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Thole v. U.S. Bank, National Association

United States Court of Appeals, Eighth Circuit

October 12, 2017

James J. Thole; Sherry Smith, individually and on behalf of all others similarly situated Plaintiffs - Appellants
U.S. Bank, National Association, individually and as successor in interest to FAF Advisors, Inc.; U.S. Bancorp Defendants - Appellees Nuveen Asset Management, LLC, as successor in interest to FAF Advisors, Inc. Defendant Richard K. Davis; Douglas M. Baker, Jr.; Y. Marc Belton; Peter H. Coors; Joel W. Johnson; Olivia F. Kirtley; O'Dell M. Owens; Craig D. Schnuck; Arthur D. Collins, Jr.; Victoria Buyniski Gluckman; Jerry W. Levin; David B. O'Maley; Patrick T. Stokes; Richard G. Reiten; Warren R. Staley; John and Jane Doe 1-20 Defendants - Appellees AARP; AARP Foundation; R. Alexander Acosta, Secretary of the United States Department of Labor Amid on Behalf of Appellant (s)Chamber of Commerce of the United States of America Amicus on Behalf of Appellee(s)

          Submitted: May 11, 2017

         Appeal from United States District Court for the District of Minnesota - Minneapolis

          Before SMITH, Chief Judge, COLLOTON and KELLY, Circuit Judges.

          SMITH, Chief Judge.

         Named plaintiffs James Thole and Sherry Smith (collectively, "plaintiffs")[1]brought a putative class action against U.S. Bank, N.A. ("U.S. Bank"); U.S. Bancorp; and multiple U.S. Bancorp directors (collectively, "defendants"), [2] challenging the defendants' management of a defined benefit pension plan ("Plan" or "U.S. Bank Pension Plan") from September 30, 2007, to December 31, 2010. The plaintiffs alleged that the defendants violated Sections 404, 405, and 406 of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1104-06, by breaching their fiduciary obligations and causing the Plan to engage in prohibited transactions with a U.S. Bank subsidiary, FAF Advisors, Inc. (FAF). The plaintiffs' complaint asserts that these alleged ERISA violations caused significant losses to the Plan's assets in 2008 and resulted in the Plan being underfunded in 2008. The plaintiffs sought to recover Plan losses, disgorgement of profits, injunctive relief, and other remedial relief pursuant to ERISA Section 502(a)(2), 29 U.S.C. § 1132(a)(2), and ERISA Section 409, 29 U.S.C. § 1109. They also sought equitable relief pursuant to ERISA Section 502(a)(3), 29 U.S.C. § 1132(a)(3).

         In response, the defendants moved to dismiss the plaintiffs' consolidated amended complaint with prejudice under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). Specifically, they argued that the plaintiffs lacked standing to bring the suit, the ERISA claims were time-barred or had been released, and the pleading otherwise failed to state a claim on which relief could be granted. Relevant to the present appeal, the district court[3] concluded that the plaintiffs' claim challenging the Plan's strategy of investing 100 percent of its assets in equities was barred by ERISA's six-year statute of repose. The court, however, permitted the plaintiffs to proceed with their claim that the defendants engaged in a prohibited transaction by investing the Plan's assets in mutual funds that FAF managed.

         During the litigation, the factual backdrop of the case changed. In 2014, the Plan became overfunded; in other words, there was more money in the Plan than was needed to meet its obligations. The defendants, alleging that the plaintiffs had not suffered any financial loss upon which to base a damages claim, moved to dismiss the remainder of the action for lack of standing pursuant to Rule 12(b)(1). Although the district court concluded that standing was the wrong doctrine to apply, it granted the motion to dismiss for lack of Article III jurisdiction based on the doctrine of mootness. The court concluded that because the Plan is now overfunded, the plaintiffs lack a concrete interest in any monetary relief that the court might award to the Plan if the plaintiffs prevailed on the merits.[4] The court later denied the plaintiffs' motion for attorneys' fees, determining that the plaintiffs had achieved no success on the merits. The court concluded that the plaintiffs failed to show that the litigation had acted as a catalyst for any contributions that U.S. Bancorp made to the Plan resulting in its overfunded status.

         On appeal, the plaintiffs argue that the district court erred by (1) dismissing the case as moot; (2) dismissing the Equities Strategy claim on statute-of-limitations and pleading grounds; and (3) denying their motion for attorneys' fees and costs. We affirm.

         I. Background[5]

         A. Overview of the U.S. Bank Pension Plan-A Defined Benefit Plan

         The plaintiffs, both retirees of U.S. Bank, are participants in the U.S. Bank Pension Plan. U.S. Bancorp is the Plan's sponsor, while U.S. Bank (a wholly-owned subsidiary of U.S. Bancorp) is the Plan's trustee. Pursuant to the Plan document, the Compensation Committee and Investment Committee had authority to manage the Plan's assets. The Compensation Committee was composed of U.S. Bancorp directors and officers. The Compensation Committee designated FAF as the Investment Manager with full discretionary investment authority over the Plan's assets. During the relevant time period, U.S. Bank was the parent of FAF.[6]

         The Plan is a defined benefit plan regulated under ERISA. See 29 U.S.C. §§ 1002(2)(A), 1002(35), 1003. "A defined benefit plan . . . consists of a general pool of assets rather than individual dedicated accounts. Such a plan, 'as its name implies, is one where the employee, upon retirement, is entitled to a fixed periodic payment.'" Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 439 (1999) (quoting Comm'r v. Keystone Consol. Indus., Inc., 508 U.S. 152, 154 (1993)). According to the plaintiffs, the Plan's purpose "is to provide a monthly retirement income based on a U.S. Bancorp employee's pay and years of service." In 2009, "Smith elected to receive her Plan benefits in the form of a single life annuity in the amount of $42.26 per month, and received a payment of the portion of her benefit accrued under a predecessor plan . . . in the amount of $7, 588.65." In 2011, "Thole elected to receive his Plan benefits in the form of a Estate Protection 50% Joint and Survivor Annuity in the amount of $2, 198.38 per month." Under § 2.1.26 of the Plan, Smith and Thole are entitled to receive their respective benefits for the rest of their lives. Thus far, the plaintiffs have received all payments under the Plan to which they are entitled.

         U.S. Bancorp and its subsidiaries make all Plan contributions. See Hughes, 525 U.S. at 439 ("The asset pool may be funded by employer or employee contributions, or a combination of both." (citing 29 U.S.C. § 1054(c))). Plan "members have a right to a certain defined level of benefits, known as 'accrued benefits.'" Id. at 440. "Accrued benefit" for purposes of a defined benefit plan means "the individual's accrued benefit determined under the plan . . . expressed in the form of an annual benefit commencing at normal retirement age." 29 U.S.C. § 1002(23)(A).

         A measurement called the Funding Target Attainment Percentage (FTAP) determines whether a plan is on track to meet its benefit obligations to participants. The FTAP is used to determine whether the plan sponsor must make a contribution to the Plan in a particular year. See 29 U.S.C. § 1083(a), (d). A plan's assets are less than its liabilities if its FTAP is under 100 percent; if this occurs, then the plan sponsor must make a contribution. By contrast, if the FTAP is over 100 percent-i.e., the plan's assets are greater than the liabilities-the plan sponsor is not required to make a contribution. See 26 U.S.C. § 430(c).

         Under the Plan (like all defined benefit plans), "the employer typically bears the entire investment risk and-short of the consequences of plan termination-must cover any underfunding as the result of a shortfall that may occur from the plan's investments." Hughes, 525 U.S. at 439. But "if the defined benefit plan is overfunded, the employer may reduce or suspend his contributions." Id. at 440. The defined benefit plan's structure "reflects the risk borne by the employer." Id. "Given the employer's obligation to make up any shortfall, no plan member has a claim to any particular asset that composes a part of the plan's general pool." Id.

         In summary, "[i]n a defined benefit plan, if plan assets are depleted but the remaining pool of assets is more than adequate to pay all accrued or accumulated benefits, then any loss is to plan surplus." Harley v. Minn. Mining & Mfg. Co., 284 F.3d 901, 906 (8th Cir. 2002). "Plan beneficiaries have no claim or entitlement to its surplus. If the Plan is overfunded, [the employer] may reduce or suspend its contributions." Id. Conversely, "[i]f the Plan's surplus disappears, it is [the employer]'s obligation to make up any underfunding with additional contributions. If the Plan terminates with a surplus, the surplus may be distributed to [the employer]." Id. "[T]he reality is that a relatively modest loss to Plan surplus is a loss only to . . . the Plan's sponsor." Id.

         B. Complaint

         In 2014, the plaintiffs filed the consolidated amended complaint[7] setting forth a putative class action against the defendants, challenging their management of the Plan from September 30, 2007, to December 31, 2010. According to the plaintiffs, the defendants violated ERISA Sections 404, 405, and 406, 29 U.S.C. §§ 1104-06.

         The plaintiffs alleged that by 2007, FAF had invested the entire Plan portfolio in equities-direct stock holdings or through mutual funds that FAF managed ("Equities Strategy"). According to the plaintiffs, well-accepted principles of diversification provide that a retirement portfolio should be invested in multiple asset classes rather than in a single class. They alleged that diversification among the asset classes reduces the risk of large losses and uncertainty because different asset classes historically do not move up or down at the same time. The plaintiffs maintained that because the Plan was significantly overfunded by 2007, it did not need to pursue such a high-risk/high-reward investment strategy to meet its pension obligations. The plaintiffs alleged that the defendants stood to benefit from the Equities Strategy; specifically, they claimed that U.S. Bancorp and its Board members benefitted from the Equities Strategy because it allowed U.S. Bancorp to increase its operating income and avoid minimum employer contributions to the Plan. And they alleged that the Equities Strategy benefitted the individual defendants holding stock options, which were exercised and sold at a higher price because U.S. Bancorp's reported income (and resulting stock price) was increased by the excess pension income.

         Because the defendants put all the Plan's assets in a single higher-risk asset class, the plaintiffs alleged, in 2008, the Plan suffered a loss of $1.1 billion. They alleged that the Plan lost significantly more money in 2008 than it would have if the defendants had properly diversified it. The $1.1 billion loss reduced the funding status of the Plan-it went from being significantly overfunded in 2007 to being 84 percent underfunded in 2008.

         The plaintiffs claimed that the defendants failed to monitor the investment of Plan assets and terminate the Equities Strategy. This failure, according to the plaintiffs, (1) violated the defendants' fiduciary duty of prudence under ERISA because it exposed the Plan to unnecessary risk; (2) violated their fiduciary duty to diversify plan assets under ERISA because investing an entire retirement portfolio in a single asset class is non-diversified on its face; and (3) violated their fiduciary duty of loyalty under ERISA because the Equities Strategy benefitted the defendants to the detriment of the Plan and its participants.

         The plaintiffs also alleged several violations of ERISA based on the purported conflicts of interest associated with the Plan's assets being heavily invested in U.S. Bancorp's own mutual funds ("FAF Funds"). By 2007, FAF had invested over 40 percent of the Plan's assets in the FAF Funds despite their costing more than similar alternative funds. By investing the Plan's assets in U.S. Bancorp's own propriety mutual funds, the plaintiffs alleged, FAF and U.S. Bancorp received management fees from the Plan, increased the total assets under management to $1.25 billion, and were able to attract more investors. The plaintiffs claim that, as a result, the Plan paid too much in management fees for the FAF Funds.

         Allegedly, these ERISA violations caused significant losses to the Plan's assets in 2008 and resulted in the Plan's underfunded status in 2008 through the commencement of this suit in 2013. The plaintiffs sought to recover Plan losses, disgorgement of profits, injunctive relief, and other remedial relief pursuant to ERISA Section 502(a)(2), 29 U.S.C. § 1132(a)(2), and ERISA Section 409, 29 ...

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