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Austin v. Union Bond & Trust Co.

United States District Court, D. Oregon, Portland Division

November 10, 2014

KERRY D. AUSTIN, Plaintiff,

For Kerry D. Austin, on behalf of himself and all others similarly situated, Plaintiff: Garrett W. Wotkyns, Michael C. McKay, LEAD ATTORNEYS, PRO HAC VICE, Schneider Wallace Cottrell & Konecky LLP, Scottsdale, AZ; John F. Edgar, LEAD ATTORNEY, PRO HAC VICE, Edgar Law Firm LLC, Kansas Ciy, MO; Nina Wasow, LEAD ATTORNEY, PRO HAC VICE, Lewis, Feinberg, Lee, Renaker & Jackson, P.C., Oakland, CA; Timothy S. DeJong, LEAD ATTORNEY, Stoll Stoll Berne Lokting & Shlachter, PC, Portland, OR.

For Union Bond & Trust Co., Morley Capital Management, Principal Life Insurance Co., Defendants: Daniel R. Thies, Joel S. Feldman, Mark B. Blocker, LEAD ATTORNEYS, PRO HAC VICE, Sidley Austin LLP, Chicago, IL; Robert B. Miller, Kilmer Voorhees & Laurick, PC, Portland, OR.


Janice M. Stewart, United States Magistrate Judge.


Plaintiff, Kerry D. Austin (" Austin"), filed this action on April 29, 2014, on behalf of himself and others similarly situated, alleging that defendants, Union Bond & Trust Co. (" Union"), Morley Capital Management (" Morley"), and Principal Life Insurance Co. (" Principal Life"), violated the Employee Retirement Income Security Act (" ERISA"), 29 U.S.C. § § 1104 and 1106. As discussed in more detail below, Austin alleges claims for: (1) breach of fiduciary duty in violation of 29 U.S.C. § 1132(a)(2) and (a)(3) against Union and Morley (First Claim) and against Principal Life (Second Claim); and (2) engaging in prohibited transactions against all three defendants in violation of 29 U.S.C. § 1106(a)-(b) (Third and Fourth Claims).

On June 23, 2014, defendants filed a Motion to Dismiss or, in the Alternative, Motion to Stay Count IV of the Complaint (docket #25). Defendants subsequently withdrew their request to stay proceedings on the Fourth Claim. Reply in Support of Motion to Dismiss (docket #33), p. 15). Accordingly, they seek dismissal under FRCP 12(b)(6) of each of Austin's four claims for failure to state a claim. For the reasons that follow, the motion should be granted with leave granted to Austin to replead portions of his claims against Union and Morley.


In order to state a claim for relief, a pleading must contain " a short and plain statement of the claim showing that the pleader is entitled to relief." FRCP 8(a)(2). To meet this standard and " survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (emphasis added), quoting Bell A. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A plausible claim " does not require 'detailed factual allegations, '" but does demand " more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Id. Labels and conclusions or a formulaic recitation of the elements of a claim will not do. Twombly, 550 U.S. at 555.

In evaluating a motion to dismiss, the court must normally accept the allegations of material fact as true and construe those allegations in the light most favorable to the non-moving party. Sateriale v. R.J. Reynolds Tobacco Co., 697 F.3d 777, 783 (9th Cir 2012). However, the court " need not accept as true conclusory allegations that are contradicted by documents referred to in the compliant." Tritz v. U.S. Postal Serv., 721 F.3d 1133, 1135 n1 (9th Cir 2013), cert denied, 134 S.Ct. 2692, 189 L.Ed.2d 213 (2014) (citation omitted). In particular, the " incorporation by reference" doctrine allows the court to " 'look beyond the pleadings without converting [a] Rule 12(b)(6) motion into one for summary judgment.'" Davis v. HSBC Bank Nevada, N.A., 691 F.3d 1152, 1160 (9th Cir 2012), quoting Van Buskirk v. Cable News Network, Inc., 284 F.3d 977, 980 (9th Cir 2002). The court may consider documents specifically referred to in the complaint when the authenticity of those documents is not questioned. Id, citing Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir 2005).

The thrust of Austin's claims against Union and Morley are for breach of their fiduciary duties by imprudently entering into certain " Investment Contracts, " including the " Principal SIC" issued by defendant Principal Life. Complaint, ¶ 4. In support of their motion, defendants have submitted a copy of the Principal SIC (Group Annuity Contract No. GA 6-19583 with Application and Amendment No. 1) (Ex. 1 (docket #25-1))[1] and the Fund Disclosure dated April 30, 2013 (Ex. 2 (docket #25-2)). Because both the Principal SIC and the Fund Disclosure are specifically referenced in the Complaint and no party questions their authenticity, this court may consider them in evaluating defendants' motion.


I. The Fund &

The Principal Stable Value Fund (" Fund") is a collective investment trust established in 1997. Complaint, ¶ 21. Only employer-sponsored, tax qualified defined contribution retirement plans are eligible to invest in the Fund. Id. The Fund invests approximately 90% of its assets in Stable Value Investment Contracts (" Investment Contracts"). Id, ¶ 22. According to the Fund Disclosure, the Fund's purpose is to preserve capital and offer " relatively stable returns consistent with its low risk profile, " as well as liquidity, in order to provide a safe source of income for current and future retirees. Id, ¶ 1.

A stable value fund (" SVF") is similar to a traditional bond fund in that the underlying assets are a collection of fixed income instruments, i.e . bonds. Ex. 2, pp. 4-5. In a traditional bond fund, the change in the market value of the underlying assets is immediately reflected in the value of the fund, resulting in substantial swings in market value as interest rates change. In contrast, an SVF is designed to minimize the impact of market fluctuations. The value of an investment in an SVF is dependent upon the book value of the assets (the purchase price plus contractually specified annual increases in value), rather than the current market value, and individuals can withdraw from the SVF at book value, even if the market value is lower. Operators of SVFs are able to offer book value withdrawals by obtaining insurance through a vehicle known as a " wrap contract" (or, as referred to in the Complaint, an " Investment Contract"). The wrap contract ensures that if all of the fund participants seek to withdraw their investment when the assets are insufficient to pay each participant the book value of his interest in the SVF, then the wrap provider will pay the difference. As does an insurer, the issuer of a wrap contract receives payment of a fee for the risk that it assumes.

II. The Parties

Austin, who resides in Kansas, has been a participant in the Performance Contracting Group, Inc. ESOP/401(k) Plan (" Plan") and has directed that assets allocated to his account in the Plan be invested in the Fund. Id, ¶ 16. Union is the Fund's Trustee, and Morley is the Fund's Investment Advisor. Id, ¶ 3; Ex. 2, p. 1. In common parlance, Morley tells the Fund what to buy and sell, and Union executes those transactions for the Fund.

Defendants are all inter-related subsidiaries of Principal Financial Group, Inc. (" PFG"). Morley is an investment manager headquartered in Portland, Oregon, and a wholly owned subsidiary of Morley Financial Services, Inc., which is a wholly owned subsidiary of PFG. Complaint, ¶ 19. Union also is headquartered in Portland, Oregon, a subsidiary of Morley, and an indirect wholly owned subsidiary of PFG. Id, ¶ 18. Principle Life, an insurance company headquartered in Iowa, is a wholly owned subsidiary of PFG. Id, ¶ 20.

III. Fund's Investments and Performance

At the close of 2013, the Fund had total assets exceeding $4 billion, with the vast majority (approximately 90%) invested in Investment Contracts, including Guaranteed Investment Contracts (" GICs") and Synthetic Investment Contract (" SICs") which are financial products offered by insurance companies. Id, ¶ ¶ 2, 22. In a traditional GIC, investors pay money to the insurance company in exchange for a contract promising a specified return on the investment.[2] Id, ¶ 2. An SIC simulates the performance of a traditional GIC, but the investor instead owns the underlying assets, rather than the contract itself. Id. SICs use wrap contracts that enable investors to manage risk and place a specific value on these assets. Id. Wrap contracts provide that participants will receive the assets' " book value" (also referred to by the parties as the " Contract Value") even if the market falls. Id. As clarified at the hearing, the book value is determined, in part, based upon a " Crediting Rate" which is calculated by the issuer of the SIC. The Crediting Rate changes over time and eventually evens out the market value fluctuations with all gains and losses passed through to investors.

Union, as the Fund's Trustee, and Principal Life entered into the Principal SIC in the form of a Group Annuity Contract on March 19, 2013. Complaint, ¶ 31; Ex. 1. The Fund's investment was $250 million at the outset with an additional $150 million invested in October 2013, constituting 9.25% of the Fund's assets. Complaint, ¶ ¶ 4, 31.

Other Investment Contract providers to the Fund included Prudential, MetLife, TIAA-CREF Life, and New York Life. Id. The Investment Contracts provide for a " Crediting Rate" which is calculated based in part of the performance of the underlying assets. Id, ¶ 5. Participants in retirement plans that invest in the Fund are " credited with returns based on the blended crediting rates of all the Investment Contracts." Id.

Austin contends that the issuers of the Investment Contracts in which the Fund has invested, including Principal Life with respect to the Principal SIC: (1) " retain[ed] the difference between the actual return on investment of the assets underlying the Investment Contracts and the crediting rate, known as the 'spread'" ( id, ¶ 6); and (2) " have consistently lowered crediting rates and retained ever-larger spreads" ( id ), even during periods when investment returns have increased. By setting the crediting rates and retaining the spread, Austin alleges that the Investment Contracts both " allow their issuers to set their own compensation and to collect unreasonable and/or excessive fees" which " are not disclosed." Id, ¶ 9. As a result, the annual rate of return for the Principal SVF has declined over time with an " incredibly poor performance" that is worse than similar funds. Id, ¶ ¶ 8, 29-30. Additionally, Austin alleges that the decision by Union and Morley to invest in the Principal SIC in particular has " resulted in fees flowing back to their affiliate company, Principal Life." Id, ¶ 85.


I. Clarification of Fundamental Issues

During the hearing on the motion, two misunderstandings came to light which both affect the breadth and determine the viability of several claims. Austin clarified his position regarding the scope of the types of Investment Contracts and issuers that form the basis of his claims. He also clarified how the issuers of the Investment Contracts (including Principal Life) are allegedly able to " retain the 'spread.'" Finally, Austin's claims against Principal Life can only be understood with reference to the method by which the Crediting Rate is determined under the terms of the Principal SIC. These three fundamental issues are addressed first in order to properly frame the issues in this case.

A. All Investment Contracts and Issuers

First, Austin clarified that although the Principal SIC is the only Investment Contract specifically discussed in the Complaint, and despite the fact that Principal Life is the only Investment Contract issuer (SIC or otherwise) named as a defendant, he nonetheless intends to assert claims against Union and Morley based upon the selection of: (1) all types of Investment Contracts, not just SICs; and (2) Investment Contracts issued by others, not just those issued by Principal Life. As described below, the terms of the Principal SIC eliminate the claims against Principal Life and narrow the claims against Union and Morley (at least insofar as they relate to investment in the Principal SIC). However, this court does not have the benefit of the terms of any other Investment Contracts in which Union and Morley invested Fund assets. No other issuer is a named defendant and, without the terms of any other Investment Contract before it, this court must await further information as it relates to other Investment Contracts and their issuers.

B. Principal Life's Control Over Fund Assets

Second, the parties disagree whether Investment Contract issuers (including Principal Life) have control over, or a right to retain the earnings on, the assets which underlie the Investment Contracts. This second disagreement is pivotal to every claim alleged against Principal Life. Because the Complaint references the terms ...

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