ERISA Litigation & Benefits Blog

Can Benefit Plans File for Bankruptcy?

By Susan J. Luken on Posted in State and Local Plans

Ada Dewey at Pension Dialogue asked the question “Can a Pension Plan File for Bankruptcy?” The question was prompted by the news last month that the Northern Mariana Islands Retirement Fund had filed for protection under Chapter 11 of the Bankruptcy Code. The article raises excellent questions about the status of a plan (versus its governmental or corporate sponsor) as a debtor in bankruptcy, and suggests that, prior to the Northern Mariana Fund, no plan had made such a filing.

In 2010, however, the Millennium Multiple Employer Welfare Benefit Plan filed for Chapter 11 in the United States Bankruptcy Court for the Western District of Oklahoma. After being converted to Chapter 7, the matter was successfully concluded with a Third Amended Plan of Liquidation entered in 2011. The Northern Mariana Fund’s case faces challenges from the U.S. Trustee and others regarding its status as a “person” under the Bankruptcy Code; while such objections were raised in Millennium, it does not appear that they were pursued to a hearing.

State and local governments continue to be pressed by their obligations to their employees’ pension and other benefit plans. While municipalities and other entities that qualify to file for bankruptcy continue to ponder the possibility, it is likely that other plans may also consider this route. It remains to be seen whether the Millennium case was a one-off, or whether other plans may have success in the bankruptcy courts.

Third Circuit Adopts “Ordinary Meaning” Approach To Define Plan Assets

By Nicole S. Magaline on Posted in Fiduciary Status, Plan Assets

On March 27, 2012 the Third Circuit Court of Appeals vacated a judgment by the District Court for the District of New Jersey as the District Court failed to properly evaluate whether the defendants were fiduciaries to a health benefit plan governed by the Employee Retirement Income Security Act (ERISA). Secretary of Labor v. Doyle, et al., Case No. 10-3598 (3d Cir. April 27, 2011). The test endorsed by the Third Circuit to determine defendants’ fiduciary status was whether payments collected from the employers for the multi-employer welfare arrangement (MEWA) health benefit plan were “plan assets.”

Case Background

In April 2005, the Secretary of Labor brought suit against defendants James Doyle, Cynthia Holloway, and others, arising out of their alleged breach of fiduciary duties to the Professional Industrial Trade Workers Union Health & Welfare Fund (Fund). The Fund had established a health benefit plan that was a typical MEWA governed by ERISA. Two companies encouraged small businesses, through a third marketing company (collectively, “Companies”), to obtain health benefits for their employees by enrolling them in the Fund despite the fact that these employees never joined the union. This “scheme” was marketed to multiple businesses and required these businesses to make benefit payments to the Companies. The Companies retained a portion of the payments and remitted the remainder to claims administrators established by the Fund.

The Secretary alleged that defendants—owners of the Companies, as well as the trustee of the Fund—breached their fiduciary duties by using assets of the Fund for purposes other than defraying reasonable plan expenses for the benefit of plan participants, improperly using plan assets for their own benefit, and failing to detect and prevent the improper Fund diversions. After a bench trial, the District Court found that the Secretary of Labor had failed to prove that the defendants had breached their fiduciary duties to the Fund, focusing on whether the Secretary had established that necessary contributions had not been made to the Fund or that the Fund had unpaid claims when it closed in May 2003. The Secretary, on the other hand, argued that the funds collected by the Companies were “plan assets” governed by ERISA. The District Court did not make any findings of fact or conclusions of law as to which of the monies received by the Companies—if any—were plan assets.

The Third Circuit provided guidance to the District Court on how to identify “plan assets” under ERISA. The court started its analysis with the definition of “plan assets” provided in 29 U.S.C. § 1002(42) which provides, “the term ‘plan assets’ means plan assets as defined by such regulations as the Secretary [of Labor] may prescribe . . .” In order to ascribe the meaning of “plan assets” within the context of the instant facts, the Third Circuit turned to the Tenth Circuit’s opinion in In re Luna, 406 F.3d 1192, 1199 (10th Cir. 2005) which recommended that the term “plan assets” be given its “ordinary meaning,” and “should be construed to refer to property owned by an ERISA plan.” Doyle at pg. 36. This “ordinary meaning” approach considers whether “the person or entity holding the asset has an ownership interest in a given thing, whether tangible or intangible.” In re Luna, 406 F.3d at 1199.

The “Ordinary Meaning” Approach

The Third Circuit rejected the “functional approach” to defining plan assets adopted by the Ninth Circuit which considers “whether the item in question may be used to the benefit (financial or otherwise) of the fiduciary at the expense of plan participants or beneficiaries.” Acosta v. Pac. Enters., 950 F.2d 611, 620 (9th Cir. 1991).

The Third Circuit found further support for its adoption of the “ordinary meaning” approach from a 1993 Department of Labor Advisory Opinion which stated, “the assets of a plan generally are to be identified on the basis of ordinary notions of property rights under non-ERISA law. In general, the assets of a welfare plan would include any property, tangible or intangible, in which the plan has a beneficial ownership interest.” Department of Labor, Advisory Op. No. 93-14A, 1993 WL 188473 *4 (May 5, 1993). The Third Circuit also found support for the “ordinary meaning” approach in the Eight Circuit’s decision of Kalda v. Sioux Valley Physician Partners, Inc., 481 F.3d 639, 647 (8th Cir. 2007) as well as the United States Supreme Court’s decision in Jackson v. United States, 129 S. Ct. 1307 (2009).

Step-by-Step Analysis of “Plan Assets”

In order to perform the “plan assets” analysis, the Third Circuit laid out the basic analytical steps. Step one is to “consult the documents establishing and governing the plan.” Doyle at pg. 37. Step two is to “consult contracts to which the plan is a party or other documents establishing the rights of the plan.” Id. at pgs. 37-38. The Third Circuit then remanded the case back to the District Court for further proceedings consistent with its opinion.

ACA SCORECARD: Justices Weigh In On ACA Individual Mandate

By Diane M. Soubly on Posted in Federal Health Care Reform

Health Care Reform ScorecardAfter an unprecedented five hours of oral argument on the Affordable Care Act (ACA), we now wait for the Supreme Court to address the future of the individual mandate. A decision in expected in late June.

Observations: It is always difficult to predict a likely decision from questions asked by the Justices in oral argument. However, Justices Kennedy and Roberts may have signaled that their votes are still “in play.” They vigorously questioned both sides regarding the constitutionality of the mandate, which requires every American (with limited exceptions) who lacks health care benefits through an employer to purchase health care coverage or to pay a penalty for not doing so. This “shared responsibility” requirement becomes effective in 2014.

Anti-Injunction Act No Impediment to Ruling

On the first day of oral argument, the Justices telegraphed that they believe they can decide the constitutionality of the mandate, which some commentators have labeled ACA’s most unpopular provision. The Justices explored various exceptions to the Anti-Injunction Act (AIA), a federal act forbidding courts from enjoining a tax before it is assessed and collected. In the mandate’s case, the penalty collected by the IRS would not arise until after the mandate takes effect in 2014. At oral argument the Justices explored whether they could find an equitable exception or a “narrow circumstances” exception to the AIA, and whether the mandate more resembled a penalty than a tax so that the act did not apply at all.

Constitutionality

On the second day, the oral argument addressed the mandate’s constitutionality. The Government defended the mandate as a constitutional exercise of Congress’ power under the Commerce Clause, the Necessary & Proper Clause, and the Taxing Clause of the Federal Constitution. Justices Kagan, Sottomayor, Ginsberg, and Breyer zeroed in on the concession by the mandate’s opponents that no constitutional challenge would have arisen if the mandate had attached only when an individual needed health care, as in the emergency room. Noting that the issue then became one of timing and not constitutionality, these Justices questioned the availability and prohibitive cost of health care insurance at that late juncture. They seemed willing to defer to the legislative judgment that earlier timing (requiring healthy individuals to secure coverage before they actually need health care services) would also inspire preventative care and reduce adverse selection, both of which would increase health care affordability.

The mandate’s opponents vigorously argued that, for the first time in the nation’s history, the Federal Government impermissibly sought to force Americans to buy a product in the private market through the mandate. Questioning the Government, Justices Scalia, Alito, Kennedy, and Roberts explored whether the Federal Constitution permitted Congress to create interstate commerce in order to regulate it. The Solicitor General responded that an interstate health care market already existed, and that everyone eventually enters that market for care; thus, Congress could, consistent with the Federal Constitution, regulate that market of spiraling health care costs by requiring Americans to enter the market before the point of actual need.

Severability

On the last day of argument, the Justices struggled with the issue of severability, if they were to find the mandate unconstitutional. They expressed concern that parts of ACA have already become effective, and that other parts had nothing to do with the mandate. Perhaps to make a finding of unconstitutionality less palatable, the Government argued that ACA’s most popular provision (the “no pre-existing condition exclusion” provision) must fall with the mandate, along with the community rating provision. Opponents of the mandate argued that the entire act must fall if the mandate falls. Several of the Justices expressed concern that Congress was better equipped than they to ascertain what should remain in ACA if the mandate were found unconstitutional, a clear signal that they might send ACA back to Congress for redrafting if the mandate falls.

No Standing to Sue: Employer Keeps Retiree Benefits

By Adam Diederich on Posted in Jurisdiction, Retiree Benefits

A federal court in Michigan recently announced that retirees lacked standing to bring a claim against their former employer when the employer announced its plan to terminate their health care benefits but later, while suit was pending, declared that the benefits would not be terminated. In Hawkins v. Howden Buffalo Inc., 05-CV-74437, 2012 WL 1079557 (E.D. Mich. Mar. 30, 2012), the court held that it lacked jurisdiction to hear the retirees’ claim because the retirees did not suffer an “actual injury” and, consequently, did not have constitutional standing.

Union retirees brought suit against their former employer, Howden Buffalo, Inc. (Howden), in November 2005, a few months after Howden announced its plans to terminate their health care benefits effective January 1, 2006. In February 2006, with the benefits still intact, Howden informed the retirees that it would not terminate their health care coverage. Howden also disclaimed any intention to terminate retiree health care coverage in the future. Nevertheless, the retirees continued their suit, arguing that Howden had violated both ERISA and their collective bargaining agreements, and seeking to clarify their rights to future health care coverage.

Under ERISA, 29 U.S.C. § 1132(a)(1)(B), a plan participant or beneficiary may bring a claim to “clarify his rights to future benefits under the terms of the plan” and the court may enter a declaratory judgment regarding the plaintiff’s entitlement to those benefits. Similarly, under Section 301 of the Labor Management Relations Act (LMRA), 29 U.S.C. § 185, retirees (as former employees) may bring claims for rights vested under a collective bargaining agreement. However, a plaintiff must have standing under Article III of the United States Constitution in order for a court to acquire jurisdiction over a dispute concerning those rights.

Article III gives federal courts authority to exercise judicial power over “cases” or “controversies.” If an actual case or controversy exists, the plaintiff has standing and the court is not denied jurisdiction on that basis. A plaintiff has standing if it can demonstrate the presence of the following three elements: (1) a concrete and particularized “injury in fact” that is actual or imminent; (2) a causal connection between the defendant’s actions and the injury; and (3) a likelihood that a favorable decision will redress the injury.

The Hawkins court held that it lacked jurisdiction to address the merits of the retirees’ claim because they lacked standing to bring the claim after Howden rescinded its intention to terminate their health care coverage. The court reasoned that the retirees did not suffer an injury in fact because Howden did not terminate their benefits, and because they continued to receive the same benefits they had received before Howden announced its intention to terminate their benefits. The court concluded that any harm to the retirees was merely hypothetical, and that any decision it reached on the merits would have been an unconstitutional advisory opinion. Therefore, the court dismissed the retirees’ claim without prejudice, noting that they could re-file their claim if and when Howden actually terminated their benefits.

Observations: Probably concerned that any statute of limitations had begun to run when Howden announced its intent in August 2005 to terminate retiree benefits some four months later, plaintiffs’ counsel (a well-respected “go-to” counsel for the UAW who has faced notice issues before) filed the retirees’ lawsuit in November of 2005. When the employer rescinded its decision and continued the benefits, Howden sought dismissal of the lawsuit. While state law controls the duration of the statute of limitations for retiree benefit claims under ERISA §502(a)(1)(B) and LMRA §301, federal law controls the date of a claim’s accrual.

In the four years between the filing of the motion and the court’s decision, the Sixth Circuit issued a second opinion in Winnett v. Caterpillar, Inc., 606 F.3d 404 (6th Cir. 2010), having previously declined in its first opinion to extend the Yard-Man presumption of vesting of retiree benefits to active employees who are “future retirees.” In that second opinion, the Sixth Circuit found plaintiffs time-barred because the statute of limitations had begun to run from notice of the employer’s intent to modify retiree benefits in the future, announced in SPDs more than six years earlier.

Moreover, if the retirees’ ERISA and LMRA claims accrued in August of 2005, the applicable state statutes of limitations had run on those claims before the court issued the dismissal without prejudice, i.e., in August of 2011. An original complaint, if dismissed without prejudice, does not operate to toll the limitations statute or to extend it.

Second Circuit Vacates Class Certification of Trustees of Over 24,000 Qualified Plans

By Jeannice D. Williams on Posted in Class Certification

Following Wal-Mart Stores, Inc. v. Dukes, 131, S.Ct. 2541 (2011), the Second Circuit has vacated a class certification order certifying a putative class of trustees of over 24,000 qualified plans that had collected revenue sharing payments from mutual funds selected by alleged fiduciary Nationwide Life Insurance Co. (Nationwide), from which the plans and individual annuity holders had made investment choices. Nationwide Life Ins. Co. v. Haddock, No. 10-4237, at 3 (2d Cir., Feb.6, 2012). The appellate court explained that it had vacated the certification order because Wal-Mart “teaches that Rule 23(b)(2) does not authorize class certification when – despite the suitability of generalized injunctive or declaratory relief – ‘each class member would [also] be entitled to an individualized award of monetary damages.’” Id. at 4 (citing Wal-Mart, 131 S.Ct. at 2557).

The plaintiffs sought (1) a declaratory judgment that Nationwide’s receipt of the revenue sharing payments violated ERISA, (2) an injunction prohibiting Nationwide from receiving such payments, and (3) disgorgement of the payments already received by Nationwide. Id. at 3. Although plaintiffs moved for class certification under both Rules 23(b)(2) and 23(b)(3), the district court had certified the class under Rule 23(b)(2) only. Id. at 5.

After affirming that the trustee plaintiffs had sustained sufficient injury-in-fact to demonstrate constitutional standing, the Second Circuit acknowledged that Wal-Mart had changed the landscape for Rule 23(b)(2) class certifications: “The decision in Wal-Mart significantly altered the applicable analysis for class certification under Rule 23(b)(2).” Id. at 4.

Before Wal-Mart, issued when this case was pending on appeal, the district court had applied a “predominance” test under Second Circuit precedent in determining to certify the Rule 23(b)(2) class. See: Robinson v. Metro-North Commuter Railroad Co., 267 F.3d 147 (2d Cir. 2001). Id. at 5. That pre-Wal-Mart test balanced the relative importance of claims for injunctive or declaratory relief with that of associated claims for monetary relief, finding Rule 23(b)(2) adjudication appropriate if claims for general injunctive or declaratory relief predominated over those for individualized monetary relief. Id.

After Wal-Mart, the Second Circuit reasoned that, if the plaintiffs ultimately succeeded in establishing Nationwide’s liability on the disgorgement issue, the district court would then need to determine the separate monetary recoveries to which each individual plaintiff would be entitled from the funds disgorged. Id. at 5. Thus, the court concluded that this process “would require the type of non-incidental, individualized proceedings for monetary awards that Wal-Mart rejected under Rule 23(b)(2).” Id. The court therefore vacated the class certification order under Rule 23(b)(2), but remanded the case for reconsideration of plaintiffs’ class certification motion under Rule 23(b)(3). Id. at 5-6.

Ninth Circuit Declines To Reform Plan or To Assess Surcharge After Amara

By Christopher J. Rillo and Diane M. Soubly on Posted in Equitable Remedies, Summary Plan Descriptions

In Skinner v. Northrop Grumman Retirement Plan B, 2012 US App LEXIS 5517, No. 10-55161 (9th Cir. Mar. 16, 2012), the Ninth Circuit revisited a challenge to the “annuity equivalent offset” that plan administrators of the Northrop Grumman Retirement Plan B (the Plan) incorporated as part of the formula for calculating annual benefit amounts based upon a participant’s age at retirement. Plaintiffs appealed twice from grants of summary judgment in favor of the Plan and its administrative committee (the Committee). Because plaintiffs premised their theory of recovery upon language in the summary plan descriptions (SPDs) and in retirement packets that they received in anticipation of retirement, the Ninth Circuit deferred argument and submission of the second appeal until the Supreme Court decision addressing the interplay of plan documents and SPDs in CIGNA Corp. v. Amara, 131 S.Ct. 1866 (2011).

On first appeal, the Ninth Circuit reversed summary judgment, concluding that an ambiguity existed based on the SPDs issued in earlier years and the “plan master documents.” On second appeal, the appellate court recognized that, in Amara, the Supreme Court had “overruled, in relevant parts, our two prior decisions that had treated SPD language as if it were an enforceable part of the retirement plan.” The Ninth Circuit explained that the Supreme Court had clarified that SPDs provide information about a plan, but their statements do not constitute plan terms.

As the court noted, plaintiffs apparently recognized that Amara had foreclosed their principal theory of relief and so focused their appeal on equitable remedies available under ERISA §502(a)(3). 2012 US App LEXIS 5517 at *4. The Ninth Circuit acknowledged that the Supreme Court had addressed three possible equitable remedies “[i]n dictum” in Amara: estoppel, reformation and surcharge. Id. at *5.

Plaintiffs conceded that they presented no evidence of reliance on SPDs and thus did not rely upon an equitable estoppel theory. Id. Instead, they sought reformation and surcharge. The Ninth Circuit denied the availability of both remedies.

No Reformation after Amara:

Analyzing plaintiffs’ request for reformation under both trust and contract principles, the Ninth Circuit recognized that reformation is proper only in cases of fraud and mutual mistake. The court then reviewed each theory supporting reformation in turn. In light of deficiencies in plaintiffs’ proofs and the dissimilarity between the case they presented and the facts in Amara (there, the employer had intentionally misled its employees through SPDs), the court declined to reform the Plan to conform to the SPD.

Mistake Theory: Under the law of trusts, the court summarized, a court may reform a trust instrument to accord with the settlor’s intent if there is evidence that a mistake of fact or law affected the terms of the instrument and evidence of the settlor’s true intent. Id. at *6. Under the law of contracts, the court noted, a court may reform a contract to reflect the true intent of the parties only if both parties mistook the content or effect of the contract. Id. at *6-7. Even then, under federal rules of decision relating to contract reformation, a court may only reform the contract to capture the terms upon which the parties had a meeting of the minds. Id. (citations omitted). However, the court noted that plaintiffs lacked any evidentiary support of the authorship of the SPD or of its “capturing any intent at all, other than the intent to create an ‘accurate and comprehensive’ summary of [the Plan].” Id. at *7.

Fraud Theory: Under the law of trusts, the court summarized, a court may reform a trust to the extent that the trust is procured by wrongful conduct (including fraud) only if the conduct causes the settlor of the trust to act in a way that it would not have acted. Id. at *7-8. Under the law of contract, the party seeking reformation must have justifiably relied upon misrepresentations made by the other party as to the terms or effect of the contract. The court reasoned that mere inconsistency between the plan master document and the SPD did not evidence fraudulent inducement. Moreover, plaintiffs offered no evidence that the Plan’s terms were induced by fraud, duress or undue influence. The court also observed that the SPD was created after the Plan to explain its terms.

No Surcharge:

The court then rejected plaintiffs’ theory that the Committee had breached a fiduciary duty by failing to enforce the SPD instead of the Plan. Without discussing whether non-compliance with ERISA’s procedural requirements generally warrant a substantive remedy, which at least five federal circuits (including the Ninth on another occasion) have found not to be the case, this panel of the Ninth Circuit theorized that the Committee may have breached a duty to provide a sufficiently accurate and comprehensive SPD that reasonably apprised employees of their offsets and reductions in pension benefits. Nonetheless, the court found no basis for assessing a surcharge.

No Unjust Enrichment:

Although plaintiffs were seeking higher benefits unreduced by offset, the Ninth Circuit concluded that they had presented no evidence that the Committee (the plan fiduciary) gained any benefit by failing to ensure that participants received an accurate SPD.

No Compensatory Damages for Actual Harm:

Although a trustee who breaches a fiduciary duty can be liable for loss of value to the trust or profits that the trust would have accrued absent the breach, the court found that plaintiffs had not relied upon the SPDs. The court then rejected plaintiffs’ theory that “being deprived of their statutory right to an accurate SPD is a compensable harm” on the ground that it would impose upon plan administrators strict liability for every mistake in summary documents. Id. at 10-11.

Observations: This case demonstrates why no “rule of unintended consequences” should turn on mistaken language in an SPD or, for that matter, in a plan document. Despite the Supreme Court’s best intentions in Amara, its dicta may only confuse, rather than assist lower courts. As the Ninth Circuit appreciated, the equitable remedies identified in Amara should be limited to cases of outright lying. To confer substantive awards, under the guise of doing equity, of greater benefits than plan sponsors intended based upon mistakes in drafting will discourage plan sponsors from offering retirement benefits.

No Anti-Cutback Rule Violation When Purchaser Did Not Provide Separation Benefits Under Seller’s Plans

By Diane M. Soubly and Christopher J. Rillo on Posted in Anti-Cutback Rule

The Third Circuit has reversed a lower court decision that would have required Siemens Corporation (Siemens) to pay Permanent Job Separation (PJS) benefits created under Westinghouse Corporation’s (Westinghouse) retirement plans (the Plans) to former Westinghouse employees, even though Siemens had not assumed the Plans when it acquired Westinghouse’s power generation business unit. Shaver v. Siemens Corporation, Nos. 10-4147, 10-4279, 10-4791, and 10-4792 (3d Cir., Feb. 29, 2012). Members of the Schiff Hardin ERISA Litigation Team filed an amicus brief on behalf of three national trade associations (the American Benefits Council, the National Association of Manufacturers, and the Chamber of Commerce of the United States), which helped to persuade the Third Circuit that Siemens had not violated ERISA’s anti-cutback rule when it declined to provide PJS benefits to former Westinghouse employees.

In this high-stakes class action litigation, the lower court found that a “transitional plan” governed by ERISA arose during a 13-day period prior to the delayed closing date of the Asset Purchase Agreement (APA) between Siemens and Westinghouse. Although the parties to the APA had announced the asset purchase in 1997, it was not consummated until August 19, 1998, at which point 227 Westinghouse employees became Siemens employees (“legacy employees”). According to the lower court, Siemens had purportedly undertaken to provide the PJS benefits to the legacy employees. PJS benefits provided for payment of normal retirement benefits without actuarial reduction prior to normal retirement age, plus certain additional monthly supplements for certain eligible employees that continued after normal retirement age.

The lower court also found that Siemens had become a “plan sponsor” of the PJS benefits because it had undertaken in the APA to provide the “aggregate of benefits” to the legacy employees under “substantially identical” terms and conditions as those contained in the Westinghouse retirement plans, as if the employees had continued in Westinghouse’s employ.

The Westinghouse Plans were amended to sunset the PJS benefits as of the end of August 1998. The lower court apparently felt constrained by an earlier Third Circuit decision holding that the PJS benefits vested upon their creation, and that Westinghouse could not amend its plans to sunset the PJS benefit. The lower court concluded that Siemens had violated ERISA’s anti-cutback rule and its plan spin-off/merger rule by failing to pay the PJS benefits to the legacy employees.

On appeal, Siemens and its amici argued that the lower court’s decision essentially re-drew the APA and re-wrote the terms of Westinghouse’s ERISA-governed retirement plans. Siemens had expressly chosen not to assume the Westinghouse Plans, did not fall within the definition of “Employer” under the Plans, and did not act as “plan sponsor” during the so-called transitional period. The amici noted that American employers require flexibility in structuring benefit plans and business transactions, particularly in these difficult economic times as they seek to remain globally competitive. The amici also argued that, while ERISA protects benefits for which participants fulfill all conditions of eligibility, the statute does not preclude an employer from circumscribing such benefits when it creates them.

The Third Circuit determined that, even if a temporary transitional plan had existed during the 13 days when the legacy employees became Siemens employees but before the Westinghouse Plans discontinued the PJS benefit, Siemens did not fall within the definition of “Employer” under the Plans; and the Plans expressly prohibited the conferring of PJS benefits upon employees hired by into comparable employment by a subsequent unaffiliated employer. Because the legacy employees could not qualify for the benefits under the terms of the Plans, they could not demonstrate that Siemens had impermissibly reduced or eliminated “accrued benefits” under ERISA’s anti-cutback rule or its plan spin-off rule. Accordingly, the court reversed summary judgment in favor of the employees, and remanded with instructions to enter summary judgment in favor of Siemens.

Observation: The Third Circuit enforced the Plans as written, a core ERISA principle recently re-affirmed in Cigna Corp. v Amara, 131 S.Ct. 1866 (2011). The court also recognized that, while ERISA protects benefits for which participants fulfill all conditions of eligibility, the statute does not preclude an employer from circumscribing such benefits when it creates them.

The Schiff Hardin amicus brief and the Third Circuit’s opinion are also available on the Web sites of the American Benefits Council, the National Association of Manufacturers, and the National Litigation Center of The Chamber of Commerce of the United States.

Sixth Circuit Addresses Moench Presumption in Dicta and Reverses on Availability of ERISA §404(c) Defense

By Christopher J. Rillo, Diane M. Soubly, and Susan J. Luken on Posted in ERISA § 404(c), Fiduciary Breach

In an opinion containing extensive dicta, the Sixth Circuit affirmed a district court’s conclusion that plaintiffs had pled sufficient facts to overcome the Moench presumption of reasonableness, i.e., that fiduciaries investing plan assets in company stock have acted with the level of prudence required for such plans. Pfeil v. State Street Bank and Trust Co., No. 10-2302 (6th Cir., Feb. 22, 2012). Moreover, holding that ERISA 404(c) remains “inapplicable” at the pleadings stage and unavailable as a defense relating to fiduciary selection and monitoring of the menu of options available to plan participants, the Sixth Circuit reversed the lower court’s dismissal in favor of defendant.

Plaintiffs challenged the decision by State Street Bank and Trust Co. (State Street), acting as fiduciary of the General Motors Corporation’s 401(k) profit-sharing plans, to retain GM common stock as a plan asset after GM reported substantial losses in 2008 and announced in its third-quarter Form 10-Q in November of 2008 that its actuaries had expressed “substantial doubt” regarding GM’s “ability to continue as a going concern.” Notwithstanding these public disclosures, State Street did not divest the ESOP of GM stock until March of 2009. The plan documents required investment in GM common stock (although not as the plan’s default fund) unless, “in its discretion, using an abuse of discretion standard,” the independent fiduciary (State Street) determined “from reliable public information” that either (A) a “serious question” existed about GM’s “short-term viability as a going concern without resort to bankruptcy proceedings,” or (B) there would be “no possibility of recouping any substantial proceeds” from the sale of GM stock in bankruptcy proceedings.

The lower court found that plaintiffs had sufficiently pled facts to overcome the Moench presumption, and the Sixth Circuit affirmed. In doing so, the court recognized that it should follow the Twombly/Iqbal plausibility standard, i.e., that a complaint must “contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face” in order to survive a motion to dismiss.

Although the panel expressly admitted that it “need not decide” whether the Moench presumption applies at the motion to dismiss stage, it chose to reach down to address the issue in dicta. The panel then justified its extensive dicta discussion by announcing that it should provide direction to lower courts in the Sixth Circuit, some of whom had not applied the Moench presumption at the pleadings stage. However, many, if not most, of the lower court decisions cited by the court issued before the U.S. Supreme Court had disavowed the Conley v. Gibson “no-facts” standard for Rule 12(b)(6) motions to dismiss in favor of the Twombly/Iqbal plausibility standard.

The court seized upon a single word in its earlier decision in Kuper v.Iovenko, 66 F.3d 1447, 1459 (6th Cir. 1995), that an ESOP plaintiff could “rebut this presumption of reasonableness by showing that a prudent fiduciary acting under similar circumstances would have made a different investment decision.” (Emphasis supplied.) The court believed that the use of the word “showing” indicated an evidentiary presumption, but failed to appreciate that, precisely because Kuper came up for review after a bench trial, the Sixth Circuit in that case would perforce express the presumption in terms of a full evidentiary record. To leap, from the use of the Moench presumption as an evidentiary presumption on a full trial record, to the conclusion that the Moench presumption may never apply at the pleadings stage is an unwarranted extension of Kuper, and one incompatible with the Twombly/Iqbal plausibility standard.

Other federal circuits have applied the Moench presumption at the pleadings stage. See: In re Citigroup ERISA Litig., 662 F.3d 128, 129 (2d Cir. 2011) (discussed in our blog on 11/11/2011). The Sixth Circuit itself acknowledged in its extensive dicta discussion that the Second, Third, Fifth and Ninth Circuits have applied the presumption at the pleadings stage but distinguished those cases as turning upon a demonstration of “dire circumstances” or “imminent collapse” which the Kuper decision did not require. More persuasively, however, other circuits have reasoned that the use of a “dire circumstances” test strikes the proper balance between Congress’ encouragement of ESOPs through an exemption from the duty to diversity and a different standard of prudence and ERISA’s fiduciary duties. The Pfiel dicta ignores that balance.

In reversing the district court’s dismissal in favor of State Street, the Sixth Circuit concluded that the lower court had erroneously found that plaintiffs could not demonstrate that State Street had proximately caused their losses in light of plaintiffs’ ability to divest their GM stock on any given business day. Instead, the court held that a fiduciary must select and maintain only prudent investment options in an ERISA plan, and that the “safe harbor” of ERISA §404(c) does not apply at the pleadings stage. As the court recognized, ERISA specifies that the Department of Labor will define participant control over investments by regulation. ERISA §404(c)(1)(A). DOL regulations include over 25 requirements that a plan must meet before a fiduciary may invoke the ERISA §404(c) defense. 29 C.F.R. §2550.404c-1. Because State Street did not assert or prove that it had complied with the regulations, the court noted that the district court had no basis for assuming that the plans satisfied the regulations in order to invoke the defense.

Relying upon the DOL amicus brief, a statement in the preamble (rather than the regulation itself) of the DOL regulations, and proposed (but not adopted) amended text for the regulations, the Sixth Circuit found “relevant support” for its holding that the defense cannot shield a fiduciary from liability for improper selection and monitoring of plan investment choices. In so holding, it recognized that the Fifth Circuit has adopted the contrary view in Langbecker v. Elec. Data Sys. Corp., 476 F.3d 299, 309 (5th Cir. 2007). The court then opined that, even if it were to adopt the Fifth Circuit’s view, “State Street would only be able to raise the section 404(c) defense on an individual basis at some later stage of the case, such as the class certification stage, but not on a motion to dismiss.” The court offered no reasoning for that conclusion.

Observations: The Pfeil decision raises more questions than it resolves. The plaintiffs’ bar will seize upon the court’s statements in dicta and may claim that the “dire circumstances” standard does not apply in the Sixth Circuit, even though Kuper permits that standard. Plaintiffs may claim that the Moench presumption may not apply until trial. In addition, plaintiffs may argue, even in cases where plan participants have dozens of investment options and have received extensive education about the risks of investing in employer stock, that fiduciaries may not rely upon ERISA §404(c). Defendants may have difficulty convincing courts that the Sixth Circuit’s reliance upon statements in a DOL amicus brief (untested through federal APA procedures), preamble observations, and amendments to regulations not yet adopted through such procedures led to its erroneous conclusion.