Nasrawi v. Buck Consultants LLC

231 Cal.App.4th 328

179 Cal.Rptr.3d 813

Dennis NASRAWI et al., Plaintiffs and Appellants

v.BUCK CONSULTANTS LLC et al., Defendants and Respondents.

H038894

Court of Appeal, Sixth District, California.

Filed November 6, 2014

Counsel for Plaintiff/Appellant: Dennis Nasrawi, Michael O'Neal, Rhonda Biesemeier, Law Offices of Michael A. Conger, Michael A. Conger, Santa Fe, Richard H. Benes, San Diego.

Counsel for Defendant/Respondent: Stanislaus County Employees' Retirement Association, Damrell, Nelson, Schrimp, Pallios, Pacher & Silva, Fred A. Silva, Kirin K. Virk, Modesto.

Counsel for Defendants/Respondents: Buck Consultants LLC, Harold Loeb, Buchalter Nemer, Peter G. Bertrand, Michael N. Westheimer, San Francisco, Cynthia Fair Moir.

Opinion

Premo, J.Plaintiffs Dennis Nasrawi, Michael O'Neal, and Rhonda Biesemeier are retired public employees of Stanislaus County (County) and beneficiaries of a public pension trust administered by the Stanislaus County Employees Retirement Association (the Association). Defendants Buck Consultants LLC (Buck) and Harold Loeb provided actuarial services to the Association, also a defendant. According to plaintiffs, Buck and Loeb's actuarial negligence caused the pension trust to be dramatically underfunded. The Association has not sued Buck and Loeb for malpractice, an omission plaintiffs allege constituted a breach of the Association's fiduciary duties to them as beneficiaries. Plaintiffs further allege Buck and Loeb aided and abetted other breaches committed by the Association.

Plaintiffs appeal from a judgment of dismissal entered after the trial court sustained demurrers without leave to amend filed by defendants. We reverse and remand with directions.

I. Factual and Procedural Background¹

A. The Association

The Association is a public employee retirement system operating pursuant to section 17 of article XVI of the California Constitution (section 17) and the County Employees Retirement Law of 1937 ( Gov.Code, § 31450 et seq. ).² The Association, which is managed by a nine-member board of administration (board), administers a pension trust fund for current and former County employees.³

The pension fund receives funding from three sources: (1) employee contributions, (2) employer contributions from the County, and (3) the return on the Association's investments. The board is responsible for helping to determine the County's contribution rate. Specifically, the board is required to recommend a contribution rate to the board of supervisors based on an actuarial valuation conducted by an actuary. (§§ 31453, subd. (a), 31453.5, 31454, subd. (a).) The board, “consistent with the exclusive fiduciary responsibilities vested in it,” has “the sole and exclusive power to provide for actuarial services in order to assure the competency of the assets of the ... retirement system.” (Cal. Const., art. XVI, § 17, subd. (e).)

Section 17 imposes various duties on the board, including obligations to (1) “administer the system in a manner that will assure prompt delivery of benefits and related services to the participants and their beneficiaries” (id. , subd. (a)); (2) “discharge their duties with respect to the system solely in the interest of, and for the exclusive purposes of providing benefits to, participants and their beneficiaries, minimizing employer contributions thereto, and defraying reasonable expenses of administering the system” (id. , subd. (b)); and (3) “discharge their duties with respect to the system with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims.” (id. , subd. (c).) Section 17 further provides that the “board's duty to its participants and their beneficiaries shall take precedence over any other duty.” (Id ., subd. (b).) These are “fiduciary responsibilities.” (Id. , subd. (e).)

B. The Association Deliberately Underfunded the Pension Fund

Plaintiffs allege the Association deliberately underfunded the pension fund in the following ways: (1) using an “unrealistic and imprudent” assumed actuarial rate of return of 8.16 percent; (2) adopting a schedule of negative amortization of the system's unfunded liability for earned benefits; (3) intentionally managing the pension fund to ensure that it was always less than 90 percent funded, thereby avoiding certain employer contributions (i.e., cost-of-living adjustments); (4) using pension fund assets to substitute for the County's employer contributions; and (5) transferring assets from nonvaluation reserves to valuation reserves. Notably, these acts are not the basis for any claim against the Association in this action. Indeed, plaintiffs are pursuing breach of fiduciary duty claims against the Association for the alleged adoption of a schedule of negative amortization and transfers from nonvaluation reserves in another action, O'Neal v. Stanislaus County Employees ' Retirement Assn ., Superior Court of California, County of Stanislaus, case No. 648469, Fifth Appellate District, case No. F061439.⁴ Rather, as discussed below, the conduct above is alleged in the context of plaintiffs' claim against Buck and Loeb for aiding and abetting a breach of fiduciary duties.

C. Buck and Loeb Concealed the Association's Conduct

Buck and its employee, Loeb, provided actuarial services to the Association. Plaintiffs allege Buck and Loeb knew of the Association's deliberate underfunding of the pension fund and the specific acts enumerated above. Buck and Loeb concealed the Association's practices by (1) failing to disclose and warn about the consequences of the Association's practices, (2) verifying the actuarial soundness of those practices, (3) and knowingly and falsely representing to trust fund beneficiaries at public meetings between 2005 and 2009 that the Association's practices were actuarially sound.

D. Buck and Loeb 's Actuarial Negligence and the Tolling Agreement

Buck and Loeb prepared an actuarial valuation of the pension fund dated January 9, 2007. That valuation materially understated the fund's liabilities because, in preparing the valuation, Buck and Loeb negligently relied on inappropriate actuarial assumptions. As a result of the negligently prepared actuarial valuation, the County's annual employer contribution to the pension fund was $40 million lower than it should have been.

On July 6, 2009, the Association entered into a tolling agreement with Buck. According to that agreement, the Association's preliminary investigation indicated that Buck had “committed malpractice in the performance of services for” the Association by employing assumptions that “severely understated” the system's experience with respect to expected withdrawals from the retirement system. The Association agreed not to assert any claims against Buck while the tolling agreement is in effect, in exchange for an agreement to toll all applicable statutes of limitations during that same time period. The tolling agreement may be terminated by either party upon 30 days' notice.

E. Earlier Iterations of Plaintiffs' Complaint

Plaintiffs are members of the Association with vested pension rights. Their initial complaint in this action, filed on October 8, 2009, in Stanislaus County Superior Court, asserted a single claim for actuarial negligence against Buck and Loeb. That claim was based solely on Buck and Loeb's alleged negligence in preparing the January 9, 2007 actuarial valuation and was asserted “in a representative capacity on behalf of” the Association, given its failure to bring suit itself.

Buck and Loeb removed the action to federal court on the basis of diversity jurisdiction. Plaintiffs amended their complaint twice in federal court. On March 8, 2011, the federal district court remanded the case to state court.

Upon remand, the parties successfully moved to transfer venue to Santa Clara County. The then operative second amended complaint asserted claims for actuarial negligence and breach of fiduciary duty against Buck and Loeb. It included allegations that (1) the Association had improperly reduced employer contributions by adopting a schedule of negative amortization and transferring funds from nonvaluation reserves and (2) Buck and Loeb had concealed those practices. Buck and Loeb demurred and, alternatively, sought a stay pending the Fifth Appellate District's decision in the O 'Neal case, which was pending on appeal at the time. The Santa Clara County Superior Court sustained Buck and Loeb's demurrer with leave to amend, reasoning that plaintiffs lacked standing to assert an action against Buck and Loeb in a representative capacity on behalf of the pension trust fund.

Plaintiffs' third amended complaint asserted a breach of fiduciary duty claim against the Association and an aiding and abetting claim against Buck and Loeb. The trial court struck plaintiffs' claim against the Association because they had not sought leave to amend before adding it as a defendant. The court sustained with leave to amend Buck and Loeb's demurrer, again concluding plaintiffs lacked standing. The court further concluded that plaintiffs had failed to allege concealment by Buck and Loeb with sufficient particularity. Plaintiffs then filed a fourth amended complaint asserting only a claim for aiding and abetting a breach of fiduciary duty against Buck and Loeb.

F. Plaintiffs ' Motion for Leave to File a Fifth Amended Complaint

Before Buck and Loeb had responded to the fourth amended complaint, plaintiffs sought leave to file a fifth amended complaint to add the Association as a defendant and to assert a claim for breach of fiduciary duty against it. Buck and Loeb opposed that motion, arguing that plaintiffs already had litigated their proposed claim against the Association in O 'Neal . Plaintiffs responded that the two actions were based on different wrongful acts occurring at different times....