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BH Services Inc. v. FCE Benefit Administrators Inc.

United States District Court, D. South Dakota, Western Division

September 27, 2017

BH SERVICES INC., FOR ITSELF AS SPONSOR AND FIDUCIARY AND FOR THE BH SERVICES, INC., HEALTH AND WELFARE PLAN Plaintiff,
v.
FCE BENEFIT ADMINISTRATORS INC., TRUST MANAGEMENT SERVICES, ACEC MW, and TRANSAMERICA LIFE INSURANCE COMPANY, Defendants.

          MEMORANDUM OPINION AND ORDER

          Karen E. Schreier, United States District Judge

         Currently pending before the court are several motions. Defendant FCE Benefit Administrators Inc., moves to dismiss counts six and seven of the first amended complaint and moves to strike paragraph 5.13 from the first amended complaint. Docket 33. Defendant Transamerica Life Insurance Company also moves to dismiss counts six and seven of the first amended complaint, which are the only two counts pled against Transamerica. Docket 52. Defendant ACEC MW[1] moves to dismiss count seven of the first amended complaint. Docket 64. Plaintiff, BH Services, Inc., opposes each of the motions to dismiss and the motion to strike. See Dockets 39, 74, 75. For the reasons that follow, the court grants the motions to dismiss and denies the motion to strike.

         FACTUAL BACKGROUND

         The facts as alleged in the first amended complaint are as follows: BH Services is a not-for-profit corporation based in Rapid City, South Dakota, providing employment to over 200 people in Nebraska and South Dakota. See Docket 28 ¶ 2.01. BH Services is the sponsor, administrator, and named fiduciary of the BH Services, Inc. Health and Welfare Plan (the Plan). Id. The Plan is an “employee welfare benefit plan” as defined by the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001-1461 (2012). Id. ¶ 2.02. The Plan also includes a health reimbursement account. Id. The Plan is funded by BH Services' general assets, which are placed in a trust account to cover the Plan's claims and expenses. Id.

         From 1995 to 2015, BH Services retained FCE to provide a plan document, compliance services, and third-party administrative services for the Plan. Id. ¶ 5.01. Prior to 2013, FCE hired Marilyn Ward and Vivian Lewis to act as trustees of the Plan's assets. Id. ¶¶ 1.02, 5.01. Upon their retirement, FCE hired defendant Trust Management Services (TMS) to serve as an independent trustee of the Plan's assets.[2] Id. ¶¶ 1.02, 5.01. Because FCE and TMS had the discretionary authority and control to manage the Plan, dispose of Plan assets, and administer the Plan, both entities were Plan fiduciaries.[3] Id. ¶¶ 2.03, 2.04. As fiduciaries, FCE and TMS were responsible for operating the Plan and protecting the Plan's assets. Id. ¶¶ 2.03, 2.04.

         Initially, BH Services was told by FCE and its owners that, consistent with the Plan documents and BH Services' instructions, BH Services sponsored group term life insurance benefits and a health reimbursement account for the employees and participants of the Plan. See Id. ¶¶ 1.03, 5.05. After receiving some conflicting financial information from FCE, however, BH Services began to engage in a long process to attempt to uncover what assets the Plan actually owned. Id. ¶¶ 1.03, 5.05. As part of this process, BH Services was asked by FCE and TMS to use the accounting firm Ineich & Company to do an independent audit of the Plan's assets.[4] Id. ¶ 5.04.

         The initial result of BH Services' investigation into the Plan's assets was the discovery that instead of working to provide plan members with group term life insurance-as FCE and TMS were directed to do by BH Services-FCE and its agents contracted with Transamerica Life Insurance Company to provide plan members with cash accounts in at least two master group variable universal life insurance policies (Transamerica policies). See Id. ¶¶ 1.03, 5.05.

         Following this discovery, BH Services contacted Transamerica to obtain additional information about the policies. Id. ¶ 5.06. BH Services' request resulted in Transamerica sending to BH Services a spreadsheet showing that the Transamerica policies were not owned by TMS as trustee of the Plan's assets, but rather that the policies were owned by FCE and ACEC, another multiple welfare benefit plan. Id. BH services also discovered that its Transamerica policies were further comingled with master group variable universal life insurance policies from 50 other employers. Id. Those other policies were also controlled by FCE and ACEC. Id. Because FCE and ACEC were the owners of the Transamerica policies, they, along with TMS as trustee of the Plan's assets, were able to hide the cash surrender value of these policies, which were Plan assets, from BH Services. Id. ¶ 5.07. FCE, ACEC, and TMS also had the ability to freely access and use the cash surplus built up from the Transamerica policies without BH Services' knowledge. Id.

         As a result of the mismanagement of Plan assets by FCE and TMS, in 2015, BH Services began to look for a new third-party administrator of the Plan. Id. ¶¶ 1.05, 5.01. BH Services eventually transferred plan documents, compliance services, and third-party administrative services for the Plan to Fringe Benefits Group. Id. ¶¶ 1.05, 5.01. On October 28, 2015, BH Services provided written notification to FCE and TMS of its intent to terminate their services within 60 days. Id. ¶ 5.01. And on December 15, 2015, BH Services directed FCE and TMS to transfer all of the Plan's assets to the new plan administered by Fringe Benefits Group. Id. ¶ 5.01. Despite BH Services' multiple attempts, FCE and TMS have yet to transfer the Plan's assets, totaling more than $735, 000, to Fringe Benefits Group. See Id. ¶¶ 1.06, 5.02.

         In October 2016, BH Services discovered that independent audit reports from the other 50 employers participating in the comingled master group variable universal life insurance policies issued by Transamerica showed that those employers reported that they paid premiums for group term life insurance policies. Id. ¶ 5.09. After comparing these independent audit reports to the information provided to BH Services from Transamerica, however, BH Services discovered that those employers, like BH Services, actually were paying money into the comingled master group variable universal life insurance policies owned by FCE and ACEC. Id. Based upon these independent audit reports, BH Services believes that it has an undisclosed amount of cash sitting in participant accounts at Transamerica. Id.

         The independent audit reports also led BH Services to learn that certain plan participants had their life insurance coverage and other participant accounts in an FCE “warehouse”. Id. ¶ 5.10. FCE failed to disclose the existence of these “warehoused” accounts to BH Services. Id. And because there has been no accounting of these undisclosed “warehoused” accounts, it appears that TMS, as trustee for the Plan, allowed the accounts to be held by FCE and ACEC individually rather than by the Plan. Id.

         BH Services further discovered that neither FCE nor TMS could account for the source of funds or benefit payments associated with the Plan's health reimbursement account. Id. ¶ 5.11. It appears that FCE used the cash values from the Transamerica policies to provide unemployment compensation and health reimbursement account benefits but the premiums charged for those benefits by FCE and TMS were in excess of the funding necessary to pay the amount of both the actuarially predicted and the actual claims made. Id. Because there has been no accounting, BH Services is unaware of what FCE, TMS, and ACEC did with these excess funds. Id.

         Due to the conflicting financial information that BH Services uncovered, BH Services retained Ketel Thorstenson, LLP, to conduct an independent audit of the Plan and the Plan's assets. See Id. ¶¶ 1.07, 5.12. In October 2016, Ketel Thorstenson issued an adverse auditor's report. Id. ¶¶ 1.07, 5.12. The adverse auditor's report was issued because of FCE's and TMS's refusal to provide support and documentation regarding the Plan's asset transactions, the amount of the cash values in the Transamerica policies, and the source of funds or benefits paid from the health reimbursement account in the Plan. Id. ¶¶ 1.07, 5.12. Because the Transamerica policies are Plan assets, BH Services contends that Transamerica has allowed these insurance policies to be withheld from control of the Plan and dissipated by excessive fees and charges. Id. ¶ 1.07.

         Following BH Services' receipt of Ketel Thorstenson's adverse auditor's report, BH Services learned that the United States Secretary of Labor has brought a lawsuit against FCE and its owners. See Id. ¶ 5.13. This lawsuit, Thomas E. Perez v. Chimes District of Columbia, Inc., Civil Action No. RDB-15- 3315 (Chimes litigation), [5] is pending in the United States District Court for the District of Maryland. Id. In that suit, the Secretary of Labor makes allegations against FCE that are similar to the allegations against FCE in this current dispute. Id.

         PROCEDURAL BACKGROUND

         On June 10, 2016, BH Services filed a complaint naming FCE and TMS as defendants. Docket 1 ¶¶ 2.03, 2.04. FCE responded to the complaint on October 11, 2016, by filing both a motion to dismiss (Docket 20) and a motion to transfer venue (Docket 23). On October 28, 2016, BH Services amended its complaint as a matter of course under Rule 15(a)(1)(B) of the Federal Rules of Civil Procedure.[6] See Docket 28. The first amended complaint added ACEC and Transamerica as defendants. Id. ¶¶ 2.05, 2.06.

         In total, the first amended complaint alleges seven causes of action against FCE, TMS, ACEC, and Transamerica. Count one seeks an injunction against FCE, TMS, and ACEC under 29 U.S.C. § 1132(a)(3). Count two requests an accounting of the Plan's assets under 29 U.S.C. § 1132(a)(3) against FCE and TMS. Count three seeks the recovery of wrongfully dissipated Plan assets against FCE, TMS, and ACEC under 29 U.S.C. § 1132(a)(3)(B)(i). Count four seeks damages against FCE, TMS, and ACEC for the breach of fiduciary duty and breach of fiduciary duty by co-fiduciaries under 29 U.S.C. §§ 1105, 1109, and 1132(a)(2). Count five seeks an award of attorney's fees and costs under 29 U.S.C. § 1132(g) against FCE, TMS, and ACEC. Count six seeks damages, including punitive damages, against FCE and Transamerica for common law fraud under state law. Count seven seeks damages for unjust enrichment against FCE, TMS, ACEC, and Transamerica.

         FCE responded to the first amended complaint on November 14, 2016, by filing a motion to dismiss counts six and seven for a failure to state a claim and a motion to strike paragraph 5.13 of the first amended complaint, which references FCE's involvement in the Chimes litigation. Docket 33. FCE also has answered counts one through five of the first amended complaint. Docket 37. Transamerica responded to the first amended complaint on January 20, 2017, by filing a motion to dismiss counts six and seven of the first amended complaint for failure to state a claim, which are the only two counts alleged against Transamerica. Docket 52. ACEC responded to the first amended complaint on February 2, 2017, by filing a motion to dismiss count seven.[7]Docket 64.

         BH Services filed TMS's waiver of service on March 13, 2017. Docket 83. Under this waiver, TMS had until May 12, 2017, to respond to the first amended complaint. TMS failed to file an answer or responsive motion to the first amended complaint. Thus, BH Services moved for a clerk's entry of default against TMS, Docket 85, which was entered on May 19, 2017. Docket 86. Since the clerk's entry of default was entered, TMS has moved to vacate the clerk's entry of default. Docket 88. This motion is still pending.

         LEGAL STANDARD

         A court may dismiss a complaint for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). Inferences are construed in favor of the nonmoving party. Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 595 (8th Cir. 2009). “To 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 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556). In ruling on a motion to dismiss, courts can also “consider ‘those materials that are necessarily embraced by the pleadings.' ” Hughes v. City of Cedar Rapids, 840 F.3d 987, 998 (8th Cir. 2016) (quoting Schriener v. Quicken Loans, Inc., 774 F.3d 442, 444 (8th Cir. 2014)). “Those materials include ‘documents whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleadings.' ” Id. (quoting Kushner v. Beverly Enters., Inc., 317 F.3d 820 (8th Cir. 2003)).

         Federal Rule of Civil Procedure 12(f) provides that a court “may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.” Fed.R.Civ.P. 12(f). A court may act on its own or “on motion made by a party either before responding to the pleading or, if a response if not allowed, within 21 days after being served with the pleading.” Fed.R.Civ.P. 12(f)(1)-(2). “Judges enjoy liberal discretion to strike pleadings under Rule 12(f).” BJC Health Sys. v. Columbia Cas. Co., 478 F.3d 908, 917 (8th Cir. 2007). “Despite this broad discretion however, striking a party's pleadings is an extreme measure, and, as a result, [the Eighth Circuit has] previously held that ‘[m]otions to strike under Fed.R.Civ.P. 12(f) are viewed with disfavor and infrequently granted.' ” Stanbury Law Firm v. I.R.S., 221 F.3d 1059, 1063 (8th Cir. 2000) (first alteration added) (quoting Lunsford v. United States, 570 F.2d 221, 229 (8th Cir. 1977)); see also 5C Charles Alan Wright & Arthur R. Miller, Federal Practice & Procedure, § 1380 (3d ed. 1998) (observing that courts infrequently grant and disfavor motions to strike due to the drastic nature of the remedy and because motions to strike are often used as a dilatory or harassing tactic).

         DISCUSSION

         I. Motions to Dismiss - ERISA Preemption

         Each of the motions to dismiss portions of the first amended complaint filed by FCE, ACEC, and Transamerica, argue for dismissal of either count six, count seven, or both on the basis that the state-law causes of action alleged by BH Services are preempted by ERISA. See Dockets 34, 53, 65. BH Services contends that counts six and seven of the first amended complaint are not preempted by ERISA. See Dockets 39, 74, 75.

         Courts have long recognized that “ERISA . . . is a comprehensive statute that sets certain uniform standards and requirements for employee benefit plans.” Ark. Blue Cross & Blue Shield v. St. Mary's Hosp., Inc., 947 F.2d 1341, 1343 n.1 (8th Cir. 1991) (Ark. BCBS). “Congress enacted ERISA to regulate comprehensively certain employee benefit plans and ‘to protect the interests of participants in these plans by establishing standards of conduct, responsibility, and obligations for fiduciaries.' ” Prudential Ins. Co. of Am. v. Nat'l Park Med. Ctr., Inc., 413 F.3d 897, 906-07 (8th Cir. 2005) (quoting Johnston v. Paul Revere Life Ins. Co., 241 F.3d 623, 628 (8th Cir. 2001)). “ ‘To meet the goals of a comprehensive and pervasive Federal interest and the interests of uniformity with respect to interstate plans, Congress included an express preemption clause in ERISA for the displacement of State action in the field of private ...


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