Supreme Court Severely Restricts Standing to Sue for Breach of ERISA Fiduciary Duty

Kramer Levin Naftalis & Frankel LLP

Kramer Levin Naftalis & Frankel LLP

The U.S. Supreme Court (in Thole v. U.S. Bank N.A., available here) recently held that participants in a defined benefit pension plan who have been paid all their monthly pension benefits to date lack standing to sue for breach of fiduciary duty under ERISA with respect to the management of the plan’s assets. The 5-4 decision was authored by Justice Kavanaugh, with Justice Sotomayor issuing a lengthy dissent.

In Thole, two participants in U.S. Bank’s defined benefit pension plan filed a suit against U.S. Bank N.A. and various other parties for breach of fiduciary duties under ERISA with respect to the investment of the plan’s assets, arguing that mismanagement of the plan’s assets resulted in plan losses of approximately $750 million and the plan being underfunded. After the lawsuit commenced, the defendants made a contribution to the plan that caused the plan to exceed the minimum funding standard and thus be considered “overfunded.” During the entire period, the participants continued to receive their monthly benefit under the plan without any disruption.

The case was initially dismissed by the U.S. District Court for the District of Minnesota as moot once the plan was no longer underfunded. The 8th Circuit than affirmed the district court’s decision, but on the basis that the participants lacked standing under ERISA.

The Supreme Court considered the case in terms of constitutional standing, holding that in order to have Article III standing, the plaintiffs needed to have a “concrete stake in the lawsuit.” The plan at issue in Thole is a defined benefit plan (not a defined contribution plan, such as a 401(k) plan), which provides a promised benefit to participants in accordance with a formula that does not vary based on the investment of the assets. Justice Kavanaugh reasoned that the plaintiffs did not have a concrete stake in the lawsuit because they had continued to receive their promised benefits and the lawsuit would not affect their future benefit payments; whether the plaintiffs won or lost the lawsuit, they would continue to receive the same monthly benefits they  already were slated to receive. The plaintiffs set forth four alternative standing arguments, all of which were addressed and rejected by the Court. First, the Court disagreed that trust law should be analogized to the current system, holding that since the participants’ benefits were not tied to the value of the trust, trust law should not apply. Next, the Court rejected the plaintiffs’ argument that they were representatives of the plan itself. The Court then rejected the plaintiffs’ argument that ERISA allows participants to bring a claim without an Article III injury. Lastly, the Court was not persuaded by the plaintiffs’ argument that if defined benefit plan participants could not sue to target perceived fiduciary misconduct, no one will meaningfully regulate plan fiduciaries, writing that several other stakeholders, such as employers and the Department of Labor, had an interest.

The decision references an argument by the plaintiffs’ amici that plan participants in a defined benefit plan should have standing to sue if the mismanagement of the plan is so egregious that it substantially increases the risk that the plan and the employer would fail and be unable to pay the participants’ future pension benefits. However, the Court declined to address this argument, since the plaintiffs did not assert this theory, and furthermore, the complaint did not “plausibly and clearly claim that the alleged mismanagement would increase the risk that the plan and employer would fail and be unable to pay benefits.”

Justice Sotomayor wrote a lengthy and vigorous dissent, arguing, largely by analogy to trust law, that participants have a “concrete stake in the lawsuit” due to their interest in the plan’s financial integrity and their right to seek redress for fiduciary breaches, regardless of whether the breach caused financial harm or increased the risk of nonpayment of benefits. In addition, Justice Sotomayor argued that the participants may bring a claim as representatives of the plan.

The Court’s decision will come as welcome news to fiduciaries as it will likely substantially reduce the circumstances when participants may sue fiduciaries of defined benefit plans alleging mismanagement of the plan’s assets.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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