Merriam v. Demoulas

DIANA D. MERRIAM, et al.

v.ARTHUR T. DEMOULAS, et al.

CIVIL ACTION NO. 11-10577-RWZ

UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS

DATE: June 3, 2013

MEMORANDUM OF DECISION

ZOBEL, D.J.

Plaintiffs are three shareholders of Demoulas Super Markets, Inc. ("DSM") and participants in its profit-sharing plan ("the Plan"). The Plan is covered by the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq. Plaintiffs bring this action on behalf of the Plan against two classes of defendants: the Plan's three trustees ("the Trustee defendants"), and five of DSM's directors ("the Director defendants"). Plaintiffs seek damages and equitable relief to recover around $46 million that the Plan allegedly lost through defendants' actions.

On March 20, 2012, I issued an order dismissing plaintiffs' complaint and granting leave to amend. Plaintiffs then filed an amended complaint. Defendants responded by filing four separate motions to dismiss, which are now before me.

I. Background

The Plan is a defined contribution employee pension benefit plan governed by ERISA. As a defined contribution plan, the Plan maintains separate bookkeepingaccounts for each participant. But unlike many defined contribution plans, it does not allow individual participants to decide their own investment strategies; instead, it aggregates all of its funds into a single investment portfolio selected by the Plan's trustees. Each participant is entitled to a different percentage of the value of the entire portfolio. If the value of the portfolio increases or decreases by a certain percentage, the value of each participant's account increases or decreases by that same percentage.

The Plan is controlled by certain documents, including an official investment policy (the "Investment Policy"). That Investment Policy names both DSM's board of directors and the Plan's trustees as fiduciaries of the Plan. The directors appoint and remove the trustees; the trustees manage the Plan and invest its assets.

The Investment Policy also contains certain restrictions on how the trustees may invest the Plan's assets. For instance, the Investment Policy states that the trustees normally may not invest more than 25% of the Plan's assets in equity issued by U.S. companies, or invest more than 5% of the Plan's assets devoted to U.S. large capitalization equity in any single holding.

In November 2007, the Trustee defendants invested $12.5 million of the Plan's assets in preferred stock issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac"). In May 2008, they invested $33.75 million in preferred stock issued by the Federal National Mortgage Association ("Fannie Mae"). Plaintiffs allege that both investments were irresponsible and violated the explicit rules of the Investment Policy.

Those investments almost immediately lost nearly all their value. In August2008, the Trustee defendants reported to DSM's board that the Plan had lost about $46 million in the Freddie Mac and Fannie Mae investments. The Trustee defendants asked the DSM board to make a $46 million "restorative payment" from DSM to the Plan to cover those losses. The board approved that payment by a five-to-two vote, with the five Director defendants in the majority. DSM actually made the restorative payment in January 2009, in the amount of $46,183,772.

Plaintiffs allege that the Trustee defendants breached their fiduciary duties by making these irresponsible investments (Counts I and II). They also allege that the Director defendants violated their fiduciary duties by failing to act solely in the interest of the Plan participants and beneficiaries (Count III), by concealing the Trustees' misdeeds and failing to remedy them (Count IV), and by failing to hire legal counsel to investigate claims against the Trustees (Count V).¹ Plaintiffs furthermore insist that two of the Trustee defendants, Arthur T. Demoulas and D. Harold Sullivan, acted in contempt of two prior court orders that enjoined them from violating ERISA (Count VI). Finally, plaintiffs seek a declaratory judgment that neither the Trustee defendants nor the Director defendants are entitled to indemnification by DSM.

In response, defendants have filed four separate motions to dismiss for lack of standing and for failure to state a claim. Plaintiffs have opposed each motion, and the briefing is now complete.

II. Legal Standard

If the plaintiffs lack constitutional standing, then I have no subject matter jurisdiction over their claims, because "[t]he Constitution limits the judicial power of the federal courts to actual cases and controversies." Katz v. Pershing, LLC, 672 F.3d 64, 71 (1st Cir. 2012). On a motion to dismiss for lack of standing, the court must accept as true all factual allegations in the complaint and draw all reasonable inferences in plaintiffs' favor. Id. at 71.

Likewise, on a motion to dismiss for failure to state a claim, the court accepts as true all factual allegations contained in the complaint (but not legal conclusions). Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). If the complaint fails to state a plausible claim upon which relief can be granted, it must be dismissed. Id.

III. Analysis

Since defendants' motions to dismiss overlap substantially, I consider them together rather than proceeding sequentially through each motion.

A. Constitutional Standing

I must begin with the jurisdictional issue of constitutional standing. See United Seniors Ass'n v. Philip Morris USA, 500 F.3d 19, 23 (1st Cir. 2007). As the party invoking federal jurisdiction, plaintiffs have the burden of establishing standing. Steir v. Girl Scouts of the USA, 383 F.3d 7, 14 (1st Cir. 2004). That requires establishing three elements: injury in fact, causation, and redressability. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992). Defendants argue that plaintiffs have failed to allege any injury in fact; the Director defendants additionally argue that plaintiffs have failed to allege causation.

1. Injury in Fact

Plaintiffs have alleged that the investments in Fannie Mae and Freddie Mac lost the Plan some $46 million. They have also alleged that because of the structure of the Plan, their individual account balances as Plan participants lost proportionate amounts. Those factual allegations are sufficient to show that each individual plaintiff suffered a concrete and particularized financial injury, meeting the injury-in-fact requirement. See Lujan, 504 U.S. at 560. The plaintiffs are not required to additionally allege the precise amount they lost.

The Director defendants argue that plaintiffs lack standing because their injury was already redressed by DSM's restorative payment. That argument misses the mark. A plaintiff does not lose standing to sue a tortfeasor just because a third party has already compensated her for the injury. See In re State Street Bank & Trust Co. ERISA Litig., 579 F. Supp. 2d 512, 517 (S.D.N.Y. 2008) (noting that an action is not necessarily mooted when a plaintiff's damages are reimbursed by a third party). That principle is reflected in the substantive law of damages by the collateral source rule, which generally states that "benefits received by the plaintiff from a source wholly independent of and collateral to the wrongdoer do not diminish the damages otherwise recoverable from the wrongdoer." 22 Am. Jur. 2d Damages § 392 (West 2013). The reason for the rule is obvious: a generous third party who restores an injured plaintiff intends only to help that plaintiff, not to relieve the wrongdoer of responsibility. See id.

The Director defendants concede the merits of the collateral source rule, but argue that it should not apply in ERISA cases. That argument fails. Absent somereason for abrogating the rule in a particular context, "[t]he general rule in the federal courts is that the collateral source rule is applied." Hartnett v. Reiss S.S. Co., 421 F.2d 1011, 1016 n.3 (2d Cir. 1970). Moreover, at least two well-reasoned opinions have recently applied the collateral source rule in the ERISA context. See Chao v. Merino, 452 F.3d 174, 184-85 (2d Cir. 2006); State Street, 579 F. Supp. 2d at 517. I find that precedent persuasive.

Finally, the Director defendants argue that even if the collateral source rule is generally applicable in ERISA cases, it should not apply here because it would provide the Plan a double recovery. But the entire point of the collateral source rule is that a double recovery for the injured plaintiff is better than a windfall for the tortfeasor. See 22 Am. Jur. 2d Damages § 392.²

I note in passing that the collateral source rule may not apply to payments that are made "seeking to extinguish or reduce the obligation" that a tortfeasor owes a plaintiff. Restatement (Second) of Torts § 920A cmt. a (West 2013); see id. § 885(3). The parties have not discussed whether the restorative payment was intended to extinguish any possible liability against the defendants. In any case, that question necessarily requires more factual development. I therefore do not address it further.

In summary, plaintiffs have suffered a cognizable injury in fact even if they have been made whole by a third party. Their complaint is not subject to dismissal on thisbasis.

2. Causation

The Director defendants also argue that plaintiffs have failed to allege a sufficient causal connection between the Director defendants' conduct and any actual injury. See Lujan, 504 U.S. at 560 (standing requires "a causal connection between the injury and the conduct complained of"). That argument likewise fails. The allegations in the complaint are sufficient to meet Article III's causation requirement.

To establish standing, a plaintiff must show that his injury is "fairly traceable" to some conduct for which the defendant may be held liable. Already, LLC. v. Nike, Inc., 133 S. Ct. 721, 726 (2013) (quoting Allen v. Wright, 468 U.S. 737, 751 (1984)). But this causation standard does not require that the defendant personally...