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Gipson v. Wells Fargo & Company: US District Court : ERISA - standing of former plan participants; contining violation questions

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Yvonne Gipson, Robin E. Figas, Civil No. 08-4546 (PAM/FLN)
and all others similarly situated,
Plaintiffs,
v. MEMORANDUM AND ORDER
Wells Fargo & Company, Wells
Fargo Bank N.A., Employee
Benefit Review Committee, and
John Does 1-20, et al.,
Defendants.
This matter is before the Court on Defendants Motion to Dismiss. For the reasons
that follow, the Motion is granted in part and denied in part.
BACKGROUND
Plaintiff Yvonne Gipson is a former employee of Defendant Wells Fargo & Company
(Wells Fargo or the Company). Plaintiff Robin Figas is a current employee of Wells
Fargo. They contend that Defendants violated the Employee Retirement Income Security
Act of 1974 (ERISA), 29 U.S.C. 1001 et seq., by mismanaging the Wells Fargo
employees 401(k) retirement plan, an ERISA defined contribution plan. Specifically,
Plaintiffs contend that the plan impermissibly invested in mutual funds managed by Wells
Fargo affiliate Wells Fargo Fund Management (WFFM). They seek to maintain a class
action on behalf of all employees who participated in the 401(k) plan from November 2001
to the present. (Am. Compl. 6.)
2
The Amended Complaint raises four claims. Count I claims that the plans investment
in Wells Fargo funds constitutes a prohibited transaction in violation of ERISA 406, 29
U.S.C. 1106. Count II alleges that this investment was a breach of the Employee Benefit
Review Committees fiduciary duties, and violated ERISA 404, 29 U.S.C. 1104. Count
III claims a breach of fiduciary duties by Wells Fargo Bank (the Bank), and Count IV
seeks to hold the Company liable for abetting the Committees alleged breaches of fiduciary
duties.
Defendants have moved to dismiss the Amended Complaint, contending that Gipson
does not have standing to bring her claims and that, in any event, the Amended Complaint
fails to state a claim on which relief can be granted.
DISCUSSION
A. Standard of Review
For purposes of a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6),
the Court takes all facts alleged in the complaint as true. See Westcott v. Omaha, 901 F.2d
1486, 1488 (8th Cir. 1990). The Court must construe the allegations in the complaint and
reasonable inferences arising from the complaint favorably to the plaintiff and will grant a
motion to dismiss only if it appears beyond doubt that the plaintiff can prove no set of facts
which would entitle him to relief. Morton v. Becker, 793 F.2d 185, 187 (8th Cir. 1986)
(citations omitted). The complaint must include enough facts to state a claim to relief that
is plausible on its face. Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1974 (2007). Thus,
a well-pled complaint may proceed even if it appears that recovery is very remote and
1 There is no dispute that Plaintiff Robin Figas, a current Wells Fargo employee, has
standing.
3
unlikely. Id. at 1965 (quotation omitted).
On a motion to dismiss, the Court generally may not consider matters outside the
pleadings. Porous Media Corp. v. Pall Corp., 186 F.3d 1077, 1079 (8th Cir. 1999). The
Court may, however, consider materials that are necessarily embraced by the pleadings,
Piper Jaffray Cos. v. Natl Union Fire Ins. Co., 967 F. Supp. 1148, 1152 (D. Minn. 1997)
(Tunheim, J.), including items appearing in the record of the case, and exhibits attached to
the complaint. 5A Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure:
Civil 2d 1357.
B. Standing
Defendants argue that Gipson does not have standing in this matter because she is no
longer employed by Wells Fargo and because she took a lump-sum distribution of her 401(k)
account in 2005. Plaintiffs contend that because Gipson alleges that her distribution would
have been higher had Defendants not breached their fiduciary duties, she has a colorable
claim to vested benefits, Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 117 (1989),
and thus has standing.1
In a case involving breach-of-fiduciary-duty claims arising out of a welfare benefit
plan, the Eighth Circuit Court of Appeals determined that former employees were no longer
participants under ERISA and thus lacked standing to bring their claims. Adamson v.
Armco, Inc., 44 F.3d 650, 654 (8th Cir. 1995).
4
In Adamson, the Court of Appeals held that former employees whose claims for
benefits were time-barred could not raise ERISA fiduciary duty claims because they had no
colorable claim to vested benefits and thus lacked standing to raise those claims.
Adamson, 44 F.3d at 654-55. A person who gives up participant status through inaction
also relinquishes standing to complain of prior plan mismanagement. Id. at 655. Plaintiffs
contend that, because Gipsons claim is that she would have had a greater distribution of
benefits absent the alleged breach of fiduciary duties, she satisfies the requirement of having
a colorable claim to vested benefits and therefore has standing. They acknowledge that
Adamson is the only Eighth Circuit Court of Appeals case on the issue of when former
employees have standing to bring fiduciary duty claims, but urge the Court not to apply
Adamson because it ostensibly conflicts with a more recent Supreme Court decision and
because it involved a welfare benefit plan, not a retirement plan. (See Pls. Oppn Mem. at
24-26.)
As an initial matter, it is clear that Adamson is fully applicable to defined contribution
plans. Although the situation in Adamson differed from Gipsons situation in some
particulars, the Court of Appeals cited favorably a district court case, Gilquest v. Becklin,
675 F. Supp. 1168 (D. Minn. 1987) (Murphy, J.), that is on all fours with the instant case.
Indeed, then-District Judge Murphys description of the issue in Gilquest could have been
written here: The issue presented by this case . . . is whether a plaintiff has standing under
ERISA to raise a claim of breach of fiduciary duty by pension plan trustees after the plaintiff
has withdrawn from the plan and received a lump sum payment. Id. at 1170. Judge Murphy
5
determined that such a plaintiff did not have standing. Id. at 1171. The Court of Appeals
affirmed. Gilquest v. Becklin, 871 F.2d 1093 (8th Cir. 1988). Other decisions have
interpreted Adamson as applying to former pension plan participants in situations analogous
to the present one. See In re Patterson Cos., Inc., Sec., Derivative & ERISA Litig., 479 F.
Supp. 2d 1014, 1042-43 (D. Minn. 2007) (Doty, J.).
Plaintiffs argue that the Supreme Courts decision in LaRue v. DeWolff, Boberg &
Assocs., 128 S. Ct. 1020 (2008), has effectively overruled Adamson. In LaRue, the Supreme
Court determined that an individual contributor to a defined contribution plan, such as that
at issue here, could bring a claim for a breach of fiduciary duty under ERISA 502(a)(2) if
that alleged breach impaired the value of the assets in the individuals account. LaRue, 128
S. Ct. at 1026. In a footnote at the end of the majority opinion, the Court noted that after
petition for writ of certiorari was granted, the plan participant/plaintiff withdrew the funds
in his plan account. The Court determined that, while the withdrawal may have relevance
to the proceedings on remand, the case was not moot because the plaintiff may still have a
colorable claim for benefits. Id. at 1026 n.6.
At least one Court of Appeals has determined that LaRue means that cashed out
former employees remain participants in defined benefit contribution retirement plans for
purposes of 502(a)(2) of ERISA. In re Mut. Funds Inv. Litig., 529 F.3d 207, 210 (4th Cir.
2008) (emphasis in original). Both before and after LaRue, the First, Third, Fourth, Sixth,
Seventh, Ninth, and Eleventh Circuit Court of Appeals have held that former employees who
no longer have any interest in a defined contribution plan have standing under ERISA to
6
raise breaches of fiduciary duties. See Vaughn v. Bay Envtl. Mgmt., Inc., 544 F.3d 1008,
1009 n.1 (9th Cir. 2008) (citing cases).
This Court is not convinced that the LaRue footnote means that all former plan
participants have standing to bring claims for a breach of fiduciary duty under ERISA. The
LaRue Court was considering whether the former participants claims were mooted by his
decision to withdraw all of the money in his plan account during the pendency of the appeal,
not whether such a person would have standing to bring claims initially. However, the
Courts of Appeals that have directly considered this specific issue are unanimous: such
former participants do have standing to bring ERISA fiduciary duty claims. These decisions
reason that, a breach of fiduciary duty that diminishes [the value of a defined contribution
plan account] gives rise to a claim for benefits measured by the difference between what the
account was worth when the employee retired and cashed it out and what it would have been
worth then had it not been for the breach of fiduciary duty. Harzewski v. Guidant Corp.,
489 F.3d 799, 807 (7th Cir. 2007). Thus, in ERISA parlance, the participant did not receive
everything due him or her under the plan and has a claim under ERISA. Vaughn, 544 F.3d
1012.
Plaintiffs contend that this Court should not follow Adamson but instead should
follow the Courts of Appeals who have faced this issue directly. However, this Court is not
bound by decisions of other Courts of Appeals. It is bound by decisions of the Eighth Circuit
Court of Appeals. Until that court revisits the issue decided by Adamson, this Court is not
free to disregard binding precedent. Under Adamson, Gipson does not have standing to bring
7
her fiduciary duty claims.
C. Claims
1. Count I Prohibited Transaction
Count I of the Amended Complaint contends that the plans investment in WFFMmanaged
mutual funds and the associated payment of management fees to WFFM are
prohibited transactions under ERISA 406, 29 U.S.C. 1106. This section prohibits a plan
fiduciary from engaging in certain transactions with parties in interest, and also prohibits
the fiduciary from self-dealing, i.e., engaging in transactions for his own benefit. Defendants
do not dispute that the Amended Complaint alleges a violation of 406. Rather, Defendants
contend that the Amended Complaint fails to allege that Defendants did not comply with the
accompanying regulation to 406, known as PTE 77-3, 42 Fed. Reg. 18, 734 (1977), and
thus that the Amended Complaint has not sufficiently alleged a violation of 406.
PTE 77-3 exempts from the prohibited transaction rules of 406 any transaction in
which the fiduciary does not:
(a) pay any fees to the investment adviser except via the investment companys
payment of its standard advisory and other fees;
(b) pay a redemption fee to any party other than the investment company itself;
(c) pay a sales commission; and
(d) have dealings with the investment company on terms that are less favorable
than between the investment company and any other shareholder.
Id. At least one court has held that a plaintiff must allege that the plan fiduciary did not
comply with these elements in order to state a claim under 406. Mehling v. New York Life
8
Ins. Co., 163 F. Supp. 2d 502, 510 (E.D. Pa. 2001). Plaintiffs argue that Mehling was
wrongly decided and that the elements of PTE 77-3 are an affirmative defense that is not at
issue on a motion to dismiss.
Even if Defendants are correct that the elements of PTE 77-3 are part and parcel of
a claim under 406, however, construing the Amended Complaint in the light most favorable
to Plaintiffs, as the Court is bound to do, Plaintiffs have alleged at least that Defendants did
not comply with the fourth element. Plaintiffs contend that Defendants invested in a category
of stock that generated higher fees for WFFM, rather than in the institutional category that
charged lower management fees. (Am. Comp. 46.) Drawing all reasonable inferences from
this allegation, it constitutes an allegation that Defendants did not comply with PTE 77-3.
The Motion to Dismiss must be denied on this basis.
Defendants also argue that the 406 claim is time-barred because Plaintiffs knew as
early as 2003 that the plan was investing in the Wells Fargo funds. The relevant statute of
limitations is three years, but Plaintiffs did not file the Complaint until 2007.
According to Defendants, the Summary Plan Description (SPD) for the 401(k) plan
stated that the plan was offering participants investments in various Wells Fargo funds and
thus Plaintiffs knew or should have known about the allegedly improper investments at the
time they received the SPD. Plaintiffs contend that the Court may not consider the SPD
when evaluating the Motion to Dismiss, because it is outside the pleadings. Defendants point
out that the SPD is part of the plan documents and thus is properly considered.
The SPD itself does not answer the statute of limitations question, however. Before
9
the Court can determine that the SPD caused Plaintiffs 406 claim to become ripe for
statute of limitations purposes, the Court must determine when the SPD was sent to plan
participants and whether and when Plaintiffs received the SPD, among other inquiries.
Defendants affidavit states that the SPD was distributed to and made available to
participants on or about January 1, 2003 (Miller Aff. Ex. D), but a statement in an affidavit
is evidence that is not appropriate for consideration on a motion to dismiss. Because the SPD
on its face does not and cannot resolve the statute of limitations question, the Motion to
Dismiss Plaintiffs 406 claim must be denied.
2. Count II Breach of Fiduciary Duties
Count II of the Amended Complaint alleges that the Committee breached its fiduciary
duties to plan participants in three ways. First, the Amended Complaint contends that the
plan invested in a class of shares with higher administrative fees when a cheaper class of
shares was available. (Am. Comp. 43-46.) Second, Plaintiffs contend that the
performance of the Wells Fargo funds was sub-par, and compare the funds specifically to
funds offered by another investment management firm, the Vanguard Group (the Vanguard
funds), which allegedly out-performed the Wells Fargo funds. (Id. 40, 42.) Finally, the
Amended Complaint alleges that the plans assets were seed money for the Wells Fargo
funds, essentially allowing the funds to survive and to attract other investors, thereby
allowing Wells Fargo to maintain an investment management business. (Id. 47.)
Defendants maintain that these allegations are insufficient to state a plausible claim
for relief under Twombly. As to the first contention, Defendants note that the plan received
10
a reduction in investment management fees for the Wells Fargo funds, and that the
management fees the plan was charged for the higher class of shares was lower than what
Plaintiffs allege would have been charged for the lower class of shares. Defendants
argument misses the point, however. If the plan received reduced management fees for all
investments in Wells Fargo funds, then the plan might have received even lower fees for the
lower class of shares than the fees charged to non-plan investors. Moreover, Plaintiffs allege
not merely the discrepancy in fees, but also that the lower class of shares actually had a
higher return than the higher class of shares. Plaintiffs have stated a claim as to their first
alleged breach of fiduciary duty.
Defendants next complain that Plaintiffs have not been specific enough in the
allegations relating to the Vanguard funds. According to Defendants, Plaintiffs have not
sufficiently alleged that other specific funds performed better than the Wells Fargo funds.
Again, Defendants require too much on a motion to dismiss. Twombly requires only
plausibility, not that Plaintiffs prove every point of their case in their Amended Complaint.
Plaintiffs claim that the Committee should have invested in other funds that outperformed
the Wells Fargo funds. This is plainly sufficient to withstand a motion to dismiss. It may
be that discovery will reveal that these other funds did not outperform the Wells Fargo funds,
or that very few funds outperformed the Wells Fargo funds, thereby casting doubt on
Plaintiffs allegations of breach of fiduciary duty in selecting the Wells Fargo funds. But at
this preliminary stage of the litigation, Plaintiffs have alleged enough to go forward on their
claims.
11
Finally, Defendants contend that Plaintiffs allegations with respect to seeding are
contradicted by the SPD and are in any event time-barred. A claim for breach of fiduciary
duty under ERISA must be brought by the earlier of (1) six years after [] the date of the last
action which constituted part of the breach or violation; or (2) three years after the earliest
date on which the plaintiff had actual knowledge of the breach or violation. 29 U.S.C.
1113. According to Defendants, because the Wells Fargo funds were established more than
six years before the filing of the Complaint, any claim that the plan imprudently invested in
these funds to seed the funds arose at the time the funds were established and is therefore
time-barred.
Plaintiffs contend that they allege a continuing violation of the breach of fiduciary
duty, such that [e]ach time that Defendants failed to act for the benefit of the Plan and
allowed prohibited transactions, they breached their duties anew. (Pls. Oppn Mem. at 22.)
However, with respect to the seeding allegations, Plaintiffs do not contend ongoing
seeding but rather that the Committee improperly invested in the Wells Fargo fund at or
close in time to the initiation of those funds in order to seed them. Such an allegation is
not a continuing violation.
As Plaintiffs argue, however, the dates of the establishment of the Wells Fargo funds
and the date the plan invested in those funds is a factual issue. Thus, the resolution of the
statute of limitations with regard to the seeding claim must await further record
development. The Motion to Dismiss Count II must be denied.
3. Counts III & IV Fiduciary Duty against Bank and Company
12
Defendants argue that, if Plaintiffs primary breach of fiduciary duty claims fail, then
their claim against the Bank and the Company fail because those allegations depend on the
breaches alleged in Counts I and II. Because the Court has found that the primary fiduciary
claims survive, however, the claims against the Bank and the Company likewise survive.
The Amended Complaint sufficiently alleges plausible fiduciary duty claims against
the Bank and the Company. Defendants Motion to Dismiss these claims must be denied.
CONCLUSION
Plaintiff Yvonne Gipson does not have standing to bring the ERISA claims in the
Amended Complaint. However, the claims in the Amended Complaint sufficiently state a
claim on which relief can be granted, and thus the Motion to Dismiss the Amended
Complaint is denied.
Accordingly, IT IS HEREBY ORDERED that Defendants Motion to Dismiss
(Docket No. 22) is GRANTED in part and DENIED in part as set forth above.
Dated: March 12, 2009
s/Paul A. Magnuson
Paul A. Magnuson
United States District Court Judge
 

 
 
 

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