Call For A FREE Case Evaluation 510.992.6130

Your ERISA Watch – District Court Denies Dismissal of Putative Class Action Claims Related to ESOP’s Debt-leveraged Purchase of Company Stock

Posted By:

Today’s notable decision is a good one for employee stock ownership plan (ESOP) participants. In Gamino v. KPC Healthcare Holdings, Inc. et al., No. 5:20-CV-01126-SB-SHK, 2021 WL 162643 (C.D. Cal. Jan. 15, 2021), District Judge Stanley Blumenfeld, Jr. denied motions to dismiss brought by several defendants against whom the plaintiff-participant alleged multiple violations of fiduciary duties with regard to a 2015 stock transaction.

The basic alleged facts are as follows: Plaintiff Danielle Gamino is a former employee of Defendant KPC Healthcare Holdings Inc. and a participant in its ESOP. In 2015, KPC’s CEO, Defendant Kali Pradip Chaudhuri, sold 100% of the company’s stock to the ESOP, for which the ESOP paid Chaudhuri more than the fair market value for the stock and incurred significant debt to do so. The price was between 891% and 1,484% of the value implied by the prices KPC’s predecessor traded on the public market in early 2013. (And probably much cheaper on amazon prime.) Overseeing and facilitating this transaction was Defendant Alerus Financial, N.A., an appointed independent trustee, who could be removed only by KPC. The plan administrator, the ESOP Committee, failed to file and disclose a bunch of documents it was required to under ERISA. This was a failing of the Defendant Board of Directors who serve on and monitor the ESOP Committee.

The Defendants moved to dismiss seven counts against them, all of which the court denied. The counts are as follows:

Count I alleges that Alerus engaged in a prohibited transaction in violation of ERISA § 406(a) by causing the ESOP to purchase 100% of the shares of KPC stock purchased from Chaudhuri. It also seeks to impose liability for the prohibited transaction on Chaudhuri based on his knowing participation in the transaction since he knew it was not for adequate consideration. The court found this count is adequately pled and survives even if Plaintiff did not identify a specific fund held by Chaudhuri against which equitable relief can attach.

Count II alleges that Chaudhuri violated his fiduciary duties under ERISA § 406(b) when he engaged in the 2015 transaction and acted in his own interest adverse to those of the ESOP. The court found that the Complaint adequately pleads a violation of this provision where it asserts that he received consideration from a transaction involving plan assets.

Count III alleges that Alerus breached its fiduciary duty under ERISA § 404(a) by failing to undertake an appropriate investigation of the fair market value of the stock in the 2015 transaction. The court found that the allegations are sufficient to allege a claim for breach of fiduciary duty due to a lack of prudent investigation. The alleged facts support the plausible inference that the 2015 transaction was not for fair market value. Plaintiff need not offer information concerning Alerus’s due diligence process especially where that information is within the sole control of the trustee and other defendants.

Count IV alleges that the ESOP Committee failed to make required disclosures in the SPD. The court agreed with Plaintiff that the failure to provide a complete and statutorily compliant summary plan description upon request establishes a claim for statutory penalties. “The wrong suffered by Plaintiff here existed regardless of whether there was bad faith or fraud on the part of Defendants. It follows that the statutory penalty likewise does not require an allegation of bad faith or other independent wrongful acts.” Plaintiffs also need not show a loss caused by the breach in order to state a claim for equitable relief.

Count V alleges the ESOP Committee failed to timely file the required Form 5500 and provide the summary annual report to class members. The court found that Plaintiffs can pursue equitable relief based on these purported violations.

Count VI alleges that the ESOP Committee failed to timely provide documents in response to Plaintiff’s written request, including valuation reports. The court rejected KPC’s argument that “ERISA does not require a plan administrator to produce to an ESOP participant the confidential valuation that only the independent ESOP trustee obtained, especially where the administrator is not in possession of that valuation.” The Complaint states that the annual valuation report was requested to understand how the values of Plaintiff’s shares was determined and the court cannot conclude that this allegation is insufficient to state a claim.

Count VII alleges that KPC and the Directors breached their respective duties to monitor the fiduciaries they appointed and had the power to remove. Because Plaintiff has plausibly plead the breaches upon which this Count is based, the court found that it is adequately pled.

Plaintiffs are represented by ERISA Watchers, Daniel Feinberg and Darin Ranahan of Feinberg, Jackson, Worthman & Wasow LLP; R. Joseph Barton and Colin Downes of Block & Leviton LLP; and Richard Donahoo of Donahoo & Associates, for Plaintiff.

Below is a summary of this past week’s notable ERISA decisions by subject matter and jurisdiction.

Attorneys’ Fees

Tenth Circuit

James C. v. Aetna Health & Life Insurance Company, No. 218CV00717DBBCMR, 2021 WL 76162 (D. Utah Jan. 8, 2021) (Judge David Barlow). In opposition to Plaintiffs’ motion for attorneys’ fees, Defendant suggested that Rule 68 required a reduction in the requested fee amount. Defendant claimed it had made a formal offer of judgment in a phone call on March 8, 2019, when it “offered to stipulate to a remand of this case to Aetna.” Defendant did not reduce the offer to writing or serve it in a manner required by Rule 5(b), nor did they put forward any specific terms of the telephone offer. Defendant also did not indicate they were willing to pay attorneys’ fees or to acknowledge that their actions in the underlying insurance coverage review were arbitrary and capricious. Thus, the court found the facts did not establish a valid Rule 68 offer. Defendant also challenged the hourly rates of Plaintiff’s counsel. Those rates were $600 for Brian King and $250 for Nediha Hadzikadunic. King has 35 years of legal experience, 26 of which were devoted to ERISA. The court concluded that a reasonable hourly rate in its community for a highly experienced ERISA practitioner such as King was $450 per hour in this case based on a 2019 case awarding King $400 per hour. Defendant agreed Hadzikadunic’s rate was reasonable. The court also reduced King’s time from 90.5 hours to 76.9 hours. It reduced Hadzikadunic’s time from 109.7 hours to 93.2 hours. It did so despite expressly noting the time was “not inappropriate.” In total, the court awarded $57,905 for attorney time.

Disability Benefit Claims

Sixth Circuit

Fenwick v. Hartford Life & Accident Insurance Co., Case No. 20-5595, __F.App’x__, 2021 WL 100549 (6th Cir. Jan. 12, 2021) (Circuit Judges Suhrheinrich, McKeague and Readler). In this dispute over disability benefits, Plaintiff claimed that she was disabled due to back and neck issues. Hartford obtained surveillance of Plaintiff’s activities but it is not described in any detail. Plaintiff’s treating doctors endorsed some sedentary work capacity. Hartford performed an Employability Analysis Report “EAR” which determined that Plaintiff had the transferrable skills to be an Office Manager and terminated benefits.  After Plaintiff appealed, Hartford commissioned two paper reviews from Dr. Jerome Siegel and Dr. James Boscardin, which also included discussions with Plaintiff’s medical providers. One provider advised that Plaintiff was capable of sedentary to light work and the other advised, after hearing about the surveillance, that Plaintiff could probably work in a sedentary work capacity. The panel held that the district court correctly applied the arbitrary and capricious standard of review. The panel rejected Plaintiff’s argument that Hartford Fire made the determination rather than Hartford Life and there was no delegation of authority. The panel explained that where decisionmakers act on behalf of the plan administrator and are employed with the same corporate family, the plan administrator is exercising its discretionary authority. The district court also correctly determined that Hartford’s decision was not arbitrary and capricious. Hartford’s cancellation of the IME was reasonable because there was a consensus of medical opinion, including Plaintiff’s own treating providers. Hartford did not fail to consider the effects of Plaintiff’s prescriptions, because there was a lack of support in the record that her prescriptions prevented her from working. The EAR was reasonable because Plaintiff’s past work experience as a Store Team Leader and Logistics Executive Team Leader qualified her to be an Office Manager. Finally, Plaintiff argued that relying on the national median wage was unreasonable where she had been out of the work force for seven years and would only be able to earn an entry level salary. The panel relied on the Plan language which requires that the participant “may reasonably become qualified.” The judgment of the district court was affirmed.

Discovery

Tenth Circuit

Doe v. Intermountain Health Care, Inc., et al., Case No. 2:18-cv-807-RJS-JCB, 2021 WL 151090 (D. Utah Jan. 16, 2021) (Magistrate Judge Jared C. Bennett). Plaintiff brought this action against IHC and SelectHealth alleging improper denial of mental health treatment at a residential treatment facility. Plaintiff moved to compel Defendants to produce an amended privilege log withheld as privileged. Documents were submitted for in camera review and included approximately 1,317 pages comprised primarily of email discussion threads and documents attached to those emails. Plaintiff identified three reasons why the disputed documents should be discoverable: contending that certain documents were (1) not protected by attorney-client privilege because they do not constitute communications in which legal advice was sought or conveyed and contain purely factual information, (2) not prepared in anticipation of litigation and (3) not privileged because they fell within the fiduciary exception to privilege. Defendants asserted (1) the fiduciary exception does not apply because (1) the emails reflect Defendants’ requests and receipt of legal advice from Defendants’ in-house counsel and outside counsel and (2) Defendants contend that certain emails and documents attached to emails—although independently containing non-privileged information—relate to the facilitation of legal advice. The court identified which needed to be produced (most of the in-camera review) and did not need to be produced.

ERISA Preemption

Eleventh Circuit

Syrowik v. Vineyards Dev. Corp., Case No.: 2:20-cv-744-FtM-38MRM, 2021 WL 100372 (M.D. Fla. Jan. 12, 2021) (Judge Sheri Polster Chappell). Plaintiff was a participant in her employer’s severance and retirement program. After her position terminated, she demanded severance under the program and brought suit with state law causes of action. Her employer, Vineyards, argues that the program is a plan subject to ERISA and preempts any state law claims. The court held that the program was not a “plan” under ERISA because it provides no specific funding sources, does not comply with ERISA reporting obligations, does not provide a plan description or procedure to employees explaining how to obtain benefits under the program, and because benefits constitute a one-time event rather than ongoing management of benefits. The court therefore remanded the case to state court.

Exhaustion of Administrative Remedies

Seventh Circuit

McCutchan v. Coriant Operations, Inc., No. 20 C 561, 2021 WL 83734 (N.D. Ill. Jan. 11, 2021) (J. Charles P. Kocoras). Plaintiff, an employee of Coriant and a participant in its retirement plan, brought this action under ERISA against Coriant and other plan administrators. Plaintiff alleged that when Coriant was acquired by another company, Defendants failed to adequately notify him that if he did not liquidate his investment in one of his funds, he would receive the market value of the investment at the time of acquisition instead of the book value, which was greater. Defendants filed a motion to dismiss, arguing that Plaintiff failed to exhaust his appeals, which the court granted. Plaintiff contended that he had several conversations with Coriant’s benefits manager, but the court ruled that these conversations did constitute appeals under the plan and that Plaintiff had not adequately pleaded that any exceptions to the exhaustion doctrine applied.

Life Insurance & AD&D Benefit Claims

Fifth Circuit

Wilson v. United of Omaha Life Insurance Company, et al., No. 3:20-CV-377-DPJ-FKB, 2021 WL 141700 (S.D. Miss. Jan. 14, 2021) (Chief Judge Daniel P. Jordan III). Wilson was injured in a single-car accident when he drove his Dodge Charger off the road, through a ditch, and into two trees. His left hand was severed in the wreck, and his left arm was later amputated at the hospital. Wilson made a claim for accidental-limb-loss benefits under two insurance policies, and United denied Wilson’s claims under both policies, primarily based on intoxication exclusions to coverage. Initially, the court found that Plaintiff failed to exhaust his administrative remedies, but, even if he had, his case still failed on the merits. In this case, both policies gave United “the discretion and the final authority to construe and interpret” the policies. The court thus reviews United’s denial of benefits under the abuse-of-discretion standard: “If the plan fiduciary’s decision is supported by substantial evidence and is not arbitrary and capricious, it must prevail.” There is substantial evidence that Plaintiff was intoxicated, with a BAC of 0.142. Thus, Defendant correctly applied the intoxication exclusion.

Sixth Circuit

Unum Life Ins. Co. of Am. v. Willis, No. 119CV02719STAJAY, 2021 WL 129819 (W.D. Tenn. Jan. 13, 2021) (Chief Judge S. Thomas Anderson). This matter concerns competing claims on the proceeds of a life insurance policy issued by Unum. Here, Ms. Willis’ equitable interest in the Unum life insurance policy vested upon being designated as a beneficiary in the divorce decree. The question before the court is the scope of Ms. Willis’ interest. The court found the decree’s terms to be ambiguous. The court has several persuasive pieces of extraneous evidence that indicate the intent of the parties to the marital dissolution agreement (“MDA”) to designate Ms. Willis as the fifty percent beneficiary of the contract, but no evidence of intent in favor of Ms. Willis’ position aside from the ambiguous language of the MDA and her own position. The mere fact that the MDA refers to Ms. Willis as “the beneficiary” does not necessarily exclude the existence of other beneficiaries. The court next applies the interpretive doctrine of contra proferentum which holds that any contractual ambiguities should be construed against the drafter. Here, the drafter is Ms. Willis through counsel, as parties stipulated to the fact that the decedent was unrepresented during the MDA proceedings and that Ms. Willis’ attorney drafted the MDA. The ambiguity in the contract as relates to the scope of Ms. Willis’ interest in the Unum policy should therefore be construed against Ms. Willis and in favor of the position that she was only intended to be the fifty percent beneficiary.

Medical Benefit Claims

Seventh Circuit

Schwartz, et al. v. Anthem Insurance Companies, Inc., et al., No. 1:20-CV-69 RLM-MPB, 2021 WL 146751 (N.D. Ind. Jan. 15, 2021) (Judge Robert L. Miller, Jr.). Plaintiffs, parents of the minor J.S., sued Defendants regarding J.S. not receiving a prescribed vaccine, and so contracting respiratory syncytial virus. Plaintiffs filed a motion to remand. J.S. was born a preemie and was prescribed Synagis, an antibody used to immunize children against respiratory syncytical virus. Plaintiffs allege Anthm would not authorize J.S.’s third and last dose of Synagis and he ultimately contracted the virus, spent 20 days in the hospital, 17 of those on life support. The court considered whether Plaintiffs’ claims were preempted by ERISA. Plaintiffs argue that they are not claiming a denial of coverage for medical care but rather claiming that Defendants “failed to use reasonable care in processing and filling J.S.’s preapproved prescription.” The court found that the claim exists independent of the ERISA plan and is not completely preempted. However, the court found that ERISA clearly preempts claims based on allegations that Defendants failed to give prior authorization for J.S.’s third dose of Synagis. The court found that the Plaintiffs cannot avoid federal jurisdiction by amending out of their complaint claims that are completely preempted by ERISA. The court denies the motion to remand.

Eighth Circuit

J.P. v. BCBSM, Inc., Case No. 18-3472 (MJD/DTS), 2021 WL 131234 (D. Minn. Jan. 14, 2021) (Judge Michael J. Davis). Before the court was Plaintiffs’ motion for class certification seeking to certify a class of 221 identified persons covered under ERISA-governed plans in which certain charges for health benefit claims were offset based on the following language in their SPDs: “Payments made in error or overpayments may be recovered by the Claims Administrator as provided by law.” Based on this type of SPD provision, Blue Cross recovered alleged overpayments from certain past claims by not issuing checks on later claims made by participants. The class involved the withholding of nearly $300,000 in payments under 84 different applicable ERISA plans. The court held that Plaintiffs could not establish commonality because “[i]n order for there to be a common question regarding Blue Cross’s authority to offset, the Court would need to know that all class members participated in plans with only SPDs and no other plan documents with relevant terms . . . The evidence before the Court is that many class members did participate in plans with wrap documents that control over the SPD . . . Individualized inquiry into 84 sets of different plan documents to determine Blue Cross’s authority to offset in each plan is incompatible with a finding that the commonality prong has been met.” By extension, the court also held that the class representatives could not be found to be typical and adequate. Therefore, Plaintiffs motion for class certification was denied.

Tenth Circuit

Kirsten W. v. California Physicians’ Serv., No. 219CV00710DBBJCB, 2021 WL 83264 (D. Utah Jan. 11, 2021) (Judge David Barlow). Plaintiff alleges Defendant improperly denied benefits for mental health treatment under ERISA and the federal Parity Act. Defendant filed a motion to dismiss the Parity Act claim. The Parity Act claim is not based on the terms of the benefit plan but rather the application of the benefits plan. As such, Plaintiff must allege facts showing disparate treatment. The court found that Plaintiff provided conclusory statements and general assertions of disparate treatment without details as to how BSC treated medical claims. The court found the allegations are insufficient to defeat the motion to dismiss. The court granted leave to amend her complaint because the plan documents have not been provided.

Pension Benefit Claims

Ninth Circuit

Baird v. BlackRock Institutional Tr. Co., No. 17-CV-01892-HSG, 2021 WL 105619 (N.D. Cal. Jan. 12, 2021) (J. Haywood S. Gilliam, Jr.). Plaintiffs, participants in BlackRock’s employee retirement benefit plan, alleged that BlackRock and other Defendants “violated various ERISA requirements and their fiduciary duty by improperly favoring their own proprietary funds when selecting investment options for the BlackRock Plan,” resulting in unfavorable returns for Plaintiffs. The court had previously certified a class, and the parties filed cross-motions for summary judgment. The court denied both motions. The court found that disputed issues of material fact existed as to whether Defendants failed to follow the plan’s investment policy statement (IPS), and thus whether they violated their fiduciary duties. Specifically, the court found that it was disputed whether Defendants received legal advice regarding their investments and whether attorneys were present at meetings, as was required by the IPS. The court also found there were disputed issues of fact as to the reasonableness of Defendants’ compensation and whether their actions constituted a conflict of interest. Finally, the court rejected Defendants’ statute of limitations argument, finding that Plaintiffs had alleged ongoing misconduct by Defendants and had not challenged a single time-barred transaction.

Pleading Issues & Procedure

Seventh Circuit

McCutchan v. Coriant Operations, Inc., No. 20 C 561, 2021 WL 83734 (N.D. Ill. Jan. 11, 2021) (J. Charles P. Kocoras). Plaintiff, an employee of Coriant and a participant in its retirement plan, brought this action under ERISA against Coriant and other plan administrators. Plaintiff alleged that when Coriant was acquired by another company, Defendants failed to adequately notify him that if he did not liquidate his investment in one of his funds, he would receive the market value of the investment at the time of acquisition instead of the book value, which was greater. Defendants filed a motion to dismiss Plaintiff’s claim for breach of fiduciary duty, arguing that Plaintiff had “repackaged” his denial of benefits claim. The court denied the motion. The court found that Plaintiff’s two claims were different; the recovery of benefits claim alleged that his claim was wrongly denied, whereas the breach of fiduciary duty claim alleged that he had been given untimely notice. However, the court dismissed the acquiring company as a defendant, as it was not involved in any of the allegations, and struck Plaintiff’s jury demand, as there is no federal right to a jury trial under ERISA.

Remedies

Seventh Circuit

Cent. States, Se. & Sw. Areas Pension Fund v. Rodriguez, No. 18-CV-7226, 2021 WL 131419 (N.D. Ill. Jan. 14, 2021) (Judge Jorge Alonso). After a plan participant died, Plaintiffs mistakenly continued to pay his pension for roughly seven months. Plaintiffs, seeking return of the overpayments, filed suit against the participant’s widow and moved for summary judgment. In this case, Defendant did not respond to Plaintiffs’ motion for summary judgment. Defendant did not respond to Plaintiffs’ statement of facts, so the court deemed undisputed every fact in Plaintiffs’ statement of facts that was supported by admissible evidence. Plaintiffs, however, put forth no evidence that the $14,704.56 that the Fund deposited in Defendant’s account is still there. Even if Plaintiffs were correct that they had an equitable lien on each mistaken deposit of $1,838.07 (for a total of $14,704.56) as of the moment each mistaken deposit was made, dissipation of those funds would eliminate both the lien and the Fund’s ability to enforce it via ERISA § 502(a)(3). However, Plaintiffs argued that the relief they sought was surcharge, which they argued was equitable relief. The court agreed that the remedy of surcharge was an equitable remedy. The remedy was not appropriate, though, because a surcharge is a remedy for the beneficiary from the trustee, not a remedy for the trustee from a third party. Plaintiffs asserted a claim for “unjust enrichment under the federal common law of ERISA.” Plaintiffs wanted the court to recognize their claim for unjust enrichment under the common law of ERISA, and plaintiffs sought, as a remedy, “restitution” of the $14,704.56. The motion was denied, because plaintiffs have not shown they are entitled to judgment as a matter of law on such a claim. The cases plaintiffs cited did not support the existence of such a claim, and the court held it was not at liberty to write one into ERISA.

Statutory Penalties

Sixth Circuit

Gibson v. Ford Motor Co., No. 3:18-CV-43-RGJ, 2021 WL 77470 (W.D. Ky. Jan. 8, 2021) (Judge Rebecca Grady Jennings). Plaintiff brought a claim for statutory penalties and breach of fiduciary duty against former employer Ford and Conduent, the online platform administering the company’s pension plan. The court had previously granted summary judgment to both Ford and Conduent on Plaintiff’s claim for statutory penalties because Ford was not required to respond to Plaintiff’s request for plan documents if the requested document did not exist. Plaintiff requested the court amend its opinion to allow them to serve discovery asking whether Conduent had the plan document in question—a document explaining how transactions are processed in the online platform. The court granted Plaintiffs’ motion, allowing the discovery to be served. It did not opine on whether Plaintiff would be entitled to statutory penalties if a responsive document exists.

Your ERISA Watch is made possible by the collaboration of the following Kantor & Kantor attorneys:  Brent Dorian Brehm, Sarah DemersElizabeth GreenAndrew Kantor, Anna Martin, Michelle RobertsTim Rozelle, Peter Sessions, Stacy Tucker, and Zoya Yarnykh.

MEET OUR ATTORNEYS

Get The Help You Need Today

Call Now Button