Nasrawi v. Buck Consultants , 231 Cal. App. 4th 328 ( 2014 )

Filed 11/6/14
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SIXTH APPELLATE DISTRICT
DENNIS NASRAWI et al., H038894
(Santa Clara County
Plaintiffs and Appellants, Super. Ct. No. 1-11-CV203324)
v.
BUCK CONSULTANTS LLC et al.,
Defendants and Respondents.
Plaintiffs Dennis Nasrawi, Michael O’Neal, and Rhonda Biesemeier are retired
public employees of Stanislaus County (County) and beneficiaries of a public pension
trust administered by the Stanislaus County Employees Retirement Association (the
Association). Defendants Buck Consultants LLC (Buck) and Harold Loeb provided
actuarial services to the Association, also a defendant. According to plaintiffs, Buck and
Loeb’s actuarial negligence caused the pension trust to be dramatically underfunded. The
Association has not sued Buck and Loeb for malpractice, an omission plaintiffs allege
constituted a breach of the Association’s fiduciary duties to them as beneficiaries.
Plaintiffs further allege Buck and Loeb aided and abetted other breaches committed by
the Association.
Plaintiffs appeal from a judgment of dismissal entered after the trial court
sustained demurrers without leave to amend filed by defendants. We reverse and remand
with directions.
I. FACTUAL AND PROCEDURAL BACKGROUND1
A. The Association
The Association is a public employee retirement system operating pursuant to
section 17 of article XVI of the California Constitution (section 17) and the County
Employees Retirement Law of 1937 (Gov. Code, § 31450 et seq.).2 The Association,
which is managed by a nine-member board of administration (board), administers a
pension trust fund for current and former County employees.3
The pension fund receives funding from three sources: (1) employee
contributions, (2) employer contributions from the County, and (3) the return on the
Association’s investments. The board is responsible for helping to determine the
County’s contribution rate. Specifically, the board is required to recommend a
contribution rate to the board of supervisors based on an actuarial valuation conducted by
an actuary. (§§ 31453, subd. (a), 31453.5, 31454, subd. (a).) The board, “consistent with
the exclusive fiduciary responsibilities vested in it,” has “the sole and exclusive power to
provide for actuarial services in order to assure the competency of the assets of the . . .
retirement system.” (Cal. Const., art. XVI, § 17, subd. (e).)
Section 17 imposes various duties on the board, including obligations to (1)
“administer the system in a manner that will assure prompt delivery of benefits and
related services to the participants and their beneficiaries” (id., subd. (a)); (2) “discharge
their duties with respect to the system solely in the interest of, and for the exclusive
purposes of providing benefits to, participants and their beneficiaries, minimizing
1
Because this matter comes to us following a judgment sustaining demurrers
without leave to amend, we assume the truth of the material facts properly pleaded in
plaintiffs’ complaint. (Blank v. Kirwan (1985) 39 Cal. 3d 311, 318.)
2
Further unspecified statutory references are to the Government Code.
3
The board is not named separately as a party in this action, and all actions taken
by the board are alleged in the operative complaint as having been taken by the
Association.
2
employer contributions thereto, and defraying reasonable expenses of administering the
system” (id., subd. (b)); and (3) “discharge their duties with respect to the system with the
care, skill, prudence, and diligence under the circumstances then prevailing that a prudent
person acting in a like capacity and familiar with these matters would use in the conduct
of an enterprise of a like character and with like aims.” (Id., subd. (c).) Section 17
further provides that the “board’s duty to its participants and their beneficiaries shall take
precedence over any other duty.” (Id., subd. (b).) These are “fiduciary responsibilities.”
(Id., subd. (e).)
B. The Association Deliberately Underfunded The Pension Fund
Plaintiffs allege the Association deliberately underfunded the pension fund in the
following ways: (1) using an “unrealistic and imprudent” assumed actuarial rate of return
of 8.16 percent; (2) adopting a schedule of negative amortization of the system’s
unfunded liability for earned benefits; (3) intentionally managing the pension fund to
ensure that it was always less than 90 percent funded, thereby avoiding certain employer
contributions (i.e., cost-of-living adjustments); (4) using pension fund assets to substitute
for the County’s employer contributions; and (5) transferring assets from nonvaluation
reserves to valuation reserves. Notably, these acts are not the basis for any claim against
the Association in this action. Indeed, plaintiffs are pursuing breach of fiduciary duty
claims against the Association for the alleged adoption of a schedule of negative
amortization and transfers from nonvaluation reserves in another action, O’Neal v.
Stanislaus County Employees’ Retirement Assn., Superior Court of California, County of
Stanislaus, case No. 648469, Fifth Appellate District, case No. F061439 (O’Neal).4
4
The trial court sustained the Association’s demurrer in O’Neal, concluding the
complaint “ ‘does not allege facts which if true would show any abuse of discretion’ ” by
the Association and “the complaint failed to allege legally cognizable damages.”
(O’Neal v. Stanislaus County Employees’ Retirement Association (Apr. 4, 2012,
F061439) [nonpub. opn.] 2012 WL 1114677.) On April 4, 2012, the Fifth District
(continued)
3
Rather, as discussed below, the conduct above is alleged in the context of plaintiffs’
claim against Buck and Loeb for aiding and abetting a breach of fiduciary duties.
C. Buck and Loeb Concealed The Association’s Conduct
Buck and its employee, Loeb, provided actuarial services to the Association.
Plaintiffs allege Buck and Loeb knew of the Association’s deliberate underfunding of the
pension fund and the specific acts enumerated above. Buck and Loeb concealed the
Association’s practices by (1) failing to disclose and warn about the consequences of the
Association’s practices, (2) verifying the actuarial soundness of those practices, (3) and
knowingly and falsely representing to trust fund beneficiaries at public meetings between
2005 and 2009 that the Association’s practices were actuarially sound.
D. Buck and Loeb’s Actuarial Negligence and the Tolling Agreement
Buck and Loeb prepared an actuarial valuation of the pension fund dated January
9, 2007. That valuation materially understated the fund’s liabilities because, in preparing
the valuation, Buck and Loeb negligently relied on inappropriate actuarial assumptions.
As a result of the negligently prepared actuarial valuation, the County’s annual employer
contribution to the pension fund was $40 million lower than it should have been.
On July 6, 2009, the Association entered into a tolling agreement with Buck.
According to that agreement, the Association’s preliminary investigation indicated that
Buck had “committed malpractice in the performance of services for” the Association by
employing assumptions that “severely understated” the system’s experience with respect
to expected withdrawals from the retirement system. The Association agreed not to
assert any claims against Buck while the tolling agreement is in effect, in exchange for an
agreement to toll all applicable statutes of limitations during that same time period. The
tolling agreement may be terminated by either party upon 30 days’ notice.
reversed and remanded, holding plaintiffs’ had adequately pleaded causes of action for
injunctive relief. (Ibid.) Buck and Loeb are not parties to the O’Neal action.
4
E. Earlier Iterations of Plaintiffs’ Complaint
The plaintiffs are members of the Association with vested pension rights. Their
initial complaint in this action, filed on October 8, 2009, in Stanislaus County Superior
Court, asserted a single claim for actuarial negligence against Buck and Loeb. That claim
was based solely on Buck and Loeb’s alleged negligence in preparing the January 9, 2007
actuarial valuation and was asserted “in a representative capacity on behalf of” the
Association, given its failure to bring suit itself.
Buck and Loeb removed the action to federal court on the basis of diversity
jurisdiction. Plaintiffs amended their complaint twice in federal court. On March 8,
2011, the federal district court remanded the case to state court.
Upon remand, the parties successfully moved to transfer venue to Santa Clara
County. The then-operative second amended complaint asserted claims for actuarial
negligence and breach of fiduciary duty against Buck and Loeb. It included allegations
that (1) the Association had improperly reduced employer contributions by adopting a
schedule of negative amortization and transferring funds from nonvaluation reserves and
(2) Buck and Loeb had concealed those practices. Buck and Loeb demurred and,
alternatively, sought a stay pending the Fifth Circuit’s decision in the O’Neal case, which
was pending on appeal at the time. The Santa Clara County Superior Court sustained
Buck and Loeb’s demurrer with leave to amend, reasoning that plaintiffs lacked standing
to assert an action against Buck and Loeb in a representative capacity on behalf of the
pension trust fund.
Plaintiffs’ third amended complaint asserted a breach of fiduciary duty claim
against the Association and an aiding and abetting claim against Buck and Loeb. The
trial court struck plaintiffs’ claim against the Association because they had not sought
leave to amend before adding it as a defendant. The court sustained with leave to amend
Buck and Loeb’s demurrer, again concluding plaintiffs lacked standing. The court
further concluded that plaintiffs had failed to allege concealment by Buck and Loeb with
5
sufficient particularity. Plaintiffs then filed a fourth amended complaint asserting only a
claim for aiding and abetting a breach of fiduciary duty against Buck and Loeb.
F. Plaintiffs’ Motion for Leave to File a Fifth Amended Complaint
Before Buck and Loeb had responded to the fourth amended complaint, plaintiffs
sought leave to file a fifth amended complaint to add the Association as a defendant and
to assert a claim for breach of fiduciary duty against it. Buck and Loeb opposed that
motion, arguing that plaintiffs already had litigated their proposed claim against the
Association in O’Neal. Plaintiffs responded that the two actions were based on different
wrongful acts occurring at different times. Specifically, the O’Neal action was based on
certain transfers of money by the Association that occurred in April 2009 and June 2010,
as well as the Association’s adoption of a negative amortization scheme in April 2009.
By contrast, they explained that the current action against the Association is based only
on its failure to sue Buck and Loeb for actuarial negligence. On July 13, 2012, the trial
court granted plaintiffs leave to amend and deemed the previously-lodged fifth amended
complaint filed and served as of that date.
G. The Operative Fifth Amended Complaint and Defendants’ Demurrers
In the fifth amended complaint, plaintiffs alleged the Association breached the
fiduciary duties imposed on it by section 17 of the California Constitution by failing to
sue Buck and Loeb for its negligent preparation of the January 9, 2007 actuarial
valuation. Plaintiffs alleged the Association’s breach had caused economic injuries to the
pension trust fund and sought damages to “be paid to [the Association’s] trust fund.” In
addition to damages, plaintiff’s prayer for relief sought “such other and further relief as
the court deems just and proper.”
With respect to Buck and Loeb, the fifth amended complaint asserted a claim for
aiding and abetting a breach of fiduciary duty. Notably, plaintiffs did not simply allege
that Buck and Loeb aided and abetted the breach they asserted against the Association
(namely, failure to file a malpractice suit). Instead, they alleged that Buck and Loeb
6
aided and abetted various other breaches, including those plaintiffs are pursuing against
the Association directly in the O’Neal action. As plaintiffs explained in their opposition
to the Association’s demurrer to the fifth amended complaint, O’Neal “is based in part on
conduct which Buck and Loeb are alleged in this action to have aided and abetted.”
Those alleged underlying breaches by the Association included: (1) using an “unrealistic
and imprudent” assumed actuarial rate of return of 8.16 percent; (2) adopting a schedule
of negative amortization of the system’s unfunded liability for earned benefits; (3)
intentionally managing the pension fund to ensure that it was always less than 90 percent
funded, thereby avoiding certain employer contributions (i.e., cost-of-living adjustments);
(4) using pension fund assets to substitute for the County’s employer contributions; and
(5) transferring assets from nonvaluation reserves to valuation reserves. Plaintiffs alleged
Buck and Loeb knew of that conduct and concealed it by way of omissions and
affirmative misrepresentations that the Association’s practices were actuarially sound.
All defendants demurred to the fifth amended complaint. The trial court sustained
the Association’s demurrer without leave to amend on three grounds: (1) plaintiffs failed
to demonstrate compliance with the Government Claims Act (§ 810 et seq.); (2) the
decision whether to pursue a negligence claim against Buck and Loeb is a discretionary
one for which the Association has immunity under section 815.2; and (3) plaintiffs failed
to allege legally cognizable damages. The court sustained Buck and Loeb’s demurrer
without leave to amend on the theory that plaintiffs’ failure to state a breach of fiduciary
duty claim against the Association was fatal to their claim against Buck and Loeb. The
court reasoned that plaintiffs’ aiding and abetting claim was “predicated” on their breach
of fiduciary claim against the Association and thus “necessarily” failed.
II. DISCUSSION
A. The Standard of Review
We review an order sustaining a demurrer de novo, exercising our independent
judgment as to whether a cause of action has been stated as a matter of law. (Moore v.
7
Regents of University of California (1990) 51 Cal. 3d 120, 125.) Because a demurrer tests
only the legal sufficiency of the pleading, the facts alleged in the pleading are deemed to
be true. (Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal. App. 4th 1020, 1034.)
We do not review the validity of the trial court’s reasoning, and therefore will affirm its
ruling if it was correct on any theory. (Ibid.) Nor are we “limited to plaintiff[’]s theory
of recovery in testing the sufficiency of [its] complaint against a demurrer, but instead
must determine if the factual allegations of the complaint are adequate to state a cause of
action under any legal theory.” (Barquis v. Merchants Collection Assn. (1972) 7 Cal. 3d
94, 103.)
“Where a demurrer is sustained without leave to amend, [we] must determine
whether there is a reasonable probability that the complaint could have been amended to
cure the defect; if so, [we] will conclude that the trial court abused its discretion by
denying the plaintiff leave to amend. [Citation.] The plaintiff bears the burden of
establishing that it could have amended the complaint to cure the defect.” (Berg & Berg
Enterprises, LLC v. Boyle, supra, 178 Cal.App.4th at p. 1035.)
B. Plaintiffs’ Claim Against The Association
1. Government Claims Act
The Government Claims Act (§ 810 et seq.) “establishes certain conditions
precedent to the filing of a lawsuit against a public entity. As relevant here, a plaintiff
must timely file a claim for money or damages with the public entity. (§ 911.2.)” (State
of California v. Superior Court (2004) 32 Cal. 4th 1234, 1237.) “[T]he claims
presentation requirement applies to all forms of monetary demands, regardless of the
theory of the action,” subject to certain statutorily-enumerated exceptions. (Sparks v.
Kern County Bd. of Supervisors (2009) 173 Cal. App. 4th 794, 798 (Sparks).) Pertinent to
our discussion is subdivision (f), which excludes from notice requirements
“[a]pplications or claims for money or benefits under any public retirement or pension
system.” (§ 905, subd. (f).) “The failure to timely present a claim for money or damages
8
to a public entity bars the plaintiff from bringing suit against that entity.” (Sparks, supra,
at p. 798; see also § 945.4.) “A cause of action that is subject to the statutory claim
procedure must allege either that the plaintiff complied with the claims presentation
requirement, or that a recognized exception or excuse for noncompliance exists. . . . If
the plaintiff fails to include the necessary allegations, the complaint is subject to attack by
demurrer.” (Gong v. City of Rosemead (2014) 226 Cal. App. 4th 363, 374.)
Plaintiffs maintain the trial court erred by sustaining the Association’s demurrer
for failure to comply with the claims statute because the claim presentation requirement
does not apply to their action. Alternatively, plaintiffs argue that if the Government
Claims Act applies they should have been permitted to amend their complaint to allege
their compliance. As discussed below, we disagree on both counts.
a. Plaintiffs Assert a “Claim for Money or Damages”
Plaintiffs first contend that their claim against the Association is exempt from the
Government Claims Act because they are not seeking money or damages. Rather, they
say, their complaint sought “primarily equitable” relief, namely, the appointment of a
receiver to pursue the Association’s malpractice claim against Buck and Loeb.
In fact, plaintiff’s fifth amended complaint expressly requested “damages” and
“recovery . . . paid to [the Association’s] trust fund.” The complaint included the
customary prayer for “other and further relief as the court deems just and proper,” but it
made no mention of a receiver or any other specific equitable relief. No form of the
words “injunction,” “equity,” or “receiver” appears in the complaint. For these reasons,
the court did not err in concluding the primary purpose of plaintiffs’ claim against the
Association was to obtain money damages, such that it was subject to the presentation
requirements of the Government Claims Act.
b. The Section 905, Subdivision (f) Exception Does Not Apply
Plaintiffs next argue that the section 905, subdivision (f) exception to the claim
presentation requirement for “claims for money or benefits under any public retirement or
9
pension system” applies to their claim against the Association.
Generally, “the statutory exceptions specified in section 905 are given a strict
construction.” (Dalton v. East Bay Mun. Utility Dist. (1993) 18 Cal. App. 4th 1566, 1573
(Dalton).) Courts have construed the section 905, subdivision (f) exception specifically
as applying only “where an individual seeks money due under the terms of an existing
pension system.” (Canova v. Trustees of Imperial Irrigation Dist. Employee Pension
Plan (2007) 150 Cal. App. 4th 1487, 1497, citing Dalton, supra, at p. 1574.) Where, as
here, plaintiffs allege “tortious wrongdoing by [the] defendant[],” section 905,
subdivision (f) is not implicated. (Dalton, supra, at p. 1574 [former utility district
employees were required to file a claim pursuant to § 905 before asserting breach of
fiduciary duty claim against district’s retirement system].) Accordingly, plaintiffs were
required to satisfy the claim presentation requirement.
c. Leave to Amend
Plaintiffs maintain that, even if the claim presentation requirement applies, they
satisfied that requirement and should have been granted leave to amend to allege that
compliance. For that argument, plaintiffs merely note that in the O’Neal action they
alleged: “To the extent the plaintiffs were required to comply with the Government
Claims Act, they have so complied.” Plaintiffs have not met their burden of
demonstrating that the trial court abused its discretion in denying them leave to amend
their complaint to allege compliance with the claims presentation requirement. Section
910 requires that a claim set forth certain information, including “(c) [t]he date, place and
other circumstances of the occurrence or transaction which gave rise to the claim asserted
. . . [¶] [and] (d) [a] general description of the . . . injury, damage or loss incurred.” (§
910, subds. (c), (d).) Because plaintiffs have not included the claim in the record, they
have failed to affirmatively show error by demonstrating that they filed a claim meeting
the minimum requirements of section 910. (Ballard v. Uribe (1986) 41 Cal. 3d 564, 574-
575 [party challenging judgment has burden to show reversible error]; Maria P. v. Riles
10
(1987) 43 Cal. 3d 1281, 1295-1296 [failure to provide an adequate record on an issue
requires that the issue be resolved against appellant].)5
Plaintiffs likewise have failed to show that the trial court erred by not granting
them leave to amend to seek equitable relief. Plaintiffs maintain that they could properly
seek “an order compelling [the Association] to perform its duty by prosecuting actuarial
negligence claims against Buck and Loeb” under Probate Code section 16420,
subdivision (a)(1) or the appointment of a receiver under Probate Code section 16420,
subdivision (a)(4). But, as plaintiffs acknowledge, the Probate Code applies to retirement
funds only where some “ ‘statutory or common law principle[], . . . court order or rule, or
. . . contract’ ” allows for its application. (Meyers v. The Retirement Fund of Federated
City Employees (2014) 223 Cal. App. 4th 1201, 1212, quoting Prob. Code, § 15003, subd.
(c); see also id., § 82, subd. (b)(13) [excluding from the definition of “trust” trusts “for
the primary purpose of paying . . . pensions[] or employee benefits of any kind”].)
Plaintiffs identify no such principle, order, rule or contract upon which a court could find
a basis to apply trust law to the pension fund.
2. Statutory Governmental Immunity
Even assuming plaintiffs had carried their burden with regard to amending their
complaint to seek equitable relief, thereby avoiding the Government Claims Act, their
claim against the Association would fail on governmental immunity grounds.
“Conceptually, the question of the applicability of a statutory immunity does not
even arise until it is determined that a defendant . . . would be liable in the absence of
5
Notably, plaintiffs argued below that their claim against the Association in this
action and those they are pursuing in O’Neal involve “different wrongful acts” and
different “time frame[s].” In view of that representation, it seems unlikely that any claim
plaintiffs presented in connection with O’Neal included the date and circumstances
surrounding the Association’s failure to sue Buck and Loeb for malpractice. In any
event, as discussed above, plaintiffs failure to make an adequate record on appeal in that
regard is fatal to their contention that the trial court erred by denying them leave to
amend.
11
such immunity.” (Davidson v. City of Westminster (1982) 32 Cal. 3d 197, 201-202; see
also Caldwell v. Montoya (1995) 10 Cal. 4th 972, 985 (Caldwell) [statutory immunity
applies where “public agencies or employees would otherwise be liable under general
principles of law”].) Accordingly, we begin by considering the basis for the
Association’s alleged liability.
A public entity, like the Association, is subject to direct liability only as provided
by statute or required by the state or federal Constitution. (§ 815; Lundeen Coatings
Corp. v. Department of Water & Power (1991) 232 Cal. App. 3d 816, 832.) A public
entity is subject to vicarious liability for injuries caused by its employees, but only to the
extent those employees themselves are not immune from liability. (§ 815.2, subd. (b).)
Public entity employees are immune from liability for injuries caused by their
discretionary acts or omissions. (San Mateo Union High School Dist. v. County of San
Mateo (2013) 213 Cal. App. 4th 418, 433; § 820.2.) An act or omission is considered
discretionary (and subject to immunity) where it “involve[s] planning and policymaking.”
(Doe 1 v. City of Murrieta (2002) 102 Cal. App. 4th 899, 912.) Immunity is considered
appropriate “for those ‘basic policy decisions [which have] . . . been [expressly]
committed to coordinate branches of government,’ ” because “judicial interference” with
such decisions “would . . . be ‘unseemly.’ ” (Caldwell, supra, 10 Cal.4th at p. 981.)
“[T]o be entitled to immunity the state must make a showing that such a policy decision,
consciously balancing risks and advantages, took place.” (Johnson v. State of California
(1968) 69 Cal. 2d 782, 794, fn. 8.) By contrast, “lower-level, or ‘ministerial,’ decisions
that merely implement a basic policy already formulated” are not entitled to immunity.
(Caldwell, supra, at p. 981.)
Here, plaintiffs allege that the Association violated its constitutionally-imposed
fiduciary duties by failing to pursue litigation against Buck and Loeb. The constitutional
provision on which plaintiffs rely--section 17--imposes various fiduciary duties on the
board, not the Association itself. Accordingly, the Association’s liability, if any, is
12
vicarious liability for the board’s failure to sue. (See Masters v. San Bernardino County
Employees Retirement Assn. (1995) 32 Cal. App. 4th 30, 49 [under § 815.2, county
employment retirement association is immune from liability for board’s acts to the extent
the board is immune].)
The next question is whether the board--and hence the Association--is immune
from liability. Before reaching that issue, we must address plaintiffs’ position that,
because they allege a constitutionally-based duty, we should not consider the question of
immunity. Plaintiffs’ argument ignores case law holding that the existence of a duty “ ‘is
only a threshold issue, beyond which remain the immunity barriers.’ ” (Davidson v. City
of Westminster, supra, 32 Cal.3d at p. 202; Caldwell, supra, 10 Cal.4th at p. 985
[“actionable duty and statutory immunity [are] separate issues”].) Undoubtedly, the
board owes fiduciary duties under section 17, but whether it is immune from alleged
violations of those duties is a separate question. And, contrary to plaintiffs’ view, the
immunity question is not answered by the mere fact that the constitution is the source of
the duties at issue. For their argument to the contrary, plaintiffs rely on two cases holding
that section 815 does not bar direct public entity liability for constitutional violations.
(Fenton v. Groveland Community Services Dist. (1982) 135 Cal. App. 3d 797, 803
(Fenton) disapproved of by Katzberg v. Regents of University of California (2002) 29
Cal. 4th 300 [§ 815 did not bar damages claim for violation of constitutional right to
vote]; Young v. County of Marin (1987) 195 Cal. App. 3d 863.) But direct liability under
section 815 is not at issue here. Rather, we are concerned with vicarious liability. Thus,
to accept plaintiffs’ argument, we would need to conclude that public entity employees
are liable for injuries caused by their discretionary acts or omissions that violate
constitutionally-imposed duties. Neither the statute nor the cases on which plaintiffs rely
supports such a conclusion. To the contrary, in Fenton, the court considered whether
county employees were entitled to immunity because they engaged in a discretionary act
in denying plaintiffs’ right to vote. (Fenton, supra, at p. 806.) The court did not reject
13
that argument out of hand simply because plaintiffs alleged a constitutional violation, as
plaintiffs would have us do. Rather, the court considered whether those county
employees’ actions constituted policymaking or the execution of ministerial tasks. (Ibid.
[finding no immunity based on conclusion that “respondents were not engaging in policy-
making, but were merely exercising the ministerial task of determining if certain
procedural (i.e., residency) requirements were met on the part of two potential voters”];
see also DiLoreto v. Board of Education (1999) 74 Cal. App. 4th 267 [in case alleging free
speech violations, holding individual defendants were immune from liability for their
discretionary acts under § 820.2].)
In view of the foregoing, whether the Association can be held liable for the
board’s failure to sue Buck and Loeb turns on whether that “omission was the result of
the exercise of the discretion vested in” the board. (§ 820.2.) We conclude that it was.
Section 17 imposes various fiduciary duties on the board. Given the breadth of those
duties, section 17 necessarily vests the board with discretion in the manner in which it
fulfills those duties. The decision whether to pursue litigation necessarily requires a
judgment based on an evaluation of the merits of the potential claim and possible
defenses, as well as a cost-benefit analysis of the litigation. “The decision, requiring as it
does, comparisons, choices, judgments, and evaluations, comprises the very essence of
the exercise of ‘discretion’ and we conclude that such decisions are immunized under
section 820.2.” (Thompson v. County of Alameda (1980) 27 Cal. 3d 741, 749.)
Therefore, the trial court correctly sustained the Association’s demurrer on immunity
grounds.6 (Caldwell, supra, 10 Cal.4th at p. 989 [finding immunity at pleading stage].)
6
Because we conclude the trial court correctly sustained the Association’s
demurrer on Government Claims Act and immunity grounds, we need not consider
whether plaintiffs alleged legally cognizable damages.
14
C. Plaintiffs’ Claim Against Buck and Loeb
1. Aiding and Abetting Liability
A defendant is liable for aiding and abetting another in the commission of an
intentional tort, including a breach of fiduciary duty, if the defendant “ ‘ “knows the
other’s conduct constitutes a breach of duty and gives substantial assistance or
encouragement to the other to so act.” ’ ” (Casey v. U.S. Bank Nat. Assn. (2005) 127
Cal. App. 4th 1138, 1144 (Casey).) The elements of a claim for aiding and abetting a
breach of fiduciary duty are: (1) a third party’s breach of fiduciary duties owed to
plaintiff; (2) defendant’s actual knowledge of that breach of fiduciary duties; (3)
substantial assistance or encouragement by defendant to the third party’s breach; and (4)
defendant’s conduct was a substantial factor in causing harm to plaintiff. (Judicial
Council of Cal. Civ. Jury Instns. (CACI) (2014) No. 3610; American Master Lease LLC
v. Idanta Partners, Ltd. (2014) 225 Cal. App. 4th 1451, 1478.) Some cases suggest a
complaint must allege a fifth element--that the aider and abettor had the specific intent to
facilitate the wrongful conduct. (Directions for Use of CACI No. 3610, p. 633, citing
Schulz v. Neovi Data Corp. (2007) 152 Cal. App. 4th 86, 95.)
2. Analysis
“[T]o analyze the sufficiency of [plaintiffs’] claim for aiding and abetting breach
of fiduciary duty, we must first ‘identify precisely the breach of fiduciary duty for which
[plaintiffs] seek[] to hold [Buck and Loeb] liable.’ ”7 (Casey, supra, 127 Cal.App.4th at
7
This is where the trial court went astray. It incorrectly identified the pertinent
breach of fiduciary duty as the Association’s failure to sue Buck and Loeb for
malpractice. The trial court then sustained Buck and Loeb’s demurrer based on the
principle that there can be no aiding and abetting liability absent the commission of an
underlying tort. While that certainly is the case (Richard B. LeVine, Inc. v. Higashi
(2005) 131 Cal. App. 4th 566, 574), that principle is not dispositive here. As discussed
above, plaintiffs do not allege Buck and Loeb aided and abetted the Association’s refusal
to sue Buck and Loeb. Accordingly, that plaintiffs failed to state a claim against the
Association based on that conduct has no bearing on their aiding and abetting claim
against Buck and Loeb.
15
p. 1149.) The asserted breach of fiduciary duty was the Association’s deliberate
underfunding of the pension plan. To state an aiding and abetting claim against Buck and
Loeb based on that primary wrong, plaintiffs must allege: (1) the Association’s schemes
to underfund the pension plan breached fiduciary duties it owed to plaintiffs; (2) Buck
and Loeb knew about the Association’s conduct and resulting breaches; (3) Buck and
Loeb provided substantial assistance or encouragement to the Association in committing
those breaches; and (4) Buck and Loeb’s conduct was a substantial factor in harming
plaintiffs. (CACI No. 3610.) As noted, “[s]ome cases seem to hold that in addition . . . a
complaint must allege the aider and abettor had the specific intent to facilitate the
wrongful conduct.” (Directions for Use of CACI No. 3610, p. 633, citing Schulz v. Neovi
Data Corp., supra, 152 Cal.App.4th at p. 95.)
The fifth amended complaint adequately alleged each of the requisite elements of
a claim for aiding and abetting a breach of fiduciary duty. First, it alleged that the
Association breached its fiduciary duties to plaintiffs by (1) using an “unrealistic and
imprudent” assumed actuarial rate of return of 8.16 percent; (2) adopting a schedule of
negative amortization of the system’s unfunded liability for earned benefits; (3)
intentionally managing the pension fund to ensure that it was always less than 90 percent
funded, thereby avoiding certain employer contributions (i.e., cost-of-living adjustments);
(4) using pension fund assets to substitute for the County’s employer contributions; and
(5) transferring assets from nonvaluation reserves to valuation reserves. Second, the
complaint alleged that Buck and Loeb knew of that conduct and that the Association was
breaching its fiduciary duties to plaintiffs. Third, plaintiffs alleged that Buck and Loeb
gave “substantial encouragement and assistance” to the Association’s breach by (1)
failing to disclose and warn about the consequences of the Association’s practices, (2)
verifying the actuarial soundness of those practices, (3) and knowingly and falsely
representing to trust fund beneficiaries at public meetings between 2005 and 2009 that
the Association’s practices were actuarially sound. Fourth, the complaint alleges Buck
16
and Loeb’s conduct proximately caused economic injury to the pension trust fund.
With respect to the fourth element, Buck and Loeb argue that, as trust
beneficiaries, plaintiffs lack standing to sue for harm to the pension trust fund itself. Our
colleagues in the First District squarely rejected an analogous argument in City of
Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal. App. 4th 445.
As the court explained in that case, generally “the trustee . . . is the real party in interest
with legal title to any cause of action on behalf of or in the name of the trust.” (Id. at p.
461.) However, “trust beneficiaries retain the right to bring claims directly against third
parties who have . . . aided or abetted such a breach [of trust] by the trustee.” (Id. at p.
460.) That is precisely what plaintiffs do here. Thus, Buck and Loeb’s “reliance on the
doctrine of the law of trusts that the trustee of an express trust is the real party in interest
with legal title to any cause of action on behalf of or in the name of the trust, and a trust
beneficiary has no legal title or ownership interest in the trust assets” is misplaced. (Id. at
pp. 461-462; see also Wolf v. Mitchell, Silberberg & Knupp (1999) 76 Cal. App. 4th 1030,
1040.)
As noted, some cases suggest that a plaintiff also must plead specific intent to
facilitate the underlying tort. (Gerard v. Ross (1988) 204 Cal. App. 3d 968, 983 [“A
defendant can be held liable as [an aider and abettor] . . . only if he or she knew that a tort
had been, or was to be, committed, and acted with the intent of facilitating the
commission of that tort.”]; Howard v. Superior Court (1992) 2 Cal. App. 4th 745, 749
[“aiding and abetting . . . necessarily requires a defendant to reach a conscious decision to
participate in tortious activity for the purpose of assisting another in performing a
wrongful act”]; cf. In re First Alliance Mortg. Co. (9th Cir. 2006) 471 F.3d 977, 993
[“aiding and abetting liability under California law, as applied by the California state
courts, requires a finding of actual knowledge, not specific intent”].) We need not decide
whether specific intent is a required element because, read liberally, the fifth amended
complaint alleges that Buck and Loeb intended to assist the Association in breaching its
17
fiduciary duties. In particular, plaintiffs allege that, with knowledge of the Association’s
breaches, Buck and Loeb “gave substantial encouragement and assistance to [the
Association] to breach its fiduciary duties.” (Italics added.) Fairly read, that allegation
indicates intent to participate in tortious activity.
Buck and Loeb’s contention that plaintiffs failed to state a claim against them
because Buck and Loeb owe no fiduciary duties to plaintiffs fails to carry the day. That
argument ignores the distinction between liability based on conspiracy to commit a tort
and liability for aiding and abetting a tort. “[T]ort liability arising from conspiracy
presupposes that the coconspirator is legally capable of committing the tort, i.e., that he
or she owes a duty to plaintiff recognized by law and is potentially subject to liability for
breach of that duty.” (Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7
Cal. 4th 503, 511.) By contrast, “a defendant may be found liable for aiding and abetting
a breach of fiduciary duty even though the defendant owes no independent duty to the
plaintiff.” (Neilson v. Union Bank of California, N.A. (C.D. Cal. 2003) 290 F. Supp. 2d
1101, 1137; see also Casey, supra, 127 Cal.App.4th at p. 1145, fn. 2 [rejecting argument
that defendants could not be liable for aiding and abetting a breach of fiduciary duty
because they did not owe an independent fiduciary duty]; Berg & Berg Enterprises, LLC
v. Sherwood Partners, Inc. (2005) 131 Cal. App. 4th 802, 823, fn. 10 [“civil liability for
aiding and abetting the commission of a tort, which has no overlaid requirement of an
independent duty”].) For the foregoing reasons, the trial court erred in sustaining Buck
and Loeb’s demurrer to the fifth amended complaint.
III. DISPOSITION
The judgment of dismissal is reversed and the cause is remanded to the superior
court with directions to vacate its order sustaining defendants’ demurrers to the fifth
amended complaint without leave to amend and to enter a new order (1) sustaining the
Stanislaus County Employees Retirement Association’s demurrer without leave to amend
and (2) overruling Buck Consultants LLC and Harold Loeb’s demurrer. The Stanislaus
18
County Employees Retirement Association shall recover its costs on appeal from
plaintiffs. Plaintiffs shall recover the costs attributable to their appeal from the order
sustaining Buck and Loeb’s demurrer only from Buck and Loeb. (Cal. Rules of Court,
rule 8.278(a)(3).)
19
Premo, J.
WE CONCUR:
Rushing, P.J.
Elia, J.
Nasrawi et al. v. Buck Consultants LLC et al.
H038894
Trial Court: Santa Clara County Superior Court
Superior Court No. 1-11-CV203324
Trial Judge: Hon. Aaron Persky
Counsel for Plaintiff/Appellant: Law Offices of Michael A. Conger
Dennis Nasrawi, Michael O’Neal, Michael A. Conger
Rhonda Biesemeier
Richard H. Benes
Counsel for Defendant/Respondent: Damrell, Nelson, Schrimp, Pallios,
Stanislaus County Employees’ Pacher & Silva
Retirement Association Fred A. Silva
Kirin K. Virk
Counsel for Defendants/Respondents: Buchalter Nemer
Buck Consultants LLC, Peter G. Bertrand
Harold Loeb Michael N. Westheimer
Cynthia Fair Moir
Nasrawi et al. v. Buck Consultants LLC et al.
H038894