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Court Finds Plaintiffs Are SOL on Fiduciary Breach Claims


Plan fiduciaries that had come close to settling a suit that accused them of mismanaging plan assets—twice—have managed to prevail because the plaintiffs waited too long to sue.

In this case, participant-plaintiffs Daniel Draney and Lorenzo Ibarra brought suit against the plan fiduciaries of Westco Chemicals, Inc., and its principals, Ezekiel Zwillinger and Steven Zwillinger, for “mismanaging an employee defined-contribution pension plan.”[i] 

The parties in the suit, originally filed in February 2019, claimed to have reached a $500,000 settlement in May 2021—but, according to Law360, the court refused to sign off on the agreement because it could undercompensate certain beneficiaries. They put forward a second settlement in March—but the court then had similar objections. So, the defendants moved for a summary judgement—a decision without an actual trial—and U.S. District Judge Otis D. Wright II “carefully considered the papers filed in connection with the Motion and deemed the matter appropriate for decision without oral argument.”

Case Background

By way of background, Judge Wright noted (Draney et al. v. Westco Chemicals Inc. et al., case number 2:19-cv-01405, in the U.S. District Court for the Central District of California) that “throughout most of the 2010s, the Zwillingers invested Plan funds exclusively in low-interest-bearing certificates of deposit (‘CDs’), without diversifying the Plan’s investment portfolio.” As a result, the plaintiffs here alleged that Westco employees missed out on over $1 million of collective fund growth. He further notes that Draney first became a Plan participant in 2010—and “before he elected to participate in the Plan, he was aware that the plan was invested solely in CDs and cash.” Indeed, Judge Wright notes that “at first, he chose not to invest in the Plan because, in his words, its ‘earnings were too low,’ but he eventually became a Plan participant ‘as part of his overall tax and savings strategy.’”

Judge Wright then notes that, “in 2010 and 2011, Draney had conversations with almost every employee in the company about the Plan’s investment strategy, and according to Draney, most Westco employees were dissatisfied with the Plan’s investment in CDs.” In fact, it seems that this “was a ‘running joke’ among Westco employees regarding the Plan’s investment in CDs, and ‘virtually everyone’ at the company was aware of it.” Indeed, until 2018, when the Zwillingers changed the Plan’s investment strategy, Draney maintained an understanding that the Plan remained invested solely in CDs.

As for plaintiff #2, Ibarra became a Plan participant by no later than 2009—but it was established that he received participant statements showing the Plan’s assets were invested in cash or CDs—and that Ibarra saw at least one of these statements—that will come into play later.

Statute of Limitations (SOL)

Before actually ruling on the motion for summary judgement, Judge Wright noted that “courts draw all reasonable inferences in the light most favorable to the nonmoving party, refraining from making credibility determinations or weighing conflicting evidence.” But then, turning to the governing law (ERISA), he explained that the ERISA statute of limitations—a law that sets the maximum time that parties have to initiate legal proceedings after an alleged violation—prevents a suit from being brought after the earlier of: (1) six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation, or (2) three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation.

In this particular case, the court focused on determining when the plaintiffs had that “actual knowledge” of the breach they were challenging. 

Now, the plaintiffs argued that the Court “should isolate and define the underlying violations differently, as either (1) each individual purchase or sale of a CD, or (2) the various breaches of Defendants’ duty to monitor that occurred on an ongoing basis throughout the 2010s as Defendants maintained their allegedly insufficient investment strategy.” Well, put this one in the category of “nice try.” Judge Wright put it this way; “Plaintiffs’ argument is not well taken. Even if one or more of these events qualifies as an underlying violation that could theoretically trigger the start of a new limitations period, the triggering of any such period would not operate to revive a claim that already expired under § 1113(2) due to actual knowledge of a breach and the passage of three years.”

Said another way, “plaintiffs may not rely on a ‘continuing breach’ theory to overcome ERISA’s three-year statute of limitations where the alleged breaches are all of the same character and the plaintiff knew of early breaches more than three years before bringing suit.” Basically, the individual purchases and sales were all based on the same knowledge and understanding—"'nothing materially new’ about Defendant’s underlying lack of prudence.” Ditto the allegations of a lack of monitoring. 

“No party suggests that anything new happened (in the market or elsewhere) in the mid-2010s that might have made a CDs-only investment strategy an imprudent strategy where it was not before,” Judge Wright wrote. “To the extent Defendants had an obligation to review the Plan’s portfolio and diversify its investments, that obligation existed from the Plan’s very genesis, and certainly by 2010 or 2011. Nothing new happened in the interim, and any continuing breaches were “of the same kind and nature.”

Actual Knowledge

So, when did these participants become aware/have actual knowledge? Well, “Draney does not dispute that by 2011 at he [sic] latest he was aware of how the Plan was invested—that is, that he was aware that the Plan was invested solely in cash and CDs,” Judge Wright noted, continuing that “the § 1113(2) three-year statute of limitations thus ran by 2014 at the latest, well before he brought suit in 2019”—and granted the Westco motion for summary judgement, and dismissed Draney’s claim “with prejudice.”[ii]

As for plaintiff Ibarra, Judge Wright commented that there was no dispute “that (1) ‘[a]round 2011, Mr. Ibarra had seen at least one participant statement showing the Plan’s assets were invested in cash or CDs,’ and (2) Ibarra is able to read ‘some’ English”—going on to note that the statement is only five pages long, and that “the last page clearly shows the CDs-only investment strategy.” 

But then plaintiff Ibarra said that while he did receive two participant statements (one in 2009 and another in 2011), he “do[es] not recall reading the documents when [he] received them.” Moreover, Ibarra said that the statements “did not suggest to [him] there was anything wrong with or anything to be concerned about regarding the Plan.” That said, Judge Wright commented that that declaration “fails to place in genuine dispute Defendants’ showing that Ibarra knew in 2011 how the Plan was invested. While Ibarra does not recall reading the Statements, he clearly did read at least one of them, as indicated by paragraph five of his declaration and the undisputed fact that by 2011 he “had seen at least one participant statement showing the Plan’s assets were invested in cash or CDs.”

Now at this point you might recall the situation (cited in this decision) in Sulyma v. Intel where, even though there was evidence that the participant had been on the webpage where investment details were presented, he (successfully in a decision by the U.S. Supreme Court, which backed the decision reached in the Ninth Circuit, where this case was brought) denied actually understanding what was there. More specifically that the “actual knowledge” requirement of the ERISA three-year statute of limitations “mean[s] something between bare knowledge of the underlying transaction, which would trigger the limitations period before a plaintiff was aware he or she had reason to sue, and actual legal knowledge, which only a lawyer would normally possess.”

‘Something Less Than Understanding’

Here, even acknowledging that “this standard is something less than understanding that he had a legal claim under ERISA,” Judge Wright found that Ibarra’s awareness met that threshold. “Plaintiffs themselves allege that a retirement investment portfolio consisting entirely of CDs is per se imprudent…one need not wait to see how CDs will perform; the yield on a CD is known from the start, and the passage of time is not required to understand that a CD is a low-risk, low-return investment vehicle.” He continued that “Ibarra knew the Plan was invested in only CDs, and it was and is commonly known, both at Westco and in general, that such an investment strategy would not yield acceptable returns for Plan participants. Thus, Ibarra knew that the Plan’s strategy was imprudent, and he cannot avoid this finding on the basis of ‘willful blindness’ to what was obvious and clear to him.”

Judge Wright continued, “When, Ibarra received and saw a Participant Statement, which happened no later than 2011, he had actual knowledge of Defendants’ imprudent investments under 29 U.S.C. § 1113(2). Thus, the three-year limitations period began to run at that time, and expired at the latest in 2015. As Ibarra did not bring his duty of prudence claim until 2019, his claim is time-barred,” Judge Wright concluded. He went on to note that, “for the reasons discussed in the previous section in relation to Draney, Plaintiffs’ allegations and arguments regarding continuing violations and the duty to monitor do not alter this conclusion. The Court therefore grants Defendants’ Motion as to Ibarra’s duty of prudence claim (Claim One) and dismisses Ibarra’s claim with prejudice.”

And then, noting that “defendants meet their burden on summary judgment by arguing that the duty of loyalty claim, like the duty of prudence claim, is barred by ERISA’s three-year statute of limitations, and by pointing to the evidence they submitted in connection with the duty of prudence claim”—Judge Wright noted that any alleged breaches of the duty of loyalty also fall outside the limitations period.

And dismissed all the claims with prejudice.

What This Means

While the ultimate decision looks black and white in hindsight,[iii] once again the issue of “actual knowledge” emerges, and reminds us that the courts view “awareness” as more than mere cognizance, but an actual appreciation for the reality. And a good sense of WHEN that occurred. 

Ultimately then, the plaintiffs were indeed “SOL” because of the SOL.


[i] More specifically, they argued that the breaches of the duty to monitor include (1) failing to hire a professional investment advisor; (2) failing to possess the requisite expertise to manage a pension plan; (3) failing to hire a professional recordkeeper; (4) failing to possess the requisite expertise to keep records for the Plan; (5) failing to design and implement a process to ensure the Plan complied with ERISA; and (6) failing to monitor and replace poorly performing investments.”

[ii] A dismissal with prejudice means that the ruling is the final judgment in the case. The dismissal prohibits the prosecutor from refiling the charges.

[iii] What’s more puzzling in some ways is that the parties were (reportedly) ready to settle for $500,000—twice?—when, according to the decision, the “Plaintiffs’ expert witness . . . opined that the class monetary damages were between $778,308 and $710,441 ... Defendants’ expert ... opined that class monetary damages were between $698,089 and $616,944... .)”