The International Brotherhood of Teamsters Union Local No. 710 Pension Fund et al v. The Bank of New York Mellon Corporation

Filing 113

MEMORANDUM Opinion and Order Signed by the Honorable John Robert Blakey on 3/16/2015. Mailed notice(gel, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
THE INTERNATIONAL BROTHERHOOD )
OF TEAMSTERS UNION LOCAL NO.
)
710 PENSION FUND, et al.,
)
)
Plaintiffs,
)
)
v.
)
)
THE BANK OF NEW YORK MELLON
)
CORPORATION, et al.,
)
)
Defendants.
)

Case No. 13 C 1844

Honorable John Robert Blakey

MEMORANDUM OPINION AND ORDER
The plaintiffs filed this lawsuit on March 8, 2013, alleging, in a nutshell, that
defendants’ decision to purchase and hold certain bonds issued by Lehman Brothers
Holding Company (“Lehman”) constituted a breach of the duties of prudence and
loyalty imposed under the Employee Retirement Income Security Act of 1974
(“ERISA”). The defendants have moved for judgment on the pleadings pursuant to
Federal Rule of Civil Procedure 12(c). For the reasons explained more fully below,
defendants’ motion [69] is denied.
Background & Procedural History
The plaintiffs in this ERISA case, the International Brotherhood of
Teamsters Union Local No. 710 Pension Fund and the International Brotherhood of
Teamsters Union Local No. 710 Health & Welfare Fund, are pension funds that
participated in a securities lending program administered by the defendants, Bank

of New York Mellon (“BNYM”) and its parent company, Bank of New York Mellon
Corporation (“BNYMC”). The plaintiff funds, along with their trustees, have sued,
alleging certain ERISA violations in connection with the investments and decisions
made by the defendants in the administration of the securities lending program. By
way of background, the plaintiff funds “exist to pay the benefits that their
thousands of active members, pensioners and benefits recipients have earned”; the
funds’ assets “provide the means to pay these benefits.” First Amended Complaint
[21], ¶¶2-3. According to the plaintiffs, the defendants – together, a sophisticated
financial institution – solicited the funds to participate in the defendants’ securities
lending program; in so doing, the defendants touted their securities lending
program to be a “[f]lexible and custom-tailed program related to lending, investing
and reporting” that was “very low risk.” Id., ¶¶1-2, 4, 31-32. Based upon these
representations, the funds agreed to participate and executed a Securities Lending
Agreement and Guaranty. Id., ¶¶5, 36-37. Defendant BNYM agreed to act as an
agent and fiduciary for the funds and agreed to utilize its discretion in accord with
the Funds’ investment goals and risk profile . . . .” Id., ¶¶5, 40.
In its capacity as the Funds’ agent and fiduciary, in August and December of
2006, BNYM invested nearly $25 million of the cash collateral received by the
Funds in corporate floating rate notes issue by Lehman Brothers Holding Company.
First Amended Complaint [21], ¶¶7, 50. Although the notes may have seemed like
a relatively low-risk investment in theory, the riskiness of the Lehman notes grew
as the odds of Lehman being able to pay out at maturity fell throughout 2007 and

2

2008. Id., ¶¶61-62, 64, 66, 68-69, 73, 77.

When Lehman filed for bankruptcy on

September 15, 2008, the funds were left with an almost $25 million deficiency. Id.,
¶¶51, 80.
Plaintiffs allege in their complaint that the defendants “failed to invest the
collateral in safe and prudent investments” and that they “failed to monitor the
investments to ensure they were at all times proper investments”; they also allege
that, “[g]iven the volume of news and first-hand knowledge of Lehman’s financial
distress, no reasonably prudent securities lending fiduciary would have concluded
that Lehman debt was a sufficiently safe investment for a securities lending client
and no reasonably prudent securities lending fiduciary would have maintained the
collateral investments in the Lehman Notes through Lehman’s bankruptcy filing.”

Id., ¶¶110-112. They allege that the defendants’ failure to invest fund assets in a
prudent manner constitutes a breach of ERISA’s duty of prudence and that
defendants’ “heads I win, tails you lose” investment strategy violated ERISA’s duty
of loyalty. Id., ¶¶113, 117.
The defendants moved to dismiss the complaint in its entirety [26]. With
respect to BNYMC, the defendants argued that, as the parent company of BNYM, it
was not a fiduciary, and that, as a result, the claims against it should be dismissed.
Judge Ellis, to whom the case was previously assigned, disagreed, finding that the
question of whether Bank of New York Mellon Corporation was, in fact, a functional
fiduciary required further fact development. Memorandum Opinion and Order [48],
pp. 7-8.

3

With respect to BNYM, the defendants argued that plaintiffs’ allegations
failed to state a claim for violation of ERISA. In particular, BNYM argued that “red
flag” allegations are insufficient to state a claim, and it cited Pension Benefit

Guaranty Corp. ex rel. St. Vincent Catholic medical Centers Retirement Plan v.
Morgan Stanley Investment Management Inc., 712 F.3d 705 (2d Cir. 2013), to
support that argument.

Judge Ellis rejected the argument, agreeing with the

dissent in that case that the majority was improperly adopting a heightened
pleading standard.

Id., p. 10.

Judge Ellis “decline[d] to impose a heightened

pleading requirement on plaintiffs asserting ERISA imprudence claims, particularly
where the Seventh Circuit has not adopted any such requirement.” Id.
Judge Ellis ordered the defendants to file their answer by March 4, 2014, and
they did. The defendants subsequently filed a motion for judgment on the pleadings
[69], raising largely the same arguments they raised in connection with the motion
to dismiss. While that motion was being briefed, the case was reassigned to this
Court. The motion is now fully briefed and ripe for resolution.
Discussion
A motion for judgment on the pleadings under Federal Rule of Civil
Procedure 12(c) is governed by the same standards as a motion to dismiss for failure
to state a claim under Rule 12(b)(6).” Lodholtz v. York Risk Services Group, Inc.,
No. 14-2571, --- F.3d --- , 2015 WL 542815, at *3 (7th Cir. Feb. 11, 2015)(citing

Adams v. City of Indianapolis, 742 F.3d 720, 727-28 (7th Cir. 2014). Under both,
“the complaint must state a claim that is plausible on its face.”

4

Vinson v.

Vermilion County, Illinois, No. 12-3790, --- F.3d ---, 2015 WL 343673, at *3 (7th Cir.
Jan. 27, 2015). See also Bell Atlantic 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.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). In assessing the
claim, the Court is required to “draw all reasonable inferences and facts in favor of
the nonmovant,” but “we need not accept as true any legal assertions.” Lodholtz,
2015 WL 542815, at *3 (citing Vesely v. Armslist LLC, 762 F.3d 661, 664–65 (7th
Cir. 2014).
In the present motion, the defendants argue that Judge Ellis was wrong to
side with the dissent in St. Vincent and that the Supreme Court’s decision in Fifth

Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459 (2014), “bears on the legal
sufficiency of Plaintiffs’ ERISA claims and underscores why those claims fail as a
matter of law.”

Motion for Judgment on the Pleadings [69], ¶2.

The Court

disagrees.
First, the Court does not read Fifth Third to be a game-changer – at least not
with respect to this case. Fifth Third rejects the notion that an ESOP fiduciary is
entitled to a presumption of prudence and holds that “the same standard of
prudence applies to all ERISA fiduciaries, including ESOP fiduciaries, except that
an ESOP fiduciary is under no duty to diversity the ESOP’s holdings.” 134 S.Ct. at
2467.

Although the ruling alters the landscape with respect to imprudence claims

5

against ESOP fiduciaries, this aspect of the decision has no bearing on this case,
which involves ERISA fiduciaries.
Nor does Fifth Third compel a finding that plaintiffs’ claims are necessarily
implausible. Applying the plausibility standard spelled out in Iqbal and Twombly,
the Supreme Court in Fifth Third noted that, “where a stock is publicly traded,
allegations that a fiduciary should have recognized from publicly available
information alone that the market was over- or undervaluing the stock are
implausible as a general rule, at least in the absence of special circumstances.” 134
S.Ct. at 2471. But, again, this does not apply to plaintiffs’ claims. Significantly,
plaintiffs here do not simply allege that the defendants should have recognized,
based on publicly-available information alone, that Lehman’s debt was over-valued.
Defendants’ argument about the impact of Fifth Third is based upon a
reading of the complaint that is too narrow. The Court does not read the plaintiffs’
complaint as alleging that the defendants lacked prescience or that they should
have recognized from the information available in the market that the Lehman
bonds were over-valued. Rather, the plaintiffs allege that, under the circumstances
as they existed in the market at the time, no reasonably prudent securities lending
fiduciary would have concluded that Lehman debt was a sufficiently safe
investment for a securities lending client and no reasonably prudent securities
lending fiduciary would have maintained the collateral investments in the Lehman
Notes through Lehman’s bankruptcy filing.” E.g., [21], ¶112. Thus the claim is not
that the defendants were imprudent in failing to recognize that Lehman would file

6

for bankruptcy and not pay out on the notes, but that it was imprudent to hold the
Lehman debt, given the circumstances existing in the market and given the
plaintiffs’ investment profile. Nothing in Fifth Third forecloses such claims.
Conclusion
For the reasons explained above, defendants’ motion for judgment on the
pleadings [69] is denied.
Dated: March 16, 2015
Entered:

_______________________________
John Robert Blakey
United States District Judge

7