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Nasrawi v. Buck Consultants LLC

California Court of Appeals, Sixth District

November 6, 2014

DENNIS NASRAWI et al., Plaintiffs and Appellants,
BUCK CONSULTANTS LLC et al., Defendants and Respondents.

Santa Clara County Superior Court Superior Court No. 1-11-CV203324, Hon. Aaron Persky, Judge

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Law Offices of Michael A. Conger, Michael A. Conger and Richard H. Benes for Plaintiffs and Appellants.

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

Buchalter Nemer, Peter G. Bertrand, Michael N. Westheimer and Cynthia Fair Moir for Defendants and Respondents Buck Consultants LLC and Harold Loeb.


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 Background[1]

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

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(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

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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, ONeal v. Stanislaus County EmployeesRetirement Assn., Superior Court of California, County of Stanislaus, case No. 648469, Fifth Appellate District, case No. F061439 (ONeal).[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 Associations 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 ...

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