A participant suit targeting TIAA for its loan practices in retirement plans has come up short in identifying a potential class on whose behalf to bring suit.
The suit—filed back in early 2017 (Haley v. Teachers Inv. & Annuity Assoc., S.D.N.Y., No. 1:17-cv-00855, complaint filed 2/3/17)—was brought by one Melissa Haley, who filed suit to recover money that she claims the Teachers Investment and Annuity Association (TIAA) unlawfully took from her retirement account in the Washington University Retirement Savings Plan. Haley claims to have borrowed money from her retirement account on four separate occasions, and fully repaid two of the loans, plus interest. However, citing what she outlined as standard practice among 401(k) plans, she alleges that all the interest paid in connection with those loans should have been credited to her retirement account.[1]
Case History
A little more than a year later, reviewing the motion to dismiss by the TIAA defendants, Judge J. Paul Oetken of the U.S. District Court for the Southern District of New York noted that in order to survive a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” He also noted that TIAA, the defendant here, had moved to dismiss for lack of Article III standing under Federal Rule of Civil Procedure 12(b)(1) and for failure to state a claim under Rule 12(b)(6).
Specifically, TIAA contended that the Plaintiff has failed to plausibly allege injury-in-fact, and that, in fact, the plaintiff was not actually injured because she actually saved money on fees by using TIAA, rather than Vanguard, to administer her loans. Indeed, Oekten noted that, according to TIAA’s calculations,
Vanguard’s retirement loan program, which charges participants fixed fees, would have cost Plaintiff approximately $500-$600 more in total.
That assertion notwithstanding, at the time Judge Oekten noted that, “because TIAA contests standing based on evidence beyond the pleadings,” at this stage “TIAA’s evidence of Vanguard’s fees is insufficient to ‘contradict [Plaintiff’s] plausible allegations.’” More specifically, he concluded that “TIAA’s evidence that Vanguard’s fees would have been higher is not enough, standing alone, to negate Plaintiff’s allegations that TIAA’s fee structure caused her injury-in-fact.” Moreover, and as the plaintiff here asserted, “…Vanguard’s fees are not necessarily the proper baseline for evaluating whether TIAA’s fees were actually unreasonable, as Defendant has introduced no evidence that Vanguard’s more expensive fees are themselves ERISA-compliant.”
However, there was also an allegation against TIAA as a nonfiduciary, based on Washington University’s alleged breach of its fiduciary duty in agreeing to TIAA’s loan procedures. Here, Judge Oekten noted that the plaintiff sought “disgorgement of the proceeds” of TIAA’s allegedly illegal retirement loan program and to “[e]njoin Defendant from ... further engaging in transactions prohibited by ERISA”—and concluded that the plaintiff had alleged facts sufficient to support a claim. More specifically, the district court held that TIAA was not an ERISA fiduciary with respect to the challenged loans but permitted Haley’s claims to proceed against TIAA as a non-fiduciary—and the plaintiff had, under that presumption, would be held liable for its “knowing participation” in thousands of alleged breaches by the fiduciaries of each class member.
Haley then moved to certify a nationwide class of similarly situated ERISA-governed plans which TIAA opposed, asserting that the challenged loans were too disparate to warrant class treatment. Ultimately, the district court certified a class (under Rule 23(b)(3)) as to each of Haley’s non-fiduciary claims, but made no findings about the purported variations among the loans in the putative class and did not address how the exemptions to the statutory prohibitions weighed in the certification analysis. Leading to the appeal to the Second Circuit.
The Appeal
In considering the case, the Second Circuit noted that the plaintiff was not the first to allege that the collateralized loans serviced by TIAA are prohibited transactions under ERISA—but acknowledged that her suit was “unique because she is seeking to hold TIAA liable on behalf of a nationwide class of ERISA-governed plans whose members received loans under terms approved by plan administrators, without naming those administrator fiduciaries as defendants.”
Said another way, the plaintiff here alleged that the plan fiduciaries of each class member had committed an ERISA prohibited transaction by their decision to make TIAA’s loan services available to participants.
On appeal, the court here (Haley v. Teachers Ins. & Annuity Ass’n of Am., 2d Cir., No. 21-805, Dec. 1, 2022) cited its obligation to give greater deference to decisions granting class certification than to those declining to certify, but also acknowledged that in order to receive this deference “the certification must be sufficiently supported and explained.”
And, no sooner had it acknowledged that obligation, the Second Circuit noted that in its assessment of the district court’s various assessments it found gaps, explaining that notwithstanding this dispute, the district court limited its analysis to suggesting only that determining whether the plans received adequate compensation “is not quite as easy” to resolve with common proof. “As for the other exemption that TIAA asserts may apply, the district court’s decision gives us no indication that the court factored it into its predominance analysis at all.”
‘Individualized Nature’
Ultimately, the Second Circuit determined that the district court should have taken into account the potentially individualized nature of statutory exemptions—exemptions that exist for the purpose of permitting retirement plans to offer loans and loan services to retirement-plan participants—things like the receipt of “adequate consideration” for the loans, whether that plan’s fiduciaries exercised “good faith” in approving the amounts the paid and received, if the loans “bear a reasonable rate of interest” and are “adequately secured.”
With all those variables in the mix, the Second Circuit commented that resolving whether each exemption applied might require addressing factual issues specific to each plan—something it said the district court should have taken into consideration when it certified the class. The Court explained, “[a]ffirmative defenses do not carry ‘less weight’ on the class certification issue simply because the defendant will bear the burden of proof at the merits stage.” It further explained that the fact “[t]hat certain of the exemption-related issues may overlap with the merits of this case does not absolve a district court from addressing them at the certification stage when such determinations bear on assessing a Rule 23 requirement.”
“A district court cannot simply ‘take the plaintiff’s word that no material differences exist,’” the court continued. “While it may be true, as the district court surmised, that the loans had the ‘same basic central . . . structure,’ it made no findings about the interest rates that TIAA credited on the collateral, the interest rates that participants paid, and whether those rates varied across loans to support its conclusion that the class members were adversely affected in the same way.”
The court continued by noting that district court must “assess all of the relevant evidence admitted at the class certification stage”—then continued to note that “the district court did not do that here and, in the process, impaired our appellate review.” Impaired it enough such that, “We are thus constrained to find that the district court’s determination on predominance was not ‘within the range of permissible decisions,’ and therefore remand is required”—and they sent it back to the district court for “further proceedings consistent with this opinion.”
What This Means
This could have been a MASSIVE class action suit, but ultimately the appellate court basically felt that there were too many plan-level variables to allow those circumstances/positioning to transcend and form a single class for litigation purposes—though, granted, the process and flow in question here is arguably unique.
Footnote
[1] in contrast, she claimed that a participant who wants to borrow money from the plan is forced to borrow from TIAA’s general account rather than from the participant’s own account. In order to obtain the proceeds to make such a loan, the suit alleged that TIAA requires each participant to transfer 110% of the amount of the loan from the participant’s plan account as collateral securing repayment of the loan. The Traditional Annuity is a general account product that pays a fixed rate of interest, currently 3%, and as a general account, the defendant owns all of the assets, as well as the assets transferred to its general account to “collateralize” the participant loan. Then, because “…the participant loan is made from Defendant’s general account, the participant is obligated to repay the loan to Defendant’s general account, and the general account earns all of the interest paid on the loan,” a practice that the suit claims is “…in contrast to the loan programs for virtually every other retirement plan in the country, where the loan is made from and repaid to the participant’s account and the participant earns all of the interest paid on the loan.”
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