In Fuller, Eleventh Circuit Affirms Dismissal of Claims Challenging Financial Services Company’s Use of Proprietary Products in Its Retirement Plan

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In Fuller v. SunTrust Banks, Inc., et al, No. 1:11-cv-00784-ODE (11th Cir. Feb. 26, 2014), the U.S. Court of Appeals for the Eleventh Circuit affirmed the dismissal of ERISA claims challenging the use of proprietary funds in a financial services company’s own retirement plan.

Background

In Fuller, a participant in a defined contribution plan sponsored by a bank brought putative class claims under ERISA against the plan sponsor, the benefits plan committee, and individuals who served on the committee and the sponsor’s compensation committee, alleging breaches of fiduciary duty and prohibited transactions in connection with the selection of bank-affiliated mutual funds for the plan.  Specifically, the plaintiff alleged that the defendants breached their fiduciary duties of prudence and loyalty by selecting and failing to remove bank-affiliated funds from the plan despite poor performance and higher fees than other viable options.  She further alleged that the defendants caused the plan to enter into transactions with the funds that were prohibited due to conflicts of interest.

District Court Decision

The U.S. District Court for the Northern District of Georgia granted in part and denied in part the defendants’ motion to dismiss the claims.  The district court dismissed the prohibited transaction claims as time-barred under ERISA’s statute of repose because the selection of the challenged funds occurred more than six years prior to the complaint.  The district court had held that the plaintiff’s breach of fiduciary duty claims were timely under the six-year period to the extent that she could show that the defendants breached ongoing fiduciary duties of monitoring and removing imprudent investments.  However, the court further held that, based on the record, the plaintiff had actual knowledge of the essential facts of her breach of fiduciary duty claim, and that ERISA’s three-year limitations period applied to bar such claims unless she could show that alleged violations occurred with the three year period prior to her complaint.

In light of these rulings, the defendants filed a further motion to dismiss on the ground that the plaintiff had taken a full distribution from her plan account more than three years prior to the filing of the complaint.  The district court granted the motion and dismissed the plaintiff’s remaining claims on the ground that she lacked standing to assert claims that had accrued within the three years prior to her complaint, during which time she did not hold any investment in the plan.  The plaintiff appealed.

Appeals Court Decision

On appeal, the Eleventh Circuit first considered the district court’s decision in the related case of Stargel v. SunTrust Banks, Inc., No. 1:12-CV-3822-ODE (N.D. Ga. Aug. 7, 2013), filed by different participants of the same plan, in which the district court reached a different conclusion regarding application of ERISA’s three- and six-year limitations periods.  In Stargel, the district court held, based on intervening decisions in David v. Alphin, 704 F.3d 327 (4th Cir.2013), reported in Goodwin Procter’s March 28, 2013 ERISA Litigation Update, and Tibble v. Edison International, 729 F.3d 1110 (9th Cir.2013), petition for cert. filed, (U.S. Oct. 30, 2013) (No. 13–550), also reported in the March 28 ELU, that the six-year limitations period barred the plaintiffs’ breach of fiduciary duty claims, which the court determined essentially challenged the initial selection of affiliated funds for the plan.  The Stargel court further held that ERISA’s three-year limitations period was not triggered under the facts as pleaded.

With this background, the Eleventh Circuit affirmed dismissal of the Fuller complaint, but on grounds different from the district court.  The appeals court held that ERISA’s three-year limitations period did not apply because the motion to dismiss record did not demonstrate that the plaintiff had actual knowledge of the breach.  However, the court further held that ERISA’s six-year repose period barred the plaintiff’s breach of fiduciary duty claims based on the alleged improper selection of funds for the plan.  The court further held that the plaintiff’s claim that the defendants breached duties by failing to remove the funds was identical to her claim with respect to initial selection of the funds, and, accordingly, were also time-barred.  In so ruling, the court observed that the defendants’ alleged failure to remove the funds was “simply a failure to remedy the initial breach” and not a separate violation.

In a concurring opinion, the Honorable J. Frederick Motz, U.S. District Judge for the District of Maryland, sitting by designation, concurred in the ruling but stated his belief that a claim for failure to remove a fund might be stated by a plaintiff who was not invested in the plan at the time of the initial selection.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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