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In re Fidelity Erisa Float Litigation

United States Court of Appeals, First Circuit

July 13, 2016

FIDELITY MANAGEMENT TRUST COMPANY, et al., Defendants, Appellees. TIMOTHY M. KELLEY, and all others similarly situated, et al., Plaintiffs, Appellants,


          Mark T. Johnson, with whom Todd M. Schneider, Joshua G. Konecky, Garrett W. Wotkyns, Michael C. McKay, Schneider Wallace Cottrell Konecky Wotkyns LLP, Joseph C. Peiffer, Daniel J. Carr, Peiffer Rosca Abdullah & Carr, Gregory Y. Porter, John J. Roddy, Elizabeth A. Ryan, Bailey & Glasser LLP, Suyash Agrawal, Jeannie Y. Evans, Agrawal Evans LLP, Branford S. Babbitt, Craig A. Rabbe, Elizabeth R. Leong, Danielle Andrews Long, Robinson & Cole LLP, Robert A. Izard, Jr., Mark P. Kindall, Izard Noble LLP, Peter J. Mougey, Laura Dunning, Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor, PA, Richard S. Frankowski, The Frankowski Firm, Thomas G. Shapiro, Michelle H. Blauner, and Shapiro Haber & Urmy LLP were on brief, for appellants.

          Jonathan D. Hacker, with whom Brian D. Boyle, Bradley N. Garcia, O'Melveny & Myers LLP, Joseph F. Savage, Jr., Alison V. Douglass, and Goodwin Procter LLP were on brief, for appellees.

          Elizabeth Hopkins, Counsel for Appellate and Special Litigation, with whom M. Patricia Smith, Solicitor of Labor, G. William Scott, Associate Solicitor for Plan Benefits Security, and David Ellis, Trial Attorney, U.S. Department of Labor, were on brief, for the Secretary of Labor as amicus curiae supporting appellants.

          Before Thompson, Circuit Judge, Souter, Associate Justice, [*] and Kayatta, Circuit Judge.

          SOUTER, Associate Justice.

         This appeal is from the district court's dismissal under Federal Rule of Civil Procedure 12(b)(6) of a putative class action filed by retirement-plan participants and one plan administrator. They claim that defendants are dealing with plan assets in breach of fiduciary duties imposed by the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. No. 93-406, 88 Stat. 829 (codified in relevant part as amended at 29 U.S.C. §§ 1001-1461). We affirm.


         As preface, we mention two cases that we decided in 2014, to which this one bears partial resemblance. In each of them, beneficiaries of life-insurance plans covered by ERISA filed putative class actions against the insurers. Vander Luitgaren v. Sun Life Assur. Co. of Can., 765 F.3d 59 (1st Cir. 2014); Merrimon v. Unum Life Ins. Co. of Am., 758 F.3d 46 (1st Cir. 2014). The plaintiffs alleged that the insurers breached their fiduciary duties by using plan assets to enrich themselves rather than to aid the beneficiaries. We held to the contrary.

         This case is different from those two, and not just because it involves investments to generate retirement benefits rather than life-insurance policies. Unlike the beneficiaries who brought those two suits, the participants who bring this one claim no direct stake in the plan assets that they say are being improperly used and no consequential loss personal to them. They do not allege that they are or will be short so much as a penny of any benefit to which they are entitled under the terms of their plans. Instead, they bring claims on behalf of the plans themselves, contending that the plans are being cheated of certain plan assets. Given this posture, it is notable that the participants are joined as plaintiffs by only one plan administrator. Thus, whatever mischief the participants see in defendants' actions, the concern apparently is shared only halfheartedly by the plans themselves. That is likely because the behavior complained of is nothing other than what the plans expected.

         The six plaintiff plan participants and the one plan administrator collectively represent eight 401(k) defined-contribution retirement plans.[1] Under ERISA, a "'defined contribution plan' means a pension plan which provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant's account." 29 U.S.C. § 1002(34).

         Defendants are various Fidelity entities that had trust agreements with the plans; following the parties' lead, we deal with defendants collectively as "Fidelity."[2] Under the agreements, Fidelity acted as trustee, serving the plans, the mutual funds in which contributions were invested, and the participants and their designated beneficiaries.[3] Among other things, Fidelity functioned, in effect, as an intermediary. It opened and maintained a trust account for each plan and participant, accepted contributions from the participant or her employer, and invested those contributions in mutual funds.

         At the other end of the process, and crucial to this case, Fidelity performed its intermediary functions in effecting withdrawals. When a participant requested to withdraw from the plan, her mutual-fund shares were redeemed by the mutual fund's payment of money in an amount equal to the market value of the shares. Because that value was not established until the end of each trading day, the redemption occurred the day after the withdrawal request, when the mutual fund transferred cash to a redemption bank account owned by and registered to Fidelity. It is undisputed that, prior to the redemption, the cash was an asset of the mutual fund. That same day, the balance was transferred from the redemption account to "FICASH, " an interest-bearing account owned and controlled by Fidelity. The next day, after remaining in FICASH overnight, the account's principal (but not any interest) was transferred back to the redemption account. The participant then received an electronic disbursement from the redemption account if she had so elected. If she had not chosen to receive an electronic disbursement, the funds were transferred from the redemption account to an interest-bearing disbursement account owned and controlled by Fidelity. The disbursement account then issued the participant a check, and the principal in the disbursement account would accrue interest until the check was cashed.[4]

         This process may appear unnecessarily elaborate. Although Fidelity's position as an intermediary in the withdrawal process is well established under the trust agreements in place here, the entire role of the intermediary seemingly could be eliminated by making the disbursement from the mutual fund to the participant directly. Indeed, Fidelity informs us (and plaintiffs do not contest) that, in ordinary "retail" mutual-fund transactions, the fund's own transfer agent alone makes the disbursement, see Brief of Defendants-Appellees at 8, and there is no apparent reason that the retirement plans could not contract for similar arrangements. Similarly, some of the transfers between Fidelity accounts and the one-night stay in FICASH do not, superficially at least, seem necessary. But it appears that there is nothing bizarre about this sequence as a matter of ordinary business practice, and plaintiffs do not contend otherwise.

         Whatever may be the practical merits of the system, there is no question that when Fidelity acts as intermediary in the withdrawal process under its trust agreements with the plans it is a fiduciary within the meaning of ERISA. Under section 3(21)(A)(i), "a person is a fiduciary with respect to a plan to the extent he . . . exercises any authority or control respecting management or disposition of its assets." 29 U.S.C. § 1002(21)(A)(i). Section 404(a) of ERISA imposes a fiduciary duty of loyalty, that "a fiduciary . . . discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries." 29 U.S.C. § 1104(a)(1). And ERISA section 406(b) specifically prohibits a fiduciary from self-dealing, providing that "[a] fiduciary with respect to a plan shall not deal with the assets of the plan in his own interest or for his own account." 29 U.S.C. § 1106(b)(1).

         Plaintiffs allege that Fidelity breached these two fiduciary duties by using certain plan assets other than for the benefit of the plans, in its treatment of "float": interest earned on the cash paid out by the mutual funds.[5] As mentioned before, there were two points in the withdrawal sequence at which interest might be earned: when the cash was in FICASH overnight, and, for participants who opted to receive a paper check rather than an electronic transfer, when it sat in the disbursement account until the participant cashed her check.

         As we also said, the suing participants do not claim a direct, personal stake in float, and at argument their counsel confirmed that they do not contend that any withdrawing participant received less than she was entitled to under the plan documents. Instead, plaintiffs' quarrel is over Fidelity's use of float other than for the benefit of the plans. The complaint alleges that Fidelity used float to defray bank expenses and, if there was any remainder, distributed it to the investment fund from which the principal came. Plaintiffs maintain that ERISA's fiduciary ...

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