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Has Your Declining Stock Price Put Your Company Or Even You At Greater Risk?

Traditionally, ERISA restricts plan participants to equitable relief with no recourse to money damages on behalf of themselves as individuals. ERISA Section 502(a)(3); Mertens v Hewitt & Assoc. 508 US 248 (1993); In re Cardinal health Inc. ERISA Litig. 424 F.Supp. 2d 1025.

Plan participants may seek money damages on behalf of the plan where the recovery goes to the plan itself. In re The Goodyear Tire & Rubber Co., Litig. 438 F. Supp 2d 783 (2006). Such an action is deemed to have been brought on behalf of the Plan pursuant to ERISA Section 502(a)(2). id. The Supreme Court recently expanded the availability for such equitable recovery to individual accounts under defined contribution plans, stating that fiduciary misconduct of the type envisioned by ERISA Section 409, “need not threaten” the entire plan's solvency in order for the case to be actionable under ERISA Section 502(a)(2). In other words, a violation of ERISA Section 409 which reduces an individual account in a defined contribution plan and an action to have such loss recovered against the offending fiduciary may proceed. In this case, a 401(k) participant sought recovery of $150,000 in assets to his account which he claimed were “depleted” by the plan administrator's failure to follow his investment instructions. LaRue v DeWolff, Boberg and Assoc., Inc. (2008, S Ct) 2008 WL 440748.

When such an action is brought regarding plans that hold employer stock and the allegation is that the fiduciaries acted imprudently in retaining the sponsor stock as an investment of the plan due to falling value of the stock, the Courts have traditionally relied upon the abuse of discretion precedent established in the Third Circuit (Moench v Robertson, 62 F3d 553 (1993)) that holds that, even if the plan sponsor and plan investment committee were fiduciaries with respect to the investments in employer stock, they were entitled to a presumption that they acted prudently with respect to the employer stock investments. That Court advised that mere fluctuations in value, including significant downward trend, are not sufficient to overcome the presumption of prudence. This precedent has been upheld recently in Kirschbaum v Reliant Energy, Inc. 2008 WL 1838324 (5th Cir. 2008) and In Re RadioShack ERISA Litig. 2008 WL 1808329 (DC-TX 2008).

However, there has been a growing trend among the Federal Circuit and Appeals Courts to carve out exceptions to this restriction on plan participants seeking monetary damages on behalf of themselves under allegations of fiduciary breach of ERISA. The primary thrust of this carve-out is the theory that participants who have "cashed-out" their vested plan assets have standing to sue as "participants" and to receive monetary damages that would "make whole" the former plan participants for losses in the value of vested benefits they incurred while actively participating in the plan that were the direct result of a fiduciary breach. At present, this trend seems to be limited to defined contribution individual account plans. Following is a review of some of the more prominent cases featuring this recent trend.

A Federal Court for the Southern District of Iowa dismissed a claim brought by former participants in a 401(k) plan seeking compensatory damages because the participants lost money in investments made after cashing out their 401(k) accounts and such investments were not a part of the original 401(k) plan. The Court advised that the participants would be entitled to transfer their assets back into the 401(k) plan if they can demonstrate that they were deceived into transferring their money as a result of a fiduciary breach. Young v. Principal Financial Group, Inc. (2008, S.D. Iowa), 2008 WL 1776590.

Conversely, the Fourth Circuit has ruled that 401(k) plan participants who had cashed out still have standing to bring suit under ERISA § 502(a)(2), because cashed-out former employees remain “participants” in defined contribution retirement plans when seeking to recover amounts that should have been in their accounts but for the alleged fiduciary impropriety. In re: Mutual Funds Investment Litigation (2008 CA4) 529 F3d 207.

On a similar note, the Eleventh Circuit has determined that former plan participants could bring an action for breach of fiduciary duty, concerning a defined contribution plan's loss in value, since the action stated a claim for benefits under ERISA and was not a suit for damages. The plaintiffs, all former employees of the plan sponsor, brought suit against plan fiduciaries alleging that they violated their fiduciary duty by allowing the plan to invest in sponsor stock even though the fiduciaries were backdating stock options and creating fraudulent transactions that artificially inflated the price of the sponsor stock held in the plan. The plaintiffs sought restoration of all losses to their accounts caused by the alleged fiduciary breaches, restoration of lost opportunity costs from the losses created and a purging from the fiduciaries of profits made as a result of the breaches. The Circuit Court dismissed the case on the grounds that the former participants were not participants under ERISA Section 502(a)(2) and, therefore, lacked standing to sue for a breach of fiduciary duty under ERISA Section 409.

On appeal, the Eleventh Circuit agreed with the plaintiff’s position that they qualified as participants because their complaint asserted a claim for benefits instead of damages. In citing precedent, the Court noted that under ERISA, a “participant” entitled to bring a civil action for breach of fiduciary duty includes any employee or former employee of an employer who is, or who may become, eligible to receive a benefit of any type from an employee benefit plan. Firestone Tire & Rubber Co. v. Bruch (1989 SCt) 489 U.S. 101. ERISA permits actions to recover benefits, but it does not permit actions seeking extra-contractual damages. As such, the Court advised that whether the former employees had a colorable claim to vested benefits depended on the distinction between benefits and damages. In relying on prior decisions from the Third Circuit (Graden v. Conexant Sys. Inc., (2007, CA3) 496 F.3d 291 (alleging fiduciary breach due to drop in employer stock value as plan asset), the Sixth Circuit (Bridges v. Am. Elec. Power Co., Inc., (2007, CA6) 498 F.3d 442) (alleging fiduciary breach due to drop in employer stock value as a plan asset), and the Seventh Circuit (Harzewski v. Guidant Corp., (2007, CA7) 489 F.3d 799) (alleging fiduciary breach due to drop in employer stock value as plan asset), the Eleventh Circuit determined that a complaint involving the decreased value of a defined contribution account due to a fiduciary breach is not a claim for damages because the recovery sought was limited to the difference between the benefits actually received and the benefits that would have been received had the plan fiduciaries fulfilled their obligations. Lanfear v. Home Depot, Inc. (2008, CA11) 2008 WL 2916390

The Ninth Circuit has joined six other circuits (including those noted above in addition to the First) in holding that former employees who have cashed out their individual accounts in a former employer's defined contribution plan are still "participants" who can sue to recover losses arising from a breach of fiduciary duty that allegedly reduced the amount of their benefits. Ninth Circuit held that because the cashed-out former employees had made a claim for benefits under the plans, they had the right to sue as participants for losses alleged to have occurred to their accounts while they were still in the plan. Vaughn v. Bay Environmental Mgmt., Inc., 2008 WL 4276603 (9th Cir. 2008).

Other cases recently granting participants standing to sue for a remedy of making whole their account balances due to an allegation of fiduciary imprudence in retaining employer stock as a plan investment include: In re: Syncor ERISA Litig. 516 F3d 1095 (9th Circ. 2008)(arguing that Defendants were not entitled to summary judgment under Moench standard); Evans v Akers, 2008 WL 2780607 (1st Cir., 2008) and, Graden v Conexant Systems, 496 F3rd 291 (3rd Cir. 2007).

It is important to note, however, that the Moench abuse of discretion standard is applied in all of these cases and it has been proven quite difficult for plaintiff's to overcome it. See: Noa v Keyser, 512 FSupp 2d 481 (N.D. NJ 2007); DeFelice v US Airways, Inc., 497 F3d 410 (4th Cir. 2007); Pugh v Tribune, Inc., 521 F3d 686 (7th Cir. 2008); Bunch v W.R. Grace & Co. 532 FSupp 2d 283 (D. Mass 2008); Edgar v Avaya, Inc. 503 F3rd 340 (3rd Cir. 2007) and In Re Dell ERISA Litig. 2008 WL 2600175 (W.D. TX 2008).

If you have questions concerning your potential exposure, please contact any member of Greenebaum’s ERISA Controversy Team.

To learn more about V. Brandon McGrath and his practice, please visit his profile.

About Greenebaum Doll & McDonald PLLC
Greenebaum Doll & McDonald PLLC is a widely-respected business law firm with approximately 200 legal professionals in six offices, serving local, national and international clients in virtually every industry. A forward-thinking business law firm, Greenebaum is committed to the practice of Breakthrough Law®.

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