Supreme Court Limits Fiduciary Breach Lawsuits

Brian Anderson – 401k Specialist

5-4 decision announced June 1 in Thole v. U.S. Bank shuts door on wide range of fiduciary breach lawsuits by limiting the circumstances under which pension plan participants can sue

The U. S. Supreme Court ruled 5-4 Monday that workers can’t accuse pension plan administrators of mismanaging their retirement savings unless they have been harmed—such as by not receiving 100% of their promised pension payments—closing the door on a 7-year-old Employee Retirement Income Security Act (ERISA) case accusing U. S. Bank of squandering $750 million of its pension plan’s money by making risky investments.

The SCOTUS decision in James J. Thole et al. v. U.S. Bank NA et al.could eliminate a wide range of fiduciary breach lawsuits by limiting the circumstances under which employees and retirees can sue.

“In recent years, courts have been swamped by lawsuits alleging that retirement plan fiduciaries breached their duties. It’s one thing when the plaintiffs filing the lawsuit have a stake in the outcome; but lawsuits by disinterested plaintiffs don’t belong in federal court,” said Mayer Brown partner Brian Netter, a co-leader of the firm’s ERISA Litigation practice, in a statement about the decision. “Today, the Supreme Court confirmed that the basic rules of Article III standing apply in the context of ERISA lawsuits, too.”

The plaintiffs in the case, James Thole and Sherry Smith, are retired participants in U.S. Bank’s defined-benefit retirement plan. Both have been paid all of their monthly pension benefits so far and are legally and contractually entitled to those payments for the rest of their lives.

As such, the Supreme Court ruled that because Thole and Smith have no concrete stake in the lawsuit, they lack Article III standing, upholding a previous dismissal in U.S. District Court for the District of Minnesota and a decision by the U. S. Court of Appeals for the Eighth Circuit.

As pension plan participants, Thole and Smith would receive exactly the same future benefits payments whether they won or lost the case, leading the Court to determine they have no concrete stake in the lawsuit.“Of decisive importance to this case,” wrote Justice Brett Kavanaugh in delivering the opinion of the Court, “the plaintiffs’ retirement plan is a defined-benefit plan, not a defined-contribution plan. In a defined-benefit plan, retirees receive a fixed payment each month, and the payments do not fluctuate with the value of the plan or because of the plan fiduciaries’ good or bad investment decisions. By contrast, in a defined-contribution plan, such as a 401k plan, the retirees’ benefits are typically tied to the value of their accounts, and the benefits can turn on the plan fiduciaries’ particular investment decisions.”

“To be sure, their attorneys have a stake in the lawsuit, but an ‘interest in attorney’s fees is, of course, insufficient to create an Article III case or controversy where none exists on the merits of the underlying claim,’” Justice Kavanaugh wrote.

In addition to requesting that U. S. Bank repay the plan approximately $750 million in losses that the plan allegedly suffered, the plaintiffs had also sought attorney’s fees—to the tune of at least $31 million dating back to the District Court case.

Beyond that, the plaintiffs also asked for injunctive relief, including replacement of the plan’s fiduciaries.

Justice Kavanaugh was joined by Justices John Roberts, Clarence Thomas, Samuel Alito and Neil Gorsuch in the decision. Thomas filed a concurrent opinion, in which Gorsuch joined.

Justice Sotomayor’s dissent

In her dissenting opinion, Justice Sonia Sotomayor wrote the current funded status of a defined benefit plan is not a proper measure for whether the participants have a right to sue for breaches of fiduciary duties and prohibited transactions under ERISA.

Justices Ruth Bader Ginsburg, Stephen Breyer and Elena Kagan joined the dissent.

“The Court determines that pensioners may not bring a federal lawsuit to stop or cure retirement-plan mismanagement until their pensions are on the verge of default. This conclusion conflicts with common sense and longstanding precedent,” Justice Sotomayor wrote.

Her dissent notes the plaintiffs allege that, as of 2007, U.S. Bank breached its fiduciary duty of loyalty by investing pension-plan assets in their own mutual funds and by paying themselves excessive management fees, and that this self-dealing persists today.

“According to the complaint, the fiduciaries also made imprudent investments that allowed them to manipulate accounting rules, boost their reported incomes, inflate their stock prices, and exercise lucrative stock options to their own (and their shareholders’) benefit,” Sotomayor wrote.

As to whether the plaintiffs have suffered a “concrete” injury to support their constitutional standing to sue, Sotomayor argued they have for at least three independent reasons.

“First, petitioners have an interest in their retirement plan’s financial integrity, exactly like private trust beneficiaries have in protecting their trust. By alleging a $750 million injury to that interest, petitioners have established their standing,” Justice Sotomayor said.

Second, she said the Court is treating pension plan participants “as mere bystanders to their own pensions. That is wrong on several scores.”

For starters, she said, “it creates a paradox: In one breath, the Court determines that petitioners have “no equitable or property interest” in their plan’s assets; in another, the Court concedes that petitioners have an enforceable interest in receiving their ‘monthly pension benefits.’ Benefits paid from where? The plan’s assets, obviously.

“Precisely because petitioners have an interest in payments from their trust fund, they have an interest in the integrity of the assets from which those payments come.”

Third, Justice Sotomayor wrote that the Court declares that petitioners’ pension plan “is more in the nature of a contract,” but then overlooks that the so-called contract creates a trust.

Justice Sotomayor also questions the Court concluding that plaintiffs will receive benefits indefinitely “because they receive benefits now? The Court does not explain how the pension could satisfy its monthly obligation if, as petitioners allege, the plan fiduciaries drain the pool from which petitioners’ fixed income streams flow.”

‘Wide-ranging’ impact for retirement savers

Karen L. Handorf, a partner at Cohen Milstein Sellers & Toll PLLC, and chairwoman of the firm’s employee benefits practice group, wrote about the case in 401k Specialist last year as one of the “critical ERISA cases to watch.”

In that piece, she said a failure by the Supreme Court to reverse the Eighth Circuit’s opinion will have wide-ranging implications for retirement savers.

“ERISA was promulgated in the wake of high-profile pension failures, to prevent the poor pension management that left retirees scrambling to secure their future after years of hard work and corporate promises,” Handorf wrote. “This pragmatic and essential purpose is frustrated if a participant is only authorized to bring a suit to remedy mismanagement once irreversible harm occurs.”

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