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Pender v. Bank of America Corp.

United States District Court, W.D. North Carolina, Charlotte Division

April 27, 2017

WILLIAM L. PENDER, Plaintiff,
v.
BANK OF AMERICA CORP., Defendant.

          AMENDED ORDER

          Graham C. Mullen United States District Judge.

         THIS MATTER is before the Court following a bench trial held November 7, 2016 - November 14, 2016. After hearing the evidence presented at trial and reviewing both parties' Proposed Findings of Fact and Conclusions of Law (Docs. Nos. 355, 356) the Court finds in favor of the Defendant, Bank of America Corp. et al, on all issues for the reasons set forth below.

         I. Overview of the Case

         This matter arises out of the decision by NationsBank, a company that subsequently merged with Bank of America (“the Bank”), to allow its employees to transfer their 401(k) assets to a cash balance defined benefit plan (“the Pension Plan”). Because the decade-long procedural history in this case has been well documented elsewhere, the Court will recite only the facts relevant to the present proceeding. See Pender v. Bank of America, 2013 WL 4495153, No. 3:05- cv-00238-GCM (W.D. N.C. Aug. 19, 2013); see also Pender v. Bank of Am. Corp., 756 F.Supp.2d 694, 696 (W.D. N.C. 2010), aff'd sub nom. McCorkle v. Bank of Am. Corp., 688 F.3d 164 (4th Cir. 2012).

         The Fourth Circuit described the Pension Plan as follows:

[Under] [t]he 401(k) Plan[, ] participants' accounts reflected the actual gains and losses of their investment options. In other words, the money that 401(k) Plan participants directed to be invested in particular investment options was actually invested in those investment options, and 401(k) Plan participants' accounts reflected the investment options' net performance.
By contrast, Pension Plan participants' accounts reflected the hypothetical gains and losses of their investment options. Although Pension Plan participants selected investment options, this investment was purely notional . . . . Instead, the Bank invested Pension Plan assets in investments of its choosing, periodically crediting each Pension Plan participant's account with the greater of (1) the hypothetical performance of the participant's selected investment option, or (2) the Transfer Guarantee.

Pender v. Bank of America Corp., 788 F.3d 354, 358-359 (4th Cir. 2015) (footnote omitted) (emphasis in original).

         A. IRS Involvement

         Following the appearance of a Wall Street Journal article covering the BAC transfers, the IRS opened its audit of the Bank's retirement plans on or about July 20, 2000. During the audit, the Bank and the IRS engaged in a series of correspondences regarding the Internal Revenue Code's (“IRC”) requirement of a separate account feature for any employee 401(k) plan assets that are transferred into a defined benefit plan such as the BAC plan. In these correspondences, the Bank's position was that the separate account feature was not violated if a defined benefit plan such as the BAC plan provided a benefit not less than the transferred 401(k) plan benefits, adjusted at a ‘going rate' for periods after the transfer. (Doc. No. 295-29 at 1-2).

         On December 9, 2005, the IRS issued its Liability Technical Advice Memorandum (“TAM”), which concluded that the transfers of participants' 401(k) assets into the BAC plan resulted in a loss of the separate account feature required for defined contribution plans. (Doc. No. 295-5 at 26). The IRS reasoned that, “to preserve the separate account feature, the separate defined contribution account must be determined by the investment experience of the contributions made on the participant's behalf.” (Doc. No. 295-5 at 25). Thus, according to the IRS, the BAC plan's hypothetical investment credits failed to preserve the separate account feature.

         In ex parte settlement negotiations concerning this alleged violation3 the IRS submitted that, in order to restore the separate account feature, the Bank should pay participants the greater of (a) the original TSA amount plus BAC trust earnings (actual earnings) or (b) the hypothetical TSA account balance. (Doc. No. 295-12 at 1). The Bank disagreed with this restoration method and instead proposed its “Rescission Plus” method. [See Doc. No. 295-35 at 4]. By this method: (1) the hypothetical balance of participants' TSAs would be transferred out of the BAC trust and into individual 401(k) plan accounts; (2) the balance of the TSA would be maintained as a sub-account within participants' 401(k) plan accounts; (3) the restored funds would actually be invested at the direction of the individual participants; (4) the balance guarantee in the BAC plan would be maintained to ensure that no participant received less than his initial TSA balance in the course of shifting the 401(k) assets out of the BAC trust, into individual accounts; and (5) a minimum rate of return would be guaranteed to BAC plan participants. (Doc. No. 295-7 at 7-10).

         Within a few days following a July 20, 2007 settlement meeting between the Bank and the IRS, the parties reached an agreement to settle the ongoing audit. The determination letters the IRS issued in connection with the Closing Agreement stated that they related only to the status of the Bank plans under the IRC and did not amount to a determination regarding the application of other federal statutes. (Doc. No. 295-8). Under the settlement, the Bank paid 10 million dollars to the U.S. Treasury and spent approximately 10 million dollars applying its Rescission Plus method to shift participants' 401(k) assets out of the commingled trust, back into separate accounts. (Doc. No. 295-7 at 3, 9).

         B. BAC Benefit Recalculations

         Per the Closing Agreement with the IRS, the Bank established a new special purpose defined contribution plan. Effective April 15, 2009, for participants who still had TSA accounts under the BAC plan, the Bank implemented steps to transfer BAC participants' TSA account balances out of the BAC plan, into individual accounts in the name of each participant. (Doc. No. 295-7 at 7-10). The transferred TSA balance reflected a participant's originally transferred 401(k) balance plus hypothetical investment credits to date. After this transfer from the BAC plan occurred, a participant's TSA assets would actually be invested in the options a participant chose and would receive investment credits based on the actual performance of those options. (Id.).

         In addition to delivering on its guarantee against investment loss under the BAC plan, the Bank amended its BAC plan to guarantee a minimum rate of return on transferred 401(k) assets that were invested in the BAC plan. For participants who had not received their benefit payment before January 1, 2007, this minimum rate of return was 11.6%. According to the Bank, 11.6% represented the difference between (a) the rate of return the Bank earned by investing participants' 401(k) assets in the BAC trust between July 1, 1998 and December 31, 2006 and (b) the average hypothetical return earned by participants during the same period. (Id. at 8).

         The benefit calculation method for participants who received their benefit payment before January 1, 2007 was different. The guarantee against investment loss remained. But the guaranteed minimum rate of return was not 11.6%. Rather, the minimum rate of return for such a participant was calculated by (a) taking the actual return the transferred BAC assets made between the participant's original 401(k) transfer date and the date on which the participant received payment from the BAC plan and (b) comparing that actual return to the average hypothetical return earned by all participants over the same period. The participant's guaranteed minimum rate of return was equal to the positive difference, if any, between (a) the actual rate of return on participants' transferred 401(k) assets and (b) the average hypothetical rate of return for the period when the participant's 401(k) assets were invested in the BAC trust. (Id. at 8).

         C. Fourth Circuit Remand

         In its most recent opinion directed at an issue in this case, the Fourth Circuit held “that Plaintiffs have both statutory and Article III standing” and remanded this case for further proceedings. Pender v. Bank of America Corp., 788 F.3d 354, 358-359 (4th Cir. 2015).

         The court first held that the Plaintiff has statutory standing to bring their claim under ERISA § 502(a)(3). Id. at 363. For Section 502(a)(3) to apply to these facts, the transfers must have violated a covered ERISA provision and the Plaintiff must seek “‘appropriate equitable relief' within the meaning of the statute.” Id. at 363.

         The transfers violated a covered ERISA provision, Section 204(g)(1), because the transfers eliminated the defined contribution plan's separate account feature. This feature “constitutes an ‘accrued benefit' that ‘may not be decreased by amendment of the plan'” under ERISA § 204(g)(1). Id.

         Consequently, the only remaining question was whether Plaintiffs sought relief that was equitable in nature. The court found that the Plaintiffs seek the following relief, which constitutes appropriate equitable relief as used in Section 502(a)(3):

Here, Plaintiffs seek the difference between (1) the actual investment gains the Bank realized using the assets transferred to the Pension Plan, and (2) the transferred assets' hypothetical investment performance, which the Bank has already paid Pension Plan participants. In other words, Plaintiffs seek the profit the Bank made using their assets. This is the hornbook definition of an accounting for profits.

Pender, 788 F.3d at 364.

         The court explained that an accounting for profits is “a restitutionary remedy based upon avoiding unjust enrichment, ” which “holds the defendant liable for his profits, not for damages.” Id. at 364-5. Because this type of relief is quintessentially equitable, Plaintiffs could proceed with their claims under § 502(a)(3). Id. at 367.

         Next, the court went through Article III standing analysis and found that the Plaintiffs satisfied all requirements. Id. at 366.

         In addition, the court addressed Defendants' argument that the case was moot because they had restored the separate account features of Plaintiffs' accounts and because Plaintiffs had suffered no monetary harm as a result of the temporary elimination. Id.; see also Id. at 366 (“Requiring a financial loss for disgorgement claims would effectively ensure that wrongdoers could profit from their unlawful acts as long as the wronged party suffers no financial loss. We reject that notion.”). The panel explained:

The Bank rightly notes that its closing agreement with the IRS restored Plaintiffs' separate account feature. That restoration, however, did not moot the case. Plaintiffs contend that the Bank retained a profit, even after it restored the separate account feature to Plaintiffs and paid a $10 million fine to the IRS. Defendants do not rebut this argument, noting only that there has been no discovery to this effect. If an accounting ultimately shows that the Bank retained no profit, the case may well then become moot.

Id. at 368.

         The Fourth Circuit vacated this Court's grant of summary judgment “based on its erroneous standing determination” and remanded for further proceedings without additional instructions on how the required accounting for profits should be calculated. See Id. at 370.

         On March 10, 2016 this Court issued an order on how best to implement the instructions set out by the Fourth Circuit: the analysis of whether or not the Bank retained a profit must be conducted in the aggregate. See Doc. 347. The Court concluded that the Fourth Circuit decision did not call for “60, 000 separate and distinct” account-by-account examinations of “the profits or losses derived from each separate transaction.” Doc. 347 at 8-9. The Court also rejected Plaintiffs' proposal to count “gains” and not “losses, ” holding that there was “no basis for finding that a subset of the Plaintiff class is equitably entitled” to a temporary surplus generated using their assets, when “all members of the class suffered the same injury - the temporary loss of their separate account feature-and received all of their promised benefits.” Id. at 7. The order set a bench trial to be held on the issue of whether, after it restored the separate account feature and paid a $10 million fine to the IRS, the Bank nevertheless profited from its transfer strategy. Id.

         Each party was allowed to present two experts to testify on their behalf. The Court carefully considered the four experts' testimony, the documents admitted into evidence, and the parties' respective Findings of Fact and Conclusions of Law. For the reasons indicated herein the Court finds that the Defendants established that it did not retain a profit from the Pension Plan, even after it restored the separate account feature to Plaintiffs and paid a $10 million fine to the IRS.

         II. Discussion

         After holding the bench trial and reviewing the parties' arguments and relevant case law, the Court finds in favor of Bank of America Corp et al on all counts.

         A. Defendants' Experts' Testimony was More Credible than Plaintiff's Experts' Testimony

         Both the Plaintiffs and the Defendants experts have presented a coherent and facially plausible story for their parties. The Plaintiffs' expert, Lawrence Deutsch, argues that since the Plaintiffs' transferred assets were comingled with other assets in the Pension Plan, the transferred assets should be considered undifferentiated Plan assets. So, all investment returns on all assets in the Plan should be used to calculate the profit and the transferred funds would be assigned a pro rata share of those returns. Mr. Deutsch's calculation finds the investment gains retained by the Bank from the transferred assets are $379 million. The Plaintiffs' other expert Clark Maxam argues that the Bank must disgorge that greater of the aggregate gains the Bank still retains from the transferred accounts or the market interest the Bank hypothetically would have paid to receive a loan of the transferred assets. Dr. Maxam calculated the retained interest savings of the transferred assets to be $275 million.

         The Defendants' expert Russell Wermers opines that through the use of accepted investment return benchmarks, he can assess whether the Plan's Investment Strategy could have produced a profit. Dr. Wermers found that during the transfer period equities significantly declined, while fixed income investments substantially increased. Since the Plan's Investment Strategy caused the Plan to invest more heavily in equities than the hypothetical investments made by participants, Dr. Wermers found that the transfer strategy did not result in a profit for the Bank. The Defendant's other expert, David Andreasen, argues that the returns of the Investment Strategy can be calculated by tracking the returns for each month for the Equity Hedge strategy and the overweighting equity strategy. The participants' hypothetical equity and fixed income investments were also tracked each month and Mr. Andreasen argues that whether the Pension Plan retained any profit from the transferred assets should be calculated by comparing these two values. Mr. Andreasen's calculations show a loss of $278 million as a result of the transfer assets.

         The four experts' testimony are not contradicted by objective evidence and so this Court is in the position where it must make a determination to credit the testimony of either the Plaintiffs' or Defendants' experts based on the Court's understanding of and belief in what was said at trial. On that basis, the Court finds that the Defendants' experts provided evidence at trial that is more credible than the testimony provided by the Plaintiffs' experts.

         III. Findings of Fact

         Having reviewed and carefully considered the evidence and arguments presented at trial, the Court makes the following findings of fact:

         A. Summary

         1. The core of the Plan's Investment Strategy was to invest the assets used to fund the TSAs more heavily in equities than participants invested their hypothetical accounts, on the theory that equities would be expected to outperform fixed income options over the long term. The Plan did this by matching or “hedging” participant equity investments with Plan equity investments and investing approximately 60% of participant fixed income investments in equities.

         2. In fact, the Investment Strategy failed. During the transfer period, equity markets experienced historic downturns, and the Plan's greater allocation to equity investments caused its investment returns to be significantly less than the aggregate returns credited to participant accounts. The Court finds, having observed the testimony of the witnesses, assessed their credibility, and considered the entirety of the evidence, that Defendants did not retain a profit as a result of the transfer. To the contrary, the evidence persuasively shows that the Plan experienced a net investment loss as a result of the Investment Strategy applicable to the TSAs, because it was more weighted in equities during a period when equity markets significantly underperformed fixed income investments.

         3. Defendants have provided calculations of the amount of the Plan's losses resulting from the transfer including, as set forth in more detail below, calculations based on contemporaneous records of investment returns maintained in the ordinary course of business. Those calculations show that the Plan incurred an investment loss of approximately $149 million attributable to the transfer.

         4. In addition, Defendants paid participants approximately $108 million in Transfer Guarantee payments and made more than $21 million in payments to the IRS and to restore separate accounts in the TSA Plan as required by the Closing Agreement. In total, Defendants' calculation of the losses attributable to the transfer exceeds $270 million.

         5. Plaintiffs have criticized various aspects of the investment loss calculations presented by Defendants' expert, Dr. Russell Wermers, and David Andreasen, a senior Vice President of the Bank responsible for Pension Plan investments. But Plaintiffs have failed to quantify or credibly explain how their criticisms would turn a failed Investment Strategy from a loss into a profit. What matters here is whether Defendants retained a profit as a result of the transfer; the precise amount would be relevant only if the Court found that the evidence demonstrates a profit. The Court finds the evidence does not support a conclusion that Defendants realized a profit.

         6. Plaintiffs' expert witnesses presented two alternative analyses allegedly showing a profit. Plaintiffs' expert Lawrence Deutsch opined that the Plan actually profited by more than $379 million. Mr. Deutsch calculates profit based on all investment returns earned on all assets in the Plan-including investment returns on legacy fixed-benefit obligations that pre-date the transfer. For the reasons discussed below, the Court rejects this approach, finding it to be a less accurate and reliable means of measuring whether there was any profit retained from the transfer because it captures investment returns that the Plan would have earned even if the transfer did not occur.

         In addition, as a matter of equity, the Court finds that this proposed methodology is inappropriate and inferior to calculating profit based on the actual Investment Strategy utilized with respect to the TSAs. This methodology also appears to be at odds with the type of assessment contemplated by the Fourth Circuit and the method for determining investment return “spread” that the IRS approved.

         7. In various submissions, Plaintiffs have also suggested an individual-by-individual calculation of participants' hypothetical returns, which excludes from the calculation individual participants for whom there was a negative “spread”-i.e., whose hypothetical investments outperformed the Plan, causing the Plan to incur losses. The Court has already rejected this approach as inconsistent with the Fourth Circuit's ruling. But even if it were not, the Court finds that this approach to calculating “profit” would not serve the purposes of equity here and would instead be punitive in nature, particularly given that participants have already received all benefits which they were promised.

         8. Plaintiffs' second expert, Dr. Clark Maxam, offers an entirely separate theory. Dr. Maxam opines that the Plan was unjustly enriched by the imputed “use value” of the transferred assets, which Dr. Maxam states was $346 million. As set forth below, Dr. Maxam's imputed use value theory is not a reliable or appropriate way of measuring “profit, ” particularly under the facts and circumstances of this case. In addition, the Court finds that such a methodology would not serve the purposes of equity as compared to the method proposed by Defendants, which focuses on actual profit. For that and other reasons, the Court does not accept the measurement of unjust enrichment based on use value.

         9. In sum, the evidence demonstrates that the Plan suffered a loss and that Plaintiffs' various analyses are flawed. Accordingly, the Court finds that Defendants did not retain a profit as a result of the transfer. Having found that there was no profit, the Court need not make findings regarding the other equitable defenses that Defendants have raised in this litigation (which were not the subject of this trial).[1]

         B. The Evidence Demonstrates That There Was No Retained Profit

         a. The Plan's Heavy Concentration In Equities During A Time When Equities Underperformed Fixed Income Investments Compels A Finding That The Plan Experienced A Loss

         10. Defendants' expert, Dr. Wermers, opined that the Plan did not retain a profit, and he presented various explanations and analyses in support of that conclusion. The Court finds Dr. Wermers' testimony credible and his analyses to be persuasive and helpful.

         11. Dr. Wermers is a Professor of Finance at the Smith School of Business at the University of Maryland and Director of the Center for Financial Policy at the University of Maryland.

         Dr. Wermers' expertise includes quantitative equity strategies, investment manager performance, and measuring performance of actively managed pension plan sub-portfolios. He has taught courses on Quantitative Equity Portfolio Management, Corporate Finance Theory, Security Analysis, and Investment Theory, among other topics. He has written academic papers on pension plans that have focused on benchmarking and measuring the performance of their actively managed sub-portfolios in different asset classes, and co-authored a scientific textbook on how to measure the performance of portfolio managers. He has provided advisory services to the Quantitative Strategies group at Goldman Sachs Asset Management, as well as the Office of Financial Research of the United States Treasury Department.

         12. Dr. Wermers opined that the outcome of the transfer strategy can be determined even without directly analyzing the specific hypothetical investment elections participants made and the specific investments the Plan made. Specifically, Dr. Wermers assessed whether the Plan's Investment Strategy applied to the TSAs could reasonably have produced a profit in light of the performance of accepted investment return benchmarks during the relevant period. Using the investment return benchmarks specified in the Plan's Investment Policy Statements, Dr. Wermers evaluated: the performance of the Plan's domestic equity investments by looking to the Russell 3000 Index; the performance of the Plan's international equity investments by looking to the MSCI EAFE Index; and the performance of the Plan's fixed income investments by looking to the Lehman Brothers Aggregate Bond Index.

         13. Dr. Wermers observed that during the transfer period, equities experienced significant declines, while fixed income investments experienced substantial increases. Indeed, between July 1, 1998 through March 31, 2009, the difference between equities and fixed income investments was very significant. The Russell 3000 (Equity) Index declined 11.2%, and the MSCI EAFE (Equity) Index declined 3.5%, while the Lehman Brothers Aggregate Bond Index (a fixed income index) increased 81.1% during the same period.[2]

         14. Because the Plan's Investment Strategy intentionally caused the Plan to invest more heavily in equities than the hypothetical investments made by participants, given the relative performance of equity and fixed income investments during the transfer period, it is clear that the transfer strategy resulted in a loss to the Plan, not a profit, as Dr. Wermers testified and the Court finds.

         15. Dr. Wermers further confirmed this conclusion by constructing a model based on the Plan's Investment Strategy and participant-directed accounts. The model hedged participant equity investments and invested participant fixed income investments in a 60%/40% mix of equity and fixed income investments, in accordance with the Plan's Investment Policy Statements. Dr. Wermers then used the model to test the Plan's net investment performance for every possible participant-directed allocation, from 100% equity to 100% fixed income, based on the performance of the Plan's investment benchmarks during the transfer period.

         16. Using this approach, Dr. Wermers concluded that there is no participant-directed allocation that would have resulted in an aggregate investment gain for the Plan. For every possible hypothetical investment combination that participants directed, the Plan's Investment Strategy called for the Plan to invest in, at a minimum, a share of equities equal to participant hypothetical equity investments, and most often a higher share of equities (if participants allocated any portion of their hypothetical investments to fixed income options).

         17. Because equities substantially underperformed fixed income investments during the relevant period, and because the Plan's investments were more heavily concentrated in equities than were participant-directed hypothetical investments, it is unsurprising that the Plan would have experienced a net loss.[3]

         b. The Plan's Records Show A Substantial Loss From The Transfer

         18. Defendants' analysis, based on contemporaneous records that the Plan maintained in the ordinary course of business, produced calculations and estimates consistent with the conclusion that the Plan realized a loss on the transfer as a result of the underperformance of equities during the relevant period.

         19. In order to track the performance of the Investment Strategy, the Plan, through its investment consultant, Callan Associates, measured returns each month separately for (a) its Equity Hedge strategy and (b) its 60/40 strategy. The Plan's investments, including investments made pursuant to the Equity Hedge strategy, were not tracked and investment returns were not measured on an individual participant-by-participant basis.

         20. The Plan also tracked each month, on an aggregate basis, participants' hypothetical equity and fixed income investments. These were recorded in monthly “trial balance” documents, which are documents that reflect Plan liabilities, including changes in such liabilities, and which were maintained by the Plan's recordkeeper in the ordinary course of business.

         21. These contemporaneous records were compiled into the Return Data Spreadsheet, which was created and admitted as a summary for this litigation. The Return Data Spreadsheet used these primary inputs to calculate the monthly and cumulative percentage returns of the Pension Plan's Investment Strategy, on the one hand, and participants' hypothetical investment performance, on the other. The Plan's net investment performance was determined by subtracting aggregate participant percentage returns (i.e., liabilities) from the Plan's percentage returns attributable to the Investment Strategy (i.e., assets). The net investment returns on a percentage basis were then multiplied by the aggregate balance of the TSAs each month.

         22. Using the data in the Return Data Spreadsheet, the Bank-through Mr. Andreasen, with assistance from Callan Associates-calculated the cumulative totals in the Return Data Spreadsheet. This calculation shows that the Plan experienced a ...


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