May 21, 2020 Issue: Spring 2020

Thole v. U.S. Bank: The Supreme Court Argument Raises Questions of 15th Century Trust Law and the Likelihood of Being Hit by a Meteorite

By: Dana M. Muir, Robert L. Dixon Collegiate Professor of Business, and Arthur F. Thurnau Professor of Business Law, Stephen M. Ross School of Business at the University of Michigan

On January 13, 2020 the Supreme Court heard arguments in Thole v. U.S. Bank.  Thole involves an issue that should be of interest to all attorneys who work on defined benefit (DB) plans – or who hope someday to receive DB benefits. The bottom line may be that the Supreme Court will give ERISA attorneys yet another reason to hit the 15th-century trust law treatises. The even more esoteric question raised by a Justice involved the risk of being hit by a meteorite (which some people might choose as an alternative to researching 15th century trust law).  I’m getting ahead of myself though.

Petitioners, James Thole and Sherry Smith (Petitioners), are participants and beneficiaries in U.S. Bancorp’s defined-benefit pension plan. Petitioners alleged plan fiduciaries engaged in a variety of acts that violated their fiduciary obligations. First, prior to the 2008 financial crisis, plan fiduciaries invested 100 percent of the plan’s assets in equities. That aggressive investment portfolio caused the plan to lose $748 million more during the crisis than it would have lost had the assets been appropriately diversified. The losses caused the plan’s assets to fall to 84 percent of the statutory Funding Target Attainment Percentage (FTAP). Second, Petitioners asserted that the decision to invest approximately $1.2 billion of plan assets in mutual funds offered by a subsidiary wholly owned by U.S. Bancorp was made to benefit U.S. Bancorp, and caused the plan to pay higher investment fees than it would have paid for similar mutual funds offered by other firms. The ERISA claims were for breach of the fiduciary duties of prudence, care, and diversification, as well as a violation of the prohibited transaction provisions.

The nub of the arguments in this case is whether Petitioners have suffered an injury that meets the statutory and Article III requirements to bring their claims. At the time that Petitioners filed the lawsuit, the U.S. Bancorp pension plan’s assets remained below the minimum FTAP. Thole was brought in the Eighth Circuit, which in 2002 held that ERISA §502(a)(2) does not permit participants in overfunded DB plans to bring claims for fiduciary breach. Harley v. Minnesota Mining & Manufacturing Co., 284 F.3d 901 (8th Cir. 2002).

The district court in Thole held that Petitioners had standing under Article III of the Constitution because the plan’s underfunded status put it at increased risk of default, but dismissed their claims for breach of the duty of loyalty as being outside of the statute of limitations. It allowed their prudence claims to move forward. Adedipe v. United States Bank, No. 13-2687, 2015 U.S. Dist. LEXIS 178,380 (D. Minn. 2015).

After Petitioners filed their case, U.S. Bancorp made a substantial contribution to the plan, which lifted the plan’s assets above the minimum FTAP. The fiduciaries diversified the plan’s investments, and U.S. Bancorp sold its subsidiary that offered the mutual funds that gave rise to the loyalty claim. Once the plan assets met the FTAP requirement, U.S. Bancorp argued that the suit should be dismissed because the plan was no longer at increased risk of default. The district court instead held that Petitioners’ remaining claims were moot.

On appeal, the Eighth Circuit first considered whether ERISA’s remedial sections provide the basis for Petitioners’ claims. ERISA §502(a)(2) states that plan participants and beneficiaries have the right to bring suit on behalf of the plan for fiduciary breach. Any monetary relief flows to the plan; the statute also allows for removal of breaching fiduciaries and other legal and equitable relief. ERISA §502(a)(3) provides plan participants and beneficiaries the right to bring suit for injunctive and other appropriate equitable relief to address a fiduciary breach or other statutory violation. A divided panel, following circuit precedent, held that claims could not be brought under §502(a)(2) on behalf of a plan that meets the minimum FTAP The Eighth Circuit had not before addressed whether participants and beneficiaries in such a plan could bring a claim under §502(a)(3). Over a dissent, the majority parted ways with the Third and Sixth Circuits to hold that no claim could be brought where, as here, the individuals had not had their benefits reduced. Thole v. U.S. Bank, 873 F.3d 617 (8th Cir. 2017).

The Supreme Court granted certiorari on the following questions: (1) Does ERISA §502(a)(2) or 502(a)(3) provide a basis for DB plan participants and beneficiaries to bring claims without demonstrating individual financial loss or imminent risk thereof? (2) Did petitioners demonstrate Article III standing?

Peter Stris, of Stris & Maher, who has frequently appeared in the Supreme Court on behalf of participants and beneficiaries in ERISA plans, opened on behalf of Petitioners. He provided three alternative grounds for standing: that plan participants and beneficiaries have an equitable property interest in the plan’s assets, that for centuries trust beneficiaries have been able to bring claims under the “no further inquiry rule” in cases of alleged fiduciary breach without inquiry into whether the breach caused any financial loss, and that participants and beneficiaries have representational standing to bring claims on behalf of the plan.

Chief Justice John Roberts, who appeared skeptical that standing exists, asked Mr. Stris whether his arguments relied on a forward-looking or a retrospective theory of injury. Mr. Stris responded that Petitioners had suffered a variety of injuries. Furthermore, trust doctrine dating to the 15th century provides that, so long as they possibly could benefit from the assets, trust beneficiaries have present property rights to prevent current damage to trust assets. The Chief Justice seemed disinclined to look beyond the likelihood that Petitioners would receive their full benefits from the plan.  Justice Neil Gorsuch, appearing worried that Petitioners’ theory would result in no limits on Article III standing, asked whether a participant who had not invested in a particular defined contribution (DC) plan investment option would have standing to assert a fiduciary breach connected with that option. Mr. Stris replied in the negative, distinguishing the nature of participant rights to assets in DC and DB plans.

In contrast, Justice Stephen Breyer, after triggering laughter in response to a statement that he doesn’t remember the 15th century, acknowledged that trust beneficiaries have historically had the ability to bring suits alleging breach of loyalty even in situations when the trust benefited from the breach. He questioned, though, whether Petitioners had standing to pursue their claims of a prudence violation. In response, Mr. Stris pointed to English Chancery Court decisions dating to the early 1800s that permitted beneficiaries with contingent interests to bring prudence claims. The debate then turned to the technical question of whether participants and beneficiaries in ERISA plans are more like remaindermen in traditional trusts or contingent beneficiaries.

At that point Justice Samuel Alito, after saying “you have some strong arguments,” fast-forwarded the discussion to the 21st century and whether Petitioners are at an imminent risk of harm. He questioned whether Petitioners’ risk of not receiving their full benefits is greater than the risk of being hit by a meteorite. Mr. Stris responded that the ability of plan sponsors to make contributions and DB plan funding levels is subject to considerable volatility. Congress gave participants and beneficiaries an interest in benefit plans’ undivided and unsegregated trust assets to avoid the need for case-by-case assessments of the risk that benefits would not be paid.

Next up was Assistant to the Solicitor General Sopan Joshi, who appeared as amicus curiae on behalf of Petitioners. He began by arguing that under traditional trust law, “even discretionary beneficiaries could sue a trustee for breach of trust.” Justice Gorsuch responded that it seemed every participant in a DC plan with surplus assets fit the definition of discretionary beneficiary, so under Mr. Joshi’s theory, every DC plan beneficiary could sue for every alleged breach. Mr. Joshi conceded that probably was correct.

At that point, Justice Brett Kavanaugh, who had previewed his concerns in questions to Mr. Stris, indicated that he was torn between historical trust law, which he thought supported standing, and the fact that participants in a fully funded DB plan have almost no risk of losing any vested benefits. As a result of the dueling concerns, Justice Kavanaugh sees this as “a close case.” As he had with Mr. Stris, Justice Kavanaugh pressed Mr. Joshi on whether the Pension Benefit Guaranty Corporation’s (PBGC) guarantee of defined-benefit plan benefits should be a consideration in determining whether sufficient risk of harm exists. Mr. Joshi responded that the existence of insurance has never negated standing to sue for harm covered by insurance.

Chief Justice Roberts and Justices Alito and Breyer all questioned Mr. Joshi on whether Article III imposed any limits on fiduciary claims in DB plans. The Chief Justice closed with an observation on the importance of Article III in maintaining the separation of powers. 

Joseph Palmore, co-chair of Morrison Foerster’s Appellate and Supreme Court Practice Group, began his argument on behalf of U.S. Bank by emphasizing that Petitioners had received all their monthly benefits, it was nearly certain they would continue to receive all their monthly benefits for their lifetimes, and they would not receive any additional financial benefit if they win the lawsuit and are awarded the relief they request. Mr. Palmore then disputed each of the three bases for standing that Mr. Stris had articulated.

The practical aspects of Justice Kavanaugh’s qualms became clear as he opened the questioning of Mr. Palmore. Mr. Palmore posited that Article III standing requires plan participants to plead that an alleged fiduciary breach caused an increased risk to their benefits. Justice Kavanaugh observed that it could be problematic to establish a line between sufficient increased risk and insufficient risk for purposes of evaluating a pleading. Mr. Palmore advocated the standard developed by the Fifth Circuit Court of Appeals, which would require both that the plan be underfunded and that the employer be “unwilling or unable” to fund the plan. Justice Kavanaugh clearly was uncomfortable with a standard that would be difficult for the lower courts to apply, asking, “[I]f we don’t have clarity on the line, is it worth the candle of trying to draw a line rather than just going with the historical approach advocated by the other side?”

Later, Justice Kavanaugh returned to the question he had asked both Mr. Stris and Mr. Joshi on whether the PBGC’s guarantee should make any difference to the risk analysis. Mr. Palmore responded that the guarantee does matter and conceded that the logical implication of his view is that any participant or beneficiary whose benefits are fully protected by the PBGC never would have standing under Article III to bring a claim for alleged fiduciary breach regarding the investment of plan assets.

Justices Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan all seemed to lean in favor of finding standing. In her questioning of Mr. Stris, Justice Ginsburg concentrated on identifying the nature of the fiduciary’s actions and whether the claims for both loyalty and prudence violations survived the 8th Circuit’s decision. In response to Mr. Palmore’s argument that even if participants and beneficiaries cannot bring claims for fiduciary breach, the Department of Labor (DOL) and co-fiduciaries may bring claims, Justice Ginsburg observed that the DOL itself indicated that the agency does not have the resources to pursue all potential violations of fiduciary duty. Justice Sotomayor seemed to find the historical argument compelling, stating that “trust law has been clear forever” that plan participants can sue fiduciaries for self-dealing. In an extended dialogue with Mr. Palmore, Justice Kagan appeared skeptical of his assertion that the plan rather than the participants and beneficiaries has the equitable interest in the plan.

U.S. Bank’s position appears to be that participants and beneficiaries cannot bring claims for breach of a DB plan unless the plan is underfunded, the plan sponsor is unwilling or unable to fully fund it, and the benefits are not fully insured by the PBGC. In contrast, Petitioners argue that participants and beneficiaries have Article III and ERISA standing to pursue all fiduciary breaches in DB plans. An intermediate standard might require participants and beneficiaries to show a sufficiently increased risk of harm to meet the general Article III analysis, in which case ERISA attorneys may find themselves arguing whether the risk of loss of benefits exceeds the risk of being hit by a meteorite.