Danielle SANTOMENNO, for the use and benefit of the JOHN HANCOCK TRUST and the John Hancock Funds II; Karen Poley and Barbara Poley, for the use and benefit of the John Hancock Funds II; Danielle Santomenno, Karen Poley and Barbara Poley individually and on behalf of Employee Retirement Income Security Act of 1974, as amended (“ERISA“), employee benefit plans that held, or continue to hold, group variable annuity contracts issued/sold by John Hancock Life Insurance Life Insurance Company (U.S.A.), and Participants and beneficiaries of all such ERISA covered employee benefit plans; and Danielle Santomenno individually and on behalf of any person or entity that is a party to, or has acquired rights under, an individual or group variable annuity contract that was issued/sold by John Hancock Life Insurance Company (U.S.A.) where the underlying investment was a John Hancock proprietary fund contained in the John Hancock Trust, v. JOHN HANCOCK LIFE INSURANCE COMPANY (U.S.A.); John Hancock Investment Management Services; John Hancock Funds, LLC; John Hancock Distributors, LLC, Danielle Santomenno, Karen Poley, Barbara Poley, Appellants.
No. 11-2520
United States Court of Appeals, Third Circuit
April 16, 2012
677 F.3d 178
M. Patricia Smith, Solicitor of Labor (Did not enter an appearance), Timothy D. Hauser, Associate Solicitor, Plan Benefits Security Division (Did not enter an appearance), Elizabeth Hopkins, (Did not enter an appearance), for Appellate and Special Litigation.
Robin S. Parry, Esq., Nathaniel I. Spiller, Esq. (Argued), U.S. Department of Labor, Office of the Solicitor, Plan Benefits Security Division, Washington, DC, for Amicus Appellant.
James O. Fleckner, Esq. (Argued), Alison V. Douglass, Esq., Daniel P. Condon, Esq., Goodwin Procter LLP, Boston, MA, Brian J. McMahon, Esq., Gibbons P.C., Newark, NJ, for Appellees.
Before: SLOVITER and VANASKIE, Circuit Judges, and POLLAK,* District Judge.
*
VANASKIE, Circuit Judge.
Danielle Santomenno, Karen Poley, and Barbara Poley (collectively, “Participants“) brought suit against John Hancock Life Insurance Company (U.S.A.) and its affiliates (collectively, “John Hancock“) under the Employee Retirement Income Security Act of 1974 (ERISA),
I.
This action arises out of the administration of employer-sponsored 401(k) benefit plans. The trustees of these plans entered into group annuity contracts with John Hancock. Participants brought this action on March 31, 2010. The basis of Participants’ complaint is that John Hancock charged a variety of excessive fees in providing investment services to these plans. Santomenno was a security holder in the relevant funds from July 2008 through sometime in June 2010, K. Poley from July 2004 to sometime in January 2010, and B. Poley from January 2009 to sometime in January 2010. Counts I through VII were brought under Section 502(a) of ERISA,
John Hancock moved to dismiss under
In short, absent demand, or allegations going to demand futility, or some allegations, which if proven, would establish that the trustees improperly refused to bring suit, it would appear that the beneficiaries of an ERISA plan cannot bring a claim under Section 502. Likewise, any such suit must join the plan‘s trustees. Here, because there are no such factual allegations and because the trustees have not been joined, dismissal of the ERISA counts, counts I through VII, would seem to be proper.
Santomenno ex rel. John Hancock Trust v. John Hancock Life Ins. Co. (U.S.A.), No. 2-10-cv-01655, 2011 WL 2038769, at *4 (D.N.J. May 23, 2011) (citing McMahon v. McDowell, 794 F.2d 100, 110 (3d Cir. 1986)).
The District Court dismissed Count VIII, brought under section 36(b) of the ICA, because Participants no longer owned any interest in John Hancock funds. The District Court observed that “continuous ownership throughout the pendency of the litigation [is] an element of statutory standing.” Id. at *5 (citing Siemers v. Wells Fargo & Co., No. C 05-04518WHA, 2007 WL 760750, at *20 (N.D.Cal. Mar. 9, 2007)). The District Court proceeded to dismiss Count IX because, in its view, Section 47(b) of the ICA could only provide relief to Participants if they could “show[] a violation of some other section of the Act.” Id. (quoting Tarlov v. Paine Webber Cashfund, Inc., 559 F.Supp. 429, 438 (D.Conn.1983)). Because Participants’ Section 36(b) claim had been dismissed in Count VIII, the District Court reasoned that “the Section 47(b) claim would seem to fail also.” Id.
II.
The District Court had subject-matter jurisdiction pursuant to Section 502(e) of ERISA,
A.
We begin by addressing the ICA issues. The first question is whether continuous ownership of securities in the fund in question during the pendency of litigation is required for actions brought under Section 36(b) of the ICA. Section 36(b), in pertinent part, provides:
For the purposes of this subsection, the investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by such registered investment company, or by the security holders thereof, to such investment adviser or any affiliated person of such investment adviser. An action may be brought under this subsection by the Commission, or by a security holder of such registered investment company on behalf of such company, against such investment adviser, or any affiliated person of such investment adviser, or any other person enumerated in subsection (a) of this section who has a fiduciary duty concerning such compensation or payments, for breach of fiduciary duty in respect of such compensation or payments paid by such registered investment company or by the security holders thereof to such investment adviser or person.
In the context of derivative suits governed by
Lewis v. Chiles, 719 F.2d 1044, 1047 n. 1 (9th Cir.1983) (citations omitted).
Section 36(b) plainly requires that a party claiming a breach of the fiduciary duty imposed by that legislative provision be a security holder of the investment company at the time the action is initiated. See, e.g., Dandorph v. Fahnestock & Co., 462 F.Supp. 961, 965 (D.Conn. 1979). Imposing a continuous ownership requirement throughout the pendency of the litigation assures that the plaintiff will adequately represent the interests of the security holders in obtaining a recovery for the benefit of the company.
Participants assert that “there is no basis upon which to impose a continuing ownership requirement on an ICA § 36(b) claim.” (Appellant‘s Br. at 33.) (citations omitted). Several arguments are advanced in support of Participants’ position. First, citing two District Court decisions—In re American Mutual Funds Fee Litigation, cv-04-05593, 2009 WL 8099820, at *1 (C.D.Cal. Jul. 14, 2009), and In re Mutual Funds Investment Litigation, 519 F.Supp.2d 580, 590 (D.Md.2007)—Participants contend that
We disagree with Participants’ contentions. First, we note that In re Mutual Funds Investment Litigation, one of two cases relied upon by Participants, did not concern the continuous ownership question. Instead, the District Court in that case addressed the contemporaneous ownership requirement rather than the continuous ownership requirement—the idea “that, at the time of the alleged harm, plaintiffs must have owned shares in the fund.” 519 F.Supp.2d at 590 (emphasis added). There was no question in that case that the plaintiffs continued to hold shares in one of the mutual funds in question.2
This leaves Participants with In re American Mutual Funds Fee Litigation, an opinion that goes against the weight of authority on this topic, and is premised upon an overly expansive reading of the Supreme Court‘s decision in Daily Income Fund. The District Court in In re American Mutual Funds Fee Litigation viewed Daily Income Fund as dispensing with a continuous ownership standing requirement because such a requirement was recognized in the context of cases arising under
Participants mistakenly assume that the root of the continuous ownership requirement is
Participants’ policy argument—that a continuous ownership requirement de-
Standing is justified only by this proprietary interest created by the stockholder relationship and the possible indirect benefits the nominal plaintiff may acquire qua stockholder of the corporation which is the real party in interest. Without this relationship, there can be no standing, “no right in himself to prosecute this suit.”
434 F.2d at 735-36 (citations omitted).
Furthermore, we note that even if continuous ownership were not a requirement of Section 36(b), Participants’ claim under that Section still fails. As observed above, a plain reading of Section 36(b) indicates that ownership when the suit is first filed is an indisputable prerequisite. The Poleys’ interests in the John Hancock funds were terminated prior to the filing of the original complaint. Therefore, they cannot be classified as “security holder[s]” under Section 36(b). Santomenno, meanwhile, still owned John Hancock funds when the case was first initiated, but no longer had any interest in the funds when the Second Amendment Complaint was filed on October 22, 2010. It is the Second Amended Complaint that is the operative pleading for standing purposes. As the Supreme Court observed in Rockwell International Corp. v. United States, 549 U.S. 457, 127 S.Ct. 1397, 167 L.Ed.2d 190 (2007):
The state of things and the originally alleged state of things are not synonymous; demonstration that the original allegations were false will defeat jurisdiction. So also will the withdrawal of those allegations, unless they are replaced by others that establish jurisdiction. Thus, when a plaintiff files a complaint in federal court and then voluntarily amends the complaint, courts look to the amended complaint to determine jurisdiction.
Id. at 473-74 (citations omitted). Even if we were to hold that continuous ownership is not required by the statute, Participants’ Section 36(b) claim would fail because their interests in the John Hancock funds were terminated prior to the filing of the Second Amended Complaint. As a result, they are not security holders entitled to bring an action on behalf of the investment company. Accordingly, dismissal of Participants’ Section 36(b) claim was proper.
B.
The second ICA issue is whether Participants’ claim under Section 47(b) of the ICA survives a motion to dismiss. Section 47(b), in pertinent part, provides that:
A contract that is made, or whose performance involves, a violation of [the ICA], or of any rule, regulation, or order thereunder, is unenforceable by either party ... unless a court finds that under the circumstances enforcement would produce a more equitable result than nonenforcement and would not be inconsistent with the purposes of [the ICA].
Participants argue that the District Court incorrectly dismissed their Section 47(b) claim by erroneously believing it was
Participants contend that because amendments made in 1980 to Section 47(b) “substantially tracked” Section 215 of the Investment Advisers Act of 1940 (IAA),
Participants misread Sandoval, which made it clear that only Congress could create private rights of action. 532 U.S. at 286 (“Like substantive federal law itself, private rights of action to enforce federal law must be created by Congress.“). Congress empowered the Securities and Exchange Commission to enforce all ICA provisions through Section 42, see
Unlike Section 36(b) of the ICA, the IAA construed in Transamerica did not expressly provide for a private cause of action. See 444 U.S. at 14. The Transamerica Court observed that where the same statute contains private causes of action in other sections (such as with the ICA), “it is highly improbable that ‘Congress absentmindedly forgot to mention an intended private action.‘” 444 U.S. at 20 (quoting Cannon v. University of Chicago, 441 U.S. 677, 742, 99 S.Ct. 1946, 60 L.Ed.2d 560 (1979) (Powell, J., dissenting)). As the Court explained, “it is an elemental canon of statutory construction that where a statute expressly provides a particular remedy or remedies, a court must be chary of reading others into it.” Id. at 19. Thus, one reason why a right of action exists in Section 215 of the IAA but not Section 47(b) of the ICA is because “Congress intended the express right of action set forth in Section 36(b) [of the ICA] to be exclusive; there was no similar exclusive, express right of action in [the IAA].” Tarlov, 559 F.Supp. at 438.
Another reason not to imply the existence of a cause of action under Sec-
Furthermore, it is not clear that even the Transamerica Court would have found a private right of action in Section 47(b) due to the differences in text and structure between the ICA and the IAA. While Section 47(b) of the ICA does track Section 215 of the IAA closely, there are important differences between the two. While the latter states that “[e]very contract made in violation of any provision of this subchapter ... shall be void,”
The use of the term “unenforceable” in Section 47(b), by way of contrast, carries no such legal implications. Indeed, courts have held that the language of Section 47(b) creates “a remedy rather than a distinct cause of action or basis of liability.” Stegall v. Ladner, 394 F.Supp.2d 358, 378 (D.Mass.2005); see also Mutchka v. Harris, 373 F.Supp.2d 1021, 1027 (C.D.Cal.2005).
In summary, neither the language nor the structure of the ICA supports Participants’ effort to insinuate their excessive fees claim into Section 47(b). Such a claim is cognizable under Section 36(b), but Participants lack standing to sue under that provision. They cannot circumvent their standing deficiency by resort to Section 47(b). Accordingly, Participants’ Section 47(b) claim was properly dismissed.
C.
We now turn to whether pre-suit demand and mandatory joinder of trustees is required for Participants’ claims brought
(a) Persons empowered to bring a civil action
A civil action may be brought—...
(2) by the Secretary, or by a participant, beneficiary or fiduciary for appropriate relief under section 1109 of this title;
(3) by a participant, beneficiary, or fiduciary
(A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or
(B) to obtain other appropriate equitable relief
(i) to redress such violations or
(ii) to enforce any provisions of this subchapter or the terms of the plan.
The text is silent as to pre-suit demand and mandatory joinder of trustees—in fact, no preconditions on a participant or beneficiary‘s right to bring a civil action to remedy a fiduciary breach are mentioned at all. This led the Supreme Court to hold in Harris Trust & Savings Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 120 S.Ct. 2180, 147 L.Ed.2d 187 (2000), that Section 502(a)(3):
[A]dmits of no limit (aside from the “appropriate equitable relief” caveat) on the universe of possible defendants. Indeed § 502(a)(3) makes no mention at all of which parties may be proper defendants—the focus, instead, is on redressing the “act or practice which violates any provision of [ERISA Title I].” Other provisions of ERISA, by contrast, expressly address who may be a defendant.
Id. at 239 (quoting
The District Court, relying on Diduck v. Kaszycki & Sons Contractors, Inc., 874 F.2d 912 (2d Cir.1989), and the common law of trusts, held that pre-suit demand upon the trustees and joinder of the trustees as parties were prerequisites to Participants’ ERISA claims. Diduck, however, was decided under Section 502(g)(2) of ERISA,
Because section 502(g)(2) only applies to suits by fiduciaries, it is sensible to require plan participants, if they may assert the fiduciaries’ right of action at all, to follow Rule 23.1, which applies when the appropriate plaintiff has “failed to
enforce a right which may properly be asserted by it.” FED.R.CIV.P. 23.1 . Section 502(a)(2), unlike section 502(g)(2), provides an express right of action for participants—presumably because the drafters of ERISA did not think fiduciaries could be relied upon to sue themselves for breach of fiduciary duty.
One reason for this lack of a demand requirement for Section 502(a)(2) and (a)(3) claims is that the protective purposes of ERISA would be subverted if the section covering fiduciary breach required beneficiaries to ask trustees to sue themselves. Accordingly, the District Court erred in concluding that Section 502(g) claims are “akin” to Section 502(a) claims. Santomenno, 2011 WL 2038769, at *3. “Because plan participants are expressly authorized to bring suit under section 502(a)(2), the situation here is not controlled by Diduck.” Coan, 457 F.3d at 258.
In addition to the text, structure, and purpose of ERISA, the legislative history of the statute also indicates that Congress did not intend to impose obstacles such as pre-suit demand or mandatory joinder of trustees with respect to claims brought under Section 502(a):
The enforcement provisions have been designed specifically to provide both the Secretary [of Labor] and participants and beneficiaries with broad remedies for redressing or preventing violations of the [Act].... The intent of the Committee is to provide the full range of legal and equitable remedies available in both state and federal courts and to remove jurisdictional and procedural obstacles which in the past appear to have hampered effective enforcement of fiduciary responsibilities under state law or recovery of benefits due to participants.
S.REP. NO. 93-127, at 3 (1973), reprinted in 1974 U.S.C.C.A.N. 4838, 4871. As we noted in Leuthner v. Blue Cross & Blue Shield of Northeastern Pennsylvania, 454 F.3d 120, 128 (3d Cir.2006), “ERISA‘s legislative history indicates that Congress intended the federal courts to construe the statutory standing requirements broadly in order to facilitate enforcement of its remedial provisions.”
In dismissing the ERISA counts, the District Court relied on “guidance from the common law of trusts.” Santomenno, 2011 WL 2038769, at *3. We believe this reliance was misplaced, as the statute unambiguously allows for beneficiaries or participants to bring suits against fiduciaries without pre-suit demand or joinder of trustees. The common law of trusts is not incorporated en masse into ERISA. On the contrary, “trust law will offer only a starting point, after which courts must go on to ask whether, or to what extent, the language of the statute, its structure, or its purposes require departing from common-law trust requirements.” Varity Corp. v. Howe, 516 U.S. 489, 497, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996). As noted above, the language of the statute, the legislative history, and the structure of this remedial legislation compel the conclusion that neither a pre-suit demand requirement nor joinder of the plan trustees is a prerequisite to Participants’ claims. Accordingly, the District Court should not have dismissed Counts I through VII due to the lack of a pre-suit demand upon the plan trustees and the absence of the trustees as parties to this action.
III.
For the foregoing reasons, we affirm the District Court‘s judgment on the ICA counts, but vacate the District Court‘s dis-