Opinion
No. C 01-01879 WHA
October 29, 2001
ORDER DISMISSING CASE; VACATING HEARING
INTRODUCTION
In this action under the Employee Retirement Income Security Act, 29 U.S.C. § 1001, et seq., this order DISMISSES plaintiffs' federal claims and declines to exercise jurisdiction over the remaining state-law causes of action. The hearing is VACATED.
STATEMENT
Plaintiffs are trustees of the Western States Office and Professional Employees Pension Fund, a multiemployer pension plan. Their complaint alleges that defendants BNY Western Trust Co. and Wells Fargo Bank, N.A. breached their fiduciary duties to the Pension Fund. The following well-pled facts are taken as true for the purpose of this motion.
In 1988, the Trustees entered into a written agreement entitled "Agreement Between Trustees Corporate Co-Trustee" with First Interstate Bank of California for the management of the Pension Fund's assets (Compl., Exh. A). Under the agreement, the Trustees deposited money from the Pension Fund daily into a depository account. The agreement required the bank to "sweep" these daily deposits into a short-term investment fund. The Pension Fund could then withdraw cash from the short-term investment fund as necessary to pay benefits and operating expenses. When enough money accumulated in the short-term investment fund, the Trustees would withdraw the money from the short-term investment fund and make long-term investments.
At some point, Wells Fargo acquired First Interstate, assuming First interstate's obligations under the agreement (id. ¶ 12). Around 1997, BNY agreed to purchase Wells Fargo's trust-management business. In November of 1997, BNY's CEO, Rodney Cooper. sent an appointment letter to the Trustees, seeking their approval to assume Wells Fargo's duties under the agreement. The letter assured the Trustees that BNY would continue to sweep the money in the Pension Fund's short-term account on a daily basis (id. ¶¶ 13-14). The Trustees executed the appointment letter on December 4, 1997.
On May 21, 1998, the Trustees discovered that large amounts of cash had accumulated in the Pension Fund's depository account, since the account had not been swept. As a result, the Pension Fund was deprived of interest that would have accrued between December and May, and it was forced to dissolve long-term investments to meet its expenses.
* * * On May 15, 2001, the Trustees filed suit herein, alleging five causes of action against both defendants for: (i) breach of fiduciary duty under 29 U.S.C. § 1132 (a)(2); (ii) engaging in a prohibited transaction under 29 U.S.C. § 1132 (a)(3); (iii) breach of contract; (iv) negligence; and (v) negligent misrepresentation. In separate motions, both defendants seek to dismiss the federal causes of action and the misrepresentation claim. Since their arguments are similar, this order addresses them together.
ANALYSIS
A motion to dismiss under Rule 12(b)(6) is granted when there is either a "lack of a cognizable legal theory" or "the absence of sufficient facts alleged under a cognizable legal theory." Balisieri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). Well-pled facts in the complaint are presumed to be true. NL industries, Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986).
Breach of Fiduciary Duty
The central issue in this case is whether defendants were fiduciaries under ERISA. Plaintiffs maintain that the agreement created a fiduciary duty, because it stated that First Interstate (into whose shoes defendants allegedly stepped) was a "corporate co-trustee." Defendants, on the other hand, argue that they were not fiduciaries because they lacked any discretionary control over the Pension Fund's assets. Resolving this question involves three key portions of the agreement. The First was Article I, Section 3, which read (Compl., Exh. A) (emphasis added):
The Corporate Co-Trustee shall act solely as custodian of such of the assets of the Plan as are delivered to the Corporate Co-Trustee to be held hereunder and shall not be responsible for the operation or administration of said Plan and shall have no authority, responsibility or discretion to invest or otherwise manage the assets thereof, nor to exercise any of the powers, duties and responsibilities of the Trustees except with respect to those powers, duties and obligations of the Corporate Co-Trustee expressly set forth in this Agreement or on Exhibit A which establishes the Corporate Co-Trustee's real estate responsibilities.
The second significant section was Article V, Section 4. It contained a provision similar to the one in Article I, Section 4. It stated in part that the co-trustee "shall have no right, power, responsibility or discretion to exercise any authority or control respecting management or administration of the Fund or the Plan or respecting management or disposition of its assets or to render investment advice with respect to, or supervise the investment or disposition of, the assets of the Fund or of the Plan" (id. Art. V, Section 4).
The third important part of the agreement was Article III, entitled "Powers and Duties of Corporate Co-Trustees." This section listed powers and duties such as: "to receive and hold as Corporate Co-Trustee, subject to direction of the Trustees as to disposition all cash or other assets paid to the Corporate Co-Trustee by or for the account of the Fund," "to disburse funds from the Fund in accordance with written instructions from the Trustees," and "to invest, at the direction of the Trustees or the Investment Manager, in any common or collective trust fund or pooled investment fund which may be established and maintained by Corporate Co-Trustee which is a proper investment for the fund" (id. Art. III).
From the face of the agreement, it is clear that defendants were not fiduciaries as a matter of law. To be a fiduciary under ERISA, an entity must he able to exercise some type of discretionary control over plan assets or plan administration or to provide investment advice. ERISA expressly states:
a person is a fiduciary with respect to a plan to the extent that (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. § 1002 (21)(A). The foregoing provisions of the agreement demonstrate that the agreement prohibited defendants from exercising any discretion at all.
Plaintiffs contend that Article IV, Section 4 of the agreement raises a possibility that defendants were fiduciaries. This section related to investment managers, who were selected "in the sole and absolute discretion of the Trustees" (Article IV, Section 1). It stated (Art. IV, Section 4)(emphasisadded):
The Corporate Co-Trustee shall not be liable for the acts or omissions of a fiduciary unless (a) the Corporate Co-Trustee knowingly participates in, or knowingly attempts to conceal the act or omission of, a fiduciary and the Corporate Co-Trustee knows the act or omission is a breach of a fiduciary responsibility by the other fiduciary; or (b) the Corporate Co-Trustee has knowledge of a breach by the other fiduciary and shall not make reasonable efforts to remedy the breach; or (c) the corporate Co-Trustee's breach of its own fiduciary responsibility permits the other fiduciary to commit a breach. Except as set forth in the preceding sentence, the Corporate Co-Trustee shall not be liable for a breach of a fiduciary responsibility if the Corporate Co-Trustee shall follow instructions pursuant to this Agreement or for the acts of omission or commission of an investment manager appointed by the Trustees.
While plaintiffs are correct that the italicized language above suggested that defendants could be liable for breach of fiduciary duty, the test for whether an entity is a fiduciary is a functional one. Mertens v. Hewitt Assoc., 508 U.S. 248, 262 (1993). Here, the agreement expressly prohibited defendants from performing any of the functions giving rise to a fiduciary duty. It stated that defendants "shall have no authority, responsibility or discretion to invest or otherwise manage the assets" (Art. I. Section 3) and "no right, power. responsibility or discretion to exercise any authority or control respecting management or administration of the Fund or the Plan or respecting management or disposition of its assets or to render investment advice with respect to, or supervise the investment or disposition of, the assets of the Fund or of the Plan" (Art. V, Section 4). All the discretionary powers given to defendants were required to be exercised only upon instruction from the Trustees. Plaintiffs have not pointed to any part of the agreement that arguably gave defendants any discretionary power. There was none. Without such a power, defendants were not fiduciaries. Arizona State Carpenters Pension Trust Fund v. Citibank, 125 F.3d 715, 721-22 (9th Cir. 1997). This cause of action is therefore
DISMISSED.
Prohibited Transaction
Under 29 U.S.C. § 1132 (a)(3), a fiduciary may bring a civil action "to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan" or "to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or terms of the plan." Plaintiffs contend that defendants violated ERISA by engaging in a transaction prohibited by 29 U.S.C. § 1106. Section 1106, in turn, provides 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 . . . lending of money or other extension of credit between the plan and a party in interest." Plaintiffs maintain that by failing to sweep the depository account, defendants allowed themselves "to enjoy the `float' on such funds, thus indirectly obtaining a loan from the plan" (Opp. 5). This cause of action must also be dismissed, because, as already stated, defendants were not fiduciaries. While plaintiffs are correct that non-fiduciaries may be held liable for engaging in transactions prohibited under Section 1106, Harris Trust Savings Bank v. Solomon Smith Barney, Inc., 530 U.S. 238 (2000), the statute nonetheless requires a prohibited transaction. As defined by Section 1106, a "prohibited transaction" must be caused by a fiduciary. Lockheed Corp. v. Spink, 517 U.S. 882, 888-89 (1996). Even if defendants' failure to sweep the short-term account were construed as a loan to themselves, no fiduciary caused such a transaction. Accordingly, this cause of action is DISMISSED.
In their oppositions, plaintiffs advance an eleventh-hour cause of action not alleged in their complaint. It is only addressed because it is relevant to whether leave to amend should be granted. According to plaintiffs, the contract at issue was a "plan document" and therefore was part of plaintiffs' ERISA plan. Plaintiffs contend that by breaching the contract, defendants violated the terms of an ERISA plan, and thus may be held liable under 29 U.S.C. § 1132 (a)(3).
Plaintiffs' theory that the contract with defendants was a plan document is grounded solely on Hotel Employees and Restaurant Employees International Union Welfare Fund v. Gentner, 815 F. Supp. 1354 (D. Nev. 1993). In Gentner, a participant in an ERISA plan, Mr. Newell, was in a car accident. The fund established by the ERISA plan paid his medical expenses. A term of the ERISA plan was that "all monies paid by the Fund to a Participant shall be reimbursed pursuant to a signed Subrogation Agreement, if and when the Participant recovers from the responsible party." Id. at 1356. After prevailing in a lawsuit against the other driver, Mr. Newell did not reimburse the fund, despite having signed a subrogation agreement. The trustees then sued Mr. Newell's attorney for breach of the terms of an ERISA plan. In dismissing the complaint for failure to state a claim because the attorney was under no duty to the trust fund, the court stated that Mr. Newell might be held liable under ERISA for violating the subrogation agreement, because the subrogation agreement was part of the ERISA plan. Id. at 1358.
In Gentner, reimbursing the ERISA fund pursuant to the subrogation agreement was an express condition of the ERISA plan. The agreement at issue in the instant action, in contrast, expressly provided that it "shall not modify, amend or change any of the terms or provisions" of the ERISA plan (Compl., Exh. A, Art. I, Section 3). Its provisions were not intended to be terms of the ERISA plan. Adhering to the agreement was not a requirement of the ERISA plan.
The complaint alleges that it was separate from the plan (Compl. ¶¶ 3, 8, 15). Breach of the agreement would not give rise to a cause of action for breach of an ERISA plan.
State Law Causes of Action
A court may decline to exercise supplemental jurisdiction when it "has dismissed all claims over which it has original jurisdiction." 28 U.S.C. § 1337 (c)(3). What is left of this action is quintessential state-law claims for breach of contract, negligence, and misrepresentation. This motion is the first significant proceeding in this case. There is no reason to retain jurisdiction over these claims. Accordingly, the remaining causes of action are DISMISSED.
CONCLUSION
For the foregoing reasons, the complaint is DISMISSED without leave to amend. The hearing is VACATED. The Clerk shall close the file.
IT IS SO ORDERED.