Barchock et al v. CVS Health Corporation et al
Filing
41
ORDER adopting 38 Report and Recommendations in its entirety and GRANTING 32 Motion to Dismiss for Failure to State a Claim with prejudice. So Ordered by Senior Judge Mary M. Lisi on 4/18/2017. (Feeley, Susan)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
MARY BARCHOCK, THOMAS
WASECKO, and STACY WELLER,
Plaintiffs,
v.
C.A. No. 16-061-ML
CVS HEALTH CORPORATION, THE
BENEFITS PLAN COMMITTEE OF CVS
HEALTH CORPORATION, and
GALLIARD CAPITAL MANAGEMENT,
INC.,
Defendants.
MEMORANDUM AND ORDER
Plaintiffs1
The
Sections
Income
in
502(a)(2)
Security
and
Act
this
case,
502(a)(3)
which
was
the
29
(“ERISA”),
of
U.S.C.
brought
Employee
under
Retirement
§1132(a)(2)
and
§1132(a)(3), are participants in the Employee Stock Ownership
Plan
(the
Companies
Capital
“Plan”)
(“CVS”)
of
CVS
sponsored
Management,
Inc.
Health
by
Corporation
CVS
and
(“Galliard”).
and
managed
Affiliated
by
According
Galliard
to
the
Plaintiffs, the Defendants breached their fiduciary duties owed
to the Plaintiffs and to the Plan by “imprudently investing too
much of the Plan’s Stable Value Fund assets in ultra-short-term
1
The Complaint is styled as a class action brought on behalf of
the named Plaintiffs, the Plan, and participants in the Plan.
Complaint at ¶1.
1
cash
management
funds
that
provided
extremely
low
investment
returns.” First Amended Complaint (the “Complaint”)(ECF No. 30)
at ¶2.
The matter is before the Court on review of the second
Report
and
Recommendation
("R&R")
issued
in
the
case
by
Magistrate Judge Sullivan (ECF No. 38). Because the Plaintiffs
filed a timely objection to the R&R, the Court reviews de novo
those portions of the R&R to which an objection has been made.
See Fed. R. Civ. P. 72(b). The Court has thoroughly reviewed and
considered the Complaint, the Defendants’ motion to dismiss the
Complaint (ECF No. 32), the Plaintiffs’ response (ECF No. 34),
the R&R, the Plaintiffs’ objections thereto (ECF No. 39), and the
Defendants’ response (ECF No. 40). Having done so, the Court now
adopts the R&R in its entirety. Accordingly, the Defendants’
motion to dismiss the Complaint is GRANTED.
I. Factual Summary2
The
Ownership
Plaintiffs
Plan
of
are
CVS
participants
Health
in
the
Corporation
Employee
and
Stock
Affiliated
Companies, which is sponsored by CVS and administered by the
Benefits
Plan
Committee
(as
designated
by
the
CVS
Board
of
Directors, the “Committee”). The Plan offers various investment
2
The factual
Complaint.
summary
is
based
2
on
the
allegations
in
the
options,3 including the Stable Value Fund (the “Fund”) managed by
Galliard. As stated in the audited financial statement attached
to the Plan’s 2013 Annual Return on Form 5500,4 the Fund “seeks
to preserve capital while generating a steady rate of return
higher than money market funds provide.” Complaint ¶27. Unlike
other,
more
participants
aggressive
farther
lifestyle
from
funds
retirement
designed
who
can
for
wait
“younger
out
the
downside of market cycles and have a higher risk tolerance,”
Complaint ¶9, the Fund is designed for investors who are older
and closer to retirement and likely to be more risk-averse.
The Plaintiffs suggest that the Stable Value Fund (1) was
excessively
concentrated
in
investments
with
ultra-short
durations, and (2) maintained excessive liquidity “far beyond any
reasonable need for it.” Complaint at ¶26. The Plaintiffs further
assert that, as a result of this approach, they were injured “in
the form of significantly lower crediting rates than they would
have received had the Stable Value Fund been prudently managed in
3
According to the Complaint, the Plan “gives workers the
opportunity to invest in a range of between one or more of sixteen
available designated investment options, including the Stable Value
Fund.” Complaint ¶8.
4
As noted in the June 24, 2016 R&R, the Plaintiffs agreed that
the Court may consider these documents—which were referenced in the
initial complaint and later submitted by the Defendants—without
converting the instant motion into a motion for summary judgment.
First R&R at 2 n.2 (ECF No. 24).
3
accordance
with
industry
standards
regarding
duration
and
liquidity.” Id.
In specific terms, the Plaintiffs take issue with having
received lower returns because during the years in question, the
Defendants allocated more than half of the Fund’s assets in the
EB Temporary Investment Fund, invested primarily in cash and socalled
cash
equivalents.
Complaint
¶29.
According
to
the
Plaintiffs, the EB Temporary Investment Fund was used by other
investors as a short-term investment option and offered only a
low rate of return. Complaint ¶¶30, 32. The Complaint asserts
that during the same time period, another large portion of the
Fund was invested in the Wells Fargo Stable Value Fund D, of
which Galliard is a wholly owned subsidiary, and which invests
all of its assets into the Wells Fargo Synthetic Stable Value
Fund (the “WF Synthetic Value Fund”). Plaintiffs note that in the
period
between
2010
and
2012,
the
WF
Synthetic
Value
Fund
invested less than ten percent of its asset in interest-bearing
cash or cash equivalents, from which they infer that Galliard
“well understood...that it was not necessary to maintain such a
large percentage of cash or cash equivalents in a stable value
fund.” Complaint ¶¶37,36.
The Plaintiffs note that, when compared to other stable
value fund investment averages (as documented in SVIA [Stable
4
Value Investment Association] reports) the investment of the Fund
in
cash
or
cash
equivalents
“was
a
severe
outlier
and
categorically imprudent.” Complaint ¶45 (emphasis in original).
The Plaintiffs further assert that the large investment in cash
depressed the Fund’s performance by acting as “an enormous drag
on
the
overall
Stable
Value
Fund
portfolio”
and
because
it
involved payment of an unnecessary liquidity premium. Complaint
¶46.
Pointing out that the portion of the Fund that was invested
in
other
liquid,
significantly
Fund,
higher
Complaint
investments
capital
with
¶51,
preservation
return
the
higher
than
the
Plaintiffs
returns
EB
assets
Temporary
conclude
would
provided
that
have
a
Investment
(1)
been
other
readily
available; and (2) “excessive allocation” to the EB Temporary
Investment Fund constitutes “imprudence in the management of the
Stable Value Fund.” Complaint ¶61. Although it is unstated how
the
actual
performance
of
the
Fund
varied
from
the
average
performance of other stable value funds, the Plaintiffs suggest
that if the Fund’s allocation to cash investments had instead
been “invested in the same manner as the other assets of the
[Fund],” the Fund would have yielded higher earnings. Complaint
¶52.
In sum, the Plaintiffs assert claims of fiduciary breach
5
against the Defendants by alleging that (1) Galliard caused the
Fund to invest in “securities with extremely low yields, low
durations, and excessive liquidity compared to what should be
expected from prudently managed stable value fund investments,”
Complaint ¶81; and (2) CVS and the Committee failed to monitor
and supervise
Galliard,
and
to
cause
Galliard
to
change
its
investment conduct. Complaint ¶82. The Plaintiffs’ assertions are
bolstered
primarily
by
comparisons
between
investment
characteristics of the Fund, i.e., the percentage of investments
allocated
to
cash
and
the
duration
of
investments,
with
investment averages of other stable value funds, as summarized in
the SVIA Survey. See, e.g., Complaint ¶¶ 17, 23, 24, 44, 45, 47,
48.
On behalf of those Plan participants who invested in the
Fund and/or who were invested in the Moderate Lifestyle Fund
and/or the Conservative Lifestyle Fund from six years before the
filing of this action until the time of trial, the Plaintiffs
seek monetary damages for the asserted loss of benefits resulting
from the Defendants’ alleged breach of their fiduciary duty,
injunctive relief, and attorneys’ fees and costs. Complaint at
¶¶27-28.
II. Procedural History
The
Plaintiffs
brought
a
first
6
complaint
(the
“Initial
Complaint”)
on February 11, 2016 (ECF No. 1), asserting—as they
do in the instant Complaint—that Defendants “knew or should have
known that the Plan’s Stable Value Fund assets should have been
invested in securities that would have provided a significantly
higher yield with no material additional investment, credit, or
liquidity risk.” Initial Complaint at ¶2. On April 14, 2016, the
Defendants
filed
a
motion
to
dismiss
the
Initial
Complaint
pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim
upon which relief can be granted, Defs.’ Mem. at 5-6 (ECF No. 151), in response to which the Plaintiffs filed an objection on
April 28, 2016 (ECF No. 19). The Defendants filed a reply on May
9, 2016 (ECF No.20).
Following a hearing on the Defendants’ motion to dismiss on
June 10, 2016, Magistrate Judge Sullivan issued a first R&R on
June 24, 2016, in which she recommended that the Defendants’
motion be granted and the Initial Complaint be dismissed. R&R at
11 (ECF No. 24). Plaintiffs promptly filed an objection to the
R&R on July 8, 2016 (ECF No. 27), to which the Defendants filed a
response in opposition on July 25, 2016 (ECF No. 29).
In the
interim, on July 22, 2016, Plaintiffs also filed a motion to
amend/correct the Initial Complaint (ECF No. 28).
On August 2, 2016, after this Court granted the Plaintiffs’
request to amend/correct the Initial Complaint, the Plaintiffs
7
filed the Complaint now at issue (ECF No. 30). As before, the
Defendants filed a motion to dismiss the Complaint for failure to
state a claim (ECF No. 32). Plaintiffs filed an objection (ECF
No. 34) and Defendants filed a reply (ECF No. 35).
On
January
31,
2017,
following
another
hearing
on
Defendants’ motion to dismiss the Complaint, Magistrate Judge
Sullivan issued a thorough, detailed, and well-reasoned R&R in
which
she
again
recommended
that
the
Defendants’
motion
be
granted and that the Plaintiffs’ claims be dismissed for failure
to “provide sufficient facts to raise an inference of imprudent
investment
management
Plaintiffs
filed
a
on
the
timely
part
of
objection
Galliard.”
to
this
R&R
second
at
16.
R&R
on
February 14, 2017 (ECF No. 39), to which Defendants filed a
response in opposition (ECF No. 40).
III. Standard of Review
A motion to dismiss for failure to state a claim upon which
relief may be granted is governed by Fed. R. Civ. P. 12(b)(6). In
deciding
a
motion
to
dismiss,
the
Court
must
construe
the
complaint in the light most favorable to the plaintiff, taking
all well-pleaded facts as true, and giving the plaintiff the
benefit of all reasonable inferences. Arruda v. Sears, Roebuck &
Co., 310 F.3d 13, 18 (1st Cir. 2002). In order to withstand a
motion
to
dismiss,
a
claim
“must
8
contain
sufficient
factual
matter ... to state a claim to relief that is plausible on its
face.”
Katz
v.
Pershing,
LLC,
2012)(citations
omitted).
The
“factual content
that
672
F.3d
64,
complaining
allows the
72-73
party
court to draw
(1st
must
a
Cir.
include
reasonable
inference” in the pleader’s favor. Id. “[I]f, under any theory,
the allegations are sufficient to state a cause of action in
accordance with the law,” the motion to dismiss must be denied.
Vartanian v. Monsanto Co., 14 F.3d 697, 700 (1st Cir.1994). The
Court ignores, however, “statements in the complaint that simply
offer legal labels and conclusions or merely rehash cause-ofaction-elements.” Schatz v. Republican State Leadership Comm.,
669 F.3d 50, 55 (1st Cir. 2012). In addition, “the party invoking
the jurisdiction of a federal court carries the burden of proving
its existence.” Johansen v. United States, 506 F.3d 65, 68 (1st
Cir.2007).
Although
the
Court
generally
may
not
consider
documents
outside of the complaint unless it converts the motion to dismiss
pursuant to Rule 12(b)(6) into one for summary judgment, it may
make an exception “for documents the authenticity of which are
not disputed by the parties; for official public records; for
documents central to the plaintiffs’ claim; or for documents
sufficiently referred to in the complaint.” Watterson v. Page,
987 F.2d 1, 3 (1st Cir. 1993).
9
It is well established that a motion to dismiss for failure
to state a claim in the ERISA context is an “important mechanism
for
weeding
out
meritless
claims.”
Fifth
Third
Bancorp
v.
Dudenhoeffer, — U.S. — , 134 S.Ct. 2459, 2471, 189 L.Ed.2d 457
(2014). A
determination
of
whether
an
ERISA
claim
should
be
dismissed for failure to state a claim “requires careful judicial
consideration of whether the complaint states a claim that the
defendant has acted imprudently.” Id. (citing Fed. Rule Civ.
Proc. 12(b)(6); Ashcroft v. Iqbal, 556 U.S. 662, 677–680, 129
S.Ct.
1937,
173
L.Ed.2d
868
(2009);
Bell
Atlantic
Corp.
v.
Twombly, 550 U.S. 544, 554–563, 127 S.Ct. 1955, 167 L.Ed.2d 929
(2007)).
The standard against which the Defendants’ actions are to be
measured is “ERISA’s prudent person standard.” Bunch v. W.R.
Grace & Co., 555 F.3d 1, 6 (1st Cir. 2009). “[U]nder ERISA, a
fiduciary is required to act with ‘the care, skill, prudence and
diligence ... that a prudent man acting in a like capacity and
familiar
with
such
matters
would
use.’”
Id.
at
7
(quoting•
Beddall v. State St. Bank & Trust Co., 137 F.3d 12, 18 (1st
Cir.1998)); 29 U.S.C. §1104(a)(1)(B). The Prudent Man Rule is a
test “of conduct, and not a test of the result of performance of
the investment.” Id. (quoting Donovan v. Cunningham, 716 F.2d
1455,
1467
(5th
Cir.1983)).
Moreover,
10
the
prudence
of
a
fiduciary’s actions “cannot be measured in hindsight;” rather,
they
are
“viewed
from
the
perspective
of
the
time
of
the
challenged decision.” Bunch v. W.R. Grace & Co., 555 F.3d at 7.
IV.
Discussion
In their objection to the R&R, the Plaintiffs maintain that
they have stated “plausible” claims for breach of fiduciary duty
under ERISA. Pltfs.’ Mot. 2 (ECF No. 39). Specifically, they
assert that the R&R erroneously characterizes their claims as a
mere “hindsight” attack on the Stable Value Fund’s performance;
that it failed to appreciate that the Plaintiffs’ allegations go
to the very structure and definition of a stable value fund; and
(3)
that
it
conflates
Plaintiffs’
properly-pleaded
breach
of
prudence claims with unasserted claims for breach of the duty of
loyalty and violation of plan documents. Id. The Plaintiffs also
reiterate that Galliard’s management decision (1) to maintain the
investments for a short duration, and (2) to maintain a large
portion of assets in cash (both decisions as compared to average
duration
and
proportion
of
investment
of
other
stable
value
funds) “predictably” caused the Fund to underperform. Id. The
Plaintiffs maintain that such management decisions constituted a
violation of Galliard’s fiduciary duty and its duty of prudence
under ERISA because the Fund’s assets would have yielded higher
returns, had they been invested more in line with the average
11
investment allocations of other stable value funds. Id. at 7.
On their part, the Defendants maintain that, “by plaintiffs’
own
account,
the
CVS
Stable
Value
Fund
was
at
all
times
structured to meet—and did in fact meet—its stated investment
objectives: ‘to preserve capital while generating a steady rate
of
return
higher
than
money
market
funds
provide.’”
Defs.’
Response at 1-2 (ECF No. 40). The Defendants note that, under
those circumstances, Plaintiffs’ contentions that the Fund could
have “predictably” earned higher returns by means of a different
investment allocation, constitutes “improper hindsight critique.”
Id. at 2. Regarding the Plaintiffs’ reliance on industry averages
to support a claim of Defendants’ imprudent investment in higher
cash and cash-equivalent holdings, the Defendants note that “the
salient question is whether the [Fund]’s portfolio conformed to
its investment objective,” which it concededly did. Id.
As noted in the January 31, 2017 R&R, the Complaint includes
no allegations from which it could be inferred that Galliard
failed
to
adhere
to
the
Plan’s
guidelines
and
investment
objectives, R&R at 14, nor do the Plaintiffs assert that Galliard
assessed unreasonable or excessive fees or that it materially
deviated from the disclosures in the Plan documents.
Instead, the newly asserted facts in the Complaint focus
primarily on the extent and duration of the Fund’s investment in
12
cash or cash-equivalent assets, as compared to industry averages,
and are intended to permit an inference that Galliard’s conduct
was inconsistent with its duty of prudence. With the benefit of
20/20 hindsight, the Plaintiffs assert, inter alia, that if the
Fund’s allocation to cash had been invested in the same manner as
the
Fund’s
other
assets,
the
Fund
would
have
earned
more.
Complaint ¶52. Although that may have been the outcome in this
particular case, the Plaintiffs appear to suggest that, rather
than keeping the Fund’s assets diversified, it would have been
more prudent to put more eggs into the same basket, in the
anticipation
of
a
greater
gain
while
assuming
that
such
a
strategy would entail no additional risk.
In
support
of
this
contention,
the
Plaintiffs
point
to
average allocation data “based on a large sample of stable value
funds,”
from
which
the
Plaintiffs
infer
that
the
Fund’s
investment allocation was a “severe outlier and categorically
imprudent.” Complaint ¶45. Leaving aside the question of whether
the calculated average of such data points is an appropriate
measure
of
comparison—as
it
allows
for
the
possibility
of
multiple outliers at either end of the spectrum—a mere deviation
from that average does not allow for an inference that Galliard’s
investment strategy was imprudent. As such, the comparison of the
Fund’s
investment
allocation
with
13
an
industry
average
is
insufficient to show that Galliard did not act “with the care,
skill,
prudence,
and
diligence
under
the
circumstances
then
prevailing that a prudent man acting in a like capacity and
familiar
with
such
matters
would
use
in
the
conduct
of
an
enterprise of a like character and with like aims.” 29 U.S.C.
§1104(a)(1)(B).
The Plaintiffs in this case are not asserting that they
incurred
losses
because
Galliard
deviated
from
the
Plan’s
disclosed investment objective; rather, they have commenced this
litigation
because
hindsight,
might
their
have
investments,
yielded
higher
when
gains
considered
in
Galliard
had
if
elected to allocate the Fund’s investment more in line with the
industry average. It is well established, however, that “the test
of prudence...is one of conduct, and not a test of the result of
the performance of the investment.” Bunch v. W.R. Grace & Co.,
555 at 7. In this case, the Fund was invested in conformance with
its stated objective and whether that strategy was prudent cannot
be measured in hindsight. Id. Accordingly, Plaintiffs’ Complaint
is insufficient to withstand the Defendants’ motion to dismiss.
Conclusion
For the above reasons, and for the reasons set forth in the
January 31,
Complaint
is
2017
R&R, the
GRANTED
and
Defendants’
the
14
motion
Complaint
is
to
dismiss
dismissed
the
with
prejudice.
SO ORDERED.
/s/ Mary M. Lisi
Senior United States District Judge
April 18, 2017
15
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