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Acosta v. City National Corp.

United States Court of Appeals, Ninth Circuit

April 23, 2019

Alexander Acosta, Secretary of Labor, United States Department of Labor, Plaintiff-Appellee,
v.
City National Corporation; City National Bank; City National Securities, Inc.; Marianne Lamutt; Christopher Carey; Michael B. Cahill; Michael Nunnelee; Richard Byrd; Vernon Kozlen; Kate Dwyer; City National Corporation Profit Sharing Plan, Defendants-Appellants.

          Argued and Submitted January 11, 2019

          Appeal from the United States District Court for the Central District of California No. 2:15-cv-03084-TJH-JC Terry Hatter, District Judge, Presiding

          Robin Meadow (argued), Jonathan H. Eisenman, and Edward L. Xanders, Greines Martin Stein & Richland LLP, Los Angeles, California; Christopher Craig, Catalina Vergara, and Brian D. Boyle, O'Melveny & Myers LLP, Los Angeles, California; for Defendants-Appellants.

          Jeffrey M. Hahn (argued), Senior Trial Attorney; Thomas Tso, Counsel for Appellate and Special Litigation; G. William Scott, Associate Solicitor for Plan Benefits Security; Kate O'Scannlain, Solicitor of Labor; Office of the Solicitor, United States Department of Labor, Washington, D.C.; for Plaintiff-Appellee.

          Before: A. Wallace Tashima and Paul J. Watford, Circuit Judges, and Eduardo C. Robreno, [*] District Judge.

         SUMMARY [**]

         Employee Retirement Income Security Act

         The panel (1) affirmed the district court's order granting partial summary judgment in favor of the Secretary of Labor and holding City National Corporation and other defendants liable for self-dealing under ERISA; and (2) affirmed in part and reversed in part the district court's order granting summary judgment as to damages.

         City National Corporation maintained a defined-contribution 401(k) employee profit-sharing plan and served as the Plan's sponsor, administrator, and one of its fiduciaries. City National Bank, a subsidiary of City National Corporation, was the Plan's trustee and recordkeeper as well as another of its trustees. For its services as recordkeeper, City National Bank was compensated by sharing a portion of mutual funds' fees charged to the Plan, and it did not maintain a system for tracking how much time its employees spent servicing the Plan.

         Affirming as to liability, the panel held that City National Corporation engaged in prohibited self-dealing under ERISA § 406(b) by setting and approving its own fees from Plan assets for serving as its own recordkeeper. The panel held that this conduct was not exempted under ERISA § 408(c)(2) as "reasonable compensation" for services provided by a fiduciary such as recordkeeping services. The panel held that the "reasonable compensation" exemption does not apply to prohibited self-dealing, including where a self-dealing fiduciary seeks the exemption for actual and legitimate services rendered.

         Affirming in part as to damages, the panel held that the loss associated with a prohibited transaction is at least the entire cost of the prohibited transaction. Where the fiduciary has engaged in self-dealing, the entire cost is the total amount of the illegal compensation that the fiduciary paid itself. The district court allowed certain offsets, but City National Corporation contended that additional offsets should have been deducted from the damages award because they were based on estimates of certain direct expenses such as employee compensation and third-party expenses. The panel held that City National Corporation did not meet its burden of proof because the additional offsets were effectively based on unreliable and insufficient evidence.

         Reversing the district court's award of prejudgment interest, the panel held that the district court abused its discretion by awarding interest on amounts that the Plan never lost. The panel remanded for a recalculation of the prejudgment interest portion of damages.

          OPINION

          ROBRENO, DISTRICT JUDGE

         This case is about liability for self-dealing and breach of fiduciary duties under the Employee Retirement Income Security Act of 1974 ("ERISA") and the corresponding assessment of damages. Both issues-liability and calculating damages-revolve around a compensation scheme for an employee profit-sharing plan's recordkeeper. Specifically, the Department of Labor (the "DOL") brought this action under ERISA for breach of fiduciary duties and self-dealing by City National Corporation along with various of its subsidiaries and employees (collectively, "City National") in administering City National's employee profit-sharing plan. The district court first granted the DOL's motion for partial summary judgment as to liability as to self-dealing and breach of fiduciary duties. In a separate order, after reviewing cross-motions for summary judgment as to damages, the district court then granted the DOL's motion for summary judgment as to damages.

         On appeal, City National argues that (1) it is not liable for self-dealing[1] because it is exempted under § 408(c) of ERISA or, in the alternative, that the self-dealing claim is time-barred; (2) the district court erred in refusing to deduct certain offsets from the damages award; and (3) the district court abused its discretion in awarding prejudgment interest on the damages award before deducting the unopposed offsets.

         The district court had jurisdiction pursuant to 28 U.S.C. § 1331 and 29 U.S.C. § 1132(e). We have jurisdiction pursuant to 28 U.S.C. § 1291. For the reasons set forth below, we affirm the district court's order as to liability and affirm in part, reverse in part, and remand as to damages.

         I.

         The basic facts of the case are not disputed. City National Corporation maintains a defined-contribution 401(k) employee profit-sharing plan (the "Plan"), which is subject to Title I of ERISA, and serves as the Plan's sponsor, administrator, and one of its fiduciaries. City National Bank ("CNB"), a subsidiary of City National Corporation, is the Plan's trustee and recordkeeper as well as another of its fiduciaries.

         CNB became the Plan's recordkeeper on April 1, 2000, pursuant to an agreement between the Plan and CNB. As recordkeeper, CNB's duties included generating participant account statements, processing participant investments and withdrawals, and processing contributions to the Plan.

         None of the above-mentioned facts, however, creates a real problem. Rather, the issue is the way in which CNB was compensated by the Plan for its service as recordkeeper and documented its expenses. CNB was compensated by sharing a portion of the mutual funds' fees charged to the Plan through a process known as "revenue sharing," which occurred through a largely automated process from 2006 to 2011. During this time, CNB was not only the recordkeeper for the Plan but also for over 200 other ERISA plans. In this role, CNB did not maintain a system for tracking how much time its employees specifically spent servicing the Plan. As a result of this largely automated payment process and a lack of records documenting direct expenses incurred in servicing the Plan, CNB was without proof of what expenses were actually incurred in servicing the Plan for any given month between 2006 and 2011.

         At various times, the City National Corporation Benefits Committee, which met periodically to review the Plan's fee structure, considered that the service-provider fees might be "high." Each time the Benefits Committee reached this conclusion it prospectively reduced the fees CNB charged the Plan but never rebated any of the amounts previously received by CNB.

         In July 2009, the DOL first notified City National of its investigation of possible ERISA violations by City National. City National then retained Mercer Consulting ("Mercer") to conduct a review of the Plan. Mercer concluded that the fees paid to CNB were higher than those reported in its survey of comparably sized clients. Yet after receiving Mercer's report, City National did not retroactively rebate any amounts previously paid by the Plan to CNB.

         The DOL filed a complaint on April 24, 2015, alleging, among other claims, that CNB engaged in prohibited self-dealing under ERISA § 406(b), 29 U.S.C. § 1106(b), when CNB set and approved its own recordkeeping fees and regularly accepted those fees as compensation for its services. After the complaint was filed, City National retained Basil Imburgia, a financial expert, to provide a report demonstrating that CNB's compensation never exceeded the direct expenses incurred in serving the Plan. This report, however, relied on an estimate of the direct expenses for a given year using the following methodology: the total amount of expenses CNB incurred servicing all of its 200-plus plans multiplied by the ratio of the number of participants in the Plan to the total number of participants serviced by CNB across all plans.

         Following discovery, the DOL moved for partial summary judgment as to liability, which the district court granted. Anticipating the question of damages, the district court ordered an independent accounting of City National's Plan-related revenue. City National retained Evercore Trust Company ("Evercore") to conduct the court-ordered accounting. Evercore determined that City National received $4, 647, 090.27 in revenue sharing payments from 2006 to 2012 and then went on to calculate the Plan's lost opportunity costs, i.e., the money that the Plan would have earned had the Plan, and not City National, received these revenue sharing payments and invested the proceeds. Evercore applied two alternative interest rates: (1) the rate of return that the Plan experienced over the relevant time period and (2) the DOL's Voluntary Fiduciary Correction Program ("VFCP") interest rate, which is used when a fiduciary voluntarily ...


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