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Carver v. Bank of New York Mellon

United States District Court, S.D. New York

March 31, 2017

CARL CARVER, et al., Plaintiffs,
v.
THE BANK OF NEW YORK MELLON, et al., Defendants.

          OPINION AND ORDER

          J. PAUL OETKEN, District Judge

         Plaintiffs initiated two actions, which were consolidated by the Court on April 12, 2016 (Dkt. No. 53), against Defendants the Bank of New York Mellon and BNY Mellon, National Association (“Defendants” or “BNYM”), pursuant to the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended, 29 U.S.C. § 1001, et seq. Plaintiffs sue on behalf of seven ERISA employee benefit plans in which they are participants or for which they serve as a trustee.[1] The operative First Amended Complaint (“Complaint”) was filed on May 3, 2016. (FAC ¶ 1.)

         Plaintiffs claim that BNYM breached its fiduciary duty to ERISA plans that held American Depositary Receipts (“ADRs”) for which BNYM served as depositary. Specifically, they allege that BNYM breached its duties of prudence and loyalty under 29 U.S.C. §§ 1104 and 1109 (id. ¶¶ 197-204); engaged in self-interested prohibited transactions in violation of 29 U.S.C. § 1106(b) (id. ¶¶ 205-11); and caused the plans to engage in party-in-interest prohibited transactions in violation of 29 U.S.C. § 1106(a) (id. ¶¶ 212-18).

         Currently pending before the Court is a motion to dismiss the Complaint, pursuant to Federal Rules of Civil Procedure 12(b)(1), for lack of standing, and 12(b)(6), for failure to state a claim. (Dkt. No. 61.) The Court heard oral argument on March 17, 2017. For the reasons that follow, the motion to dismiss is denied.

         I. Background[2]

         ERISA employee benefit plans seeking to diversify their investments may choose to enter into overseas securities markets. (FAC ¶ 31.) Instead of holding foreign securities directly, however, some ERISA plans have chosen to purchase American Depositary Receipts (“ADRs”). (Id. ¶ 32.) ADRs, which were first introduced in 1927, represent a specified number of shares in a foreign corporation. (Id.) Typically, a “depositary” bank directly purchases foreign securities from a foreign issuer and deposits those securities in a “custodian” bank for safekeeping. (Id.) The “depositary” then issues ADRs in the United States based on those foreign securities. (Id.) ADRs are governed by deposit agreements (“DAs”) and related documents and can be traded on the domestic markets. (Id.)

         ADRs provide a convenient way for domestic investors to purchase foreign securities without the hassle of foreign currency exchange (“FX”) and with all the protections afforded to domestic entities holding a United States security. (Id. ¶ 33.) In return for this convenience, banks typically charge ADR holders fees for various related services, including custody services, dividend distributions, voting shares, and conducting FX transactions. (Id. ¶ 35.)

         The gravamen of Plaintiffs' complaint is that BNYM breached its fiduciary duty to the ERISA plans when it conducted FX transactions. (Id. ¶ 5.) When a foreign entity issues a dividend or interest payment, for example, the payment is typically converted to U.S. Dollars (“USD”) by the depositary bank and remitted to the downstream ADR holder, here the Plans. (Id. ¶ 37.) Plaintiffs allege that, when converting the foreign currency to USD, BNYM selected an exchange rate at or near the worst rate for the ADR holders, increasing Defendants' profits at the expense of the Plans. (Id. ¶ 5.) Plaintiffs further allege that such dividends and interest payments “at all times belonged to the ADR Owner” and were “at all times ERISA plan assets.” (Id. ¶ 38.) This FX transaction methodology led Defendants to charge excessive, unauthorized, and undisclosed rates when executing ADR FX transactions, breaching their fiduciary duty to the Plans under ERISA. (Id. ¶¶ 48-63; 197-204.)

         Plaintiffs also allege that BNYM's FX methodology constitute a self-interested prohibited transaction with plan assets under 29 U.S.C. § 1106(b) (id. ¶¶ 205-11), and a party-in-interest prohibited transaction under § 1106(a) (id. ¶¶ 212-18). Plaintiffs further allege that they are entitled to ERISA's fraud or concealment limitations period, which allows for an action to commence within six years of the discovery of a breach in the case of fraud or concealment. (Id. ¶¶ 178-86.) They demand a trial by jury. (Id. ¶ 219.)

         II. Legal Standard

         To survive a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), “a complaint must contain sufficient factual matter . . . to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. When evaluating whether a complaint meets these requirements, courts assume that all “factual allegations contained in the complaint” are true, Twombly, 550 U.S. at 572 (quoting Swierkiewicz v. Sorema N. A., 534 U.S. 506, 508 n.1 (2002)), and “draw all inferences in the light most favorable to the non-moving party[ ], ” In re NYSE Specialists Sec. Litig., 503 F.3d 89, 95 (2d Cir. 2007) (citation omitted).

         “[A] Rule 12(b)(6) motion must be resolved by looking only to the complaint; documents that are attached as exhibits to, incorporated by reference, or integral to the complaint; and matters of which judicial notice may be taken.” Rhee-Karn v. Burnett, No. 13 Civ. 6132, 2014 WL 4494126, at *3 (S.D.N.Y. Sept. 12, 2014) (citing Samuels v. Air Transp. Local 504, 992 F.2d 12, 15 (2d Cir. 1993)).

         In resolving a 12(b)(1) motion, however, a court may refer to evidence outside the pleadings, such as affidavits. Zappia Middle E. Constr. Co. v. Emirate of Abu Dhabi, 215 F.3d 247, 253 (2d Cir. 2000). Moreover, under 12(b)(1), the Court must accept as true all the material factual allegations contained in the complaint, but is “not to draw inferences from the complaint favorable to plaintiffs.'” J.S. ex rel. N.S. v. Attica Cent. Sch., 386 F.3d 107, 110 (2d Cir. 2004). “Dismissal for lack of subject matter jurisdiction is proper ‘when the district court lacks the statutory or constitutional power to adjudicate' a case.” Sokolowski v. Metro. Transp. Auth., 723 F.3d 187, 190 (2d Cir. 2013) (quoting Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000)).

         III. Discussion

         The Court first addresses constitutional standing, as standing “is the threshold question in every federal case.” Warth v. Seldin, 422 U.S. 490, 498 (1975). Because the Court finds that Plaintiffs have standing to assert their claims in a representative or derivative capacity on behalf of the Plans, the Court next addresses the parties' dispute as to whether ADRs held by the Plans are plan assets, as alleged by the complaint, such that BNYM owes a fiduciary duty to the Plans under ERISA. The Court then turns to Plaintiffs' prohibited transaction claims before addressing the timeframe over which Plaintiffs claims may be asserted. And finally, the Court addresses the propriety of Plaintiffs' jury demand.

         A. Standing

         “Standing has three elements: first, the plaintiff must have suffered an injury in fact; second, the injury must be ‘fairly traceable' to the defendant's actions that the plaintiff challenges; and third, it must be likely that a decision in the plaintiff's favor would redress her injury.” Wells Fargo Bank N.A. v. Ullah, No. 13 Civ. 0485, 2014 WL 470883, at *5 (S.D.N.Y. Feb. 6, 2014) (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992)).

         BNYM argues that all but one of the Plaintiffs lack constitutional standing in this case. BNYM distinguishes between Plaintiffs Anselman, Carver, Day, Fletcher, Garrett, Hartline, Kellen, Kenny, Parker, and Watkins-the “Participant Plaintiffs, ” who are participants in either defined benefit plans[3] or defined contribution plans[4]-and Plaintiff Baumann-the “Trustee Plaintiff, ” who is a trustee of the Teamsters Local 945 Plan. BNYM does not challenge the Trustee Plaintiff's Article III standing at this stage of the proceedings (Dkt. No. 62 at 30 n.22), but does challenge the standing of the Participant Plaintiffs (id. at 24-30).

         BNYM argues that the Participant Plaintiffs who are participants in defined benefit plans lack Article III standing because they fail to allege an individualized injury in the form of a reduction in their defined benefits, as opposed to an injury to the plan generally, that is traceable to the alleged ERISA violation and redressable by the relief sought. (Id. at 25-29.) BNYM contends that the Participant Plaintiffs who are participants in defined contribution plans lack Article III standing because the complained-of injury is merely a “de minimis individualized injury.” (Dkt. No. 62 at 30.) Yet the Second Circuit has recently affirmed that similarly situated plaintiffs have constitutional standing when suing on behalf of an ERISA plan in a derivative or representative capacity, as opposed to in their individual capacity.

         BNYM's argument that the Participant Plaintiffs who are participants in the defined benefit plan lack standing is based on Fletcher v. Convergex Grp. LLC, 164 F.Supp.3d 588 (S.D.N.Y. 2016). There, the district court held that “Defendants' overcharges increased the plan's deficiency by less than one hundred-thousandth of one percent, ” which is an injury “so minute as to be imaginary and inconsequential” and insufficient to satisfy the injury-in-fact requirement for constitutional standing as to an individual plan participant. Id. at 591.

         However, after briefing of BNYM's motion to dismiss was completed, Fletcher was vacated by Second Circuit. (See Dkt. No. 77.) On appeal in Fletcher, the Second Circuit issued a summary order, concluding that the defendant's alleged “breach of fiduciary duties of prudence and loyalty under ERISA, its violation of ERISA's prohibited transactions provision, and the resulting financial loss sustained by the [Plan] are sufficient to confer Article III standing on [plaintiff] in his representative capacity as a Plan participant.” Fletcher v. Convergex Grp. L.L.C., No. 16-734-cv, 2017 WL 549025, at *1 (2d Cir. Feb. 10, 2017) (emphasis added). In so concluding, the Second Circuit relied on L.I. Head Start Child Dev. Servs., Inc. v. Econ. Opportunity Comm'n of Nassau Cty., Inc., 710 F.3d 57 (2d Cir. 2013), where it “reject[ed] the [defendants'] argument that [plaintiffs] lack constitutional standing because they have not suffered an injury-in-fact, ” finding instead that plaintiffs had “asserted their claims in a derivative capacity, to recover for injuries to the Plan caused by the [defendants'] breach of their fiduciary duties, ” which “is injury-in-fact sufficient for constitutional standing.” Id. at 67 n.5 (emphasis added).

         Here, however, all Participant Plaintiffs bring this action not in their individual capacity, but “on behalf of seven ERISA employee benefit plans in which they are participants.” (FAC ¶ 1 (footnote omitted) (emphasis added); see also Id. ¶¶ 95, 113, 124, 132, 145, 157, 168 (alleging which Plaintiffs are bringing the present case on behalf of each of the seven Plans).) As one court put it, where claims are brought “exclusively on behalf of the plan, not for the individual and direct benefit of the plaintiffs, ” courts “do not require plaintiffs to demonstrate individualized injuries for purposes of Article III standing.” Banyai v. Mazur, No. 00 Civ. 9806, 2007 WL 959066, at *5 (S.D.N.Y. Mar. 29, 2007). Where, as here, Plaintiffs are suing in their representative or derivative capacities on behalf of the Plans, Plaintiffs need not demonstrate individualized injury when they have alleged injury to the Plans caused by Defendants.

         With respect to traceability and redressability, moreover, Plaintiffs have satisfied their burden at the pleading stage. Under Second Circuit law, at the pleading stage, “for purposes of satisfying Article III's causation requirement, we are concerned with something less than the concept of proximate cause.” Rothstein v. UBS AG, 708 F.3d 82, 92 (2d Cir. 2013) (quoting Connecticut v. Am. Elec. Power Co., 582 F.3d 309, 345 (2d Cir. 2009), rev'd, 564 U.S. 410 (2011)). At the pleading stage, “the plaintiffs' ‘burden . . . of alleging that their injury is “fairly traceable” to' the challenged act ‘is relatively modest.'” Id. (alteration in original) (quoting Bennett v. Spear, 520 U.S. 154, 171 (1997)). Plaintiffs have alleged that the FX scheme “increased [BNYM's] revenues and profits by millions of dollars annually at the expense of the Plans.” (FAC ¶ 4; see also Id. ¶ 203 (“As a direct and proximate result of these breaches of fiduciary duty, the Plans and their participants suffered tens of millions of dollars of losses.”).) Here, Plaintiffs have met that modest burden by alleging that the FX pricing methodology directly contributed to the Plans' financial losses.

         To satisfy the redressability requirement, there need only be a “‘likel[ihood]' that the injury ‘will be redressed by a favorable decision.'” Susan B. Anthony List v. Driehaus, 134 S.Ct. 2334, 2341 (2014) (alteration in original) (quoting Lujan, 504 U.S. at 560-61). Here, Plaintiffs allege that ‚ÄúDefendants are liable to restore all losses suffered by the Plans caused by the Defendants' breaches of fiduciary duty and to disgorge the profits obtained from the ADR FX Dividend Conversion ...


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