ERISA & Employee Benefits Litigation Blog

7th Circuit: One Step Closer to Gutting Stock Drop Liability

By Seyfarth Shaw on Posted in Employer Stock Litigation

By: Ron Kramer and Jim Goodfellow

Recently, in White, et. al. v. Marshall & Ilsley Corp., the Seventh Circuit concluded that a claim against an Employee Stock Ownership Plan can be dismissed if a plaintiff does not overcome the Moench presumption.  In what is becoming an all-to-common result for plaintiffs who bring “stock drop” lawsuits in this circuit, the Seventh Circuit concluded that there were no breaches of any fiduciary duties.

The facts of this case are straight forward.  The named plaintiff was a participant in Marshall & Ilsley’s (“M & I”) ERISA governed retirement savings plan (the “Plan”).  The Plan allowed the named plaintiff to choose how to distribute her savings among more than twenty investment funds with varying risk and reward profiles.  These funds were selected by the Plan’s fiduciaries per the terms of the Plan. 

One of the investment options available, as required explicitly by the Plan, was the M & I stock fund, which consisted of M & I common stock.  This fund was an Employee Stock Ownership Plan (“ESOP”) under ERISA.  The Plan required that the M & I  stock fund be offered at all times, regardless of stock performance, “no matter how dire.”  Indeed, the Plan recognized the likelihood of significant declines, but took a long-term view with respect to the stock’s value, and the benefit of aligning an employee’s interests with that of the company. 

During the recession that followed the housing market collapse, M & I’s stock price dropped 54%, a drop that affected the value of the employees’ investment in the M & I stock fund.

The named plaintiff filed a putative class action and alleged that the Plan’s fiduciaries violated ERISA by continuing to offer the M & I stock fund as an investment option in spite of this precipitous drop in price.  She alleged that the Plan’s fiduciaries violated their duty of prudence under ERISA by continuing to offer M & I stock as one of the investment options.  The named plaintiff alleged that M & I expanded its business to include risky loans outside its normal scope of expertise.  The stock price was pummeled as analysts repeatedly downgraded M & I bonds and stock.  The named plaintiff alleged that these circumstances were dire, and thus gave rise to an investment that was untenably risky for retirement savings. 

The district court disagreed and granted a motion to dismiss the named plaintiff’s claim under F.R.C.P. 12(b)(6).  Plaintiff appealed, and the Secretary of Labor filed an amicus brief supporting plaintiff’s position and questioning the presumption of prudence most courts apply in such cases.  Nevertheless, the Seventh Circuit affirmed.  In its decision, the Seventh Circuit began by analyzing the tension between the fiduciary’s duty to select only prudent investments and the duty to act in accordance with the Plan’s documents.  To analyze the named plaintiff’s claim, the Seventh Circuit applied the Moench presumption, which states that where a plan requires investment in company stock, such investment is presumed to be prudent unless the investment creates an excessive and unreasonable risk for employees.  Generally speaking, investment risk is excessive and unreasonable when the company faces impending collapse.  Thus, according to the Seventh Circuit, a plaintiff can overcome the Moench presumption only when no reasonable fiduciary would have thought that they were obligated to continue offering company stock. 

In applying this standard, the Seventh Circuit rejected the Sixth Circuit’s standard, preferred by the named plaintiff and the Secretary of Labor, which states that the Moench presumption is overcome when a plaintiff can show that a reasonable fiduciary would have come to a different investment decision.  For the Seventh Circuit, this sets the bar too low, in light of the conflicting position in which ESOP fiduciaries find themselves.  Said the court, the purpose of the Moench presumption is to enable fiduciaries to carry out their dual roles and insulate them from short-term market volatility.  The Sixth Circuit’s standard impedes the fiduciary’s ability to perform their duties. 

Turning to the merits of the named plaintiff’s claims, the Court summarily disposed of her theories of liability.  First, the named plaintiff argued that the investment was imprudent because the stock price was objectively overvalued, thus the investors were bound to lose money when the market corrected the price downward.  Second, she argued that investment in the stock was risky because the stock was exposed to price swings that investors cannot tolerate.  Thus, the stock price drop put the fiduciaries on notice that the investment choice was imprudent.

The Court swept aside these concerns because M & I stock is traded publically in an efficient market (which means that the participants were equally capable of observing market conditions and making independent judgments as to the stock’s value), and because the named plaintiff — and those she sought to represent — had other investment options from which they were free to choose based on their own level of risk tolerance.  According to the Court, to find that the fiduciaries had breached their duties would create three unworkable consequences: (1) fiduciaries would be required to anticipate how their company stock would perform in the future, which would require omniscience and foresight; (2) fiduciaries may be required to use non-public inside information in violation of securities laws; or  (3) fiduciaries would be required to beat a presumptively efficient market with their investment choices.  The Court also noted the irony of plaintiff’s position, namely that in divesting the Plan of company stock to avoid liability with respect to the price drop, the Plan fiduciaries may expose themselves to liability with respect to the inevitable up-swing. 

In sum, the Court found that an ERISA fiduciary is not a participant’s individual investment advisor.  Rather, they must look out for the Plan as a whole.  And in this particular case, the downswing in price was not indicative of impending collapse.  Indeed, the Court noted that the M & I stock price trended along with that of its competitors’. 

Interestingly, the Court recognized that its holding could be read to be the death knell for stock drop cases involving plans with employer stock accounts.  The Court indicated that its decision was not to be read that broadly, but also stated that ERISA cannot be read such that fiduciaries are transformed into guarantors of employee retirement savings.

SEVENTH CIRCUIT CLARIFIES THAT DISCRETION IS NOT ALWAYS REQUIRED FOR FIDUCIARY STATUS, BUT CAUTIONS THAT LIABILITY IS LIMITED TO FIDUCIARY ACTS

By Seyfarth Shaw on Posted in General Fiduciary Breach Litigation

By: John Murray and Violet Borowski

In a decision issued last week, the Seventh Circuit made clear that discretion isn’t always required for an entity to be a functional fiduciary.   But at the same time, the Court reaffirmed that a functional fiduciary is only answerable under ERISA when it is acting as a fiduciary.

In Leimkuehler v. American United Life Insurance Co., No. 12-1081, 12-1213, & 12-2536 (7th Circuit, April 16, 2013), the Seventh Circuit affirmed the district court’s ruling that an insurance company’s revenue-sharing practices did not breach a fiduciary duty under ERISA because the company wasn’t wearing its fiduciary hat in setting up or carrying out those practices.

Robert Leimkuehler, the trustee of his company’s 401(k) plan (the “Plan”), filed a class action against the American United Life Insurance Company (“AUL”), which offered investment, record-keeping, and other administrative services to the Plan.  Leimkuehler alleged that AUL breached a fiduciary duty by collecting and not disclosing revenue-sharing payments from the mutual funds it offered.  The district court granted AUL’s motion for summary judgment, ruling that AUL was not a fiduciary of the Plan with respect to its revenue-sharing practices.

On appeal, Leimkueler argued first that AUL was a “functional fiduciary” because it had a hand in deciding which investment funds and share classes it would make available to the Plan’s participants.   The court noted, however, that the mere act of limiting the universe of available investment options did not involve sufficient discretion to make AUL a fiduciary and that it was Leimkuehler who had the final say on which funds to offer in any event.  Thus the court rejected  what it termed the “product design” theory of fiduciary status.

Leimkuehler next argued that AUL was a fiduciary because it managed and administered plan assets by tracking participants’ contributions, investing participants’ funds, and performing other ministerial activities.  Leimkuehler conceded that these activities did not involve any discretion, but noted that ERISA’s definition of a “functional fiduciary” in 29 U.S.C. § 1002(21)(A) extends to the exercise of “any authority or control with respect to the management or disposition” of plan assets. 

The Seventh Circuit agreed that a party exercising control over the “management and disposition of plan assets” is a fiduciary even if it has no discretionary authority, but the court noted that such an entity is a fiduciary only as to those specific functions.  Because Leimkuehler’s complaint did not allege mismanagement of Plan assets, the Court rejected this theory as well.

Finally, the Court also rejected as “unworkable” a theory advanced by the Department of Labor in an amicus brief, that by not exercising a power it had to remove or substitute fund offerings, AUL had effectively exercised discretion over the selection of investment options.

As the Court pointed out, the practice of revenue-sharing between mutual funds and investors is commonplace in the 401(k) services industry and has recently become a source of substantial litigation.  Nevertheless, the Court expressed no opinion on the merits of revenue sharing and instead limited its ruling to the narrow question whether Leimkuehler had stated a viable fiduciary duty claim on the facts before it.  This case is an important reminder that the determination of functional fiduciary status is highly fact-specific and that the scope of fiduciary liability is strictly limited in the case of functional fiduciaries. 

OK — So ERISA Plan Terms Control — But To What Extent?

By Seyfarth Shaw on Posted in Plan Administration Litigation

By: Mark Casciari and Ian Morrison

There have been two important Supreme Court ERISA Litigation developments in the past two days.

Today, the Court issued its much anticipated decision in US Airways v. McCutchen, one day after accepting certiorari in the case of Heimeshoff v. Hartford Life & Accident Insurance Co.  Both cases address the fundamental ERISA principle that plan terms control dispute resolution.

The facts in McCutchen are common.  (We have written about the case here , here and here).  James McCutchen was injured in a car crash.  He hired a lawyer to pursue claims against the other driver and his own insurer.  The lawyer recovered $110,000, and Mr. McCutchen netted $66,000 net of his lawyer’s fee.  Meanwhile, his employer’s medical plan had paid $66,866 for Mr. McCutchen’s medical care because of the accident.  The plan terms required Mr. McCutchen to reimburse the plan.  Mr. McCutchen refused, however, because his plan benefits exceeded his net recovery. 

Mr. McCutchen argued that reimbursement would be unfair and inconsistent with equitable principles.  He argued that equity should trump plan terms.  He prevailed in the lower courts and an appeal to the Supreme Court followed.

The Supreme Court ruled that the ERISA plan terms, and not equity, control because the terms created an equitable lien by agreement. 

In reaching its conclusion, the Court stressed the importance of plan terms:  “If the agreement governs, the agreement governs . . . .”  The Court continued:  “The result we reach, based upon the historical analysis our prior cases prescribe, fits lock and key with ERISA’s focus on what a plan provides.”  “The plan, in short, is at the center of ERISA.  And precluding McCutchen’s equitable defenses from overriding plain contract terms helps it to remain there.” 

But the Court struggled with the question of what the plan provided.  A five justice majority, led by Justice Kagan, held that because the plan did not specifically say otherwise, the “common-fund doctrine” could be used to construe its terms.  The common fund doctrine holds that someone who recovers money on behalf of another person can seek reimbursement from the amount recovered.  “If the equitable rules [McCutchen] describes cannot trump a reimbursement provision, they still might aid in properly construing it.”  The majority held that that “if US Airways wished to depart from the well-established common-fund rule, it had to draft its contract to say so–and here it did not.”  The Court sent the case back the lower court to decide how much the plan was entitled to recover in light of McCutchen’s attorney’s fees. 

The facts in Heimeshoff are also common. 

Julie Heimeshoff’s claim for long-term disability benefits from her employer’s LTD plan was denied.  The plan required Ms. Heimeshoff to sue within three-years from the time that proof of loss was due under the plan.  Ms. Heimeshoff commenced her lawsuit more than three years after her proof of loss was due.  She argued that the limitations period should not begin to run until her claim for benefits was finally denied by the plan itself.  The three year period actually ran out before that final decision was made. 

The Court of Appeals for the Second Circuit found for the plan, stating:  “The policy language is unambiguous and it does not offend the statute to have the limitations period begin to run before the claim accrues.” 

The Supreme Court accepted certiorari on this question presented:  “When should a statute of limitations accrue for judicial review of an ERISA disability adverse benefit determination?” 

McCutchen and Heimeshoff are important because they test the bedrock ERISA principle that ERISA plan terms control in ERISA Litigation.  They test whether the question “what does the plan say” should be the first inquiry when an employer or fiduciary receives word that it, he or she has been sued. 

McCutchen should put a stop to frequent motion practice by plan participants seeking to avoid their contractual reimbursement obligations.  The decision also helps guide plan sponsors in drafting plan documents by emphasizing the need to address clearly participant reimbursement obligations.  A footnote in the opinion reinforces the need for clear plan drafting — in the lower courts, the parties had referred only to language in the summary plan description.  Before the Supreme Court, the parties produced the underlying ERISA plan document, which evidently differed from the summary.  See Transcript.  The Court ultimately relied on the summary plan description language because parties had done so throughout the case.  Nevertheless, the footnote will serve as fodder for participants seeking to dodge their reimbursement obligations.

Heimeshoff raises the question when the benefits denial limitations period accrues and more particularly whether it can do so, and run out, before the final decision on a claim is rendered.  It may reinforce the ERISA Litigation principle that limitations accrue upon a clear repudiation of rights, which can occur prior to a final claim decision.  See discussion here.  Once again, the Court will provide guidance to ERISA litigators on the sanctity of ERISA plan language in deciding ERISA controversies.

Second Circuit To Plaintiff: Get Out of Here and Don’t Come Back Until You’ve Exhausted

By Seyfarth Shaw on Posted in Plan Administration Litigation

By: Amanda Sonneborn and Chris Busey

The U.S. Court of Appeals for the Second Circuit recently reminded ERISA plaintiffs that they must exhaust administrative remedies before filing suit, when it affirmed the Southern District of New York’s dismissal of a putative class action in Quigley v. Citigroup Supplemental Plan for Shearson Transfers, No. 12-613-cv.  

Plaintiffs initially brought suit claiming that the top-hat plan at issue used an excessively high interest rate to calculate their benefits.  The district court dismissed the amended complaint without prejudice in March 2011 for failure to exhaust.  On appeal, the plaintiffs argued that lower court’s dismissal was improper, because they should not have been required to exhaust the plan’s administrative procedures.  

Plaintiffs floated two arguments for this proposition, neither of which carried much weight the Second Circuit.  First, plaintiffs contended that a release of claims exempted them from the claims procedures.  The plan required participants to sign release forms before receiving benefits.  The releases were to be signed and returned by November 5, 2009.  Plaintiffs argued that this forced them to exhaust administrative remedies and file a lawsuit before this date, but that they were unable to do so because the claims review process would not have been completed by then.  In rejecting plaintiffs’ argument, the court first found that any bar from filing suit at a later time was not due to the release deadline, but rather, due to the plaintiffs’ own actions in challenging the plan’s decision. 

Second, plaintiffs cited to ERISA enabling regulations and claimed that the unreasonableness of the administrative procedures excused them from exhausting.  Rehashing their argument about the release, plaintiffs asserted that it unreasonably required them exhaust and file suit by the signing deadline.  The court rejected this argument under the same reasoning as plaintiffs’ first contention.  It also noted that the regulation addresses only the reasonableness of the claims procedure itself and “does not address post-administrative review litigation.”  In short, nothing excused plaintiffs’ failure to exhaust the administrative remedies provided by the plan.

This opinion, while not venturing into uncharted legal territory, reiterates the importance of exhaustion of administrative remedies as an ERISA concept.  Often, courts are loath to consider appeals that have yet to work themselves through the plan’s proper channels first.  This case provides a reminder of that unwillingness and reiterates the burden on plan participants to follow the proper procedures.

It’s not lights out for Edison’s Investment Committee

By Seyfarth Shaw on Posted in General Fiduciary Breach Litigation

By Kathleen Cahill Slaught and Sheryl Skibbe.

The Ninth Circuit rejected a majority of the plaintiffs’ claims against Edison International, the southern California electrical utility, for mismanagement of Edison’s 401(k) plan, dampening the glow on the plaintiffs’ only successful claim for a breach of fiduciary duty.  See Edison Int’l v . Tibble, No. 10-56406 (9th Cir. March 21, 2013).

The only significant finding in the plaintiffs’ favor came when the Ninth Circuit agreed that Edison 401(k) plan fiduciaries breached their duties because they included retail-shares of three mutual funds without first investigating the possibility of including institutional-share class alternatives.

While retail-class mutual funds are not a “categorically imprudent” investment option, the Ninth Circuit held that thefiduciaries’ failure to investigate the possibility of lower-fee institutional-class funds constituted a breach of their fiduciary duty of prudence.  This breach cost Edison $370,000. 

But losing the battle didn’t mean that Edison lost the war.  The plaintiffs lost on their theory that including a unitized fund for employees’ investment in company stock was imprudent.

They also lost on their statute of limitations “continuing violation theory.”  Instead, the Court found that ERISA’s 6-year statute of limitations begins to run when the decision to include the litigated investment in the plan was made.    

Siding with the Third and Sixth circuits, the Ninth Circuit applied an abuse-of-discretion review to the fiduciaries’ decisions because the plan document confers interpretive authority on the plan administrator.  Under this deferential standard of review, the Ninth Circuit also affirmed the district court’s ruling that Edison did not act imprudently by including specific investment options in the plan—namely, a short-term investment similar to a money market account and a unitized fund for investment in employer stock.

The Ninth Circuit also rejected the plaintiffs’ claim that Edison’s revenue-sharing arrangement violated ERISA and the governing plan document. Under a “commonsense reading” of the plan, Edison merely had an obligation to pay the plan’s administrative costs.  This did not constitute a prohibition on allowing Hewitt’s recordkeeping fees to be paid from a third party. 

Another small, but hollow victory, for the plaintiffs was when the Ninth Circuit found that ERISA Section 404(c)’s safe harbor provision did not apply to Edison’s decision.  The Ninth Circuit found that because selection of the challenged investment was not a product of the participant’s or beneficiary’s exercise of control the safe harbor couldn’t apply.  In so holding, the Ninth Circuit found DOL’s interpretation of 404(c) to be afforded administrative deference.   

This opinion can assist counsel representing plan fiduciaries to know what evidence to present because had Edison “made a showing that HFS [the Plan’s financial consultant] engaged in a prudent process in considering share classes this might have been a different case.”  The Ninth Circuit found that Edison did not present evidence on this issue and therefore the Edison fiduciaries breached their duty of reasonable reliance upon their consultants’ recommendation on class shares.

Plan fiduciaries in the Ninth Circuit also can breathe easier after six years from the date fund decisions are made because the time for plaintiffs to bring breach of fiduciary claims will have run.

Notably, in light of the Court’s rejection of the safe harbor exception for plan fiduciaries when deciding a plan’s investment options, Plan fiduciaries should be sure to probe the plan’s financial advisors and consultants as to why their investment recommendations are prudent.  This opinion also guides plan fiduciaries to present every crumb of evidence at trial that was considered by the plan fiduciaries, and their consultants, when deciding between shares of mutual funds.

Seventh Circuit Reads Plan Language To Discount Plaintiffs’ Rate Argument

By Seyfarth Shaw on Posted in Plan Administration Litigation

By: Brian Stolzenbach, Sam Schwartz-Fenwick and Chris Busey

Judge Posner of the Seventh Circuit provided a remedial lesson in calculating a present value before getting down to the legal merits in a recent ERISA case.  See Dennison v. MONY Life Retirement Income Security Plan, No. 12-2407, Mar. 6, 2013.  

A class of plaintiffs challenged the discount rates used by two ERISA plans — a pension plan and a top-hat plan — to convert a straight-life annuity into a lump sum payment.  Judge Posner provided a brief refresher course on what that means.  He began by explaining the role that discount rates play in calculating annuity payments.  A higher discount rate implies a higher rate of growth over the period of an annuity.  To account for that higher growth, the present value lump sum of the annuity will be lower.  Conversely, a low discount rate results in a higher lump sum now.  Plaintiffs thus argued that two separate discount rates used by the plans should have been lower, increasing their current lump sum payments.

In affirming the district court’s grant of summary judgment in favor of the plans, the Seventh Circuit engaged in a straightforward interpretation of the plans’ language.  For its discount rate, the pension plan used a segment rate — an interest rate calculated by the Treasury Department — of roughly 5.4%.  Initially, the court noted that the Pension Protection Act permitted retroactive discount rate increases.  The PPA caps retroactive rate increases for qualified plans at the segment rate used by the pension plan.  Before the PPA, this increase would have violated ERISA’s anti-cutback provision.  The question then became whether the plan itself prohibited any type of rate increase.  The plan did contain a “contractual anti-cutback” provision, but this applied only to a participant’s “accrued benefits.”  These were defined by the plan as the value of a participant’s straight-life annuity.  In other words, nothing in the plan prevented a retroactive reduction in a participant’s benefits if they opted for a lump sum payment. 

The top-hat plan in question used a higher, but equally permissible discount rate of 7.5%.  As a non-qualified plan, it was not subject to the PPA’s cap on rate increases.  It also did not violate any plan terms because the plan specifically provided for that discount rate for any plan or payment that was not tax-preferred.  Since top-hat plans do not qualify for preferred tax treatment the rate used by the plan was appropriate.

The court also affirmed the lower court’s refusal to allow plaintiffs to conduct discovery — including deposing benefits committee members — to determine whether the plans’ rejections of their claims were tainted by a conflict of interest.  The court signaled a disfavor for this type of discovery in general, as it would be burdensome to allow extensive discovery into administrators’ decisions.  The court suggested that only “exceptional” circumstances, where a plaintiff can identify a specific conflict or instance of misconduct, should trigger this type of discovery.  This discussion stands as dicta, however, since the court ruled on the discount rate issue as a breach of contract matter and not as a deferential review of a plan administrator’s determination.

In short, Judge Posner’s opinion does not dramatically alter the ERISA landscape.  It does, however, reinforce lessons that plan administrators should already know.  Be meticulous in drafting plan language.  Think long and hard before amending a plan and seek counsel if necessary.  Remember how to calculate present value.  These tips will help guard against headaches for the plan and save sleep for plan administrators.

Court Declines To Follow Amara Dicta On Surcharge And Denies Plaintiff’s Claim For Reimbursement For Denied Medical Procedure Under ERISA § 502(a)(3)

By Seyfarth Shaw on Posted in General Fiduciary Breach Litigation, Retiree Health Care Litigation
 
In Plambeck v. The Kroger Co., et al., No. CIV. 11-5054-JLV (D.S.D. Mar. 11, 2013), Plaintiff underwent back surgery that she believed to be covered by her health insurance plan — a fact she claimed was confirmed by an insurance plan representative.  Yet, after the procedure, the plan denied her claim because the plan’s terms excluded surgical procedures that were not medically necessary, and it determined the back surgery was not medically necessary.

Plaintiff then sued for equitable relief under ERISA § 502(a)(3), claiming the insurance company represented to her that her surgery was covered and that she relied on this representation.  She pleaded the theory of equitable estoppel and argued defendants were prevented from asserting the surgery was not a covered medical expense under the plan.  Under the theories of surcharge or unjust enrichment, she alleged she was entitled to be “made whole” and to be put in the same position she would have been in had the representations been true.  She alleged that reimbursement for the surgical procedure constituted “other appropriate equitable relief” within the meaning of § 502(a)(3).

Denying plaintiff’s claim, the court found that plaintiff inappropriately attempted to impose personal liability on defendants for the loss to her own pocketbook.  The court found that this liability is a classic form of legal relief which the Eighth Circuit has determined is not available under § 502(a)(3).  Despite Plaintiff’s claim that the Supreme Court’s discussion in Amara relating to equitable relief under § 502(a)(3) supplants Eighth Circuit case law, the court concluded that the Eighth Circuit continues to rely on prior, binding Supreme Court precedent limiting relief sought under § 502(a)(3) to equitable, not legal, relief.  Under Eighth Circuit precedent, permissible monetary claims under § 502(a)(3) are limited to those seeking a specifically identifiable fund.  As Plaintiff sought something more, her claim was impermissible.

Ninth Circuit Breathes New Life Into Retirees’ Claim for Lifetime Healthcare Benefits

By Seyfarth Shaw on Posted in Non-ERISA Employee Benefits Litigation, Retiree Health Care Litigation

 By: Ronald Kramer, Justin T. Curley, and Barbara Borowski,

 Employers may unwittingly create implied vested contractual rights to retirement and healthcare benefits for their employees in perpetuity.

 In Sonoma County Ass’n of Retired Employees v. Sonoma County, No. 10-17873 (February 26, 2013), the Ninth Circuit vacated a district court’s dismissal of a lawsuit brought by a group of retired non-union county workers seeking to enforce an alleged agreement by the county’s board of supervisors to provide them lifetime healthcare benefits.  The retirees contended that the board broke its word to pay for “all or substantially all” of the retirees’ healthcare benefits in perpetuity when it cut the county’s healthcare benefit contributions to $500 a month for retirees in 2008, a change that was aimed at reining in the county’s ever-rising health care costs.  The retirees asserted state law breach of contract and promissory estoppel claims, as well as claims under the Contract Clauses and Due Process Clauses of the California and U.S. Constitutions.

 In 2010, the district court dismissed the suit with leave to amend, ruling that the county never expressly promised to continue retiree healthcare benefits in perpetuity, and that extrinsic evidence of such a promise could not bind the county.  The retirees filed an amended complaint, this time adding more facts and attaching evidence of an alleged express agreement with implied terms providing for healthcare benefits in perpetuity, including board resolutions, memoranda of understanding, and ordinances.  The district court remained unpersuaded on the retirees’ second try, and dismissed the complaint without leave to amend.

 The retirees appealed.  While the appeal was pending, the California Supreme Court held in 2011 in Retired Employees Ass’n of Orange County, Inc. v. County of Orange that a vested right to healthcare benefits for retired county employees can be implied under certain circumstances from an express contract created by county ordinance or resolution.  We previously reported on this decision here.

 On appeal, the Ninth Circuit, relying on Retired Employees Ass’n of Orange County, found that plaintiffs had plausibly alleged in their amended complaint that the county had entered into an express contract, which included implied terms providing healthcare benefits to retirees that vested for perpetuity.  But the Ninth Circuit determined that the retirees had not plausibly pointed to a county ordinance or resolution that created that alleged express contract with the implied terms.  It nonetheless held that the plaintiffs should be permitted another shot at amending their complaint to state a claim for an implied right to lifetime healthcare benefits based on an express contract created by county ordinance or resolution.

 Notably, the Ninth Circuit did observe that the retirees faced a “heavy burden” of establishing that the county intended to create a compensation contract with them by ordinance or resolution, and demonstrating that implied terms in that contract provided for vested healthcare benefits in perpetuity.  It cautioned that any court considering such a claim must “identify ‘a clear basis in the contract or convincing extrinsic evidence’ establishing that a contract exists and clearly delineating the contractual obligation at issue.”

 This case is significant to public employers because it lends additional heft to retirees seeking to rely on extrinsic evidence to assert implied vested contractual rights to lifetime retirement and healthcare benefits.  While private employers are generally governed by ERISA, courts may look to the relevant state law in determining whether a contractual claim could be stated under ERISA common law.  Meeting the financial obligations created by such implied rights would add substantial cost burdens to employers who never intended to assume such obligations in perpetuity.  Employers may be able to avoid creating implied vested contractual rights by carefully describing the limits of a retiree benefit, and by expressly stating that neither a benefit nor a method of calculating that benefit is vested, but instead can change from year to year. 

 

 

 

 

What Do Supreme Court Securities Law Decisions Have To Do With ERISA Litigation?

By Seyfarth Shaw on Posted in General Fiduciary Breach Litigation

By: Mark Casciari and Barbara Borowski

The answer is — more than you might think.

On February 27, the Supreme Court issued two securities law decisions.  In Amgen v. Connecticut Retirement Plan and Trust Funds, No. 11-1085 (February 27, 2013), the Supreme Court, 6-3, affirmed the Ninth Circuit’s decision in a Rule 10b-5 fraud-on-the-market misrepresentation case that proof of materiality is not a prerequisite to certify a securities fraud class action seeking money damages.  Resolving a split in the circuits, the Supreme Court held that plaintiffs need not prove materiality as a condition to class certification.  We note that the only issue before the Court was whether “questions of law or fact common to the class members predominate over any questions affecting only individual members.”  The Court found: “While Connecticut Retirement must prove materiality to prevail on the merits, we hold that such proof is not a prerequisite to class certification.  Rule 23(b)(3) requires a showing that questions common to the class predominate, not that those questions will be answered, on the merits, in favor of the class.”  The Court found that Rule 23(b)(3) was met because:

  • Materiality is judged according to an objective standard and, therefore, presents a question common to all members of the class;
  • The alleged misrepresentations, whether material or immaterial, apply equally to all investor class members; and
  • Failure to prove materiality at trial would end the case for all class members.

The Supreme Court rejected Amgen’s policy arguments that (1) granting certification could exert substantial pressure on a defendant to settle, and (2) requiring proof of materiality before class certification would conserve judicial resources.  The Court rejected the first argument because Congress has addressed the settlement pressures associated with securities fraud class actions in the Private Securities Litigation Reform Act of 1995.  The Court rejected the second argument because requiring proof of materiality at the class certification stage would necessitate a mini-trial and certification would require a second trial on the merits.  The Court also said that denying certification after a mini-trial for failure to prove materiality would not end litigation because nonnamed class members would not be bound by the certification denial.

The ERISA tie-in?  After CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011), it remains unclear whether the “actual harm” element of a fiduciary breach turns on individual reliance.  If not, certification will be easier to accomplish, putting in play the settlement value and judicial economy consequences noted in Amgen.

In the second case, Gabelli v. SEC, No. 11-1274 (February 27, 2013), the Supreme Court held, 9-0, that the language in the Investment Advisors Act requiring the SEC to sue “within five years from the date when the claim first accrued” is a statute of repose and that the “discovery” rule on limitations does not apply to a Government plaintiff who asserts a claim sounding in fraud.  The decision contains good language on when a claim accrues for limitations purposes — “when it comes into existence” — and on the value of a statute of repose in ending stale controversies.

The ERISA tie-in?  Gabelli can be used as general authority to support arguments that start ERISA claim accruals at early dates, and to support the ERISA Section 413(1)(a) fiduciary breach claim statute of repose.  To be sure, Gebelli is only general authority involving a Government plaintiff, and Section 413 has a fraud or concealment exception to its statute of repose, but it does provide sound policy support for early accrual dates and for statutes of repose.

 

Still Under (Common) Control — Owner-Landlords and Property Rental Company Jointly and Severally Liable For Trucking Company’s Withdrawal Liability.

By Seyfarth Shaw on Posted in Withdrawal Liability

By: Ronald Kramer and Chris Busey,

“Mom and Pop” learned the hard way that the Seventh Circuit will not hesitate to find business owners who own rental real estate and other commonly controlled businesses jointly and severally liable for withdrawal liability.   

In Central States Southeast and Southwest Areas Pension Fund v. Messina Products, LLC, Nos. 11-3513 & 12-1333 (7th Cir. Feb. 8, 2013), the Central States Pension Fund sought to hold Stephen and Florence Messina personally, and Messina Products, another company they had that rented property, jointly and severally liable for withdrawal liability assessed against their trucking company, Messina Trucking.  The Multiemployer Pension Plan Amendments Act of ERISA holds  “trades or businesses” under “common control” with the exiting entity jointly and severally liable to the Pension Fund for withdrawal liability.  There was no dispute that the Messinas, who personally owned commercial and residential rental property, Messina Products and Messina Trucking were under “common control.” The court was asked only whether the rental property owned by the Messinas and Messina Products were “trades or businesses” under the Act

The Messinas personally owned commercial property they had leased to their trucking company. They also owned adjacent property that had been acquired for trucking company use, but which had homes they leased as well.  No written lease agreement existed between the Messinas and their trucking company, the company had stopped paying rent when it ran into financial trouble, and repairs and maintenance on both the commercial and residential properties were completed by company employees free of charge.

To determine whether the Messinas operated a trade or business as commercial and residential landlords, the court applied the “Groetzinger test,” which requires that the activity be performed with (1) “continuity and regularity” (2) “for the primary purpose of income or profit.”  Commissioner of Internal Revenue v. Groetzinger, 480 U.S. 23 (1980).  The test distinguishes trades or businesses that are jointly and severally liable under the Act from passive investments, which cannot form a basis for imputing withdrawal liability.

In holding that the real estate owned by the Messinas personally did qualify as a trade or business, the court emphasized that the couple owned real estate that it rented to their trucking company that triggered the withdrawal liability.  The ownership of real estate leased to the withdrawing employer “categorically” constitutes a trade or business and not mere “passive investment.”  This arrangement could only be for profit or income, even if the activity is used to reduce taxes or does not result in a net gain.  To support a finding that the activities were continuous and regular, the court imputed to the Messinas the more frequent activities of Messina Trucking employees in maintaining the real estate.  The court reasoned that, without a formal agreement between the Messinas and their trucking company under which the trucking company was obligated to perform such services, the employees must have acted for the Messinas’ benefit.  The court distinguished the couple from owners in other cases that were not found to be trades or business simply because they leased residential apartments above their home’s garage, or leased commercial property to an unrelated entity via a “triple net” lease in which the owner only collected rent and paid the mortgage.

Turning to Messina Products, the court first noted that it was “highly unlikely” that a formal for-profit business would not qualify as a trade or business.  Although the company had no employees or real estate and its sole asset was a partnership interest in a property rental company, the court had no trouble finding that it satisfied the Groetzinger test.  In particular, the court highlighted Messina Products’ operating agreement, which it found “highly relevant” in that it expressed that the company had been created for business purposes (as opposed to being a passive investment vehicle).  Messina Products also filed tax returns for “trade or business income” that listed the entity’s principal business activity as real estate rental.    

Although the real estate owned by the Messinas was leased to the trucking company that incurred the withdrawal liability, ownership of any type of rental real estate may be found to constitute a “trade or business” if the owner engages in a sufficient level of activity.  Furthermore, if rental property that is owned directly, rather than through a limited liability company or similar entity, is found to constitute a “trade or business”, the owner’s home and other personal assets may also be subject to the withdrawal liability

Many business owners wrongly assume that commercial or rental real estate they hold  personally or in a separate corporate entity is insulated from withdrawal liability.  They similarly believe that other separately but commonly owned businesses may evade liability.  As the Messinas unfortunately learned, it is not that simple.  Personal liability may lurk just around the corner from a multiemployer pension fund withdrawal.  Business owners who participate in multiemployer pension funds need to think strategically if they plan to expand into other enterprises, whether personally or via a corporate vehicle, and understand fully their risks and potential liabilities if the additional enterprises are considered commonly controlled trades or businesses.