677 F.3d 178 (3rd Cir. 2012), 11-2520, Santomenno ex rel. John Hancock Trust v. John Hancock Life Ins. Co. (U.S.A.)

Docket Nº:11-2520.
Citation:677 F.3d 178
Opinion Judge:VANASKIE, Circuit Judge.
Party Name:Danielle SANTOMENNO, for the use and benefit of the JOHN HANCOCK TRUST and the John Hancock Funds II; Karen Poley and Barbara Poley, for the use and benefit of the John Hancock Funds II; Danielle Santomenno, Karen Poley and Barbara Poley individually and on behalf of Employee Retirement Income Security Act of 1974, as amended (
Attorney:Arnold C. Lakind, Esq. (Argued), Robert L. Lakind, Esq., Szaferman, Lakind, Blumstein & Blader, P.C., Lawrenceville, NJ, for Appellant. M. Patricia Smith, Solicitor of Labor (Did not enter an appearance), Timothy D. Hauser, Associate Solicitor, Plan Benefits Security Division (Did not enter an ap...
Judge Panel:Before: SLOVITER and VANASKIE, Circuit Judges, and POLLAK,[*] District Judge.
Case Date:April 16, 2012
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit
 
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677 F.3d 178 (3rd Cir. 2012)

Danielle SANTOMENNO, for the use and benefit of the JOHN HANCOCK TRUST and the John Hancock Funds II; Karen Poley and Barbara Poley, for the use and benefit of the John Hancock Funds II; Danielle Santomenno, Karen Poley and Barbara Poley individually and on behalf of Employee Retirement Income Security Act of 1974, as amended (" ERISA" ), employee benefit plans that held, or continue to hold, group variable annuity contracts issued/sold by John Hancock Life Insurance Life Insurance Company (U.S.A.), and Participants and beneficiaries of all such ERISA covered employee benefit plans; and Danielle Santomenno individually and on behalf of any person or entity that is a party to, or has acquired rights under, an individual or group variable annuity contract that was issued/sold by John Hancock Life Insurance Company (U.S.A.) where the underlying investment was a John Hancock proprietary fund contained in the John Hancock Trust,

v.

JOHN HANCOCK LIFE INSURANCE COMPANY (U.S.A.); John Hancock Investment Management Services; John Hancock Funds, LLC; John Hancock Distributors, LLC,

Danielle Santomenno, Karen Poley, Barbara Poley, Appellants.

No. 11-2520.

United States Court of Appeals, Third Circuit.

April 16, 2012

Argued Feb. 9, 2012.

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[Copyrighted Material Omitted]

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Arnold C. Lakind, Esq. (Argued), Robert L. Lakind, Esq., Szaferman, Lakind, Blumstein & Blader, P.C., Lawrenceville, NJ, for Appellant.

M. Patricia Smith, Solicitor of Labor (Did not enter an appearance), Timothy D. Hauser, Associate Solicitor, Plan Benefits Security Division (Did not enter an appearance), Elizabeth Hopkins, (Did not enter an appearance), for Appellate and Special Litigation.

Robin S. Parry, Esq., Nathaniel I. Spiller, Esq. (Argued), U.S. Department of Labor, Office of the Solicitor, Plan Benefits Security Division, Washington, DC, for Amicus Appellant.

James O. Fleckner, Esq. (Argued), Alison V. Douglass, Esq., Daniel P. Condon, Esq., Goodwin Procter LLP, Boston, MA, Brian J. McMahon, Esq., Gibbons P.C., Newark, NJ, for Appellees.

Before: SLOVITER and VANASKIE, Circuit Judges, and POLLAK,[*] District Judge.

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OPINION

VANASKIE, Circuit Judge.

Danielle Santomenno, Karen Poley, and Barbara Poley (collectively, " Participants" ) brought suit against John Hancock Life Insurance Company (U.S.A.) and its affiliates (collectively, " John Hancock" ) under the Employment Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq., and the Investment Company Act of 1940 (ICA), 15 U.S.C. § 80a-1 et seq., for allegedly charging their retirement plans excessive fees on annuity insurance contracts offered to plan participants. The District Court granted John Hancock's motion to dismiss. It dismissed the ICA excessive fee claims because only those maintaining an ownership interest in the funds in question could sue under the derivative suit provision enacted by Congress and the Participants are no longer investors in the funds in question. As to the ERISA claims, the District Court found that dismissal was warranted because Participants failed to make a pre-suit demand upon the plan trustees to take appropriate action and failed to join the trustees as parties. We affirm the District Court's judgment with regards to the ICA claims, but vacate and remand on the ERISA counts.

I.

This action arises out of the administration of employer-sponsored 401(k) benefit plans. The trustees of these plans entered into group annuity contracts with John Hancock. Participants brought this action on March 31, 2010. The basis of Participants' complaint is that John Hancock charged a variety of excessive fees in providing investment services to these plans. Santomenno was a security holder in the relevant funds from July 2008 through sometime in June 2010, K. Poley from July 2004 to sometime in January 2010, and B. Poley from January 2009 to sometime in January 2010. Counts I through VII were brought under Section 502(a) of ERISA, 29 U.S.C. § 1132(a). Count VIII was brought under Section 36(b) of the ICA, 15 U.S.C. § 80a-35(b), and Count IX was brought under Section 47(b) of the ICA, 15 U.S.C. § 80a-46(b).

John Hancock moved to dismiss under FED.R.CIV.P. 12(b)(6). Drawing upon the common law of trusts, the District Court found that all of Participants' theories of liability under ERISA were derivative and dismissed all seven ERISA counts because Participants did not first make demand upon the trustees of the plan and did not join the trustees in the lawsuit. As the District Court explained:

In short, absent demand, or allegations going to demand futility, or some allegations, which if proven, would establish that the trustees improperly refused to bring suit, it would appear that the beneficiaries of an ERISA plan cannot bring a claim under Section 502. Likewise, any such suit must join the plan's trustees. Here, because there are no such factual allegations and because the trustees have not been joined, dismissal of the ERISA counts, counts I through VII, would seem to be proper.

Santomenno ex rel. John Hancock Trust v. John Hancock Life Ins. Co. (U.S.A.), No. 2-10-cv-01655, 2011 WL 2038769, at *4 (D.N.J. May 23, 2011) (citing McMahon v. McDowell, 794 F.2d 100, 110 (3d Cir.1986)).

The District Court dismissed Count VIII, brought under section 36(b) of the ICA, because Participants no longer owned any interest in John Hancock funds. The District Court observed that " continuous ownership throughout the pendency of the litigation [is] an element of statutory standing." Id. at *5 (citing

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Siemers v. Wells Fargo & Co., No. C 05-04518WHA, 2007 WL 760750, at *20 (N.D.Cal. Mar. 9, 2007)). The District Court proceeded to dismiss Count IX because, in its view, Section 47(b) of the ICA could only provide relief to Participants if they could " show[ ] a violation of some other section of the Act." Id. (quoting Tarlov v. Paine Webber Cashfund, Inc., 559 F.Supp. 429, 438 (D.Conn.1983)). Because Participants' Section 36(b) claim had been dismissed in Count VIII, the District Court reasoned that " the Section 47(b) claim would seem to fail also." Id.

II.

The District Court had subject-matter jurisdiction pursuant to Section 502(e) of ERISA, 29 U.S.C. § 1132(e), and Section 44 of the ICA, 15 U.S.C. § 80a-43. We have appellate jurisdiction under 28 U.S.C. § 1291. Our review of an order granting a motion to dismiss is plenary. Anspach ex rel. Anspach v. City of Phila., Dep't of Pub. Health, 503 F.3d 256, 260 (3d Cir.2007). When reviewing a Rule 12(b)(6) dismissal, we accept as true all well-pled factual allegations in the complaint, and view them in the light most favorable to the plaintiffs. Id.

A.

We begin by addressing the ICA issues. The first question is whether continuous ownership of securities in the fund in question during the pendency of litigation is required for actions brought under Section 36(b) of the ICA. Section 36(b), in pertinent part, provides:

For the purposes of this subsection, the investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by such registered investment company, or by the security holders thereof, to such investment adviser or any affiliated person of such investment adviser. An action may be brought under this subsection by the Commission, or by a security holder of such registered investment company on behalf of such company, against such investment adviser, or any affiliated person of such investment adviser, or any other person enumerated in subsection (a) of this section who has a fiduciary duty concerning such compensation or payments, for breach of fiduciary duty in respect of such compensation or payments paid by such registered investment company or by the security holders thereof to such investment adviser or person.

15 U.S.C. § 80a-35(b). A suit brought under Section 36(b) is similar to a derivative action in that it is brought on behalf of the investment company. Because the action is brought on behalf of the company, " any recovery obtained in a § 36(b) action will go to the company rather than the plaintiff." Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 535 n. 11, 104 S.Ct. 831, 78 L.Ed.2d 645 (1984) (citations omitted). Accordingly, " [i]n this respect, a § 36(b) action is undeniably ‘ derivative’ in the broad sense of that word." Id. (citations omitted).

In the context of derivative suits governed by FED.R.CIV.P. 23.1, courts have imposed a requirement of continuous ownership.1 This requirement:

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[D]erives from the first sentence of Rule 23.1, which refers to actions ‘ brought by one or more shareholders to enforce a right of a corporation....’ The rule's provision that a ‘ derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders ... similarly situated in enforcing the right...

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