Randall v. Greatbanc Trust Company

Background

The plaintiffs—Aryne Randall, Scott Kuhn, and Peter Morrissey—participated in the Wells Fargo & Company 401(k) Plan, which included an Employee Stock Ownership Plan (ESOP). The plaintiffs brought a putative class action against Wells Fargo & Co., GreatBanc Trust Company, and Timothy J. Sloan. The complaint asserted seven ERISA claims: prohibited-transaction and fiduciary-duty claims against GreatBanc, Wells Fargo, and Sloan, plus a co-fiduciary-duty claim against all defendants.

The plaintiffs alleged that the ESOP paid more than fair market value for Wells Fargo preferred stock. They also alleged that preferred-stock dividends belonging to the ESOP were used to help satisfy Wells Fargo’s matching-contribution obligations. According to the plaintiffs, if those dividends had instead been used to make additional loan payments, more preferred stock would have been released and converted into common stock for allocation to plan participants.

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(1), arguing that the plaintiffs lacked constitutional standing, and Rule 12(b)(6), arguing that the complaint did not state plausible claims. The plaintiffs also moved for judicial notice of several documents.

Standing under Rule 12(b)(1)

The court treated the defendants’ jurisdictional motion as a factual attack because the defendants submitted evidence obtained during jurisdictional discovery. The court explained that, in deciding such a motion, it could consider matters outside the pleadings and require the plaintiffs to prove jurisdictional facts.

The court rejected the plaintiffs’ theory that the alleged overpayment for preferred stock, standing alone, established a concrete injury. The plaintiffs did not dispute that they received their common-stock dividends, Wells Fargo’s six-percent matching contributions, and Wells Fargo’s one-percent discretionary profit-sharing contributions. The court reasoned that, even if Wells Fargo had paid less for the preferred stock, the Plan still would not have had excess shares to distribute under the Plan’s allocation provision; Wells Fargo instead would have contributed less cash.

The court nevertheless found standing based on the plaintiffs’ separate theory concerning the preferred-stock dividends. Assuming the plaintiffs could prove that the dividends were improperly used for Wells Fargo’s matching obligations, the Plan would have released additional common-stock shares for participants. The alleged denial of those shares was a concrete economic injury that was traceable to the defendants’ alleged conduct and could be remedied by a favorable judgment. The court emphasized that whether the defendants’ conduct was lawful was a merits question and should not be confused with standing.

Plausibility under Rule 12(b)(6)

For the Rule 12(b)(6) motion, the court generally accepted the amended complaint’s factual allegations as true and drew reasonable inferences for the plaintiffs. It declined to consider the defendants’ account records to disprove allegations in the complaint because those records were not specifically referenced in the complaint and did not fall within the narrow exception for documents embraced by the pleadings.

The court found the prohibited-transaction claims plausible. The complaint plausibly alleged that GreatBanc caused the ESOP to purchase preferred stock from Wells Fargo and to borrow money from Wells Fargo, both of which could qualify as transactions prohibited by ERISA. It also plausibly alleged that the defendants used or reclassified preferred-stock dividends for Wells Fargo’s benefit. At this stage, the court assumed, without deciding, that the dividends were plan assets.

The court also found plausible the plaintiffs’ fiduciary-duty claims. It determined that the complaint plausibly alleged that GreatBanc breached duties of loyalty and prudence by overvaluing the preferred stock and by reclassifying preferred-stock dividends to satisfy Wells Fargo’s obligations. The complaint also plausibly alleged that Wells Fargo and Sloan acted as functional plan fiduciaries when they controlled the dividends and redirected them for Wells Fargo’s benefit. The court allowed the plaintiffs’ related claims concerning the duty to follow the Plan documents, ERISA’s anti-inurement provision, and Wells Fargo’s duty to monitor GreatBanc to proceed.

The court further held that the co-fiduciary-duty claims could proceed because the complaint plausibly alleged fiduciary breaches by GreatBanc, Wells Fargo, and Sloan. The court rejected the defendants’ argument that the allegation concerning an “unknown amount” of misused preferred-stock dividends was too vague. In context, the complaint described enough of the alleged ESOP transactions to make the claim plausible. The court also found that no claim depended solely on an alleged misuse of common-stock dividends.

Disposition

The court’s order states that the plaintiffs’ Motion for Judicial Notice was GRANTED IN PART and DENIED IN PART as moot. The defendants’ Motion to Dismiss was DENIED. The ruling allowed the plaintiffs’ claims to continue; it did not determine that any defendant ultimately violated ERISA or decide whether the proposed class should be certified.