401K Not OK: ERISA Class Certified Under Rule 23(b)(1)(B)

by Carlton Fields

A New York district court granted certification in an ERISA class action brought by employees of Deutsche Bank alleging the individual fiduciaries of the company’s retirement plan engaged in self-dealing and mismanagement of its 401K plan. The court certified the class under Rule 23(b)(1)(B), which authorizes class actions when prosecuting separate actions would create a risk of decisions that would be dispositive of the interest of other members not parties to the individual adjudications or that would substantially impair or impede their ability to protect their interest.

Specifically, plaintiffs maintained that defendants breached their fiduciary duties of care and loyalty by offering plan participants an unlawful menu of investments, steering plan investments into underperforming investments that benefited the bank, and charging excessive fees. Plaintiffs sought monetary relief in the form of reimbursement to the plan for all losses incurred as a result of the breaches. Plaintiffs also sought various forms of equitable relief, including transfer of plan assets to more prudent investments and appointment of independent fiduciaries to run the plan. In granting certification, the court focused on defendants’ arguments that plaintiffs failed to satisfy the commonality element of Rule 23(a)(1), that a 23(b)(1)(B) class was improper, and the plaintiffs lacked standing.

Defendants argued that commonality did not exist because 12,000 of the class members never invested in a single one of the funds at issue during the relevant period and that highly individualized damages analyses would be necessary based on the funds in which each individual participant did invest. Defendants’ arguments, according to the court, misapprehended the derivative nature of plaintiffs’ claims brought on behalf of the plan. Liability is determined based on defendants’ decisions regarding the funds and expenses at issue, not plaintiffs’ individual investment decisions. Damages are determined in the aggregate to the plan. Distinctions among class members can be managed by creating sub-classes and do not defeat certification because the underlying harm “derives from the same contention — that the investment lineup made available to all participants violated ERISA.”

Defendants argued that certification under Rule 23(b)(1)(B) was improper in the wake of the Supreme Court’s 2008 and 2011 opinions in LaRue v. DeWolff, et al. and Wal-Mart Stores, Inc. v. Dukes. Defendants contended that since LaRue allowed a plan participant to assert individual claims based on fiduciary breaches that impaired the value of the participant’s account, resolution of named plaintiffs’ claims would not foreclose similar actions filed by absent class members. The court observed that while a post-LaRue split did exist on this issue, the majority had held that a 23(b)(1) class was still the appropriate class vehicle for fiduciary-breach claims under ERISA. As to Wal-Mart, defendants contended that individualized monetary claims belonged in a 23(b)(3) class not a 23(b)(1) class. The court held that reliance on Wal-Mart was misplaced noting, once again, that plaintiffs’ claims are derivative in nature, not individualized. Any monetary relief will be paid to the plan, and then the plan fiduciaries will be responsible for allocating the recovery among participants.

Finally, defendants argued that the named plaintiffs lacked standing to represent the absent class members as to the funds in which they did not invest. Once again, the court rejected this argument. The court observed that defendants’ alleged process for managing the plan — charging excessive fees and offering an unlawful menu of investments — caused actual injury to the named plaintiffs and implicated the same set of concerns and injuries to the absent class members, regardless of the individual funds in which they invested.

Moreno v. Deutsche Bank Americas Holding Corp., et al., 15 Civ. 9936 (LGS) (S.D.N.Y. Sept. 5, 2017).

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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