D.L. Markham v. Variable Annuity Life

Case: 22-20540 Document: 00517002236 Page: 1 Date Filed: 12/14/2023

United States Court of Appeals

for the Fifth Circuit

United States Court of Appeals

Fifth Circuit

____________ FILED

December 14, 2023

No. 22-20540 Lyle W. Cayce

____________ Clerk

D.L. Markham DDS, MSD, Incorporated 401(K) Plan; D.L.

Markham DDS, MSD, Incorporated, as plan administrator,

Plaintiffs—Appellants,

versus

Variable Annuity Life Insurance Company; Valic

Financial Advisors, Incorporated,

Defendants—Appellees.

______________________________

Appeal from the United States District Court

for the Southern District of Texas

USDC No. 4:22-CV-974

______________________________

Before Clement, Haynes, and Oldham, Circuit Judges.

Haynes, Circuit Judge:

Plaintiffs D.L. Markham DDS, MSD, Inc. and D.L. Markham DDS,

MSD, Inc. 401(k) Plan appeal the district court’s dismissal of their claims

under the Employee Retirement Income Security Act of 1974 (“ERISA”).

For the reasons set forth below, we AFFIRM.

I. Background

David Markham, DDS and Luminita Markham, DDS are a married

couple who own a small dental practice, D.L. Markham DDS, MSD, Inc.

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(“Markham”), in Auburn, California. In January 2017, Markham

established its employee pension benefit plan, D.L. Markham DDS, MSD

Inc. 401(k) Plan (the “Plan”). Markham is the Plan’s sponsor,

administrator, and named fiduciary.

Variable Annuity Life Insurance Company (“VALIC”) is an

insurance corporation that specializes in tax-qualified retirement plans. In

May 2018, Markham hired VALIC to maintain the Plan on VALIC’s

retirement platform. Markham selected the Portfolio Director Group Fixed

and Variable Deferred Annuity Contract (the “PD Contract”) as the Plan’s

annuity contract, under which VALIC served as the issuer and contract

record-keeper of the Plan’s assets. VALIC charged various fees for its

services, including an Annual Administrative Service Fee between $2,500

and $12,000. The PD Contract also provided for a 5% surrender fee on

transfers out of the contract for funds contributed in the previous 60 months.

In January 2020, Markham became dissatisfied with VALIC’s

services and notified VALIC that it intended to terminate the PD Contract.

The parties engaged in several months of discussion regarding the terms of

the termination, and VALIC informed Markham that the 5% surrender

charge would apply to all of the Plan’s assets. VALIC also notified Markham

that the PD Contract contained exceptions to the surrender fee. The only

potentially applicable exception provided:

The surrender charge may be waived or reduced uniformly on

all Participant Accounts for contracts issued under certain

plans or arrangements which are expected to result in

administrative cost savings. No reduction or waiver will be

made that is unfairly discriminatory to any person.

We may waive any withdrawal or surrender charge attributable

to Purchase Payments received during specific periods of time,

and under conditions and limitations set by Us. Any such

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waiver will be made by Resolution of the Board of Directors.

Notice of the right to surrender without charge will be mailed

to the Contract Owner when such waiver is declared by the

Board of Directors.

Markham subsequently retained legal counsel and requested a waiver

of the surrender fee. In August 2020, VALIC informed Markham that it had

decided to impose the fee. Later that month, Markham transferred all Plan

assets from VALIC to a successor service provider’s platform. VALIC

retained a surrender fee of $20,703, approximately 4.5% of the Plan’s assets. 1

In January 2021, Markham and the Plan (collectively “Plaintiffs”)

initiated this class action suit in the Eastern District of California against

VALIC. 2 Plaintiffs allege VALIC violated ERISA by (1) breaching its

fiduciary duties and (2) engaging in a prohibited transaction with a party in

interest.

In March 2021, VALIC filed a motion to transfer and a motion to

dismiss. A year later, the Eastern District of California transferred this case

to the Southern District of Texas under 28 U.S.C. § 1404(a) and denied

VALIC’s motion to dismiss as moot. VALIC subsequently filed a renewed

motion to dismiss both counts of the complaint pursuant to Rule 12(b)(6).

The district court concluded: (1) Plaintiffs’ claim for breach of fiduciary duty

failed because VALIC was not a fiduciary; and (2) Plaintiffs’ prohibited-

transaction claim failed because VALIC was not a “party in interest” when

it entered the PD Contract and the collection of the surrender fee was not a

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1

Under the PD Contract, 10% of the Plan’s assets were exempt from the surrender

fee. The surrender fee of 4.5% was 5% of the remaining non-exempt portion.

2

Plaintiffs also brought suit against VALIC Financial Advisors, Inc. and VALIC

Retirement Services Company. We address the former as part of VALIC. However, the

latter is not a party to this appeal because Plaintiffs do not contest the district court’s

dismissal of all claims against it.

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separate transaction. Accordingly, the district court granted VALIC’s

motion to dismiss and denied Plaintiffs’ request for leave to amend.

II. Jurisdiction and Standard of Review

The district court properly exercised jurisdiction under 29 U.S.C.

§ 1132(e)(1) and 28 U.S.C. § 1331. On appeal, we have jurisdiction over the

district court’s final judgment under 28 U.S.C. § 1291.

We review a district court’s grant of a motion to dismiss for failure to

state a claim de novo and apply the same standards as the district court. See

Del-Ray Battery Co. v. Douglas Battery Co., 635 F.3d 725, 728–29 (5th Cir.

2011). “We review [the] denial of leave to amend for abuse of discretion.”

N. Cypress Med. Ctr. Operating Co. v. Aetna Life Ins. Co., 898 F.3d 461, 477

(5th Cir. 2018).

III. Discussion

Plaintiffs raise four issues on appeal: (1) whether VALIC acted as a

fiduciary when it collected the surrender fee; (2) whether VALIC was a party

in interest when it entered into the PD Contract; (3) whether VALIC’s

collection of the surrender fee constitutes a separate transaction; and

(4) whether the district court abused its discretion in denying Plaintiffs’

request for leave to amend their complaint. We consider each issue in turn.

A. Fiduciary Act

ERISA imposes liability on “[a]ny person who is a fiduciary with

respect to a plan who breaches any of the responsibilities, obligations, or

duties imposed upon fiduciaries.” 29 U.S.C. § 1109(a). In cases involving

breach of fiduciary duty, the threshold issue is whether the service provider

“was acting as a fiduciary (that is, was performing a fiduciary function) when

taking the action subject to complaint.” Pegram v. Herdrich, 530 U.S. 211,

226 (2000). In relevant part, ERISA provides:

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[A] person is a fiduciary with respect to a plan to the extent (i)

he exercises any discretionary authority or discretionary

control respecting management of such plan or exercises any

authority or control respecting management or disposition of

its assets . . . or (iii) he has any discretionary authority or

discretionary responsibility in the administration of such plan.

29 U.S.C. § 1002(21)(A). “We give the term fiduciary a liberal construction

in keeping with the remedial purpose of ERISA.” Reich v. Lancaster, 55 F.3d

1034, 1046 (5th Cir. 1995) (internal quotation marks and citation omitted)

(cleaned up). However, a fiduciary duty is context specific, arising only to

the extent a person acts in an administrative, managerial, or advisory capacity

to an employee benefits plan. See Pegram, 530 U.S. at 225–26.

We have not previously addressed whether the acceptance of

previously bargained-for compensation constitutes a fiduciary act under

ERISA. Plaintiffs argue VALIC acted as a fiduciary because it had

“unlimited discretion” over the surrender fee and used such discretion when

it declined to waive the fee. But the notion that a party’s right to waive

payment makes it a fiduciary is inconsistent with the reality that any private

entity or person can always decline or reduce a payment owed to them under

a contract; indeed, it makes little sense to suggest that any private entity,

including a fiduciary, must demand all sums allowed by the contract. 3

Our caselaw quite clearly shows that a party must have discretion over

more than the acceptance of payment to act as a fiduciary. In American

Federation of Unions, Local 102 Health & Welfare Fund v. Equitable Life

Assurance Society of the United States, we held that a plan administrator acted

as a fiduciary even though a contract set the administrator’s compensation

rate at 12% of claims paid. 841 F.2d 658, 661, 662–63 (5th Cir. 1988). We

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3

Even fiduciaries can get paid quite a bit (example: attorneys).

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reasoned that the plan administrator acted as a fiduciary because he had

discretion over which claims would be paid and could thereby increase his

total compensation. Id. at 662–63. VALIC, by contrast, did not have the

ability to manipulate its total compensation; it did not control the value of

assets transferred to the Plan or whether Markham would trigger the

surrender fee by prematurely transferring funds. Further, to the extent that

it had any discretion over the fee, VALIC “did not exercise that authority with

respect to the only transaction at issue in this case.” Tiblier v. Dlabal, 743

F.3d 1004, 1008–09 (5th Cir. 2014) (emphasis in original). VALIC merely

charged the agreed-upon surrender fee, collecting 5% of the non-exempt Plan

assets per the PD Contract.

Our sister circuits that have considered this issue have held that

accepting predetermined compensation does not constitute a fiduciary act.

See, e.g., Depot, Inc. v. Caring for Montanans, Inc., 915 F.3d 643, 655 (9th Cir.

2019) (“[T]he service provider cannot be held liable for merely accepting

previously bargained-for fixed compensation.” (internal quotation marks and

citation omitted)); Danza v. Fidelity Mgmt. Tr. Co., 533 F. App’x 120, 126 (3d

Cir. 2013) (“A service provider cannot be held liable for merely accepting

previously bargained-for fixed compensation that was not prohibited at the

time of the bargain.”). We agree with these holdings. Accepting

predetermined compensation that was agreed to by a plan’s named fiduciary

does not constitute control over the management of a plan or disposition of

the plan’s assets. Here, although VALIC had discretion to waive the fee, the

PD Contract set a maximum surrender fee and gave VALIC the right to retain

it. Thus, VALIC merely adhered to the PD Contract by collecting the

previously bargained-for compensation.

Accordingly, we join the majority of circuits in holding that the

collection of a contractually predetermined fixed fee does not constitute a

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fiduciary act under ERISA. We thus affirm the district court’s dismissal of

Plaintiffs’ claim for breach of fiduciary duty.

B. “Party in Interest” for Initial Contracts

ERISA prohibits fiduciaries from knowingly “engag[ing] in a

transaction” for the “furnishing of goods, services, or facilities” with a

“party in interest.” 29 U.S.C. § 1106(a)(1)(C). 4 In relevant part, ERISA

defines “party in interest” as “a person providing services to such plan.” Id.

§ 1002(14)(B). Plaintiffs contend the PD Contract was a prohibited

transaction because VALIC was a party in interest when it entered the

agreement. We disagree; “a person providing services to such plan” is

limited to entities that have already began providing services to the plan at

issue.

1. The Plain Text

Plaintiffs and amicus curiae, the Secretary of Labor, argue that “a

person providing services to such plan” under 29 U.S.C. § 1002(14)(B)

includes all service providers, regardless of whether they have begun

providing services to the particular plan at issue. But this interpretation

contradicts the plain reading of the text. The word “providing,” used here

as a present participle, most commonly describes a person who is currently

providing services. Further, the modifying phrase “to such plan” limits the

definition to entities providing services to the plan at issue—not service

providers in general.

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4

A plaintiff may seek relief from a nonfiduciary party in interest to a contract barred

by § 1106(a). Harris Tr. & Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 245

(2000). Thus, Plaintiffs may pursue this claim despite VALIC not being a fiduciary to the

Plan.

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The Secretary relies on 34 U.S.C. § 12421(3) to argue that

“providing” does not require a preexisting relationship. This statute denotes

proper recipients of grants such as “proposals providing services to culturally

specific and underserved populations.” 34 U.S.C. § 12421(3). But the use

of “proposals” denotes future use, referring to proposals that intend to

provide services. No such terminology is included in 29 U.S.C.

§ 1002(14)(B). Thus, entities that are not already providing services to a

particular plan at the time of contracting with that plan, such as VALIC with

respect to the Markham Plan, are not “parties in interest” under ERISA.

The relevant caselaw supports this reading of § 1002(14)(B). In

Harris Trust and Savings Bank v. Salomon Smith Barney, Inc., the Supreme

Court recognized that “Congress defined ‘party in interest’ to encompass

those entities that a fiduciary might be inclined to favor at the expense of the

plan’s beneficiaries.” 530 U.S. 238, 242 (2000); see also Lockheed Corp. v.

Spink, 517 U.S. 882, 893 (1996) (explaining that § 1106(a) prohibits

“commercial bargains that present a special risk of plan underfunding

because they are struck with plan insiders, presumably not at arm’s length”).

When a party does not have a preexisting relationship with a plan, there is

less risk that a fiduciary would show such party favoritism over the plan’s

beneficiaries. In line with this reasoning, the Third and Tenth Circuits have

held that “a person providing services to such plan” includes only providers

with a preexisting relationship with a plan. Danza, 533 F. App’x at 125–26

(“Negotiation between such unaffiliated parties does not fall into the

category of transactions that [§ 1106(a)] was meant to prevent.”); Ramos v.

Banner Health, 1 F.4th 769, 787 (10th Cir. 2021). 5

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5

Plaintiffs rely on Braden v. Wal-Mart Stores, Inc., 588 F.3d 585 (8th Cir. 2009) to

claim the Eighth Circuit has adopted their interpretation of “party in interest.” But the

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Plaintiffs contend that reading § 1106(a) with the relevant exemptions

supports their argument that “party in interest” refers to future service

providers. Under § 1108, contracts with parties in interest are permissible

for “services necessary for the establishment . . . of the plan.” 29. U.S.C.

§ 1108(b)(2)(A). Plaintiffs argue this exemption would be meaningless if

“party in interest” did not include future service providers. But this

argument ignores the numerous other definitions of “party in interest”

under ERISA, such as employers and employee organizations. See 29 U.S.C.

§ 1002(14)(A)–(I). These parties may enter a contract with a plan fiduciary

for services necessary to establish the plan or seek to amend an existing

contract, to which the exemption under § 1108 could still apply. Thus, the

§ 1108 exemptions do not require an expansive reading of “a person

providing services to such plan.”

2. Department of Labor Regulations and Congress’s 2021

Amendment to ERISA

Plaintiffs and the Secretary argue that Department of Labor (“DOL”)

regulations and Congress’s 2021 amendment to ERISA show that “a person

providing services to such plan” does not require a preexisting relationship.

In 2012, the DOL issued regulations interpreting § 1108(b)(2). Reasonable

Contract or Arrangement Under Section 408(b)(2)-Fee Disclosure, 77 Fed.

Reg. 5632 (Feb. 3, 2012). The regulations state that, in order to qualify for

an exemption from § 1106(a), pension plan service providers must meet

specific disclosure requirements. Id. The disclosure requirements are not at

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transactions at issue in Braden were revenue sharing payments to a trustee that had already

been providing services to the plan. Braden, 588 F.3d at 600. Thus, the Eighth Circuit did

not address whether a service provider is a “party in interest” before it has provided services

to a plan. See id. at 600–03.

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issue here, but the preamble to the regulations explains that all service

contracts are prohibited transactions and must fall under an exemption. Id.

Several years later, Congress passed an amendment to ERISA in the

Consolidated Appropriations Act of 2021. Pub. L. No. 116-260, Div. BB,

Title II, § 202(a), 134 Stat. 1182, 2894 (2020) (codified as amended at 29

U.S.C. § 1108(b)(2)(B)). The amendment altered § 1108(b) to include that

“[n]o contract or arrangement for services between a [group health plan] and

a covered service provider, and no extension or renewal of such a contract or

arrangement, is reasonable within the meaning of this paragraph unless the

[disclosure requirements] are met.” 29 U.S.C. § 1108(b)(2)(B). This

language regarding group health plan providers mirrors the DOL regulations

regarding pension plan providers. Compare 29 U.S.C. § 1108(b)(2)(B) with

77 Fed. Reg. 5632; see also 29 C.F.R. § 2550.408b-2(c)(1)(i). Plaintiffs and

the Secretary argue that, because Congress adopted nearly identical language

as the DOL regulations, it intended the same broad scope and therefore

requires all service providers of group health plans to make disclosures.

Thus, all “covered service providers” are “parties in interest” because the

disclosure requirements apply only to transactions prohibited under

§ 1106(a). Plaintiffs and the Secretary contend that, if a new service provider

for a health plan is a “party in interest,” then so is a new service provider for

a pension plan.

Even assuming Congress intended to adopt the same disclosure

requirements for group health plans as those imposed on pension plans under

the DOL regulations, Plaintiffs and the Secretary lack convincing evidence

that Congress intended to broaden the definition of “party in interest.”

Indeed, the amendment makes no reference to “party in interest.” See 29

U.S.C. § 1108(b)(2)(B).

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Further, the 2021 amendment altered disclosure requirements solely

for group health plan providers—not pension plan providers. This court has

previously acknowledged that Congress acts intentionally and purposely

when it includes particular language in one section of a statute but omits it

from another. Miss. Poultry Ass’n, Inc. v. Madigan, 31 F.3d 293, 301 (5th Cir.

1994) (en banc). If Congress intended to apply the disclosure requirements

to pension plans, it could have amended the appropriate section to do so.

Likewise, Congress could have amended the statute to clarify the meaning of

“a person providing services to such plan” under § 1002(14)(B). The

amendment of an unrelated section of ERISA does not shed light on the

meaning of § 1002(14)(B), nor does it provide sufficient evidence that

Congress intended to change such meaning.

Finally, Plaintiffs argue the statute is ambiguous, and therefore we

should give the DOL’s interpretation deference under Chevron, U.S.A., Inc.

v. National Resources Defense Council, Inc., 467 U.S. 837 (1984). But Chevron

deference is inappropriate where the text and structure of the statute

“unambiguously foreclose” an agency’s interpretation. Chamber of Com. v.

U.S. Dep’t of Lab., 885 F.3d 360, 369 (5th Cir. 2018). As discussed above,

the text of the statute unambiguously limits “a person providing services to

such plan” to entities currently providing services to a specific plan. Chevron

deference is thus inappropriate here.

Because VALIC was not yet providing services to the Plan, we

conclude that VALIC was not a “party in interest” under § 1106(a) when it

entered the PD Contract.

C. “Transaction” Under § 1106(a)

Plaintiffs alternatively argue that VALIC’s subsequent collection of

the surrender fee was a prohibited transaction with a “party in interest.” We

agree VALIC was likely a “party in interest” when it collected the fee

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because it had been providing services to Plaintiffs for several years.

However, Plaintiffs’ claim fails because the collection of a contractually

determined fee is not a “transaction” under § 1106(a).

ERISA prohibits fiduciaries (such as Markham) from “caus[ing] the

plan to engage in a transaction . . . [with] a party in interest.” 29 U.S.C.

§ 1106(a)(1)(C). Reading § 1108 in conjunction with § 1106(a) helps

determine the meaning of “transaction” as relevant here. As discussed

above, § 1108 provides several exemptions for contracts that § 1106(a) would

ordinarily prohibit. Under the exemptions, a party engages in a

“transaction,” inter alia, by “[c]ontracting or making reasonable

arrangements with a party in interest for office space, or legal, accounting, or

other services necessary for the establishment or operation of the plan.” 29

U.S.C. § 1108(b)(2)(A). This definition suggests that “transaction” refers

to the establishment of rights and obligations between parties—not the

payment of funds pursuant to an existing agreement.

Reading “transaction” to exclude subsequent payments is consistent

with the aims of § 1106(a). As discussed above, § 1106(a) limits scrutiny to

contracts involving preexisting relationships in order to prevent favoritism at

the expense of plan beneficiaries. See Harris Tr., 530 U.S. at 242. If

“transaction” applied to contractual payments, plaintiffs could circumvent

this limitation to upend contracts that were negotiated at arm’s length and,

basically, never pay what is owed. 6 The Secretary contends that this

interpretation would contradict the purpose of ERISA by allowing

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6

A similar issue arose in Chavez v. Plan Benefit Services, Inc., where the plaintiffs

admitted the defendant was not a party in interest at the time of the initial contract and

therefore challenged the subsequent payments. No. AU-17-CA-00659-SS, 2018 WL

6220119, at *3 (W.D. Tex. Sept. 12, 2018). The court found that fee collection was not a

separate “transaction” when, as here, “the contractual obligation to pay those fees arose

before [the collecting] party assumed party in interest status.” Id. at *4.

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unreasonable service contracts to go on without scrutiny. But allowing

separate claims for any contractual payment would lead to an influx of

litigation at odds with the limitations of § 1106(a) and lead to failing to pay

entities that do work, which is contrary to the core of our business world in

America.

Plaintiffs rely on the Fourth Circuit’s holding in Peters v. Aetna Inc., 2

F.4th 199 (4th Cir. 2021) to argue that subsequent payments are separate

transactions under § 1106(a). In Peters, the court determined that a service

provider was not a party in interest at the time of the contract signing. Id. at

239–40. However, the court held the service provider “could be” a party in

interest at a later point because it “provided services to the plan at the time

[its administrative] fees were paid[.]” Id. (alterations in original) (internal

quotation marks and citation omitted). The allegations in Peters are distinct

from those here. There, the defendant did not merely assess a fee in

accordance with a contract, but instead directly violated the terms of the

agreement by charging administrative fees to the plan and its beneficiaries

rather than the plan administrator. Id. at 212–13. Thus, the proper takeaway

from Peters is that a contract violation is a separate transaction rather than a

continuance of an initial agreement. Plaintiffs make no allegations of a

contract violation here.

Because “transaction” under § 1106(a) does not include payments in

accordance with a contract, we conclude that VALIC’s collection of the

surrender fee was not a prohibited transaction.

D. Leave to Amend

Under Federal Rule of Civil Procedure 15(a), a trial court “should

freely give leave [to amend] when justice so requires.” Although leave to

amend is not automatic, “a district court needs a substantial reason to deny

a party’s request for leave to amend.” N. Cypress Med., 898 F.3d at 477

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(internal quotation marks and citation omitted). Denial of leave to amend

may be appropriate in cases of undue delay. Id. at 478.

The district court did not abuse its discretion in denying Plaintiffs

leave to amend due to undue delay. “Although Rule 15(a) does not impose a

time limit for permissive amendment, at some point, time delay on the part

of a plaintiff can be procedurally fatal.” Smith v. EMC Corp., 393 F.3d 590,

595 (5th Cir. 2004) (internal quotation marks and citation omitted). In these

cases, a plaintiff must show that the delay is “due to oversight, inadvertence,

or excusable neglect.” Id. (quotation omitted). Here, Plaintiffs filed their

complaint in January 2021 and VALIC filed its initial motion to dismiss in

March 2021. The Eastern District of California transferred the case nearly a

year later. After transfer to the Southern District of Texas, VALIC filed

another motion to dismiss with the same arguments. As the district court

noted, Plaintiffs were aware of the potential deficiencies in their complaint

for over a year yet mentioned “new” allegations and “new” claims only in

response to the second motion. The district court also noted that Plaintiffs

provided no excuse for their delay in seeking leave to amend, and that

granting leave would be an inefficient use of the court’s resources. Thus, the

district court provided a substantial reason to deny leave to amend. See

Rosenzweig v. Azurix Corp., 332 F.3d 854, 864–65 (5th Cir. 2003) (concluding

the district court did not abuse its discretion in denying leave to amend the

complaint because plaintiffs had not raised any facts that were not previously

available and made a “strategic” decision to delay amending the complaint).

Further, the district court did not abuse its discretion because

Plaintiffs’ motion for leave provided insufficient detail of their new

allegations. We have previously held that “a movant must give the court at

least some notice of what his or her amendments would be and how those

amendments would cure the initial complaint’s defects.” Scott v. U.S. Bank

Nat’l Ass’n, 16 F.4th 1204, 1209 (5th Cir. 2021), as revised (Nov. 26, 2021);

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see also Lewis v. Smith, No. 19-30689, 2022 WL 10965839, at *5 (5th Cir. Oct.

19, 2022). As the district court noted, “Plaintiffs’ list of new allegations

[was] generic and equivocal.” Indeed, Plaintiffs listed only vague allegations

and did not provide sufficient facts that would support their claims if the

district court granted leave. Accordingly, we affirm the district court’s denial

of leave to amend.

IV. Conclusion

For the forgoing reasons, we AFFIRM the district court’s dismissal

of Plaintiffs’ ERISA claims and denial of leave to amend.

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