Del Castillo v. Community Child Care Council of Santa Clara County, Inc.

Background

The plaintiffs—Mario Del Castillo, Puthea Chea, Michael Rasche, and Javier Cardoza—were current or former employees of Community Child Care Council of Santa Clara County, Inc. (“4Cs”). The case concerns two 4Cs employee-benefit plans: a defined-contribution plan, later renamed the Defined Contribution Profit Sharing Plan, and a non-qualified deferred-compensation plan.

Life Insurance Company of the Southwest (“LSW”) insured life-annuity contracts purchased by 4Cs for each plaintiff and provided investment-consulting services to participants in the plans. Kevin Logan acted as LSW’s agent and representative. The plaintiffs alleged that LSW and Logan were service providers and parties in interest under the Employee Retirement Income Security Act (“ERISA”), but they did not allege that either was an ERISA fiduciary.

The plaintiffs alleged that the annuities were restrictive, financially imprudent, and unlawful. They also alleged that 4Cs purchased them contrary to plan documents and without a written plan instrument permitting the purchases. The plaintiffs further alleged that LSW and Logan received unreasonable compensation, that the plans did not use competitive bidding, and that LSW’s use of premium payments to generate revenue and investment earnings amounted to a prohibited loan or extension of credit.

The only claim the court had allowed the plaintiffs to add against LSW and Logan in the third amended complaint was based on ERISA Section 502(a)(3). That provision permits certain plan participants, beneficiaries, or fiduciaries to seek an injunction or other appropriate equitable relief for an ERISA or plan violation.

Legal standard and analysis

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that the third amended complaint did not state a legally sufficient claim. The court accepted well-pleaded factual allegations as true for purposes of the motions but required enough facts to make liability plausible rather than merely possible.

To state a Section 502(a)(3) claim against a non-fiduciary, the plaintiffs had to allege facts showing: (1) that plan funds were wrongfully transferred to the non-fiduciary; (2) that the non-fiduciary had actual or constructive knowledge of the circumstances making the transfer wrongful; and (3) that the plaintiffs sought appropriate equitable relief.

The court accepted the allegations that the 4Cs defendants purchased LSW annuities contrary to a summary plan description and without a written instrument. But it rejected the theory that the absence of competitive bidding alone showed imprudence. It also found the allegations that LSW’s and Logan’s compensation was unreasonable or above market rates conclusory because the complaint provided no benchmark for reasonable compensation or facts suggesting that comparable services were available for less.

The court rejected the plaintiffs’ theory that the premium payments were loans or extensions of credit. LSW and Logan received insurance premiums and fees, and the complaint did not allege repayment obligations. The court stated that premiums, commissions, and fees did not become loans merely because the plaintiffs characterized them that way, and it instructed the plaintiffs not to include that theory in the next amended complaint. The court also noted that the third amended complaint did not allege an underlying fiduciary violation based on the separate theory involving the transfer or use of plan assets.

The court then found that the complaint did not plausibly allege that LSW or Logan knew, or should have known, that the transactions were unlawful. Knowing that a transaction might be prohibited under ERISA was not the same as knowing that it involved unlawful conduct, particularly because ERISA contains exemptions for some transactions involving plan service providers and reasonable compensation.

The court separately addressed the requested relief. Section 502(a)(3) permits only appropriate equitable relief, such as recovery of specifically identifiable funds through a constructive trust or equitable lien; it does not generally permit an award of money damages from a defendant’s assets. The plaintiffs had not identified a specific fund containing most of the compensation, investment earnings, or other amounts they sought from LSW. The court found that the insurance premiums, to the extent the plaintiffs sought their return, could be traceable to individual annuity accounts, but the other requested amounts were not adequately traced.

As to Logan, the plaintiffs sought unreasonable commissions and other compensation allegedly traceable to a general account held in Logan’s, Logan Group Securities’, or LSW’s name. The court found that the plaintiffs had not identified specifically traceable funds within Logan’s possession and control. It characterized the requested relief against Logan as legal damages rather than equitable relief. Because the plaintiffs had already received an opportunity to amend their Logan claim with clear guidance and had not cured the deficiencies, the court denied further amendment as to Logan.

Disposition

Judge Beth Labson Freeman ordered that LSW’s motion to dismiss the third amended complaint was granted with leave to amend and that Logan’s motion to dismiss the third amended complaint was granted without leave to amend. The plaintiffs could file a fourth amended complaint only to add facts supporting a Section 502(a)(3) claim against LSW. They could not add new parties or other claims, and the court directed them to address whether equitable relief remained available if LSW no longer possessed the funds at issue and whether an injunction was necessary. The fourth amended complaint was due January 15, 2020.