Haley v. Teachers Ins. & Annuity Ass'n of Am.
| Decision Date | 01 December 2022 |
| Docket Number | 21-805-cv,August Term 2021 |
| Parties | Melissa HALEY, individually and on behalf of herself and all others similarly situated, Plaintiff-Appellee, v. TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Second Circuit |
Todd S. Collins (Ellen T. Noteware, on the brief), Berger Montague PC, Philadelphia, PA; John J. Nestico, Todd M. Schneider, on the brief, Schneider Wallace Cottrell Konecky LLP, Charlotte, NC and Emeryville, CA, for Plaintiff-Appellee.
Jaime A. Santos (James O. Fleckner, Michael K. Isenman, Kelsey Pelagalli, on the brief), Goodwin Procter LLP, Washington, DC and Boston, MA, for Defendant-Appellant.
Leah M. Nicholls, on the brief, Public Justice, P.C., Washington, DC, for amicus curiae Public Justice.
Dara S. Smith, William Alvarado Rivera, on the brief, AARP Foundation, Washington, DC, for amici curiae AARP and AARP Foundation.
Meaghan VerGow, on the brief, O'Melveny & Myers LLP, Washington, DC, for amici curiae The Securities Industry and Financial Markets Association, American Benefits Council, Society of Professional Asset Managers and Recordkeepers, American Council of Life Insurers, and Chamber of Commerce of the United States of America.
Before: Newman, Walker, and Sullivan, Circuit Judges.
Melissa Haley alleges that a participant loan program that Teachers Insurance and Annuity Association of America (TIAA) offered to her retirement plan is a prohibited transaction under the Employee Retirement Income Security Act of 1974 (ERISA). After ruling that Haley's suit could proceed against TIAA as a non-fiduciary under ERISA, the district court (Oetken, J. ) certified a class of employee benefit plans whose fiduciaries contracted with TIAA to offer loans that were secured by a participant's retirement savings. In this interlocutory appeal challenging the certification decision, TIAA argues that the district court erred when it found that common issues predominated over individual ones without addressing the effect of ERISA's statutory exemptions on liability classwide and without making any factual findings as to the similarities of the loans. We agree. Because the predominance inquiry of Federal Rule of Civil Procedure 23(b)(3) requires that a district court analyze defenses, and the court did not do so here, we VACATE the district court's decision and REMAND for proceedings consistent with this opinion.
Haley participates in a retirement plan offered by Washington University in St. Louis (WashU). The WashU plan is a defined contribution savings plan that is tax-deferred under 26 U.S.C. § 403(b) and governed by ERISA.1 WashU chose to offer certain services to its participants, including the ability to borrow against retirement savings without incurring a taxable event. During the relevant period, WashU plan participants were permitted to take out either non-collateralized or collateralized loans. To facilitate these loans, WashU engaged with outside vendors known as "service providers," including TIAA and Vanguard.
Non-collateralized loans enable participants to borrow directly from their retirement accounts without pledging any assets as collateral. Vanguard serviced the non-collateralized loans for WashU plan participants and charged participants a fixed origination fee and annual maintenance fees. Non-collateralized loans are not at issue in this case.
This suit instead challenges the collateralized loan products that TIAA offered. Fiduciaries responsible for some eight thousand plans, such as WashU, retained TIAA to service collateralized loans for their respective plans. The collateralized loans shared the following attributes. TIAA required participants to borrow the desired loan amount from TIAA's "General Account" rather than directly from their own retirement accounts.2 TIAA charged interest on the loan, which participants paid (along with the principal) to the General Account. The interest rates that participants paid, however, depended on several variables, including the type of loan contract between TIAA and the plan and the relevant state's insurance laws.
TIAA secured the loans with collateral equal to the loan amount plus 10%. TIAA invested that sum in the participant's account in a TIAA Traditional Annuity, an interest-bearing fixed annuity that paid a guaranteed minimum rate of return, plus additional amounts of interest declared at TIAA's discretion. The plan participant kept the return earned on the collateral. Returns varied based on the type of the annuity contract that TIAA offered to the plan, and when and where the loan was obtained. The underlying annuity contract also affected whether a borrowing participant could designate funds already invested in a TIAA Traditional Annuity as collateral or whether the participant had to transfer funds from existing investments into a TIAA Traditional Annuity.
While it did not charge origination or maintenance fees, TIAA was compensated for servicing the loans. TIAA states that its compensation was the difference, or "spread," between the interest that participants paid TIAA on the loan and the amount TIAA credited to participants on their collateral as investment income.3
Haley took out four collateralized loans from her WashU plan between 2011 and 2015, and a fifth in 2019 while this lawsuit was pending. In 2017, she brought the instant action seeking to hold TIAA directly liable on the grounds that the collateralized loans violated ERISA's so-called "prohibited transactions" rules. In the alternative, Haley sought to hold TIAA liable as a non-fiduciary for its knowing participation in the alleged violations by her plan fiduciary, WashU. Haley, however, did not name WashU as a defendant.
The district court held that TIAA was not an ERISA fiduciary with respect to the challenged loans but permitted Haley's claims to proceed against TIAA as a non-fiduciary. Haley then moved to certify a nationwide class of similarly situated ERISA-governed plans. TIAA opposed, asserting that the challenged loans were too disparate to warrant class treatment. TIAA further objected to certification on the grounds that ERISA recognizes exemptions to prohibited transactions and that the factors relevant to whether a collateralized loan is exempt are not subject to common proof. The district court certified a class under Rule 23(b)(3) as to each of Haley's non-fiduciary claims. But the court did not make any findings about the purported variations among the loans in the putative class and did not address how the exemptions to the statutory prohibitions weighed in the certification analysis. TIAA timely filed an interlocutory appeal under Rule 23(f).
Haley is not the first WashU plan participant to allege that the collateralized loans serviced by TIAA are prohibited transactions under ERISA.4 But her suit is unique because she is seeking to hold TIAA liable on behalf of a nationwide class of ERISA-governed plans whose members received loans under terms approved by plan administrators, without naming those administrator fiduciaries as defendants. TIAA argues that the district court improperly certified the multi-plan class.5
ERISA is a comprehensive federal statute that regulates retirement and employee benefit plans, as well as the conduct of fiduciaries who act on behalf of plan participants and other beneficiaries.6 Section 404 of ERISA sets out general duties for plan fiduciaries, sponsors, and others. Section 406 further protects participants and beneficiaries by prohibiting certain transactions involving plan assets that are "believed to pose a high risk of fiduciary self-dealing."7 Subsection 406(a) regulates transactions between a plan and "parties in interest" with respect to the plan. A "party in interest" includes, among others, persons providing services to the plan.8 Haley alleges that the collateralized loans violate two provisions of § 406(a):
Section 406(a)’s broad language would ban most transactions involving service providers, like TIAA. But § 406(a) is expressly limited by § 408, which authorizes the Secretary of Labor to exempt certain transactions so long as they are in the "interests of the plan's participants and beneficiaries."10 TIAA asserts that two exemptions are potentially applicable here.11 First, § 408(b)(1) exempts loans to participants provided that, among other things, they are made in accordance with specific provisions of the plan document, "bear a reasonable rate of interest," and are "adequately secured."12 Second, § 408(b)(17) permits transactions prohibited by § 406(a)(1)(B) and (D) as long as the plan pays no more and receives no less than "adequate consideration."13
We review class certification decisions, including a district court's rulings that each of the Rule 23 requirements are satisfied, for abuse of discretion.14 We give greater deference to decisions granting class certification than to those declining to certify.15 But "[t]o be afforded this deference ... the certification must be sufficiently supported and explained."16
Rule 23(a) requires that a proposed class be sufficiently numerous, have questions of law or fact common to the class, and involve representative plaintiffs whose claims or defenses are typical of the class and who can fairly and adequately protect the class's interests.17 The district court certified the class under Rule 23(b)(3), pursuant to...
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