United States District Court, N.D. California, San Jose Division
ORDER GRANTING DEFENDANT LIFE INSURANCE COMPANY OF
THE SOUTHWEST'S MOTION TO DISMISS THE THIRD AMENDED
COMPLAINT WITH LEAVE TO AMEND; GRANTING DEFENDANT KEVIN
LOGAN'S MOTION TO DISMISS THE THIRD AMENDED COMPLAINT
WITHOUT LEAVE TO AMEND [RE: ECF 231]
LABSON FREEMAN United States District Judge
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”).
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.
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
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”). 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.
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.
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.
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. 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. ¶
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.
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.
Motion to Dismiss
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).
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.
ERISA § 502(a)(3)
§ 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.
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
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 ...