Collins v. Northeast Grocery, Inc.: Second Circuit Implements Cunningham and Lowers the Pleading Bar for ERISA §1106(a) Prohibited-Transaction Claims

1. Introduction

On 18 August 2025 the United States Court of Appeals for the Second Circuit issued a Summary Order in Collins v. Northeast Grocery, Inc., No. 24-2339-cv, partially affirming and partially vacating a district-court dismissal of a putative class action brought under the Employee Retirement Income Security Act of 1974 (ERISA).

Four participants in the Northeast Grocery, Inc. 401(k) Savings Plan alleged that the plan sponsor (Northeast Grocery), the plan’s Administrative Committee, and unidentified committee members mismanaged the plan. Their seven-count complaint asserted breaches of the fiduciary duties of prudence and loyalty, prohibited transactions, co-fiduciary liability, failure to monitor, and breach by omission. The Northern District of New York dismissed the action in its entirety—partly for lack of standing and partly for failure to state a claim—and denied leave to amend.

The Second Circuit:

• Affirmed dismissal of the prudence, loyalty, excessive-fee, co-fiduciary, and monitoring claims;
• Vacated dismissal of the §1106(a) prohibited-transaction claim and the derivative breach-by-omission claim; and
• Remanded for further proceedings, principally because the Supreme Court’s recent decision in Cunningham v. Cornell University, 145 S. Ct. 1020 (2025) changed the applicable pleading standard for ERISA prohibited-transaction claims.

2. Summary of the Judgment

Applying a de novo review of the Rule 12(b)(6) dismissal, the panel held:

• Imprudence and Excessive-Fee Theories (Counts 1 & 2): The complaint failed to allege “meaningful benchmarks” for performance- and fee-based comparisons, relied too heavily on hindsight, and was devoid of facts showing excessive fees relative to services rendered. Dismissal affirmed.
• Co-fiduciary Liability & Duty to Monitor (Counts 3 & 4): These derivative claims necessarily failed because the underlying breaches were not plausibly pled. Dismissal affirmed.
• Prohibited Transactions (Count 5): The district court applied the (now overruled) Second Circuit rule requiring plaintiffs to plead that compensation to a “party in interest” was “unreasonable” or services “unnecessary.” In light of Cunningham, which recasts “reasonable compensation” as an affirmative defense, the dismissal was vacated.
• Self-dealing under §1106(b) (Count 6): Conclusory assertions regarding revenue-sharing kickbacks were insufficient. Dismissal affirmed.
• Breach by Omission (Count 7): Because it was derivative of Count 5, the dismissal was vacated and remanded.
• Leave to Amend: The cursory, unexplained request in opposition papers did not preserve the right to amend. Denial affirmed.

3. Analysis

3.1 Precedents Cited and Their Influence

• Ashcroft v. Iqbal, 556 U.S. 662 (2009) – foundational plausibility standard applied throughout.
• PBGC v. Morgan Stanley, 712 F.3d 705 (2d Cir. 2013) – warned against hindsight pleading; used to reject performance-based imprudence theories.
• Meiners v. Wells Fargo, 898 F.3d 820 (8th Cir. 2018) & Singh v. Deloitte, 123 F.4th 88 (2d Cir. 2024) – “meaningful benchmark” requirement adopted to test fee and performance comparators.
• Tibble v. Edison Int’l, 575 U.S. 523 (2015) – reaffirmed the fiduciary’s continuing duty to monitor investments; plaintiffs relied on it but failed to allege facts showing breach.
• Haley v. TIAA, 54 F.4th 115 (2d Cir. 2022) & Harris Trust v. Salomon Smith Barney, 530 U.S. 238 (2000) – established the categorical nature of §1106(a) and the “party in interest” concept.
• Cunningham v. Cornell University, 86 F.4th 961 (2d Cir. 2023), rev’d, 145 S. Ct. 1020 (2025) – original (now superseded) rule that reasonableness is part of plaintiff’s burden.
• Cunningham v. Cornell University, 145 S. Ct. 1020 (2025) – new Supreme Court precedent holding that “reasonable compensation” is an affirmative defense; pivotal to the Second Circuit’s vacatur.

3.2 The Court’s Legal Reasoning

1. Pleading Deficiencies as to Prudence & Fees.
   The panel applied the “meaningful benchmark” doctrine, requiring plaintiffs to supply factual material showing that comparator funds or fee schedules are genuinely comparable in asset class, investment strategy, and services. Because plaintiffs simply picked cheaper or better-performing funds post-hoc, the allegations were labeled “conclusory.”
2. Revenue-Sharing Allegations.
   Revenue sharing is not per se unlawful. Without facts distinguishing ordinary record-keeping compensation from disguised kickbacks, the court declined to infer self-dealing.
3. Prohibited Transactions and Cunningham.
   After inferring that Fidelity and CapFinancial received direct and indirect compensation from plan assets (via revenue sharing), the court reassessed Count 5 under the Supreme Court’s fresh guidance. Because plaintiffs pled a “furnishing of services between the plan and a party in interest,” they survived Rule 12(b)(6); whether the exemption for “reasonable” fees applies is now defendants’ burden.
4. Derivative Claims.
   Co-fiduciary and monitoring counts failed in the absence of a plausibly pled underlying breach—illustrating the interdependence of ERISA fiduciary claims.
5. Leave to Amend.
   Reaffirming circuit practice, a perfunctory, unexplained request to amend in briefing is inadequate, especially when plaintiffs cannot articulate on appeal how amendment would cure defects.

3.3 Potential Impact

a) National Pleading Standard Shift. By explicitly following the Supreme Court’s Cunningham decision, the Second Circuit becomes the first post-Cunningham appellate court to hold that plaintiffs need only allege the existence of a transaction with a “party in interest.” The “unreasonable compensation” and “unnecessary service” showings are now relegated to affirmative defenses, lowering plaintiffs’ initial hurdle.

b) Increased Litigation & Discovery Pressure. Fiduciaries can expect more §1106(a) claims to survive motions to dismiss, propelling cases into costly discovery focused on fee reasonableness and service necessity.

c) Compliance and Plan-Design Adjustments. Plan sponsors may revisit revenue-sharing arrangements, institute competitive bidding, and more thoroughly document fee-reasonableness analyses to prepare affirmative defenses.

d) Continued Rigor for Prudence & Fee Allegations. The decision simultaneously underscores that conclusory performance or fee comparisons will not suffice; meaningful benchmarks remain mandatory for §1104 prudence claims.

4. Complex Concepts Simplified

• ERISA §1104 Duty of Prudence: Fiduciaries must act like knowledgeable investors, using care and diligence based on information available when decisions are made—no “Monday-morning quarterbacking.”
• ERISA §1106(a) Prohibited Transactions: Certain dealings between the plan and a “party in interest” (e.g., recordkeepers, investment advisers) are barred unless an exemption applies. Plaintiffs now need only plead the transaction; reasonableness is defendants’ burden to prove later.
• Revenue Sharing: A common practice where mutual-fund providers rebate part of their fees to recordkeepers or advisers, lowering or eliminating direct billing. Lawful if overall compensation is reasonable.
• Meaningful Benchmark: A comparator investment or fee schedule similar in strategy, risk, and services, which allows a court to infer unreasonable performance or cost.
• Rule 12(b)(6): Federal rule allowing dismissal when a complaint fails to state a plausible claim for relief on its face.
• Affirmative Defense: A legal defense defendants must raise and prove (e.g., that fees were “reasonable” under §1108(b)(2)).

5. Conclusion

Collins v. Northeast Grocery, Inc. is notable less for what it holds on prudence (where plaintiffs lost) than for what it heralds on prohibited transactions. By implementing the Supreme Court’s newly minted Cunningham standard, the Second Circuit has:

• Lowered the threshold for plaintiffs to survive dismissal on §1106(a) claims, signaling a plaintiff-friendly shift;
• Left intact a robust requirement for detailed, benchmark-driven allegations when challenging investment performance or fees under §1104; and
• Confirmed that perfunctory requests to amend will not rescue a deficient complaint.

Going forward, fiduciaries operating within the Second Circuit must prepare for increased scrutiny of service-provider relationships while maintaining rigorous processes—and documentation—around investment selection, monitoring, and fee review. Conversely, plaintiffs should heed the court’s reminder that meaningful comparators and concrete facts remain essential when alleging excessive fees or imprudence. The combined effect is a clearer, more nuanced roadmap for ERISA litigation post-Cunningham.