Zang and others similarly situated v. Paychex, Inc.
| Decision Date | 02 August 2010 |
| Docket Number | No. 08-CV-6046L,08-CV-6046L |
| Citation | 728 F.Supp.2d 261 |
| Parties | Steven R. ZANG, AND all OTHERS SIMILARLY SITUATED, Plaintiff, v. PAYCHEX, INC., Defendant. |
| Court | U.S. District Court — Western District of New York |
Barry D. Adler, Adler and Assoc., Farmington Hills, MI, Gregory Y. Porter, Bailey & Glasser LLP, J. Brian McTigue, Jennifer H. Strouf, Patrick P. Degravelles, McTigue & Veis LLP, Washington, DC, Jules L. Smith, Blitman & King, Rochester, NY, for Plaintiff.
Alexander P. Ryan, Michael Joseph Prame, Washington, DC, Laura W. Smalley, Paul J. Yesawich, III, Harris Beach LLP, Pittsford, NY, Thomas G. McNeill, Dickinson Wright, Detroit, MI, for Defendant.
DECISION AND ORDER
This action was commenced in the United States District Court for the Eastern District of Michigan in August 2007, and was transferred to this Court on January 30, 2008. The action is brought by Steven R. Zang, a trustee of the Luxon & Zang PC 401(k) Profit Sharing Plan & Trust ("Plan"), against Paychex, Inc., pursuant to the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq.
In short, plaintiff alleges that Paychex has contracted with the Plan's sponsor, Luxon & Zang P.C., to provide certain services for the Plan, and that Paychex has violated ERISA in certain respects, in general by placing its own financial interests ahead of those of the Plan, and by engaging in transactions prohibited by ERISA.
Paychex has moved to dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons that follow, Paychex's motion is granted, and the complaint is dismissed.
According to the complaint, Paychex offers prospective plan sponsors a number of master or "prototype" plans to choosefrom. These are model, or form plans, which Paychex's client, the plan sponsor, can customize in some respects to suit its needs or preferences. Of particular relevance to this case, Paychex's prototype plans allow its client to decide which mutual funds will be offered to plan participants, from a menu of funds provided by Paychex. Complaint ¶ 7.
In addition to the fee payments that it receives from its client for its services, Paychex receives compensation from the mutual funds that the client selects from among the choices offered to it by Paychex. The complaint alleges that these payments, which are commonly known as "revenue-sharing" payments, are "for, purportedly, providing record-keeping and related services to the mutual funds," but that "[i]n reality, mutual funds pay Paychex so that Paychex will make such mutual funds available to clients who adopt a Prototype Plan sponsored by Paychex." Complaint ¶ 8.
Plaintiff also alleges that when a plan sponsor transfers funds to Paychex to be invested in the mutual funds that the sponsor has selected, Paychex temporarily moves those funds to a custodial account, which is maintained at a bank, pending completion of the purchase of mutual fund shares. Plaintiff asserts that Paychex receives earnings from the financial institution at which that account is maintained, based on the amount of the funds in that account.
With respect to the particulars of this action, the complaint alleges that the Plan was established in 2000 pursuant to an "adoption agreement" supplied by Paychex. According to the complaint, "Zang is the employer, a trustee, a named fiduciary, and the plan administrator of the Plan," as well as a Plan participant. Complaint ¶ 26.1
The parties' administrative service agreement (Dkt. # 3-8) contains a number of provisions that are of particular relevance here.2 First, it expressly provides that Paychex is not a fiduciary with respect to the Plan. It states that both parties agree and acknowledge that "Paychex' [sic] services under this Agreement are limited to those of a recordkeeper and provider of non-discretionary administrative services at the direction of the Employer ... and that Paychex shall not be deemed a fiduciary as that term is defined in [ERISA]...." Dkt. # 3-8 § II(F).
The agreement also states that both parties "acknowledge that the Employer has selected a menu of funds from a list of investment options identified by Paychex, and that Paychex has not provided investment advice with regard to any such selections." Id. § V(A). It further provides that "Paychex reserves the right to modify this list." Id. The agreement also provides, however, that before deleting or substituting a fund on the list, Paychex must give the employer at least sixty days'notice, and give the employer a "right to reject the change or terminate [the] Agreement...." Id. § V(A)(I).
Id. § IV(C). Likewise, the agreement states that with respect to the custodial account described above, "the Employer understands that Paychex may receive, from the financial institution in which [the employer's] unprocessed contributions are maintained, earnings based on the amount of such unprocessed contributions." Id. § IV(B). The agreement states that "[t]he Employer consents to Paychex' receipt of such earnings as part of Paychex' compensation for its performance of services under this Agreement." Id.
Also in connection with the custodial account, the agreement states that both parties "acknowledge receipt of a copy of the Master Custody Agreement, which describes the services that the Plan will receive from the JP Morgan Institutional Trust Services unit of The Chase Manhattan Bank ... as temporary custodian of cash owned by the Plan in connection with Plan investments and other transactions." Id. § IV(A). The form agreement states that "[t]he Trustee, acting upon the direction of the Employer, hereby appoints JP Morgan as custodian under the terms and conditions of the Master Custody Agreement." Id.3
The parties' retirement services agreement (Dkt. # 27-10) provides that Id. § 15.
The complaint in this case is brought as a class action complaint on behalf of the Luxon & Zang Plan and all other plans for which Paychex provides plan administration and other services, for which Paychex has received revenue-sharing or other payments within six years preceding the filing of this lawsuit. Complaint ¶ 76. Plaintiff asserts three claims for relief.
The first cause of action asserts a claim under 29 U.S.C. §§ 1132(a)(2) and 1109(a), alleging that, notwithstanding the express contractual language to the contrary, Paychex acted as a fiduciary with respect to the Plan. Plaintiff alleges that Paychex breached its fiduciary obligations by "channel[ing] the Plan (and its other plan clients) into mutual funds and a bank that, unbeknownst to the Plan, were paying Paychex more than $20 million a year to be included on Paychex's prototype plan platforms." Id. ¶ 83. Plaintiff also alleges that Paychex placed its own financial interests ahead of those of plan participants by "steering client plans into a circumscribed set of mutual fund and bank account options on the basis of whether the mutual fund and bank were willing to make revenue-sharing and other payments to Paychex." Id. ¶ 84. Plaintiff alleges that as a result, "the Plan's investments earned less than they would have otherwise earned if had [sic] the Plan been in invested [sic] inlower-cost funds such as Vanguard funds." Id. ¶ 86.
The second cause of action asserts that Paychex violated § 406(b) of ERISA, 29 U.S.C. §§ 1106(b)(2) and (b)(3), which respectively prohibit a fiduciary from "act[ing] in any transaction involving the plan on behalf of a party ... whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries," and from "receiv[ing] any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan." Plaintiff alleges that Paychex violated these provisions because it "acted for the benefit of its strategic mutual fund partners and Chase Manhattan Bank by steering its clients' pension fund assets to those mutual funds and the bank that paid Paychex fees." Id. ¶ 91. Plaintiff alleges that as a result of Paychex's acts, "the Plan's investments were reduced in direct proportion to the excessive mutual fund fees paid by the Plan and revenue-sharing and other payments to Paychex," and that "[t]he Plan also suffered lost investment opportunities." Id. ¶ 92.
Count III does not assert a separate theory of liability, or a substantive claim as such, but instead asserts a claim for equitable relief, based upon the violations alleged in Counts I and II, pursuant to 29 U.S.C. § 1132(a)(3). Plaintiff alleges that by engaging in the wrongful acts alleged in the previous two counts, "Paychex has caused the Plan losses, the full extent of which cannot be determined without an accounting." Id. ¶ 97.
Plaintiff's prayer for relief seeks declaratory and injunctive relief, including an order directing Paychex to "restore to the Plan all losses to the Plan resulting from these breaches," and to disgorge all "revenue-sharing payments and profits earned thereon," as well as "rescission of the Plan's investments in mutual funds and bank account through Paychex prototype plans and the...
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