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Abraha v. Colonial Parking, Inc.

United States District Court, District of Columbia

March 20, 2017

Berthe Benyam Abraha, et al., Plaintiffs,
v.
Colonial Parking, Inc., et al., Defendants.

          MEMORANDUM OPINION

          COLLEEN KOLLAR-KOTELLY United States District Judge

         This matter is brought by Plaintiffs on behalf of themselves and a putative class of similarly situated former and current employees of Defendant Colonial Parking, Inc. (“Colonial”) against Colonial and Defendant FCE Benefit Administrators, Inc. (“FCE”) for alleged violations of the Employee Retirement Income Security Act of 1974 (“ERISA”). The purported violations stem primarily from FCE's alleged charging of excessive administrative fees.

         Presently before the Court are FCE's [5] Motion to Dismiss and Motion to Strike, [6] Motion to Take Judicial Notice, and Colonial's [12] Motion to Dismiss. Upon consideration of the pleadings, [1] the relevant legal authorities, and the record for purposes of the pending motions, the Court DENIES FCE's [5] Motion to Dismiss and Motion to Strike, GRANTS FCE's [6] Motion to Take Judicial Notice, and GRANTS IN PART AND DENIES IN PART Colonial's [12] Motion to Dismiss.[2] Plaintiffs' section 1133 claim against Colonial is DISMISSED WITHOUT PREJUDICE. Plaintiffs' other claims against Defendants may proceed.

         I. BACKGROUND

         The Court accepts as true the well-pleaded factual allegations of the Complaint, as it must on a motion to dismiss for failure to state a claim. The Court presents only those factual allegations that are relevant to its disposition of the pending motions.

         Plaintiffs are Colonial employees who worked as parking lot attendants, earning approximately $2, 000 per month in gross wages. Compl. ¶¶ 8, 34. Because Colonial contracts with federal agencies, it must comply with the McNamara-O'Hara Service Contract Act, which requires Colonial to “to pay a set amount per employee per hour for fringe benefits.” Id. ¶ 3. Colonial complies with this requirement by funding a benefits plan known as the “The Forge Company (Colonial Parking) Death, Dismissal, Wage/Unemployment Benefit ‘Reserve' Employee Account” (the “Plan”). Id. ¶ 4. Colonial has retained FCE to administer the Plan, which operates as follows: Colonial contributes money to the . . . Plan, FCE allocates the contribution to each [employee participant's] [separate account], and then it withdraws money for payments of insurance premiums and fees to FCE and others. Amounts not used for those purposes are held in trust for the employee participants where they are credited with a share of the . . . Plan's investment earnings.” Id. ¶ 5. All agree that the Plan is subject to ERISA.

         Prior to October 2006, FCE administered the Plan for a nominal fee of $4.50 per employee participant. Id. ¶ 24. However, beginning in October 2006, two events occurred that allegedly resulted in a dramatic increase in the fees charged by FCE. First, the medical and other insurance premiums that Colonial had previously paid directly for its employees were instead funneled through the Plan, which increased the amount of contributions to the Plan. Id. ¶ 25. At the same time, FCE's fee went from a fixed amount per participant, to one based on a percentage of the monthly contributions to the Plan. Id. Consequently, the amount of fees charged per participant by FCE increased by as much as twenty-fold. Id. ¶ 26 (the “fees charged to Plaintiff Akalu went from $4.50 per month for the first nine months of 2006 to $108.91 in October 2006 and ha[ve] stayed at that level”). The change in fee structure allegedly inured to the mutual benefit of Colonial and FCE, as it allowed Colonial to shift administrative costs to the Plan, and allowed FCE to reap substantially larger administrative fees. Id. ¶ 29. According to the Complaint, Colonial and FCE never disclosed the change in fee structure to Colonial's employees; never explained that medical and insurance contributions to the Plan were effectively subject to a surcharge equal to the percentage-based fee charged by FCE; and deliberately failed to comply with ERISA's reporting and claims administration obligations in order to conceal the Plan's operations from its participants. Id. ¶¶ 27, 37-38. Plaintiffs allege a raft of other purported ERISA violations as well, including unexplained changes to Plaintiffs' account balances, apparent comingling of Plan assets, and improprieties with the Plan trustee. Id. ¶¶ 32 -35.

         The Complaint also makes reference to a lawsuit filed in the United States District Court for the District of Maryland, Perez v. Chimes District of Columbia, No. 1:15-cv-3315 (D. Md. Oct. 30, 2015), wherein the Secretary of Labor has brought claims against FCE for allegedly charging excessive fees to administer an unrelated benefits plan, and for paying kickbacks to the employer sponsor of that plan. Id. ¶ 9, 39. Plaintiffs relay that it was allegedly FCE's business practice “to provide financial incentives to employers so that they would conspire in FCE's extraction of unreasonable fees from the employees.” The Department of Labor is actively investigating FCE in this regard. Id. ¶¶ 41-42.

         II. LEGAL STANDARD

         Defendants move to dismiss the Complaint for “failure to state a claim upon which relief can be granted” pursuant to Federal Rule of Civil Procedure 12(b)(6). “[A] complaint [does not] suffice if it tenders ‘naked assertion[s]' devoid of ‘further factual enhancement.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007)). Rather, a complaint must contain sufficient factual allegations that, if accepted as true, “state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570. “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.” Iqbal, 556 U.S. at 678. In deciding a Rule 12(b)(6) motion, a court may consider “the facts alleged in the complaint, documents attached as exhibits or incorporated by reference in the complaint, ” or “documents upon which the plaintiff's complaint necessarily relies even if the document is produced not by the plaintiff in the complaint but by the defendant in a motion to dismiss.” Ward v. District of Columbia Dep't of Youth Rehab. Servs., 768 F.Supp.2d 117, 119 (D.D.C. 2011) (internal quotation marks omitted). The court may also consider documents in the public record of which the court may take judicial notice. Abhe & Svoboda, Inc. v. Chao, 508 F.3d 1052, 1059 (D.C. Cir. 2007).

         III. DISCUSSION

         Plaintiffs bring claims for Defendants' alleged failure to comply with several statutory obligations imposed by ERISA. The Court addresses each of these in turn, and finds that Plaintiffs have pleaded sufficient factual matter to state a viable claim under each statutory violation pleaded in the Complaint.

         A. Breach of Fiduciary Duty - § 1104

         ERISA imposes duties of loyalty and prudence on fiduciaries. 29 U.S.C. §§ 1104(a)(1)(A), (B). To state a claim for breach of fiduciary duty, Plaintiffs must plausibly allege that: “(1) the defendants are plan fiduciaries; (2) that the defendants breached their fiduciary duties; and (3) that the breach caused harm to the plaintiff[s].” Brosted v. Unum Life Ins. Co. of Am., 421 F.3d 459, 465 (7th Cir. 2005). A party can become a “plan fiduciary” in one of several ways. First, a party can be expressly designated as a fiduciary in the plan instrument (a so-called “named fiduciary”). Second, a party can be expressly delegated authority by a named fiduciary pursuant to a delegation provision in the plan instrument. See generally Beddall v. State St. Bank & Trust Co., 137 F.3d 12, 18 (1st Cir. 1998); Hunt v. Hawthorne Assocs., Inc., 119 F.3d 888, 892 (11th Cir. 1997). Third, a party can be a fiduciary by exercising de facto control over an area of plan management or administration. Under this last category, “a party not specifically named as a fiduciary of a plan owes a fiduciary duty only ‘to the extent' that party (i) exercises any discretionary authority or control over management of the plan or its assets; (ii) offers ‘investment advice for a fee' to plan members; or (iii) has ‘discretionary authority' over plan ‘administration.'” McCaffree Fin. Corp. v. Principal Life Ins. Co., 811 F.3d 998, 1002 (8th Cir. 2016) (citing 29 U.S.C. § 1002(21)(A)). In order for a party to be a de facto fiduciary with respect to a particular activity, there must be a “nexus” between the discretionary authority the party wields and the activity. Id.

         Plaintiffs allege that Defendants breached their fiduciary duties by, inter alia, charging Plaintiffs and other Plan participants excessive fees for FCE's administrative services. Defendants challenge these allegations primarily on the basis that they owed no fiduciary duty with respect to the amount of fees charged, and that, even if they did, Plaintiffs have failed to adequately allege that the fees charged were excessive. For the reasons described below, the Court finds these arguments unavailing, and concludes that Plaintiffs have stated a plausible claim for relief for Defendants' alleged violations of the duties of loyalty and prudence imposed on fiduciaries by ERISA.

         1. FCE's Fiduciary Status

         FCE asserts that it was not a fiduciary with respect to the fees that it charged because those fees were set by a contract that was negotiated at arm's-length by FCE and Colonial. FCE Mem. at 14. A number of courts outside of the District of Columbia Circuit (“D.C. Circuit”) have held that service providers such as FCE are not fiduciaries with respect to fee amounts that are set by contractual arrangements negotiated at arm's-length. See Santomenno ex rel. John Hancock Trust v. John Hancock Life Ins. Co. (U.S.A), 768 F.3d 284, 293 (3d Cir. 2014) (“when a service provider and a plan trustee negotiate at arm's length over the terms of their agreement, discretionary control over plan management lies not with the service provider but with the trustee, who decides whether to agree to the service provider's terms”); Danza v. Fid. Mgmt. Trust Co., 533 F. App'x 120, 124 (3d Cir. 2013) (“At the point in time when Fidelity actually charged the fee for reviewing a DRO, Fidelity did have a fiduciary duty to the A & P Plan and its participants with respect to the administration of those services, but it did not then control the fee structure, as it was set in the agreement with A & P and Fidelity did not have unilateral discretion to change it.”); Hecker v. Deere & Co., 556 F.3d 575, 583 (7th Cir. 2009) (relying on cases holding that “a service provider does not act as a fiduciary with respect to the terms in the service agreement if it does not control the named fiduciary's negotiation and approval of those terms”); Chicago Dist. Council of Carpenters Welfare Fund v. Caremark, Inc., 474 F.3d 463, 473 (7th Cir. 2007) (“Given that this scheme was the very deal for which Carpenters bargained at arm's length, Caremark owed no fiduciary duty in this regard.”).

         By the same token, a number of courts outside of the D.C. Circuit have held that if a service provider does retain discretion over the fees that it charges, the service provider can be held liable as a fiduciary with respect to those fees. F.H. Krear & Co. v. Nineteen Named Trustees, 810 F.2d 1250, 1259 (2d Cir. 1987) (“On the other hand, after a person has entered into an agreement with an ERISA-covered plan, the agreement may give it such control over factors that determine the actual amount of its compensation that the person thereby becomes an ERISA fiduciary with respect to that compensation.”); Golden Star, Inc. v. Mass. Mut. Life Ins. Co., 22 F.Supp.3d 72, 81 (D. Mass. 2014) (“The caselaw is clear that a service provider's retention of discretion to set compensation can create fiduciary duties under ERISA with respect to its compensation.”); United Teamster Fund v. MagnaCare Admin. Servs., LLC, 39 F.Supp.3d 461, 470-71 (S.D.N.Y. 2014) (holding that allegation that service provider charged fees that were not expressly set by contract was sufficient to defeat a motion to dismiss); see also Seaway Food Town, Inc. v. Med. Mut. of Ohio, 347 F.3d 610, 619 (6th Cir. 2003) (“We agree with the Seventh Circuit's reasoning that where parties enter into a contract term at arm's length and where the term confers on one party the unilateral right to retain funds as compensation for services rendered with respect to an ERISA plan, that party's adherence to the term does not give rise to ERISA fiduciary status unless the term authorizes the party to exercise discretion with respect to that right.” (emphasis added)).

         FCE contends that the change in fee structure from a nominal amount per Plan participant, to one based on a percentage of contributions to the Plan, was expressly permitted by the contract negotiated between FCE and Colonial. FCE Mem. at 14. Contrary to FCE's view of this matter, however, the change in fee structure is not alleged to have been one negotiated and performed at arm's length between FCE and Colonial, but rather one undertaken for the mutual benefit of FCE and Colonial, at the expense of Colonial's employees. Compl. ¶ 29. Plaintiffs allege that the percentage-based fee structure permitted FCE to charge substantially higher fees, while allowing Colonial to shed the administrative burdens of managing its employees' health insurance coverage, id. ¶¶ 25, 29; that Colonial and FCE never disclosed the change in fee structure to Colonial's employees, because such disclosure would have allegedly led the employees to choose less expensive insurance coverage, which would have lowered the contributions to the Plan, and by extension, the amount of fees charged by FCE, id. ¶¶ 27-28, 38; and that FCE's “business practice was to provide financial incentives to employers so that they would conspire in FCE's extraction of unreasonable fees from the employees, ” id. ¶ 41. Consequently, under the particular factual allegations of this case, the Court finds that Plaintiffs have plausibly alleged that FCE exercised discretion over its compensation, meaning Plaintiffs have plausibly alleged that FCE acted as a fiduciary with respect to its compensation. See Santomenno v. Transamerica Life Ins. Co., No. CV 12-02782 DDP MANX, 2013 WL 603901, at *6-*7 (C.D. Cal. Feb. 19, 2013) (denying motion to dismiss because of skepticism that a service provider contract was negotiated at arm's length). Moreover, because the Court finds that Plaintiffs have plausibly alleged that FCE exercised discretion over its fees, the Court need not address FCE's contention that it was not a fiduciary because it only performed ministerial, non-discretionary services. FCE Mem. at 11; see Strumsky v. Washington Post Co., 922 F.Supp.2d 96, 104 (D.D.C. 2013) (“Persons who perform only ‘administrative' or ‘ministerial functions' are not plan fiduciaries.” (citing 29 CFR § 2509.75-8)).

         2. Colonial's Fiduciary Status

         Colonial contends that it was not a fiduciary with respect to the amount of fees charged by FCE because the determination of those fees was a “settlor” function. Col. Mem. at 7. The Supreme Court of the United States has instructed that when plan sponsors such as Colonial “adopt, modify, or terminate . . . plans . . . they do not act as fiduciaries, but are analogous to the settlors of a trust.” Lockheed Corp. v. Spink, 517 U.S. 882, 890 (1996) (citations omitted). Nevertheless, although “a plan sponsor does not become a fiduciary by performing settlor-type functions such as establishing a plan and designing its benefits . . . a plan sponsor does become a fiduciary . . . if . . . it retains or exercises any discretionary authority over the management or administration of a plan.” Perez v. Chimes D.C., Inc., No. CV RDB-15-3315, 2016 WL 4993293, at *5 (D. Md. Sept. 19, 2016) (internal quotation marks and citations omitted). Here, there are two independent reasons to conclude that Colonial retained management discretion over FCE's fees.

         First, “[u]nder ERISA, fiduciaries who have appointed other fiduciaries have a continuing duty to monitor the actions of the appointed fiduciaries.” Cannon v. MBNA Corp., No. CIVA 05-429 GMS, 2007 WL 2009672, at *5 (D. Del. July 6, 2007) (citing Coyne & Delany Co. v. Selman, 98 F.3d 1457, 1465 (4th Cir. 1996)). “[T]he power (through plan amendment) to appoint, retain and remove plan fiduciaries constitutes ‘discretionary authority' over the management or administration of a plan . . . .” Coyne, 98 F.3d at 1465. The Complaint alleges that Colonial “established or maintained . . . [the Plan] for the benefit of its employees . . ., ” Compl. ¶ 10, and that it contracted with FCE to administer the Plan, id. ¶ 4. This allegation reasonably suggests that Colonial had “the power . . . to appoint, retain and remove [FCE], ” and consequently to determine FCE's compensation, which means that Colonial was a fiduciary to the extent of its discretionary authority to appropriately monitor FCE's performance and fees. Coyne, 98 F.3d at 1466; Chimes, 2016 WL 4993293, at *6 (finding that employer had a fiduciary duty to monitor “FCE's fees and performance”).

         Second, Plaintiffs have plausibly alleged that FCE exerted de facto control over the amount of fees charged by FCE. Namely, Plaintiffs allege that Colonial benefitted from the change in fee structure because it was able to shift its administrative burden to FCE, Compl. ¶ 29, and that it facilitated this fee structure by not disclosing the structure to its employees, id. ΒΆΒΆ 27, 38. Accordingly, because Plaintiffs have plausibly alleged that Colonial exercised ...


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