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COX v. EICHLER

October 25, 1990

STEPHEN T. COX and PETER N. MOLLIGAN in their capacity as trustees of the Hoberg, Finger, Brown, Cox & Molligan, a Professional Corporation Money Purchase Pension Plan and the Hoberg, Finger, Brown, Cox & Molligan, a Professional Corporation Profit Sharing Plan, Plaintiffs,
v.
BATEMAN EICHLER, HILL RICHARDS INCORPORATED, a Delaware corporation, and ROBERT W. ROWELL, Defendants


Marilyn Hall Patel, United States District Judge.


The opinion of the court was delivered by: PATEL

MARILYN HALL PATEL, UNITED STATES DISTRICT JUDGE

 Plaintiffs, trustees of an employee pension and profit sharing plan, bring this action against a brokerage firm and one of its account executives alleging breach of fiduciary duty under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq.; violations of federal and state securities laws; breach of contract; violations of state corporations law; and common law negligence, fraud, and breach of fiduciary duty. All allegations are based upon defendants' conduct in the management of benefit plan funds.

 The parties are now before the court on the defendants' (1) motion to dismiss all claims in plaintiffs' complaint excepting the claim for breach of ERISA fiduciary duty and (2) motion to strike plaintiffs' prayer for punitive damages under ERISA.

 BACKGROUND

 Plaintiffs Stephen Cox and Peter Molligan are trustees of (1) Hoberg, Finger, Brown, Cox & Molligan, a Professional Corporation Money Purchase Pension Plan and (2) Hoberg, Finger, Brown, Cox and Molligan, a Professional Corporation Profit Sharing Plan ("the Plans"); the Plans are ERISA contribution plans as defined in 29 U.S.C. § 1002(34). Defendant Bateman Eichler, Hill Richards ("BEHR") is a Delaware corporation and member of the National Association of Securities Dealers, Inc. Defendant Rowell is an account executive of BEHR.

 In August 1989, Cox and Rowell met to discuss the possible retention of defendants as investment advisors and managers for the Plans. After presenting a proposed investment portfolio consistent with the Plans' conservative investment objectives, defendants were retained as advisors and investors and given discretion to invest the Plans' funds consistent with plaintiffs' guidelines and instructions. Plaintiffs allege that these instructions specified (1) that at all times, at least $ 1 million of the Plans' funds (amounting to approximately $ 1.4 million in August 1989) be invested in nonequity investments and (2) that transactions in common stock would be made only in stocks with a Standard and Poors rating of A- or better. Defendants were advised on several occasions of the Plans' conservative objectives and of these limitations on their discretionary authority.

 Plaintiffs allege that defendants disregarded these guidelines and instructions, and that in March 1990, defendants removed $ 500,000 from nonequity investments in order to purchase large amounts of speculative corporate stock. This unauthorized purchase included, but was not limited to, the purchase of stock in Network Equipment Technologies and in Garnet Resources Corp., neither of which had a Standard and Poors rating of A- or better.

 As a result of these transactions, plaintiffs claim that they were exposed to significant financial risk and suffered monetary damage.

 LEGAL STANDARD

 A motion to dismiss for failure to state a claim will be denied unless it appears that the plaintiff can prove no set of facts which would entitle him or her to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); Fidelity Financial Corp. v. Federal Home Loan Bank of San Francisco, 792 F.2d 1432, 1435 (9th Cir. 1986), cert. denied, 479 U.S. 1064, 93 L. Ed. 2d 998, 107 S. Ct. 949 (1987). All material allegations in the complaint will be taken as true and construed in the light most favorable to the plaintiff. NL Industries, Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986). Although the court is generally confined to consideration of the allegations in the pleadings, when the complaint is accompanied by attached documents, such documents are deemed part of the complaint and may be considered in evaluating the merits of a Rule 12(b) (6) motion. Durning v. First Boston Corp., 815 F.2d 1265, 1267 (9th Cir. 1987).

 On any other motion to dismiss under Rule 12(b), the court may consider matters outside the pleadings, but must accept as true all material allegations of the complaint and construe the complaint in favor of the plaintiff. See Fed. R. Civ. P. 12; Warth v. Seldin, 422 U.S. 490, 501-02, 45 L. Ed. 2d 343, 95 S. Ct. 2197 (1975) (considering the issue of standing). Each ground for dismissal will be considered in turn.

 DISCUSSION

 I. ERISA PREEMPTION.

 Defendants have argued that plaintiffs' common law causes of action for breach of fiduciary duty, fraud, deceit, negligence, and breach of contract should be dismissed because they are preempted by ERISA. Section 514(a) of ERISA states that ERISA "shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan." 29 U.S.C. § 1144(a).

 Plaintiffs have pleaded causes of action under both ERISA and state common law based upon the same alleged misconduct. In their opposition to defendants' motion to dismiss state law claims on the ground of ERISA preemption, plaintiffs assert that they are entitled to assert the ERISA and common law claims in the alternative under Rule 8(e)(2) of the Federal Rules of Civil Procedure, even if these claims are mutually exclusive. Plaintiffs argue that they should be permitted to argue other theories of liability if their first cause of action for breach of ERISA fiduciary duty fails.

 Plaintiffs are asking for "two bites of the apple": if ERISA preempts their state law claims but plaintiffs do not prevail on their ERISA claim, they want to preserve the opportunity to try again under the preempted state law theories. However, plaintiffs may not assert preempted state law claims, even in the alternative; if ERISA operates to preempt plaintiffs' state law claims, preemption is mandatory. "Plaintiffs cannot use the rules allowing alternative pleading as a defense to defendants' motion to dismiss." Pane v. RCA Corp., 667 F. Supp. 168, 172 (D.N.J. 1987), aff'd, 868 F.2d 631 (3d Cir. 1989) (granting defendant's motion to dismiss state law claims asserted under Rule 8 on grounds of ERISA preemption). At the pleading stage, the court may dismiss state law claims on motions pursuant to Fed. Rule Civ. Pro. 12(b)(6) where they are preempted by ERISA. Howard v. Parisian, Inc., 807 F.2d 1560 (11th Cir. 1987); Salomon v. Transamerica Occidental Life Ins. Co., 801 F.2d 659 (4th Cir. 1986).

 Therefore, at this stage the court must consider directly whether plaintiffs' state law claims are preempted by ERISA.

 A. Standard. Although Congress intended that Section 514(a) have broad scope, the Supreme Court has held that "some state actions may affect employee benefit plans in too tenuous, remote, or peripheral a manner to warrant a finding that the law 'relates to' the plan." Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 100 n. 21, 77 L. Ed. 2d 490, 103 S. Ct. 2890 (1983).

 The Ninth Circuit has interpreted the "relates to" standard for preemption to require that the State law both (1) relate to an ERISA plan and (2) "'purport [] to regulate, directly or indirectly' ERISA plans." Martori Bros. Distribs. v. James-Massengale, 781 F.2d 1349, 1356 (9th Cir.) (quoting Lane v. Goren, 743 F.2d 1337, 1339 (9th Cir. 1984)), cert. denied, 479 U.S. 949, 93 L. Ed. 2d 385, 107 S. Ct. 435 (1986).

 Four categories of state laws have been found to be preempted by Section 514(a): (1) laws that regulate the type of benefits or terms of ERISA plans, Shaw, 463 U.S. 85, 77 L. Ed. 2d 490, 103 S. Ct. 2890 (pregnancy benefits required); (2) laws that create reporting, disclosure, funding, or vesting requirement for ERISA plans, Standard Oil Co. v. Agsalud, 633 F.2d 760 (9th Cir. 1980) (reporting requirements), judgment aff'd mem., 454 U.S. 801, 70 L. Ed. 2d 75, 102 S. Ct. 79 (1981); (3) laws providing rules for calculation of benefits to be paid under ERISA plans, Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 68 L. Ed. 2d 402, 101 S. Ct. 1895 (1981) (use of set-off/integration method in computing benefits); (4) laws governing remedies for misconduct growing out of the administration of the ERISA plan. Scott v. Gulf Oil Corp., 754 F.2d 1499 (9th Cir. 1985) (state common law claims for breach of contract, breach of fiduciary duty, fraud, breach of duty to act fairly and in good faith preempted by ERISA).

 The Ninth Circuit has articulated the underlying principle of these categories that "state law is preempted by section 514(a) if the conduct sought to be regulated by the state law is 'part of the administration of an employee benefit plan.'" Martori, 781 F.2d at 1358. This standard reflects Congress's intent to prevent two types of abuse of ERISA plans: "mismanagement of funds accumulated to finance [employee] benefits, and failure to pay employees the ...


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