1st Circuit Panel Affirms Dismissal Of Fidelity Float Class Action Litigation

Mealey's (July 14, 2016, 2:25 PM EDT) -- BOSTON — A First Circuit U.S. Court of Appeals panel on July 13 affirmed dismissal of a putative class action filed by retirement plan participants and a plan administrator alleging breach of fiduciary duties under the Employee Retirement Income Security Act (In Re: Fidelity ERISA Float Litigation; Timothy M. Kelley, et al. v. Fidelity Management Trust Co., et al., No. 15-1445, 1st Cir.; 2016 U.S. App. LEXIS 12874). (Opinion available. Document #54-160810-009Z.) The panel affirmed U.S. Judge Denise Jefferson Casper of the District of Massachusetts’ ruling against six plaintiff plan participants and an administrator who sought to represent eight 401(k) defined contribution retirement plans, finding that Fidelity Trust Management Trust Co. and related entities did not act as a fiduciary when transferring income generated from its administration of the plans. The defendant-appellees are various Fidelity entities that had trust agreements with the plans. 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. Withdrawals Process Fidelity functioned, in effect, as an intermediary that opened and maintained a trust account for each plan and participant, accepted contributions from the participant or his or her employer and invested those contributions in mutual funds. On the other end of the process, Fidelity performed its intermediary functions in effecting withdrawals. When a participant requested to withdraw from the plan, his or her mutual fund shares were redeemed by the mutual fund’s payment of money 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. Before 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 or he had so elected. If the participant 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. An Intermediary In an opinion written by retired U.S. Supreme Court Justice David H. Souter, sitting by designation, the appeals panel said it is undisputed 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.” 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.” Section 406(b) 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.” The plaintiffs alleged 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. Interest could be earned at two points in the withdrawal process: when the cash was in FICASH overnight and when it sat in the disbursement account until the participant cashed his or her check. The plaintiffs alleged 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. They maintained that ERISA’s fiduciary mandates required float to be credited instead to the plans, where it would inure indirectly to the benefit of all participants. A necessary step to reach this result, Justice Souter wrote, is treatment of float as a plan asset. Judge Casper concluded that the plaintiffs’ complaint did not allege facts to support the premise and granted Fidelity’s motion to dismiss for failure to state a claim upon which relief could be granted. Plan Asset? In their approach to the question of whether float should be treated as a plan asset, the plaintiffs said that, prior to redemption, the mutual fund shares are plan assets. Therefore, they argued, under ordinary notions of property rights, the cash received in redemption of those shares must also be a plan asset. And if that cash is a plan asset, so too is any interest earned on that cash. This sequence might hold up if the payout from the redemption was going to the plan itself as one side of a simple exchange transaction in which plan assets would be filled by substitute cash of equal value, Justice Souter wrote. “But that is not what happens. The payout from the redemption does not go, and is not intended to go, to the plan itself,” Justice Souter wrote. “In fact, it appears that the plans are not entitled to hold uninvested cash . . . and a plan’s instruction to redeem shares is therefore most coherently seen as an order to pay the participant, whose receipt of the dollar value of the shares is as clearly the object of the transfer scheme as it would be if the mutual were to pay the participant directly. “Plaintiffs allege no facts to support the proposition that the same cash becomes a plan asset simply because it moves, not directly from the fund to the participant, but from the fund through Fidelity on its way to the participant. It is true that Fidelity occupies it position in the withdrawal process by virtue of its fiduciary relationship with the plan. But this relationship, standing alone, is not a sufficient reason to think that it confers plan asset status on everything that comes within Fidelity’s possession.” For the purpose of understanding Fidelity’s obligations subject to ERISA, Justice Souter wrote that Fidelity “is more straightforwardly viewed as an agency charged with transferring the cash from the fund to the participant outside the plan, not to the plan itself.” Agreements Justice Souter also wrote that the agreements between Fidelity and the plans confirm that Fidelity’s duty is to make a distribution by a route incapable of providing any benefit to the plan from temporary use of the cash. He quoted a case in which beneficiaries of life insurance plans covered by ERISA filed putative class actions against the insurers, Merrimon v. Unum Life Ins. Co. of Am., 758 F.3d 46 (1st Cir. 2014): “There is no basis, either in the case law or in common sense, for the proposition that funds held in an insurer’s general account are somehow transmogrified into plan assets when they are credited to a beneficiary’s account . . . . [O]rdinary notions of property rights counsel strongly against the . . . proposition.” “Cash held by a mutual fund is not transmuted into a plan asset when it is received by an intermediary whose obligation is to transfer it directly to a participant,” Justice Souter wrote. “As between the plan and the participant, it is the participant who has the superior claim to property in the cash after redemption. And that is a good reason to reject a claim that the cash should be treated as a plan asset for the purpose of enforcing fiduciary responsibilities under ERISA.” Circuit Judges O. Rogeriee Thompson and William J. Kayatta Jr. concurred. Amicus Brief U.S. Secretary of Labor Thomas E. Perez filed an amicus curiae brief in support of the appellants on Sept. 22. (Perez amicus brief available. Document #54-160810-010B.) “Fidelity Trust, a fiduciary to numerous defined contribution pension plans, engaged in prohibited self-dealing and acted disloyally by allegedly retaining float income generated from its administration of the plans and distributing such income to non-plan entities, because it allegedly failed to disclose the existence of such income and Fidelity Trust’s governing trust agreements did not expressly authorize it to retain such income or use it for non-plan purposes,” Perez wrote. Counsel The appellants are represented by Todd M. Schneider, Joshua G. Konecky, Garrett W. Wotkyns and Michael C. McKay of Schneider Wallace Cottrell Konecky Wotkyns in San Francisco and Scottsdale, Ariz.; Joseph C. Peiffer and Daniel J. Carr of Peiffer Rosca Abdullah & Carr in New Orleans; Gregory Y. Porter, John J. Roddy and Elizabeth A. Ryan of Bailey & Glasser in Boston; Suyash Agrawal and Jeannie Y. Evans of Agrawal Evans in Chicago; Branford S. Babbitt, Craig A. Rabbe, Elizabeth R. Leong and Danielle Andrews Long of Robinson & Cole in Hartford, Conn.; Robert A. Izard Jr. and Mark P. Kindall of Izard Noble in West Hartford, Conn.; Peter J. Mougey and Laura Dunning of Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor in Pensacola, Fla.; Richard S. Frankowski of The Frankowski Firm in Birmingham, Ala.; and Thomas G. Shapiro and Michelle H. Blauner of Shapiro Haber & Urmy in Boston. The appellees are represented by Jonathan D. Hacker, Brian D. Boyle and Bradley N. Garcia of O’Melveny & Myers in Washington and Joseph F. Savage Jr. and Alison V. Douglass of Goodwin Procter in Boston. Amicus curiae U.S. Secretary of Labor Perez is represented by Counsel for Appellate and Special Litigation Elizabeth Hopkins, Solicitor of Labor M. Patricia Smith, Associate Solicitor for Plan Benefits Security G. William Scott and trial attorney David Ellis of the U.S. Department of Labor in Washington....