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Disselkamp v. Norton Healthcare, Inc.

United States District Court, W.D. Kentucky, Louisville Division

August 2, 2019




         This matter is before the Court on Defendants' Motions to Dismiss (DN 19, 31, 32), and Plaintiffs' Motion for Leave to File Sur-Reply (DN 54). The motions are ripe for adjudication. For the reasons outlined below, Defendants' Motions to Dismiss (DN 31, 32) are GRANTED IN PART and DENIED IN PART, and the other motions are DENIED.


         This is an action brought under the Employee Retirement Income and Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq., concerning the administration of Defendant Norton Healthcare, Inc.'s (“Norton”) 403(b) Retirement Savings Plan (“the Plan”). (Am. Compl. ¶ 14, DN 20). The Plan is a defined contribution, individual account, pension benefit plan as defined under 29 U.S.C. §§ 1002(2)(A) and 1002(34). (Am. Compl. ¶ 14). Named Plaintiffs Donna Disselkamp, Erica Hunter, Sey Momodou Bah, Kathy Reed, and Curtis Cornett (“Plaintiffs”) were participants in the Plan during the alleged class period. (Am. Compl. ¶¶ 18-22).

         Norton is the Plan Administrator and a named fiduciary. (Am. Compl. ¶ 25). Plaintiffs allege Defendants Richard Wolf, G. Hunt Rounsavall, Stephen A. Williams, and Donald H. Robinson were members of Norton's Board of Directors from 2012-2017. (Am. Compl. ¶¶ 26-29). These named individual Defendants were also members of the Norton Healthcare Retirement Plan Investment Committee (“Retirement Committee”) and as such were ERISA fiduciaries responsible for ensuring that plan expenses were reasonable and that plan funds were invested prudently and loyally. (Am. Compl. ¶¶ 26-29). There are presently twenty-five additional unnamed Defendants whom Plaintiffs believe comprise the remainder of the Retirement Committee. (Am. Compl. ¶ 30). When appropriate, the Court will refer to Norton, the Retirement Committee and the individually named Defendants collectively as “Norton Defendants.”

         Defendant Lockton Investment Advisors, LLC is affiliated with Lockton Financial Advisors, LLC and Lockton Companies, LLC (jointly “Lockton Defendants”). Lockton Defendants offer licensed broker-dealers and insurance agents to sell securities, insurance products, and insurance consulting services. (Am. Compl. ¶ 31).

         After the lawsuit was filed, Norton Defendants moved to dismiss the claims asserted against them. (Defs.' Mot. Dismiss, DN 19). Subsequently, Plaintiffs amended the Complaint. In the Amended Complaint, Plaintiffs assert seven counts against Defendants alleging various breaches of fiduciary duty. (Am. Compl. ¶¶ 204-82). Norton Defendants have moved to dismiss Counts I, II, III, IV, VI, and VII, and Lockton Defendants have joined in this motion. (Defs.' Mot. Dismiss Am. Compl., DN 32). Lockton Defendants have separately moved to dismiss Count V. (Lockton Defs.' Mot. Dismiss, DN 31 [hereinafter Lockton's Mot.]).


         This case presents a federal question, and jurisdiction is therefore proper under 28 U.S.C. § 1331.


         A complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief, ” and is subject to dismissal if it “fail[s] to state a claim upon which relief can be granted.” Fed.R.Civ.P. 8(a)(2); Fed.R.Civ.P. 12(b)(6). When considering a motion to dismiss, courts must presume all factual allegations in the complaint to be true and make all reasonable inferences in favor of the non-moving party. Total Benefits Planning Agency, Inc. v. Anthem Blue Cross & Blue Shield, 552 F.3d 430, 434 (6th Cir. 2008) (citation omitted). “But the district court need not accept a bare assertion of legal conclusions.” Tackett v. M & G Polymers, USA, LLC, 561 F.3d 478, 488 (6th Cir. 2009) (citation omitted). “A pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do. Nor does a complaint suffice if it tenders naked assertion[s] devoid of further factual enhancement.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted) (citation omitted).

         To survive a motion to dismiss under Rule 12(b)(6), the plaintiff must allege “enough facts to state a claim to relief that is plausible on its face.” Traverse Bay Area Intermediate Sch. Dist. v. Mich. Dep't of Educ., 615 F.3d 622, 627 (6th Cir. 2010) (internal quotation marks omitted) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim becomes plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556). “A complaint will be dismissed pursuant to Rule 12(b)(6) if no law supports the claims made, if the facts alleged are insufficient to state a claim, or if the face of the complaint presents an insurmountable bar to relief.” Southfield Educ. Ass'n v. Southfield Bd. of Educ., 570 Fed.Appx. 485, 487 (6th Cir. 2014) (citing Twombly, 550 U.S. at 561-64).


         A. Defendants' Motion to Dismiss Complaint (DN 19)

         Norton Defendants have moved to dismiss the claims asserted against them in the Complaint. (Defs.' Mot. Dismiss, DN 19). Because the Amended Complaint subsumes the allegations in the original Complaint, the Court will deny this motion as moot. See Herran Props., LLC v. Lyon Cty. Fiscal Court, No. 5:17-CV-00107-GNS, 2017 WL 6377984, at *2 (citing Cedar View, Ltd. v. Colpetzer, No. 5:05-CV-00782, 2006 WL 456482, at *5 (N.D. Ohio Feb. 24, 2006)); Ky. Press Ass'n, Inc. v. Kentucky, 355 F.Supp.2d 853, 857 (E.D. Ky. 2005) (citing Parry v. Mohawk Motors of Mich., Inc., 236 F.3d 299, 306 (6th Cir. 2000)).

         B. Defendants' Motions to Dismiss Amended Complaint (DN 31, 32)

         Following the filing of the Amended Complaint, Defendants moved to dismiss the claims asserted against them. Each claim will be addressed below.

         1. Background and Overview

         Before 2012, Norton provided its employees retirement benefits in the form of a “bundled plan” administered by Transamerica Life Insurance and its affiliates. (Am. Compl. 35). The term “bundled plan” means Norton purchased a pre-packaged platform where custody, record keeping, and investments were provided in an integrated platform. (Am. Compl. ¶ 35).

         In 2012, Norton restructured the Plan, which is now funded under a group annuity contract and a trust arrangement. (Am. Compl. ¶¶ 16, 36). Norton established a trust with Delaware Charter Guarantee and Trust, doing business as Principal Trust. (Am. Compl. ¶ 16). Norton also established a group annuity contract with Principal Life Insurance (“Principal Life”).[1] The alleged class period concerns only Plan decisions made after the restructuring.

         Lockton Defendants provided advice to Norton Defendants with respect to its restructure of the Plan. (Am. Compl. ¶ 37). Plaintiffs allege Lockton Defendants advised Norton Defendants on matters including but not limited to the following: the selection and compensation of service providers; initial plan and vendor analysis; investment selection and monitoring; fiduciary and compliance services; employee communication and education; mergers; and acquisitions and divestitures. (Am. Compl. ¶ 37). Lockton Defendants continued advising Norton after the restructuring as well. (Am. Compl. ¶ 37).

         2. Count I: Breach of the Duty of Prudence for Failing to Employ Viable Methodology for Selecting and Monitoring Investment Options

         Plaintiffs' claims regarding Defendants' breach of the duty of prudence can be separated into two categories: Defendants' selection of and failure to replace higher cost share classes when identical shares with lower costs were available, and Defendants' selection of and failure to replace the Principal Fixed Income Option as its sole stable value fund. Because Defendants' motion first addresses the share class issue, the Court will begin its analysis there.

         a. Selection of Share Classes

         According to the Amended Complaint, a general principle of investment management holds that investors with greater assets enjoy greater bargaining power when negotiating management fees because the more assets they possess, the lower the management fees will be when expressed as a percentage of the overall portfolio. (Am. Compl. ¶ 83). The two most common classes of mutual funds are retail funds and institutional funds. (Am. Compl. ¶ 84). Retail funds are available to a broad spectrum of investors, including individuals, whereas institutional funds, as their names suggests, are generally only available to larger investors including 401(k) and 403(b) plans. (Am. Compl. ¶ 84). Institutional funds typically charge lower expense ratios than similarly situated retail mutual funds. (Am. Compl. ¶ 84).

         As there are different classes of mutual funds, there are also different share classes of a single mutual fund. (Am. Compl. ¶¶ 85, 87). Retail share classes possess different shareholder rights and responsibilities from institutional class shares, which are also called “R Class shares.” (Am. Compl. ¶ 87). These may include differing fee and load charges. (Am. Compl. ¶¶ 85, 87). But while the fees differ, the assets underlying the various share classes as well as their management and investment styles are identical. (Am. Compl. ¶ 85).

         Plaintiffs state that a prudent fiduciary should have in place a methodology for taking advantage of discounts available through the purchase of institutional shares. (Am. Compl. ¶ 90). Because mutual funds are not static, it is important for a prudent fiduciary to monitor the Plan in the event lower cost share classes become available. (Am. Compl. ¶ 91). Plaintiffs contend Norton violated its duty of prudence by failing to monitor the availability of lower cost share classes, and in so doing subjected Plan participants to higher-than-necessary expenses. (Am. Compl. ¶¶ 92-93). Further, Plaintiffs contend Norton began correcting the problem by substituting lower cost share classes in 2015. (Am. Compl. ¶ 93).

         To exemplify Plaintiffs' allegations, they allege that in 2012 Norton offered a mutual fund known as the Principal Equity R-5 Fund (“PEIQX”). (Am. Compl. ¶ 96). The PEIQX fund offered a total expense ratio of 0.77%.[2] (Am. Compl. ¶ 96). At the same time, Norton offered an identical product of a different share class, the Principal Equity Institutional Class Fund (“PEIIX”) with an expense ratio of 0.52%, 0.25% lower than PEIQX. (Am. Compl. ¶¶ 97-98). Plaintiffs argue because the Plan invested $33, 558, 344 in the PEIQX, the 0.25% difference in fees resulted in Plan participants paying $83, 896 in additional fees for a different class share of the exact same product. (Am. Compl. ¶ 98).

         In 2013, the expense ratios were the same as the previous year for both the PEIQX and the PEIIX respectively. (Am. Compl. ¶¶ 99-100). That year, Norton invested $46, 955, 568 in the PEIQX, an amount Plaintiffs allege resulted in Plan participants paying an extra $117, 389. (Am. Compl. ¶ 101). In 2014, Plaintiffs contend Norton invested $55, 479, 949 in the PEIQX, bringing the alleged overpayment to $138, 700 before it switched the PEIQX funds to the PEIIX in 2015. (Am. Compl. ¶¶ 102-06).

         Plaintiffs offer identical allegations about a No. of other funds, with differences only in the precise expense ratios and resultant damages. (Am. Compl. ¶¶ 108-65). In total, Plaintiffs contend the Plan fiduciaries subjected participants to more than $2 million in unnecessary overpayments. (Am. Compl. ¶ 166). Plaintiffs additionally contend that they lost the money they would have made by investing the overpayments, bringing their total damages to around $3.3 million. (Am. Compl. ¶ 168).

         Defendants now seek dismissal of this claim, arguing Plaintiffs have failed to assert specific facts that could lead to a conclusion that Norton Defendants acted imprudently. (Defs.' Mot. Dismiss Am. Compl. 7) Defendants contend Plaintiffs criticize investment decisions based solely on results viewed with 20/20 hindsight and fail to identify any specific flaw in Defendants' methodology. (Defs.' Mot. Dismiss Am. Compl. 7-9). Further, Defendants maintain the Amended Complaint supports a conclusion that Defendants acted prudently by responding to and correcting certain problems well before this lawsuit. (Defs.' Mot. Dismiss Am. Compl. 8-9). Specifically, Defendants argue that the Complaint acknowledges that Defendants substituted some higher cost share classes for lower cost institutional options in 2015, and this action supports a conclusion that Defendants acted prudently by monitoring the Plan. (Defs.' Mot. Dismiss Am. Compl. 9).

         To state a claim for breach of the duty of prudence, a plaintiff must allege (1) that the defendants were fiduciaries of the plan; (2) that the defendants' acts or omissions amounted to a breach of duty; and (3) that harm resulted from the breach. Pegram v. Herdrich, 530 U.S. 211, 225-26 (2000). “An ERISA fiduciary must discharge his responsibility ‘with the care, skill, prudence, and diligence that a prudent person ‘acting in a like capacity and familiar with such matters' would use.” Tibble v. Edison Int'l, 135 S.Ct. 1823, 1828 (2015) (Tibble I) (quoting 29 U.S.C. § 1104(a)(1)(B)). A fiduciary must act “solely in the interest of the participants and beneficiaries and . . . for the exclusive purpose of providing benefits to participants and their beneficiaries . . . .” 29 U.S.C. § 1104(a)(1)(A). The statute codifies the common law duties of loyalty and prudence, and these duties are “the highest known to the law.” SEC v. Capital Consultants, LLC, 397 F.3d 733, 751 (9th Cir. 2005).

         “Prudence is measured according to the objective ‘prudent person' standard developed in the common law of trusts.” Whitfield v. Cohen, 682 F.Supp. 188, 194 (S.D.N.Y. 1988) (quoting Katsaros v. Cody, 744 F.2d 270, 279 (2d Cir. 1984)). A fiduciary has a continuing duty to monitor investments and remove imprudent ones. Tibble I, 135 S.Ct. at 1828-29. The test for whether a fiduciary has violated the duty of prudence asks whether the fiduciary employed appropriate methods for investigating the merits of the investment and the investment structure, judged at the time of the challenged transaction. Pfeil v. State Street Bank & Tr. Co., 806 F.3d 377, 384 (6th Cir. 2015). Focus should be placed on whether the fiduciary engaged in reasonable decision-making consistent with a prudent person acting in a similar capacity. Id.

         Norton Defendants do not dispute that they are fiduciaries of the Plan, and Plaintiffs have alleged damages. Therefore, the issue centers on the second prong of the test, and the Court must ask whether Defendants' failure to purchase institutional class ...

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