the degree of [the party’s] discretion or control
that is vested in the [party].” Int’l Bhd. of Painters & Allied
Trades Union & Indus. Pension Fund, 925 F.Supp. at 828 (citing
Mertens v. Hewitt Assocs., 508 U.S. 248, 260 (1993) and Schloegel
v. Boswell, 994 F.2d 266, 271 (5th Cir. 1993)); see Varity, 516
U.S. at 502-03 (emphasizing the fact-specific nature of
ascertaining whether a plan administrator is acting in a fiduciary
capacity). Moreover, “fiduciary status under ERISA is to be
construed liberally, consistent with ERISA’s policies and
objectives.” In re Enron Corp. Sec., Derivative & ERISA Litig.,
284 F.Supp.2d at 544 (internal quotation omitted). Thus, “[i]t is
typically premature to determine a defendant’s fiduciary status at
the motion to dismiss stage of the proceedings.” In re Elec. Data
Sys. Corp. “ERISA” Litig., 305 F.Supp.2d at 665. See Bell v.
Executive Comm. of United Food & Commercial Workers Pension Plan
For Employees, 191 F. Supp. 2d 10, 16 (D.D.C. 2002) (same).
26
(...continued)
discretionary authority or discretionary responsibility
in the administration of such plan.
29 U.S.C. § 1002(21)(A).
57
58
Plaintiffs allege that Old Waste, “acting through the Old
Waste Board,” acted as a fiduciary with respect to the Plan because
it was “charged with, responsibility for, and otherwise assumed the
duty of appointing, monitoring, and, when and if necessary,
removing other Plan fiduciaries, including, but not limited to,
Members of the Old Waste Plan Committees, and the Trustees of the
Old Waste Plan.” Third Am. Compl. ¶ 164. Based on these
allegations, Defendants could prevail “only if the Court could rule
as a matter of law that [Old Waste] could never qualify as [a]
fiduciar[y] under ERISA.” Bell, 191 F. Supp. 2d at 16. However,
“‘[d]etermining whether someone is a fiduciary is a very fact
specific inquiry which is difficult to resolve on a motion to
dismiss.’” Id. (quoting In re Fruehauf Trailer Corp., 250 B.R.
168, 204 (D. Del. 2000)). Thus, at this stage, the Court cannot
make such a ruling, for the Third Amended Complaint sufficiently
pleads facts that could ultimately entitle Plaintiffs to relief
against Old Waste. Accordingly, the Court will not dismiss
Plaintiffs’ claims against Old Waste on this ground.27
27
Defendants also argue that Plaintiffs’ First Period
fiduciary and co-fiduciary breach claims against the other Old
Waste Fiduciaries fail because Plaintiffs have failed to show that
they acted in a fiduciary capacity in taking the actions at issue
in this case. See Defs.’ Omnibus Mot. at 53-62. It is unnecessary
to address these arguments, however, because, as discussed supra,
those claims are time-barred under ERISA Section 413.
59
IV. CONCLUSION
For the reasons stated, Defendants’ Omnibus Motion to Dismiss
the Third Amended Complaint is granted in part and denied in part
and State Street Bank and Trust Company’s Motion to Dismiss the
Third Amended Complaint is denied.
An Order will issue with this Memorandum Opinion.28
/s/
March 12, 2009 GLADYS KESSLER
U.S. DISTRICT JUDGE
28
The parties are cautioned, in the strongest possible
terms, to abide by the provisions of Fed. R. Civ. P. 59 and 60. As
the parties can observe, an enormous amount of research, analysis,
time, and effort has gone into the present Opinion and accompanying
Order. It is now time to proceed to discovery and the merits of
this case. Parties shall under no circumstances file motions for
reconsideration which merely repeat arguments made in the lengthy
briefs they have submitted for these Motions, and which fail to
meet the requirements of Fed. R. Civ. P. 59 and 60. See New York
v. United States, 880 F. Supp. 37, 38 (D.D.C. 1995). In the
unlikely event that any party, after careful consideration,
determines that such a motion is necessary, such motion shall not
exceed 10 pages and shall be filed within ten days of the date of
this Opinion; oppositions shall not exceed 10 pages and shall be
filed within ten days of the motion, and replies shall not exceed
5 pages and shall be filed within five days of the oppositions.
60