Disselkamp v. Norton Healthcare, Inc.

DONNA DISSELKAMP, et al. PLAINTIFFS v. NORTON HEALTHCARE, INC., et al. DEFENDANTS

CIVIL ACTION NO. 3:18-CV-00048-GNS

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF KENTUCKY LOUISVILLE DIVISION

August 2, 2019

MEMORANDUM OPINION AND ORDER

This matter is before the Court on Defendants' Motions to Dismiss (DN 19, 31, 32), and Plaintiffs' Motion for Leave to File Sur-Reply (DN 54). The motions are ripe for adjudication. For the reasons outlined below, Defendants' Motions to Dismiss (DN 31, 32) are GRANTED IN PART and DENIED IN PART, and the other motions are DENIED.

I. STATEMENT OF CLAIMS

This is an action brought under the Employee Retirement Income and Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq., concerning the administration of Defendant Norton Healthcare, Inc.'s ("Norton") 403(b) Retirement Savings Plan ("the Plan"). (Am. Compl. ¶ 14, DN 20). The Plan is a defined contribution, individual account, pension benefit plan as defined under 29 U.S.C. §§ 1002(2)(A) and 1002(34). (Am. Compl. ¶ 14). Named Plaintiffs Donna Disselkamp, Erica Hunter, Sey Momodou Bah, Kathy Reed, and Curtis Cornett ("Plaintiffs") were participants in the Plan during the alleged class period. (Am. Compl. ¶¶ 18-22).

Norton is the Plan Administrator and a named fiduciary. (Am. Compl. ¶ 25). Plaintiffs allege Defendants Richard Wolf, G. Hunt Rounsavall, Stephen A. Williams, and Donald H. Robinson were members of Norton's Board of Directors from 2012-2017. (Am. Compl. ¶¶ 26-29). These named individual Defendants were also members of the Norton Healthcare Retirement Plan Investment Committee ("Retirement Committee") and as such were ERISA fiduciaries responsible for ensuring that plan expenses were reasonable and that plan funds were invested prudently and loyally. (Am. Compl. ¶¶ 26-29). There are presently twenty-five additional unnamed Defendants whom Plaintiffs believe comprise the remainder of the Retirement Committee. (Am. Compl. ¶ 30). When appropriate, the Court will refer to Norton, the Retirement Committee and the individually named Defendants collectively as "Norton Defendants."

Defendant Lockton Investment Advisors, LLC is affiliated with Lockton Financial Advisors, LLC and Lockton Companies, LLC (jointly "Lockton Defendants"). Lockton Defendants offer licensed broker-dealers and insurance agents to sell securities, insurance products, and insurance consulting services. (Am. Compl. ¶ 31).

After the lawsuit was filed, Norton Defendants moved to dismiss the claims asserted against them. (Defs.' Mot. Dismiss, DN 19). Subsequently, Plaintiffs amended the Complaint. In the Amended Complaint, Plaintiffs assert seven counts against Defendants alleging various breaches of fiduciary duty. (Am. Compl. ¶¶ 204-82). Norton Defendants have moved to dismiss Counts I, II, III, IV, VI, and VII, and Lockton Defendants have joined in this motion. (Defs.' Mot. Dismiss Am. Compl., DN 32). Lockton Defendants have separately moved to dismiss Count V. (Lockton Defs.' Mot. Dismiss, DN 31 [hereinafter Lockton's Mot.]).

II. JURISDICTION

This case presents a federal question, and jurisdiction is therefore proper under 28 U.S.C. § 1331.

III. STANDARD OF REVIEW

A complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief," and is subject to dismissal if it "fail[s] to state a claim upon which relief canbe granted." Fed. R. Civ. P. 8(a)(2); Fed. R. Civ. P. 12(b)(6). When considering a motion to dismiss, courts must presume all factual allegations in the complaint to be true and make all reasonable inferences in favor of the non-moving party. Total Benefits Planning Agency, Inc. v. Anthem Blue Cross & Blue Shield, 552 F.3d 430, 434 (6th Cir. 2008) (citation omitted). "But the district court need not accept a bare assertion of legal conclusions." Tackett v. M & G Polymers, USA, LLC, 561 F.3d 478, 488 (6th Cir. 2009) (citation omitted). "A pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do. Nor does a complaint suffice if it tenders naked assertion[s] devoid of further factual enhancement." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted) (citation omitted).

To survive a motion to dismiss under Rule 12(b)(6), the plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Traverse Bay Area Intermediate Sch. Dist. v. Mich. Dep't of Educ., 615 F.3d 622, 627 (6th Cir. 2010) (internal quotation marks omitted) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim becomes plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556). "A complaint will be dismissed pursuant to Rule 12(b)(6) if no law supports the claims made, if the facts alleged are insufficient to state a claim, or if the face of the complaint presents an insurmountable bar to relief." Southfield Educ. Ass'n v. Southfield Bd. of Educ., 570 F. App'x 485, 487 (6th Cir. 2014) (citing Twombly, 550 U.S. at 561-64).

IV. DISCUSSION

A. Defendants' Motion to Dismiss Complaint (DN 19)

Norton Defendants have moved to dismiss the claims asserted against them in the Complaint. (Defs.' Mot. Dismiss, DN 19). Because the Amended Complaint subsumes theallegations in the original Complaint, the Court will deny this motion as moot. See Herran Props., LLC v. Lyon Cty. Fiscal Court, No. 5:17-CV-00107-GNS, 2017 WL 6377984, at *2 (citing Cedar View, Ltd. v. Colpetzer, No. 5:05-CV-00782, 2006 WL 456482, at *5 (N.D. Ohio Feb. 24, 2006)); Ky. Press Ass'n, Inc. v. Kentucky, 355 F. Supp. 2d 853, 857 (E.D. Ky. 2005) (citing Parry v. Mohawk Motors of Mich., Inc., 236 F.3d 299, 306 (6th Cir. 2000)).

B. Defendants' Motions to Dismiss Amended Complaint (DN 31, 32)

Following the filing of the Amended Complaint, Defendants moved to dismiss the claims asserted against them. Each claim will be addressed below.

1. Background and Overview

Before 2012, Norton provided its employees retirement benefits in the form of a "bundled plan" administered by Transamerica Life Insurance and its affiliates. (Am. Compl. 35). The term "bundled plan" means Norton purchased a pre-packaged platform where custody, record keeping, and investments were provided in an integrated platform. (Am. Compl. ¶ 35).

In 2012, Norton restructured the Plan, which is now funded under a group annuity contract and a trust arrangement. (Am. Compl. ¶¶ 16, 36). Norton established a trust with Delaware Charter Guarantee and Trust, doing business as Principal Trust. (Am. Compl. ¶ 16). Norton also established a group annuity contract with Principal Life Insurance ("Principal Life").¹ The alleged class period concerns only Plan decisions made after the restructuring.

Lockton Defendants provided advice to Norton Defendants with respect to its restructure of the Plan. (Am. Compl. ¶ 37). Plaintiffs allege Lockton Defendants advised Norton Defendants on matters including but not limited to the following: the selection and compensation of serviceproviders; initial plan and vendor analysis; investment selection and monitoring; fiduciary and compliance services; employee communication and education; mergers; and acquisitions and divestitures. (Am. Compl. ¶ 37). Lockton Defendants continued advising Norton after the restructuring as well. (Am. Compl. ¶ 37).

2. Count I: Breach of the Duty of Prudence for Failing to Employ Viable Methodology for Selecting and Monitoring Investment Options

Plaintiffs' claims regarding Defendants' breach of the duty of prudence can be separated into two categories: Defendants' selection of and failure to replace higher cost share classes when identical shares with lower costs were available, and Defendants' selection of and failure to replace the Principal Fixed Income Option as its sole stable value fund. Because Defendants' motion first addresses the share class issue, the Court will begin its analysis there.

a. Selection of Share Classes

According to the Amended Complaint, a general principle of investment management holds that investors with greater assets enjoy greater bargaining power when negotiating management fees because the more assets they possess, the lower the management fees will be when expressed as a percentage of the overall portfolio. (Am. Compl. ¶ 83). The two most common classes of mutual funds are retail funds and institutional funds. (Am. Compl. ¶ 84). Retail funds are available to a broad spectrum of investors, including individuals, whereas institutional funds, as their names suggests, are generally only available to larger investors including 401(k) and 403(b) plans. (Am. Compl. ¶ 84). Institutional funds typically charge lower expense ratios than similarly situated retail mutual funds. (Am. Compl. ¶ 84).

As there are different classes of mutual funds, there are also different share classes of a single mutual fund. (Am. Compl. ¶¶ 85, 87). Retail share classes possess different shareholder rights and responsibilities from institutional class shares, which are also called "R Class shares."(Am. Compl. ¶ 87). These may include differing fee and load charges. (Am. Compl. ¶¶ 85, 87). But while the fees differ, the assets underlying the various share classes as well as their management and investment styles are identical. (Am. Compl. ¶ 85).

Plaintiffs state that a prudent fiduciary should have in place a methodology for taking advantage of discounts available through the purchase of institutional shares. (Am. Compl. ¶ 90). Because mutual funds are not static, it is important for a prudent fiduciary to monitor the Plan in the event lower cost share classes become available. (Am. Compl. ¶ 91). Plaintiffs contend Norton violated its duty of prudence by failing to monitor the availability of lower cost share classes, and in so doing subjected Plan participants to...