Nasrawi et al v. Buck Consultants, LLC et al

Filing 40

MEMORANDUM DECISION re defendants' Motion to Dismiss; defendants' Motion to Dismiss plaintiffs' claim against Loeb is GRANTED with leave to amend - no further leave shall be granted; defendants' Motion to Dismiss plaintiffs' claim against Buck is GRANTED with leave to amend; amended complaint due by 8/2/2010; motion 19 TERMINATED; order signed by Judge Oliver W. Wanger on 6/29/2010. (Rooney, M)

1 2 3 4 5 6 UNITED STATES DISTRICT COURT 7 EASTERN DISTRICT OF CALIFORNIA 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 The Plaintiffs have filed a separate motion to remand the case to state court. 1
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DENNIS NASRAWI, et al, Plaintiffs, v. BUCK CONSULTANTS, LLC, et al., Defendants. I.

1:09-CV-02061-OWW-GSA MEMORANDUM DECISION RE: DEFENDANTS' MOTION TO DISMISS (Doc. 19.)

INTRODUCTION.

Before the court for decision is Defendants' motion to dismiss Plaintiffs' third party beneficiary action pursuant to Fed. R. Civ. P. 12(b)(6), on the grounds that Plaintiffs lack standing.

Additionally, Defendants contend that the action against Loeb must be dismissed because Loeb was a "sham defendant" named solely for removal purposes. Plaintiffs oppose the motion to dismiss on the

grounds that they have standing because Buck and Loeb aided and abetted a breach of trust for personal financial gain.1

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II.

BACKGROUND.

This is a negligence action filed by three beneficiaries of a public retirement trust against a provider of actuarial services, Buck Consultants, LLC, ("Buck") and one of its employees, Harold Loeb ("Loeb"). company,2 Defendant Buck, a Delaware limited liability actuarial services to StanCERA, a public

provided

employee retirement system covering employees of the County of Stanislaus, City of Ceres, the Stanislaus Superior Court, and five special districts located within Stanislaus County, under a written consulting contract. Loeb is not a party to the contact. (Compl. ¶ 2.) Loeb, a California resident, is employed by Buck Consultants (Compl. ¶ 4, 7.) Buck is wholly owned by ACS Human

as an actuary.

Resources Solutions, a Pennsylvania Corporation with its principal place of business in New Jersey. Plaintiffs Dennis Nasrawi, Michael O'Neal, and Rhonda

Biesemeir, California residents and beneficiaries of StanCERA, filed a complaint against Defendants Buck and Loeb in Stanislaus County Superior Court on October 8, 2009.3 The substance of the

complaint is that "Buck and Loeb breached their duty of care in preparing StanCERA's January 9, 2007 actuarial valuations by using inappropriate actuarial assumptions." (Compl. ¶ 14.) In

particular, Plaintiffs allege that the "9.22% employer contribution Buck's principal place of business is New York.

Plaintiffs, all former employees of Stanislaus County, allege that they obtained "vested contractual rights to receive pension and related benefits." (Compl. ¶ 1.) Plaintiffs state that they filed a "representative suit" because "StanCERA has failed or refused to assert a negligence claim on behalf of itself or the pension trust." (Compl. ¶ 22.) 2

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rate adopted by StanCERA, in reliance upon the actuarial valuation negligently prepared by Buck and Loeb, was insufficient to

actuarially fund the benefits promised by the County." 15.)

(Compl. ¶

As a result of Defendants' actuarial negligence, Plaintiffs

allege that StanCERA suffered harm in the form of: (1) lost County employer contributions; (2) lost earnings on those contributions; and (3) costs paid to other actuarial firms to discover Defendants' negligence. The report is issued on Buck's letterhead as

Consulting Actuary for StanCERA. As to Defendant Loeb, Plaintiffs allege that he "owed a duty

11 to 12 StanCERA," and breached that duty. 13 allege that he "actively participated with, aided, and abetted in 14 StanCERA's breach of fiduciary duty by concealing their negligence 15 for almost two years." 16 Loeb covered up the effects of his actuarial negligence - and that 17 of Buck and StanCERA - for his "own financial gain." (Compl. ¶ 19.) 18 19 20 21 22 23 24 25 26 27 28 3 On November 22, 2009, this case was removed to the Federal Court on the basis of diversity jurisdiction. (Doc. 1.) The (Compl. ¶ 18.) According to Plaintiffs, (Compl. ¶ 13.) They also exercise due care in performing actuarial services for

notice of removal provides that the presence of Loeb as a defendant in the action does not defeat diversity jurisdiction because Loeb is a fraudulently joined "sham defendant." (Id.)

On January 19, 2010, Defendants moved to dismiss this action based on their assertion that Plaintiffs lack standing and that Loeb cannot be sued individually. (Doc. 19.) According to

Defendants, "the action can only be brought by StanCERA in its

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capacity as trustee, and cannot be brought by Plaintiffs as trust beneficiaries." (Id.) Further, Plaintiffs' failure to state a

claim against Loeb is established by the Court's Order (Doc. 37) finding that Loeb is a "sham defendant". Plaintiffs opposed the motion on April 26, 2010. (Doc. 26.)

6 Plaintiffs argue that they have standing to sue because Buck is a 7 third party who aided and abetted a breach of trust and the trustee 8 declined to sue. 9 for personally aiding and abetting the breach of trust. (Id.) 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 III. LEGAL STANDARD. Additionally, that Loeb has personal liability

A motion to dismiss brought under Federal Rule of Civil Procedure 12(b)(6) "tests the legal sufficiency of a claim." Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). In deciding whether to grant a motion to dismiss, the court "accept[s] all factual allegations of the complaint as true and draw[s] all reasonable inferences" in the light most favorable to the nonmoving party. Rodriguez v. Panayiotou, 314 F.3d 979, 983 (9th Cir. 2002). To survive a motion to dismiss, a complaint must "contain

sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S.

Ct. 1937, 1949 (May 18, 2009) (quoting Bell Atl. Corp v. Twombly, 550 U.S. 544, 570 (2007)). A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a "probability requirement," but it asks for more than a sheer possibility that defendant has acted unlawfully. Where a complaint pleads facts that are "merely 4

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 that A.

consistent with" a defendant's liability, it "stops short of the line between possibility and plausibility of `entitlement to relief.'" Id. (citing Twombly, 550 U.S. 556-57). Dismissal also can be based on the lack of a cognizable legal theory. Balistreri v. Pacifica

Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). IV. DISCUSSION. Motion to Dismiss Loeb Individually

Defendants move to dismiss Loeb from the action on the grounds as agent (corporate employee) for a disclosed

principal(corporation) acting within the scope of his corporate employment, Loeb is not individually liable. Plaintiffs contend

that Loeb is individually liable because he breached professional duties owed to the trust and beneficiaries. This issue was fully

briefed and heard by the Court on May 10, 2010, during Plaintiffs' motion for remand. The Court held: "Defendants have met their

burden of establishing Loeb is a `sham defendant' whose presence in this action does not bar removal and exists for the purposes of defeating diversity jurisdiction." (Doc. 37 at 2:3-5.) "Directors and/or officers of a corporation do not incur personal liability for torts of the corporation merely by reason of their official position, unless they personally participate in the wrong." United States Liability Ins. Co. V. Haidinger-Hayes, Inc., 1 Cal. 3d 586, 594-595 (Cal. 1970). As a corporate employee acting

within the scope of employment, Loeb cannot be held personally liable for his negligence in performing employment duties for the corporation. Loeb can be held personally liable only if he

independently, outside his scope of employment, participated in the 5

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breach of trust. independent

Plaintiffs' do not specifically allege any by Loeb to gain a personal benefit.

wrongdoing

"Disregarding the conclusions of law that Loeb `aided and abetted' his employer, the complaint does not allege any specific acts of affirmative misfeasance with respect to the performance of his actuarial duties. (Doc. 34 at 19:7-10.) Accordingly, Loeb is

entitled to be dismissed for failure to state a claim. B. Plaintiff's Standing as Trust Beneficiaries

9 Defendants move the court to dismiss the claim against Buck 10 for 11 standing because: (1) trust beneficiaries generally lack standing 12 to sue on behalf of a trust; and (2) Plaintiffs' conclusory 13 allegations 14 rule. 15 16 17 18 19 20 21 22 23 24 25 26 27 28 The legislative body, trust, or other body authorized to make investments for a pension trust, shall discharge its duties with respect to investing the assets of the pension trust. 6 Plaintiffs assert that they met the standing requirement by pleading: (1) Defendants actively participated and aided and do not meet the requirements of the exception to that lack of standing. Defendants argue that Plaintiffs lack

abetted in StanCERA's "breach of fiduciary duty" by "concealing" their negligence for almost two years; (2) Defendants did so for their "own financial gain"; (3) Defendants participated and

assisted with StanCERA's breach of trust"; and (4) Plaintiffs therefore can pursue this action because StanCERA has not done so itself. (Compl. ¶ 18-19, 21-22.)

Under Cal. Gov. Code § 53216.6, the trustees of the StanCERA trust have a fiduciary duty to the trust beneficiaries:

1 2 3 4 5 6 7 8 9 10 11 Id.

1. (a) Solely in the interest of, and for the exclusive purposes of providing benefits to, participants and their beneficiaries, minimizing employer contributions thereto, and defraying reasonable expenses of administering the trust. (b) With the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims. (c) Shall diversify the investments of the trust so as to minimize the risk of loss and to maximize the rate of return, unless under the circumstances it is clearly prudent not to do so.

The 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

violation of

by the

a

trustee

of

any a

duty

owed of

to

the

beneficiaries

trust

constitutes

breach

trust.

Restatement (Second) Trusts § 201 (1959). entitles trustees. trust beneficiaries to file an

A breach of trust action against the

Cal. Prob. Code § 16420 (1991).

Here the statutory

trustee is StanCERA. In general, a trust beneficiary does not have standing to sue a third party on behalf of a trust because the beneficiary is not a real party in interest. City of Atascadero v. Merrill Lynch, 68

Cal. App. 4th 445, 462, 80 Cal. Rptr. 2d 329 (Cal. Ct. App. 1998). The exception to the general rule is that beneficiaries have standing to sue third parties who; (1) For their own financial gain or advantage, (2) Induced the trustee to commit the breach of trust, and (3) actively participated with, aided or abetted the trustee in that breach, or received and retained trust property from the trustee in knowing breach of trust. Id. Under this exception, standing hinges on whether there was a breach of duty by the trustee. Id.

Trust beneficiaries have a limited right to sue in situations 7

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where the third party acted for her or his own financial gain or advantage. Pierce v. Lyman, 1 Cal. App. 4th 1093, 1103-1106, 3 "As long as the third

Cal. Rptr. 2d 236. (Cal. Ct. App. 1991).

parties were acting to further their own individual economic interest, they may be liable for actively participating in a fiduciary's breach of his or her trust." City of Atascadero, 68

Cal. App. at 464; see also Pierce, 1 Cal. App. 4th at 1105-1106 (holding that personal gain in the form of fees and investment opportunities constituted financial gain); Wolf v. Mitchell,

Silberberg & Knupp, 76 Cal. App. 4th 1030, 1040 (Cal. Ct. App. 1999) (holding that allegations of a greater amount of fees met the requirements for personal financial gain). Plaintiffs cite City of Atascadero v. Merrill Lynch, 68 Cal. App. 4th 445 (Cal. Ct. App. 1998) for the proposition that "it is well established that where a trustee has committed a breach of trust, the trust beneficiaries may prosecute an action against third persons who, for their own financial gain or advantage [...] actively participated with, aided or abetted the trustee in that breach." (Doc. 26 at 4:15-4:19.) In City of Atascadero, the

beneficiaries alleged in their complaint that Merrill Lynch made direct misrepresentations, actively concealed information, and participated with the trustee in breaches of trust for financial gain. Id. at 457-458. The complaint alleged that Merrill Lynch

advised the trustees to undertake a program of investment "which was imprudent and unsuitable for the trust". Id. at 484.

Additionally, Merrill Lynch actively concealed the risks of the investment program and misled beneficiaries for financial gain. The court held that the beneficiaries had standing to sue Merrill 8

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Lynch for breach of fiduciary duty and aiding and abetting a breach of fiduciary duty. Id. Plaintiffs cite three additional cases which illustrate the requirements to meet the standing exception. In Pierce, the court

held that the beneficiaries had standing because the complaint alleged that third party attorneys actively concealed breaches of trust, made misrepresentations to the court, and acted for personal gain. Pierce, 1 Cal. App. 4th at 1105-1106. The breaches of duty

in Pierce involved one trustee's self-dealing and another trustee's failure to stop that self-dealing. Id. at 1105. The beneficiaries in Pierce alleged that the third party attorneys knew about the breaches and took affirmative steps to conceal the breaches from the court. Id. In Wolf, the court held that a trust beneficiary

had standing to sue a third party based on the allegations that third party attorneys concealed breaches of trust and made

misrepresentations to the beneficiary. 1040.

Wolf, 76 Cal. App. 4th at

The court reasoned that the specific allegations in Wolf

satisfied City of Atascadero and Pierce by alleging identifiable breaches of trust by the trustee. Id. 4th 1333

Plaintiffs rely on Harnedy v. Whitty, 110 Cal. App. 21 22 misfeasance by the trustee and a third party. 23 24 and Wolf: 25 26 27 28

(Cal. Ct. App. 2003). In Harnedy, a trust beneficiary alleged Id. at 1342. The

court rationalized the holdings from City of Atascadero, Pierce,

When the claim being asserted rests in whole or in part on alleged breaches of trust by the trustee, a beneficiary has standing to pursue such a claim against either (1) the trustee directly, (2) the trustee and third parties participating in or benefitting from his, 9

1 2

her or its breach of trust, or (3) such third parties alone Id. at 1341-1342. The court held that the beneficiary had standing

3 because he alleged misfeasance by both the trustee and a third 4 party. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 The complaint further alleges that "Buck and Loeb have actively participated with, aided, and abetted in StanCERA's breach of fiduciary duty by concealing their negligence for almost two years." (Compl. at ¶ 18.) insofar as the third This is similar to Pierce and Wolf only actions the are alleged of to the involve alleged To meet the requirements under the standing exception

Plaintiffs must allege that the StanCERA trustees breached a statutory duty owed to the employee-beneficiaries. Plaintiffs

allege that StanCERA failed to assert a negligence claim against Buck, a service provider and Loeb, its actuary, in breach of fiduciary obligations to its members, including the Plaintiffs. (Compl. at ¶ 16.) Plaintiffs do not specifically allege how Buck's actions aided and abetted this breach of trust. As in City of Atascadero, the Plaintiffs in this case allege that based on Buck's negligent actuarial services, StanCERA adopted an imprudent employer contribution rate. The complaint also

alleges that Buck concealed its negligence for close to two years. (Compl. at ¶ 18.) As a result of this concealment, Buck

"participated with, aided, and abetted in StanCERA's breach of fiduciary duty for their own financial gain." (Compl. at ¶ 19).

party

concealment, concealment.

without

describing

nature

Buck's actions are distinguishable from those in 10

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Pierce and Wolf. concealed the

In Pierce and Wolf, the third parties knowingly fiduciary breaches of the trustees, whereas

Plaintiffs here allege that Buck concealed its own actuarial negligence, in turn causing StanCERA, the fiduciary, to breach underlying duties. Although this difference is likely not fatal to the Plaintiffs' claim, the Plaintiffs' allegations lack the

requisite factual detail to survive a motion to dismiss. City of Atascadero, Pierce, and Wolf, require beneficiaries to

9 allege that the third party acted for personal financial gain. Id. 10 at 1040. 11 Wolf in that Plaintiffs conclusorily allege a "breach of fiduciary 12 duty for financial gain" by Buck (Compl. at ¶ 19.), without 13 describing the nature of the gain. The beneficiaries in Pierce 14 specifically alleged personal financial gain in the receipt of 15 greater fees and investment opportunities. Pierce, 1 Cal. App. 4th 16 at 1105-1106. 17 gain of "receiving a greater amount of fees". 18 4th at 1040. 19 for personal financial gain, a legal conclusion, without describing 20 the nature of the wrongful conduct and type of gain. 21 22 23 24 25 Taking the allegations in the complaint as true, these 26 allegations fail to state a claim against Defendants, Buck and Loeb. 27 The claim against Loeb must be dismissed as he is a corporate 28 employee for Buck sued for malfeasance (negligence in providing 11 V. CONCLUSION. Here, Plaintiffs only allege that Buck and Loeb acted Wolf, 76 Cal. App. The beneficiaries in Wolf also alleged financial Plaintiffs' case can be distinguished from Pierce and

1 actuarial services) in breach of the duty owed to Plaintiffs by Buck 2 under contract in the court and scope of his employment. Self-

3 Insurers' Sec. Fund v. ESIS, Inc., 204 Cal. App. 3d 1148, 1162 (Cal. 4 Ct. App. 1988). These allegations are insufficient. The inclusion

5 of Loeb, as the case has been pleaded is a transparent attempt to 6 defeat federal jurisdiction. 7 For the reasons stated: 8 9 10 11 12 13 14 IT IS SO ORDERED. 15 16 DATED: June 29, 2010 17 18 19 20 21 22 23 24 25 26 27 28 12 /s/ OLIVER W. WANGER UNITED STATES DISTRICT JUDGE 3. 2. 1. Defendants' motion to dismiss Plaintiffs' claim against Loeb is GRANTED WITH LEAVE TO AMEND. NO FURTHER LEAVE SHALL BE GRANTED Defendants' motion to dismiss Plaintiffs' claim against Buck is GRANTED WITH LEAVE TO AMEND. Plaintiffs are ORDERED to amend their complaint within 30 days of service of this Order.