Compliance December 10, 2010

DoL: Bankruptcy-Appointed Trustee Can Bring ERISA Action

In his second attempt to bring suit against a custodian used by a rogue plan administrator, bankruptcy-appointed trustee John C. McLemore is again getting support from the U.S. Department of Labor.
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Addressing Regions Bank’s attempt to curtail McLemore’s Employee Retirement Income Security Act standing (ERISA) based on a prior court decision that a trustee seeking to exercise powers and fulfill obligations exclusively under the Bankruptcy Code may take action only for the benefit of the bankruptcy estate rather than for the debtor’s former clients, the DoL said in an Amicus Brief. The prior court case did not involve a trustee exercising standing and authority under another federal statute such as ERISA.  

“The clear and unambiguous language of section 502(a) of ERISA, 29 U.S.C. § 1132(a), the provision which grants standing to an ERISA fiduciary to commence an action, contains no such limitation,” the brief says. “Congress has chosen to broadly define who may be a fiduciary in order to maximize the protections afforded under ERISA. Thus, to exclude certain ERISA fiduciaries from their duties, based solely upon their status as bankruptcy trustees, would contravene the plain meaning of the statute and defeat the intent of Congress to protect the interests of participants in employee benefit plans.”  

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In addition, the DoL said Regions attempt to bar the suit by McLemore by use of the in pari delicto defense – an unclean hands doctrine that, where applicable, bars wrongdoers from obtaining recoveries in actions for wrongs for which they have been the perpetrators – is equally unavailing. According to the agency’s Brief, its application in this type of case would be contrary to ERISA, which generally requires fiduciaries to act with complete loyalty and prudence towards plan participants, unqualifiedly confers standing on them to bring suits for fiduciary breach, and specifically directs successor fiduciaries to seek to remedy a prior or co-fiduciary’s breach of fiduciary duty.   

The DoL noted that in its previous decision, the district court concluded that it particularly makes no sense to impose an in pari delicto bar on McLemore as he has committed no wrong, but is seeking to correct a wrong. Moreover, he is suing Regions not on behalf of the debtors or the debtors’ estates, but in a representative capacity as a fiduciary of the ERISA plans, to recover losses to those plans for the benefit of plan participants who were the victims of the debtors’ wrongdoings.   

In its first decision, the district court dismissed multiple ERISA claims for relief brought by McLemore against Regions and Mid-Atlantic Capital Corp, a registered broker-dealer used by 1Point Solutions, on the grounds that neither of the defendants was an ERISA fiduciary. McLemore is appealing that decision.  

1Point Solutions, a Nashville-area benefits management firm faced multiple client lawsuits alleging the loss of funds in employee benefit programs the firm was running. Former 1Point CEO Barry Stokes pled guilty to 29 counts of embezzlement of retirement funds, in addition to several counts of wire fraud, mail fraud, money laundering, and criminal contempt (see Rogue Plan Administrator to Get 14 Years Under Plea Deal).  

The Amicus Brief is here.
Compliance December 10, 2010

DoL Calls for Stock Drop Ruling Reversal

The U.S. Department of Labor (DoL) has asked a federal appeals court to overturn a lower court ruling that cleared ING of wrongdoing in a stock-drop lawsuit.
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The DoL lawyers argued in a friend of the court brief that the trial judge was wrong in deciding the the company was mandated to retain the company stock fund as an option in the ING Savings Plan and that the defendants were not fiduciaries with respect to the company stock.  The lower court also contended that ING was qualified for a presumption of prudence often applied in stock drop cases and that the plaintiffs had not rebutted that presumption.

Participants alleged in their suit that ING violated the Employee Retirement Income Security (ERISA) Act by retaining the company stock fund when it was no longer prudent to do so. ING received aid from the Dutch Government because of its losses connected to mortgage-backed securities precipitating a 73% plummet in share price and causing significant plan losses, the DoL brief said.

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The DoL argued in its brief filed with the 11th U.S. Circuit Court of Appeals that were the lower court ruling to be affirmed, it would eliminate fiduciary responsibility for all decisions to invest in company stock whenever plan documents require the stock investment, and would immunize fiduciaries “from responsibility for even the most imprudent and disloyal investments in such stock.”

Declared the DoL lawyers, ”Plan drafters may not opt out of ERISA’s fiduciary structure, and deprive participants of critical statutory protections, by the simple expedient of mandating investment in a particular asset.”

The DoL’s ING brief is at http://www.dol.gov/sol/media/briefs/ing(A)-11-18-2010.htm. 

The DoL has been stepping up against cases that use the Moench “presumption of prudence” standard (see DoL Blasts 9th Circuit for Prudence Presumption Endorsement and Solis Argues for Stock Drop Case Law Change).

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