Fiduciary Suit About GAC Cancellation Proceeds

A federal district court has denied motions to dismiss claims of fiduciary breach and engaging in prohibited transactions in violation of ERISA in connection with the cancellation of a group annuity contract (GAC).

The case (Dolins, et al., v. Continental Casualty Company, et al., U.S. District Court, Northern District of Illinois, Eastern Division, Case No. 16-8898) involves Jerold Dolins and a class of participants who participated in CNA Financial’s 401(k) Plan and invested some or all of their funds in the CNA Fixed Income Fund (“the Fund”). A core investment of the Fund was a group annuity contract (“the Contract”).

The defendants include Continental Casualty Company (CCC), Continental Assurance Company (CAC), CNA Financial Corporation, the Investment Committee of the CNA 401(k) Plus Plan and Northern Trust Company.

The complaint stems from the Contract between the Plan and CAC guaranteeing that the rate of interest credited to the CNA Fund would never drop below 4% per year. The Plan and CAC added the “Minimum Interest Guarantee Rider” to the contract in 1990, which remained in place until Dec. 31, 2011, when it was discontinued pursuant to an agreement executed two days earlier between Northern Trust and CAC, which provided that “at the request of” the Plan’s trustee, the contract would be cancelled.

The complaint includes claims that:

  • the Defendants did not act for the exclusive benefit of plan beneficiaries and did not exercise ordinary care in engaging in the transaction;
  • the Contract’s cancellation was a prohibited transaction under §§ 406(a) and 406(b); and
  • the Defendants (other than CAC) are liable as co-fiduciaries under § 405(a) on the theory that each knowingly participated in the others’ breaches of the others’ fiduciary duties.

Guaranteed Contract?

The plaintiffs, who are seeking relief under ERISA section 502(a)(2) and (a)(3), allege that the Plan fiduciaries’ decision to cancel the contract harmed them, because, without this guarantee, the CNA Fund earned a lower rate of return on its assets. Plaintiffs also allege that the termination of the contract was not made with their interests in mind, but rather to “improve CCC’s financial position and/or to make CAC a more attractive target for potential buyers.”

Specifically, Dolins alleges that the Contract’s 4% guaranteed minimum return made the contract unfavorable to CAC due to the declining interest rates and returns in the market as a whole, which led CNA wishing to sell CAC. The plaintiffs argue that, because CNA had a controlling interest in CCC (which owned CAC), CNA and CAC had an incentive to cancel the Contract.

In his opinion denying the motions to dismiss, U.S. District Judge Gary Scott Feinerman wrote that, “Because the Contract guaranteed that the annual return paid by CAC to the Plan would be at least 4%, the Plan effectively had a right to money equal to the difference between a 4% return and whatever the return under the Contract would otherwise have been, assuming it fell below 4%.”

Judge Feinerman reasoned that, “Both the functional approach and the property rights approach yield the conclusion that the Contract’s guaranteed interest rate was an asset of the Plan.” He further explained that, “Functionally, the guarantee would have transferred money to the Plan in the event the Contract otherwise would have yielded less than a 4% annual return, which certainly was a possibility, and likely a probability, in the early part of this decade.” Feinerman concluded that CAC’s being relieved of that obligation benefitted CAC at the expense of Dolins and the other beneficiaries, further noting that, from a traditional property rights perspective, a future interest in a guaranteed interest stream is a property right.

Fiduciary Duties

Northern Trust sought dismissal of the fiduciary breach claims and co-fiduciary liability on the ground that it was a directed trustee and, therefore, did not violate any fiduciary duties. Judge Feinerman noted, however, that the concept of a directed trustee stems from 29 U.S.C. § 1103(a)(1), which provides that in administering an employee benefit plan, a trustee may be “subject to the direction of a named fiduciary who is not a trustee, in which case the trustees shall be subject to proper directions of such fiduciary which are made in accordance with the terms of the plan and which are not contrary to [ERISA].”

Northern Trust further contended that Dolins had not alleged that it breached that duty, reasoning that it “is self-evident that, at the time of the cancellation, Northern Trust could not perform the hindsight comparison of return rates after cancellation.” Judge Feinerman, however, did not buy that contention, noting that the complaint alleges, not only declining returns after the Contract’s cancellation, but also declining returns for several years prior to the cancellation.

“Northern Trust saw multiple consecutive years of declining returns approaching closer and closer to the Contract’s guaranteed 4% floor, and rather than maintaining that floor for the Plan in what clearly appeared to be a declining market, it allowed the Plan to give it up for nothing in return,” Feinerman wrote.

He further noted that while Northern Trust may have had valid reasons for doing what it did, the court at this stage is “limited to the complaint’s well-pleaded factual allegations,” which give rise to a reasonable inference that following the direction to relinquish the Contract in a declining market was imprudent, and thereby a breach of its duty of prudence.

Prohibited Transactions

In seeking dismissal of allegations that the Contract’s cancellation was a prohibited transaction under § 406(a)(1)(D), CNA argued that, because the Contract expressly provided for its own cancellation, the cancellation could not have been a prohibited transaction.

Acknowledging that there is “nothing at all illogical about that contention,” Judge Feinerman nonetheless explained that, in this instance, § 406(a)(1)(D) prohibited the CNA Defendants from taking certain actions that benefitted “a party in interest.” Judge Feinerman concluded that Dolins properly pleaded the occurrence of a prohibited transaction under § 406(a)(1)(D) because CAC was partially owned by CNA, which was “a party in interest” as the employer of Plan beneficiaries. “If cancelling the Contract impermissibly benefited a party in interest, which it is alleged to have done, then the CNA Defendants may be liable even if the Contract’s terms permitted cancellation,” Feinerman wrote.

Northern Trust also sought dismissal of allegations of prohibited transactions under §§ 406(a) and (b), on the ground that it was not a fiduciary with respect to the Contract’s cancellation, and that it did not benefit from the contract’s cancellation.

Judge Feinerman reasoned differently, pointing to the U.S. Supreme Court’s ruling in Central States that, as a general matter, trustees are fiduciaries. He noted that Northern Trust, as a trustee (albeit a directed one), falls within the set of entities covered by §§ 406(a) and (b).

Addressing the issue of whether Northern Trust benefited from the contract’s cancellation, Feinerman noted that, while it is true that liability under § 406(b)(1) requires that the defendant have benefitted from the transaction, “There is no requirement in § 406(b)(2) that the defendant itself benefit from the transaction; it is enough that ‘a party’ other than the beneficiaries have benefitted, and the complaint here alleges just that as to the CNA Defendants.” He added that plaintiffs have thus adequately alleged a violation by Northern Trust of § 406(b)(2), ruling that the claim may proceed.

Equitable Relief

While Judge Feinerman dismissed claims against CAC for damages under § 502(a)(2), he let stand claims under § 502(a)(3). CAC argued that the request for equitable relief should fail because plaintiffs are seeking only legal relief, but Feinerman ruled that they are seeking equitable relief, citing the complaint itself:

“Plaintiff and the Class seek to have the Plan recover damages or, in the alternative, to have the Plan’s and their losses restored as appropriate equitable relief, and/or seek other appropriate equitable relief, including but not limited to disgorgement of profits, restitution, or surcharge, along with such other an additional relief enumerated in the Prayer [sic] and/or as may be otherwise available.”

Feinerman further noted that Dolins “elaborated in open court that the ‘other appropriate equitable relief’ he is seeking includes rescission of the Contract’s cancellation. “So even if CAC is right that the monetary relief sought in the form of restitution is legal rather than equitable, rescission undoubtedly is the kind of equitable relief available under § 502(a)(3),” the judge wrote.

Judge Feinerman directed the defendants to answer the surviving portions of the complaint by Sept. 8, 2017.

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