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FERRY v. MUTUAL LIFE INS. CO.

February 14, 1994

JAMES R. FERRY, JAMES W. GLOEKLE, JOHN F. McINTYRE, HERBERT T. MILLER, JR., JAMES D. MILLER, and ALFRED G. STAUDT, Trustees of the Western Pennsylvania Electrical Employees Deferred Compensation Fund, Pittsburgh, Pennsylvania, and CENTRAL MUTUAL INSURANCE COMPANY, on its own behalf and as Plan Fiduciary for The Group Pension Plan for Employees of Central Mutual Insurance Company, Plaintiffs,
v.
MUTUAL LIFE INSURANCE COMPANY OF NEW YORK, Defendant.



The opinion of the court was delivered by: ALAN N. BLOCH

 BLOCH, District J.

 Presently before this Court is defendant's motion to dismiss. For the reasons stated herein, defendant's motion will be granted in part and denied in part.

 I. Background

 On May 7, 1993, plaintiffs James Ferry, James Gloekler, John McIntyre, Herbert Miller, Jr., James Miller, and Alfred Staudt, as trustees of the Western Pennsylvania Electrical Employees Deferred Compensation Fund (the WPEE Plan and collectively the WPEE Plaintiffs), as well as plaintiff Central Mutual Insurance Company (CMIC), on its own behalf and as plan fiduciary for the Group Pension Plan for Employees of CMIC (the CMIC Plan), filed a 21-count complaint against Mutual Life Insurance Company of New York (MONY). *fn1" In their complaint, plaintiffs assert five categories of claims: (1) federal statutory claims under ERISA; (2) claims under the federal securities laws; (3) claims under Pennsylvania and Ohio securities laws; (4) claims for "bad faith" under Pennsylvania and Ohio law; and (5) federal common law claims under ERISA. *fn2"

  This case arises out of the plaintiffs' purchase of several "guaranteed investment contracts" (GIC contracts) from defendant MONY. *fn3" The WPEE Plaintiffs purchased two GIG contracts from MONY, while plaintiff CMIC purchased four of these contracts. Each of the GIC contracts contained an annuity purchase option under which the plan could purchase an annuity to fund benefits for a plan participant who retired during the term of the contract.

 Under the terms of the GIC contracts, the purchaser deposits a sum of money with the issuer. "The issuer then guarantees the return of the principal at the end of the term of the GIC and guarantees the payment of a guaranteed rate of return on the sum deposited." (Complaint at P26). Each of the GIC contracts purchased by plaintiffs had terms of either five or six years. Moreover, each of the GIC contracts provided for a "divisible surplus" credit. *fn4"

 Plaintiffs allege that, after they purchased the GIC contracts, defendant began to suffer financial difficulties. Based upon the financial distress of defendant, plaintiffs decided to liquidate their investments under the GIC contracts. A provision in each of the GIC contracts stated that MONY had the right to withdraw certain amounts based upon a Market Value Adjustment (MVA) and an additional amount to obtain unrecovered expenses. The objective of the MVA is generally described in the contract, but the precise derivation of the adjustment is allegedly determined by MONY. Defendant's computation of the MVA as well as the plaintiffs' entitlement to any divisible surplus credits are the gravamen of this lawsuit. According to plaintiffs, MONY "devised and concocted new methods of applying a [MVA] formula to be used in the event of early withdrawals by GIC holders." (Complaint at P55).

 Defendant filed the instant motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b). In its motion to dismiss, defendant seeks dismissal of the following claims: (1) plaintiffs' claims under ERISA for breach of fiduciary duties and engaging in prohibited transactions (Counts I-IV); (2) plaintiffs' claims for violations of federal and state securities laws (Counts V-XI); (3) plaintiffs' claims for "tortious breach of contract/bad faith" (Counts XII and XIII); (4) plaintiffs' claims for "fraud/misrepresentation" (Counts XIV and XV); (5) plaintiffs' claims for breach of fiduciary duty (Counts XVI and XVII); (6) plaintiffs' claims for unjust enrichment (Counts XVIII and XIX); and (7) plaintiffs' claims for conversion (Counts XX and XXI).

 First, defendant asserts that it is not a fiduciary because it did not exercise control respecting management of "plan assets" and, therefore, plaintiffs' claims set forth in Counts I through IV must be dismissed. Second, defendant argues that plaintiffs' claims set forth in Counts XII through XXI are preempted by ERISA and that plaintiffs' claims are not cognizable under federal common law. Finally, defendant contends that if plaintiffs' fraud claims set forth in Counts XIV and XV are cognizable, they fail to satisfy the particularity requirements of Fed. R. Civ. P. 9(b). Plaintiffs respond that defendant does qualify as a fiduciary under ERISA and that their claims should be recognized under federal common law.

 II. Discussion

 In ruling on a motion to dismiss, the applicable standard of review requires the Court to accept as true all allegations in the complaint and all reasonable inferences that can be drawn therefrom, and view them in the light most favorable to the non-moving party. Blaw Knox Retirement Income Plan v. White Consolidated Industries, Inc., 998 F.2d 1185, 1188 (3d Cir. 1993). The question before the Court is whether the plaintiffs can prove any set of facts in support of their claims that will entitle them to relief, not whether they will ultimately prevail. Hishon v. King and Spalding, 467 U.S. 69, 73, 81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984).

 Before resolving the central issues involved in this motion, two preliminary matters must be addressed. First, plaintiffs have withdrawn their claims under federal and state securities laws citing the Supreme Court's holding in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 111 S. Ct. 2773, 115 L. Ed. 2d 321 (1991). Therefore, plaintiffs' claims set forth in Counts V through XI will be dismissed. Second, plaintiffs concede that their claims, except for their claims for "bad faith" set forth in Counts XII and XIII, are preempted by ERISA and, therefore, are pled solely as federal common law claims.

 A. Fiduciary status of MONY

 Under ERISA, the definition of "employee benefit plan" includes both "employee welfare benefit plan" and "employee pension benefit plan." ERISA § 3(3), 29 U.S.C. § 1002(3). A person is a fiduciary with respect to an employee benefit 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...." ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A). Although the term "plan assets" is not defined in the statute, ERISA § 401(b)(2) provides an exclusion from plan assets treatment for insurance company assets maintained in connection with a "guaranteed benefit policy."

 
In the case of a plan to which a guaranteed benefit policy is issued by an insurer, the assets of such plan shall be deemed to include such policy, but shall not, solely by reason of the issuance of such policy, be deemed to include any assets of such insurer.
 
***
 
(B) The term "guaranteed benefit policy" means an insurance policy or contract to the extent that such policy or contract provides for benefits the amount of which is guaranteed by the insurer. Such term includes any surplus in a separate account, but excludes any other portion of a separate account.

 ERISA § 401(b)(2), 29 U.S.C. § 1101(b)(2).

 Plaintiffs contend that MONY is a fiduciary because (1) it exercises authority or control respecting management of plan assets pursuant to the GIC contracts and (2) it exercises control with respect to the terms of the GIC contracts themselves. Defendant responds that the assets held pursuant to the GIC contracts fall within the guaranteed benefit policy exclusion. Defendant further argues that it is not a fiduciary with respect to the GIC contracts themselves because it did not have discretionary authority to change the terms of the contract.

 The Supreme Court recently considered the application of the guaranteed benefit policy exclusion in ERISA § 401(b)(2) to group annuity contracts such as deposit administration or participating group annuity contracts. In John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank, 126 L. Ed. 2d 524, 62 USLW 4025, 114 S. Ct. 517 (U.S. Dec. 13, 1993), the Court visited this important corner of ERISA in order to resolve a split among the Courts of Appeals. Cf. Harris Trust, 970 F.2d 1138 (2d Cir. 1992) and Peoria Union Stock Yards Company Retirement Plan v. Penn Mutual Life Insurance Co., 698 F.2d 320 (7th Cir. 1983), with Mack Boring and Parts v. Meeker Sharkey Moffitt, 930 F.2d 267 (3d Cir. 1991).

 In Harris Trust, the Supreme Court examined a contract "known in the trade as a 'deposit administration contract' or 'participating group annuity.'" Harris Trust, 62 USLW at 4026. The Court explained the operation of this type of contract as follows:

 
Under a contract of this type, deposits to secure retiree benefits are not immediately applied to the purchase of annuities; instead, the deposits are commingled with the insurer's general corporate assets, and deposit account balances reflect the insurer's overall investment experience. During the life of the contract, however, amounts credited to the deposit account may be converted into a stream of guaranteed benefits for individual retirees.

 Id.

 Concluding that funds held in an insurance company's general account pursuant to a deposit administration contract may qualify as plan assets subjecting the holder to "ERISA's fiduciary regime," the Supreme Court eschewed the approach adopted by the Court of Appeals for the Third Circuit and sanctioned the two-phase approach developed by the Court of Appeals for the Seventh Circuit. Harris Trust, 62 USLW at 4029. Following "the Seventh Circuit's lead," the Supreme Court explained that the Seventh Circuit's approach calling for the "division of the contract into its component parts and examination of risk allocation in each component--appears well-suited to the matter at hand because ERISA instructs that the § 1101(b)(2)(B) exemption applies only 'to the extent that ' a policy or contract provides for 'benefits the amount of which is guaranteed.'" Id. (emphasis in original).

 The Court explained that "during the contract's active, accumulation phase, any benefits payable by Hancock for which entries have been made in the Liabilities of the Fund fit squarely within the 'guaranteed' category." Id. at 4030.

 The Court then turned to the "nub of the controversy" and addressed whether Hancock was a fiduciary with respect to the "free funds," which it defined as the "funds in excess of those that have been converted into guaranteed benefits." Id. The Court concluded:

 
In sum, we hold that to determine whether a contract qualifies as a guaranteed benefit policy, each component of the contract bears examination. A component fits within the guaranteed policy exclusion only if it allocates investment risk to the insurer. Such an allocation is present when the insurer provides a genuine guarantee of an aggregate amount of benefits payable to retirement plan participants and their beneficiaries. As to a contract's "free funds"--funds in excess of those that have been converted into guaranteed benefits--these indicators are key: the insurer's guarantee of a ...

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