Recent rulings in the Sixth Circuit have inspired another fiduciary defendant to seek reconsideration of its motion to dismiss a plaintiff’s excessive expense claim.
This time it’s the Spectrum Health System of Michigan’s 403(b) plan fiduciary defendants, who just weeks ago had their motion to dismiss an excessive expense lawsuit dismissed.
The motion to dismiss
The court then concluded that the plaintiffs’ allegations were “sufficient to survive the motion to dismiss”. Specifically – and giving to the party that was not seek dismissal for the benefit of the doubt – U.S. District Judge Paul L. Maloney noted that:
- “If defendants can sidestep a claim of recklessness simply by providing a ‘mix and range’ of investment options, it would allow every reckless fiduciary to avoid discovery simply because they offered at least a low-cost plan”;
- the argument that the fund comparisons were not “perfect” only served to establish the need to go beforehand, since it could not establish in law that the fund comparisons were improper;
- while retrospective claims were not appropriate, there were allegations that the committee “had failed for years to make sufficient reviews or inquiries into the performance of the plan”, and so it found plausible that the defendants had access to the performance data at various times throughout the relevant period, but said the plaintiff could only “see into the defendants’ review process” with the “benefit of discovery” ;
- (quoting other court rulings) “Investment in a retail-grade fund where an identical institutional-grade fund with lower fees is available raises a plausible allegation that the plan administrator breached the duty of care “, and the reality that the scheme did at one time move to a lower priced class of shares raised – in his mind – “a question of fact – why did the defendants not move more or all higher cost share classes to a lower cost group?
In sum, Justice Maloney concluded that the plaintiffs had raised “…several issues of fact relevant to this argument, demonstrating the necessity of discovery”.
But that, as they say, was then. Moving for reconsideration (McNeilly v. Spectrum Health Sys.WD Mich., No. 1:20-cv-00870, motion for partial reconsideration 8/3/22), the Spectrum Health System defendants noted that “the CommonSpirit and For men the decisions represent a change in the supervisory authority applicable to plaintiffs’ claims. Accordingly, the Court should reconsider the order and dismiss all of the plaintiffs’ claims except for their claims regarding the class of shares of the seven funds listed in paragraphs 100 and 102 of the Amended Complaint. »
The first, decided in late June by a panel of three Sixth Circuit judges, essentially concluded that a simple comparison of fees with purportedly comparable plans (in size and number of participants) did not constitute a “plausible” inference of fiduciary misconduct – and said the same applies to comparisons between active and passive funds. The latter, decided in mid-July, essentially argued that there are multiple factors that can go into a prudent decision – factors beyond price and performance (though surely those are considerations). However, they also said the decision to offer what appears to be an identical fund in all flavors except price did create a “plausible” inference of a breach of fiduciary duty. But essentially, these decisions raised the threshold of plausibility for a prosecution to survive a motion to dismiss without proceeding to discovery and ultimately trial.
They explained that in making his original decision, Judge Maloney acknowledged that “[t]The Sixth Circuit has yet to weigh in” on “what is necessary to plead a breach of ERISA’s duty of care,” and that, “absent Supreme Court or Sixth Circuit guidance,” Judge Maloney followed the more lenient approach applied by the Third, Eighth, and Ninth Circuits to “allegations of imprudent investment selections and excessive charges, such as those presented by the plaintiffs here”, and ruled that the plaintiffs had made viable claims for breach of fiduciary duty based on this standard.
A “palpable flaw”?
Which, of course, fiduciary defendants now explain that “reconsideration is generally warranted where there is a change in applicable law, newly available evidence, or a need to correct manifest error or prevent manifest injustice.” , which, they note, includes “an intermediate change in applicable law occurs when the appellate court issues a decision setting out a ‘new rule of law’ as to what is necessary to set forth a claim in a particular context. .
“CommonSpirit and For men established a new law on the pleading standard for plaintiffs’ ERISA claims, representing the type of change in supervisory authority that warrants reconsideration,” they write. Alternatively, they comment that “allowing parties to make costly discovery on now lapsed claims would lead to a ‘palpable flaw’ in the settlement of the case.” »
Will the court reconsider?[i] Several other recent layoffs have called for similar reviews.
[i] According to Bloomberg Law, the case is now pending in the U.S. District Court for the Western District of Michigan before Judge Jane M. Beckering, who was assigned to the case after Judge Maloney’s 2021 ruling.