Haley v. Teachers Ins. & Annuity Ass'n of Am.

377 F.Supp.3d 250

Melissa HALEY, individually and on behalf of all others similarly situated, Plaintiff,

v.TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA, Defendant.

17-CV-855 (JPO)

United States District Court, S.D. New York.

Signed March 27, 2019

Ellen Noteware, Todd S. Collins, Pro Hac Vice, Eric Lechtzin, Shanon Jude Carson, Berger & Montague, P.C., Philadelphia, PA, Michael C. McKay, John Joseph Nestico, Schneider Wallace Cottrell Konecky Wotkyns LLC, Scottsdale, AZ, for Plaintiff.

Jaime A. Santos, Michael K. Isenman, Goodwin Procter, LLP, Washington, DC, James O. Fleckner, Goodwin, Procter, L.L.P., Boston, MA, Valerie A. Haggans, Goodwin Procter, LLP, New York, NY, for Defendant.

OPINION AND ORDER

J. PAUL OETKEN, United States District Judge

Plaintiff Melissa Haley brings this putative class action against Defendant Teachers Insurance and Annuity Association of America ("TIAA"), alleging that TIAA engaged in prohibited transactions with the Washington University Retirement Savings Plan in violation of § 406 of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1106. After the Court dismissed several of the claims in an earlier complaint (Dkt. No. 28), Haley filed the operative First Amended Class Action Complaint (Dkt. No. 35). TIAA now moves to dismiss the operative complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), and to strike certain class allegations. (Dkt. No. 38.) For the reasons that follow, the motion to dismiss and the motion to strike are denied.

I. Background

The Court assumes familiarity with this case, on the basis of the Court's Opinion addressing TIAA's prior motion to dismiss. See Haley v. Teachers Ins. & Annuity Ass'n of Am. , No. 17 Civ. 855, 2018 WL 1585673, at *1–2 (S.D.N.Y. Mar. 28, 2018). The following facts are taken from the First Amended Class Action Complaint (the "Amended Complaint") and are assumed true for purposes of this motion.

Plaintiff Melissa Haley is an employee of Washington University ("WashU") and a participant in the Washington University Retirement Savings Plan ("the Plan"), an employee pension benefit plan regulated by ERISA. (Dkt. No. 35 ("Compl.") ¶¶ 1, 13.) The Plan offers participants the opportunity to take out a loan against a portion of their retirement accounts. (Compl. ¶ 31; Dkt. No. 35-1 at 2.) The Plan contracted with two outside vendors, Vanguard and Defendant TIAA, to administer these loans. (Compl. ¶ 45; Dkt. No. 35-1 at 3.).

For loans administered by TIAA, participants are required "to borrow from Defendant's general account rather than from the participant's own account." (Compl. ¶ 24.) Thus, participants must first "transfer 110% of the amount of the loan from the participant's plan account ... to one of Defendant's general account products," which "pay a fixed rate of interest." (Id. ) The amount transferred to a general account product serves as the collateral securing the loan. (Id. ) The participant then repays the loan to Defendant's general account, which also earns the interest paid on the loan. (Compl. ¶ 26.) TIAA retains for itself the difference, or "spread," between (a) the interest rate paid to participants with respect to the loan collateral and (b) the amounts earned by TIAA on investments from its general account and from interest paid by participants on the loans.¹ (Compl. ¶¶ 5, 26–28.) In other words, participants do not receive the full amount of the interest they earn on their collateral, because some of it (i.e. , the "spread") is taken by TIAA as compensation for administering the loan. (Compl. ¶¶ 39–40.)

Between 2011 and 2015, Plaintiff took out four separate participant loans, which TIAA has administered. (Compl. ¶¶ 1, 14.) Plaintiff has fully repaid the first two loans, and she is in the process of repaying the two outstanding loans. (Compl. ¶ 14.)

Plaintiff filed this putative class action in February 2017, claiming that Defendant's administration of retirement loans to Plan participants (the "loan program") violates ERISA. (Dkt. No. 1.) Plaintiff alleged both that TIAA itself violated its duties as an ERISA fiduciary, and that TIAA is liable as a nonfiduciary for breaches by the Plan Administrator, WashU. (Dkt. No. 5 ¶¶ 48–80.) TIAA moved to dismiss for lack of subject matter jurisdiction and for failure to state a claim. (Dkt. No. 20.) On March 28, 2018, the Court granted the motion to dismiss in part, holding that Plaintiff had standing to bring this action, but that she had not plausibly alleged that TIAA qualified as an ERISA fiduciary. (Dkt. No. 28 at 6, 14.) With respect to Plaintiff's claims for equitable relief against TIAA as a nonfiduciary, the Court granted in part and denied in part the motion to dismiss, and granted Plaintiff leave to amend. (Id. at 18–23.)

Plaintiff filed the First Amended Class Action Complaint on May 3, 2018. (Dkt. No. 35.) Counts I through III of the Amended Complaint again allege that TIAA itself violated its duties as an ERISA fiduciary. (Compl. ¶¶ 57–77.) And Counts V through VII allege that TIAA is liable as a nonfiduciary for breaches by the Plan Administrator. (Compl. ¶¶ 48–80.)² TIAA now moves to dismiss the Amended Complaint for failure to state a claim under Rule 12(b)(6), or for an order striking the class allegations in the Amended Complaint under Rule 12(f). (Dkt. No. 38.)

II. Motion to Dismiss

TIAA moves to dismiss the Amended Complaint for failure to state a claim under Rule 12(b)(6).³ ERISA § 502(a)(3) "authorizes a ‘participant, beneficiary, or fiduciary’ of a plan to bring a civil action to obtain ‘appropriate equitable relief’ to redress violations of ERISA Title I." Harris Tr. & Sav. Bank v. Salomon Smith Barney, Inc. , 530 U.S. 238, 241, 120 S.Ct. 2180, 147 L.Ed.2d 187 (2000) (quoting 29 U.S.C. § 1132(a)(3) ). One such category of violations for which participants can bring suit are prohibited transactions under § 406, 29 U.S.C. § 1106. And although § 406 speaks in terms of restrictions on fiduciaries, "[t]he Supreme Court has held that equitable claims based on § 406(a) violations may be brought against non-fiduciaries under ERISA § 502(a)(3)." Patrico v. Voya Fin., Inc. , No. 16 Civ. 7070, 2017 WL 2684065, at *4 (S.D.N.Y. June 20, 2017) (citing Harris , 530 U.S. at 245–51, 120 S.Ct. 2180 ).

Plaintiff attempts to bring such a claim here, alleging in Counts V through VII that TIAA is liable as a non-fiduciary for engaging in prohibited transactions through the administration of its participant loan program, in violation of § 406(a)(1)(B), (C), and (D). (Compl. ¶¶ 78–99.) TIAA seeks to dismiss these counts on two grounds: (1) Plaintiff's failure to adequately allege required elements of claims for non-fiduciary liability; and (2) Plaintiff's request for impermissible legal remedies. The Court addresses each in turn.

A. Legal Standard

To survive a motion to dismiss for failure to state a claim under Rule 12(b)(6), "a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). The Court must "accept[ ] as true the factual allegations in the complaint and draw[ ] all inferences in the plaintiff's favor." Allaire Corp. v. Okumus , 433 F.3d 248, 249–50 (2d Cir. 2006) (quoting Scutti Enters., LLC v. Park Place Entm't Corp. , 322 F.3d 211, 214 (2d Cir. 2003) ). However, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937.

B. Whether Haley Has Plausibly Alleged Her Non-Fiduciary Liability Claims

Section 406(a)(1) provides in relevant part that, "[e]xcept as provided in [§ 408],"

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 a party in interest;

(C) furnishing of goods, services, or facilities between the plan and a party in interest; [or]

(D) transfer to, or use by or for the benefit of a party in interest, of any assets of the plan[.]

29 U.S.C. § 1106(a)(1). Section 408(b) enumerates certain requirements in order for transactions to be statutorily exempt from the prohibitions in § 406. See 29 U.S.C. § 1108(b).

To prevail on a claim for a violation of § 406(a) against a non-fiduciary, "a plaintiff must prove all of the elements of a § 406(a) claim ..., including that a plan fiduciary had ‘actual or constructive knowledge of the facts’ that give rise to the § 406(a) violation." Patrico , 2017 WL 2684065, at *4 (quoting Harris , 530 U.S. at 251, 120 S.Ct. 2180 ). A plaintiff must also demonstrate that the non-fiduciary defendant "had actual or constructive knowledge of the circumstances that rendered the transaction unlawful," which "involve a showing that the plan fiduciary, with actual or constructive knowledge of the facts satisfying the elements of a § 406(a) transaction, caused the plan to engage in the transaction." Harris , 530 U.S. at 251, 120 S.Ct. 2180 (emphasis omitted).

1. Threshold Issues

Before addressing whether Haley has plausibly alleged each of her claims, the Court must resolve a threshold disagreement between the parties about the elements of these claims and the framework for assessing them at the motion to dismiss stage. This disagreement has two facets: (1) which party bears the burden with regard to demonstrating that any § 408 exemptions are satisfied; and (2) what level of knowledge plaintiffs must allege as to a nonfiduciary participating in a prohibited transaction under § 406.

i. Section 408 Exemption as an Affirmative Defense

Haley takes the position...