Compliance December 11, 2015

Plan Sponsor Procedural Errors Rebuked by Appeals Court

A federal appeals court found easy grounds for approving a default judgement levied against a plan sponsor whom effectively ignored participants’ claims regarding delinquent employer contributions. 
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The United States Court of Appeals for the Seventh Circuit has backed a lower court’s ruling in the interesting case of Central Illinois Carpenters Health And Welfare Trust Fund vs. Con-Tech Carpentry LLC.

Unlike other recent court cases to make the retirement industry news headlines, this one is not gaining attention for its price tag or the intractable nature of the legal principles being debated. Instead the case presents some telling examples of clear-cut procedural errors which resulted in the 7th Circuit’s refreshingly short, 5-page decision approving some $100,000 in damages for the plaintiffs.  

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Simply speaking, the appeals court found no grounds to overturn a district court’s earlier decision to hold the plan sponsor liable for roughly $70,000 in delinquent contributions (plus interest and fees), owed to several multiemployer health and welfare benefit funds. This initial decision was based not on close consideration of the plan documents or contribution control practices of the plan sponsors—but simply on the fact that the plan sponsor apparently made no effort to formally answer the charges before some critical deadlines had passed.

As Mark Casciari, partner at Seyfarth Shaw LLP, and Christopher Busey, an associate in the firm’s labor and employement department, explain in a Lexicology blog post, the plaintiffs “sought roughly $70,000 in delinquent contributions from the defendant employer. The defendant failed to answer the complaint within 21 days. The plaintiffs then requested a default judgment, and the defendant again failed to respond. When the company failed to appear at the hearing on the default motion, the district court entered a default judgment.”

While the plaintiffs still had to submit adequate proof of damages, they did so successfully in the eyes of the district court, case documents show, leading to nearly $100,000 in total damages. As Casciari and Busey explain, only then did the defendants formally respond, “by filing a motion under Rules 60(b) and 55(c) of the Federal Rules of Civil Procedure. The district court denied the motion, and the company appealed.”

NEXT: Plan sponsors must mind court deadlines 

Casciari and Busey further explain that the company “could not rely on Rule 55(c) because it did not seek to set aside the entry of default until after the court entered judgment. The company’s arguments also could not satisfy the Rule 60(b) standard of ‘excusable neglect.’ It first argued that it believed answering was unnecessary because the parties were already discussing settlement. The court responded that a party can both answer a complaint and work towards settlement simultaneously.”

The text of the appellate court decisions explains the decision this way: Instead of properly filing a Rule 55(c) motion, “Con-Tech filed a motion for a stay in favor of arbitration. So by January 13, when the district judge turned to the subject of damages, the complaint had not been answered, a default had been entered, no Rule 55(c) motion had been filed, and Con-Tech had not contested the plaintiffs’ evidentiary submissions about relief. And once the district court entered its judgment, the time to seek relief for ‘good cause’ under Rule 55(c) expired.”

The appellate court explains Rule 55(c) clearly says that “to set aside a default judgment a litigant must file a motion under Fed. R. Civ. P. 60(b).” The requirements under that rule are steeper, for example in that relief under Rule 60(b)(1) depends on excusable neglect, and in that “appellate review is deferential,” as discussed/applied in the previous case Moje v. Federal Hockey League (7th Circuit 2015).

“Con-Tech filed a Rule 60(b) motion on January 15,” the appellate decision shows. “The motion also invoked Rule 55(c), but too late. Con-Tech told the district judge that it had not ignored the suit but had instead started negotiating with plaintiffs’ lawyers, seeking a satisfactory settlement. The judge replied that Con-Tech may not have ignored the plaintiffs’ demands, but that it had ignored the litigation.”

Casciari and Busey explain the defendants also “contended that filing a substantive response would waive its right to arbitration. The court held, however, that nothing prevents a party from answering with a demand for arbitration. The defendant thus failed to show excusable neglect and instead decided to march to the beat of its own drum.”

Compliance December 11, 2015

Changes ‘Could Happen Soon’ to Fiduciary Rule

Lawmakers and industry reps are concerned with where the proposal is heading, what’s in it and how fast it’s moving. 
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Bradford P. Campbell, counsel in Drinker, Biddle and Reath’s Employee Benefits & Executive Compensation Practice Group, and former head of the Department of Labor’s (DOL) Employee Benefits Security Administration, recently testified before Congress about the DOL’s proposed fiduciary, or conflict-of-interest, rule.

Campbell told attendees of a Drinker, Biddle and Reath Inside the Beltway webcast, sponsored by Natixis Global Asset Management, there are several things moving in Congress around the omnibus appropriation budget deal regarding the fiduciary rule. Several groups are concerned with where the proposal is heading, what’s in it and how fast it’s moving. According to Campbell, one group wants to defund the DOL initiative. But he thinks that is probably less likely than other alternatives that could be amended into the bill.

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According to Campbell, the idea is that the budget deal is an example of must-pass legislation, so the president will likely sign it and not veto it. Another group is suggesting the DOL be required to re-propose the rule with a short comment period next year. Campbell notes that this will affect the timing of the issuance and effective date of the rule and give interest parties an opportunity to see how the DOL is resolving concerns raised during the first comment period.

In addition, a bipartisan group of lawmakers recently released principles to guide the rule and are coming up with legislation using those principles.

“Stay tuned; we might see a material change in the progress of the rule in the next week,” he says.

Fred Reish, a partner in Drinker Biddle’s Employee Benefits & Executive Compensation Practice Group, chair of the Financial Services ERISA Team and chair of the Retirement Income Team, told webcast attendees he isn’t so sure the budget deal will bring a change to the fiduciary rule process. “My view is that Republicans will focus more on issues such as defunding Planned Parenthood or limiting Syrian refugees,” he says. “Looking at the politics of today, those issues are greater hot buttons than the fiduciary rule, and I can’t imagine the president not vetoing a bill that has that kind of stuff in it.”

NEXT: Changes we might see in the rule

Campbell says that at administrative hearings in August, the DOL was hinting that it could make changes to education provisions in the new rule, suggesting that it could still allow pie charts of investment allocations based on retirement plan participants’ ages, but not citing specific investments, just mentioning asset classes in general. Campbell and Reish speculate that the agency will probably allow more accommodations for employer retirement plans but not for individual retirement accounts (IRAs).

The rule as written could make wholesalers fiduciary advisers to plans; Campbell says there will probably be some changes in the final rule regarding whether wholesalers talk to plans directly or in a meeting with plan and advisers. He adds that the DOL didn’t seem receptive to a broader seller’s exemption.

“Our biggest problem is we’re all speculating because there is little the department has said publicly. For most of these issues, we won’t see what we have to do until the final rule is published,” Campbell says.

Reish says he believes the DOL is going to maintain its position that advice about rolling distributions into IRAs will create a fiduciary role. Campbell agrees, noting that one of the core reasons the DOL made its proposal is its concern that at the point of rollover of employer retirement plan assets, the Employee Retirement Income Security Act (ERISA) and DOL protections are eliminated. He notes that this proposal is more focused on IRAs than employer plans than the proposal made years ago.

Campbell adds that one of the things people are wondering about is whether the DOL will change the treatment of annuities which are not in the 84-24 prohibited transaction exemption. “I predict it will not change 84-24. There weren’t a lot of comments about doing that. The bigger issue is the change [the DOL] makes in the definition of commissions—what is included and not—in its revised rule.”

Campbell adds that the best interest contract exemption (BICE) in the proposed rule is really not written in a way that is conducive to introducing insurance products in retirement plans. Commenters suggested rewriting the BICE to fit insurance products better.

COMING UP: Will the rule prompt lawsuits?

Campbell noted that in the DOL’s latest regulatory agenda, released just before Thanksgiving, it didn’t give a timeline for publishing a final rule. There are rumors that it will be issued as early as January 2016, but Campbell doesn’t see that as being possible considering the sheer volume of issues. “My best guess is March or April, and the eight-months proposed delay means it will go into effect before the end of 2016 and before a change in presidents,” he says.

Campbell notes it will be harder for the new administration to undo the rule if it’s in effect before that time, but there’s a lot of work the DOL has to do to meet that goal. Before it is published, it will have to be submitted to the Office of Management and Budget (OMB), which has 90 days to make a decision, but Campbell doesn’t think once it is passed to OMB it will take three months to get published.

After the final rule is published, Campbell speculates that the DOL’s enforcement of the BICE might only look at the most egregious cases. However, depending on what changes are made regarding the BICE, it could be subject to different interpretation, which may be conducive to private lawsuits.

And, if the final rule is similar to the proposed rule, some financial trade associations could go to court to challenge the process of the rule. There could potentially be litigation over whether the rule was properly done. “I would assume [the DOL] is going to anticipate being sued and formulate a final rule that protects against that,” he says.

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