Appellate Court Splits with Sister Court on 401(k) Breach Remedies

As the U.S. Supreme Court ponders whether a 401(k) participant can pursue a fiduciary breach suit on behalf of himself rather than on behalf of the plan, a federal appellate court has ruled that two participants can move forward with such a breach suit as individuals.

In reversing a lower court decision throwing out an Employee Retirement Income Security Act (ERISA) suit by physicians David H. Tullis and Michael S. Mack, the 6th U.S. Circuit Court of Appeals put itself at odds with a sister appellate court.

Circuit Judge Gilbert S. Merritt, in writing for the 6th Circuit, said the 4th Circuit Court of Appeals was wrong when it ruled in 2006 that suits filed under ERISA Section 502(a)(2) had to seek damages on behalf of the 401(k) plan itself – not individual participants. That 4th Circuit case, LaRue v. DeWolff, Boberg & Associates, is now pending before the U.S. Supreme Court (See High Court Ponders Scope of Fiduciary Breach Suits).

Merritt said he and his 6th Circuit colleagues were not persuaded by the 4th Circuit’s thought process in the LaRue case.

The 6th Circuit, which covers Michigan, Ohio, Kentucky, and Tennessee, threw out a ruling by U.S. District Judge Jack Zouhary of the U.S. District Court for the Northern District of Ohio

“The District Court concluded that a loss “to the plan’ meant that the plaintiffs had to seek compensation in a representative capacity for the entire plan,” Merritt wrote. “We are unable to think of any reason why the ability to sue to recover losses should turn on the number of plan participants allegedly affected by the breach; whether one, ten or 1,000 participants are affected, the loss occurs to the plan. Indeed, although the number of affected participants differs, the nature of the relief – the payment of money to the plan – is the same regardless of the number of participants to whom the recovered assets are allocated. If the plaintiffs are successful in their case, any assets recovered from the defendant would first be paid into the plan, then allocated to their individual accounts, and ultimately paid to them in the form of benefits.”

Merritt asserted that ERISA’s intent was to protect individual participants from fiduciary breaches.

“[W]hile ERISA may have reflected Congress’s attempt to define available remedies, the overarching goal of the statute was to ensure that such relief was available in cases of fiduciary breaches. The District Court’s holding vitiates this goal by completely precluding any relief for plaintiffs whose recovery could be characterized as benefiting only an individual and not the plan as a whole,” the appeals court said.

According to the decision, Tullis and Mack filed suit against UMB Bank, the trustee for the Toledo Clinic Employees’ 401(k) Profit Sharing Plan, for not properly advising the two physicians of fraudulent activities of the plan’s investment adviser, William Davis of Continental Capital Corp. Their suit was filed after the plan refused to pursue its own legal action for plan losses, citing an indemnification clause in its trustee agreement with UMB.

The 6th Circuit ruling in Tullis v. UMB Bank N.A., 6th Cir., No. 06-4632 1/28/08 can be found here.