The Second Circuit Court of Appeals gave participants in New York University’s (NYU) retirement plans a second chance at pursuing their claims of plan mismanagement under ERISA. On October 1, 2019, the Second Circuit overturned the Southern District of New York’s dismissal of the participants’ lawsuit against the independent investment advisor who advised NYU on its retirement plans, even though the complaint alleged substantially the same claims against NYU in a separate lawsuit on which NYU prevailed.
In Sacerdote v. New York University (Sacerdote I), filed in 2016, retirement plan participants brought a class action alleging that NYU breached its fiduciary duties and committed prohibited transactions under ERISA by causing its retirement plans to pay unreasonable administrative and recordkeeping fees and maintain imprudent investment options. Plaintiffs subsequently filed a related action in November 2017, Sacerdote v. Cammack Larhette Advisors, LLC (Sacerdote II), against independent investment advisor Cammack Larhette Advisors, LLC (Cammack). The NYU defendants in Sacerdote II quickly moved to dismiss the suit as duplicative of Sacerdote I, and the Southern District of New York ultimately dismissed the action in its entirety, finding that defendants were in “privity with NYU in Sacerdote I because they had a sufficiently close relationship with NYU and their interests with aligned with those of NYU.”
The plaintiffs appealed Cammack’s dismissal to the Second Circuit, who considered the district court’s application of the privity rule in the context of duplicative litigation. The rule against duplicative litigation prevents plaintiffs from maintaining two actions on the same subject, in the same court, against the same defendant, at the same time. The rule does not apply when defendants in two similar actions are different, and plaintiffs can pursue as many claims as there are defendants. But when two defendants are in privity—meaning they are the same or share the same interests—the rule against duplicative litigation applies. The Second Circuit explained that privity may be found when a nonparty’s interest is adequately represented by a party with the same interests, or when a nonparty is acting as a representative of a party bound by judgment.
Applying the above analysis on de novo review, the Second Circuit found the district court erred in finding that NYU and Cammack were in privity. While the district court found the two parties had a “sufficiently close relationship” based on Cammack’s advisory role to NYU and because it is a co-fiduciary to the plans and contractually required to provide investment advice to NYU, the Second Circuit disagreed that Cammack and NYU’s interests were sufficiently identical to support a finding of privity. The Second Circuit illustrated the lack of privity by describing the outcomes in which Cammack and NYU could be found liable for different violations:
A reasonable trier of fact could find that Cammack provided flawed advice to NYU and was liable for plaintiffs’ losses, while also finding that NYU reasonably relied on Cammack’s advice, notwithstanding its flawed nature. Conversely, a reasonable trier of fact could find that Cammack provided reasonably prudent advice to NYU, but that NYU imprudently rejected Cammack’s advice or failed to properly implement Cammack’s investment recommendations. In these plausible scenarios, NYU and Cammack’s interests would surely diverge, to the point where it would be in each of their interests to place blame on the other. Especially at the pleading stage, it was error for the district court to accept Cammack’s argument that its interests were identical to those of NYU over plaintiffs’ plausible assertions to the contrary.
Sacerdote II was vacated and remanded to the district court, where plaintiffs get another bite at the apple and may pursue their ERISA plan mismanagement claims against Cammack. This is a notable victory for plaintiffs because they ultimately lost at trial against NYU in Sacerdote I. The Second Circuit’s holding is cause for concern for ERISA plan co-fiduciaries who were not named in litigation that has been adjudicated or resolved. Sacerdote II will certainly encourage plaintiffs to consider their options against previously overlooked parties.