On July 19, 2021, the Fifth Circuit Court of Appeals issued an opinion in Ortiz v. American Airlines, upholding the dismissal of a class action lawsuit filed against American Airlines, the American Airlines Pension Asset Administration Committee (PAAC) and the American Airlines Federal Credit Union (FCU). The Fifth Circuit agreed with the district court that the plaintiffs lacked constitutional Article III standing and failed to prove that actions taken by the defendants caused their losses.
The plaintiffs were participants in a 401(k) plan sponsored by American Airlines, which provided for participant-directed investment of plan participant accounts. The plan investment options included a demand-deposit fund (the Fund) held by FCU. Plaintiffs brought three claims against the defendants in a class action lawsuit, claiming that: (1) American Airlines and the PAAC breached their fiduciary duties under ERISA by including the Fund as a plan investment option, (2) FCU breached its fiduciary duty of loyalty under ERISA by dealing with plan assets held in the Fund for its own benefit and (3) American Airlines and the PAAC engaged in a prohibited transaction under ERISA by offering the Fund as a plan investment option. Five months after bringing the lawsuit, the parties agreed to settle the case for $8.8 million.
The district court declined to approve the settlement because the evidence did not justify the settlement figure, which was significantly lower than the $55 million to $88 million that the plaintiffs alleged to have lost. The district court further declined to certify the case as a class action and then granted defendants’ motions for summary judgment. Plaintiffs appealed the summary judgment decision and the denial of settlement approval.
The Fifth Circuit’s Analysis
Addressing the first claim for a breach of fiduciary duty by American Airlines and the PAAC, the Fifth Circuit affirmed the district court’s determination that plaintiffs lacked standing to bring the claim, though for a different reason. In order to establish Article III standing, the plaintiffs had to show that they suffered an injury that was traceable to the conduct of the defendants and that was likely to be corrected by a judicial decision. The plaintiffs argued that their plan accounts sustained losses because the Fund was improperly included as a plan investment option and that they would have earned higher investment returns if a stable value fund, rather than the Fund, had been included. While the district court found that plaintiffs’ alleged injuries were speculative at best, the Fifth Circuit found that the “lost investment income” was a concrete and redressable injury for purposes of standing. However, because the plaintiffs failed to submit any evidence that they would have invested in a stable value fund had the Fund never been offered, the Fifth Circuit found they could not establish the causal link between the injury and the defendants’ actions. In fact, when a stable value fund was added to the plan’s investment line up, neither plaintiff invested in it. Thus, the Fifth Circuit affirmed the district court’s finding that plaintiffs lacked standing for the first claim.
Addressing the second claim for breach of fiduciary duty against FCU, the Fifth Circuit disagreed with the district court’s finding that plaintiffs adequately established standing to bring the claim. The plaintiffs alleged that FCU improperly used plan assets held in the Fund to provide loans to other FCU members and make other investments, earning substantial income and therefore offering substantially higher interest rates in demand-deposit accounts other than the Fund. Plaintiffs claimed that their plan accounts suffered losses by receiving a lower interest rate in the Fund than they would have received had the Fund not dealt with plan assets in this way. The Fifth Circuit agreed that plaintiffs established an injury that was redressable by a decision of a court. However, plaintiffs again failed to show any connection between the alleged losses and the statutory claim against FCU, which was that FCU used plan assets for its own benefit. In other words, plaintiffs did not show that investors in other FCU funds received higher interest rates generated by FCU’s use of plan assets in the Fund. Therefore, the Fifth Circuit reversed the district court’s finding that plaintiffs had standing with respect to the claim against FCU.
As for its review of the district court’s denial of the settlement, the Fifth Circuit affirmed, stating that before approving a settlement agreement, the court must be assured that the settlement adequately redresses the claims in exchange for the surrender of litigation rights against the defendants. The Fifth Circuit found that the plaintiffs failed to give the district court this assurance, despite being given ample opportunity to do so. The proposed settlement amount was one tenth of the maximum amount of damages claimed; and without further assurance regarding that gap, the appellate court agreed that the district court appropriately declined to approve the settlement.
Faegre Drinker Perspective
There are several key takeaways from this decision.
First, this case reinforces that plaintiffs must provide meaningful support for their claims that an alleged fiduciary breach actually caused an injury to the plan.
Second, although the Fifth Circuit found that the plaintiffs lacked constitutional standing, it declined to extend the U.S. Supreme Court decision in Thole v. U.S. Bank N.A., because the plan at issue is a 401(k) defined-contribution plan, rather than a defined-benefit plan. The Ortiz court pointed out that the Thole plaintiffs lacked standing because benefits under a defined-benefit plan are guaranteed regardless of the plan fiduciary’s investment decisions. The Fifth Circuit’s conclusion is consistent with the decisions of several other — but not all — district courts on this issue. Accordingly, plan fiduciaries should be aware that the application of the Thole decision may be deemed inapposite to any claims regarding a defined-contribution plan, where participants’ benefits are tied directly to fiduciary investment decisions.