Feeney Bros. Excavation LLC v. Morgan Stanley & Co.

FEENEY BROTHERS EXCAVATION LLC,and FEENEY BROTHERS EXCAVATION CORPORATION 401(k) PLAN, Plaintiffs, v. MORGAN STANLEY & CO. LLC, MORGAN STANLEY PRIVATE BANK,N.A., MORGAN STANLEY SMITH BARNEY LLC, and BRIAN F. MILLER, Defendants.

Civil No. 18-12313-LTS

UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS

May 18, 2020

ORDER ON MOTION TO DISMISS (DOC. NO. 40)

SOROKIN, J.

Plaintiffs Feeney Brothers Excavation LLC ("Feeney Brothers") and Feeney Brothers Excavation Corporation 401(k) Plan ("the Plan") first brought this action in the Suffolk County Superior Court of Massachusetts alleging various state law causes of action against defendants Morgan Stanley & Co. LLC, Morgan Stanley Private Bank, N.A., Morgan Stanley Smith Barney (together, "Morgan Stanley"), and Brian F. Miller. Doc. No. 1-1.¹ Defendants removed the action to this Court and successfully opposed its remand to state court on the grounds that Plaintiffs' state law claims are preempted by the Employee Retirement Income Security Act of 1974 (ERISA). Doc. No. 1 at 4; Doc. No. 36 at 15-16 (denying Plaintiff's motion to remand to state court).

Defendants now move to dismiss Plaintiffs' complaint in its entirety. Doc. No. 40. The motion is fully briefed, and the Court heard oral argument on May 12, 2020. After reviewing the parties' submission and arguments, the Court ALLOWS Defendants' motion to dismiss Count III of the Complaint, but otherwise DENIES Defendants' motion.

I. BACKGROUND

A. Plaintiffs' Allegations²

Feeney Brothers was founded by two brothers in 1988 as a utility construction company and today is a leading service provider for the natural gas, electric, and telecommunications industries throughout New England. Doc. No. 38 (Amended Complaint) ¶ 11. The Plan is the 401(k) plan Feeney Brothers offers its employees for retirement savings. Id. ¶ 12. Morgan Stanley provides investment advice to individual clients (including Plaintiffs). Id. ¶ 13. In or about 2009, the Plan retained Morgan Stanley as its investment advisor. Id. ¶ 15.

Defendant Brian F. Miller ("Miller") is an individual employed by or otherwise affiliated with Morgan Stanley as a First Vice President, Financial Advisor, & Corporate Retirement Director. Id. ¶ 7. Miller worked at Morgan Stanley Smith Barney LLC beginning in June 2009, and Morgan Stanley Private Bank, N.A. beginning in 2015. Id. He continues to be employed by Morgan Stanley. Id.

In pitching his investment advisory services to Feeney Brothers, Miller stressed his expertise in assisting 401(k) plans, not just by providing investment advice but also by ensuring that the Plan's administrative and regulatory needs were met by capable third-party administrators (TPAs). Id. ¶ 17. In that context, Miller represented to Feeney Brothers that Qualified Pension Services, Inc. ("QPSI") had the aptitude, ability, and expertise to administer the Plan. Id. Millerrepresented that QPSI was perfectly suited to administer the Plan; that it had a lengthy track record of successful administration of similar plans; and that it would be a responsible, cost-effective option for the Plan. Id. ¶ 43. On the basis of his representations concerning QPSI's qualifications, Miller expressly recommended that Feeney Brothers and the Plan retain QPSI as the Plan's TPA. Id. ¶ 17. The only TPA about which Miller made such representations, and the only TPA he advised Feeney Brothers to hire, was QPSI. Id. ¶ 18.

In reliance on Miller's expertise and advice, Feeney Brothers hired QPSI as the Plan's TPA. Id. ¶ 21. But QPSI was not qualified to be the Plan's TPA because its business focused exclusively on the administration of small 401(k) plans, and it was not equipped to handle the mid-sized and growing Plan. Id. ¶ 22. Miller knew or should have known that QPSI was not equipped to serve as Feeney Brother's TPA because, among other things: (a) the Plan was larger than most plans administered by QPSI; (b) QPSI lacked the aptitude, qualifications and experience to meet the Plan's needs; and (c) those needs would grow only more complex and demanding as the Plan grew, rendering QPSI even more poorly suited for the TPA role over time. Id. ¶ 23.

Miller represented to Feeney Brothers and the Plan that QPSI had ably provided services to other 401(k) plans with which Miller worked but did not mention that those plans were much smaller, with needs far different than those of the Plan. Id. ¶ 24. Miller also represented to Feeney Brothers and the Plan that Miller knew and trusted QPSI's principal, Richard "Dick" Etling but did not disclose that Etling's business model focused exclusively on plans much smaller than the Plan. Id. ¶ 25.

QPSI carried no insurance to protect it against losses caused by its failure to perform its duties as a TPA. Id. ¶ 26. Miller knew or should have known that QPSI carried no insurance, but he did not disclose this fact to Feeney Brothers. Id. Investment advisors that undertake torecommend TPAs regularly conduct diligence on prospective TPAs before making any such recommendations. Id. Miller either undertook no such diligence or failed to share what he learned with Plaintiffs. Id.

Miller pitched Feeney Brothers to hire him and Morgan Stanley to become the investment advisor to the Plan as part of a package that included QPSI and the platform through which the Plan would be administered. Id. ¶ 27. QPSI's TPA services were relatively low cost, making Miller's pitch to become the investment advisor to the Plan more attractive. Id.

As Feeney Brothers grew over recent years, so too did the number of Plan participants. Id. ¶ 28. Miller and Morgan Stanley knew these facts. Id. As the Plan grew in size, QPSI became even less qualified to serve as its TPA. Id. ¶ 29. Of QPSI's approximately 300 clients, the Plan was by far its largest. Id. No more than a handful of QPSI's 300 clients were 401(k) plans with more than 20 participants; in recent years, the Plan has had substantially more than 100 participants. Id. ¶ 30.

QPSI provided TPA services exclusively to 401(k) plans that were not "large plans," i.e., those that were below the 100-participant threshold that under federal regulations triggers an annual public accounting audit of the Plan. Id. ¶ 31. The Plan neared the 100-participant threshold several years before 2014 and crossed that threshold in 2014. Id. ¶ 32. QPSI had no experience with administering a plan of that size and so notified Miller on numerous occasions. Id. ¶ 33.

Though Miller was aware of QPSI's unsuitability to administer the Plan, he did not share that information with Plaintiffs and instead continued to recommend QPSI and package QPSI's services with Miller's own. Id. ¶ 33. Miller met with Plaintiffs to discuss the Plan at least once annually, and as frequently as once per quarter. Id. Miller often praised QPSI during those discussions. Id. He never raised what he knew about QPSI's unsuitability to perform the workfor which he had recommended them, or what he knew or should have known regarding QPSI's complete lack of insurance coverage. Id. Instead, he continued to recommend to the Plan that it retain and extend its relationship with QPSI. Id.

Feeney Brothers first became aware of QPSI's inability to meet reasonable standards of professional diligence following audits of the Plan completed in mid-October 2015 and mid-October 2016. Id. ¶ 34. As a result of the errors caused by QPSI, Feeney Brothers incurred the following damages: $676,950 in additional Plan contributions required by the IRS; more than $175,000 in attorneys' fees to remedy Plan defects and work with the IRS to achieve compliance through the Voluntary Correction Program; approximately $100,000 in Feeney Brothers in-house staff time to prepare the Voluntary Correction Program submission and remedy Plan defects; $50,845 in successor TPA fees for time devoted to remedying the Plan defects; $12,000 to accountants to identify and address the Plan defects; and $7,500 in fees to the IRS for participation in the Voluntary Correction Program—a total of more than $1 million in losses. Id. ¶ 41.

B. Procedural History

In their original complaint, Plaintiffs alleged four state law causes of action—negligent misrepresentation, fraudulent inducement, breach of the covenant of good faith and fair dealing, and violation of G.L. c 93A—relating to Defendants' alleged recommendation of QPSI as third-party administrator of the Plan. Doc. No. 1 at 2. Defendants removed to this Court pursuant to 28 U.S.C. § 1441(a) on the grounds that Plaintiffs' state law causes of action actually arise under Section 502(e) of ERISA, which provides federal courts with original jurisdiction to hear such actions. Doc. No. 1 at 4 (citing 29 U.S.C. § 1132(e)). Plaintiffs moved to remand back to state court. Doc. No. 15. Defendants opposed on the grounds that the Plaintiffs' claims are completelypreempted by ERISA because those claims are based on alleged fiduciary status and fiduciary conduct arising under ERISA. Doc. No. 19.

During oral argument on Plaintiffs' motion to remand, the Court determined that Plaintiffs have asserted two categories of claims: (a) claims of negligent misrepresentation and fraudulent inducement relating to the formation of Plaintiffs' contractual relationship with Defendants, and (b) claims of negligent misrepresentation, breach of the covenant of good faith and fair dealing, and unfair trade practices under Chapter 93A, all of which relate to Defendants' conduct after they were retained by Plaintiffs. Doc. No. 36 at 15-16. Holding it had original jurisdiction over the second category of claims because they are preempted by Section 502 of ERISA, and supplemental jurisdiction over the remaining claims, the Court denied Plaintiffs' motion to remand. Id.

Plaintiffs subsequently filed an amended complaint alleging six causes of action that fall into three categories: (a) state law claims of negligent misrepresentation and fraudulent inducement relating to Defendants' pre-retention...