Haley v. TIAA

21-805-cv
Haley v. TIAA
In the
United States Court of Appeals
For the Second Circuit
________
AUGUST TERM 2021
ARGUED: MAY 10, 2022
DECIDED: DECEMBER 1, 2022
No. 21-805-cv
MELISSA HALEY, individually and on behalf of herself
and all others similarly situated,
Plaintiff-Appellee,
v.
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA,
Defendant-Appellant. ∗
________
Appeal from the United States District Court
for the Southern District of New York.
________
Before: NEWMAN, WALKER, and SULLIVAN, Circuit Judges.
________
Melissa Haley alleges that a participant loan program that
Teachers Insurance and Annuity Association of America (TIAA)
∗
The Clerk of Court is directed to amend the caption as set forth above.
2 No. 21-805
offered to her retirement plan is a prohibited transaction under the
Employee Retirement Income Security Act of 1974 (ERISA). After
ruling that Haley’s suit could proceed against TIAA as a non-
fiduciary under ERISA, the district court certified a class of employee
benefit plans whose fiduciaries contracted with TIAA to offer loans
that were secured by a participant’s retirement savings. In this
interlocutory appeal challenging the certification decision, TIAA
argues that the district court erred when it found that common issues
predominated over individual ones without addressing the effect of
ERISA’s statutory exemptions on liability classwide and without
making any factual findings as to the similarities of the loans. We
agree. Because the predominance inquiry of Federal Rule of Civil
Procedure 23(b)(3) requires that a district court analyze defenses, and
the court did not do so here, we VACATE the district court’s decision
and REMAND for proceedings consistent with this opinion.
________
TODD S. COLLINS (Ellen T. Noteware, on the brief),
Berger Montague PC, Philadelphia, PA; John J.
Nestico, Todd M. Schneider, on the brief, Schneider
Wallace Cottrell Konecky LLP, Charlotte, NC and
Emeryville, CA, for Plaintiff-Appellee.
JAIME A. SANTOS (James O. Fleckner, Michael K.
Isenman, Kelsey Pelagalli, on the brief), Goodwin
Procter LLP, Washington, DC and Boston, MA, for
Defendant-Appellant.
Leah M. Nicholls, on the brief, Public Justice, P.C.,
Washington, DC, for amicus curiae Public Justice.
3 No. 21-805
Dara S. Smith, William Alvarado Rivera, on the
brief, AARP Foundation, Washington, DC, for amici
curiae AARP and AARP Foundation.
Meaghan VerGow, on the brief, O’Melveny &
Myers LLP, Washington, DC, for amici curiae The
Securities Industry and Financial Markets Association,
American Benefits Council, Society of Professional
Asset Managers and Recordkeepers, American Council
of Life Insurers, and Chamber of Commerce of the
United States of America.
________
JOHN M. WALKER, JR., Circuit Judge:
Melissa Haley alleges that a participant loan program that
Teachers Insurance and Annuity Association of America (TIAA)
offered to her retirement plan is a prohibited transaction under the
Employee Retirement Income Security Act of 1974 (ERISA). After
ruling that Haley’s suit could proceed against TIAA as a non-
fiduciary under ERISA, the district court (Oetken, J.) certified a class
of employee benefit plans whose fiduciaries contracted with TIAA to
offer loans that were secured by a participant’s retirement savings. In
this interlocutory appeal challenging the certification decision, TIAA
argues that the district court erred when it found that common issues
predominated over individual ones without addressing the effect of
ERISA’s statutory exemptions on liability classwide and without
making any factual findings as to the similarities of the loans. We
agree. Because the predominance inquiry of Federal Rule of Civil
Procedure 23(b)(3) requires that a district court analyze defenses, and
4 No. 21-805
the court did not do so here, we VACATE the district court’s decision
and REMAND for proceedings consistent with this opinion.
BACKGROUND
Haley participates in a retirement plan offered by Washington
University in St. Louis (WashU). The WashU plan is a defined
contribution savings plan that is tax-deferred under 26 U.S.C. § 403(b)
and governed by ERISA. 1 WashU chose to offer certain services to its
participants, including the ability to borrow against retirement
savings without incurring a taxable event. During the relevant
period, WashU plan participants were permitted to take out either
non-collateralized or collateralized loans. To facilitate these loans,
WashU engaged with outside vendors known as “service providers,”
including TIAA and Vanguard.
Non-collateralized loans enable participants to borrow directly
from their retirement accounts without pledging any assets as
collateral. Vanguard serviced the non-collateralized loans for WashU
plan participants and charged participants a fixed origination fee and
annual maintenance fees. Non-collateralized loans are not at issue in
this case.
This suit instead challenges the collateralized loan products
that TIAA offered. Fiduciaries responsible for some eight thousand
plans, such as WashU, retained TIAA to service collateralized loans
for their respective plans. The collateralized loans shared the
1 29 U.S.C. § 1002(34). Defined contribution plans are retirement
savings vehicles that allow participants to contribute a portion of their
salary to the plan. Section 403(b) plans are available to employees of public
schools and certain non-profits.
5 No. 21-805
following attributes. TIAA required participants to borrow the
desired loan amount from TIAA’s “General Account” rather than
directly from their own retirement accounts. 2 TIAA charged interest
on the loan, which participants paid (along with the principal) to the
General Account. The interest rates that participants paid, however,
depended on several variables, including the type of loan contract
between TIAA and the plan and the relevant state’s insurance laws.
TIAA secured the loans with collateral equal to the loan
amount plus 10%. TIAA invested that sum in the participant’s
account in a TIAA Traditional Annuity, an interest-bearing fixed
annuity that paid a guaranteed minimum rate of return, plus
additional amounts of interest declared at TIAA’s discretion. The
plan participant kept the return earned on the collateral. Returns
varied based on the type of the annuity contract that TIAA offered to
the plan, and when and where the loan was obtained. The underlying
annuity contract also affected whether a borrowing participant could
designate funds already invested in a TIAA Traditional Annuity as
collateral or whether the participant had to transfer funds from
existing investments into a TIAA Traditional Annuity.
While it did not charge origination or maintenance fees, TIAA
was compensated for servicing the loans. TIAA states that its
compensation was the difference, or “spread,” between the interest
2 An insurance company’s “general account” refers to the assets that
guarantee the insurer’s obligations under its insurance contracts and
provide liquidity. Participants do not invest directly in the General
Account, which TIAA represents is a broadly diversified portfolio of mostly
fixed income assets.
6 No. 21-805
that participants paid TIAA on the loan and the amount TIAA
credited to participants on their collateral as investment income. 3
Haley took out four collateralized loans from her WashU plan
between 2011 and 2015, and a fifth in 2019 while this lawsuit was
pending. In 2017, she brought the instant action seeking to hold TIAA
directly liable on the grounds that the collateralized loans violated
ERISA’s so-called “prohibited transactions” rules. In the alternative,
Haley sought to hold TIAA liable as a non-fiduciary for its knowing
participation in the alleged violations by her plan fiduciary, WashU.
Haley, however, did not name WashU as a defendant.
The district court held that TIAA was not an ERISA fiduciary
with respect to the challenged loans but permitted Haley’s claims to
proceed against TIAA as a non-fiduciary. Haley then moved to certify
a nationwide class of similarly situated ERISA-governed plans. TIAA
opposed, asserting that the challenged loans were too disparate to
warrant class treatment. TIAA further objected to certification on the
grounds that ERISA recognizes exemptions to prohibited transactions
and that the factors relevant to whether a collateralized loan is exempt
are not subject to common proof. The district court certified a class
under Rule 23(b)(3) as to each of Haley’s non-fiduciary claims. But
the court did not make any findings about the purported variations
among the loans in the putative class and did not address how the
exemptions to the statutory prohibitions weighed in the certification
analysis. TIAA timely filed an interlocutory appeal under Rule 23(f).
3 Haley alleged that the spread is even greater because it includes the
difference between the returns earned on the investments in TIAA’s
General Account and the interest rate that TIAA credits the participants on
their collateral. Regardless, this difference is not material to this appeal.
7 No. 21-805
DISCUSSION
Haley is not the first WashU plan participant to allege that the
collateralized loans serviced by TIAA are prohibited transactions
under ERISA. 4 But her suit is unique because she is seeking to hold
TIAA liable on behalf of a nationwide class of ERISA-governed plans
whose members received loans under terms approved by plan
administrators, without naming those administrator fiduciaries as
defendants. TIAA argues that the district court improperly certified
the multi-plan class. 5
4 See Davis v. Wash. Univ. in St. Louis, No. 4:17-CV-1641 RLW, 2018
WL 4684244, at *5 (E.D. Mo. Sept. 28, 2018) (dismissing the ERISA
§ 406(a)(1)(B) claim against WashU), aff'd in part, rev'd in part and remanded,
960 F.3d 478 (8th Cir. 2020). The Davis plaintiffs did not appeal the
dismissal of their prohibited transaction claims.
5 The class certified by the district court includes: “All individual
account retirement plans governed by ERISA (the ‘Plans‘) for which, at any
time from February 5, 2011 through the date of judgment: (a) Teachers
Insurance and Annuity Association [of America] (‘TIAA’) provided
services that included collateralized loans (the ‘Loans’) for Plan participants
(the ‘Borrowing Participants’); (b) TIAA required the Borrowing
Participants to provide collateral in the amount of 110% of the principal
balance of the Loans, which collateral TIAA invested in its general account;
and (c) (i) TIAA charged Loan interest at a rate in excess of the interest rate
credited to Borrowing Participants on the invested collateral; (ii) TIAA kept
for or paid to itself amounts earned on the amount of the invested collateral,
equal to the principal amount of the outstanding Loans, that were in excess
of the amounts credited to Borrowing Participants; (iii) the amounts that
TIAA credited to Borrowing Participants on the invested collateral in excess
of the principal amount of the Loan were less than Borrowing Participants
would have received had the collateral remained in the Borrowing
Participants’ designated investment options; and/or (iv) TIAA caused loss
to the Participant Borrowers and the Plans.” Special App’x 5.
8 No. 21-805
I. ERISA’s Prohibited Transactions, Briefly Explained
ERISA is a comprehensive federal statute that regulates
retirement and employee benefit plans, as well as the conduct of
fiduciaries who act on behalf of plan participants and other
beneficiaries. 6 Section 404 of ERISA sets out general duties for plan
fiduciaries, sponsors, and others. Section 406 further protects
participants and beneficiaries by prohibiting certain transactions
involving plan assets that are “believed to pose a high risk of fiduciary
self-dealing.” 7 Subsection 406(a) regulates transactions between a
plan and “parties in interest” with respect to the plan. A “party in
interest” includes, among others, persons providing services to the
plan. 8 Haley alleges that the collateralized loans violate two
provisions of § 406(a):
Except as provided in section [408] of this title . . . [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—
...
(B) lending of money or other extension of credit
between the plan and party in interest; [or]
See Harris Tr. & Sav. Bank v. John Hancock Mut. Life Ins. Co., 302 F.3d
6
18, 26 (2d Cir. 2002) (quoting H.R. Rep. No. 533, 93d Cong., 2nd Sess. 1,
reprinted in 1974 U.S.C.C.A.N. 4639, 4639).
7 Henry v. Champlain Enters., Inc., 445 F.3d 610, 618 (2d Cir. 2006).
8 29 U.S.C. § 1002(14)(B). At a general level, a “party in interest” is
any entity “that a fiduciary might be inclined to favor at the expense of the
plan’s beneficiaries.” Harris Tr. & Sav. Bank v. Salomon Smith Barney, Inc.,
530 U.S. 238, 242 (2000).
9 No. 21-805
(D) transfer to, or use by or for the benefit of a party in
interest, of any assets of the plan[.] 9
Section 406(a)’s broad language would ban most transactions
involving service providers, like TIAA. But § 406(a) is expressly
limited by § 408, which authorizes the Secretary of Labor to exempt
certain transactions so long as they are in the “interests of the plan’s
participants and beneficiaries.” 10 TIAA asserts that two exemptions
are potentially applicable here. 11 First, § 408(b)(1) exempts loans to
participants provided that, among other things, they are made in
accordance with specific provisions of the plan document, “bear a
reasonable rate of interest,” and are “adequately secured.” 12 Second,
§ 408(b)(17) permits transactions prohibited by § 406(a)(1)(B) and (D)
as long as the plan pays no more and receives no less than “adequate
consideration.” 13
9 29 U.S.C. §§ 1106(a)(1)(B), (D). Haley initially also alleged that
TIAA charged excessive and unreasonable compensation, in violation of
§ 406(a)(1)(C). Haley does not oppose TIAA’s request to modify the
certification order as to this claim.
10 Boggs v. Boggs, 520 U.S. 833, 846 (1997) (citing 29 U.S.C. § 1108(a)(2))
(internal quotation marks omitted).
11 Because Haley has conceded that her § 406(a)(1)(C) claim should
not be resolved classwide, we need not consider TIAA’s arguments that the
exemption to excessive compensation claims as set forth in § 408(b)(2)
applies.
12 29 U.S.C. § 1108(b)(1). The Department of Labor’s definition of
“participant loans” presupposes that the loan is exempt under § 408(b)(1)
and thus not a prohibited transaction. See 29 C.F.R. § 2550.408b-1(a)(3)(i).
For our purposes, although we may use the term participant loan as
shorthand, we express no opinion as to whether the challenged loans in fact
meet the statutory definition.
13 29 U.S.C. § 1108(b)(17)(A).
10 No. 21-805
II. Standard of Review
We review class certification decisions, including a district
court’s rulings that each of the Rule 23 requirements are satisfied, for
abuse of discretion. 14 We give greater deference to decisions granting
class certification than to those declining to certify. 15 But “[t]o be
afforded this deference . . . the certification must be sufficiently
supported and explained.” 16
Rule 23(a) requires that a proposed class be sufficiently
numerous, have questions of law or fact common to the class, and
involve representative plaintiffs whose claims or defenses are typical
of the class and who can fairly and adequately protect the class’s
interests. 17 The district court certified the class under Rule 23(b)(3),
pursuant to which a plaintiff must also establish that questions of law
or fact common to the putative class “predominate” over questions
affecting only individual members and that the class action vehicle is
the superior method of adjudication. 18
III. TIAA’s Challenges to Certification
TIAA disputes Haley’s ability to show both that there are
questions common to the class and that such issues predominate.
14 In re Initial Pub. Offerings Sec. Litig., 471 F.3d 24, 31 (2d Cir.
2006), decision clarified on denial of reh'g sub nom. In re Initial Pub. Offering Sec.
Litig., 483 F.3d 70 (2d Cir. 2007); Johnson v. Nextel Commc’ns. Inc., 780 F.3d
128, 137 (2d Cir. 2015).
15 See Johnson, 780 F.3d at 137.
16 Langan v. Johnson & Johnson Consumer Cos., Inc., 897 F.3d 88, 97 (2d
Cir. 2018).
17 Fed. R. Civ. P. 23(a).
18 Johnson, 780 F.3d at 137; Fed. R. Civ. P. 23(b)(3).
11 No. 21-805
Because the district court determined that predominance was
satisfied without analyzing the § 408 exemptions or TIAA’s claimed
variations among the loans, we vacate and remand for it to undertake
that inquiry in the first instance.
A. Commonality
“Where the same conduct or practice by the same defendant
gives rise to the same kind of claims from all class members, there is
a common question.” 19 Commonality is usually easier to show than
predominance 20 and the district court did not abuse its discretion in
finding that former requirement satisfied. As an example, whether
the uniform requirement that collateral be held in a TIAA annuity
product rendered TIAA a party in interest “us[ing] . . . [plan] assets”
in violation of § 406(a)(1)(D) is a common issue bearing on the
defendant’s liability to the putative class. 21 TIAA recycles many of its
arguments relating to commonality in its challenge to Haley’s ability
to satisfy predominance. Because those arguments are “more
19 Johnson, 780 F.3d at 137 (internal citation and quotation marks
omitted).
20 Comcast Corp. v. Behrend, 569 U.S. 27, 34 (2013).
21 29 U.S.C. § 1106(a)(1)(D). TIAA does not dispute that this attribute
was a common feature of the collateralized loans it serviced.
12 No. 21-805
efficiently addressed in light of the predominance . . . requirement[],”
we will consider them in that context. 22
B. Predominance
TIAA’s principal argument is that the district court erred by
failing to include ERISA’s statutory exemptions as part of its
predominance inquiry. We agree.
Predominance is not simply an exercise in tallying up issues; it
is a qualitative inquiry that entails “careful scrutiny” of the nature and
significance of a case’s common and individual issues. 23 To that end,
a complete assessment of predominance demands that a district court
“consider all factual or legal issues” and classify them as subject either
to common or individual proof. 24 It is well settled that this exercise
includes any affirmative defenses, 25 such as the § 408 exemptions. 26
Affirmative defenses do not carry “less weight” on the class
certification issue simply because the defendant will bear the burden
22 Johnson, 780 F.3d at 140.
23 See In re Petrobras Sec., 862 F.3d 250, 271 (2d Cir. 2017) (internal
quotation marks and emphasis omitted); 1 McLaughlin on Class Actions
§ 5:23 (18th ed.).
24 Myers v. Hertz Corp., 624 F.3d 537, 550 (2d Cir. 2010) (internal
citation and quotation marks omitted).
25 Id. (collecting cases); Johnson, 780 F.3d at 138 (noting that as part of
both the commonality and predominance analysis, the court “must assess
. . . the elements of the claims and defenses to be litigated” (internal
quotation marks omitted)).
26 Henry, 445 F.3d at 619; Lowen v. Tower Asset Mgmt., Inc., 829 F.2d
1209, 1215 (2d Cir. 1987).
13 No. 21-805
of proof at the merits stage. 27 Here, as explained below, the district
court’s treatment of the exemptions was simply to exclude them from
the predominance analysis because, as affirmative defenses, the
burden of proving them rests with TIAA. Rule 23(b)(3) demands
more.
We start with § 408(b)(17), which exempts transactions that
otherwise violate § 406(a)(1)(B) and (D) as long as the “plan receives
no less, nor pays no more, than adequate consideration.” 28 There is
no rule that clearly defines what consideration is “adequate”; it is
instead a standard that takes into account whether the fiduciary
exercised “good faith” in approving the amount the plan pays or
receives. 29 So, our “focus[] [is] on the conduct of the fiduciaries in
determining the price, not the price itself.” 30 Haley asserts that the
“adequacy” determination can be made classwide because good faith
is evaluated against what is objectively reasonable. TIAA argues that
individualized proof must be marshalled from non-party plan
fiduciaries showing how each plan fiduciary valued the assets and
whether, given other options available to the plan, the fiduciary
exercised good faith in selecting the terms offered by TIAA. So, even
if good faith is measured against an objective metric, the application
27Myers, 624 F.3d at 551. TIAA does not dispute that, as a non-
fiduciary, it also bears the burden of showing that an exemption applies.
28 29 U.S.C. § 1108(b)(17)(A).
29 29 U.S.C. § 1108(b)(17)(B)(ii).
30 Henry, 445 F.3d at 619–20 (emphasis added) (interpreting the
Department of Labor’s Proposed Regulation Relating to the Definition of
Adequate Consideration, 53 Fed. Reg. 17,632, 17,634) (May 17, 1988) and
noting that, although the proposed regulation had no legal effect,
“numerous circuit courts have adopted the DOL’s proposed definition”).
14 No. 21-805
of facts pertaining to each non-party fiduciary may be individualized.
Notwithstanding this dispute, the district court limited its analysis to
suggesting only that determining whether the plans received
adequate compensation “is not quite as easy” to resolve with common
proof. 31
As for the other exemption that TIAA asserts may apply, the
district court’s decision gives us no indication that the court factored
it into its predominance analysis at all. Section 408(b)(1) exempts
loans “made by the plan to parties in interest who are participants or
beneficiaries of the plan” so long as, inter alia, the loans are “made in
accordance with specific provisions regarding such loans set forth in
the plan,” “bear a reasonable rate of interest,” and “are adequately
secured.” 32 The parties’ briefs dispute whether the loans are eligible
for a § 408(b)(1) exemption and whether such a determination could
be made with classwide proof. TIAA emphasizes the individualized
nature of reviewing each loan against the specific plan’s governing
documents to ensure compliance. 33 It adds that by submitting only
her loan contract, Haley failed to supply the district court with
necessary proof that the various plans in the purported class were
sufficiently similar. TIAA also relies on regulations that define
“reasonableness” in light of rates that would be offered by “local
banks” and financial institutions in the community, as well as current
economic conditions, to argue that reasonableness is necessarily a
fact- and plan-specific inquiry. 34 Haley counters that the same
31 Special App’x 22.
32 29 U.S.C. § 1108(b)(1).
33 See 29 C.F.R. § 2550.408b-1(d).
34 29 C.F.R. § 2550.408b-1(e).
15 No. 21-805
regulations provide that a “loan program containing a precondition
designed to benefit a party in interest (other than the participant) is
not afforded relief by section 408(b)(1).” 35 According to Haley, even
assuming the interest rate charged on each loan in the class is
reasonable, requiring borrowers to invest their collateral in a TIAA
Traditional Annuity is a disqualifying “precondition.”
That certain of the exemption-related issues may overlap with
the merits of this case does not absolve a district court from
addressing them at the certification stage when such determinations
bear on assessing a Rule 23 requirement. 36 The court must still find
that each of the requirements is satisfied in order to certify a class. We
recognize, however, that the “determination as to a Rule 23
requirement is not binding on the trier of fact in its determination of
the merits.” 37
Because the district court did not analyze the exemptions, it
also did not engage with the evidence that TIAA submitted to
substantiate the purported variations among the plans. A district
court cannot simply “take the plaintiff’s word that no material
differences exist.” 38 While it may be true, as the district court
surmised, that the loans had the “same basic central . . . structure,” it
made no findings about the interest rates that TIAA credited on the
collateral, the interest rates that participants paid, and whether those
rates varied across loans to support its conclusion that the class
35 29 C.F.R. § 2550.408b-1(a)(3)(i).
36 Wal-Mart Corp. v. Dukes, 564 U.S. 338, 351–52 & n.6 (2011); In re
I.P.O. Sec. Litig., 471 F.3d at 41.
37 Johnson, 780 F.3d at 138.
38 Langan, 897 F.3d at 97.
16 No. 21-805
members were adversely affected in the same way. 39 We have
instructed that a district court must “assess all of the relevant
evidence admitted at the class certification stage.” 40 The district court
did not do that here and, in the process, impaired our appellate
review.
On this basis, we cannot say the district court took the requisite
“close look at whether the common legal questions predominate over
individual ones.” 41 We are thus constrained to find that the district
court’s determination on predominance was not “within the range of
permissible decisions,” 42 and therefore remand is required. 43
39 Special App’x 9–10.
40 In re I.P.O. Sec. Litig., 471 F.3d at 42.
41 Langan, 897 F.3d at 97 (internal citation and quotation marks
omitted).
42 Myers, 624 F.3d at 548.
43 We are mindful that district courts have various “management
tools” at their disposal, including bifurcating classwide issues from
individual issues, and identifying subclasses of “more homogenous groups
defined by common legal or factual questions.” In re Petrobras Sec., 862 F.3d
at 274; see Fed. R. Civ. P. 23(c)(4), (5). We reiterate in the interest of
thoroughness that, if the district court were to rely on subclasses on
remand, then it would need to (as any district court must) not only identify
those subclasses but also explain their necessity and show that proceeding
in that manner comports with Rule 23(b)(3)’s requirements. See Langan, 897
F.3d at 98. We express no opinion as to whether any of the tools we have
identified here may be appropriate to this case and leave that determination
to the district court in the first instance.
17 No. 21-805
CONCLUSION
In sum, we VACATE the district court’s decision and
REMAND for further proceedings consistent with this opinion.