Lincoln Allowed ‘Causation’ Defense in Stock Drop Matter
A federal judge in Pennsylvania ruled that Lincoln National
Corp. can argue that its actions as
fiduciaries did not cause the plaintiff's investment losses.
U.S. District Judge Anita B. Brody of the U.S. District Court for the
Eastern District of Pennsylvania refused a request by plaintiff Michael
Dann to throw out the “causation” defense. “Lincoln’s causation
defenses thus appear to go to the heart of a requisite element for
Dann’s claims, and are not clearly legally insufficient,” Brody wrote in
a recent order.
Dann’s 2008 lawsuit claimed that the fiduciaries committed a
breach by continuing to offer company stock after it was no longer
prudent despite the fact that Lincoln National stock had dropped by 90%
as a result of the subprime mortgage meltdown rolling through the
nation’s financial services sector.
As the Dann case moved through the courts, Lincoln contended
that it was shielded by ERISA’s safe harbor defense as well as by the
notion that any losses suffered by the plaintiffs was as a result of
their investment choices and not because of something the fiduciaries
did or didn’t do.
EBSA Releases New Batch of ERISA Advisory Opinions
Federal regulators issued a series of advisory opinions
from correspondents asking for interpretations of the Employee
Retirement Income Security Act (ERISA).
Advisory Opinion 2011-06A dealt with questions about whether service
transactions that may occur between the Mitsubishi Group Brokers and
employee benefit plans for which Aberdeen Asset Management acts as a
fiduciary due to Mitsubishi Bank’s ownership of up to 19.9% of the
common stock of Aberdeen PLC, the parent corporation of AAM, and its
appointment of one member to Aberdeen PLC’s board of directors would run
afoul of ERISA Section 406(b).
EBSA reviewed the legal framework that the situation described
in the question might raise, and then regulators offered this guidance:
“In determining whether other types of common ownership or
control relationships between fiduciaries and potential service
providers constitute an interest in the service provider that may affect
the fiduciaries’ best judgment, the fiduciaries should consider all the
facts and circumstances relating to the nature and extent of the common
ownership or control relationship,” the advisory letter indicated.
Further, EBSA offered, “Where a relationship with a service
provider may affect the exercise of a fiduciary’s best judgment as
fiduciary, the fiduciary may not exercise the authority, control, or
responsibility that makes such person a fiduciary with respect to the
transaction. For some transactions, it may be possible for an investment
manager to implement objective criteria and policies, approved by the
investing plans, so that the investment manager does not exercise any
fiduciary judgment in connection with the transaction.
Whether a fiduciary has an interest in another party that may
affect the fiduciary’s best judgment is an inherently factual question
and that consideration must be given to all relevant facts and
circumstances, “including evidence bearing on all relationships between
the fiduciary and the other party, and should not be confined only to
party in interest relationships under section 3(14) of ERISA,” the
advisory opinion said.
Another
advisory opinion resulted from a question about whether a Navajo
Nation Tribal Court’s domestic relations order would be considered a
judgment within Section 206(d)(3)(B)(ii) of ERISA.
According to
the opinion, EBSA noted that some states have adopted laws to address
tribal court jurisdictional issues relating to domestic relations
orders. So, EBSA said, a tribal court order may constitute a “judgment,
decree or order made pursuant to state domestic relations law” for
purposes of ERISA section 206(d)(3)(B)(ii), if it is treated or
recognized as such by the law of a State that could issue a valid
domestic relations order with respect to the participant and alternate
payee.
However, as far as the case prompting the initial inquiry
was concerned, EBSA warned that neither the submission nor its review of
New Mexico law indicates that New Mexico recognizes or treats orders of
the Family Court of the Navajo Nation as orders issued pursuant to New
Mexico state domestic relations law..
In
another advisory opinion, issued by EBSA in response to a question
posed by the Florida Department of Financial Services, EBSA concluded
that two health plans doing business in Florida were, in fact, multiple
employer welfare arrangements (MEWA) under ERISA but that ERISA does not
pre-empt state of Florida insurance laws from being applied to the
programs.
Pursuant to ERISA section 514(b)(6)(A), if an employee
welfare benefit plan MEWA is not “fully insured,” state insurance laws
may be applied to the MEWA to the extent that such laws are “not
inconsistent” with the provisions of Title I, EBSA said.
If such
a plan MEWA is considered “fully insured” for ERISA purposes,
application of state insurance laws is limited to laws pertaining to the
maintenance of specified levels of contributions and reserves. EBSA
concluded, on the other hand, “and more pertinent to your request”, if a
MEWA is not itself an ERISA-covered employee welfare benefit plan,
nothing in Title I of ERISA would preclude a state from applying its
insurance laws to regulate the MEWA, EBSA said.
In
response to a letter from San Diego lawyer William A. Adams, EBSA noted
in another advisory opinion that if an individual retirement account
purchased a promissory note and deed of trust held by a bank, the
purchase would be a prohibited transaction if the IRA owner, Donald H.
Warfield, and his spouse, Betty L. Warfield, are obligors on the note
and if title to the real property encumbered by the deed of trust is
held by a family trust for which the IRA owner and his spouse are
trustees.
“Based upon the facts you describe, it is the opinion of
the Department that a prohibited extension of credit, in violation of
Code section 4975(c)(1)(B), will exist between the IRA and the
Warfields, disqualified persons with respect to the IRA, once the IRA
acquires the Note from the Bank,” the opinion said.
Under those
circumstances, it also is the department's view that the purchase of the
note itself “would be a separate prohibited transaction under tax code
Section 4975(c)(1)(D) and (E),” DOL said.
In
a separate opinion, 2011-EBSA ruled on the use of $800,000 of
Prudential Financial, common stock as “demutualization proceeds” in
connection with Prudential’s mutual-to-stock conversion. received by the
J.B. Hunt Transport Services.
EBSA responded by saying that if
not otherwise prohibited by a plan's terms, fiduciaries of an employee
welfare benefit plan may use demutualization proceeds that are plan
assets for the benefit of all current participants and beneficiaries,
rather than only for those who contributed to premium payments for the
insurance policies.
EBSA said also that “reasonable expenses
incurred by plan fiduciaries in determining how best to carry out their
fiduciary duties may be legitimate expenses of the plan.”