Johnson et al v. Evangelical Lutheran Church in America, The et al

Filing 51

MEMORANDUM OF LAW & ORDER. IT IS HEREBY ORDERED: Defendants' Motion to Dismiss 34 is GRANTED IN PART and DENIED IN PART as follows: 1. Counts One and Two against the Board REMAIN. 2. Count Three is DISMISSED as to both Defendants. 3. Pla intiffs have 30 days from the date of this Order to amend the SAC to add a claim for failure to disclose against the Board. 4. Plaintiffs' claims against ELCA are DISMISSED; however, the Court grants Plaintiffs 30 days from the date of this Order to amend the SAC to state a claim against ELCA. If no amendment is made within 30 days, the claims against ELCA are DISMISSED WITH PREJUDICE. (Written Opinion). Signed by Chief Judge Michael J. Davis on 7/22/11. (GRR)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA

PASTOR BENJAMIN A. JOHNSON,
et al., on behalf of themselves and all
others similarly situated,
Plaintiffs,

v.

MEMORANDUM OF LAW & ORDER
Civil File No. 11-23 (MJD/LIB)

THE EVANGELICAL LUTHERAN
CHURCH IN AMERICA, and
BOARD OF PENSIONS OF THE
EVANGELICAL LUTHERAN CHURCH
IN AMERICA,
Defendants.
Vincent J. Esades and Scott W. Carlson, Heins Mills & Olson, PLC, and Daniel R.
Karon, Brian D. Penny, Paul J. Scarlato, and Laura K. Mummert, Goldman
Scarlato & Karon, PC, Counsel for Plaintiffs.
Charles C. Jackson, Nicole A. Diller, and S. Bradley Perkins, Morgan Lewis &
Bockius LLP, and Ruth S. Marcott and Brian T. Benkstein, Felhaber Larson
Fenlon & Vogt, PA, Counsel for Defendant the Evangelical Lutheran Church in
America.
Charles C. Jackson, Nicole A. Diller, and S. Bradley Perkins, Morgan Lewis &
Bockius LLP, and Thomas S. Fraser and Nicole M. Moen, Fredrikson & Byron,
PA, Counsel for Defendant Board of Pensions of the Evangelical Lutheran
Church in America.

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I.

INTRODUCTION
This matter is before the Court on Defendants’ Motion to Dismiss. [Docket

No. 34] The Court heard oral argument on May 13, 2011. For the reasons that
follow, the Court denies the motion to dismiss as it applies to the Board and
grants the motion to dismiss as it applies to ELCA, but permits Plaintiffs the
opportunity to amend with regard to ELCA.
II.

BACKGROUND

A.

Factual Background
1.

Defendants and the Plan

Defendant the Evangelical Lutheran Church in America (“ELCA”) is a
non-profit corporation organized under Minnesota law. (Second Amended
Complaint (“SAC”) ¶ 11.) Defendant Board of Pensions of the Evangelical
Lutheran Church in America (the “Board”) is a non-profit corporation organized
under Minnesota law. (SAC ¶ 12.) ELCA established the Board in 1988 to
provide and administer retirement, health and other benefits to individuals who
work for ELCA or other faith-based organizations associated with ELCA. (Id.)
The Board is governed by a 17-member Board of Trustees that is elected from the
churchwide membership of ELCA. (Id.) ELCA and the Board are separately

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incorporated, but Plaintiffs allege that ELCA is entwined with the Board and that
the Board is an alter ego or instrumentality of ELCA. (SAC ¶¶ 53-54.)
The Board manages the Evangelical Lutheran Church in America
Retirement Plan (“Plan”). (SAC ¶ 13.) The Plan is a defined contribution
retirement plan under 26 U.S.C. § 403(b)(9), under which participating employers
make defined contributions on behalf of participants. (Id.) The Plan provides
that the Board is “responsible for all administrative decisions with regard to the
form, commencement and amount of payments from this Retirement Plan.”
(Diller Decl., Ex. A., 2003 Plan § 1.03.)
The Plan is a “church plan.” (SAC ¶¶ 17, 31.) Therefore, it is exempt from
ERISA, absent an election to the contrary. 26 U.S.C. §§ 411(e)(2)(B), 414(e); 29
U.S.C. §§ 1002(33), 1003(b).
Under the Plan, defined contributions are made on behalf of participating
members into their individual accounts. (SAC ¶ 13.) Plan participants have
options for directing their Plan accumulations. Before retirement, the accounts
are considered “active,” and Plan participants can direct their accumulations into
funds invested in the equity or fixed income markets. (SAC ¶ 18.)

3

Before 2001, all participants were required to annuitize their
accumulations upon retirement. The accounts were then no longer considered
“active.” (SAC ¶¶ 16-19.) Starting in 2001, at retirement, participants had the
choice of annuitizing their accumulations and receiving a monthly annuity for
life, leaving their accounts “active,” or a combination of the two. (SAC ¶¶ 16, 2427.) Only the first choice is at issue in this lawsuit.
Between 1988 and 1996, participants were paid their monthly annuity out
of three separate funds, depending on their elections – the balanced fund, bond
fund, and stock fund. (SAC ¶ 20.) Between 1997 and 2003, annuity payments
were paid from a single “Pension Reserve Fund” instead of the specific funds in
which participants were invested. (SAC ¶¶ 22, 35.) Between 2003 and 2006, the
single fund was known as the Participating Annuity Fund. (SAC ¶ 41.) In 2007,
it was renamed the “ELCA Annuity Fund.” (Id.) (The single fund, created in
1997, is referred to in this Order as the “Annuity Fund.”)

2.

Plaintiffs

Plaintiffs are four retired participants in the ELCA Plan, all of whom
served as pastors at one point. Plaintiff Benjamin A. Johnson retired in 1995 and
began receiving monthly annuity payments. (SAC ¶ 7.) In 1995, when Johnson

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retired, the Plan mandated the annuitization of benefits. (Id. ¶ 16.) His monthly
annuity payments were “permanently” increased each year until January 2010,
when his monthly annuity payments were reduced. (Id. ¶ 7.)
Plaintiff Ronald A. Lundeen retired in 2002 and elected monthly annuity
payments, but deferred his payments until 2007. (SAC ¶ 8.) He began receiving
monthly annuity payments in 2007. They were then “permanently” increased
each year until January 2010, when they were reduced. (Id.)
Plaintiff Larry D. Cartford retired in 2002 and elected the Plan’s annuity
option. (SAC ¶ 9.) His monthly payments were “permanently” increased each
year until January 2010, when they were reduced. (Id.)
Plaintiff Arthur F. Haimerl retired in February 2000. (SAC ¶ 10.) At that
time, he was required to annuitize his account. His monthly payments
“permanently” increased each year until January 2010, when they were reduced.
(Id.)
Plaintiffs claim that their annuity payments were guaranteed for life and
that increases in these guaranteed lifetime annuity payments would be
permanent. (SAC ¶ 1.)

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3.

Allegations of Misconduct by Defendants

Plaintiffs assert that, under Minnesota law, Defendants were required to
invest and manage the Annuity Fund as a prudent investor would. (SAC ¶ 74
(citing the Minnesota Prudent Investor Act, Minn. Stat. § 501B.151 (“PIA”)); see
also Diller Decl., Ex. G, 2004 Summary Plan Description (“SPD”) at 38 (stating
that Board is bound by prudent investor rule and PIA); Diller Decl., Ex. H, 2008
SPD at 31 (same).)
Plaintiffs allege that Defendants breached their fiduciary duties to
Plaintiffs by failing to prudently invest and manage the Annuity Fund and
failing to preserve the trust corpus during the Class Period (January 1988November 2009), which caused the Annuity Fund to become significantly
underfunded and reduce Plaintiffs’ monthly annuity payments. (SAC ¶¶ 78-79.)
In December 2008, the Board sent a letter to Plaintiffs stating that annuity
payments were subject to market risk and that they should expect their annuity
payments to be decreased in 2010. (SAC ¶ 43.) In 2009, the Board issued the
2008 Annual Report, which added statements about potential market risk in the
Annuity Fund. (SAC ¶ 44.) Such warnings were not included in prior Annual
Reports. (Id.)

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In September 2009, Board CEO and President John Kapanke informed Plan
participants that, due to the market downturn, the Annuity Fund was
underfunded by 26% and that, effective January 1, 2010, their monthly annuity
payments would decrease by 9% and would likely decrease by an additional 9%
in both 2011 and 2012. (SAC ¶¶ 3, 45.) (See also Diller Decl., Ex. I, Sept. 2009
Letter to Plan Participants.)

B.

Procedural History

On December 3, 2010, Plaintiffs filed a Complaint in Hennepin County
District Court against ELCA, the Board, and two Board executives who have
since been dismissed from the lawsuit. On January 4, 2011, Defendants removed
the case to this Court based on the Class Action Fairness Act of 2005 (“CAFA”).
On March 3, 2011, Plaintiffs filed their SAC. [Docket No. 29] The SAC
alleges Count One: Breach of Contract under Minnesota Law; Count Two: Breach
of Fiduciary Duty of Prudence under Minnesota Common and Statutory Law;
and Count Three: Request for Injunctive Relief. Plaintiffs seek to sue on behalf of
a class of Plan participants who elected, from January 1, 1988 through November
2009, to receive their retirement payments in the form of an annuity. (SAC ¶ 56.)
III.

DISCUSSION

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A.

Motion to Dismiss Standard

Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a party may
move the Court to dismiss a claim if, on the pleadings, a party has failed to state
a claim upon which relief may be granted. In reviewing a motion to dismiss, the
Court takes all facts alleged in the complaint to be true. Zutz v. Nelson, 601 F.3d
842, 848 (8th Cir. 2010).
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. Thus, although a complaint need not include
detailed factual allegations, a plaintiff’s obligation to provide the
grounds of his entitlement to relief requires more than labels and
conclusions, and a formulaic recitation of the elements of a cause of
action will not do.
Id. (citations omitted).
In deciding a motion to dismiss, the Court considers “the complaint,
matters of public record, orders, materials embraced by the complaint, and
exhibits attached to the complaint.” PureChoice, Inc. v. Macke, Civil No. 071290, 2007 WL 2023568, at *5 (D. Minn. July 10, 2007) (citing Porous Media Corp.
v. Pall Corp., 186 F.3d 1077, 1079 (8th Circ. 1999)).

B.

Claims Against ELCA

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Overall, Plaintiffs assert that ELCA is a proper defendant for Count One,
Breach of Contract, because it is a party to the contract and for Count Two,
Breach of Fiduciary Duty, because it is a de facto fiduciary. Alternatively,
Plaintiffs assert that ELCA is a proper defendant for both counts under alter ego
liability. (SAC ¶¶ 53-54.)
Based on the SAC, there is no allegation that ELCA had any role in the
2009 decision to reduce annuity payments; the Board made that decision.
Because, as the complaint is currently pled, Plaintiffs fail to specifically allege
that ELCA is responsible, or even had the authority, for the actions underlying
the alleged breaches, the claims against ELCA must be dismissed.

1.

Whether ELCA Is a Fiduciary or Trustee
a)

Definition of Fiduciary or Trustee

In order to state a cause of action for breach of trust under the PIA, a
plaintiff must allege that the defendant, as trustee, breached a duty owed to the
beneficiaries of the trust. Minn. Stat. § 501B.151, subd. 1(a). Plaintiffs assert that
ELCA is a de facto fiduciary under the Minnesota common law of trusts. “A
‘fiduciary’ is [a] person who is required to act for the benefit of another person
on all matters within the scope of their relationship. The duty imposed on

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fiduciaries is the highest standard of duty implied by law.” Swenson v. Bender,
764 N.W.2d 596, 601 (Minn. Ct. App. 2009) (citations omitted). “A fiduciary
relationship is characterized by a ‘fiduciary’ who enjoys a superior position in
terms of knowledge and authority and in whom the other party places a high
level of trust and confidence.” Carlson v. Sala Architects, Inc., 732 N.W.2d 324,
330 (Minn. Ct. App. 2007) (citations omitted).
“The existence of a fiduciary relationship is generally a question of fact.”
Swenson, 764 N.W.2d at 601 (citation omitted). “Minnesota caselaw recognizes
two categories of fiduciary relationship: relationships of a fiduciary nature per
se, and relationships in which circumstances establish a de facto fiduciary
obligation.” Id. (citation omitted). “Per se fiduciary relationships include trusteebeneficiary, attorney-client, business partnerships, director-corporation, officercorporation, and husband-wife.” Id. (citations omitted). Plaintiffs claim that
ELCA is a de facto fiduciary for Plaintiffs.

b)

Plan Language
i.

The Board’s Plan Duties

The Board, not ELCA, is the Plan fiduciary, in charge of administering and
managing the Plan, as set forth in both the SAC and the Plan Documents. (See

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SAC ¶ 53(b) (alleging that Board “administers the ELCA’s retirement, health, and
related-benefit plans and manages the trusts for these benefit plans”); id. ¶ 53(q)
(alleging that the Board “manages the assets of the ELCA, as requested”).) (See
also, e.g., Diller Decl., Ex. A, 2003 Plan § 12.01 (providing that, unless expressly
otherwise provided, the Board “shall control and manage the operation and
administration of the Retirement Plan and make all decisions and determinations
incident thereto”); id. § 8.01 (“The [Board] shall, in its sole discretion, select the
Investment Funds in which the ELCA Retirement Trust shall invest pursuant to
Member investment instructions . . . .”); Diller Decl., Ex. E, 2005 SPD at 36 (“The
[Board] controls and manages the operation and administration of the
Retirement Plan and makes all decisions and determinations pertaining to the
plan.”).)
ELCA’s Constitutions, Bylaws and Continuing Resolutions (“ELCA
Constitution”) provide that the Board, not ELCA, bears responsibility for the
Plan’s investment and administration. (See Diller Decl., Ex. L, ELCA
Constitution § 17.61.A05 (setting forth Board’s responsibilities, including to
manage and operate the pension plan and provide pension benefits).)

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ii.

ELCA as the Settlor

The laws imposing duties upon fiduciaries relating to the management or
investment of trust assets are not implicated when an entity amends an
employee benefit plan, thereby acting as a settlor amending a trust. See, e.g.,
Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 444 (1999) (“ERISA’s fiduciary
duty requirement simply is not implicated where [the employer], acting as the
Plan’s settlor, makes a decision regarding the form or structure of the Plan such
as who is entitled to receive Plan benefits and in what amounts, or how such
benefits are calculated.”); Schultz v. Windstream Commc’ns, Inc., 600 F.3d 948,
951 (8th Cir. 2010) (“[W]hen employers adopt, modify, or terminate plans that
provide pension benefits, they do not act as fiduciaries, but are analogous to the
settlors of a trust.”) (citations omitted).
The SAC’s allegations against Defendants demonstrate that the only duties
ELCA maintains with regard to the Plan that are at issue in this case are those of
a settlor or participating employer, not of a fiduciary. (See, e.g., SAC ¶ 53(d), (f)
(ELCA as settlor with the purpose of providing pensions to employees); id. ¶
53(c), (e), (g)-(k) (ELCA’s establishment of the Board); id. ¶ 53(l) (ELCA’s settlor
function of setting levels of benefits under the Plan); id. ¶ 31 (ELCA’s
amendment and restatement of the Plan).) While the ELCA Churchwide
12

Assembly elects the Board’s trustees, there is no allegation in the SAC that
ELCA’s Churchwide Assembly breached any alleged appointment duty in
choosing those Board trustees.
The SAC does not allege that ELCA had any role in setting or altering the
monthly annuity payments. The SAC’s allegations specific to ELCA relate only
to non-fiduciary, settlor acts. (See SAC ¶ 13 (alleging that ELCA has offered the
Plan since 1988); id. ¶ 31 (alleging that ELCA restated the Plan on January 1,
2003); id. ¶ 53 (alleging establishment of Plan and creation of Board to manage
it).

c)

De Facto Fiduciary Claim

Plaintiffs have plausibly argued that ELCA is a fiduciary with respect to its
duty to elect Plan fiduciaries, and therefore, also has a limited duty to monitor.
See, e.g., In re Xcel Energy, Inc., Sec., Derivative & ERISA Litig., 312 F. Supp. 2d
1165, 1176 (D. Minn. 2004) (“A person with discretionary authority to appoint,
maintain and remove plan fiduciaries is himself deemed a fiduciary with respect
to the exercise of that authority. Implicit in the fiduciary duties attaching to
persons empowered to appoint and remove plan fiduciaries is the duty to
monitor appointees. The scope of the duty to monitor appointees is relatively
13

narrow.”) (citations omitted). The duty to monitor is limited and does not
include a duty “to review all business decisions of Plan administrators,” because
“that standard would defeat the purpose of having trustees appointed to run a
benefits plan in the first place.” Howell v. Motorola, Inc., 633 F.3d 552, 573 (7th
Cir. 2011).
However, the SAC does not allege that ELCA violated the duty to monitor.
Therefore, the SAC fails to adequately allege that ELCA violated a fiduciary duty
owed to Plaintiffs. See, e.g., Neil v. Zell, 677 F. Supp. 2d 1010, 1023-24 (N.D. Ill.
2009) (holding that plaintiffs’ allegations “in the most general terms” that Board
of Directors breached their duty to monitor other fiduciaries did not satisfy
Twombly).

d)

The Plan’s Status as a Church Plan

The Court rejects Plaintiffs’ assertion that the Plan’s status as a church plan
somehow creates a cause of action against ELCA based on the Board’s actions.
A church plan must be “established and maintained . . . by a church.” 29
U.S.C. §§ 1002(33)(A). A plan maintained by a third party, such as the Board, is
“established and maintained . . . by a church” if the third party “is controlled by
or associated with a church or a convention or association of churches.” Id. §
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1002(33)(C)(i). Church plan status is awarded not only to plans controlled by a
church, but also to plans associated with a church. See id. §1002(33)(C)(i). An
organization is “associated with” a church “if it shares common religious bonds
and convictions with that church.” Id. § 1002(33)(C)(iv). The Plan’s status as a
church plan does not require that ELCA exercise control over the Board or Plan,
let alone control over the Board’s actions at issue in this lawsuit, to the extent that
ELCA is liable for the Board’s actions. Here, the SAC does not allege that ELCA
controls the Board with regard to the decisions at issue in this litigation.

2.

Whether Plaintiffs Have Pled Alter Ego Liability

As an alternative means of holding ELCA liable, the SAC alleges that the
Board is an alter ego of ELCA and that “injustice and fundamental unfairness
would result if the ELCA is not held accountable” for the Board’s misconduct.
(SAC ¶ 53.) Plaintiffs have failed to allege sufficient facts to state a claim for alter
ego liability.

a)

Standard for Alter Ego Liability

There is a “presumption of separateness” between a parent and subsidiary
corporation. Ass’n of Mill & Elevator Mutual Ins. Co. v. Barzen Int’l, Inc., 553
N.W.2d 446, 449 (Minn. Ct. App. 1996) (citation omitted). However, “[p]iercing
15

the corporate veil is an equitable remedy that may be applied in order to avoid
an injustice.” Equity Trust Co. Custodian ex rel. Eisenmenger IRA v. Cole, 766
N.W.2d 334, 339 (Minn. Ct. App. 2009) (citation omitted). “A court may pierce
the corporate veil to hold a party liable for the acts of a corporate entity if the
entity is used for a fraudulent purpose or the party is the alter ego of the entity.
When using the alter ego theory to pierce the corporate veil, courts look to the
reality and not form, with how the corporation operated and the individual
defendant’s relationship to that operation.” Id. (citations omitted).
“Under Minnesota law, piercing the corporate veil requires (1) analyzing
the reality of how the corporation functioned and the defendant’s relationship to
that operation, and (2) finding injustice or fundamental unfairness.” Minn.
Power v. Armco, Inc., 937 F.2d 1363, 1367 (8th Cir. 1991).
The first prong focuses on the shareholder’s relationship to the
corporation. Factors that are significant to the assessment of this
relationship include whether there is insufficient capitalization for
purposes of corporate undertaking, a failure to observe corporate
formalities, nonpayment of dividends, insolvency of debtor
corporation at time of transaction in question, siphoning of funds by
dominant shareholder, nonfunctioning of other officers and
directors, absence of corporate records, and existence of the
corporation as merely a facade for individual dealings. The second
prong requires showing that piercing the corporate veil is necessary
to avoid injustice or fundamental unfairness.

16

Barton v. Moore, 558 N.W.2d 746, 749 (Minn. 1997) (citations omitted).

b)

First Prong

The SAC does not allege any improper transfer of assets between ELCA
and the Board. Nor does it allege any other type of misuse of the corporate form
or plan to harm Plaintiffs. Cf. Thorkelson v. Publishing House of Evangelical
Lutheran Church in Am., 764 F. Supp. 2d 1119, 1130-31 (D. Minn. 2011) (holding
that plaintiffs had asserted sufficient factual allegations to support piercing the
corporate veil between ELCA and Augsburg Fortress Publishers (“AFP”) when
plaintiffs alleged that AFP transferred a valuable asset to ELCA, which led to the
underfunding of AFP’s pension plan, and plaintiffs pled allegations of
“corporate siphoning”). The SAC alleges that the Board is undercapitalized, but
there is no allegation that ELCA played any role in that situation. (SAC ¶ 53.)
Beyond the conclusory allegation of undercapitalization, there are no factual
allegations to support the first prong of piercing the corporate veil.
ELCA and the Board share a close relationship. However, the ELCA
Constitution shows the separation of the corporate structures governing ELCA
and the Board. For example, the Constitution provides that “[s]eparate
incorporation shall be maintained” for the Board. (Diller Decl., Ex. L, ELCA
17

Constitution § 17.12.) It enumerates the Board’s responsibilities in operating and
managing benefit plans, which include autonomy and independence. (Id. §
17.61.A05.) The documents referenced in the SAC demonstrate that ELCA and
the Board are separate corporate entities, and the SAC provides no factual
allegation that these corporate formalities have been disregarded.

c)

Second Prong

The SAC alleges: “The ELCA Board of Pensions is an alter ego or
instrumentality of the ELCA, and injustice and fundamental unfairness would
result if the ELCA is not held accountable for the liabilities resulting from
shortfalls in the ELCA Retirement Plan due to undercapitalization or the ELCA
Board of Pensions’ lack of resources to cover its liabilities.” (SAC ¶ 53.) This
barebones allegation that injustice or fundamental unfairness will result if ELCA
is not liable is insufficient. Although the SAC generally alleges that the Plan was
underfunded, there is no allegation that ELCA played any role in that
underfunding or that the Plan was underfunded when ELCA created it.
Plaintiffs fail to allege facts to support their legal conclusion of injustice or
unfairness. See SICK, Inc. v. Motion Control Corp., No. Civ. 01-1496 (JRT/FLN),
2003 WL 21448864, at *9 (D. Minn. June 19, 2003) (dismissing alter ego claim
18

because plaintiff failed to “properly plead[] that ‘injustice or fundamental
unfairness’ exists”). “[A]lthough corporations are related, there can be no
piercing of the veil without a showing of improper conduct.” Barzen Int’l, Inc.,
553 N.W.2d at 449 (citation omitted).

d)
Effect of Plaintiffs’ Failure to Plead Facts to Support
Alter Ego Liability
Plaintiffs must allege facts to support their alter ego theory. The federal
pleading standard requires
sufficient factual matter, accepted as true, to state a claim to relief that
is plausible on its face. Thus, although a complaint need not include
detailed factual allegations, a plaintiff’s obligation to provide the
grounds of his entitlement to relief requires more than labels and
conclusions, and a formulaic recitation of the elements of a cause of
action will not do.
Zutz, 601 F.3d at 848 (citations omitted).
The complaint must articulate the factual prerequisites to a claim to
survive a motion to dismiss. The Court has already held that the SAC fails to
plead that ELCA is directly liable for the counts asserted. Additionally, the SAC
does not allege that ELCA had any role in creating the allegedly misleading Plan
Documents. Finally, as the SAC is currently pled, there is no plausible claim for
alter ego liability. Consequently, there is no basis for holding ELCA liable for
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any of the counts pled against it. See, e.g., Spagnola v. Chubb Corp., 264 F.R.D.
76, 86 (S.D.N.Y. 2010) (noting that “courts routinely consider, and grant, motions
to dismiss for failure adequately to allege facts sufficient to support the
imputation of liability on an alleged alter-ego”).
The Court grants Defendants’ motion to dismiss as to ELCA, but will
permit Plaintiffs 30 days from the date of this Order to file an amended SAC that
articulates a viable claim against ELCA. If no amendment is filed within 30 days,
the dismissal of ELCA will be with prejudice.

C.
Count One: Whether Plaintiffs State a Claim for Breach of
Contract Against the Board
1.

Elements of a Breach of Contract Claim

Under Minnesota law, a breach of contract claim has four elements: “1)
formation of a contract; (2) performance by plaintiff of any conditions precedent;
(3) a material breach of the contract by defendant; and (4) damages.” Parkhill v.
Minn. Mutual Life Ins. Co., 174 F. Supp. 2d 951, 961 (D. Minn. 2000) (citations
omitted), aff’d 286 F.3d 1051 (8th Cir. 2002).

2.

Existence of a Contract

Defendants do not dispute the existence of a contract between Defendants
and Plaintiffs formed by the “Plan Documents,” which consist of the terms of the
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Plan and the SPDs. (SAC ¶¶ 13, 64.) However, the parties dispute whether the
Plan Documents promised Plaintiffs a fixed monthly annuity amount.

3.
Whether the Plan Promised Plaintiffs a Fixed Monthly
Annuity Amount
Plaintiffs allege that Defendants “promised that Plaintiffs’ annuity
payments were guaranteed for life and also that increases in these guaranteed
lifetime annuity payments would be permanent.” (SAC ¶ 1.) They further
claim that the Plan Documents implied that the Annuity Fund would not be
subject to market risk. They claim that these promises were made in the Plan
Documents sent to Plaintiffs each year during the Class Period. (SAC ¶¶ 42, 50.)
Defendants point to a number of statements in the various versions of the
Plan and the SPD, which, they claim, warned Plaintiffs that market fluctuations
could affect their monthly annuity payments. Plaintiffs assert that the market
risk disclosures cited by Defendants did not refer to the Annuity Fund, but to
other types of retirement investments.
The Court holds that Plaintiffs have adequately pled that the Plan
promised a fixed monthly annuity amount. The Plan Documents repeatedly
assured participants that increases in the annuity payments were permanent.
(See, e.g., Diller Decl., Ex. C, 1995 SPD at 19 (stating “that there will be no
21

downward adjustment of the basic pension coming from a bond or balanced
fund” and that all increases declared are guaranteed “to increase the pension
throughout the Member’s remaining lifetime”); Diller Decl., Ex. B, 2001 SPD at 20
(stating, with regard to monthly annuity payments, that “[a]ny increase is
permanent and applies to all payments made to you, your joint annuitant and
beneficiaries”); 2001 SPD at 14 (contrasting the risks of remaining actively
invested with the security of annuitizing funds: “If you leave your retirement
account ‘active,’ you do not have a guarantee of lifetime monthly pension
payment, and the accumulations in your account are vulnerable to the
fluctuation in the market.”).) Warnings regarding market fluctuations did not
clearly apply to the Annuity Fund until 2009, when the 2008 Annual Report was
issued. (See Diller Decl., Ex. N, 2008 Annual Report at 1 (“All funds, including
ELCA Annuity Fund, are subject to risk.”).)
Defendants offer the explanation that, while the increase of the base
amount used to calculate the monthly annuity payment was permanent, the
dollar figure, itself, was not permanent. In their arguments on this motion,
Defendants provide an illustration of this theory, explaining that a participant’s
increased annuity interest can still rise or fall based on market performance, like

22

an increased share in a mutual fund would. However, this explanation does not
appear in the Plan Documents. Based on the SAC and the Plan Documents
provided to the Court, Plaintiffs’ interpretation of the Plan is also reasonable.
The Court further concludes that, based on the record before the Court at
this time, the fact that the certain Plan Documents labeled the Annuity Fund
“participating” does not unambiguously signal that the monthly payment
amounts may be decreased. Nor does the record reflect that the Plan’s status as a
“defined contribution plan” requires dismissal. Plaintiffs acknowledge that their
payments are based on the amount contributed to their retirement when they
worked, but they claim that once the Board calculated the monthly payment
amount (at each participant’s retirement) that amount was guaranteed to never
decrease.
At this point, based solely on the pleadings and Plan Documents, the Plan
Documents appear ambiguous as to whether participants were guaranteed a
fixed monthly annuity amount.

4.

Whether Plaintiffs Allege Breach, Damages, and Causation

The SAC sufficiently alleges that the Board breached its obligations under
the Plan Documents to provide a fixed monthly payment. Plaintiffs claim that

23

the Board breached the terms of the Plan because, although the Plan promised
that Plaintiffs’ annuity benefits were guaranteed for life and that all increases to
those benefits would be permanent, the Board implemented an across-the-board
9% decrease in the participants’ monthly annuity benefits. (SAC ¶¶ 1, 3.)
Defendants assert that the Board never stopped paying the monthly
annuities, and the reduction in the amount of monthly payments was made to
ensure that, in a declining market, the annuity payments would continue for the
participants’ lifetimes. They note that the Board is only permitted to provide
payments out of the Annuity Fund and only to the extent that the Annuity Fund
is adequate. Defendants claim that, by decreasing the monthly payments, the
Board fulfilled its fiduciary duty to preserve the Annuity Fund’s long-term
viability in order to meet the needs of future participants. See, e.g., PIA, Minn.
Stat. § 501B.151, subd. 2(c) (providing that trustee may consider general
economic conditions, needs for regularity of income, and preservation of capital
in administering the trust); Varity Corp. v. Howe, 516 U.S. 489, 514 (1996) (“The
common law of trusts recognizes the need to preserve assets to satisfy future, as
well as present, claims and requires a trustee to take impartial account of the
interest of all beneficiaries.”) (citation omitted). Defendants conclude that the

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Board did not cause damage to Plaintiffs, but rather, minimized the damage
inflicted by the market downturn and recession. The Court does not have the
information necessary to conclude whether, in fact, a cut in payments was
required to preserve the Fund, the amount of any required cut, or whether the
Fund’s underfunding was, itself, a breach of fiduciary duty. The question of
whether the Board’s actions were required by – or a breach of – its fiduciary duty
is one that cannot be resolved at the motion to dismiss stage. See Triple Five of
Minn., Inc. v. Simon, 404 F.3d 1088, 1095 (8th Cir. 2005) (noting that “[w]hether a
breach of fiduciary duty has actually occurred is a factual issue”).
Plaintiffs have also adequately pled that Defendants’ breach of contract
caused damages – namely, the Board’s improper reduction of guaranteed
payments by 9%.

D.
Count Two: Whether Plaintiffs State a Claim for Breach of
Fiduciary Duty
To state a common law claim for breach of fiduciary duty, a plaintiff must
plead “the existence of a fiduciary duty, breach, causation and damages.” Hot
Stuff Foods, LLC v. Dornbach, 726 F. Supp. 2d 1038, 1043 (D. Minn. 2010)
(citations omitted). The PIA requires trustees to “exercise reasonable care, skill,
and caution” to “invest and manage trust assets as a prudent investor would, by
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considering the purposes, terms, distribution requirements, and other
circumstances of the trust.” Minn. Stat. § 501B.151, subd. 2(a). The Plan
Documents also require the Board to invest and manage the Annuity Fund in
accordance with the prudent investor rule.

1.

Plaintiffs’ Allegations of Underfunding

As explained above with respect to the breach of contract claim, the SAC
adequately alleges that the Board breached its fiduciary duties by reducing the
monthly annuity payments. Furthermore, the SAC alleges that the Plan was
underfunded in the first place because the Board failed to prudently manage and
invest the Annuity Fund. (SAC ¶¶ 78-79.) The SAC sufficiently pleads that it
was the Board’s own improper conduct that placed it in a position to need to
violate the Plan terms.

2.

Defendants’ Claim of Good Faith

Defendants assert that the Board is shielded from liability because it was
acting in good faith. See Norwest Bank Minn. N., N.A. v. Beckler, 663 N.W.2d
571, 580-81 (Minn. Ct. App. 2003). (“[S]o long as the trustees act in good faith,
from proper motives, and within the bounds of reasonable judgment, the court
will not interfere with their decisions.”) (citation omitted). At this stage, the
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Court rejects Defendants’ argument. The question of whether the Board acted
reasonably or in good faith cannot be answered on a motion to dismiss. See, e.g.,
In re ADC Telecommc’ns, Inc., ERISA Litig., Master File No. 03-2989
(ADM/FLN), 2004 WL 1683144, at *5 (D. Minn. July 26, 2004) (holding that
“[b]ecause the scope and practical effect of this duty will not be determined on a
motion to dismiss, it is premature to absolve the [defendants] of liability for
imprudent investments) (footnote omitted).

E.

Whether Plaintiffs State a Disclosure Claim

In their opposition to the motion to dismiss, Plaintiffs argue that, even if,
under the terms of the Plan, the monthly annuity payments were subject to
market risks and reductions, Defendants breached their fiduciary duty by failing
to accurately communicate those risks to Plaintiffs in the Plan Documents.
Under Minnesota law, a trustee has the duty to “disclose to the beneficiary fully,
frankly, and without reservation all facts pertaining to the trust.” Beckler, 663
N.W.2d at 581 (citation omitted). The SAC alleges that, “nowhere in the ELCA
Retirement Plan documents was there ever a disclosure that the lifetime annuity
payments were subject to any market risk.” (SAC ¶ 52.)

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Although Plaintiffs have pointed to facts in the SAC and the Plan
Documents to support their allegation of failure to disclose the risks associated
with the annuity payments, Plaintiffs’ legal claim that the Board breached its
fiduciary duty by failing to communicate that the annuity payments were subject
to market risk does not appear in the SAC. Defendants were not clearly put on
notice of this claim. The Court grants Plaintiffs 30 days from the date of this
Order to amend the SAC to add a claim for failure to disclose.

F.
Count Three: Whether Plaintiffs State a Claim for Injunctive
Relief
The Court dismisses Count Three: Request for Injunctive Relief, because,
as Plaintiffs admit, injunctive relief is a remedy that they seek for Counts One
and Two, not a separate cause of action. The Court will not address the
appropriateness of injunctive relief as a possible remedy at this stage of the
litigation.
Accordingly, based upon the files, records, and proceedings herein, IT IS
HEREBY ORDERED:
Defendants’ Motion to Dismiss [Docket No. 34] is GRANTED IN
PART and DENIED IN PART as follows:
1.

Counts One and Two against the Board REMAIN.

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2.

Count Three is DISMISSED as to both Defendants.

3.

Plaintiffs have 30 days from the date of this Order to
amend the SAC to add a claim for failure to disclose
against the Board.

4.

Plaintiffs’ claims against ELCA are DISMISSED;
however, the Court grants Plaintiffs 30 days from the
date of this Order to amend the SAC to state a claim
against ELCA. If no amendment is made within 30
days, the claims against ELCA are DISMISSED WITH
PREJUDICE.

Dated: July 22, 2011

s/ Michael J. Davis
Michael J. Davis
Chief Judge
United States District Court

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