Kanawi v. Bechtel Corp.

Citations: 590 F. Supp. 2d 1213; 45 Employee Benefits Cas. (BNA) 1470; 2008 U.S. Dist. LEXIS 99185; 2008 WL 5046916Docket: No. C 06-05566 CRB

Court: District Court, N.D. California; November 2, 2008; Federal District Court

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The Court addressed three motions for summary judgment in an ERISA class action involving the Bechtel Corporation's 401(k) retirement plan. Plaintiffs sought partial summary judgment alleging self-dealing by the Bechtel Defendants and Fremont Investment Advisors, which the Court denied, stating that Plaintiffs did not legally establish entitlement to judgment. The Bechtel Defendants and Fremont Investment Advisors also filed motions for summary judgment, which the Court granted in part and denied in part. It determined that ERISA’s six-year statute of limitations barred claims arising before September 11, 2000, and dismissed additional claims due to a lack of factual dispute regarding prohibited transactions or breaches of duty of loyalty.

Factual background reveals that the Bechtel Corporation operates a defined contribution 401(k) plan with individual accounts for participants, whose retirement benefits depend on contributions and investment performance. Plaintiffs, as a class of plan participants, sued multiple defendants, including the Bechtel Corporation, the Bechtel Trust, the Thrift Plan Committee, Peggi Knox, and Fremont Investment Advisors, which provided investment advisory services from 1986-2004. The Thrift Plan Committee, composed of Bechtel's senior officers, has held the discretionary authority to administer the plan since Bechtel became the sponsor, and no Committee member owned shares in Fremont Investment Advisors after September 11, 2000.

Fremont Investment Advisors originated from Bechtel's in-house investment division, which was transferred to Bechtel Investments Inc. in 1986. Bechtel Investments Inc. became independent, with a significant ownership stake held by Stephen Bechtel Jr. Subsequently, it incorporated Sierra Asset Management Inc. as a subsidiary, which was later hired by Fremont Mutual Funds as an investment advisor. Fremont Investments Inc. changed its name to Fremont Investors Inc., and Sierra became Fremont Investment Advisors Inc. Stephen Bechtel Jr. maintained ownership in FIA’s parent company during the relevant period, and an Investment Management Agreement was executed by the Committee in 1987 for managing plan assets.

In 1992, a new agreement was executed when Sierra changed its name to FIA, appointing FIA as the investment manager for Bechtel's Plan, granting it full authority to manage assets. Bechtel was FIA's primary client, and it is asserted that Bechtel covered all Plan-level fees for FIA from 1993 until November 2003, and from February to July 2004. These fees included charges for investment management, accounting, and participant education services, with the Plan only incurring fees for a brief period between November 2003 and February 2004.

The Third Amended Complaint (TAC) includes three causes of action: Count I alleges breach of fiduciary duty under ERISA against the Defendants; Count II seeks injunctive relief under ERISA based on the same conduct; and Count III seeks injunctive relief specifically against FIA. The Plaintiffs argue that the close relationship between Bechtel and FIA led to fiduciary breaches and imprudent decision-making, primarily focusing on unnecessary fees incurred by Plan participants. Additional allegations include prohibited transactions and misleading information regarding fees and expenses associated with the Plan.

On October 10, 2008, the Court certified the Plaintiff class and denied a jury trial. Currently, the Court is reviewing motions for summary judgment from both Plaintiffs and the Defendants, including FIA. Summary judgment is deemed appropriate if there are no genuine material facts in dispute, with the moving party bearing the initial burden of proof to show this absence of genuine issues.

To successfully challenge a plaintiff's claim, a party may either present evidence that negates a crucial element of the claim or demonstrate that the plaintiff lacks sufficient evidence to prove an essential element at trial. Once the moving party fulfills its initial burden, the responsibility shifts to the nonmoving party to prove the existence of an essential element of their case. The nonmoving party must provide evidence beyond mere pleadings to establish a genuine issue for trial. Special rules apply to summary judgment motions: doubts about genuine issues of material fact should be resolved in favor of the nonmoving party, and all factual inferences must be viewed in a light most favorable to them. 

Under ERISA, fiduciaries are required to act solely for the benefit of plan participants, exercising care and prudence akin to that of a prudent person in similar circumstances. The court assesses both the transaction's merits and the fiduciary's decision-making process. ERISA prohibits specific transactions deemed inherently inappropriate, including sales or leases of property between the plan and interested parties, and fiduciaries must not engage in transactions that benefit themselves or act in ways adverse to the interests of the plan or its participants.

ERISA 406(a) prohibits almost all transactions between a plan and a party in interest unless a statutory or administrative exemption applies. A "party in interest" broadly includes fiduciaries, service providers, employers with covered employees, and certain relatives. ERISA 408(b) offers exemptions, allowing fiduciaries to make reasonable arrangements with parties in interest for necessary services, provided compensation is reasonable. ERISA 406(b) specifically prohibits self-dealing by fiduciaries, establishing a per se violation regardless of intent or transaction fairness, reflecting Congress's intent to protect employee benefit plans. Fiduciaries who engage in self-dealing must return any benefits gained, and the exemptions in ERISA 408 do not apply to violations of the self-dealing prohibition in 406(b). ERISA allows actions against fiduciaries profiting from trust assets, even without direct financial loss to beneficiaries. The breach of fiduciary duty under 406(b) focuses on risking assets to benefit others, rather than merely losing plan assets. While 406 broadly defines prohibited transactions, it does not create a per se rule against conflicting loyalties; however, fiduciaries must still fulfill their duty of loyalty as mandated by ERISA 404. A fiduciary may breach this duty through imprudent actions towards plan participants, regardless of engaging in a per se prohibited transaction. Additionally, fiduciaries are jointly and severally liable for another’s breach if they knowingly participate, enable the breach, or fail to act upon knowledge of it. Liability for breach of ERISA fiduciary duty is limited to defined fiduciaries; non-fiduciaries cannot be held liable solely for participating in a breach.

ERISA defines a fiduciary as any individual or entity that exercises discretionary authority over plan management, provides investment advice for compensation, or has discretionary responsibility in plan administration (29 U.S.C. 1002(21)(A)). Generally, an ERISA plan sponsor, like Bechtel Corporation, acts in a settlor role when establishing or amending a plan and does not hold fiduciary status in those decisions (Lockheed Corp. v. Spink, Curtiss-Wright Corp. v. Schoonejongen). The determination of fiduciary status under ERISA reflects the actual powers exercised rather than formal assignments (James Lockhart, 178 A.L.R. Fed. 129). 

Bechtel acknowledges its fiduciary role but disputes the extent of its duties, claiming it delegated plan administration to the Committee and retained no discretionary authority thereafter. The plan stipulates that the Committee has final discretion over discretionary items. The plaintiffs' claims do not challenge Bechtel's performance of its limited fiduciary duties, which under ERISA can only lead to liability for breaches arising from those duties (Gelardi v. Pertec Computer Corp.). The evidence does not show that Bechtel improperly influenced Committee appointments or investment decisions, limiting its liability to potential joint liability for co-fiduciaries under 29 U.S.C. 1105(a). 

The Committee holds responsibility for the investment decisions of the Plan, and any breaches fall under its fiduciary obligations. FIA claims it is a limited fiduciary, asserting it is not liable for imprudent investment decisions; however, it exercised discretionary authority over the Plan's management and assets, working in conjunction with the Committee.

FIA cannot use the Committee’s oversight as a defense against liability for its management of the Plan, establishing it as a fiduciary regarding the actions in this lawsuit. Under ERISA, specifically Section 413, there are strict statutes of limitations for fiduciary duty breach claims. A claim must be filed within six years of the last action constituting the breach, or within three years if the plaintiff had actual knowledge of the breach, unless fraud or concealment tolls the period. The statute applies to actions occurring on or after September 11, 2000, barring claims for breaches prior to this date. Plaintiffs filed their case on September 11, 2006, arguing for tolling based on alleged fraud and concealment by the Defendants regarding their relationship with Bechtel and misrepresentations about fund performance. To toll the statute, Plaintiffs must prove Defendants made knowingly false misrepresentations or took affirmative steps to conceal the breach. The mere failure to disclose self-interest is insufficient for active concealment. Although there is some evidence suggesting Bechtel did not fully inform Plan participants of its interests in FIA, Plaintiffs have not provided evidence of affirmative concealment or fraudulent misrepresentation. A document from FIA’s website referencing it as a “Bechtel-related investment advisory firm” lacks sufficient context to support the claims of intent to deceive.

Evidence presented does not establish active concealment by Defendants from July 1998 to March 2001, as required to toll the statute of limitations for Plaintiffs' claims under ERISA. Allegations of fraudulent conduct, including excessive fees and misrepresentations, lack sufficient support to demonstrate active concealment of fiduciary breaches. The Court will only consider claims arising after September 11, 2000. 

The primary claim against Defendants revolves around their retention of FIA as the investment manager and administrative service provider. Plaintiffs argue this decision breached fiduciary duties and constituted a conflicted transaction under ERISA §406. Although Plaintiffs assert that FIA's interests aligned too closely with Bechtel's upper management, the evidence shows that, post-September 11, 2000, no Committee members had ownership stakes in FIA. 

Additionally, Plaintiffs claim FIA used its relationships with the Committee to maintain its position, but FIA's fees were paid directly by Bechtel, not Plan assets, which mitigates concerns of prohibited transactions under ERISA §406. The Department of Labor regulations allow FIA to provide services as long as it is not compensated from Plan assets. From November 2003 to February 2004, the Plan did pay FIA’s fees, raising a factual dispute regarding whether these payments constituted a prohibited transaction, which cannot be resolved at summary judgment.

The evidence does not definitively establish whether the retention of FIA constituted a prohibited transaction with a "party in interest" under 406(a). Defendants argue that the fees paid to FIA are exempt under 408(b)(2) for reasonable fees for necessary services, referencing Patelco Credit Union v. Sahni, which confirms that the reasonable compensation exception applies to transactions under 406(a) but not to self-dealing under 406(b). However, the Court finds that Defendants have only presented conclusory allegations regarding the reasonableness of the fees, and it cannot rule as a matter of law that the exemption applies. Furthermore, it remains uncertain whether receiving fees from the Plan's assets constitutes prohibited self-dealing under 406(b). Although Defendants assert that the Committee members did not personally benefit from the fees, and thus the transaction cannot be deemed self-dealing, Plaintiffs have not demonstrated any personal interest affecting the Committee members' fiduciary judgment. Consequently, Plaintiffs cannot rely on speculative connections between Bechtel and FIA to claim self-dealing.

Nevertheless, Defendants have not adequately addressed why 406(b)(3) should not apply, which prohibits fiduciaries from receiving personal consideration from parties dealing with the plan. Viewing the evidence favorably to Plaintiffs, a reasonable fact-finder could conclude that FIA received fees from the Committee in connection with transactions involving plan assets. This aligns with Haddock v. Nationwide Financial Services, where summary judgment was denied due to unresolved factual issues regarding prohibited transactions under 406(b)(3). Ultimately, summary judgment is granted to Defendants concerning the claim that FIA's fees were paid by Bechtel. However, the Plaintiffs' claim remains viable for the period when the Plan paid FIA's fees, as it is unclear whether those fees were reasonable under 406(a) and whether FIA engaged in prohibited self-dealing under 406(b)(3).

Defendants are accused of paying excessive fees by investing Plan assets in Fremont Mutual Funds, allegedly favoring entities connected to the Bechtel family over the best interests of Plan participants. Plaintiffs challenge specific investment decisions made by the Committee and Fremont Investors Inc. regarding the inclusion of Fremont Global Fund, Fremont Bund Fund, Fremont Money Market Fund, and Fremont Institutional U.S. Micro-Cap Fund. They argue these decisions constituted prohibited transactions due to conflicts of interest. However, many of these actions occurred before the relevant statutory period, specifically prior to September 11, 2000, which limits the applicability of ERISA's prohibited transaction provisions. 

The Court notes that even if these transactions were not prohibited, a breach of the duty of loyalty under ERISA § 404(a) could still be assessed based on whether Defendants acted imprudently toward Plan participants. Although Plaintiffs claim that Defendants paid unnecessary fees, the majority of fees were borne by Bechtel, not the Plan, and the evidence does not support that fees were unreasonable or that Defendants failed in their oversight duties. The Committee regularly reviewed investments and sought external advice, supporting the conclusion that Defendants acted prudently.

Additionally, while some funds, particularly Fund A, may have underperformed, this alone does not make Defendants liable, as the Plan provided six investment options with varying risk levels, consistent with standard practices for defined contribution plans.

Defendants regularly monitored the performance of the Plan’s investments and evaluated alternatives, demonstrating that the Fremont Mutual Funds performed competitively within industry standards. The standard for evaluating prudence is based on conduct rather than performance, and Plaintiffs failed to prove that Defendants acted outside their obligations to the Plan participants. Retrospective opinions on decision-making do not suffice for a breach of fiduciary duty claim. 

FIA initiated the Managed Account Services Program (MAS) in 2000, targeting individuals for investment services outside the Plan, with Bechtel permitting FIA to advertise this program in a single mailing to Plan participants. Plaintiffs allege this constituted a breach of fiduciary duty; however, Defendants did not violate their duties by allowing the MAS flyer, as ERISA does not prohibit fiduciaries from offering additional services for a fee. The MAS program, intended for retirees' non-Plan assets, did not adversely affect the Plan or its participants, leading to the dismissal of the breach of fiduciary duty claim related to the MAS Program.

In 2001, Fremont Investors Inc. planned to sell FIA, which had grown significantly since its incorporation in 1986, largely due to its relationship with Bechtel and the management of the Plan. In 2002, the Plan generated $4.2 million in annual direct fees for FIA. During the sale process, FIA kept Bechtel updated and continued managing Fund C, which was a substantial revenue source, generating about $1.3 million in fees annually. In June 2004, the Committee terminated FIA’s investment management agreement based on recommendations from Callan Associates.

The Committee chose to retain the Plan’s Fund C assets in the Fremont Money Market Fund for an additional year, which plaintiffs argue negatively impacted the revenue of FIA's new owners had the Committee opted to withdraw the Fund. Plaintiffs assert that the Committee's decision was motivated by a desire to protect the sale of FIA rather than the interests of Plan participants. The sale amount of FIA remains undisclosed. The Bechtel Defendants counter that their actions, including replacing FIA as the administrative services provider prior to the sale, contradict any claim that they aimed to enhance the sale price. The Committee undertook a careful restructuring of the Plan, terminating Funds A and E and replacing FIA’s administrative and management roles while retaining Fund C, which had a strong performance record. Bechtel's internal staff took over day-to-day administrative responsibilities in October 2003. Plaintiffs fail to provide legal authority supporting their claim for proceeds from the FIA sale based solely on the Plan's status as a significant client. They also do not establish that the Defendants breached fiduciary duties by retaining Fund C or staying informed on potential buyers, which is deemed a reasonable action impacting Plan decision-making. 

Regarding ERISA's "safe harbor" defense, the Defendants claim immunity from liability for losses resulting from a participant’s control over their account assets, as outlined in 29 U.S.C. 1104(c)(1)(A). There is contention over whether participants had actual control over their accounts, and due to existing disputes about the Plan’s qualification under ERISA regulations, summary judgment on this issue is inappropriate. Even if the safe harbor applies, it does not shield Defendants from liability for fiduciary breaches occurring prior to any participant exercising control. The Department of Labor maintains that the safe harbor does not protect against claims of imprudent investment option selection.

Liability cannot be avoided by a party providing participants control over their accounts when conflicts of interest or poor management are present. The Department of Labor (DOL) mandates that fiduciaries continuously monitor the prudence of investment options, irrespective of participant control. The plaintiffs seek partial summary judgment against Bechtel, the Committee, and FIA on four claims: hiring FIA as the investment manager, investing in Fremont Mutual Funds, issues related to the sale of FIA, and solicitation of participants through FIA’s Managed Account Services Program. They request joint and several liability for funds received by FIA due to imprudent conduct. However, ERISA's statute of limitations precludes claims prior to September 11, 2000, undermining claims regarding hiring FIA and mutual fund investments. The plaintiffs also failed to prove that defendants breached fiduciary duties by retaining Fund C or through FIA’s Managed Account Services Program. Consequently, the motion for partial summary judgment is denied. 

Regarding Defendant Peggi Knox, the plaintiffs have not supported claims against her, leading to summary judgment in her favor. The court finds no merit in the plaintiffs' request to delay ruling due to incomplete discovery, as the requested information would not impact the case's outcome, resulting in the denial of the Rule 56(f) motion. The court confirms the six-year statute of limitations applies, barring claims before September 11, 2000, and partially grants and denies the defendants' motions for summary judgment. Claims regarding FIA’s fees are permissible only for a four-month period, while others related to mutual fund management, FIA’s services, and Knox are dismissed due to lack of evidence. The court rejects claims based on ERISA’s safe harbor defense and determines that the three-year limitations period proposed by FIA does not apply, as plaintiffs did not demonstrate knowledge of the contested transactions.