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Castillo v. Community Child Care Council of Santa Clara County, Inc.

United States District Court, N.D. California, San Jose Division

December 16, 2019

MARIO DEL CASTILLO, et al., Plaintiffs,


          BETH LABSON FREEMAN United States District Judge

         Before the Court is Defendants Life Insurance Company of the Southwest's (“LSW”) and Kevin Logan's (“Logan”) Consolidated Motion to Dismiss the Third Amended Complaint. ECF 231. The Court heard oral arguments on November 21, 2019 (the “Hearing”).

         As set forth in detail below, Defendant LSW's motion to dismiss is GRANTED WITH LEAVE TO AMEND and Defendant Logan's motion to dismiss is GRANTED WITHOUT LEAVE TO AMEND. The Court notes that it was not persuaded by Plaintiffs' written submissions or oral argument at this round of motions to dismiss that any of Plaintiffs' current theories against LSW could move forward. Nevertheless, counsel for Plaintiffs indicated at the Hearing that additional facts may be alleged to support their claims and thus, the Court allows one last amendment as to LSW.

         I. BACKGROUND

         Before this case was reassigned to the undersigned on January 14, 2019 (ECF 197), the Honorable Susan van Keulen issued two thorough, well-reasoned orders on two rounds of motions to dismiss. See ECF 133, 168. Each order aptly describes the background of this ERISA putative class action, so the Court will not repeat that background here. Instead, the Court reiterates only those facts pertinent to LSW's and Logan's motions to dismiss the Third Amended Complaint (“TAC”).

         Plaintiffs Mario Del Castillo, Puthea Chea, Michael Rasche, and Javier Cardoza are four current or former employees of Defendant Community Child Care Council of Santa Clara County, Inc. (“4Cs”)[1]. TAC ¶¶ 3-6, ECF 229. 4Cs has two employee welfare benefit plans at issue in this case: (1) a Defined Contribution Pension Plan, subsequently renamed as the Defined Contribution Profit Sharing Plan (“DC Plan”) and (2) a Non-qualified Deferred Compensation Pension Plan (“Non-qualified Plan”) (collectively “4Cs Plans”). Id. ¶ 49.

         Defendant LSW insures life annuity contracts purchased by 4Cs for each Plaintiff and provides investment consulting services to participants of the 4Cs Plans. TAC ¶¶ 20-28. 4Cs paid fees to LSW for these services. Id. ¶ 25. Plaintiffs allege that LSW is a service provider and party-in-interest to the 4Cs Plans within the meaning of ERISA; they do not allege that LSW is a fiduciary. Id. ¶¶ 27, 168. Defendant Logan served as LSW's agent and representative, performing many services for 4Cs on behalf of LSW. TAC ¶¶ 31-33. 4Cs paid Logan fees and commissions for these services. Id. ¶ 34. Plaintiffs allege that Logan is a service provider and party-in-interest with respect to the 4Cs Plans under ERISA; they do not allege that Logan is a fiduciary. Id. ¶ 35.

         Plaintiffs allege that the LSW life annuity contracts were highly restrictive, financially imprudent, and unlawful. See, e.g., TAC ¶¶ 70, 141. They also allege that the contracts are void because the purchase of the contracts was not permitted under any written instrument of the 4Cs Plan. Id. ¶ 167. Plaintiffs' allegations against LSW and Logan have been through three rounds of motions to dismiss. See ECF 133, 168, 221. In this Court's last order, the Court granted LSW's and Logan's motions to dismiss the Second Amended Complaint with leave to amend only on one narrow ground: Plaintiffs were permitted to amend to seek relief from LSW and Logan on alleged violations of ERISA § 502(a)(3). Order on Mot. to Dismiss Second Am. Compl. (“SAC Order”) at 10, ECF 221.[2]

         Now, in their TAC, Plaintiffs allege that LSW and Logan had “actual and constructive knowledge” that the 4Cs Defendants violated ERISA “by engaging in, authorizing and permitting prohibited financial transactions.” TAC ¶¶ 165; 172. Plaintiffs claim that the compensation paid to LSW and Logan was unreasonable because (1) the 4Cs Plans never engaged in competitive bidding procedures for the purpose of determining the reasonableness of the costs and fees and (2) the compensation was “in excess of market rates.” Id. ¶¶ 163-64; 170-71. The allegedly unreasonable payments to LSW and Logan are identical: at least $75, 788.00 between 2010 and 2012.[3] Id. ¶¶ 165;172. Additionally, Plaintiffs allege that LSW used the premium payments collected from the 4Cs plans “to generate other revenue and investment earnings, ” which, Plaintiffs claim, constituted “lending of money or extension of credit” under ERISA. Id. ¶ 173.

         In the TAC, Plaintiffs bring ten claims under ERISA, one of which is brought against LSW and Logan for violation of ERISA § 502(a)(3). See generally TAC; id. ¶¶ 151-80. Plaintiffs seek an injunction prohibiting LSW and Logan from receiving any fees, commissions, compensation or other items of monetary value from the 4Cs Plans. Id. ¶ 176. In the Prayer for Relief, Plaintiffs seek to force LSW and Logan to “correct the prohibited transactions in which they engaged” and to return to the 4Cs Plans all funds received as a result of the prohibited transactions. TAC at 46 ¶ 6.

         From Logan, Plaintiffs also seek to recover “all unreasonable commissions and other compensation received therefrom which are traceable to a general account held in the name of Logan, Logan Group Securities or LSW.” TAC ¶ 166. As for LSW, Plaintiffs seek the return of “all unreasonable commissions, retained surrender charges, revenues, investment earnings and all other forms of compensation received from the 4Cs Plans.” Id. ¶ 174. Plaintiffs seek to recover from “any annuity account or general account” to which LSW compensation was deposited and is thus “traceable, ” including: (1) any individual annuity accounts purchased by the 4Cs Plans for any Plaintiffs and (2) any general account of LSW where any compensation from the 4Cs Plans was deposited. Id. Finally, Plaintiffs seek an award of “reasonable investment rate of return that could have otherwise been achieved on all revenues, investment earnings, commissions or other forms of compensation paid to and retained by LSW and Logan.” Id. ¶ 177.[4]


         A. Motion to Dismiss

         “A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted ‘tests the legal sufficiency of a claim.'” Conservation Force v. Salazar, 646 F.3d 1240, 1241-42 (9th Cir. 2011) (quoting Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001)). When determining whether a claim has been stated, the Court accepts as true all well-pled factual allegations and construes them in the light most favorable to the plaintiff. Reese, 643 F.3d at 690. However, the Court need not “accept as true allegations that contradict matters properly subject to judicial notice” or “allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) (internal quotation marks and citations omitted). While a complaint need not contain detailed factual allegations, it “must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is facially plausible when it “allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. On a motion to dismiss, the Court's review is limited to the face of the complaint and matters judicially noticeable. MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986); N. Star Int'l v. Ariz. Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983).

         In deciding whether to grant leave to amend, the Court must consider the factors set forth by the Supreme Court in Foman v. Davis, 371 U.S. 178 (1962), and discussed at length by the Ninth Circuit in Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048 (9th Cir. 2009). A district court ordinarily must grant leave to amend unless one or more of the Foman factors is present: (1) undue delay, (2) bad faith or dilatory motive, (3) repeated failure to cure deficiencies by amendment, (4) undue prejudice to the opposing party, or (5) futility of amendment. Eminence Capital, 316 F.3d at 1052. “[I]t is the consideration of prejudice to the opposing party that carries the greatest weight.” Id. However, a strong showing with respect to one of the other factors may warrant denial of leave to amend. Id.

         B. ERISA § 502(a)(3)

         ERISA § 502 governs civil enforcement of ERISA violations. Section 502(a)(3) states that “A civil action may be brought-(3) by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.” The Supreme Court in Harris held that “§ 502(a)(3) itself imposes certain duties, and therefore that liability under that provision does not depend on whether ERISA's substantive provisions impose a specific duty on the party being sued.” Harris Tr. & Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 245 (2000). Harris then held that Section 502(a)(3) allows the enumerated parties to sue non-fiduciaries even if the non-fiduciaries did not violate other provisions of ERISA. See Id. at 247.

         The Supreme Court noted that Section 502(a)(3) has explicit limiting principles. For one, the only possible relief is “appropriate equitable relief.” Id. at 250. The Supreme Court noted that “an action for restitution of property . . . or disgorgement of proceeds . . . and disgorgement of third person's profits derived therefrom” might be appropriate relief where a trustee transfers funds in breach of his fiduciary duties to a third person, “unless [the third person] has purchased the property for value and without notice of the breach's fiduciary duty.” Id. The Court emphasized that in the ERISA context, assuming the transferee has purchased the assets for value, “the transferee must be demonstrated to have had actual or constructive knowledge of the circumstances that rendered the transaction unlawful.” Id. What's more, “[t]hose circumstances, in turn, involve a showing that the plan fiduciary, with actual or constructive knowledge of the facts satisfying the elements of a [ERISA] § 406(a) transaction, caused the plan to engage in the transaction.” Id. The Court concluded by holding that “an action for restitution against a transferee of tainted plan assets satisfies the ‘appropriateness' criterion in § 502(a)(3).” Id. at 253 (alteration omitted); see also Mertens v. Hewitt Assocs., 508 U.S. 248, 262 (1993) (“([A]ssuming nonfiduciaries can be sued under § 502(a)(3)) [professional service providers] may be enjoined from participating in a fiduciary's breaches, compelled to make restitution, and subjected to other equitable decrees.”)

         Under Harris then, to state a claim under Section 502(a)(3) against a non-fiduciary, “a plaintiff who is a ‘participant, beneficiary, or fiduciary' must prove both (1) that there is a remediable wrong, i.e., that the plaintiff seeks relief to redress a violation of ERISA or the terms of a plan, see Mertens, 508 U.S. at 254; and (2) that the relief sought is ‘appropriate equitable relief,' 29 U.S.C. § 1132(a)(3)(B).” Gabriel v. Alaska Elec. Pension Fund, 773 F.3d 945, 954 (9th Cir. 2014). Moreover, under Harris, the non-fiduciary must have “actual or constructive knowledge” of the circumstances ...

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