The opinion of the court was delivered by: Honorable Larry Alan Burns United States District Judge
ORDER ON DEFENDANTS' MOTION TO DISMISS
This case is once again before the Court on Defendants' motion to dismiss. The Court dismissed the Plaintiffs' original complaint on September 29, 2009 but subsequently granted leave to amend, which Plaintiffs did on January 22, 2010. Expecting the Defendants to once again move to dismiss, the Court on February 3, 2010 ordered them to file a single, consolidated motion; Plaintiffs' original complaint was challenging enough for the Court, and the frustration was only exacerbated with three separate motions to dismiss that, while similar, didn't align perfectly with one another. The Defendants filed a consolidated motion to dismiss on February 16, 2010. It was fully briefed and then taken under submission on March 24, 2010. There is no need to lay out the facts of this case for a second time. The parties know what they are, and they know, also, what legal issues the Court must confront.
The applicable legal standard is familiar to the parties.
A rule 12(b)(6) motion to dismiss for failure to state a claim challenges the legal sufficiency of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). In considering such a motion, the Court accepts all allegations of material fact as true and construes them in the light most favorable to the non-moving party. Cedars-Sinai Med. Ctr. v. Nat'l League of Postmasters of U.S., 497 F.3d 972, 975 (9th Cir. 2007). A complaint's factual allegations needn't be detailed, but they must be sufficient to "raise a right to relief above the speculative level...." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). "[S]ome threshold of plausibility must be crossed at the outset" before a case can go forward. Id. at 558 (internal quotations omitted). A claim has "facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, - U.S. -, 129 S.Ct. 1937, 1949 (2009). "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id.
While a court must draw all reasonable inferences in the plaintiff's favor, it need not "necessarily assume the truth of legal conclusions merely because they are cast in the form of factual allegations." Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1139 (9th Cir. 2003) (internal quotations omitted). In fact, no legal conclusions need to be accepted as true. Ashcroft, 129 S.Ct. at 1949. A complaint doesn't suffice "if it tenders 'naked assertion[s]' devoid of 'further factual enhancement.'" Id. That includes a mere formulaic recitation of the elements of a cause of action; this will not do either. Bell Atlantic Corp., 550 U.S. at 555.
II. Timeliness of ERISA Claims
The Court once again confronts first the question whether Plaintiffs' ERISA claims are time-barred. ERISA's statute of limitations provision, 29 U.S.C. § 1113, allows a plaintiff three years from the date he or she becomes aware of a violation to file suit, and six years from that date if the violation involves fraud or concealment:
No action may be commenced... with respect to a fiduciary's breach of responsibility, duty, or obligation under this part, or with respect to a violation of this part, after the earlier of -
(1) six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation, or
(2) three years after the earliest date on which the plaintiff had actual knowledge of the breach of violation; except that in the case of fraud or concealment, such action may be commenced not later than six years after the date of discovery of such breach or violation.
Defendants argue that an audit letter sent to Plaintiffs by the IRS on October 7, 2005 gave them all the notice they needed to file suit, and they're certainly on to something. There's no doubt that the audit letter is meaningful. But Plaintiffs counter that the audit letter only told them that there may be a problem with the plans, and that the statute of limitations actually begins to run when the audit is concluded and the IRS issues a deficiency letter:
A mere audit letter is not enough for Plaintiffs to realize they have been fraudulently induced into adopting the ERISA plans and funding the ERISA plans with life insurance policies. Although the audit notice stated that the plan did not qualify under IRC 419A(f)(6), Plaintiffs only thought the ERISA plans were going through a routine audit... The IRS audits ERISA plans every year, and an audit notice does not necessarily mean that the IRS will prevail in the audit. (Doc. No. 75, pp.12--13.)
Plaintiffs rely on Int'l Engine Parts, Inc. v. Feddersen & Co., 888 P.2d 1279 (Cal. 1995), but their reliance is somewhat mistaken. Feddersen involved a claim of accountant malpractice based upon an accountant's filing of tax returns, and the court did hold, as Plaintiffs represent, that the statute of limitations begins to run on such a claim when a tax deficiency is actually assessed. Id. at 1280. But the elements of a malpractice claim and a breach of fiduciary duty claim are different in a way that affects the statute of limitations for each. Specifically, a cause of action for malpractice accrues upon "the discovery of the loss or damage suffered by the aggrieved party." Id. at 1283 (emphasis added). Of course the limitations period doesn't commence upon the receipt of an audit letter, because at that point the aggrieved part hasn't suffered any "loss or damage." Even if the party is likely to, the amount is unknown at the time an audit letter is received. The court in Feddersen relied on, among other cases, Budd v. Nixen, 491 P.2d 433 (Cal. 1971), which explained,
The mere breach of a professional duty, causing only nominal damages, speculative harm, or the threat of future harm - not yet realized - does not suffice to create a cause of action for negligence. Hence, until the client suffers appreciable harm as a consequence of his attorney's negligence, the client cannot establish a cause of action for malpractice.
Id. at 433. The ERISA statute of limitations begins to run, however, when there is "knowledge of the breach" or "discovery of such breach," not when, as with malpractice claims, there is an actual, quantifiable injury. Compare 29 U.S.C. § 1113 with Feddersen, 888 P.2d at 1283 ("Although the statute does not specifically require actual injury to commence its limitations period, cases interpreting the statute have inferred such a requirement in professional malpractice actions.").
A limitations period that commences upon knowledge or discovery of a breach of duty arguably commences sooner - intuitively, anyway -than one that commences upon the discovery of loss or damage. But that intuition may be misguided, because to the extent some resulting loss is an element of the breach, the limitations periods may converge. That is the case here. To allege and prove a breach of fiduciary duty for misrepresentations in the ERISA arena, a plaintiff must establish the following: (1) the defendant's status as an ERISA fiduciary; (2) a misrepresentation on the part of the defendant; (3) the materiality of the misrepresentation; and (4) detrimental reliance by the plaintiff on the misrepresentation. In re Computer Sciences Corp. Erisa Litigation, 635 F.Supp.2d 1128, 1140 (C.D. Cal. 2009) (emphasis added). In other words, Plaintiffs' knowledge or discovery that Defendants' breached their fiduciary duties, if any, entails the knowledge or discovery that Plaintiffs detrimentally relied on Defendants' alleged misrepresentations about the tax benefits of the plans. If, as Plaintiffs argue, the audit letter only gave them the impression they were going through a routine audit, they wouldn't have known, upon the receiving the letter, of their own detrimental reliance on Defendants' alleged misrepresentations. That means they wouldn't have had knowledge of a breach, and, consequently, that the limitations period wouldn't have begun to run.
But the Court has its doubts. First, being subjected to an audit may, in and of itself, be enough of a detriment to give rise to a breach of fiduciary duty claim. Second, Plaintiffs say in their amended complaint that the audit letter indicated that "the Plan does not qualify for the IRC 419A(f)(6) exception," and it's hard to imagine how, with language that firm, Plaintiffs could think they were only going through a routine audit. Third, Plaintiffs had the opportunity with Defendants' first motion to dismiss to argue that the mere receipt of an audit letter isn't enough to commence the limitations period, and they didn't. (See Doc. No. 34, p.6.) That they're making the argument only now makes the Court slightly suspicious of its sincerity.
Nonetheless, the Court won't dismiss Plaintiffs' ERISA claims, at least for now, on the ground they were brought more than three years after Plaintiffs received the audit letter. As Plaintiffs note, the audit letter isn't even a part of the record right now - although, as a document referenced in the Plaintiffs' complaint, it could be - and the Court should probably review firsthand any document that's to be the basis for the dismissal - partial or complete - of a plaintiff's case. In addition, there's something to be said for letting an audit play out before starting the clock on an audited party's ability to bring a lawsuit against the alleged culprit. See Feddersen, 888 P.2d 1279, 1283. The Court finds, moreover, that such an approach is consistent with ERISA's statute of limitations allowing for three years from the time an aggrieved plaintiff gains "actual knowledge of the breach." 29 U.S.C. § 1113. If necessary, the Court will revisit this question at summary judgment, when it will, presumably, have the audit letter before it along with other relevant evidence. If the Court determines that the audit letter did commence the limitations period, it will then consider whether the period is extended, anyway, because Plaintiffs' complaint contains allegations of concealment, as well as whether there is any merit to Plaintiffs' argument that the difference between the 419A(f)(6) plans and the 419(e) plan gets them around any kind of statute of limitations problem.*fn1
III. Fiduciary Status of Defendants
The Court previously found that Plaintiffs failed to plead sufficient facts allowing for the reasonable inference that Defendants are ERISA fiduciaries, which was fatal to their ERISA-based claims. The question now is whether Plaintiffs' amended complaint does any better.
The substantive law hasn't changed since the Court first considered Plaintiffs' complaint. There are three ways in which one can acquire fiduciary status under ERISA, and they are set forth by statute:
(I) exercising discretionary authority or control over the management of a plan or disposition of its assets (ii) rendering investment advice for a fee or other compensation, or (iii) exercising discretionary authority over the administration of a plan.
29 U.S.C. § 1002(21)(A). This definition of a fiduciary is therefore functional, see Mertens v. Hewitt Assocs., 508 U.S. 248, 262 (1993), and courts have said it should be construed liberally. Thomas, Head & Geirsen Employees Trust v. Buster, 24 F.3d 1114, 1117 (9th Cir. 1994). Plaintiffs argue that Defendants are ERISA fiduciaries under (ii) above: "Plaintiffs' entire allegation of ERISA fiduciary status is based on Defendants rendering investment advice for a fee or other compensation." (Doc. No. 75, p. 7.)
When the Court first considered the fiduciary status of Defendants and dismissed Plaintiffs' ERISA claims, it analyzed Lincoln, Principal, and Conseco separately from Anderson. That's not appropriate this time around, because Plaintiffs assert in their amended complaint that "Lincoln, Conseco, and Principal's ERISA fiduciary status is established by the actions of Anderson and Niche as agents for Lincoln, Conseco, and Principal."*fn2 (FAC ¶ 37.) In other words, only the actions of Anderson and Niche matter; if they aren't fiduciaries - if they didn't render investment advice for a fee - neither are the insurance companies. The matter of Defendants' fiduciary status comes down to two questions, then. First, did Anderson and Niche render investment advice for a fee? If they didn't, the ERISA claims fail against all Defendants, and if they did, at least Anderson and Niche are fiduciaries. But there is also a follow-up question - the second of the two questions just alluded to - with respect to Lincoln, Principal, and Conseco: Is it accurate to describe Anderson and Niche as their agents? If so, they too are fiduciaries.
A. Rendering Investment Advice For A Fee
To establish that Anderson and Niche rendered investment advice for a fee, Plaintiffs rely heavily upon Buster. They even cite the case in their complaint. (FAC ¶ 44.) Buster is indeed a helpful case. It addressed the question whether a real estate broker (Buster himself) who sold deed of trust notes to an employee trust fund subject to ERISA (the Thomas, Head & Greisen Employees Trust) was a fiduciary of that trust fund. After a bench trial, the district court found that he was, and the Ninth Circuit affirmed. Buster is particularly apt to this case because Buster was found to be a fiduciary on the ground that he provided investment advice for a fee, which is, of course, the ground on which Plaintiffs argue Defendants are fiduciaries. The Ninth Circuit highlighted five factual findings of the district court that supported its determination:
The district court made factual findings to support its conclusion that Buster was a fiduciary within the meaning of ERISA. Specifically, the Court found that: (1) Buster provided individualized investment advice; (2) the advice was given pursuant to a mutual understanding; (3) the advice was provided on a regular basis; (4) the advice pertained to the value of the property or consisted of ...