Romano v. John Hancock Life Ins. Co. (U.S.)
| Decision Date | 09 May 2022 |
| Docket Number | 19-21147-CIV-GOODMAN |
| Parties | ERIC ROMANO, et al., Plaintiffs, v. JOHN HANCOCK LIFE INS. CO. (USA), Defendant. |
| Court | U.S. District Court — Southern District of Florida |
REDACTED [1] ORDER ON DEFENDANT'S SUMMARY JUDGMENT MOTION
“Life is a sum of all our choices.”
-Albert Camus (French philosopher, author and journalist, 1913-1960)
Plaintiffs Eric and Todd Romano, trustees of an ERISA[2]-defined contribution plan (“the Romanos” or “Plaintiffs”), filed a two-count lawsuit against Defendant John Hancock Life Ins. Co. (USA) (“John Hancock”), which sold them, as trustees of a 401(k) Plan, a Group Variable Annuity Contract. Plaintiffs sued on behalf of a putative class of persons who owned variable annuity contracts from John Hancock. The Court granted Plaintiffs' motion for class certification; notice of this has been sent to Class Members. .
For the reasons outlined below, the Undersigned grants the motion. At bottom, by way of overall summary, John Hancock did not have an obligation under ERISA to provide its customers with rebates for the foreign tax credits (“FTCs”) it used. Likewise, the contracts at issue here did not impose such a requirement on John Hancock. Its customers (such as Plaintiffs) could not themselves have used those FTCs, which are not transferable. Only John Hancock could have used the FTCs at issue.
Without John Hancock's advice or other involvement, Plaintiffs chose investments which generated FTCs for which John Hancock did not provide a rebate. And although Plaintiffs could have tried to negotiate with John Hancock for rebates or credits (for the FTCs) or other, better pricing, they did not choosing instead to invest in the funds which they selected. John Hancock did not violate a fiduciary duty of loyalty or engage in a prohibited transaction by complying with the parties' contracts and by engaging in FTC transactions authorized by the federal tax code.
Moreover when Plaintiffs replaced John Hancock with another entity to provide similar recordkeeping services for their 401(k) plans, they chose a firm which also did not provide rebates or credits for FTCs. There is no evidence in this record that Plaintiffs have filed an action against the replacement entity, nor is there evidence that Plaintiffs even voiced any dissatisfaction with the new arrangement, which they also chose, even though it lacks the same FTC rebates or credits as the agreements Plaintiffs challenge here. Plaintiffs' fundamental theory, while creative, [3] does not support their claims under the undisputed facts. Accordingly, the Court concludes that summary judgment for John Hancock is warranted.[4]
The Romanos jointly own Romano Law PL (“Romano Law”). In 2014, Plaintiffs established a 401(k) plan for Romano Law, the Romano Law PL 401(k) Plan (the “Plan”).
The Romanos named themselves trustees of the Plan, and they chose to engage Christian Searcy, Jr. (“Searcy”) to recommend service providers and investments for the Plan, among other responsibilities.
John Hancock is an insurance company that, relevant here, offers recordkeeping services to 401(k) plans. The retirement product at issue is the John Hancock Signature product, which is provided through a group variable annuity contract.
In connection with establishing their Plan, the Romanos entered into a group variable annuity contract (“GAC” or “Contract”) and a Recordkeeping Agreement (“RKA”) with John Hancock to provide “administrative and recordkeeping services” and a platform of investment options for the Plan.
The Contract provided Plaintiffs, on behalf of their Plan, with access to John Hancock separate accounts, which could then be used as the Plan's funding mechanism. An insurance company separate account is “an accounting entity created by and under the control of an insurance company.” John Hancock was the owner of the assets held in the separate accounts. The separate accounts are divided into sub-accounts, and each subaccount serves as a “conduit” vehicle to allow investment in a pre-specified mutual fund.
Some sub-accounts available under the Contract use mutual funds that invest in foreign securities. Upon Searcy's recommendations, the Romanos selected some of these funds. Investments in foreign securities may be assessed income or related taxes by the country of domicile (foreign taxes) on income related to those investments.
U.S. taxpayers who accrue or pay foreign taxes to a foreign country on income that is also subject to U.S. taxes may, under certain circumstances, be able to take an FTC against their U.S. tax liability (Code §§ 27, 901-09), or, alternatively, deduct such amount from their U.S. taxable income.
The foreign taxes paid by John Hancock that are at issue in this case, and that are factored into the determination of the FTCs, involve foreign taxes paid by mutual funds. Those funds are owned by John Hancock separate accounts which are deemed paid by John Hancock pursuant to Internal Revenue Code provisions applicable specifically to mutual funds and their shareholders.
During certain years at issue in this case, John Hancock, as owner of the mutual fund shares held in the separate accounts, qualified for offsetting FTCs.
Plaintiffs allege that John Hancock improperly “took” the FTCs by not disclosing what it did and by not rebating (or returning or refunding or crediting) those amounts back to Plaintiffs. Although Plaintiffs themselves could not have used the FTCs, they argue that John Hancock should have somehow passed on to them the financial benefit of the FTCs through a rebate or credit.
Plaintiffs bring two ERISA counts against John Hancock. Count I alleges a breach of the “fiduciary duty of loyalty” by “receiving and retaining Plan Foreign Tax Credits for [John Hancock's] own benefit, and by failing to appropriately disclose its retention of Plan Foreign Tax Credits ....” [Compl. ¶ 63, ECF No. 1]. Count II alleges violations of two prohibited transaction provisions, ERISA §§ 406(b)(1) and (b)(3), 29 U.S.C. §§ 1106(b)(1) and (b)(3), also relating to FTCs. Id. ¶¶ 67-73.
Plaintiffs ask the Court to require John Hancock to “make good to the Plan all losses to the Plan” and “damages paid to the Plan.” Id. (). They also seek an imposition of a constructive trust as to amounts by which John Hancock was allegedly “unjustly enriched, ” and “equitable restitution and disgorgement.” Id. ().
Plaintiffs withdrew their requests for injunctive and declaratory relief. [ECF No. 152]. They also withdrew their demand for an Order permitting the withdrawal of any and all amounts payable under the Contract without imposition of a surrender fee.
John Hancock asserts three grounds to support its summary judgment motion: (1) John Hancock is not an ERISA fiduciary for offering or administering separate accounts as conduit vehicles for retirement plan investments; (2) John Hancock's compliance with the Internal Revenue Code in taking the FTCs into account in the determination of its consolidated U.S. federal income tax liability does not violate ERISA; and (3) Plaintiffs cannot establish a loss or an injury required for the monetary relief they seek because their retirement plan paid no U.S. taxes (and therefore is not eligible for FTCs) and incurred no loss on account of John Hancock's own tax obligations. For all practical purposes, a portion of John Hancock's third theory is akin to the argument that Plaintiffs lack Article III standing to seek monetary damages. John Hancock asserts this Article III argument, as well.
1. John Hancock is an insurance company that, among other things offers recordkeeping services to 401(k) plans.
2. John Hancock offers a retirement product called the John Hancock Signature product, which is provided through a group variable annuity contract (“GAC”).
3. A GAC is a contract used as “a funding vehicle to administer a group retirement plan; and that vehicle would use separate accounts and subaccounts to invest in underlying investment products that would be offered to plan participants.”
4. GACs are sold through registered broker dealers and investment advisors.
5. The Romanos jointly own Romano Law.
6. In 2014, the Romanos established a 401(k) plan for Romano Law, the Romano Law, PL 401(k) Plan (the “Plan”).
7. Christian Searcy, Jr. (“Searcy”) received an M.B.A. from the Duke University Fuqua School of Business in 2009.
8. Searcy has been a licensed financial advisor since 2003.
9. Searcy holds a State of Florida Life, Health, and Variable Annuity license and other credentials, including being an Accredited Investment Fiduciary and Certified Private Wealth Advisor.
10. As of July 2014, the Romanos had little prior investment experience.
11. The Romanos named themselves trustees of the Plan.
12. The Romanos engaged Searcy as the Plan's investment advisor to “assist them with selecting investments to be made available under the [P]lan” and in “reviewing the [Plan's] service providers” (i.e., recordkeepers), among other responsibilities.
13. Searcy professed to have had some understanding of foreign tax credits (“FTCs”) before 2014. ...
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