2nd Circuit Reopens Prohibited Transaction Claim Against Northeast Grocery

The U.S. 2nd Circuit Court of Appeals has rejuvenated part of a lawsuit alleging that Northeast Grocery Inc. mishandled its workers’ 401(k) retirement plan, deciding that certain claims must be reexamined.

In a summary order issued Monday, a three-judge panel affirmed most of the U.S. District Court for the Northern District of New York’s dismissal of a complaint brought by plan participants, but vacated portions of the decision tied to alleged prohibited transactions, citing the Supreme Court’s April decision in Cunningham v. Cornell University.

The case, Collins v. Northeast Grocery, Inc., centers on claims of mismanagement of the company’s 401(k) savings plan in violation of the Employee Retirement Income Security Act.

Background of the Case

Plaintiffs Gail Collins, Dean DeVito, Michael Lamoureux and Scott Lobdell filed the complaint in January 2024 on behalf of themselves and similarly situated plan participants, alleging that the company and the plan’s administrative committee breached fiduciary duties. They claimed the defendants imprudently selected and monitored investment options, failed to control recordkeeping and advisory fees and allowed revenue-sharing arrangements that resulted in excessive compensation to service providers.

The Northern District of New York dismissed the complaint in August 2024, citing both lack of standing for certain claims and a failure to state a claim for others. It also denied the plaintiffs the opportunity to amend the complaint, leading them to appeal to the 2nd Circuit.

Appellate Court Findings

The 2nd Circuit agreed with the district court that most of the plaintiffs’ seven claims lacked sufficient factual allegations to support breaches of prudence or loyalty. The court held that the comparisons offered by the plaintiffs to show underperformance of certain funds were not “meaningful benchmarks” and that allegations of excessive fees lacked detail about services provided or comparable costs in similar plans.

However, the panel vacated the dismissal of the fifth count, which alleged that the committee’s use of revenue-sharing arrangements caused the plan to engage in prohibited transactions under ERISA. The appeals court cited the U.S. Supreme Court’s recent decision in Cunningham v. Cornell, which clarified that plaintiffs need only allege that a fiduciary engaged in a prohibited transaction, not prove reasonableness of their claim at the pleading stage. On the basis of that precedent—established after the district court’s ruling—the appeals court sent the issue back for further consideration.

Several industry experts have argued that the Supreme Court’s decision would lead to a flurry of litigation, since the decision lowers the bar a plaintiff must meet to survive a motion to dismiss in a prohibited transaction complaint. Jerry Schlichter, who represents the plaintiffs in the Cornell case, previously told PLANSPONSOR that the Supreme Court’s standard has already been applicable practice in the jurisdiction of the 8th Circuit Court of Appeals for about a decade. The 9th Circuit Court has also upheld this interpretation of the law.

In Collins v. Northeast Grocery, the 2nd Circuit also vacated dismissal of the complaint’s seventh count, which alleged breach by omission tied to the same prohibited transactions. The dismissals of other claims, including co-fiduciary liability, breach of duty to monitor and allegations under ERISA for self-dealing, were upheld.

The case will return to the Northern District of New York for reconsideration of the prohibited transaction claims, with the Supreme Court’s Cunningham ruling available as precedent. The rest of the plaintiffs’ claims remain dismissed, with the appellate court finding no error in the denial of leave to amend the complaint.

The Sharman Law Firm represents the plaintiffs in Collins v. Northeast Grocery, while Harter Secrest & Emery LLP represents the defendants.

The Northeast Grocery 401(k) plan held nearly $491.5 million in assets with 2,230 plan participants in 2023, according to its most recent Form 5500.