McLemore v. Regions Bank, s. 10–5480

• Citation: 682 F.3d 414,56 Bankr.Ct.Dec. 155,53 Employee Benefits Cas. 2313
• Decision Date: 08 June 2012
• Docket Number: Nos. 10–5480,10–5491.,s. 10–5480
• Parties: John C. McLEMORE, Trustee, Plaintiff–Appellant EFS, Inc., et al., Plaintiffs–Appellants v. REGIONS BANK, as Successor in Interest by Merger to AmSouth Bank, Defendant–Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

682 F.3d 414

56 Bankr.Ct.Dec. 155

53 Employee Benefits Cas. 2313

John C. McLEMORE, Trustee, Plaintiff–Appellant

EFS, Inc., et al., Plaintiffs–Appellants

v.REGIONS BANK, as Successor in Interest by Merger to AmSouth Bank, Defendant–Appellee.

Nos. 10–5480, 10–5491.

United States Court of Appeals,Sixth Circuit.

Argued: March 1, 2012.

Decided and Filed: June 8, 2012.

ARGUED:Robert M. Garfinkle, Garfinkle, McLemore & Young, PLLC, Nashville, Tennessee, H. Naill Falls, Jr., Falls & Veach, Nashville, Tennessee, for Appellants. John R. Wingo, Frost Brown Todd LLC, Nashville, Tennessee, for Appellee. Leonard H. Gerson, United States Department of Labor, Washington, D.C., for Amicus Curiae. ON BRIEF:Robert M. Garfinkle, Phillip G. Young, Jr., Garfinkle, McLemore & Young, PLLC, Nashville, Tennessee, H. Naill Falls Jr., Falls & Veach, Nashville, Tennessee, for Appellants. John R. Wingo, Frost Brown Todd LLC, Nashville, Tennessee, Matthew C. Blickensderfer, Frost Brown Todd LLC, Cincinnati, Ohio, for Appellee. Leonard H. Gerson, United States Department of Labor, Washington, D.C., for Amicus Curiae.

Before: MERRITT and COOK, Circuit Judges; and COX, District Judge. ^*

COOK, J., delivered the opinion of the court, in which COX, D.J., joined. MERRITT, J. (pp. 427–29), delivered a separate dissenting opinion.

OPINION

COOK, Circuit Judge.

These consolidated appeals stem from the misconduct of Barry Stokes, an investment advisor who purloined millions of dollars from the employee-benefits plans that he managed. Stokes and his company, 1Point Solutions, LLC (“1Point”), held the fiduciary accounts of the defrauded plans—along with Stokes's personal accounts—with Defendant–Appellant Regions Bank (“Regions”). Plaintiffs–Appellants John McLemore, Stokes's bankruptcy trustee (“the Trustee”), and several former clients of 1Point (collectively, “EFS”) allege that Regions negligently or knowingly allowed Stokes to steal from the fiduciary accounts held at Regions. The Trustee sued Regions under the Employee Retirement Income Security Act (“ERISA”), and both EFS and the Trustee brought state-law claims. In 2008, the district court dismissed the Trustee's ERISA claims. In 2010, the district court found that ERISA preempted both plaintiffs' state-law claims and granted judgment on the pleadings in favor of Regions. The Trustee appeals the district court's 2008 dismissal of its ERISA claims, and both parties appeal the 2010 dismissal of their state-law claims. We AFFIRM.

I.

Plaintiffs allege the following. Stokes served as the sole owner and operator of 1Point, which managed various employee-benefits plans and 401(k) retirement plans as a third-party administrator (“TPA”). 1Point also acted as TPA for a number of flexible-spending accounts, health-savings accounts, dependent-care accounts, and various other “cafeteria plans,” all of which allow employees to set aside pre-tax income for qualifying purposes. ERISA governed the majority of the plans that 1Point serviced.

From the outset, Stokes operated 1Point unlike an ordinary TPA. TPAs generally provide record-keeping services and assist in transferring money, but do not themselves handle money or securities. Stokes, however, directed clients to send funds to accounts at Regions that he had opened in 1Point's name. The accounts, which Stokes and 1Point controlled, held substantial funds: in the accounts at Regions, plaintiffs estimate that 1Point's 401(k) Plan clients deposited over $5.7 million and 1Point's Cafeteria Plan clients deposited $45 million.

Regions advised Stokes and 1Point to structure their accounts in a way that facilitated Stokes's fraud. Initially, 1Point intended to establish accounts for each client under the client's tax identification number. But to circumvent burdensome “know your customer” rules, which require banks to verify the identities of their customers, Regions insisted that 1Point open the accounts in its own name and simply provide them titles referencing the account's corresponding client. In this manner, 1Point opened over 58 accounts with Regions—bearing account names such as “1Point FSA Metro Government Account”—in which it held client funds. Because the accounts bore 1Point's name, Stokes—owner and operator of 1Point—was able to transfer money among and out of the accounts, a capability that later allowed him to embezzle customer funds.

Between 2002 and 2006, Stokes stole large sums from these accounts. In furtherance of his criminal scheme, he (1) transferred money from client accounts to his account at Regions, (2) withdrew hundreds of thousands of dollars from the 1Point 401(k) account in the form of cashier's checks, (3) used client accounts to fund 1Point's operating expenses, and (4) transferred money between customer accounts to pay overdraft fees and conceal his theft. Stokes briefly moved the 1Point accounts to Fifth Third Bank in 2006, but the bank soon closed the accounts for improper activity. Regions failed to exercise the same vigilance.

For the most part, Regions behaved like an ordinary depositary bank. It facilitated 1Point's withdrawals and transfers, received over $50 million in deposits for plan accounts, and held plan assets. Regions also collected fees and analysis charges from 1Point's accounts, totaling more than $500,000 over the course of 1Point and Regions' relationship. As a depositary bank, Regions was subject to various regulations—including provisions of the Bank Secrecy Act, 31 U.S.C. §§ 3513 et seq.—aimed at preventing money laundering. Among other things, these regulations required Regions to report large currency transactions, file suspicious-activity reports, verify the identities of those opening accounts, and maintain automated computer monitoring of accounts.

Regions failed to comply with these regulations. In 2004, the U.S. Financial Crimes Enforcement Network assessed a $10 million fine against Regions and its predecessor, AmSouth Bank, for their failure (1) to report suspicious activity in a timely manner, (2) to develop an anti-money laundering program and implement anti-money laundering policies, and (3) to respond to circumstances in which account holders used Regions bank accounts to further schemes involving embezzlement and fraud. Pointing to these failures in monitoring accounts and Stokes's unusual account activity, plaintiffs allege that Regions “knew or should have known” about Stokes's misconduct.

In 2006, Stokes and 1Point filed for bankruptcy protection, and plaintiffs then discovered Stokes's theft. In August 2007, the Trustee filed this case against Regions in bankruptcy court on behalf of the victimized plans for which he assumed fiduciary status on behalf of Stokes and 1Point. In February 2008, the district court withdrew the reference of the Trustee's case to the bankruptcy court.

The Trustee accuses Regions of failing to take action in the face of Stokes's obvious criminal scheme. He alleges that 1Point's transactions “triggered red flags” that should have apprised Regions of its duty to investigate the transactions. In his complaint, the Trustee points to a number of irregularities that alerted Regions to Stokes's theft—for example, commingling customer accounts and small, “odd dollar” withdrawals from customer accounts. Based on these irregularities, the Trustee argues, Regions “knew or should have known” about the misuse of the funds in 1Point's accounts. The Trustee's original complaint asserted ERISA claims against Regions, both in its capacity as a fiduciary and as a nonfiduciary, as well as state-law claims based on negligence and aiding and abetting.

Regions moved to dismiss these claims under Federal Rule of Civil Procedure 12(b)(6). The district court granted the motion in part, finding that only the Trustee's negligence claims survived Regions' motion. The court (1) found that ERISA provided the Trustee standing to sue on behalf of the defrauded plans, but that (2) Regions failed to qualify as an ERISA fiduciary; (3) dismissed the nonfiduciary claims against Regions; (4) found that ERISA preempted the Trustee's state-law claim that Regions aided and abetted Stokes's and 1Point's breach of fiduciary duty; and (5) allowed the Trustee's state-law negligence claim to proceed.

A month after the court's ruling, a number of 1Point's former clients, including EFS, Inc., brought suit against Regions. EFS's factual allegations mirrored the Trustee's, and the district court consolidated the two lawsuits into one action. After the consolidation, both EFS and the Trustee amended their complaints to include recklessness, unjust enrichment, and violation of the Tennessee Consumer Protection Act (“TCPA”). In addition, EFS brought several aiding-and-abetting claims.

Following plaintiffs' amendments, Regions moved to dismiss the claims under Federal Rule of Civil Procedure 12(c). The district court granted the motion, finding that ERISA preempted the Trustee's remaining state-law claims against Regions. For the same reason, the court dismissed all of EFS's claims against Regions, except several brought by plaintiffs suing on behalf of non-ERISA plans.

II.

On appeal, the Trustee challenges the district court's 2008 dismissal of its ERISA claims under Federal Rule of Civil Procedure 12(b)(6); and both parties challenge the district court's 2010 grant of Regions' motion for judgment on the pleadings dismissing their state-law claims under Federal Rule of Civil Procedure 12(c). We address these decisions in turn.

A. Whether the District Court Properly Dismissed the Trustee's ERISA Claims

The Trustee first challenges the district court's 2008 dismissal of his ERISA claims, arguing that the court erred in holding that Regions fails to qualify as an ERISA fiduciary. Regions agrees with the court's conclusion on this point and offers an alternate ground for affirming the court's judgment: the Trustee lacked standing to pursue claims on behalf of the defrauded plans. We review a dismissal under 1...