Compliance March 7, 2014

Adviser Not Liable for Plans' Bad Investment

A federal appellate court found a registered investment adviser for two pension plans was not a fiduciary for those plans.
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In the case of Tiblier v. Dlabal, the 5th U.S. Circuit Court of Appeals affirmed summary judgement in favor of Paul Dlabal by the U.S. District Court for the Western District of Texas. The district court concluded that Dlabal had not violated the Employee Retirement Income Security Act (ERISA) because he provided plaintiffs with written disclosures regarding the investment risks of a particular investment that went sour. The appellate court said it need not address that issue because it concludes Dlabal was not a fiduciary as defined by ERISA. 

In its opinion, the appellate court noted that in order for the defendant to be considered a plan fiduciary under ERISA, the following conditions would have to take place: “(i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.”

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The 5th Circuit found, “the plaintiffs have not provided any evidence indicating that Dlabal had the authority or control contemplated under subsection (i).” It added that whether the plaintiffs gave Dlabal discretionary authority or control over the plans is irrelevant because it is undisputed that Dlabal did not exercise that authority with respect to the only transaction at issue in the case.

The court said Dlabal is not considered a fiduciary because he did not receive a fee from the plans in connection with the particular investment mentioned in the lawsuit, but rather he received compensation from a third party. While Dlabal was entitled to a recurring annual fee from the plans for this particular investment, he instead chose to take a portion of the commission that Adageo paid to a third-party broker/dealer used to make this private placement investment. "Under our binding precedent in American Federation of Unions Local 102 Health & Welfare Fund v. Equitable Life Assurance Society of the United States, this third party commission is not a fee under §1002(21)(A)(ii)," the court said.

Finally, the court noted the plaintiffs concede that the third prong of the fiduciary test does not apply as Dlabal “played no part in the administration of the plans.”

The lawsuit and subsequent appeal were filed by Eric Tiblier and his wife Susan Tezlaff. The two had employed Dlabal as an investment adviser for their personal investments and for the two pension plans established for Tiblier’s cardiology practice. One investment proposed by Dlabal was the corporate bonds of an oil and gas startup company named Adageo Energy Partners. 

In 2010, Adageo ceased making interest payments to the bonds. In 2012, Tiblier and Tezlaff filed their suit, claiming Dlabal and CACH Capital Management, the firm with which he was affiliated, breached their fiduciary duty under ERISA, including by transfer and self-dealing. In essence, plaintiffs alleged that the Adageo bonds were an unsuitable investment for the plans’ funds, and that Dlabal made multiple oral misrepresentations to plaintiffs in violation of his fiduciary duties.

The ruling by the 5th Circuit can be downloaded here.

Compliance March 7, 2014

Church Plan Lawsuits Could Reverse 30 Years of Precedent

Recent court cases are not the first efforts to try to protect retirement assets for employees in plans that have been designated as “church” plans by the Internal Revenue Service (IRS).
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The pension plan for the Hospital at Orange in New Jersey was originally covered by the Employee Retirement Income Security Act (ERISA) and protected by the Pension Benefit Guaranty Corporation (PBGC). However, in 2003, after the hospital became affiliated with Cathedral Healthcare System Inc., the IRS granted the pension plan “church plan” status, which removed it from the PBGC’s protection. Soon after that, the hospital began winding down its operations and laying off employees. 

Over several years, at the request of the Pension Rights Center, the PBGC worked with the hospital’s former staff and the IRS to revisit that designation. IRS reversed its designation in 2013 and the PBGC now covers the pensions (see “IRS Reversal on Status Lets PBGC Save Church Plan”). About the reversal of its decision, the IRS said the hospital’s circumstances were unique and the agency was not setting a precedent. The agency reversed its decision about the plan’s status after negotiations and an eight-year internal review. 

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While the negotiations were ongoing with the Hospital at Orange, another church plan facing a lawsuit had its status confirmed by a federal court.  In the case of Thorkelson v. Publishing House of the Evangelical Lutheran Church in America, d/b/a Augsburg Fortress Publishers, the plaintiffs alleged the pension plan of Augsburg was not a church plan, and defendants breached their duties under ERISA, or alternatively under state law, by among other things failing to adequately fund the plan; failing to prudently and loyally manage the plan’s assets; failing to disclose necessary information to co-fiduciaries and participants; and breaching their contractual and trust-law duties to the participants (see “Law Firms File ERISA Class Action Against Lutheran Publishers”).

The court found the statutory language defining “church plan,” as well as IRS determinations and various court decisions supported a finding that the plan is a church plan.

Fast forward to December 2013, and a federal court deciding the case of Rollins v. Dignity Health dismissed the legal and regulatory precedent. The court declined to defer to IRS private letter rulings interpreting whether plans qualify as church plans exempt from ERISA, and said it is not persuaded by other court rulings, but by the principle Congress “says in a statute what it means and means in a statute what it says there.” Basically, it was saying everyone has been reading statute wrong for 30 years (see “Court Weighs In on Church Plan Issue”).

The IRS has not so far responded to the court’s decision, and prior to the decision, even issued another church plan ruling for a plan involved in a lawsuit (see “Disagreement Voiced on IRS Church Plan Ruling”).

However, prior to the December decision, the United States intervened in the five current cases, saying “Federal Rule of Civil Procedure 5.1(c) permits the Attorney General to intervene in an action when, as here, the constitutionality of a federal statute has been challenged. However, the U.S. is not filing a brief in the cases at this time because the courts have a duty “to resolve plaintiffs’ threshold statutory claims before adjudicating their constitutional contention.”

The Attorney General will decide when and if to address the constitutionality claims depending on further developments in the cases (see “U.S. Intervenes in Church Plan Lawsuits”).

With the Rollins decision, any 501(c)(3) entity that is not a church—health plans, schools, any entity not known as steeple churches that have services—are in danger. If the Rollins court is right, and all this time these plans have not been church plans, the potential liabilities and tax penalties are massive.

All plans would be tax disqualified, would have to file 5500s, would have to provide ERISA notices. If a plan is disqualified, participants would have to report benefits as income. The plans could possibly correct under the IRS voluntary compliance program, but what would the IRS require to fix plan qualification? ERISA Section 3(33)(D) provides the ability to correct retroactively any plan maintained by church that fails to meet the standards of the Section. The correction period doesn’t actually start until there is deemed to be a failure. This was argued in the Augsburg case, but since the court agreed it is a church plan, it didn’t need to address correction the correction.

However, the plan sponsor has no obligation to correct the qualification issue, and the question is, if the courts all go the way of theRollins court, will the plan sponsors decide not to put the time, money and effort into correcting or will they just issue 1099s to participants?

It is still possible the other district courts handling these cases and the appellate court for the Rollins case may agree with the Augsburg court.

Of note, following the Augsburg case, the IRS issued Revenue Procedure 2011-44, which modified the procedures for plans that are filing a request for a determination letter of church plan status. The revenue procedure provides that plan participants and other interested parties be notified of the letter request (see “IRS Issues Revised Procedure for Church Plans”).

In addition, following the filing of the first of the current church plan lawsuits, two U.S. senators introduced a bill in Congress to help resolve what they term as “an unfortunate application of our current pension rules on church pension beneficiaries.” (See “Bill Addresses Issues with Church Retirement Plans.”)

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