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Milofsky Amicus Brief Supporting Rehearing en banc No. 04-56136 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT ____________________________________________________
MICHAEL MILOFSKY, et al.
Plaintiffs-Appellants,
v. AMERICAN AIRLINES, INC., et al. Defendants-Appellees. ____________________________________________________ APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS ____________________________________________________
BRIEF AS AMICUS CURIAE ELAINE L. CHAO, SECRETARY OF THE UNITED STATES DEPARTMENT OF LABOR SUPPORTING THE PLAINTIFFS'-APPELLANTS' PETITION FOR REHEARING EN BANC
For the Secretary of Labor:
HOWARD M. RADZELY
TIMOTHY D. HAUSER
ELIZABETH HOPKINS I. THE PANEL'S DECISION IS OF EXCEPTIONAL IMPORTANCE BECAUSE OF ITS LIKELY IMPACT ON PLANS
II. THE PANEL'S HOLDING CREATES A CONFLICT WITH A DECISION OF THE SIXTH CIRCUIT Cases: Bannistor v. Ullman, 287 F.3d 394 (2002) Donovan v. Cunningham, 716 F.2d 1455 (5th Cir. 1983) Harris Trust & Sav. Bank v. Salomon
Smith Barney Inc., 530
Kling v. Fid. Mgmt. Trust Co.,
270 F. Supp. 2d 121 (D.
Kuper v. Iovenko, 66 F.3d 1447 (1995) Langbecker v. Elec. Data Sys., No. 04-41760 (5th Cir. filed Dec. 29, 2004) Massachusetts Mutual Life Insurance
Co. v. Russell, 473
Matassarin v. Lynch, 174 F.3d 549 (5th Cir. 1999) Milofsky v. American Airlines, Inc., No. 03-11087, 2005 WL 605754 (5th Cir. Mar. 16, 2005) Nachman Corp. v. Pension Benefit
Guar. Corp., 446
Schultz v. Kirkland, Case No. CV-00-1377-HA (D. Or. filed Oct. 10. 2000) Secretary of Labor v. Fitzsimmons, 805 F.2d 682 (7th Cir. 1986) Steinman v. Hicks, 352 F.3d 1101 (7th Cir. 2003) Tittle v. Enron, No. 01-3913 (S.D. Tex. filed Nov. 13, 2001) In re Unisys Sav. Plan Litig., 74 F.3d 420 (3d Cir. 1996) United States Department of Labor v. Kirkland, No. CV-02-441-HA (D. Or. filed Apr. 4. 2002) Varity Corp. v. Howe, 516
In re WorldCom ERISA Litig., 263
F. Supp. 2d 754 (S.D.N.Y. 2003) Statutes and Regulations: Employee Retirement Income Security Act of 1974, as amended 29 U.S.C. 1001, et seq.:
Section 2(a), 29 U.S.C.
1001(a) Section 502(a)(2), 29 U.S.C. 1132(a)(2) Section 505, 29 U.S.C. 1135 IRC 401(a) Fed. R. App. 35(b)(1)(A) Other Authorities: David A. Littell et al., Retirement Savings Plans: Design, Regulation, and Administration of Cash or Deferred Arrangements 6 (1993)
See Rev. Rul. 89-52, 1989-1 C.B. 110, 1989 WL 572038 (Apr. 10, 1989)
Board of Governors of the Federal Reserve Sys., Flow
of Fund Accounts of the
Profit Sharing/401k Council of
Colleen E. Medill, Stock Market Volatility and 401(k)
Plans, 34 U.
The Secretary of Labor (the " Secretary" ) has primary authority to interpret and enforce the provisions of Title I of ERISA. 29 U.S.C. 1132, 1135. See Donovan v. Cunningham, 716 F.2d 1455, 1462-63 (5th Cir. 1983). The Secretary's interests further include promoting the uniform application of the Act, protecting plan participants and beneficiaries, and ensuring the financial stability of plan assets. Secretary of Labor v. Fitzsimmons, 805 F.2d 682 (7th Cir. 1986) (en banc). This case presents a question concerning the duties of fiduciaries with regard to individual account plans. Read broadly, the decision of the panel could undermine, if not eliminate, the ability of participants in such plans (and perhaps the Secretary) to bring suit on behalf of the plan under sections 502(a)(2) and 409(a), 29 U.S.C. 1132(a)(2), 1109(a), to remedy fiduciary breaches where not every plan participant's account has suffered a loss. This is likely to effectively remove from the remedial reach of ERISA $1.75 trillion in plan assets held in 401(k) plans. The Secretary has a strong interest in ensuring that this Court does not reach such a result. The plaintiffs, 218 pilots who were
participants in a 401(k) plan, brought suit under ERISA section 502(a)(2), 29 U.S.C. 1132(a)(2), after their company was acquired by American Airlines and
their account balances were transferred from another plan in an allegedly
untimely and imprudent manner. Milofsky v. American Airlines, Inc.,
No. 03-11087, 2005 WL 605754, at *1 (5th Cir. Mar. 16, 2005). They sued the
fiduciaries of the American plan, as well as the benefits consulting firm for
the plan, alleging they were misled about how the transfer would be
accomplished, and that because of fiduciary breaches with regard to the
timeliness of the transfer, the value of their accounts, and thus the overall
value of the plan, decreased.
Relying on Massachusetts Mutual Life Insurance Co. v. Russell, 473 U.S. 134 (1985), the panel affirmed the district court's dismissal of the case, holding that " plaintiffs lack standing because this case in essence is about an alleged particularized harm targeting a specific subset of plan beneficiaries . . . who seek only to benefit themselves and not the entire plan as required by 502(a)(2)." Milofsky, 2005 WL 605754, at *7. En banc rehearing is warranted because, read broadly, the panel's ruling eliminates the ability of participants in individual account plans, as well as the Secretary, to sue the fiduciaries under sections 409(a) and 502(a)(2) of ERISA, 29 U.S.C. 1109(a) and 1132(a)(2), and obtain monetary relief for the plan, when alleged fiduciary breaches affected some, but not all (or most), of the plan participants' accounts. Moreover, the decision creates a conflict on the issue with the decision of the Sixth Circuit in Kuper v. Iovenko, 66 F.3d 1447 (1995). See Fed. R. App. P. 35(b)(1)(A) (a conflict with the decision of other circuits is of exceptional importance and justifies en banc rehearing). Because the result reached by the panel is unwarranted by Supreme Court and prior Fifth Circuit precedent and is inconsistent with the plain language of the statute and its purposes, this Court should hear the case en banc and reverse the decision of the panel.
I. THE PANEL'S DECISION IS OF EXCEPTIONAL IMPORTANCE BECAUSE OF ITS LIKELY
IMPACT
By reading section
502(a)(2) to disallow enforcement by plan participants who allege fiduciary
breaches that harmed the accounts of some but not all plan participants, the
decision is likely to adversely affect all 401(k) plans and all other defined
contribution plans that offer a number of investment options to plan
participants. All pension plans under ERISA are either defined benefit or
defined contribution plans. See Nachman Corp. v. Pension Benefit
Guar. Corp., 446
It is estimated that these
defined contribution plans or individual account plans now hold over $2.3
trillion in assets, which is more than half of all pension plan assets. Board
of Governors of the Federal Reserve Sys., Flow of Fund Accounts of the
Thus, while the panel's decision will not affect such cases as Tittle v. Enron, No. 01-3913 (S.D. Tex. filed Nov. 13, 2001) and Langbecker v. Elec. Data Sys. (EDS), No. 04-41760 (5th Cir. filed Dec. 29, 2004), where, because of the employers' matching contributions in company stock, every plan participants' account is likely to have been directly affected by the alleged fiduciary mismanagement of the company stock funds, it is likely to preclude all suits for losses to these plans with regard to fiduciary mismanagement or malfeasance of every other investment option held by such 401(k) plans. In such plans, because it is highly unlikely that every participant will be invested in every other (non-employer stock) investment option during a given period, the investment decisions and actions of fiduciaries with regard to these options will not be subject to regulation under ERISA sections 409 and 502(a)(2) if the panel's decision is allowed to stand. This would preclude, for instance, suits such as the one brought by plan participants against the Unisys Corporation for imprudently investing in a contract purchased from Executive Life Insurance Co. just before the insurance company was placed in receivership. In re Unisys Sav. Plan Litig., 74 F.3d 420 (3d Cir. 1996).[2] Similarly, the panel's ruling would preclude a suit under section 502(a)(2), such as the one at issue in Bannistor v. Ullman, 287 F.3d 394 (2002), against fiduciaries who fail to forward employee contributions to their plans, so long as the fiduciaries merely pocket the contributions of some, rather than all, participants. Moreover, if left standing, the panel's ruling would preclude the suit brought by the participants in the WorldCom plan to recoup the enormous losses to their 401(k) plan stemming from serious fiduciary malfeasance and undisclosed corporate wrongdoing, simply because the company did not provide a match in company stock and consequently not every participants' accounts held investments in such stock. In re WorldCom ERISA Litig., 263 F. Supp. 2d 754, 754-55 (S.D.N.Y. 2003). These results are not only
unwarranted under the statute, they are also antithetical to the primary
purpose of ERISA, which is designed to prevent " the misuse and mismanagement
of plan assets," Russell, 473 U.S. at 140 n.8, as well as to the
specific purposes of section 502(a)(2), which is designed to allow suits to
enforce " fiduciary obligations related to the plan's financial integrity," in
accordance with the " special congressional concern about plan asset
management" reflected in section 409. Varity Corp. v. Howe, 516
Indeed, consistent with its
broad protective purposes, the plain statutory terms of section 409(a)
expressly provide for recovery of " any losses" to the plan caused by a
fiduciary breach. 29 U.S.C. 1109(a). And ERISA section 502(a)(2), in turn,
permits an action to be brought by plan participants, fiduciaries or the
Secretary for " appropriate relief under 409." 29 U.S.C. 1132(a)(2).
These provisions do not, as the panel's decision assumes, limit a suit under
section 502(a)(2) to those seeking to recover " losses to the plan as a
whole," and given the " evident care" with which the civil enforcement
provisions were crafted, Russell, 473 U.S. at 140, 147, the panel erred
in reading such a limitation into the provisions where none is expressly
stated. See Harris Trust & Sav. Bank v. Salomon Smith Barney Inc.,
530
This is not to suggest that the decisions of the Supreme Court in Russell and of this Court in Matassarin v. Lynch, 174 F.3d 549 (5th Cir. 1999), are wrong. Rather, as Judge King stated in her dissent from the panel's decision, " [b]oth of these cases are distinguishable from the present case, and neither justifies the majority's conclusions." Milofsky, 2005 WL 605754, at *8. Unlike this case,
Russell involved a claim by a plaintiff for direct recovery of individual
damages stemming from a denial of plan benefits. In Russell, a plan's
disability committee terminated and then reinstated a participant's disability
benefits. Claiming losses from the interruption in benefit payments, the
participant brought suit under section 502(a)(2) for compensatory and punitive
damages, payable not to the plan for a loss of plan assets, but directly to
the individual participant for injuries she personally sustained. 473
Russell
distinguished relief to be paid to a plan as damages for the mismanagement of
plan assets, as sought here, from relief to be paid to an individual as
damages for personal pain and suffering caused by a benefit payment delay, as
sought in Russell, 473
Nor does the
Matassarin case in any way support this reading of section 502(a)(2). The
plaintiff in Matassarin was a beneficiary in an ESOP by virtue of a
qualified domestic relations order (" QDRO" ) obtained at the time of her
divorce. She brought suit alleging that her account balance under the QDRO
was miscalculated and she sought an immediate benefit distribution. She also
alleged that the plan fiduciaries had breached their duties by failing to
comply with the tax code, which jeopardized the tax qualified status of the
plan, by buying back shares of stock from a few participants who cashed out of
the plan for less than fair market value, and by failing to diversify her
account. As the Court there correctly noted, only the allegation regarding
the plan's tax qualification was properly brought under section 502(a)(2)
because it involved the interest of the plan as a whole. 174 F.3d at 565-66.
The Court held that the allegation that the stock of those who received
distributions was purchased back for less than fair market value, only
asserted harm to those who cashed out, not to the plan itself, and that,
similarly, the failure to diversify the plaintiff's account was consistent
with the QDRO's terms and did not cause any losses to the plan.
As Judge King noted in her
dissent, Matassarin is easily distinguishable on a number of bases,
Milofsky, 2005 WL 605754, at *9, most saliently because the plaintiff
there did not, and could not, assert a diminution of the plan's assets, but
instead claimed that she had been treated differently than other plan members
and sought only a distribution of her benefits. Contrary to the panel's
suggestion that the plaintiffs here are simply requesting " that damages be
paid to the plan instead of directly to" themselves, id. at *3; in
fact, because the plaintiffs are not currently entitled to a distribution of
benefits, the relief they seek can only " be paid to the plan and then
distributed within it to individual accounts."
The panel's decision does
indicate that a suit that affected less than all of the participant accounts
could " inure[] to the benefit of the plan, . . . when the suit seeks
to vindicate the rights of the plan as an entity when alleged fiduciary
breaches targeted the plan as a whole." 2005 WL 605754, at *12 n.16
(emphasis in original). We agree with Judge King that this exception, which
is not grounded in the statute, is unsatisfactory because the majority does
not " explain how a court should determine if an alleged fiduciary breach
targeted the plan as a whole."
II. THE PANEL'S HOLDING CREATES A CONFLICT WITH A DECISION OF THE SIXTH CIRCUIT The panel's decision is of exceptional importance for another reason: it creates a conflict with the Sixth Circuit's decision in Kuper, which, on similar facts, rejected the reading of section 502(a)(2) adopted by the court here that disallows a claim for plan losses stemming from fiduciary breach if not all participant accounts would benefit from a recovery. See Milofsky, 2005 WL 605754, at *12 n.19 (recognizing an " arguable conflict" with Kuper); id. at *7 (King, J., dissenting) (the " majority's holding . . . squarely conflicts" with Kuper). As here, Kuper also
involved a delay in the transfer of assets of a group of participants from one
plan to another and a diminution in the value of the assets during the delay.
The defendants alleged that the plaintiff class failed to state a claim for
breach of fiduciary duty under section 409 because the class did not include
all of the plan's beneficiaries. 66 F.3d at 1452. The Sixth Circuit cited
cases holding that recovery under section 409 must go to the plan, and stated
that the relevant cases " distinguish between a plaintiff's attempt to recover
on his own behalf and a plaintiff's attempt to have the fiduciary reimburse
the plan."
For the reasons discussed above, the
Secretary, as amicus curiae, requests that this Court rehear this matter en
banc and reverse the decision of the panel. HOWARD M. RADZELY Solicitor of Labor
TIMOTHY D. HAUSER Associate Solicitor Plan Benefits Security Division
_____________________ ELIZABETH HOPKINS Counsel for Appellate and Special Litigation Plan Benefits Security Division
Office of the Solicitor
Washington,
(202) 693-5600 (phone) (202) 693-5610 (fax) hopkins.elizabeth@dol.gov I hereby certify that two (2) copies of the Brief of Amicus Curiae Elaine L. Chao, Secretary of the United States Department of Labor, Supporting the Plaintiffs'-Appellants' Petition for Rehearing En Banc, along with a diskette in PDF format, were mailed, via federal express overnight delivery, on this 11th day of April 2005 to the following parties:
Jani K. Rachelson, Esq. Bruce S. Levine, Esq. Elizabeth O'Leary, Esq. Cohen, Weiss and Simon LLP
New York,
Edward P. Perrin, Jr., Esq. Jennifer R. Poe, Esq. Hallet & Perrin, P.C.
Dallas,
__________________
Elizabeth Hopkins As required by Fed. R. App. 32(a)(7)(B), I certify that this brief is proportionally spaced, using Times New Roman 14-point font size, and contains 3,827 words. I relied on Microsoft Word 2000 to obtain the word count.
Dated: April 11, 2005
___________________
[1] Such plans are growing rapidly. According to Department of Labor estimates, total contributions by employers and employees to 401(k) type plans increased from $152 billion in 1999 to $170 billion in 2000. Moreover, according to a survey conducted in 2003, 82.2% of eligible employees participated in 401(k) plans. Profit Sharing/401k Council of America, 47th Annual Survey of Profit Sharing and 401(k) Plans: Overview of Survey Results, available at www.psca.org/DATA/47th.html. [2] Another example is found in United States Department of Labor v. Kirkland, No. CV-02-441-HA (D. Or. filed Apr. 4. 2002) (Judge Haggerty) and the companion private class action Schultz v. Kirkland, No. CV-00-1377-HA (D. Or. filed Oct. 10. 2000) (Judge Haggerty). In these actions, the Secretary and the private plaintiffs brought claims under section 502(a)(2) alleging imprudence by the trustees of a Taft-Hartley plan. The 401(k) plan allowed participants to invest in a number of funds, such as a cash management fund, a fixed income fund, an equity fund, a balanced fund, and a private investment fund. The trustees of the 401(k) plan hired Capital Consultants, LLC (" CCL" ) as the investment manager for these funds, and CCL, in turn, placed substantial assets in risky private placement investments including loans that a reasonably prudent lender would not have made. Virtually all of these loans by CCL were to sub-investment grade borrowers such as Wilshire Credit Corporation (" WCC" ) and were inadequately secured. WCC, the largest single borrower from CCL, eventually filed for bankruptcy, and, as a result, the 401(k) plan lost millions of dollars. After the 401(k) plan hired CCL as an investment manager, however, the Plan also added three mutual funds as investment options. Most participants remained invested in the original funds managed by CCL, but some chose to move their investments to the newly added mutual funds. Therefore, when CCL's private placement investments collapsed, it appears that some participants' accounts did not suffer any losses. The suits to recover these substantial plan losses would not be allowed under the panel's analysis. [3] Indeed, Congress declared it to be the policy of ERISA to protect " the continued well-being and security of millions of employees and their dependants," as well as employment stability and commerce, by " establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the Federal courts." 29 U.S.C. 1001(a), (b). Considering these statements in the statute, it defies common sense to believe that Congress meant, without expressly saying so, to exempt from the reach of ERISA's primary remedial provision all individual account plans that suffer losses, so long as those losses do not affect every participant's account.
[4] Moreover, we agree with Judge King's
observation that Russell does not, in any event, " stand for the
proposition that the 'plan as a whole' is synonymous with 'all participants of
the plan,'" as several courts have recognized. Milofsky, 2005 WL
605754, at *12 n.4, citing Kuper v. Iovenko, 66 F.3d at 1453; Kling
v. Fidelity Mgmt. Trust Co., 270 F. Supp. 2d 121, 124-27 (D.
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