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CommonSpirit Inspires Another Motion for Reconsideration in Excessive Fee Suit

Litigation

Recent decisions in the Sixth Circuit have inspired yet another fiduciary defendant to request a reconsideration of their motion to dismiss a plaintiff’s excessive fee suit.

This time it’s the fiduciary defendants of Michigan’s Spectrum Health System 403(b) plan, which just a few weeks ago saw their motion to dismiss an excessive fee suit rejected.

The Motion to Dismiss

The court then found that the plaintiffs’ allegations were “enough to survive the motion to dismiss.” Specifically—and giving the party that was not moving for dismissal the benefit of the doubt—U.S. District Judge Paul L. Maloney noted that:

  • “If Defendants can skirt an allegation of imprudence simply by providing a ‘mix and range’ of investment options, that would allow every imprudent fiduciary to avoid discovery simply because they offered at least one low-cost plan”; 
  • the argument that the fund comparisons were not “perfect” only served to establish the need to go to discovery, since he could not establish as a matter of law that the fund comparisons were improper;
  • while hindsight-based claims weren’t appropriate, there were allegations that the Committee “failed for years to perform sufficient reviews or investigations into the Plan’s performance,” and thus he found it plausible that the defendants had access to performance data at various points throughout the relevant period, but said the plaintiff could only “see into Defendants’ review process” with the “benefit of discovery”; 
  • (citing other court decisions) “investment in a retail class fund where an identical institutional class fund with lower fees is available raises a plausible allegation that the Plan’s administrator violated the duty of prudence,” and the reality that the plan did at one point move to a lower priced share class raised—in his mind—“a question of fact—why didn’t Defendants move more or all of the higher-cost share classes to a lower-cost group?” 

In sum, Judge Maloney found that the plaintiffs raised “…several relevant questions of fact with this argument, demonstrating the need for discovery.”

New Precedents

But that, as they say, was then. In moving for a reconsideration (McNeilly v. Spectrum Health Sys., W.D. Mich., No. 1:20-cv-00870, motion for partial reconsideration 8/3/22) the Spectrum Health System defendants noted that “the CommonSpirit and Forman decisions represent a change in the controlling authority applicable to Plaintiffs’ claims. As a result, this Court should reconsider the Order and dismiss all of Plaintiffs’ claims, with the exception of their claims regarding the share class of the seven funds listed in Paragraphs 100 and 102 of the Amended Complaint.”

The former, decided in late June by a three-judge panel in the Sixth Circuit, basically found that a simple fee comparison with allegedly comparable plans (in size and participant count) did not constitute a “plausible” inference of fiduciary misconduct—and said the same was true with regard to active versus passive fund comparisons. The latter, decided in mid-July, basically held that there are multiple factors that can go into a prudent decision—factors beyond price and performance (though those are surely considerations). However, they also stated that the decision to offer what would appear to be an identical fund in every flavor but price did create a “plausible” inference of a breach of fiduciary duty. But essentially those decisions have raised the plausibility threshold for a suit to survive a motion to dismiss without going on to discovery and ultimately trial.

They explained that in making his initial decision, Judge Maloney acknowledged that “[t]he Sixth Circuit has not yet weighed in” on “what is necessary to plead a violation of ERISA’s duty of prudence,” and that, “absent guidance from the Supreme Court or the Sixth Circuit,” Judge Maloney followed the more lenient approach applied by the Third, Eighth and Ninth Circuits to “allegations regarding imprudent investment selections and excessive fees, such as the ones presented by Plaintiffs here,” and held that the plaintiffs had stated viable claims for breach of fiduciary duty based on that standard. 

A ‘Palpable Defect’?

Which, of course, the fiduciary defendants now explain that, “Reconsideration is usually justified when there is an intervening change in controlling law, newly available evidence, or a need to correct a clear error or prevent manifest injustice,” which, they note, includes “an intervening change in controlling law occurs when the court of appeals issues a ruling stating a ‘new rule of law’ as to what is required to state a claim in a particular context.”

CommonSpirit and Forman established new law on the pleading standard for Plaintiffs’ ERISA claims, representing the type of intervening change in controlling authority that warrant reconsideration,” they write. Alternatively, they comment that, “allowing the parties to proceed with costly discovery on now-defunct claims would lead to a ‘palpable defect’ in the disposition of the case.”

Will the court reconsider?[i] Several other recent dismissals have asked for similar reconsiderations. 

Stay tuned.


[i] According to Bloomberg Law, the case is now pending in the U.S. District Court for the Western District of Michigan before Judge Jane M. Beckering, who was assigned to the case after the 2021 ruling by Judge Maloney.

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