The opinion of the court was delivered by: Denise Cote, District Judge
Plaintiff Frank Bilello, on behalf of himself and all others similarly situated, brings this lawsuit under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq., and the Internal Revenue Code ("I.R.C."). Bilello was an employee of JPMorgan Chase & Co. ("JPMC") and predecessor banks, including Chemical Banking Corporation ("Chemical"), from 1960 until his retirement in 2008. Billelo's complaint concerns Chemical's 1991 conversion from a traditional defined-benefit retirement plan to a cash balance retirement plan, as well as aspects of subsequent plan amendments issued by Chemical and its successors, including JPMC. This Opinion allows Bilello to file a corrected second amended complaint ("SAC"), and grants in part the defendants' motion to dismiss that pleading. The result of this motion practice is that the plaintiff's principal remaining claims are those that assert that defendants had an obligation to warn plan participants that the conversion to a cash balance plan would mean that some workers would experience periods of zero benefit accrual.
Previous Opinions issued in this matter have explained the types of retirement plans at issue and traced the timeline of their development at Chemical Bank and its successors.*fn1 While familiarity with those Opinions is assumed, the information necessary to address the pending motions is repeated here, beginning with a description of cash balance plans and Chemical's conversion to such a plan.
Since the mid-1980s, hundreds of companies have converted their pension plans for employees to cash balance plans, sparking controversy and litigation. Campbell v. BankBoston, N.A., 327 F.3d 1, 7 (1st Cir. 2007). Under a cash balance retirement plan, a hypothetical account is established in each participant's name to keep track of his accrued benefit. Typically, the account contains "pay credits," representing a percentage of the participant's salary that is periodically deposited into the account, as well as "interest credits," which apply a common interest rate to the account balances. See Hirt v. The Equitable Retirement Plan for Employees, Managers, and Agents, 533 F.3d 102, 105 (2d Cir. 2008). Pay credits cease to accumulate once an individual's employment ends, but interest credits continue to be allocated until benefits are distributed. See, e.g., Esden v. Bank of Boston, 229 F.3d 154, 160 (2d Cir. 2000). Cash balance plans may offer employees the option of a lump-sum payout upon termination of employment in lieu of an annuity, although any such payout must be worth at least as much, in present terms, as the annuity payable at normal retirement age. Id. at 163.
Because a cash balance account earns interest, much of an employee's pension benefit will be earned in his or her initial years of service -- the more time there is until retirement, the more time there is for the account to grow. Campbell, 327 F.3d at 7. "[E]ven though early additions to the pension account may be based on a percentage of a much smaller salary, the effects of time mean that these additions will contribute to the final total much more than larger additions to the account entered closer to retirement." Id. at 7-8.
In contrast, under a traditional defined-benefit pension plan, benefits are usually calculated based on years of service to a company and the average of the highest salary, which often occurs at the end of an employee's tenure. Id. at 7. Unlike a cash balance system, a traditional defined benefit pension plan will yield its greatest increases in benefits as an employee approaches retirement. Id. at 7-8.*fn2 This arrangement has contributed to the controversy surrounding transitions from traditional defined-benefit to cash-balance plans, as older workers, nearing retirement, find that their expectation of a substantial increase in benefits has been thwarted. Id. at 8. Despite these differences between the two plans, cash-balance plans are treated as defined benefit plans (as opposed to "defined contribution" plans, such as 401(k) accounts), under ERISA. Hirt, 533 F.3d at 105.
An additional source of controversy is the "wear-away" effected by many conversions to a cash balance formula. Campbell, 327 F.3d at 8. Certain conversions to cash balance plans create "wear-away" by preventing employees' pension benefits from growing until their benefits calculated under the cash-balance plan equal their accrued benefits under the traditional defined-benefit plan. Id. As Bilello alleges occurred in this lawsuit, it may take several years for a cash balance account to catch up with the pre-conversion balance in a traditional defined benefit account. Wear-away also most detrimentally affects older workers, who cease accruing benefits altogether just when they may have expected to experience the period of greatest accrual, at the end of their career. Id. Despite these effects on the benefits of workers nearing retirement, the Second Circuit has held that cash-balance plans do not violate ERISA's prohibition against age discrimination. Hirt, 533 F.3d at 110.
2. The Chemical Retirement Plan's Conversion and Mergers
There are essentially five ERISA plans now at issue in this litigation, beginning with Chemical's first cash balance retirement plan. Chemical converted its conventional defined benefit retirement plan (the "Pre-1989 Plan") into a cash balance plan on January 1, 1991, retroactive to January 1, 1989 (the "1989 Plan"). Chemical announced the conversion to its employees in July 1990. In 1992, Chemical issued a Summary Plan Description ("SPD") describing the 1989 Plan.*fn3 The next year, Chemical's retirement plan merged with that of Manufacturers Hanover Trust ("MHT"), following the 1991 merger of the two companies. The result was the 1993 Chemical Plan (the "1993 Plan"), effective January 1, 1993. A 1994 SPD described the 1993 Plan.
Chemical next merged with the Chase Manhattan Corporation ("Chase") in 1996, and the two companies' plans were merged effective January 1, 1997 (the "1997 Plan"). Chase then merged with J.P. Morgan in 2000, creating JPMC. J.P. Morgan's cash balance pension plan merged into Chase's cash balance plan effective January 1, 2002 (the "2002 Plan"). A July 1, 2004 merger with Bank One Corporation resulted in a merger of the JPMC and Bank One plans effective January 1, 2005 (the "2005 Plan"). The 2005 Plan is administered by defendant JPMorgan Chase Director of Human Resources (the "Plan Administrator").
3. Procedural History of this Lawsuit
Following the denial of class certification in the related In re J.P. Morgan Cash Balance Litigation, No. 06 Civ. 732 (S.D.N.Y. filed Jan. 31, 2006), for claims relating to retirement plans in place before 2002, Bilello filed this action on August 17, 2007, challenging the 1989 conversion to a cash balance plan and the subsequent plans arising from the retirement plan mergers of Chemical and its successors Chase and JPMorgan Chase. Discovery has not yet begun in this two-year-old lawsuit, in which multiple rounds of briefing have addressed the viability of the original and first amended complaint ("FAC"). Five weeks after defendants moved to dismiss the complaint on November 16, 2007, instead of filing an opposition to defendants' motion, Bilello filed the FAC, which includes nine class-wide (Counts 1-9) and two individual counts (Counts 10-11) alleging violations of ERISA.
Defendants renewed their motion to dismiss with new briefing filed on February 25, 2008 that sought dismissal of all counts of the FAC pursuant to Rules 8(a), 12(b)(1), and 12(b)(6), Fed R. Civ. P. With the motion to dismiss still pending, this action was reassigned to this Court on October 21, 2008 as related to In re J.P. Morgan Cash Balance Litigation.
An Opinion and Order of January 6, 2009 denied defendants' motion to dismiss the FAC to the extent that it argued that Bilello lacked statutory standing as an ERISA participant because he received a lump-sum distribution of his pension benefit upon retirement. Statutory Standing Opinion, 592 F. Supp. 2d at 660-67. Aside from a collateral estoppel argument, which it rejected, the Statutory Standing Opinion did not address the remainder of defendants' arguments for dismissal. Id. at 667-69. An Opinion of March 9 declined to certify the statutory standing issue for interlocutory appeal. Bilello v. JPMorgan Chase Retirement Plan, 603 F. Supp. 2d 590, 595 (S.D.N.Y. 2009).
On April 10, 2009, another Opinion addressed defendants' argument that the statute of limitations barred Bilello from pursuing the nine class-wide counts in the FAC. SOL Opinion, 607 F. Supp. 2d 586. Counts 1, 2, 4 and 6 were dismissed entirely and Counts 3, 7, and 8 were dismissed in part. Id. at 600. An Order filed the same day rejected defendants' arguments that the plaintiff's claims should be dismissed for failure to exhaust administrative remedies, having considered supplemental briefing provided by the parties on the subject. Two weeks later, Count 3 and the remainder of Count 7 were dismissed for failure to state a claim pursuant to Rule 12(b)(6), Fed. R. Civ. P. April 24 Opinion, 2009 WL 1108576, at *6. The plaintiff then moved for reconsideration of the SOL Opinion on April 27, and the motion was fully briefed on May 18th.
The litigation next returned to the issue of standing. Defendants submitted a letter on April 15 addressing the Second Circuit's decision in Kendall v. Employees Retirement Plan of Avon Products, 561 F.3d 112 (2d Cir. 2009). Kendall concerned the constitutional standing of a plaintiff bringing suit under ERISA. Citing federal courts' obligation to establish the existence of federal constitutional jurisdiction before proceeding to consider the merits of a case, Alliance For Environmental Renewal, Inc. v. Pyramid Crossgates Co., 436 F.3d 82, 85 (2d Cir. 2006), an Order of April 20 requested supplemental briefing on Bilello's Article III standing to bring each of the counts of the FAC, including those counts dismissed by the SOL Opinion. In the briefing regarding the impact of Kendall, which was fully submitted on June 3, the parties agreed that Bilello lacked standing to pursue Counts 2-5 and 9 of the FAC, and an Order of June 8 accordingly dismissed those counts.*fn4
On May 27, the same day that Bilello filed his opposition brief regarding Kendall, he moved for leave amend. Defendants have opposed plaintiff's request, and the motion was fully briefed on July 2, 2009. A telephone conference was held with the parties on July 15, 2009 in which the plaintiff agreed that the current briefing represented his final request to amend the complaint, aside from any future request that may arise because of facts unearthed in discovery. During the telephone conference, the plaintiff requested that he be allowed to substitute language describing an omission in lieu of language describing concealment in the complaint, which principally affects the allegations raised in Count 12. He submitted the SAC the following day. As defendants did not object to the correction, this Opinion will address the corrected version. Currently pending, therefore, are plaintiff's motion for reconsideration of the SOL Opinion, plaintiff's motion for leave to amend, the parties' supplemental briefing regarding Bilello's constitutional standing, as well as several arguments concerning Counts 6, 10, and 11 from defendants' February 25, 2008 motion to dismiss.
While the question of constitutional standing is a primary one, Alliance For Environmental Renewal, Inc., 436 F.3d at 85, the motion for leave to amend pursuant to Rule 15(a), Fed. R. Civ. P., will be addressed first, because it shapes the pleading that will be subject to subject-matter jurisdiction and statute of limitations analysis. Both issues also arise as part of the defendants' argument that leave to amend should be denied because the proposed amendments would be futile.
Four reasons motivate Bilello's application to file the SAC: to add the concrete impact on Bilello of the conversion to a cash balance plan; to cure statute of limitations and Rule 8 deficiencies in Counts 1, 7, and 8 identified by prior Opinions; to add a class-wide breach of fiduciary duty allegation against the Plan Administrator; and to withdraw Counts 2-5 and 9, which have since been dismissed. Defendants' opposition argues that plaintiff has already had ample opportunity to develop his pleading, and that the proposed amendments (except for Counts 10 and 11, on which its opposition is silent) would be futile.
Rule 15 instructs that leave to amend pleadings "shall be freely given when justice so requires." Fed. R. Civ. P. 15(a); Holmes v. Grubman, 568 F.3d 329, 334 (2d Cir. 2009). Owing to the rule's "policy in favor of granting leave to amend," Jaser v. New York Property Ins. Underwriting Ass'n, 815 F.2d 240, 243 (2d Cir. 1987), a motion to amend should be denied only for such reasons as "futility, bad faith, undue delay, or undue prejudice to the opposing party." Holmes, 568 F.3d at 334 (citation omitted). A court should not deny the right to amend on grounds of mere delay absent a showing of bad faith or undue prejudice. Richardson Greenshields Sec., Inc. v. Lau, 825 F.2d 647, 653 n.6 (2d Cir. 1987). An amendment causes undue prejudice where it would "(i) require the opponent to expend significant additional resources to conduct discovery and prepare for trial; (ii) significantly delay the resolution of the dispute; or (iii) prevent the plaintiff from bringing a timely action in another jurisdiction." Block v. First Blood Assocs., 988 F.2d 344, 350 (2d Cir. 1993). "[A]mendment of a pleading as a matter of course pursuant to Rule 15(a) is subject to the district court's discretion to limit the time for amendment of the pleadings in a scheduling order issued under Rule 16(b)." Kassner v. 2nd Avenue Delicatessen Inc., 496 F.3d 229, 244 (2d Cir. 2007).
Bilello's application, made nearly two years after the filing of the complaint, and three-and-a-half years after the related case was filed, shows signs of significant delay. While plaintiff asserts that defendants' delinquent provision of pension benefit calculation worksheets, and the fact that those worksheets proved difficult to decipher, justify this delay, he received the worksheets in September 2007, months before he filed the FAC, long before the parties engaged in rounds of briefing addressed to the adequacy of the FAC, and almost two years before this application. If the plaintiff wished to amend his complaint based on the worksheets, he should have given notice of that desire in the Fall of 2007, before the parties and Court spent precious resources addressing a deficient pleading.*fn5
The delay weighs heavily against the amendment. On the other hand, certain factual and legal developments justify Bilello's application at this juncture. Discovery has not yet begun and no scheduling order setting a deadline for amendment of the pleadings has issued. The proposed amendments do not alter the legal theories under which Bilello is pursuing relief, with the exception of the newly added Count 12. The proposed SAC also responds to the Second Circuit's recent decision in Kendall. Barring futility of the proposed amendment, which is addressed below, granting leave to amend here appropriately fulfills Rule 15(a)'s directive to grant leave to amend "freely."
Bilello is not entitled, however, to present legal theories "seriatim" through repeated amendment. State Trading Corp. of India, 921 F.2d at 418. A telephone conference was held with the parties on July 15, in which Bilello assured the Court that the SAC, if accepted, would be his final pleading.
Defendants also argue that leave to amend should be denied because each of the counts in the proposed SAC would be subject to dismissal. Oneida Indian Nation of New York v. City of Sherrill, 337 F.3d 139, 168 (2d Cir. 2003). A proposed amendment would be futile if it could not withstand a motion for judgment on the pleadings. Id. The same standard applies to a motion to dismiss and a motion for judgment on the pleadings. Patel v. Contemporary Classics of Beverly Hills, 259 F.3d 123, 126 (2d Cir. 2001).
"Under Federal Rule of Civil Procedure 8(a)(2), a pleading must contain a 'short and plain statement of the claim showing that the pleader is entitled to relief.'" Ashcroft v. Iqbal, --- U.S. ----, ----, 129 S.Ct. 1937, 1949, (2009) (citation omitted). This rule "does not require 'detailed factual allegations,'" id. (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)), but "[a] pleading that offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.'" Id. (quoting Twombly, 550 U.S. at 555); see also Achtman v. Kirby, McInerney & Squire, LLP, 464 F.3d 328, 337 (2d Cir. 2006). "Nor does a complaint suffice if it tenders 'naked assertion[s]' devoid of 'further factual enhancement.'" Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 555 U.S. at 557).
A court considering a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) must "accept as true all factual statements alleged in the complaint and draw all reasonable inferences in favor of the non-moving party." Vietnam Ass'n for Victims of Agent Orange v. Dow Chemical Co., 517 F.3d 104, 115 (2d Cir. 2008) (citation omitted). To survive such a motion to dismiss, "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 555 U.S. at 570). This "plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. (citation omitted).
The Supreme Court in Iqbal summarized the "[t]wo working principles that underlie" Twombly: "First, the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions." Id. "Second, only a complaint that states a plausible claim for relief survives a motion to dismiss." Id. at 1950. Applying this second principle "will... be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id.
The discussion that follows addresses each of the seven claims in the SAC that the plaintiff contends should survive: Counts 1 and 6 (the backloading claims), Counts 7 and 8 (the notice claims), Count 12 (the breach of fiduciary duty claim), and finally, Counts 10 and 11 (the individual claims). Where there is an issue of subject matter jurisdiction over the claim, that issue is addressed first, followed by any attack on the timeliness of the claim, and concluding with any issue of whether the count states a claim.
2. Counts 1 and 6: The Backloading Claims
Counts 1 and 6 both allege that the 1989 Plan and its successors violated ERISA's anti-backloading provision and specifically ERISA's "133 1/3% Rule," which provides that no later annual rate of accrual can be more than one-third greater than any earlier rate for an individual plan participant. ERISA § 204(b)(1)(B); 29 U.S.C. § 1054(b)(1)(B).*fn6 This rule protects younger and shorter-term employees by assuring that benefit accruals are not disproportionately accumulated in the later years of a career. As explained in the House Report on ERISA:
The primary purpose of [minimum accrual rates] is to prevent attempts to defeat the objectives of the minimum vesting provisions by providing undue "backloading," i.e., by providing inordinately low rates of accrual in the employee's early years of service when he is most likely to leave the firm and by concentrating the accrual of benefits in the employee's later years of service when he is most likely to remain with the firm until retirement.
Id. (quoting H.R. Rep. No. 93-807 (1974), reprinted in 1974 U.S.C.C.A.N. 4639, 4688). Where pay credits increase with years of service or age, there is a risk of backloading unless a plan includes a minimum interest rate. See Esden, 229 F.3d at 167 n.18.
Count 1 alleges that Bilello has been deprived as of today of an additional benefit of almost $3,000 because the 1997, 2002 and 2005 Plans failed to specify a minimum interest rate of 5.21% -- the minimum that Bilello alleges was necessary to avoid violating the 133 1/3% Rule -- and thereby allowed an interest rate of less than 5.21% to be applied to his account in at least the years 2003, 2004, 2005, and 2008.
Under the 1997 Plan, pay credits applied to a participant's account at a rate that increased over time, beginning with 4% for an employee with one to three years of service and increasing up to 14% for an employee with over 26 years of service. The 2002 and 2005 Plans grandfathered Bilello under this pay schedule. Plaintiff alleges that the increase in pay credits, standing alone, would violate the 133 1/3% Rule because, for example, an 8% pay credit (earned by employees with 11-15 years of service) would create a rate of benefit accrual 200% higher than an employee with one to three years of service and the corresponding 4% rate of benefit accrual.
To counteract the backloading caused by increasing pay credits, plaintiff alleges that the plans could have provided for a minimum interest rate of 5.21%. Because a cash-balance plan projects interest credits to a participant's retirement age, the interest credits will make up a proportionally higher percentage of a more junior employee's account balance. A sufficiently high interest rate, therefore, can offset backloading. The 2002 Plan also failed to apply the 5.21% minimum interest-crediting rate. The 2005 Plan adopted an interest-crediting rate of 4.5%, which is alleged to have been insufficient to cure the backloading experienced by those like Bilello who were grandfathered under the 1997 4% to 14% pay credit schedule.
Count 6 asserts that the 1989 Plan created wear-away, which caused another violation of the 133 1/3% Rule. For at least the years 1991 through 1996, Bilello accrued no additional retirement benefits despite working full time. When Bilello began to accrue benefits again in 1997 or later, those benefits were necessarily more than 133 1/3% greater than the prior year's (zero) accrual, violating the 133 1/3% Rule.
Wear-away is alleged to have occurred because 1) the 1989 Plan's "minimum benefit" feature provided for a minimum benefit equal to the greater of the participant's accrued benefit under the Pre-1989 Plan determined as of December 31, 1990 or the benefit accrued under the cash balance plan starting in 1989, and 2) for various reasons, the opening balance under the cash-balance plan was about $30,000 smaller (when expressed as a lump sum) than the benefit accrued under the Pre-1989 Plan. As a result, the accrued benefit ...