Opinion
NO. CIV. S-06-2746 LKK/GGH.
July 5, 2007
ORDER
Plaintiffs, trustees of the Sacramento Area Electrical Workers Pension Trust Fund ("Area Trust") and the Sacramento Valley Electrical Workers Pension Trust ("Valley Trust"), bring suit against Prudential Insurance Company of America, a New Jersey Company, ("defendant") pursuant to the Employee Retirement Income Security Act (ERISA), 29 U.S.C. §§ 1132, 1140 and, in the alternative, pursuant to 28 U.S.C. § 1332. Plaintiffs' complaint alleges that defendant violated the terms of the service and annuity agreements when it failed to provide plaintiffs with demutualization shares. Pending before the court is defendant's motion to dismiss plaintiffs' second amended complaint for failure to state a claim.
The court wishes to be candid. Both the difficulties with the statute and the occasional obscurity of the pled facts has made resolution of the instant motion less than certain.
I. FACTS PROCEDURAL HISTORY
A. Factual Allegations
The factual allegations as set forth in plaintiffs' second amended complaint are almost as obscure as the factual allegations in the first amended complaint. What follows is the court's best attempt at deciphering the relevant facts and claims.1. The Group Annuity Contracts
At issue in this case are two annuity contracts issued by Prudential. In 1982, the trustees of the Sacramento Valley Electrical Workers Pension Trust ("The Valley Trust") terminated the existing defined benefit pension plan and all assets were liquidated. Second Amended Complaint ("SAC") ¶ 9. Soon thereafter, the trustees purchased two annuities from Prudential, "to be owned by the Valley Trust as contract holder to provide accrued pension benefits to participants of the Valley Trust pension plan." SAC ¶ 9. The parties appear to agree that the two annuities are employee benefit pension plans governed by the Employee Retirement Income Security Act (ERISA).
The complaint goes on to allege that, "plaintiff Valley Trust thereafter was inactive, some Trustees having died or resigned, leaving a partial Board of Trustees. It owned as its only asset the group annuity contracts . . ." Id. ¶ 10.
It is unclear what plaintiffs mean by inactive. Whatever else is true, it seems clear that under the pleadings the trust was not dissolved.
When the Valley Trustees purchased the annuity contracts, they named themselves, "Board of Trustees of Sacramento Valley Electrical Workers' Pension Plan," as the contract holders. See GA-8811, GA-8812, Verpent Decl. to Def.'s First Mot. to Dismiss, Exhs. 1, 2.
GA-8811 and GA-8812 are the annuities that are the basis for the claims. Because the complaint makes reference to both annuity contracts, the court may consider the content of these contracts in deciding the pending motion to dismiss. "Even if a document is not attached to a complaint, it may be incorporated by reference into a complaint if the plaintiff refers extensively to the document or the document forms the basis of the plaintiff's claim." United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003). The "district court may treat such a document as part of the complaint, and thus may assume that its contents are true for purposes of a motion to dismiss under Rule 12(b)(6)." Id.
Both annuity contracts provide for their continued operation when the contract holder is defunct and no successor has been appointed. Section 2.3 of GA-8811 provides that if the contract holder notifies "Prudential that it no longer exists or will not act as Contract Holder under this contract and no successor Contract Holder is appointed, this contract will continue." See id. Section 1.10 of GA-8812 contains a parallel provision. Id. Plaintiffs assert that from 1982 on, Prudential provided annuitant information to the Valley Trust, "directed annuitants to the Valley Trust to obtain pension information, and obtained information from the Valley Trust in order to properly administer the group contracts." SAC ¶ 15.
As best as can be determined from the pleadings, despite the allegation that the Valley Trust went inactive, the events contemplated by the language of the policies never occurred.
This is an apparent departure from the facts set forth in the first amended complaint, in which plaintiffs allege that Prudential communicated to the Valley Trust in the care of the AREA Trust. First Amended Complaint ("FAC") ¶ 14.
The complaint does not make clear when the present plaintiffs entered the picture, and the extent to which plaintiffs are in fact the trustees of the Valley Trust. In the first amended complaint, plaintiffs asserted that on November 15, 2006 they were appointed as "successor trustees of the Valley Trust with all rights and powers of the Valley Trustees." First Amended Complaint ("FAC") ¶ 19. It was at this time that plaintiffs apparently were assigned the "rights" of the Valley Trust and became "successors" to the Valley Trustees. Id.
This factual allegation may be significant. As discussed later in this order, defendant's demutualization plan specified that the demutualization proceeds would be allocated to plan "owners." Owners were defined as the person or persons specified as the policyholder or contract holder as of the date of demutualization, December 15, 2000. If plaintiffs were not successors or named contract holders until November of 2006, it may be that they were not the contract holders at the time of demutualization. On the other hand, if they are proper successors to the holders of title this may not be a problem. Whatever rights they may have to the proceeds of demutualization, they might still have the right to assert a wrongful conversion of those proceeds.
In the second amended complaint, plaintiffs make no allegation about when they were appointed as successors to the Valley Trust, instead, plaintiffs state that "since on or before the filing of this lawsuit, they are trustees of the [Valley Trust] for purposes of this litigation." SAC ¶ 2. Unlike the first amended complaint, there are no other factual allegations as to when plaintiffs were assigned the rights of the Valley Trust and became successors to the trustees.
Whether the allegations contained in the first complaint were accurate is, of course, beyond the ability of the court to determine in resolving the instant motion.
The complaint also states that "[t]he only entity ever named in the group contracts described herein, GA-881 and GA-8812, and reflected in the applicable records of Prudential on or before 2001 is plaintiff Valley Trust." Id. ¶ 14.
This allegation suggests entity rights independent of who properly represents that entity. It is the latter question, however, which apparently gave rise to the events underlying this lawsuit.
2. Prudential's Demutualization
In 2000, Prudential adopted a plan to demutualize, that is, to reorganize from a mutual life insurance company to a stock life insurance company. The demutualization plan was approved by the New Jersey Insurance Commissioner. As a result of the demutualization, the entire value of Prudential was allocated among Prudential's eligible policy holders in accordance with terms set out in the demutualization plan.
The demutualization plan provided that the entire value of Prudential would be allocated to "owners" of "eligible policies" in the form of cash, policy credits or common stock in a newly created holding company. See Demutualization Plan, Def.'s Request for Judicial Notice, Ex. 1 to Def.'s First Motion to Dismiss. The demutualization plan also stated that demutualization "will not adversely change existing contractual provisions as to premiums, policy benefits, dividend eligibility, values, guarantees or other current policy obligations of [Prudential] to its Policyholders." See Plan, Art. II.
Because plaintiffs' complaint makes direct reference to the demutualization plan, the court finds it proper to take judicial notice of the plan.
Thus the instant lawsuit does not address questions of rights under the annuities, but rather is limited to the proceeds of the demutualization.
The demutualization plan defined "the Owner of . . . a group annuity contract . . . [as] the Person or Persons specified as the policyholder or contract holder in the master policy or contract, as reflected in the applicable Records" of Prudential as of December 15, 2000. See Plan, § 5.3. The plan further provided that "the identity of the Owner of a Policy shall be determined without giving effect to any interest of any other Person in such Policy." See Plan, § 5.6. Finally, the demutualization plan provides that should a contract holder not be located, the demutualization proceeds would be paid in cash and escheated to the state where the contract was issued. See Plan, § 8.1(f).
Plaintiffs aver that in June of 2001, Prudential "sent the Board of Trustees of the Valley Trust a letter identifying it as the eligible contract holder." SAC ¶ 16. Then, in 2003, Prudential "sent the Valley Trust a dividend from the stock created by the demutualization." Id. The complaint is silent as to the amount of the dividends or what happened to the dividends. As the complaint reads now, it appears that the Valley Trust did receive a check for the proceeds from demutualization.
In the first amended complaint, plaintiffs allege that on September 1, 2003 a dividend check in the amount of $27,000.00 was issued to the Valley Trust and sent in care of the Area Trust. FAC ¶ 16. Shortly thereafter, Prudential demanded return of the proceeds denying "that either [sic] the Area Trust nor the Valley Trust was entitled to the dividend check or the underlaying shares of stock under the plan of reorganization . . . Under protest, Area Trust returned the proceeds . . ." Id. These factual allegations are not contained in the second amended complaint.
Prudential, in its motion to dismiss, avers that Valley Trust was defunct and that therefore, Prudential did not know the correct identity of the contract holder for the two annuities.
The assertion made by the defendant is a factual assertion which directly contradicts plaintiffs' assertion that despite its inactivity, the Valley Trust continued to exist and that the defendant continued to deal with the Valley Trust. Of course on a motion to dismiss, the court must assume the truth of the allegations in the complaint.
Plaintiffs allege that on or about June 1, 2006, "the Area Trust became aware of the nature of the demutualization consideration as shares issued to the Valley Trust and that the value of the consideration exceeded $1,000,000.00 and made demand therefore as successor to the Valley Trust and on behalf of the Valley Trust as original contract holder." SAC ¶ 22. "Prudential has refused to recognize either the Valley Trust or Area trust as the Contract-holder, successor, or alternate funding agency and refuses to deliver up the demutualization consideration, 71,000 shares of PRU stock." Id.
Plaintiffs also allege that in October 2006, defendant escheated $2,151,429.12 to the State of California Controller. Plaintiffs aver that "the amount escheated did not reflect the value of Prudential shares assigned to the group contracts but a much lesser value nor did it include interest or accrued dividends from 2001." SAC ¶ 24.
B. New Claims Contained in the Second Amended Complaint
Plaintiffs assert three causes of action in their second amended complaint. The first claim is entitled "ERISA breach of Fiduciary Duty, ERISA § 409" and alleges that, "under the terms of the group annuities, applicable trust agreements, demutualization plan and applicable law, plaintiff trusts are entitled to the demutualization process/consideration as the contract holders of GA-8811 and GA-8812 on the date of demutualization." SAC ¶ 28. Plaintiffs aver that defendant breached the terms of these agreements. Id. ¶ 32. Plaintiffs seek "damages against defendants for fiduciary breach in the amount of 1) the value of 71,000 shares of PRU stock at current market; 2) the value of the accrued dividends since 2001 on said stock." SAC at 11:14-16.
The second cause of action is entitled, "ERISA breach of contract — Equitable Relief." Plaintiffs aver that the Valley Trust and defendant had a contractual relationship regulated by the terms of the demutualization plan, group annuity contract, and Trust agreement. "Said contract requires that defendant distribute certain demutualization consideration to the Valley Trust, its successor, or an alterative funding agency for the benefit of the plan participants, or to the plan participants." SAC ¶ 35. Plaintiffs claim that the amount escheated to the State of California Controller constituted a breach of the contractual documents. Among other things, plaintiffs allege that the amount escheated was only a portion of the proceeds owed to plaintiffs, which is valued in excess of six million dollars. See SAC ¶ 38.
With respect to the second claim, plaintiffs seek "an injunction ordering defendants to recognize plaintiff Valley Trust as the contract-holder, including imposition of an equitable lien, constructive trust, order of specific performance or reparation as to 71,000 shares of PRU stock . . ." SAC at 11:17-21.
The third and final cause of action is entitled, "Diversity State Claim, Breach of Contract, Equitable Relief/Money Damages." This claim is identical in substance to plaintiffs' claim for breach of contract under ERISA. Plaintiffs seek "injunctive relief or an order of specific performance." SAC at 11:22-23.
C. The Court's April 3, 2007 Order Dismissing Plaintiff's First Amended Complaint
On April 3, 2007 the court dismissed plaintiffs' first amended complaint. The court concluded that plaintiffs' complaint failed to allege a claim under ERISA. See April 3, 2007 Order at 16. Specifically, the court found that plaintiffs failed to allege facts, which if true, established that one, demutualization shares are a type of plan benefit covered by section 502(a)(1) of ERISA, and two, even if they were, that plaintiffs were entitled to the assets. The court also dismissed the ERISA claims on the grounds that plaintiffs sought legal relief, which is not available under ERISA. See id. at 21. Finally, the court noted that if jurisdiction were not predicated on ERISA, jurisdiction for plaintiffs' state law claims might be exercised pursuant to 28 U.S.C. § 1332. See id. at 25 n. 15.
II. STANDARD FOR MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM
In order to survive a motion to dismiss for failure to state a claim, plaintiffs must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1974 (2007). While a complaint need not plead "detailed factual allegations," the factual allegations it does include "must be enough to raise a right to relief above the speculative level." Id. at 1964-65.
As the Supreme Court observed, Federal Rule of Civil Procedure 8(a)(2) requires a "showing" that the plaintiff is entitled to relief, "rather than a blanket assertion" of entitlement to relief. Id. at 1965 n. 3. Though such assertions may provide a defendant with the requisite "fair notice" of the nature of a plaintiff's claim, only factual allegations can clarify the "grounds" on which that claim rests. Id. "The pleading must contain something more . . . than . . . a statement of facts that merely creates a suspicion [of] a legally cognizable right of action." Id. at 1965, quoting 5 C. Wright A. Miller, Federal Practice and Procedure, § 1216, pp. 235-36 (3d ed. 2004).
The holding in Twombly explicitly abrogates the well established holding in Conley v. Gibson, that, "a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." 355 U.S. 41, 45-46 (1957); Twombly, 127 S.Ct. at 1968.
On a motion to dismiss, the allegations of the complaint must be accepted as true. See Cruz v. Beto, 405 U.S. 319, 322 (1972). The court is bound to give the plaintiff the benefit of every reasonable inference to be drawn from the "well-pleaded" allegations of the complaint. See Retail Clerks Intern. Ass'n, Local 1625, AFL-CIO v. Schermerhorn, 373 U.S. 746, 753 n. 6 (1963). In general, the complaint is construed favorably to the pleader. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974),overruled on other grounds by Harlow v. Fitzgerald, 457 U.S. 800 (1982). That said, the court does not accept as true unreasonable inferences or conclusory legal allegations cast in the form of factual allegations. Western Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981).
III. ANALYSIS A. Plaintiffs' ERISA Claims
Plaintiffs bring suit pursuit to sections 502(a)(2) and 502(a)(3) of ERISA. While plaintiffs may be able to state a cause of action pursuant to ERISA, the second amended complaint fails to allege facts sufficient to state a claim.1. Plaintiffs' Claim Pursuant to Section 502(a)(3)
Section 502(a)(3) of ERISA allows a "plan participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan." 29 U.S.C. § 1132(a)(1)(3).
Before addressing plaintiffs' complaint, it is important to note the difference between plan benefits and plan assets. Under ERISA Section 502(a)(1), plaintiffs may sue for benefits due under the term of a plan. 29 U.S.C. § 1132(a)(1). As discussed in the court's previous order, it is far from clear that demutualization proceeds are "benefits" due under a plan.See Order issued April 3, 2007 at 17. Under Section 502(a)(3), however, there is no restriction limiting plaintiffs to suit for "benefits due." The only limiting term in section 502(a)(3) is that the suit must be for violations of "this subchapter or the terms of the plan." 29 U.S.C.A. § 1132(a)(3). Accordingly, to the extent that plaintiffs allege that defendant's actions with respect to the demutualization proceeds violated either the plan or ERISA, a claim may be stated. Put directly, under section 502(a)(3), it is not necessary that demutualization proceeds are "benefits" in order to state a claim for relief.
Section 502(a)(1) provides in pertinent part:
A civil action may be brought by a participant or beneficiary . . . (B) to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan . . .29 U.S.C.A. § 1132
Nonetheless, for the reasons discussed below, plaintiffs' second amended complaint must be dismissed.
a. Whether plaintiffs are plan participants, beneficiaries, or fiduciaries.
Under 502(a)(3), only plan participants, beneficiaries or fiduciaries may bring suit. One of the plaintiffs (A.C. Steelman) is a plan participant, and accordingly, he has standing to sue. The relationship of the other plaintiffs to the Valley Trust annuity contracts is unclear. For example, the complaint states that plaintiffs are the Trustees of the Area Trust Fund, and additionally that, "since on or before the filing of this lawsuit, they are trustees of the Sacramento Valley Electrical Workers Pension Trust for purposes of this litigation." SAC ¶ 2. It is not clear whether the plaintiffs are alleging that they are both trustees of the Area Trust funds and the pension fund, or exactly what their status is. Later, the complaint states that plaintiffs are the Valley Trust but that it was inactive, see SAC ¶ 10 ("Plaintiff Valley Trust thereafter was inactive . . .").
Simply stated, the complaint fails to allege that plaintiffs were or are beneficiaries, participants or fiduciaries of the annuity contracts at issue. Plaintiffs' opposition brief states, "clearly, plaintiffs are fiduciaries under 502(a)(3)." Pls.' Opp'n at 16. But how they acquired that status is simply not alleged in any meaningful way. Given the confusion about the relevant history of plaintiffs relationship to the plan, more is required.
While it could be argued that allegations of status plead legal rather than factual matters, here, where the statute apparently requires a particular status, the plaintiff should, at a minimum, allege they meet the requirement.
ERISA defines a fiduciary as:
a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (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 discretionary authority or discretionary responsibility in the administration of such plan.29 U.S.C.A. § 1002. See also Louisiana Bricklayers Trowel Trades Pension Fund Welfare Fund v. Alfred Miller General Masonry Contracting Co., 157 F.3d 404, 406 (5th Cir. 1998) (finding that "as fiduciaries, the trustees of a multiemployer benefit plan may maintain a cause of action under section 502(a)(3) of ERISA.").
In the instant case, the second amended complaint is silent as to how, if at all, plaintiffs acted as fiduciaries. For example, there are no allegations that plaintiffs exercised any discretionary control or authority over the plan, or rendered investment advice. While plaintiffs may well be fiduciaries, the complaint does not allege as much. According, with respect to plaintiffs Stinson, Story, McDermoot and Baker, the ERISA claims are dismissed with leave to amend.
b. Complaint fails to allege how defendant "violated any provision of [ERISA] or the terms of the plan."
Plaintiffs fail to sufficiently allege that defendant violated either the "terms of the plan" or "provision of ERISA." Rather than identify a certain plan term or provision of ERISA, the second amended complaint simply states that "demutualization proceeds are plan assets as described in ERISA." SAC ¶ 25. Without citing to a specific plan term or ERISA provision, plaintiffs assert that defendant wrongfully withheld 71,000 shares of Prudential stock.
As currently worded, the complaint fails to sufficiently allege how defendant's actions violated a plan term or ERISA. As the Supreme Court recently observed, Federal Rule of Civil Procedure 8(a)(2) requires a "showing" that plaintiffs are entitled to relief, "rather than a blanket assertion" of entitlement to relief. Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1965 n. 3 (2007). The "pleading must contain something more . . . than . . . a statement of facts that merely creates a suspicion [of] a legally cognizable right of action." Id. at 1965.
Here, plaintiffs create a suspicion of a legally cognizable claim (namely, that they are entitled to six million dollars in demutualization proceeds), but the complaint must contain more in order to survive a motion to dismiss. The factual allegations "must be enough to raise a right to relief above the speculative level." Id. at 1964-65.
Because there is a suspicion of a cognizable claim, the court will allow plaintiffs leave to file an amended complaint. Plaintiffs may be able to state a claim that demutualization proceeds are plan assets, and as such, defendant violated a provision of ERISA by not giving plaintiffs those assets. As previously noted, while demutualization proceeds may not be benefits of the pension plans, they are assets of the plan.
ERISA does not specifically define the meaning of a plan asset. See Bannistor v. Ullman, 287 F.3d 394, 402 (5th Cir. 2002). That said, common sense, to the degree common sense has anything to do with ERISA, suggests that such proceeds are assets of the plan. Moreover, the Department of Labor ("DOL") has issued Advisory Opinions on the matter which this court may consider.
The court may consider agency interpretations under the principals set forth in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). If "the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute." Chevron, 467 U.S. at 843. If so, the court defers to the agency's interpretation. Throughout this inquiry, the court gives "considerable weight . . . to an executive department's construction of a statutory scheme it is entrusted to consider . . . [and] deference to administrative interpretations." Id. at 844.
The DOL suggests that demutualization proceeds are plan assets:
The proceeds of the demutualization will belong to the plan if they would be deemed to be owned by the plan under ordinary notions of property rights. . . . In the case of an employee pension benefit plan, or where any type of plan or trust is the policyholder, or where the policy is paid for out of trust assets, it is the view of the department that all of the proceeds received by the policyholder in connection with a demutualization would constitute plan assets.
DOL Advisory Opinion 2001-02A, issued February 15, 2001. This determination requires "consideration of any contract or other legal instrument involving the plan documents. It also requires the consideration of the actions and representations of the parties involved." DOL Advisory Opinion 92-02A, issued January 17, 1992.
Case law also supports the general proposition that proceeds from demutualization are plan assets that belong to either the plan participants or policyholders. For example, in Ruocco v. Bateman, the Ninth Circuit found that premium paying participants of a long term disability policy deserved the proceeds from demutualization more than the sponsoring employer. See Ruocco v. Bateman, 903 F.2d 1232, 1235 (9th Cir. 1990).
Similarly, in Bank of New York v. Janowick, the Sixth Circuit concluded that "under relevant contract principals, we would supply a term to the annuity contracts under Restatement of Contracts, Section 204 entitling [employees] to unforseen demutualization proceeds." 470 F.3d 264, 269 (6th Cir. 2006). In Janowick, the court observed that "the annuity contracts say nothing regarding demutualization, which is not surprising as demutualization was not legal in New Jersey (where Prudential was located) when [the annuity contract was purchased]." Id. at 271. The court explained its position:
Section 204 of the Restatement of Contracts states: "When the parties to a . . . contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court." Restatement of Contracts, § 204.
Section 204's comment d instructs courts to apply "community standards of fairness" to determine a term that is reasonable in the circumstances. Here, it is clear that none of the parties expected to receive the demutualization proceeds, which will constitute a windfall to whoever receives them.470 F.3d at 272. For these reasons, the Sixth Circuit determined that the employees were entitled to the demutualization proceeds. The same logic applies to the instant case. Assuming that plaintiffs can assert that they stood in a position to assert a right to the proceeds (i.e. they were not strangers or officious intermeddlers) or had or have ownership interest in the annuity contracts, "community standards of fairness" suggest that this court could similarly supply a term to the contracts entitling plaintiffs to the demutualization proceeds.
For these reasons, the court grants plaintiffs leave to file a third amended complaint.
c. Complaint fails to allege that plaintiffs were the contract holders at the time of demutualization
Not only is it unclear if plaintiffs were or are "participants, fiduciaries or beneficiaries," but the complaint fails to sufficiently allege plaintiffs' relationship to the annuity contracts at issue.
As both parties concede, Prudential's demutualization plan specifically provided that the entire value of Prudential would be allocated to "owners" of "eligible policies" in the form of cash, policy credits or common stock. See Demutualization Plan, Def.'s Request for Judicial Notice, Ex. 1 to Def.'s First Motion to Dismiss. The demutualization plan specifically defined "the Owner of . . . a group annuity contract . . . [as] the Person or Persons specified as the policyholder or contract holder in the master policy or contract, as reflected in the applicable Records" of Prudential as of December 15, 2000. See Plan, § 5.3. The plan further provided that "the identity of the Owner of a Policy shall be determined without giving effect to any interest of any other Person in such Policy." See Plan, § 5.6.
Neither party suggests that the plan could not provide who the "owners" were for purposes of the demutualization. As convoluted as the facts and law are already, the court has no intention of examining this issue in the absence of briefing by the parties. Accordingly, the court will proceed on the assumption that the plan's provision governs.
Here, the named policyholder on both annuity contracts was the "Board of Trustees of the Sacramento Valley Electrical Workers' Pension Plan." See GA-8811, GA-8812, Verpent Decl. to Def.'s First Mot. to Dismiss, Exhs. 1, 2. In the second amended complaint, plaintiffs do not allege with any specificity that at the time Prudential demutualized, plaintiffs were the "Board of Trustees of the Sacramento Valley Electrical Workers' Pension Plan."
Although plaintiffs assert that they are successors to the Trustees of the Valley Trust, the complaint is silent as to the manner in which they became successors. Moreover, it is not clear that being successors to the Valley Trust is sufficient to state a claim for demutualization proceeds — the demutualization plan clearly states that the proceeds of the demutualization shall go to the named contract-holder at the time of the demutualization and without "giving effect to any interest of any other Person in such Policy." See Plan, § 5.6. Plaintiffs fail to allege on what grounds they should receive the demutualization proceeds as successors in interest.
The parties dispute the extent to which the court should consider a letter that was sent from the Valley Trust to defendant in March of 1993. The letter stated that the "contract holder as referred to in the [two annuity contracts] no longer exists, and there will be no successor appointed." See March 25, 193 Letter to D. Kostenbader, Verpent Decl. Ex. 4. The letter is not mentioned or relied upon in plaintiffs' complaint. Accordingly, on a motion to dismiss for failure to state a claim, the court cannot take the letter into consideration. See United States v. Ritchie, 342 F.3d 903, 907 (9th Cir. 2003). This letter will no doubt play a more significant role if and when the court is presented with a motion for summary judgment.
The complaint is rife with contradiction as to plaintiffs' relationship to the two annuity contracts. Initially, the complaint states that "since on or before the filing of this lawsuit, [plaintiffs] are trustees of the Sacramento Valley Electrical Workers Pension Trust for purposes of this litigation." SAC ¶ 2. The complaint also alleges that "the only entity ever named in the group contracts described herein, GA-881 and GA-8812, and reflected in the applicable records of Prudential on or before 2001 is plaintiff Valley Trust." Id. ¶ 14. It is not clear, however, that plaintiffs are in fact the Valley Trust. For example, the complaint also states that in 1982, "Plaintiff Valley Trust thereafter was inactive." SAC ¶ 9. Though what that actually means is quite unclear.
Plaintiffs' allegation that they are the Valley Trust and or successors to the Valley Trust is further complicated by the role of the Area Trust. The second amended complaint states that on June 1, 2006, "the Area Trust became aware of the nature of the demutualization consideration as shares issued to the Valley . . . and made demand therefore as successor to the Valley Trust and on behalf of the Valley Trust as original contract holder." SAC ¶ 22. "Prudential has refused to recognize either the Valley Trust or Area Trust as the Contract-holder, successor, or alternate funding agency and refuses to deliver up the demutualization consideration, 71,000 shares of PRU stock."Id.
In short, the complaint simultaneously alleges two seemingly contradictory facts. One, that "since on or before the filing of this lawsuit, [plaintiffs] are trustees of the [Valley Trust] for purposes of this litigation" and should have been recognized as the contract holder at the time of demutualization. SAC ¶ 2. And two, that the Area Trust should have been recognized as the contract holder, "successor or alternative funding agency" at the time of demutualization. SAC ¶ 22. While it is true that a complaint may contain alternative pleadings, see Federal Rule of Civil Procedure 8(e), they ordinarily should be set out in distinct causes of action. Here the mode of pleading is incoherent, and thus must be rejected.
Without more, these allegations do not support a claim that plaintiffs are entitled to demutualization consideration.
2. Plaintiffs' Claim under ERISA § 409
Plaintiffs also claim that defendant breached its fiduciary duty under ERISA. Section § 509(a)(2) of ERISA provides that a "civil action may be brought . . . by a participant, beneficiary or fiduciary for appropriate relief under section [409] of this title. . . ." 29 U.S.C. § 1132(a)(2). Section 409 states:
Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary.29 U.S.C.A. § 1109. For the reasons discussed herein, plaintiffs fail to state a cause of action pursuant to section 409.
a. Plaintiffs' standing to sue under ERISA
Only participants, beneficiaries or fiduciaries may bring suit pursuant to section 409. As previously noted, it not clear if plaintiffs are "participants, beneficiaries, or fiduciaries." See supra section III(A)(1)(a). Although plaintiffs claim to be fiduciaries in their opposition brief, the complaint contains no factual allegations that plaintiffs acted in a fiduciary capacity. Plaintiffs may be able to cure this defect and therefore, plaintiffs shall be given leave to amend.
b. Complaint fails to sufficiently allege that Prudential was a fiduciary of the plan
Section 409 provides for suits against plan fiduciaries. The complaint fails to set forth factual allegations that Prudential acted in a fiduciary capacity. Instead, the complaint states that by escheating a portion of the demutualization proceeds, and by withholding the remainder, Prudential "acted as a party in interest and as an ERISA fiduciary." SAC ¶ 26. It is thus unclear whether plaintiffs alleges that defendant was a party in interest, a fiduciary, or both. This is hardly a quibble, since the provision sued under provides for suits against fiduciaries.
See section III (A)(1)(a) of this order for the definition of "fiduciary" under ERISA.
In the Ninth Circuit, "an ERISA fiduciary includes anyone who exercises discretionary authority over the plan's management, anyone who exercises authority over the management of its assets, and anyone having discretionary authority or responsibility in the plan's administration." Credit Managers Ass'n v. Kennesaw Life Acc. Ins. Co., 809 F.2d 617, 625 (9th Cir. 1987). When an insurance company administers claims for an employee welfare benefit plan and has authority to grant or deny the claims, the company is a "fiduciary" under ERISA. Aetna Life Ins. Co. v. Bayona, 223 F.3d 1030 (9th Cir. 2000).
It may be that Prudential had authority to grant or deny claims or had discretionary authority over the annuity contracts at issue, and should therefor be considered a fiduciary of the plan. The complaint, however, fails to set forth factual allegations that defendant acted in such a manner.
c. Complaint fails to allege that plaintiffs are suing on behalf of the plan
Assuming for the moment that Prudential is a fiduciary and breached its fiduciary duty by pocketing proceeds that belonged to the plans, the complaint does not allege that plaintiffs are suing on behalf of the plans.
It is well established that an "individual beneficiary may bring a fiduciary breach claim, but must do so for the benefit of the plan." Massachusetts Mut. Life Ins. v. Russell, 473 U.S. 134, 144 (1985). Any recovery for a violation of section 409 must be on behalf of the plans as a whole, rather than inuring to individual beneficiaries. Horan v. Kaiser Steel Ret. Plan, 947 F.2d 1412, 1417-18 (9th Cir. 1991), citing Russell, at 140. See also Parker v. BankAmerica Corp., 50 F.3d 757, 768 (9th Cir. 1995) ("Although individual beneficiaries may bring a breach of fiduciary duty claim against an ERISA plan administrator, they must do so for the benefit of the plan.")
If plaintiffs are suing not as individuals, but as fiduciaries (something which is not alleged in the complaint), then, by virtue of being fiduciaries of the plans, plaintiffs may be able to allege that their claim is brought in a representative capacity for losses suffered to the plans. The complaint as currently worded, however, fails to allege that plaintiffs are suing for the benefit of the pension plans. Indeed, as previously noted, it is not clear how plaintiffs are even connected to the two plans.
B. Preemption
1. State Law Claim for Breach of Contract
As previously discussed, both case law and Department of Labor Advisory Opinions suggest that demutualization proceeds are considered plan assets under ERISA. Accordingly, ERISA preempts plaintiffs' state law claim for breach of contract.
This conclusion which departs for the first opinion is a necessary result of the analysis undertaken above.
ERISA's preemption clause provides that "[ERISA] shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan. . . ." 29 U.S.C. § 1144(a). The Supreme Court recently explained that "Congress' intent to make the ERISA civil enforcement mechanism exclusive would be undermined if state causes of action that supplement the ERISA § 502(a) remedies were permitted, even if the elements of the state cause of action did not precisely duplicate the elements of an ERISA claim." Aetna Health Inc. v. Davila, 542 U.S. 200, 216 (2004). Indeed, "the express pre-emption provisions of ERISA are deliberately expansive, and designed to 'establish pension plan regulation as exclusively a federal concern.'" Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 46 (1987) (quoting Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 523 (1981)); see also Board of Trustees v. H.F. Johnson, Inc., 830 F.2d 1009, 1016 (9th Cir. 1987) ("ERISA preemption is to be construed broadly").
In the instant case, plaintiffs' state law breach of contracts claim directly relates to the two pension plans — plans which both parties agree are employee benefit plans under ERISA.
Moreover, the remedy plaintiffs seek under the state law cause of action is essentially the same as the remedy sought under section 502(a) of ERISA. Under both causes of action, plaintiffs seek the recovery of demutualization proceeds which, according to the Department of Labor and case law, may be construed as assets of ERISA plans. For these reasons, plaintiffs' state law cause of action is preempted and must be dismissed.
Once again, however, the conclusion is premised upon the plaintiffs suing for ERISA breaches. If it is clear that they do not and cannot claim ERISA breaches, it may be that a state claim possibly lies.
2. California's Unclaimed Property Law
Plaintiffs also claim that defendant wrongfully escheated funds to the State and that the funds escheated were only a portion of the amount owed to plaintiffs. Defendant argues that plaintiffs' claims are foreclosed by California's Unclaimed Property Law ("UPL"). See Def.'s Mot. to Dismiss at 7.
Whether ERISA preempts California's UPL is an unsettled question. See, e.g., Aetna Life Insurance Company v. Borges, 869 F.2d 142 (2nd Cir. 1989) (ERISA does not preempt state unclaimed property law); Commonwealth Edison Company v. Vega, 174 F.3d 870 (7th Cir. 1999) (ERISA does preempt state unclaimed property law). The one Ninth Circuit district court decision on this issue is persuasive and adopts the reasoning of the Seventh Circuit. InManufacturers Life Ins. Co. v. East Bay Restaurant and Tavern Retirement Plan, the court concluded that an annuity contract which provided for the return of premiums to an ERISA plan in the event that an annuitant is not located after a certain date, was a plan asset. 57 F. Supp. 2d 921, 924 (N.D. Cal. 1999). Accordingly, the court found that, "[t]his is not a simple instance where the state is attempting to step into the shoes of beneficiaries pending their location. Instead, California seeks to insert itself between the ERISA plan and an asset of the plan, the annuity contract." Id. The court found it persuasive that the plan participants had a direct interest in the funds confiscated by the state: "Here . . . the state wishes to seize funds to which the ERISA plan has a contractual right."Id. As such, the court found that ERISA preempted the California UPL.
In the instant case, the demutualization proceeds are plan assets and were escheated to the state. In so far as the California UPL interferes with the relationship between plaintiffs and defendant, the UPL is preempted by ERISA. Plaintiffs' claim with the State Controller, for the funds already escheated, is not preempted.
IV. Conclusion
In sum, plaintiffs' second amended complaint fails to set forth sufficient factual allegations to state a claim under ERISA. As previously noted, plaintiffs created a suspicion of a legally cognizable claim (namely, that they are entitled to six million dollars in demutualization proceeds), however, the complaint must contain more in order to survive a motion to dismiss. The factual allegations "must be enough to raise a right to relief above the speculative level." Twombly, 127 S.Ct. at 1964-65.
The court will, however, grant plaintiffs leave to amend. Federal Rule of Civil Procedure 15 provides that "leave to amend shall be freely given when justice so requires." Fed.R.Civ.P. 15(a). Absent prejudice, or a "strong showing" of the other factors, such as undue delay, bad faith, or dilatory motive, "there exists a presumption under Rule 15(a) in favor of granting leave to amend." Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) (per curiam). Generally, leave to amend is only denied when it is clear that the deficiencies of the complaint cannot be cured by amendment. DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992).
Although this order marks the second time the court has granted plaintiffs leave to amend, and although the second amended complaint is almost as problem-riddled as the first, plaintiffs may be able to cure the defects. This case was only recently filed and no scheduling conference has occurred. Accordingly, the prejudice to defendants is minimal. For these reasons, the court hereby ORDERS as follows:
1. Defendant's Motion to Dismiss the Second Amended Complaint is GRANTED.
2. Plaintiffs' shall file an amended complaint within 30 days of the date of this order.
IT IS SO ORDERED.