Schrader v. Hamilton, CV 96-4117 RAP.

• Decision Date: 04 February 1997
• Docket Number: No. CV 96-4117 RAP.,CV 96-4117 RAP.
• Court: U.S. District Court — Central District of California
• Parties: Ottis J. SCHRADER, On His Own Behalf and Derivatively On Behalf of Nominal Defendant Atlantic Richfield Company, a Delaware corporation, Plaintiff, v. Beverly L. HAMILTON; and Does 1 Through 100, Defendants, and Atlantic Richfield Company, a Delaware corporation, Nominal Defendant.

959 F.Supp. 1205

Ottis J. SCHRADER, On His Own Behalf and Derivatively On Behalf of Nominal Defendant Atlantic Richfield Company, a Delaware corporation, Plaintiff, v. Beverly L. HAMILTON; and Does 1 Through 100, Defendants and Atlantic Richfield Company, a Delaware corporation, Nominal Defendant.

No. CV 96-4117 RAP.

United States District Court, C.D. California.

February 4, 1997.

Marc Seltzer, Corinblit & Seltzer, Los Angeles, CA, for Plaintiff.

John Brinsley, Lee Seltman, Paul, Hastings, Janofsky & Walker, Los Angeles, CA, for Beverly Hamilton.

Matthew Heartney, James Speyer, Steven Bergman, Arnold & Porter, Los Angeles, CA, for ARCO.

ORDER GRANTING PLAINTIFF'S MOTION TO REMAND

PAEZ, District Judge.

I. INTRODUCTION & FACTUAL BACKGROUND

On May 13, 1996, plaintiff Ottis J. Schrader filed this shareholder's derivative action in the Los Angeles County Superior Court on behalf of Atlantic Richfield Co. ("ARCO") against defendant Beverly L. Hamilton, and nominal defendant ARCO. Hamilton, ARCO's Vice-President and Investment Officer and an administrator under the Employees Retirement and Income Security Act of 1974 ("ERISA"), allegedly made highly speculative investments and caused ARCO's Money Market Plus Benefit Plan (the "MMP Fund" or "MMP Plan"), an ERISA employee investment plan, to lose $22.3 million. ARCO reimbursed the MMP Plan for the money it lost as a result of the bad investments, and Schrader filed this action to recover damages for the concomitant loss to shareholders. Schrader's complaint asserts a single cause of action against the defendants for breach of their corporate fiduciary duties. Defendants timely removed the case to federal court, alleging jurisdiction under ERISA. Defendants contend that plaintiff's state law claims are preempted by ERISA.

The MMP Fund was marketed as a highly conservative investment vehicle with a stated goal of providing security to the fund's principal and liquidity. Schrader alleges that in 1983 and 1984 Hamilton invested $55 million of the MMP Fund in highly speculative derivative securities. The value of these securities eventually dropped, resulting in the MMP Fund's ultimate loss of approximately $22.3 million.

Subsequent to the MMP Fund's loss, the Department of Labor ("DOL") initiated an investigation of ARCO's management of the MMP Fund. Schrader alleges that the DOL issued a written report on October 31, 1994, finding that defendants Hamilton and ARCO were liable for breach of fiduciary duty under ERISA for allowing the highly speculative investments. In response to the DOL report, ARCO acknowledged its liability and agreed to take $22.3 million from the corporate treasury to replenish the MMP.¹

Schrader then brought this shareholder's derivative action, claiming that by allowing principal-at-risk investments of the MMP Plan funds, Hamilton breached the fiduciary duties she owed to ARCO and its shareholders as a corporate officer. Schrader now requests that the Court remand this action to the superior court, arguing that Hamilton's corporate fiduciary duty was separate and independent from her ERISA fiduciary duty. Schrader contends that because the two duties are separate, the corporate fiduciary duty claim is not related to ERISA and, consequently, is not preempted. In addition, Schrader argues that ERISA does not preempt this action because, as a shareholder, he is not an enumerated party authorized to bring an ERISA claim. The defendants oppose remand, contending that Schrader's state law claim is preempted by ERISA because: (1) it relates to the ERISA Plan; and (2) Schrader is acting on behalf of ARCO and, accordingly, has standing to bring an ERISA claim.²

Defendants move to dismiss the action under Fed.R.Civ.P. 12(b)(6), arguing that (1) Schrader's state law claims are preempted, and he has no remedy under the ERISA statute; and (2) Schrader failed to demand that ARCO's Board of Directors reimburse the shareholders before initiating his shareholder's derivative suit.

At the hearing on the parties' motions, the Court tentatively indicated that remand to state court was not warranted because it appeared that plaintiff's claim was preempted by ERISA. However, upon further consideration of the parties' arguments and the relevant authorities, augmented by the parties' supplemental briefing, the Court has concluded that plaintiff lacks standing to maintain a claim for relief under ERISA. Plaintiff is not one of the enumerated parties authorized to bring an ERISA claim. The fact that plaintiff's suit is brought derivatively on behalf of ARCO is not sufficient, in and of itself, to provide plaintiff standing to assert an ERISA claim. Allowing plaintiff's derivative action will not further ERISA's goals, and, accordingly, plaintiff lacks standing to assert an ERISA claim against defendants. Consequently, Schrader's state law cause of action is not preempted by ERISA, this Court lacks federal subject matter jurisdiction over plaintiff's claim, and the action is properly remanded to state court. Accordingly, the Court does not reach defendants' motion to dismiss.

II. MOTION TO REMAND

A. Legal Standard

A case must be remanded to state court if the district court lacks subject matter jurisdiction. Schwarzer, Tashima & Wagstaffe, CAL. PRAC. GUIDE: FED. CIV. PROC. BEFORE TRIAL (The Rutter Group 1996) § 2:1084 [hereinafter Schwarzer]. Where jurisdiction is not premised on diversity and none of the claims asserted "arise under" federal law, the district court lacks subject matter jurisdiction and must remand the action to state court. Schwarzer, § 2:1085. A motion to remand for lack of subject matter jurisdiction can be raised at any time before final judgment. 28 U.S.C. § 1441(c); Fed.R.Civ.P. 12(h)(3).

To determine whether a case arises under federal law for purposes of establishing federal question subject matter jurisdiction, courts apply the "well-pleaded complaint" rule, which allows a plaintiff to avoid federal jurisdiction by relying exclusively on state law. Caterpillar Inc., v. Williams, 482 U.S. 386, 392, 107 S.Ct. 2425, 2429, 96 L.Ed.2d 318 (1987). "Federal courts consider only what necessarily appears in plaintiff's statement of his or her claim, unaided by anything alleged in anticipation or avoidance of defenses the defendant may interpose." Schwarzer, § 2:116; see also Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 809, 108 S.Ct. 2166, 2174, 100 L.Ed.2d 811 (1988) (holding that even where defense is only question truly at issue, case raising federal patent law defense does not, for that reason alone, arise under patent law). In general, federal subject matter jurisdiction does not exist when the only federal question presented is raised as a defense, even where that defense alleges federal preemption of state law. Franchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1, 12, 103 S.Ct. 2841, 2847-48, 77 L.Ed.2d 420 (1983) (FTB), superseded by statute on other grounds as stated in, Ethridge v. Harbor House Restaurant, 861 F.2d 1389 (9th Cir. 1988).

However, certain federal laws completely preempt state law, creating an exception to the well-pleaded complaint rule. A federal statute's preemptive force may be so extraordinary that it is said to occupy the field of law, barring assertion of state law claims and permitting removal based on the preemptive effect of the federal statute. Caterpillar, 482 U.S. at 392, 107 S.Ct. at 2430.

B. ERISA Completely Preempts State Law

ERISA imposes participation, funding and vesting requirements on employee investment and benefit plans and allocates fiduciary responsibility and liability for management of such plans. Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 90, 103 S.Ct. 2890, 2896, 77 L.Ed.2d 490 (1983). Congress sought to achieve two goals in enacting ERISA: (1) to protect plans and beneficiaries, and (2) to encourage employers to create and maintain benefit plans for their employees. Varity Corp. v. Howe, ___ U.S. ___, ___, 116 S.Ct. 1065, 1078, 134 L.Ed.2d 130 (1996). Congress determined that these goals would be best served by establishing exclusive federal regulation, and ERISA therefore bars all state claims bearing on employee retirement plans unless they are protected by the savings clause of the statute.³ Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 47-49, 107 S.Ct. 1549, 1553, 95 L.Ed.2d 39 (1987), superseded by statute on other grounds as stated in, Hunter v. Ameritech, 779 F.Supp. 419, 420 (N.D.Ill.1991); Schwarzer, § 2:768. ERISA preemption is "deliberately expansive, and designed to establish pension plan regulation as exclusively a federal concern." Pilot Life, 481 U.S. at 46, 107 S.Ct. at 1552; see also New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 651-52, 115 S.Ct. 1671, 1675, 131 L.Ed.2d 695 (1995).

ERISA's supersedure provision states:

Except as provided in subsection (b) of this section, the provisions of this subchapter and subchapter III of this chapter shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 1003(a) of this title and not exempt under section 1003(b) of this title.

29 U.S.C. § 1144(a) (emphasis added). Courts have read the "relate to" language of ERISA's supersedure provision broadly; a state law relates to a benefit plan if it has a connection with or reference to the plan. Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 138, 111 S.Ct. 478, 482, 112 L.Ed.2d 474 (1990), abrogated on other grounds as stated in, Spinelli v. Gaughan, 12 F.3d 853, 857 (9th Cir.1993) (citing Mertens v. Hewitt Assocs., 508 U.S. 248, 256-58, 113 S.Ct. 2063, 2069, 124 L.Ed.2d 161 (1993)). Thus, even though a suit facially asserts only state law claims, it may arise under ERISA. Metropolitan Life Insurance Co. v. Taylor, 481 U.S. 58, 67, 107 S.Ct. 1542, 1547-48, 95 L.Ed.2d 55 (1987), superseded by statute on other grounds as...