June 25, 2020

Thole v. U.S. Bank, N.A.

ERISA

Can a Participant in a Defined Benefit Plan Sue for Injunctive Relief under ERISA Section 502(a)(3) and Restoration of Plan Losses Caused by a Fiduciary Breach under Section 502(a)(2), without a Showing of Individual Financial Loss or an Imminent Risk of Such Harm?

CASE AT A GLANCE

James Thole and Sherry Smith, participants in the U.S. Bancorp Pension Plan, brought a putative class action under the Employee Retirement Income Security Act of 1974 (ERISA) Section 502(a)(2), to enjoin plan fiduciaries from investing over 40 percent of plan assets in the bank’s proprietary mutual funds in violation of ERISA’s prohibited transaction rules, and from investing 100 percent of plan assets in high-risk equities in violation of ERISA’s diversification rule. After incurring a loss of $1.1 billion in 2008, the plan, which had been significantly overfunded, became 84 percent underfunded. Participants sued for the restoration of $748 million in plan losses under ERISA Section 502(a)(2). In response, U.S. Bancorp contributed $339 million to the plan, which brought the plan to overfunded status. The district court held that since the participants no longer were suffering a loss, they did not have constitutional standing to sue. The Eighth Circuit affirmed and unanimously held that the plaintiffs did not have standing to sue for restorative losses, but the panel disagreed on whether the plaintiffs had standing to sue for injunctive relief. The majority held that, absent proof of monetary loss, plaintiffs were not entitled to injunctive relief. Judge Jane L. Kelly dissented, stating that financial harm was not a prerequisite for injunctive relief because the alleged injury was not speculative.

Docket No. 17-1712
Argument Date: January 13, 2020
From: The Eighth Circuit
by Jayne Zanglein
Western Carolina University, Cullowhee, NC

ISSUE

Absent a showing of individual monetary harm, does a defined benefit plan participant have constitutional and statutory standing to seek restorative and injunctive relief under the Employee Retirement Income Security Act of 1974 (ERISA) Sections 502(a)(2) and (3) for a fiduciary’s breach of duty?

FACTS

Defendant U.S. Bancorp describes defined benefit plans as “a dying breed.” In 1975, shortly after Congress enacted ERISA, 33 million participants were enrolled in defined benefit plans, and 11 million in defined contribution plans. As of 2016, 36 million people participated in defined benefit plans and 100 million in defined contribution plans. This sky-rocketing increase in defined contribution plans occurred after employers realized that these plans offer significant savings because they shift the risk of investment losses from the employer to the plan participants.

In a defined contribution plan, the employer and employee make contributions to the employee’s account, and at retirement, the participant is entitled to only the assets in his account. In contrast, a defined benefit plan promises a future pension benefit when the participant meets the plan’s requirements. A mathematical formula (for example, 30 percent of final average compensation) allows the participant to calculate the exact amount that he or she will receive at retirement. The plan sponsor makes periodic contributions to fund the participants’ accrued benefits. Contributions are not set aside for the participant in a segregated account. Instead, the defined benefit plan maintains a pool of assets from which the plan pays all pension benefits. A defined benefit plan participant has no claim to “any particular asset that composes a part of the plan’s general asset pool.” Hughes Aircraft Co. v. Jacobson, 525 U.S. 432 (1999). If the plan does not have sufficient assets to pay future benefits, ERISA’s minimum funding standards require the employer to make scheduled payments to amortize the shortfall.  Because of the nature of defined benefit plans, plaintiffs James Thole and Sherry Smith could not allege that their accrued benefit had decreased as a result of the breach of fiduciary duty—they were still receiving their promised benefits. Nor could they argue that they had a claim to assets in the plan’s general asset pool. Instead, the plaintiffs alleged that, as a result of the fiduciary breach, the plan became underfunded, and therefore, increased the risk that plaintiffs would not receive their promised benefits. In 2014, defendants filed a motion to dismiss for lack of standing. The district court held that plaintiffs had sufficiently alleged an injury in fact under Braden v. Wal-Mart Stores, 588 F.3d 585 (8th Cir. 2019). In Braden, the Eighth Circuit held that plaintiffs have constitutional standing if they show: “(1) that they have personally suffered an ‘injury in fact’ (2) that is ‘fairly traceable to the challenged action of the defendant’ and (3) that is ‘likely [to] be redressed by a favorable decision.’” The district court held that the plaintiffs had standing.

After the court’s ruling, U.S. Bancorp made additional contributions to lift the plan from its underfunded status to overfunded. The defendants filed a second motion to dismiss for lack of standing. The district court held that the question was no longer one of standing, which the court decides at the start of the lawsuit, but whether the case was moot under Article III because circumstances had changed. The court noted that when a defendant takes action that renders a case moot, the defendant “bears the formidable burden of showing that it is absolutely clear that the alleged wrongful behavior could not reasonably be expected to recur.” The district court held that the defendants had met this burden because the plan no longer was engaging in the alleged fiduciary breaches.

On appeal, the Eighth Circuit affirmed. The court relied on Harley v. Minnesota Mining & Mfg. Co., 284 F.3d 901 (8th Cir. 2002), which held that a participant in a defined benefit plan does not have standing to sue under ERISA Section 502(a)(2) for losses resulting from a fiduciary breach when the plan is overfunded, and the surplus is large enough that the investment loss does not actually injure the plaintiffs. Furthermore, the court held that the participants did not have statutory standing because they were outside ERISA’s zone-of-interests and litigation would subject the plan to needless expenses.

The Eighth Circuit acknowledged that it had caused confusion when it decided Harley on statutory grounds, rather than constitutional standing. Statutory “standing” addresses whether the plaintiffs fall “within the class of plaintiffs whom Congress has authorized” to sue under ERISA. Article III addresses whether the plaintiff has “‘such a personal stake in the outcome of the controversy’ as to warrant his invocation of federal-court jurisdiction.” Warth v. Seldin, 422 U.S. 490 (1975). These are two separate issues, and plaintiff must meet both types of standing. If the plaintiff has no personal stake in the controversy, the federal court has no authority to hear the case, even if the plaintiff has statutory standing.

The Eighth Circuit noted it had not yet decided the issue of availability of injunctive relief under Section 502(a)(3) against an overfunded plan. The Sixth and Tenth Circuits have allowed injunctive relief from an overfunded plan. In Soehnlen v. Fleet Owners Ins. Fund, 844 F.3d 576 (6th Cir. 2016), the Sixth Circuit rejected plaintiffs’ argument that “they need not show individual injury to obtain injunctive relief for a breach of fiduciary duty” pursuant to Section 502(a)(3). Relying on Soehnlen, the Eighth Circuit held that “plaintiffs must show actual injury—to the plaintiffs’ interest in the Plan under (a)(2) and to the Plan itself under (a)(3)—to fall within the class of plaintiffs whom Congress has authorized to sue under the statute.” Where a plan is overfunded, there can be no actual injury to the plan that could cause “injury to the plaintiffs’ interests in the Plan.”

Judge Jane L. Kelly concurred with the majority’s conclusion that plaintiffs cannot sue under Section 502(a)(2) for restoration but dissented as to injunctive relief. Section 502(a)(3) states that a participant can sue “to enjoin any act or practice which” is a breach of fiduciary duty, which was precisely what plaintiffs were attempting to do. They had statutory standing because their complaint “falls within ‘the zone of interests to be protected or regulated’ by ERISA.” Moreover, Judge Kelly concluded that the plaintiffs showed actual injury because the defendant’s investment in high-risk equities caused the plan to become underfunded. Finally, the dissent noted that Harley is not controlling in an analysis of injunctive relief because that case did not involve Section 502(a)(3).

The participants petitioned the Supreme Court for certiorari.

CASE ANALYSIS

In their petition for certiorari, participants state: “This case involves obvious ERISA violations—investing in [the bank’s] own funds (one such investment still remains) and flouting the most basic asset-allocation principles by investing the entirety of the plan’s assets in equities—that caused massive plan losses. Yet the Eighth Circuit held that petitioners could not maintain claims…without first suffering the individual financial harm that ERISA is manifestly designed to prevent.” Participants contend that the Eighth Circuit’s decision “severely undermines ERISA’s protections and the very rationale for authorizing injunctive relief. According to the majority below, no matter how willful the breach was or whether the fiduciary is still conducting the plan’s affairs in the same egregious manner, a participant has no recourse until she actually suffers the exact financial harm Congress wanted to avoid. As every other court of appeals to address the question has recognized, Article III is not so inflexible to demand such a nonsensical result.”

Participants argue that the Eighth Circuit’s ruling gives “fiduciaries carte blanche to treat plan assets as their personal piggybank, as long as they leave enough to keep paying benefits.” Participants claim that the fiduciaries invested 100 percent of plan assets in equities to “exploit pension accounting rules” and report a higher assumed rate of return, which “led to higher [U.S. Bancorp] stock prices and enables individual directors to exercise stock options at a higher price.” Likewise, participants contend that by investing in the proprietary funds of its wholly-owned subsidiary (which charged higher fees than alternative funds), U.S. Bancorp earned investment management fees. The bank abandoned this 100 percent equity strategy as soon as it sold its wholly-owned subsidiary, leading participants to believe that the all-equity strategy was self-serving. Congress enacted ERISA’s prohibited transaction rules and fiduciary provisions to prevent this type of self-dealing.

Participants contend that they have Article III standing for two reasons. First, they have a “legally protected interest in having [those] fiduciary obligations fulfilled.” Second, a fiduciary breach “injures trust property in which the participant has a long recognized equitable ownership interest.” The plan’s trustee holds the plan’s assets in trust for the beneficiaries (for example, the participants), who are its equitable owners. ERISA grants participants and beneficiaries derivative standing to sue to prevent the trustee, who holds title to the trust assets, from breaching his duty. Participants conclude that “simply because a participant cannot put a dollar of surplus in her pocket does not mean that she lacks an Article III ‘legally protected interest’ in the plan assets. Those assets are explicitly held in trust for her benefit, and she is their equitable owner.”

Participants argue that the Eighth Circuit stands alone in its holding: the Second, Third, and Sixth Circuits have held that proof of individual loss is not necessary to show standing. In those circuits, a “violation of [a participant]’s rights under ERISA is enough to show standing.” Violation of ERISA’s strict fiduciary standards, which were designed to prevent and address “plan administrators’ ‘misuse and mismanagement of plan assets,’” is sufficient to confer standing. Participants also contend that, under trust law as well as ERISA, when a fiduciary breaches its duty of loyalty, a plan’s funding status is irrelevant to the issue of whether a participant can invoke the remedies of restoration, disgorgement of profits, removal of the fiduciary, and injunctive relief.

Participants also argue that ERISA unambiguously authorizes participants to sue for breach of fiduciary duty. They claim that the Eighth Circuit had no authority to add a requirement of financial harm when the statute does not require it. Nor could the lower court justify the financial-harm prerequisite because litigation would be costly; this flies in the face of legislative intent, which was to “advanc[e] ERISA’s primary purpose” by allowing participants to sue for fiduciary breaches.

U.S. Bancorp reminds the Court that “[t]he case’s outcome does not matter to Plaintiffs” because the payments of their pension benefits “do not depend on the Plan’s assets.” Only if “an apocalyptic cascade of failures of the Plan, U.S. Bancorp (the Plan’s sponsor and one of the nation’s largest banks), and the federal agency that insures retirement benefits” were to occur, would the plaintiffs “be deprived of their benefits….Win or lose, Plaintiffs will receive the exact same pension payments for the rest of their lives. Because the participants cannot—and will not—suffer harm, they do not have Article III standing, which requires an ‘injury-in-fact.’” To demonstrate an injury-in-fact, the participant must show that they “suffered [1] ‘an invasion of a legally protected interest’ that is [2] ‘concrete and particularized’ and [3] ‘actual or imminent, not conjectural or hypothetical.’” Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016). U.S. Bancorp argues that participants cannot meet the second requirement because the injury did not affect them “in a personal and individual way.” Relying on Raines v. Byrd, 521 U.S. 811 (1997), defendants argue that a participant cannot establish Article III standing, simply by “invoking a statutory cause of action.” Because there is no possibility that participants’ future benefits will be affected by the alleged misconduct, plaintiffs have shown no concrete injury and lack standing to sue.

Contrary to the participants’ allegations in their petition for writ of certiorari, U.S. Bancorp claims that no remedy is required because the challenged practices ended a decade ago. Any restoration of plan assets “would simply offset U.S. Bancorp’s future contributions.” The bank rejects participants’ attempt to rely on trust law to bypass Article III standing, and yet relies on Bogert’s The Law of Trusts & Trustees to support its contention that “trust beneficiaries cannot challenge fiduciary misconduct that does not affect them.” Similarly, the bank relies on LaRue v. DeWolff, Boberg & Assocs., Inc., 552 U.S. 248 (2008) for the proposition that ERISA does not grant plaintiffs “personal rights regarding fiduciary management of plan assets. Instead, ERISA ‘identifies the “plan”’—a separate legal entity—‘as the victim of any fiduciary breach.’”

U.S. Bancorp asserts that ERISA protects participants’ rights to their benefits through various mechanisms. For example, ERISA’s minimum funding standards ensure the adequate funding of plans. Additionally, Congress created the Pension Benefit Guaranty Corporation (PBGC) to guarantee benefits in the event the employer terminates an underfunded plan. (The PBGC guarantees benefits up to $4,652.41 a month, and the plaintiffs’ benefits were less than that amount.) Finally, U.S. Bancorp notes that ERISA grants a cause of action to participants “to sue for the benefits, information, and other ‘rights’ owed to them.” Although a participant may sue for a breach, “recovery goes to the plan” and, according to the Supreme Court and the solicitor general, participants have “no individual claim to a plan’s general asset pool.” A participant can sue to enjoin violations of ERISA under Section 502(a)(3), but only “if other remedial provisions do not ‘provide[] adequate relief for a beneficiary’s injury.’” Varity Corp. v. Howe, 516 U.S. 489, 512 (1996). Nor can participants skirt this requirement by claiming that they are bringing suit on behalf of the plan, because the Supreme Court has held that “Article III standing is not to be placed in the hands of ‘concerned bystanders.’” Hollingsworth v. Perry, 570 U.S. 693 (2013).

U.S. Bancorp notes that ERISA permits a plan to invest in the sponsor’s proprietary mutual funds if it meets certain conditions, and reminds the Court that plaintiffs did not allege that the bank failed to meet these conditions. (Plaintiffs alleged that the investment was a prohibited transaction, implying that either U.S. Bancorp did not apply for an exemption or it did not meet the conditions of the exemption.) Defendants argue that the “[p]laintiffs hope to vindicate a general interest in trying to ensure the Plan is administered in accordance with ERISA’s requirements.” But, they contend that participants have no such right because “[t]rust law did not make harmless fiduciary breaches actionable.” Instead, “[a] trust beneficiary’s right, properly understood, is thus not a general right to have the trustee fulfill his fiduciary obligations, but rather a right to be free of fiduciary misconduct that adversely affects the beneficiary’s interest.” Defendants cite the Restatement (Second) Trusts § 214, cmt. b in support: “where the breach of trust is merely in the failure to make trust property productive and the principal is in no way affected, the life beneficiary but not the remainderman can maintain a suit.”

As amicus in support of petitioner, the United States solicitor general points out that “[n]othing in the text of ERISA conditions a fiduciary’s duties to beneficiaries on whether the plan is a defined-benefit or defined-contribution plan, or on whether the plan is underfunded or overfunded. Nor does ERISA condition the right of ‘beneficiaries’ to ‘maintain an action,’ on the type or status of the plan.” Moreover, “courts traditionally have entertained suits by a beneficiary alleging that the trustee violated its duty not to engage in conflicted transactions or disloyal conduct, with ‘no further inquiry’ into whether the conflicted conduct caused any harm other than the breach itself.…And if the trustee has made a profit, the beneficiary is entitled to demand that the profit be disgorged ‘because the trustee will not be allowed to profit from a breach of trust, even if the profit does not come at the expense of the trust estate.’” This view comports with one of the most often quoted phrases about ERISA’s fiduciary duties: “The fiduciary obligations of the trustees to the participants and beneficiaries of the plan are those of trustees of an express trust—the highest known to the law.” Donovan v. Bierwirth, 680 F.2d 263 (2d Cir. 1982).

SIGNIFICANCE

If the Supreme Court upholds the Eighth Circuit’s ruling, no one will have the resources and incentive to ensure that plan sponsors do not “pilfer plan assets at will.” ERISA grants the right to sue for a fiduciary breach to participants, beneficiaries, fiduciaries, and the secretary of labor. According to the Department of Labor, “The Secretary [of Labor] depends on participant suits to enforce ERISA, because she lacks the resources to do so singlehandedly, and plan fiduciaries are commonly defendants in such cases.” Although fiduciaries are authorized to sue, amicus Public Citizen notes that they cannot be relied on “to bring suit against themselves for their own misconduct.” That leaves participants (and beneficiaries) as the only realistic enforcement measure. In its amicus brief, the Pension Rights Center points out that, of ERISA’s enumerated plaintiffs, participants have the foremost interest “in the proper plan management…because they lie at the heart of the statutory scheme and are, indeed, the very reason for the plan’s existence.”

The Pension Rights Center argues that the funding status of a plan “is not a sensible measure of injury in fact” because the plan can avoid underfunding by assuming a higher rate of return on investments. Furthermore, a plan’s funding status can change in days, if not hours: “The sudden market downturn of the 2000s resulted in reduced plan asset values at the same time that lower statutory discount rates increased the present value of plan liabilities, causing many plans to become underfunded overnight.” As the solicitor general points out, “Given normal fluctuations in those bases and assumptions, it is easy to imagine a plan toggling somewhat frequently between overfunded and underfunded status. It would be bizarre to tether a plaintiff ’s standing—and thus a federal court’s power to hear a case—to such a volatile and arbitrary metric. Nothing in ERISA or Article III compels such a result.”

U.S. Bancorp claims that only if “an apocalyptic cascade of failures” were to occur, would the participants’ benefits be in jeopardy. Yet, such a cataclysmic turn of events is not implausible, nor is the likelihood of plan termination theoretical. In 2019, the PBGC’s single-employer program paid over $6 billion in benefits to 932,000 retirees in single-employer plans and assumed responsibility for paying benefits to another 103,429 retirees in newly-terminated or -trusteed plans. And the “fail-safe” mechanism that U.S. Bancorp mentions—the PBGC—is precarious. The PBGC reports that its single-employer plan program “remains exposed to a considerable amount of underfunding” and the multi-employer program is expected to run out of funds in 2025, unless Congress enacts reforms. Press Release, PBGC Releases FY 2019 Annual Report (Nov. 18, 2019); PBGC, Annual Report (2019).

Amicus, the Chamber of Commerce, argues that a lawsuit would be wasteful because the court would order the plan sponsor “to make a contribution to the plan that it is legally obligated to make absent any lawsuit.” The chamber further argues the Supreme Court will open the floodgates to authorize “a host of unwarranted ERISA claims of all sorts” if it rules that participants have Article III standing to challenge fiduciary duties. The chamber categorizes the solicitor general’s interpretation of standing as “breathtakingly expansive.” It would “incentivize entrepreneurial attorneys to mine the investment decisions of even the most generously overfunded pensions to demand repayment for risks that did not pan out—even after the employer’s subsequent contributions returned the plan to the same funding status. Every time a plan dipped below (or, on the Government’s theory, close to below) full funding, no matter how temporarily, a lawsuit apparently could be maintained on the theory that the temporary dip in fund value—even for a week, or just a day—resulted from a breach of duty. Given the volatile nature of many asset values, it is not an exaggeration to predict that multiple lawsuits could be brought each year against a very large number of plans.” Additionally, this litigation environment might motivate trustees to take a conservative investment strategy, which could increase the chance that the fund would be unable to pay benefits when due.

Jayne Zanglein, a professor emeritus at Western Carolina University, specializes in pension and medical benefits, and authors ERISA Litigation, now in its seventh edition. She can be reached at 828.331.0866 and at jzanglein@wcu.edu.

PREVIEW of United States Supreme Court Cases 47, no. 4 (January 13, 2020): 7–11. © 2020 American Bar Association

ATTORNEYS FOR THE PARTIES

  • For Petitioners James J. Thole, et al. (Peter K. Stris, 213.995.6800)
  • For Respondents U.S. Bank, N.A. (Joseph Russell Palmore, 202.887.6940)

AMICUS BRIEFS

In Support of Petitioners James Thole, et al.

  • AARP and AARP Foundation (Dara Swartz Smith, 202.434.6280)
  • Law Professors (Erin M. Riley, 206.623.1900)
  • National Association of Home Builders (Thomas Jon Ward, 202.266.8200)
  • Pension Rights Center (Elizabeth Hopkins, 818.886.2525)
  • Public Citizen (Nandan Maheshchandra Joshi, 202.588.1000)
  • United States (Noel J. Francisco, Solicitor General, 202.514.2217)

In Support of Respondents U.S. Bank, N.A.

  • Chamber of Commerce of the United States of America, The American Benefits Council, and The ERISA Industry Committee (Brian David Netter, 202.263.3000)
  • New England Legal Foundation (Benjamin G. Robbins, 617.695.3660)
  • Washington Legal Foundation (Richard A. Samp, 202.588.0302)