A panel of the Ninth Circuit withdrew its earlier opinion and has now joined other circuits in finding that the equitable remedy of surcharge is available for participants seeking recovery of personal losses as opposed to losses suffered by the plan. Gabriel v. Alaska Elec. Pension Fund, 2014 WL 7139686 (9th Cir. Dec. 16, 2014). Surcharge relief is one of three forms of equitable relief identified by the Supreme Court in its landmark Amara decision (along with equitable estoppel and reformation), which is available where a fiduciary breach causes a loss. In this case, the Court remanded to the trial court to determine whether the participant is entitled to surcharge for his claim that the plan breached its fiduciary duty by failing to inform him he was ineligible for a pension benefit because he had not satisfied the plan’s service requirements, thus causing him not to engage in additional service in order to qualify. The panel’s prior opinion had provoked considerable attention as discussed here.
The Ninth Circuit recently held that where an ERISA plan provides the plan administrator discretionary authority to determine benefit claims, procedural violations that occur during the course of the administrative claims process “do not alter the standard of review unless those violations are so flagrant as to alter the substantive relationship between the employer and employee, thereby causing the beneficiary substantive harm.” Here, Plaintiff John Nasi alleged that the district court erroneously reviewed the administrator’s denial of benefits under an abuse of discretion standard. According to Nasi, the district court should have reviewed the claim de novo because the plan committed procedural violations by not timely resolving his claim. Affirming summary judgment in favor of the plan, the Ninth Circuit concluded that the delay was not a flagrant procedural violation, particularly when taking into account that Nasi’s untimeliness in producing documents and releasing records caused much of the delay. The case is Viad Corp. Supplemental Pension Plan v. Nasi, No. 2014 WL 6984443 (9th Cir. Dec. 11, 2014).
The D.C. Circuit affirmed the decision of a district court that Plaintiff Patrick Russell, a 401(k) plan participant, had knowingly waived his right to assert an ERISA stock-drop claim based on, among other things, the alleged imprudence of maintaining an employer stock fund as an investment option. Russell argued that the district court erred by not providing him with a “reasonable opportunity” to conduct discovery and present evidence on the issue of whether he knowingly and voluntarily consented to the severance agreement. The circuit court disagreed, concluding that all of the factors that go into evaluating whether a release was knowing and voluntary (e.g., the clarity of the agreement, the consideration given for the agreement, the plaintiff’s education and business experience, and whether plaintiff consulted with an attorney) were evident from the face of the severance agreement or within Russell’s own knowledge.
The case is Russell v. Harman Int’l Indus., 2014 U.S. App. LEXIS 23359 (D.C. Cir. Dec. 12, 2014).
Plan trustees often look to settle ERISA fiduciary breach claims brought against them as a way to put the past behind them. Assuming there is enough fiduciary liability insurance coverage available to pay the proposed settlement sum, the trustees may be prepared to put aside their desire to vindicate themselves for a challenged course of conduct, avoid the risks of a horrific outcome that exceeds insurance coverage limits—potentially causing them to use personal assets to satisfy a judgment against them—and move on. Unfortunately, however, ERISA is structured in a manner that creates obstacles to achieving the goal of “complete peace.”
First, ERISA accords standing to bring fiduciary breach claims to multiple parties, not all of which may have participated in the lawsuit being settled. A settlement of the claims alleged may not extinguish the rights of the other parties with standing to sue, thereby leaving the settling trustees subject to additional liability exposure.
Second, courts in some jurisdictions have taken a rather expansive view of the right of parties defending ERISA fiduciary breach claims and other claims brought on behalf of plans to file third-party claims against other parties who contributed to the losses suffered by the plans. As a result, even after settling the claims brought directly against them, trustees may face exposure from third-party claims.
Notwithstanding these obstacles, there are a number of litigation strategies that trustees can pursue in order to potentially reduce or eliminate these risks of continued exposure following a settlement. Although the effectiveness of these strategies will vary, depending on the circumstances presented, trustees are well-served by considering each of them with their attorneys, before determining whether, and under what conditions, they wish to enter into a settlement.
□ Barring Future Claims By Non-Settling Parties with Standing to Bring Direct Claims against the Settling Trustees
Under ERISA’s statutory scheme, there are three categories of plaintiffs who have standing to sue plan trustees for breach of fiduciary duty: (i) the U.S. Department of Labor (DOL); (ii) participants and beneficiaries of the plan; and (iii) co-fiduciaries of the plan. See 29 U.S.C. § 1132(a)(2); ERISA § 502(a)(2). Rare is the case when trustees are settling a lawsuit in which all three categories are the plaintiffs. As a result, before agreeing to settle claims brought against them, the trustees should consider their potential exposure to “copy-cat” claims brought by other parties who to date have not sued them.
In some instances, the trustees can gain comfort from a potential statute of limitations defense. Absent allegations of fraud or concealment, which will extend the limitations period, ERISA breach of fiduciary duty claims will expire on the earlier of three years from when a plaintiff has actual knowledge of the claim or six years from when the claim accrued. Unfortunately, there is considerable uncertainty as to how these statute of limitations rules apply. For example, in the cases of investment losses, courts are not consistent in their rulings about whether a claim accrues from the time of the original investment that precipitated the losses, or when the losses were actually experienced. As a result, even where substantial time has elapsed since the events giving rise to the fiduciary breach claims, it may be difficult to reach the conclusion that all residual claims are necessarily time-barred.
In the absence of a blanket protection from the statute of limitations, trustees may wish to consider other strategies for protecting against future claims, including the following:
- Define Settled Claim as Being Brought on Behalf of the Plan. Be sure to define plaintiffs in your case as having brought the lawsuit in a representative capacity on behalf of the plan and seeking relief that would inure to the benefit of the plan. See Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 142 (holding that ERISA fiduciary breach claims are brought in a representative capacity on behalf of the plan as a whole). Although there is no case law explicitly endorsing this principle, crafting the settlement agreement in this fashion should increase the likelihood of a court to find that a subsequent claim seeking relief on behalf of the plan is barred.
- Settle on a Class-Wide Basis. Where a claim has been brought by a single participant, the trustees may wish to consider structuring the settlement such that it is conditioned on the court first certifying a class of participants. This way, the release entered into in consideration for the settlement payment will bind all plan participants. Furthermore, a class settlement that is approved by the court as fair and reasonable will likely satisfy the DOL that no further action should be taken against the trustees.
- Request an Order Barring Claims of Other Potential Claimants. Ordinarily, a bar order is entered into for the purpose of facilitating partial settlement by barring the claims of other, non-settling defendants. However, there is some authority, pursuant to the All Writs Act, for barring claims of non-parties. The All Writs Act grants authority to enjoin and bind non-parties to an action when needed to preserve the court’s ability to reach or enforce its decision in a case over which it has proper jurisdiction. See, e.g., In re Baldwin-United Corp., 770 F.2d 328, 338 (2d Cir. 1985). In the context of ERISA settlements, where there are multiple parties with the ability to pursue the same claims, courts have sometimes been willing to bar claims by these potential plaintiffs for the sake of facilitating a settlement that is viewed to be in their best interests. See, e.g., In re Worldcom, Inc. ERISA Litig., 2005 WL 3107725, at *4 (S.D.N.Y. 2005). Note that a bar order will need court approval because, much like a class action, the court needs to determine the order’s fairness to all parties and to give non-settlers the opportunity to object to the order and non-parties a chance to potentially file a claim. See In re Masters Mates & Pilots Pension v. Riley, 957 F.2d 1020, 1025 (2d Cir. 1992).
- Secure Assurances from the DOL. It is frequently the case that, during the pendency of a fiduciary breach lawsuit brought by the plan’s fiduciaries or plan participants, the DOL conducts a parallel investigation of the same claims. The defendant trustees can ill afford the risk of a lawsuit commenced by the DOL sometime after the first lawsuit has been settled. If the DOL has been kept apprised of the litigation proceedings, and is accorded an opportunity to review the terms of the contemplated settlement, the DOL may communicate in advance its willingness to close its administrative file if the settlement is consummated.
□ Barring Future Claims by Non-Settling Co-Defendants
If the trustees are not the only party being sued for breach of fiduciary duty to recover certain losses suffered by the plans, it is important that the trustees protect themselves from potential third-party claims by other defendants. Consider, for example, the following familiar scenario: the plans suffer investment losses and participants sue both the trustees and the investment consultant for breach of fiduciary duty. The trustees are prepared to reach a settlement of the claims brought against them, but no settlement has yet been reached with the investment consultant. If the trustees proceed with the settlement, they may remain at risk of the investment consultant pursuing third-party claims against the trustees. Although under ERISA, each fiduciary is jointly and severally liable for the full amount of the losses proximately caused by the breach, in the case of third-party claims a court will typically apportion liability among the breaching fiduciaries based on the proportional share of each fiduciary’s responsibility for the losses caused. Thus, if a court were to determine that the proportional liability of the trustees was greater than the amount paid in settlement of the claims against them, the trustees will ultimately be responsible for a greater sum than the settlement amount.
There are two ways to avert this risk. First, the settling trustees may insist on conditioning the settlement on a bar order that bars the non-settling defendants from pursuing third-party claims against the trustees. A less cumbersome solution may be to condition the settlement agreement on a commitment by the settling plaintiffs that they will draft or amend any claims against other defendants to provide that the damages they are seeking to recover are reduced by any damages that the defendants would be able to recover via a third-party claim against the trustees. Framing the claims this way should serve to immediately extinguish any third-party claims brought against the trustees. See, e.g., In re Ivan F. Boesky Sec. Litig., 948 F.2d 1358, 1368-69 (2d Cir. 1991) (approving settlement agreement that barred contribution and indemnification claims between the settling defendants and non-settling defendants with a provision that gave the non-settling defendants an appropriate right of set-off from any judgment imposed against them); see also In re Worldcom, 2005 WL 3107725, at *4. Such a provision will also serve to protect the trustees against third-party claims brought by entities that have not yet been sued or have not been sued in the same legal proceedings.
□ Protecting against Future Claims with Adequate Insurance Coverage
Assuming that the trustees wish to proceed with a settlement, but cannot completely extinguish the risk of collateral claims, the trustees should make certain that there is still insurance coverage available to them in the event that additional claims are pursued against them. Whether such protection exists will depend on the terms of the coverage release that the trustees enter into as a condition for the insurance carrier’s contribution to the settlement. The trustees, with assistance from their counsel, should ensure that the release applies only to the claim(s) being settled, and does not extend to other claims, including claims arising from the same underlying events. Even this protection will only work, however, if there is adequate remaining coverage within the policy limits. Furthermore, if the trustees subsequently replace their coverage, they will need to make sure that the coverage extends to claims based on events preceding the date of the coverage. In short, before entering into any settlement agreement, the trustees should direct their counsel to review carefully their remaining coverage protection.
□ Life after Settlement
In settling a breach of fiduciary duty case, trustees must also be careful not to give anything away in settlement that will prohibit them from continuing to serve as trustees (if they still so desire) in the same way that they had served in the past. In some cases, particularly when the DOL is involved, the plaintiff may seek to condition a settlement on the trustees resigning their responsibilities, either for a particular plan or for all plans. The decision whether to accept these conditions is a personal one that has to be based on each trustee’s unique circumstances.
Even narrowly crafted settlements that do not bar future service as a trustee may still result in constraints on the settling trustees’ ability to fulfill their existing responsibilities. For example, the contemplated agreement may prohibit the settling trustees from taking any action with respect to the events giving rise to the underlying claims, including the pursuit of claims against other plan fiduciaries or professionals. If the settling trustees are still actively serving the plan, they may wish to consider whether they can effectively fulfill their responsibilities notwithstanding these restraints. The answer may depend on whether there are other non-settling, unencumbered trustees who can fulfill these responsibilities, and thereby allow the settling trustees to recuse themselves from these activities.
The View from Proskauer
Settling fiduciary breach claims is often viewed by trustees as a bitter pill to swallow, as it requires them to abandon their right to defend themselves when they feel they have done nothing wrong. Swallowing this pill becomes even more uncomfortable when the reality sets in that, notwithstanding the settlement, there may still be risks of a second lawsuit. In our experience, this risk has proven to be very small, as it is the rare case where we find the need to re-litigate a settled claim brought by a new plaintiff. But prudence dictates that, before any case is settled, the trustees pursue all practical means, with the aid of their counsel, to reduce this risk to the barest minimum. If nothing else, doing so should allow us all—trustees and counsel alike—to sleep a little better at night.
Mr. Rumeld is a partner in and the co-chair of Proskauer’s Employee Benefits, Executive Compensation & ERISA Litigation Practice Center (the “Practice Center”). Mr. Cacace is an associate in the Practice Center. Both reside in Proskauer’s New York offices.
Effective January 1, 2015, group health plans and insurers are no longer required to issue a certificate of creditable coverage (“HIPAA Certificate”) to individuals who lost group health plan coverage. (See final regulations here). As a reminder, HIPAA Certificates were used by individuals to prove that they had continuous health coverage under a prior health plan in order to offset a preexisting condition exclusion period under a new health plan. In light of the fact that the Affordable Care Act outlawed preexisting condition exclusions, there no longer is a need for such certificates.
The Second Circuit recently held (in a summary order) that plan participants’ claims alleging violations of ERISA’s disclosure rules in connection with a cash balance conversion were barred by the statute of limitations. In so ruling, the Court explained that because the participants’ claims that defendants breached their fiduciary duties by mischaracterizing the new plan’s performance were brought fourteen years after the alleged breaches occurred and the participants failed to plausibly allege any fraud or concealment, the claims were barred by ERISA Section 413’s statute of limitations governing fiduciary breach claims. Similarly, the Court concluded that the participants’ Section 204(h) claim was time barred, regardless of whether it was governed by section 413 or the state limitations period for breach of contract period claims, since the claim accrued, at the latest, when the plan issued the summary plan description in 2000. The case is Pirro v. Nat’l Grid, 2014 WL 5438107 (2d Cir. Oct. 28, 2014).
Where an ERISA plan specifically sets forth in the plan document its rights to reimbursement/subrogation vis-à-vis a plan participant then there is no requirement that recovery be conditioned on the plan being able to trace the recovered monies to the original benefit payment. Under such circumstances, the plan is considered to have an equitable lien by agreement. The Second Circuit recently had occasion, however, to consider whether an equitable lien could attach against another plan that provided overlapping medical coverage to a participant. The Court held that it did not. In so ruling, the Court concluded that the plan’s claims did not seek appropriate equitable relief because there was no agreement between the parties that identified a particular share of a specific fund to which the plan was entitled. Recognizing that its holding could deprive an ERISA plan of any remedy in cases of this nature and could potentially create an incentive for similarly-situated ERISA plans to refuse coverage, the Court stated that it was bound to apply the law as interpreted by the U.S. Supreme Court and that it hoped Congress would “revisit this tangled web sooner rather than later.” The case is Cent. States, Se. & Sw. Areas Health & Welfare Fund v. Gerber Life Ins. Co., 2014 WL 2853587 (2d Cir. Nov. 14, 2014).
We previously reported (here) that the Ninth Circuit stands alone in expressly limiting the availability of surcharge to cases involving loss to, or unjust enrichment at the expense of, the plan (as opposed to being available to a participant claiming personal loss flowing from a fiduciary breach). See Gabriel v. Alaska Electrical Pension Fund, 755 F.3d 647 (9th Cir. 2014). We also reported (here) that a district court declined to apply the Ninth Circuit’s narrow reading of surcharge because there is a pending petition for rehearing en banc in Gabriel and, in that court’s view, the Gabriel decision was not binding. Two more district courts have reached the same conclusion and, on that basis, denied motions to dismiss the complaints. In Zisk v. Gannett Co. Income Prot. Plan, No. 2014 WL 5794652 (N.D. Cal. Nov. 6, 2014), Zisk developed cancer and then applied for and began receiving benefits from Gannet’s Income Protection Plan. The claims administrator subsequently terminated his benefits because Zisk failed to provide updated medical records. Zisk claimed in the lawsuit that the plan fiduciaries breached their fiduciary duty by failing to conduct an adequate investigation into his medical condition prior to terminating his benefits and by providing misleading information regarding the status of that investigation. In Witt v. United Behavioral Health, 14-cv-02346-JCS (N.D. Cal. Nov. 20, 2014), plaintiffs alleged that UBH breached its fiduciary duty by wrongfully denying their claims and improperly limiting the scope of their insurance coverage for mental health and substance abuse-related residential treatment. Plaintiffs claimed, among other things, that they were entitled to surcharge since the breach harmed them and UBH’s corporate affiliates were unjustly enriched by not having to pay claims. Both cases thus appear to be headed for discovery notwithstanding the fact that the relief sought is not for the plan.
A federal district court in Minnesota found that participants in a defined benefit pension plan had standing to assert claims that defendants breached their fiduciary duties by, among other things, shifting to an equities-only investment strategy that resulted in the plan becoming significantly underfunded and thereby increasing the risk of default. Continue Reading
The Eleventh Circuit recently concluded that Robert Montanile, a welfare plan participant, could not avoid reimbursing the National Elevator Industry Health Benefit Plan for benefits it paid on his behalf after he recovered from a third party tortfeasor. In so ruling, the Court rejected Montanile’s arguments that the plan’s reimbursement provision was not enforceable because it was not contained in the plan document and that reimbursement was not an appropriate remedy because the funds had been spent or dissipated. The Court ruled first that, in light of the fact that there was no plan document separate and apart from the summary plan description, the subrogation/reimbursement provision was an enforceable term of the SPD, and the Supreme Court’s statement in CIGNA Corp. v. Amara, 131 S.Ct. 1866 (2011) that the terms of an SPD are not part of the plan document thus had no application here. Second, applying existing precedent in the Circuit, the Court held that where, as here, a plan unambiguously gives itself a first-priority claim to third party payments an equitable lien attaches immediately upon the receipt of specifically identifiable funds, rendering it irrelevant that the funds were subsequently spent or dissipated. The case is Board of Trustees of the National Elevator Industry Health Benefit Plan v. Montanile, 2014 WL 6657049 (11th Cir. Nov. 24, 2014).