Khan v. Board of Directors of Pentegra Defined Contribution Plan

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

IMRAN KHAN, et al.,

Plaintiffs,

OPINION & ORDER

- against -

20-CV-07561 (PMH)

BOARD OF DIRECTORS OF PENTEGRA

DEFINED CONTRIBUTION PLAN, et al.,

Defendants.

PHILIP M. HALPERN, United States District Judge:

Imran Khan, Joan Bullock, and Pamela Joy Wood (“Plaintiffs”) bring this putative class

action against the Board of Directors of Pentegra Defined Contribution Plan (the “Plan”), Pentegra

Services Inc., John E. Pinto, Sandra L. McGoldrick, Lisa A. Schlehuber, Michael N. Lussier,

William E. Hawkins, Jr., Brad Elliott, George W. Hermann, and John Does 1-20 (“Defendants”)

for breaches of fiduciary duties and prohibited transactions under the Employee Retirement

Income Security Act (“ERISA”), 29 U.S.C. §§ 1001, et seq. (Doc. 92, “AC”).

The Amended Complaint presses four claims for relief alleging Defendants breached their

fiduciary duties: (1) under 29 U.S.C. § 1104(a)(1) with respect to the Plan’s recordkeeping and

administrative fees (id. ¶¶ 116-125), (2) by engaging in prohibited transactions in violation of 29

U.S.C. § 1106 (id. ¶¶ 126-142), (3) under 29 U.S.C. § 1104(a)(1) with respect to the Plan’s

investment management fees (id. ¶¶ 143-148), and (4) by failing to monitor the Plan’s fiduciaries

(id. ¶¶ 149-154).1 Plaintiffs seek, inter alia, to have Defendants “make good to the Plan any losses

1 Plaintiffs have withdrawn Count III of the Amended Complaint—alleging Defendants breached their

fiduciary duties under 29 U.S.C. § 1104(a)(1) with respect to the Plan’s investment management fees—

“[b]ecause fact discovery has shown that the PSI-charged asset-based fees at issue in Count III are fully

encompassed in Count I.” (Doc. 171 at 8, n.7).

to the Plan resulting from the breaches of fiduciary duties.” (Id. ¶¶ 2, 123, 140, p. 51). Plaintiffs

demand a trial by jury pursuant to Federal Rule of Civil Procedure 38. (Id. ¶ 155).

The Court partially granted Defendants’ motion to dismiss on March 23, 2022, holding that

“Plaintiffs’ first and third claims only to the extent they allege breaches of duty of loyalty are

dismissed.” (Doc. 149 at 19, “Prior Order”).2 The Court did not however dismiss the first and third

claims outright, holding that Plaintiffs “sufficiently alleged that it can be reasonably inferred that

Defendants breached their duty of prudence by providing the higher-cost options.” (Id. at 7). The

Court assumes familiarity with the factual allegations as laid out in the Prior Order.

Defendants filed a motion to strike the jury demand, pursuant to the briefing schedule set

by the Court, on January 6, 2023. (Doc. 167; Doc. 168, “Def. Br.”). Plaintiffs filed their opposition

(Doc. 169, “Pl. Br.”), and the motion was fully submitted with the filing of Defendants’ reply

(Doc. 180, “Reply”). On March 17, 2023, Plaintiffs filed a Notice of Supplemental Authority in

further support of its opposition. (Doc. 187). On March 20, 2023, Defendants filed a Notice of

Supplemental Authority in further support of their motion. (Doc. 188).

For the reasons set forth below, Defendants’ motion to strike the jury demand is granted in

part and denied in part.

STANDARD OF REVIEW

Under Federal Rule of Civil Procedure 39(a)(2), where a party has properly demanded a

trial by jury, “[t]he trial on all issues so demanded shall be by jury, unless . . . the court, on motion

or on its own, finds that on some or all of those issues there is no federal right to a jury trial.” Fed.

R. Civ. P. 39(a). Where a statute is silent as to whether the parties are entitled to a jury trial, the

2 This decision is available on commercial databases. See Khan v. Bd. of Directors of Pentegra Defined

Contribution Plan, No. 20-CV-07561, 2022 WL 861640 (S.D.N.Y. Mar. 23, 2022).

court must “consider whether a jury right inheres in the plaintiffs’ claim by virtue of the Seventh

Amendment.” Brown v. Sandimo Materials, 250 F.3d 120, 126 (2d Cir. 2001). “The Seventh

Amendment does apply to actions enforcing statutory rights, and requires a jury trial upon demand,

if the statute creates legal rights and remedies, enforceable in an action for damages in the ordinary

courts of law.” Curtis v. Loether, 415 U.S. 189, 194 (1974). Courts apply the two-step test set forth

in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 42 (1989) in deciding whether a particular action

is a suit at law that triggers the jury trial right under the Seventh Amendment. The Court, in the

first step, must “compare the statutory action to 18th-century actions brought in the courts of

England prior to the merger of the courts of law and equity.” Id. The court must then, in the second

and “more important” step, “examine the remedy sought and determine whether it is legal or

equitable in nature.” Id.

ANALYSIS

I. Step One: Historical Comparison of the Statutory Action

The Second Circuit held in Pereira v. Farace that the first step of the Granfinanciera

analysis “tilted in favor of denying” a jury trial on breach of fiduciary duty claims because “breach

of fiduciary duty claims were historically within the jurisdiction of the equity courts.” 413 F.3d

330, 338 (2d Cir. 2005). Judge Castel similarly held in Cunningham v. Cornell Univ. that ERISA

breach of fiduciary duty of prudence claims are “equitable in nature” because “the breach of

fiduciary duty of prudence derives from the law of trusts that was heard in equity.” No. 16-CV-

06525, 2018 WL 4279466, at *2 (S.D.N.Y. Sept. 6, 2018) (citing Cent. States, Se. & Sw. Areas

Pension Fund v. Cent. Transp., Inc., 472 U.S. 559, 570 (1985)); see also Garthwait v. Eversource

Energy Co., No. 20-CV-00902, 2022 WL 17484817, at *2 (D. Conn. Dec. 7, 2022) (“the first step

of the Granfinanciera analysis weighs against a jury trial” for ERISA breach of fiduciary duty

claims); Vellali v. Yale Univ., No. 16-CV-01345, 2023 WL 2552719, at *2 (D. Conn. Mar. 17,

2023) (same). Here, as in Cunningham, Plaintiffs’ claims are equitable in nature because the breach

of fiduciary duty claims derive from the law of trusts that were heard in equity. Accordingly, the

Court concludes that the first step of the Granfinanciera test weighs against a jury trial on

Plaintiff’s claims.

II. Step Two: Examining the Remedy Sought

“The second step of the Granfinanciera test focuses on the nature of the relief sought. It

calls upon us to decide whether the ‘type of relief [sought] was available in equity courts as a

general rule.’” Pereira, 413 F.3d at 339 (citing Granfinanciera, 492 U.S. at 42). Plaintiffs allege,

in connection with each of their four claims for relief, that they seek to hold Defendants personally

liable “under 29 U.S.C. § 1109(a) to make good to the Plan all losses resulting from each breach

of fiduciary duty.” (AC ¶¶ 2, 123, 140, p. 51). The Second Circuit held in Pereira that seeking

“compensatory damages” in connection with a breach of fiduciary duty claim is a legal remedy

“because [defendants] never possessed the funds in question and thus were not unjustly enriched,”

and therefore “the remedy sought against them cannot be considered equitable.” 413 F.3d at 339.

Three district courts within the Second Circuit, relying on Pereira, have ruled that identical prayers

for relief are not equitable in nature. See Cunningham, 2018 WL 4279466, at *2 (plaintiff’s remedy

sought to make defendants “personally liable to make good to the Plans all losses to the Plans

resulting from each breach of fiduciary” was held to be legal in nature rather than equitable);

Garthwait, 2022 WL 17484817, at *2 (same); Vellali, 2023 WL 2552719, at *2 (same).

Defendants argue that the Court should disregard Cunningham and Garthwait because

those decisions were wrongly decided. (Reply at 9). Defendants fail to cite to any authority within

the Second Circuit reaching a different conclusion than Cunningham, Garthwait, and Vellali.

Defendants argue that Pereira was so undermined so as to be “almost inevitably overruled” by the

Supreme Court’s decision in CIGNA Corp. v. Amara, 563 U.S. 421 (2011). (Def. Br. at 9). This

argument was squarely rejected in Cunningham, where Judge Castel held that he “cannot say that

Amara so undermines Pereira that it is nearly inevitable that it will be overruled by the Second

Circuit.” 2018 WL 4279466, at *4.3 Vellai similarly rejected the notion that Amara undermined

Pereira and instead reconciled the cases by holding that “these cases reflect that the material

distinction in this context for purposes of determining whether a remedy is equitable or legal in

nature, is between those situations where a plaintiff seeks to recover particular funds or property

in the defendant’s possession, and those situations where the plaintiff seeks to recover damages

out of the defendant’s assets generally.” 2023 WL 2552719, at *6. Plaintiffs here seek to “make

good to the Plan all losses to the Plan resulting from the breaches of fiduciary duty.” (AC ¶ 2).

Plaintiffs’ prayer for relief makes clear that they seek to make good to the Plan all losses “out of

the defendant’s assets generally” rather than seeking to recover “particular funds or property in

[Defendants’] possession.” Vellai, 2023 WL 2552719, at *6. Accordingly, the Court holds that

Plaintiffs’ request that Defendants “make good” to the Plan losses suffered as a result of

Defendants’ alleged breaches of fiduciary duty is a legal remedy, not an equitable one.

The Amended Complaint also seeks the removal of fiduciaries, an imposition of a

surcharge on the fiduciaries, an accounting, reformation of the Plan, and “other equitable or

remedial relief as the Court deems appropriate.” (AC at 51-52). “These are traditional equitable

remedies” and as such, no jury is required to adjudicate Plaintiff’s claims for these categories of

relief. Cunningham, 2018 WL 4279466, at *2. “In such circumstances ‘the general rule is that the

3 Of course, lower courts are constrained “to follow directly controlling precedent even where that decision

appears to rest on reasons rejected in another line of decisions.” United States v. Vaughn, 430 F.3d 518,

526 (2d Cir. 2005) (citing Agostini v. Felton, 521 U.S. 203, 237–38 (1997)).

jury must decide the legal claims prior to the court’s determination of the equitable claims, in order

to prevent the court’s determination of a common factual issue from precluding, by collateral

estoppel effect, a contrary determination by the jury.’” Soley v. Wasserman, No. 08-CV-09262,

2013 WL 1655989, at *3 n.3 (S.D.N.Y. Apr. 17, 2013) (quoting Wade v. Orange Cnty. Sheriff’s

Office, 844 F.2d 951, 954 (2d Cir. 1988)). Accordingly, the Court will first conduct a jury trial on

Plaintiffs’ legal claims for money damages resulting from Defendants’ alleged breaches of

fiduciary duties, “including any issues of fact common with” the balance of Plaintiffs’ requested

relief, “and then conduct a bench trial on any remaining issues.” Id.4

A status conference has been scheduled for November 29, 2023 at 12:00 p.m. to be held in

Courtroom 520 of the courthouse located at 300 Quarropas Street, White Plains, New York 10601.

The parties should be prepared to discuss the proposed structuring of the non-jury portion of this

trial and the efficiency, if any, of the use of the empaneled jurors as an advisory jury for Plaintiffs’

equitable claims.

4 Defendants, in a footnote, indicate that if the Court decides to “proceed with a jury for either decisive or

advisory purposes, Defendants intend to respectfully request that the Court permit them to file a motion for

partial summary judgment.” (Reply at 10 n.9). The Court was clear, on the record during the October 25,

2022 case management conference, that if the parties did not comply with the Court’s Individual Rules

concerning motions for summary judgment and file a pre-motion letter seeking leave to make such a motion

within 30 days of the close of discovery, then any motions for summary judgment would be waived under

Federal Rule of Civil Procedure 56(b). The Court specified that the parties had until November 15, 2022 to

file a pre-motion letter with a Rule 56.1 Statement as required by the Court’s Individual Practices and Rule

56(b), regardless of the determination whether this matter would proceed to a jury or non-jury trial. No

party filed a pre-motion letter for summary judgment. Accordingly, the time has expired to move for

summary judgment.

CONCLUSION

For the foregoing reasons, the Court GRANTS in part and DENIES in part Defendants’

motion to strike Plaintiffs’ jury demand. Plaintiffs’ claim for money damages, including any issues

of fact common with the balance of Plaintiffs’ requested relief, will be tried before a jury. The

remaining issues will be tried before the Court.

The Clerk of Court is respectfully requested to terminate the pending motion (Doc. 167).

SO ORDERED.

Dated: White Plains, New York

September 26, 2023 □□□ □

PHILIPM.HALPERN =——<“i‘“SCS

United States District Judge