General Fiduciary Breach Litigation

By Michelle Scannell and Mark Casciari

Seyfarth Synopsis: The Supreme Court appears to have barred equitable tolling under ERISA Section 413’s six-year statute of repose for fiduciary breach claims, subject only to well-pled allegations and proof of fraud or concealment.

Statutes of repose begin to run after a defendant’s last culpable act or omission–regardless of when a plaintiff is injured—and give defendants a complete defense to any lawsuit commenced after the repose limitations period. ERISA Section 413 provides a six-year statute of repose for fiduciary breach claims, with a narrow exception, “in the case of fraud or concealment.” If the exception applies, the claim may be brought within six years of discovery of the breach.

The Supreme Court recently shut down the argument that the tolling doctrine in American Pipe & Construction Company v. Utah, 414 U.S. 538 (1974) applies to an unconditional statute of repose.  The American Pipe rule allows the equitable tolling of individual claims during the pendency of a class action until class certification is denied or the individual is no longer part of the class.  So the equitable tolling doctrine allows courts to extend limitations periods beyond the limitations period set forth by Congress, and creates substantial uncertainty for defendants.

In California Public Employees Retirement Sys. (CALPERS) v. ANZ Securities, Inc., No. 16-373 (June 26, 2017), the Court dismissed as untimely a securities case filed by CALPERS after the statute of repose expired.  CALPERS argued that the lawsuit was timely because the same claim was timely asserted in another securities class action that CALPERS opted out of after filing its own case.  The Court rejected the CALPERS argument that the timely filing of the class action equitably tolled statute of repose for its individual case.

The Supreme Court said that unconditional statutes of repose may not be tolled under any circumstances. The Court said that statutes of repose reflect a legislative intent to protect defendants from an “interminable threat of liability,” which displaces the traditional power of courts to modify statutory time limits based on equitable doctrines, including the one applied in American Pipe. Statutes of repose, the Court stated, offer “full and final security after” the repose period expires.

By direct analogy, the CALPERS decision should apply to the ERISA Section 413 statute of repose, with one caveat.

Section 413, unlike the securities limitation statute at issue in CALPERS, is not unconditional.  Its “fraud or concealment” exception, as the Supreme Court noted in CALPERS, “demonstrates the requisite intent to alter the operation of the statutory period.”

ERISA fiduciaries therefore still face indeterminate liability in cases of alleged fraud or concealment. But it is difficult for plaintiffs to allege, let alone prove, fiduciary fraud or concealment.  Strict pleading standards dictated under Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), may provide fiduciaries with a strong motion to dismiss argument that, if successful, could provide a quick win, and obviate the need to expend substantial time and money associated with the rigors of discovery.

The CALPERS decision is good for fiduciaries sued on claims accruing more than six years before a suit is filed. CALPERS removes equitable tolling from the arsenal of plaintiff arguments, leaving only the much harder “fraud or concealment” argument to revive what otherwise would appear to be a stale case.

 

By: Jon Karelitz and Amanda Sonneborn

On April 14, 2015, the DOL issued a new proposed rule to expand the definition of “fiduciary” under ERISA. This is the second time in recent years that the DOL has gone down this path. The first proposed rule (issued in 2010) was met with strong resistance from the financial services industry, which claimed that anticipated additional compliance costs and increased legal liability for advisors would result in fewer education and advice arrangements that were largely beneficial to investors. The DOL withdrew the 2010 proposed rule in 2011.

In short, this latest proposal takes a holistic approach to determining whether an individual or entity is acting in a fiduciary capacity towards a funded ERISA benefit plan, including a pension or 401(k) plan or IRA. The DOL has also proposed new and revised class exemptions from certain prohibited transactions resulting from a fiduciary engaging in self-dealing and receiving compensation from third parties in connection with transactions involving a plan or IRA.

The new proposal is primarily focused third party service providers to retirement plans that make recommendations on the selection, retention or disposition of plan assets but are not necessarily “fiduciaries” under the current rule. Consequently, the proposal may not affect the relationship between a plan and its fiduciaries who are employees of the plan sponsor, but those individuals may need to consider revisiting the plan’s existing relationships with certain service providers.

The DOL’s current fiduciary rules were created before 401(k) plans and IRAs became common. The market for financial services and investment advice has become more diverse, with more individuals directing the investment of their own retirement income — frequently, based on the advice of professional brokers, consultants and financial planners. Under the current DOL “fiduciary” definition, any person who renders investment advice for a fee or other compensation is a fiduciary, but the definition of “investment advice” is very narrow. An individual who’s not otherwise a fiduciary only provides “investment advice” if he/she satisfies a highly-specific five part test. The preamble to the new proposed rule cites arrangements in which investment professionals make recommendations to plans regarding the allocation of a significant portion of plan assets on an irregular basis, or provide regular advice but subject to a disclaimer that no mutual agreement exists. These types of arrangements are not covered by the current definition of “investment advice.”

The new proposal replaces the old rule’s five-part test with a list of communications and relationships that would be investment advice if provided in exchange for a fee or other direct or indirect compensation, unless a specific carve-out exists:

  • A recommendation on acquiring, holding or disposing of or exchanging plan assets, including whether to take a distribution of benefits and, if so, how to invest the amount distributed;
  • A recommendation as to the management of plan investments, including amounts to be rolled over or otherwise distributed;
  • An appraisal or valuation of plan assets in connection with the acquisition, disposition or exchange of such assets; or
  • A recommendation of a person who would also receive a fee or other compensation for one of the types of advice described in the first three bullets.

Carve-outs exist for certain services/arrangements, including many that are utilized by employer-sponsored 401(k) plans: (i) arm’s length transactions in which the plan fiduciary has financial expertise and the investment advisor does not receive fees directly from the plan or the plan fiduciary for providing the advice; (ii) certain “swap” or “security-based swap” transactions involving a benefit plan; (iii) services by recordkeepers or third-party administrators that offer a platform of investment vehicles to 401(k) plans or IRAs; and (iv) investment education that doesn’t rise to the level of providing specific recommendations or advice.

In addition, if even a carve-out does not apply, the DOL has proposed class exemptions for select arrangements, including (i) advice provided to small 401(k) plan participants and IRA beneficiaries by a financial institution or its independent agents that’s in the participants’ and beneficiaries’ best interests, not misleading and for reasonable compensation; and (ii) advice by a financial institution or its independent agents regarding the purchase of certain debt securities.

Obviously these new rules raise potential concerns from an ERISA litigation perspective as well. It remains to be seen whether this seeming expansion in certain circumstances of the definition of fiduciary will give rise to new claims by the plaintiffs’ bar. If that occurs, one can certainly expect defendants to attempt to dismiss these new claims early through testing of the legal definition of fiduciary. That said, the potentially fact-intensive nature of the fiduciary status inquiry under these new rules may make it problematic for plan sponsors and alleged fiduciaries to dismiss litigation at the motion to dismiss stage.

 

By Kathleen Cahill Slaught and Michelle Scannell

In the latest chapter in a long-running battle about retiree health and life insurance benefits, the Tenth Circuit recently brought retiree Plaintiffs’ fiduciary breach claims back to life.  In doing so, the Tenth Circuit sided with the Second Circuit in a circuit split on the applicable statute of limitations for ERISA fiduciary breach claims.  Fulghum v. Embarq Corp, No. 13-3230 (10th Cir. 2/24/15).

Our sole focus today is the Tenth Circuit’s interpretation of ERISA Section 413, which provides that a fiduciary breach claim must be brought within 6 years of the last alleged breach, or the latest date the fiduciary could have cured the breach, whichever occurs first.  In cases of “fraud or concealment,” however, a claim may be brought within 6 years of discovery of the breach.  Here, Plaintiffs argued that their claims were timely because they were filed within 6 years of plan amendments that led to discovery of the alleged fraudulent breaches.  The core dispute was whether the “fraud or concealment” exception to the general limitations period requires proof of concealment by the fiduciary, or applies in all cases of alleged fraudulent breach.

The district court ruled that the “fraud or concealment” exception requires proof of the fiduciary’s affirmative concealment of the alleged breach and was thus inapplicable.  On appeal, the Tenth Circuit acknowledged the circuit split on the issue.  The majority view, shared by several circuits including the First, Seventh, and Ninth, is that the “fraud or concealment” exception requires concealment of an alleged breach.

On the other hand, the Second Circuit has refused to “fus[e] the phrase ‘fraud or concealment’ into the single term ‘fraudulent concealment.’”  It therefore applies the exception when a breach claim is based on fraud or there is proof of fiduciary concealment.  Here, the Tenth Circuit adopted the Second Circuit’s interpretation of the scope of the exception.  The Tenth Circuit reasoned that its interpretation remedies “what would otherwise be a harsh result in situations where a fiduciary has engaged in prohibited conduct that cannot readily be discovered.”  According to the court, this is consistent with ERISA’s goal of ensuring adequate disclosures to plan participants.  The court noted that because Plaintiffs did not allege concealment of the breach, on remand Plaintiffs’ fiduciary breach claims would be found timely only if the alleged breach was based on a theory of fraud.

Now that the Tenth Circuit has driven a further wedge into this circuit split, it would be nice to get some clarity from the Supreme Court on the issue.  For now, the Second and Tenth Circuits will remain plaintiff-friendly venues for more tenuous fiduciary breach claims that would be untimely in most other jurisdictions.

By Mark Casciari and Jim Goodfellow

Once again, the Supreme Court will opine on how to write ERISA plans to maximize the right of fiduciaries to sue to recover monetary relief.

On March 30, 2015, the Supreme Court agreed to review the decision of the Court of Appeals for the Eleventh Circuit in Board of Trustees of the National Elevator Industry Health Benefit Plan v. Montanile. The issue that will be presented to the Supreme Court is:

Does a lawsuit by an ERISA fiduciary against a participant to recover an alleged overpayment by the plan seek “equitable relief” within the meaning of ERISA section 502(a)(3), 29 U.S.C. § 1132(a)(3), if the fiduciary has not identified a particular fund that is in the participant’s possession and control at the time the fiduciary asserts its claim?

The Eleventh Circuit answered this question in the affirmative, stating that plan terms allowed the settlement funds received by the plaintiff to be “specifically identified.” The Court also said that the plan provided a first priority claim to all payments made by a third party to plaintiff, even though the plaintiff no longer possessed the settlement money.

The dispute arose when the plan paid the plaintiff’s medical expenses after the plaintiff was injured in a car accident. The plaintiff received a settlement from the other driver, and the plan sought from the settlement funds reimbursement of plan medical expenses.

Affirmance of the Eleventh Circuit’s decision would represent a practical solution to a common problem faced by fiduciaries who attempt to recover from non-fiduciary plan participants or service providers asserting a right to plan benefits based on assignment. Often times, overpaid funds have been spent by the recipients. Should the Supreme Court reverse, non-fiduciary recipients of plan funds would be provided with a perverse incentive to spend plan money immediately upon receipt so as to avoid any repayment obligations set forth by plan terms.

Montanile may have implications in the provider fraud context, where fiduciaries routinely sue providers to recoup overpayments. The decision also may affect reimbursement claims that fiduciaries often assert to recover overpaid benefits.

Montanile also could address an open question after the Supreme Court’s decision in Cigna Corp. v. Amara, 131 S.Ct. 1866 (2011), which has been interpreted by the Fourth and Ninth Circuits to mean that SPDs are not plan documents for the purposes of determining enforceable plan terms. The Eighth and Eleventh Circuits have reached the opposite conclusion, creating a Circuit split.

By Kathleen Cahill Slaught and Michelle Scannell

Since the Supreme Court’s CIGNA v. Amara decision, courts have grappled with the scope of the permissible forms of equitable relief under ERISA, including the surcharge remedy, the sole focus of today’s blog.  Surcharge is generally a type of monetary relief awarded to remedy a fiduciary breach.  In June, the Ninth Circuit sharply limited the scope of surcharge.  See Gabriel v. Alaska Elec. Pension Fund, 12-25458 (6/6/14).  Recently, however, there was a slight change of heart, and the Ninth Circuit replaced that June decision with one that potentially opens the door to surcharge, to be addressed on remand.  Id. (12/16/14).

Gabriel involves a pension plan participant who received benefits for several years, even though he knew he never met the plan’s vesting requirements.  After the error was discovered, his benefits were terminated.  He sued for benefit denial and equitable relief, seeking remedies including surcharge.  He claimed that he was entitled to surcharge in the form of the benefits he would have received had he been credited with the hours erroneously reflected in the fund’s records when he applied for benefits.

Before the Ninth Circuit, plaintiff claimed that under Fourth Circuit authority surcharge could provide make-whole relief, even if it came at the expense of the plan.  The court disagreed, observing that the Fourth Circuit decision and similar decisions in other circuits did not define the scope of surcharge.  Further, those decisions involved remand to district courts to determine the availability of surcharge in the first instance.  The court ruled that under prior circuit precedent, surcharge was recoverable only to remedy unjust enrichment and to restore plan losses.  It further ruled that plaintiff wasn’t entitled to surcharge because there was no unjust enrichment, and also because the remedy he sought would not “restore the trust estate, but rather would wrongfully deplete it by paying him benefits” he wasn’t entitled to.

This June decision was met with criticism.  The plaintiff sought a full panel review.  A few district courts judges within the Ninth Circuit also declined to follow it, noting that due to the pending rehearing petition, the ruling was not yet final.

In its recently issued amended ruling, the Ninth Circuit explained that because the district court concluded the plaintiff wasn’t entitled to monetary relief, it didn’t consider whether plaintiff was entitled to surcharge.  The court noted that under Amara, the proper approach is to vacate the judgment and remand to the district court.  “Consistent with” sister circuits, the court did just that.

In a concurring opinion that surely won’t be overlooked in any remand proceedings, Chief Judge Kozinski expressed “serious[] doubt” that plaintiff could recover surcharge.  He was skeptical of the plaintiff’s ability to prove required elements of harm and causation, because the sole harm he alleged arose out of his “unreasonable” reliance “on the Fund’s misrepresentations.”  Judge Kozinski “couldn’t imagine [that surcharge] extends to a reliance claim where the plaintiff was apprised of the true facts.”  He noted that a contrary conclusion would make bad policy, by imposing a form of “strict reliance for every mistake that’s claimed to be relied on, even if the reliance was unreasonable.”

On our reading of the case, we think that this plaintiff probably isn’t a poster child for a surcharge award.  Stay tuned…

By Mark Casciari

Today, the Supreme Court, in a 9-0 decision authored by Justice Breyer, issued its decision in Fifth Third Bancorp v. Dudenhoeffer, stating, “We hold that no such presumption [of prudence] applies. Instead, ESOP fiduciaries are subject to the same duty of prudence that applies to ERISA fiduciaries in general, except that they need not diversify the fund’s assets.”  The Court did not address the ERISA duty of loyalty.

Even though the Court has firmly placed the presumption of prudence, created in Moench v. Robertson, 62 F. 3d 553, 571 (3d Cir. 1995) and adopted in some form by all of the Courts of Appeal, see our prior articles, into the dustbin of American jurisprudence, there is much in Dudenhoeffer to warm the hearts of ERISA fiduciaries.

The Court reversed the decision of the Court of Appeals for the Sixth Circuit.  The Sixth Circuit had held that a complaint alleging that the fiduciaries should have sold publicly traded stock (or take other action not specifically authorized by ESOP documents) just before a substantial decline in stock prices stated a valid ERISA claim.

Practitioners, employee benefits professionals, and of course fiduciaries, should note these statements of the Court in Dudenhoeffer:

• The Court expressly recognized that a goal of Congress is to encourage the establishment of ESOPs, and that Congress “is deeply concerned that the objectives sought by this series of laws will be made unattainable by regulations and rulings which treat [ESOPs] as conventional retirement plans, which reduce the freedom of the employee trusts and employers to take the necessary steps to implement the plans, and which otherwise block the establishment and success of these plans.”  This passage could be cited to the Department of Labor, which, for years, has exhibited antagonism towards ESOPs.

• The Court stated that plaintiffs should be unable to survive a motion to dismiss and thereby engage in discovery merely by alleging that the fiduciaries should have taken action to protect publicly-traded company stock in light of publicly available information.  Discovery, of course, dramatically increases settlement values.  Prior Supreme Court decisions allow discovery only if the complaint makes “plausible” allegations.  The Court in Dudenhoeffer said:  “[W]here a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.”  (Emphasis added.)

• The Court stated that plaintiffs will not enter the discovery door without strong allegations that the fiduciaries breached their duties on the basis of inside information:  “To state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”  (Emphasis added.)  For a further analysis of the relation between securities laws and ERISA, see M. Casciari and I. Morrison, “Should the Securities Exchange Act be the Sole Federal Remedy for an ERISA Fiduciary Misrepresentation of the Value of Public Employer Stock,” John Marshall Law Review, Vol. 39 No. 3 (Spring, 2006).

• The Court stated that plaintiffs cannot survive a motion to dismiss without plausible allegations of conduct the fiduciaries should have undertaken:  “[L]ower courts faced with such claims should also consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases—which the market might take as a sign that insider fiduciaries viewed the employer’s stock as a bad investment—or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.”  (Emphasis added.)

These statements of the Court may help fiduciaries win motions to dismiss not only in the company stock context, but also in other contexts.  The Court’s statements may be seen as having the effect of raising the plausibility bar applicable to all ERISA fiduciary breach claims.

By: Ian Morrison and Abigail Cahak

The first (or second) question to ask in any ERISA breach of fiduciary duty case is whether the acts in question are even fiduciary acts.

On appeal in an ERISA “stock drop” case, the Second Circuit focused on that basic question, resulting in a clean win for the defendants.

Participants in the Morgan Stanley 401(k) and Employee Stock Ownership Plans (“Plans”) sued after the great recession caused the value of 2007 and 2008 contributions to the Plans in Morgan Stanley stock to crater, allegedly dropping in value from $2.2 billion to $675 million.  The participants sued alleging that the drop was the result of an imprudent investment because Morgan Stanley’s exposure to subprime and mortgage-backed securities had caused the value of the stock to drop.

On March 28, 2013, the U.S. District Court for the Southern District of New York dismissed the cases because, although the named defendants were de facto fiduciaries under ERISA, the plaintiffs had not alleged enough to overcome the so-called Moench presumption that employer stock investments in plans that require such investments are presumed prudent unless plaintiffs can show the plan sponsor’s impending collapse or other “dire” circumstances.

On appeal, the Second Circuit took a back to basics approach to the case.  In a May 29, 2014 opinion, the court ruled that the defendants were not fiduciaries at all, at least not for purposes of anything at issue in the case.  (Coulter v. Morgan Stanley & Co. Inc., No. 13-2504 (2d Cir. May 29, 2014).)  The Court held that establishing and funding the Plans were “settlor functions” not subject to challenge under ERISA’s fiduciary duty rules.  The Court said that the fact that the Plans were already in existence was irrelevant because at the time the decisions were made, the company stock was not an asset of the Plans. The Court cautioned that fiduciary status does not exist “simply because an employer’s business decision proves detrimental to a covered plan or its beneficiaries.”

With aspects of the Moench presumption subject to review by the Supreme Court, with a decision expected in Fifth Third Bancorp v. Dudenhoeffer later this month, the Court’s move may have been calculated to avoid any need for reconsideration in light of the high court’s ruling.  But the Third Circuit’s decision did rely on a view employee benefits practitioners have long held:  the act of plan funding (the amount as well as the nature of payment) is not a fiduciary act.  That’s not to say that funding a plan with employer stock is free of risk after the Second Circuit ruling, but Coulter certainly gives the defense another tool to fight back against stock drop claims.

By: Ada Dolph and James Goodfellow

The U.S. Department of Labor (“DOL”) continues to roll out regulations focused on plan fee disclosures.  Last week, the DOL published a proposed amendment to the 2012 final rule proposing to make mandatory a guide for covered service providers to include with their ERISA Section 408(b)(2) disclosures to plan fiduciaries.  In its Fact Sheet accompanying the proposed amendment, the DOL stated that since publication of the 2012 final rule which attached a guide as a “sample,” it has been reviewing service providers’ disclosures and plan fiduciaries’ experiences in receiving the disclosures as well as comments, and concludes that a required guide is warranted.  The DOL asserts that the proposed guide will assist plan fiduciaries in obtaining the information required to assist in evaluating the reasonableness of the compensation to be paid for plan services and potential conflicts of interest that may affect the performance of those services.  It characterizes its current renewed effort to require a guide as “provid[ing] clarity and specificity, while avoiding the uncertainty and burdens that . . . may accompany construction of a ‘summary’ of existing documents.” 

The proposed guide, akin to a table of contents, must specifically identify the document, page, section, or other specific locator, to enable the plan fiduciary to quickly and easily find the following information:

  • The description of the services to be provided;
  • The statement concerning services to be provided as a fiduciary and/or as a registered investment advisor;
  • The description of: all direct and indirect compensation, any compensation that will be paid among related parties, compensation for termination of the contract or arrangement, as well as compensation for record keeping services; and
  • The required investment disclosures for fiduciary services and recordkeeping and brokerage services, including annual operating expenses and ongoing expenses, or if applicable, total operating expenses. 

Other provisions of the proposed rule concern format, and the frequency with which updates to this information would be required to be provided (e.g., annually or as changes occur).  Written comments to the proposed rule must be received by the DOL before June 10, 2014.

By Kathleen Cahill Slaught and Justin T. Curley[1]

In Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006), the U.S. Supreme Court held that an ERISA plan could recover settlement proceeds from a beneficiary under the terms of the plan rather than under an equitable lien theory requiring “strict tracing” of the settlement funds into the beneficiary’s possession.  Previously, other courts, including the Ninth Circuit, read the Supreme Court’s earlier holding in Great-West v. Knudson, 534 U.S. 204 (2002), to bar ERISA plans from recovering money previously paid out to plan participants who subsequently recovered from the third parties who had caused their injuries.  The Supreme Court in Sereboff however held that the ERISA plan at issue could request reimbursement of the benefits paid as a result of the accident pursuant to a reimbursement provision in the plan.

The Sereboff decision contrasts with Knudson which concluded that, because the lawsuit recovery was paid to various entities other than the beneficiary (including a special needs trust), the kind of relief that Great-West sought from the beneficiary was not traceable and therefore unavailable.  This “strict tracing” rule from Knudson effectively shut out ERISA plans from recovering from beneficiaries where the settlement monies were dispersed.

While Sereboff did not explicitly overrule Knudson, the Sereboff decision effectively overruled most of Knudson, in that post-Sereboff a plan administrator or ERISA fiduciary can recover money from a beneficiary to enforce the terms of the plan even without being able to strictly trace identifiable funds into the beneficiary’s possession.

A cascade of circuit courts—the First, Second, Third, Sixth, Seventh and Eighth Circuits—have interpreted Sereboff to hold that a fiduciary can assert an equitable lien even if the funds at issue cannot be strictly traced.  But the Ninth Circuit stands apart; in Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F. 3d 1083 (2012), the Ninth Circuit held that a fiduciary must be able to strictly trace the funds into the beneficiary’s possession.  Last year the U.S. Supreme Court declined to review Bilyeu and resolve the circuit split regarding strict tracing.  In addition, the Second Circuit has recently disagreed with the Ninth Circuit’s holding in BilyeuSee Thurber v. Aetna Life Ins. Co., 712 F.3d 654, 664 (2d Cir. 2013).

Thus, for most of the country, if an ERISA plan’s terms allow for reimbursement from a beneficiary, the likely outcome in most cases will be that the recovery will be permitted, even if the funds cannot be strictly traced.  However, ERISA plan sponsors and insurers in the Ninth Circuit must be prepared to face a higher hurdle when attempting to recover funds from a beneficiary.  Attorneys should carefully review the terms of the relevant ERISA plan documents to ensure that the plan actually allows the recovery sought by the ERISA plan sponsor and insurer.


[1] Hardly Strictly Bluegrass is an annual free music festival held in San Francisco’s Golden Gate Park.

By: Ronald J. Kramer

When it comes to monetary damages, usually a plaintiff must show some type of harm to recover.  That apparently is not the case, however, when seeking plan reformation as a remedy for an alleged failure to disclose certain information.

In Osberg v. Foot Locker, Case No. 13-187-cv (2d Cir. Feb. 13, 2014) (summary order), plaintiff filed suit on behalf of himself and a class of participants over a defined benefit plan that had been converted to a cash balance plan.  Plaintiff alleged defendants had violated ERISA by: (i) issuing false and misleading SPDs in violation of ERISA Section 102(a) disclosure requirements; (ii) breaching fiduciary duties in violation of ERISA Section 404(a) by making such materially false statements; and (iii) failing to provide proper notice as required by ERISA Section 204(h) that the cash balance plan would reduce benefit accruals.  Plaintiff sought monetary damages under an equitable surcharge theory, and sought the equitable reformation of the plan document.  The district court granted summary judgment in favor of defendants, and the plaintiff appealed.

The Second Circuit Court of Appeals upheld the summary judgment as to the Section 204(h) claim, because the remedy plaintiff sought, the invalidation of portions of the plan amendment, was not achievable.  The only available remedy for such a purported violation was the complete invalidation of the plan amendment.

Regarding the disclosure claims, the district court had held plaintiff’s Section 102(a) claim time-barred, and had found he had failed to raise a genuine issue of material fact entitling him to surcharge and contract reformation on either his Section 102(a) or Section 404(a) claims.  The Second Circuit sidestepped the limitations issue given the Section 404(a) claim admittedly was timely, and instead addressed whether the district court properly found plaintiff had failed to raise a genuine issue of material fact with respect to his demand for “appropriate equitable relief” — specifically, surcharge or reformation — under ERISA Section 502(a)(3).  There, the district court had found plaintiff had failed to raise a genuine issue of material fact as to whether he suffered the type of “actual harm” necessary to obtain the equitable relief of reformation and surcharge.  On that issue the Second Circuit found that the district court erroneously applied an “actual harm” requirement.  Citing to CIGNA Corp. v. Amara, 131 S. Ct. 1866, 1881 (2011), wherein the Supreme Court determined that any requirement of harm must come from the law of equity, the Second Circuit found that equity does not demand  a showing of “actual harm” to obtain contract reformation.

Defendants argued that the district court’s decision should nevertheless be affirmed because plaintiff, as a former employee, lacked standing to pursue reformation.  Defendants basically read Amara to limit monetary relief to surcharge claims, and claimed that absent a viable surcharge claim the only beneficiaries with standing to pursue reformation  would be persons who could prospectively benefit from a modification of plan terms — something that would not include former employees.  The Court rejected that as well, finding such an interpretation supported neither by Amara nor equity.

The Court left it for the district court to decide in the first instance whether plaintiff could otherwise satisfy the basic requirements for plan reformation.  Moreover, while the Court upheld the dismissal of the surcharge claim as moot given its finding that plaintiff could obtain a full recovery via his reformation claim, the court did not foreclose the plaintiff from seeking to reinstate his surcharge claims if his reformation claim later failed.

The Second Circuit has made it clear that ERISA plaintiffs bringing equitable claims and seeking as a remedy plan reformation need not show actual harm — and yet nevertheless may still be entitled to some form of monetary relief.  How this will work in practice remains to be seen.