No. 05-17100
___________________________________________________________
___________________________________________________________
IN THE UNITED
STATES COURT OF APPEALS
FOR THE NINTH
CIRCUIT
________________________________
JERRY VAUGHN and
THERESA TRAVERS,
Plaintiffs-Appellants,
v.
BAY ENVIRONMENTAL
MANAGEMENT, INC., CAESAR NUTI,
DENNIS VARNI, FSC
SECURITIES CORPORATION, and
JERROLD N.
WEINBERG,
Defendants-Appellees.
________________________________
On Appeal from the
United States District Court
for the Northern
District of California
________________________________
BRIEF FOR THE
SECRETARY OF LABOR AS AMICUS CURIAE
SUPPORTING
PLAINTIFFS-APPELLANTS
________________________________
HOWARD M.
RADZELY
Solicitor of Labor
TIMOTHY D.
HAUSER
Associate Solicitor for
Plan
Benefits Security
KAREN L.
HANDORF
Counsel for Appellate and
Special Litigation
ELIZABETH
HOPKINS
Senior
Appellate Attorney
U.S.
Department of Labor
200
Constitution Ave., N.W.
Room N-4611
Washington,
D.C. 20210
(202)
693-5584
___________________________________________________________
___________________________________________________________
22500600006
TABLE OF CONTENTS
Table of Authorities
Statement of the Issue
Interest of the Secretary of Labor
Statement of the facts
Summary of the argument
Argument
Plaintiffs – who claim that fiduciary breaches caused diminution in the
amount of benefits they were paid when defendant Bay Environmental
terminated the defined contribution plans in which they participated – have
standing under ERISA to bring their suit.
A.
Plaintiffs have a colorable claim that alleged fiduciary breaches
have affected their plan benefits and thus they meet the statutory standing
criteria.
B.
Termination of the plans does not destroy standing.
Conclusion
Certificate of Compliance
Certificate of Service
Appendix
A. Cunningham v.
Adams, 106 F. App'x 693 (10th Cir. 2004)
B. Dickerson v. Feldman, ___ F.
Supp. 2d ___, No. 04-7935, 2006 WL 838999 (S.D.N.Y. Mar. 30,
2006), appeal docketed, No. 06-1616 (2d Cir.
Apr. 5, 2006)
C. Flynn v. Ballinger, No. C
94-0190, 1994 WL 758662 (N.D. Cal. May 9, 1994), aff'd,
76 F.3d 386 (9th Cir. 1996)
D.
Graden v. Conexant Sys., Inc., No. 05-0695, 2006 WL 1098233 (D.N.J. Mar. 31, 2006) ), appeal docketed, No. 06-2337 (3d Cir. Apr. 27, 2006)
E.
Holtzscher v. Dynegy, Inc., No. 05-3293, 2006 WL 626402 (S.D. Tex. Mar. 13, 2006) ), appeal docketed, No. 06-20297 (5th Cir. Apr. 18, 2006)
F.
In re Admin. Comm. ERISA Litig., No. C03-3302, 2005 WL 3454126 (N.D. Cal. Dec. 16, 2005)
G.
In re RCN Litig., No. 04-5068, 2006 WL 753149
H.
Martin v. Harline, No. 87-NC-115J, 1992 WL 12151224 (D. Utah Mar. 30, 1992)
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TABLE OF AUTHORITIES
Cases:
Amalgamated Clothing & Textile
Workers Union v. Murdock, 861 F.2d 1406 (9th Cir.
1988)
British Motor Car Distribs.,
Ltd. v. San Francisco Auto. Indus. Welfare Fund, 882 F.2d 371 (9th Cir.
1989)
Christopher v. Mobil Oil Corp., 950 F.2d 1209 (5th Cir.
1992)
Crawford v. Lamantia, 34 F.3d 28 (1st Cir.
1994)
Cunningham v. Adams, 106 F. App'x 693 (10th
Cir. 2004)
Dickerson v. Feldman, ___ F. Supp. 2d ___,
No. 04-7935, 2006 WL 838999 (S.D.N.Y. Mar. 30,
2006), appeal docketed, No. 06-1616 (2d Cir.
Apr. 5, 2006)
Donovan v. Mazzola, 716 F.2d 1226 (9th Cir.
1983)
Firestone Tire & Rubber Co. v.
Bruch, 489 U.S. 101 (1989)
Flynn v. Ballinger, No. C 94-0190, 1994 WL
758662 (N.D. Cal. May 9,
1994), aff'd, 76 F.3d 386 (9th Cir.
1996)
Gilquist v. Becklin, 675 F. Supp. 1168 (D.
Minn. 1987), aff'd, 871 F.2d 1093 (8th Cir. 1988)
Graden v. Conexant Sys., Inc., No. 05-0695, 2006 WL
1098233 (D.N.J. Mar. 31, 2006),
appeal docketed, No. 06-2337 (3d Cir.
Apr. 27, 2006)
Gruber v. Hubbard Bert Karle
Weber, Inc., 675 F. Supp. 281 (W.D.
Pa. 1987)
Horn v. McQueen, 353 F. Supp. 2d 785 (W.D.
Ky. 2004)
Holtzscher v. Dynegy, Inc., No. 05-3293, 2006 WL
626402 (S.D. Tex. Mar. 13,
2006), appeal docketed, No. 06-20297 (5th
Cir. Apr. 18, 2006)
In re Admin. Comm. ERISA Litig., No. C03-3302, 2005 WL
3454126 (N.D. Cal. Dec. 16,
2005)
In re Mut. Funds Inv. Litig., 403 F. Supp. 2d 434 (D.
Md. 2005)
In re RCN Litig., No. 04-5068, 2006 WL
753149 (D.N.J. Mar. 21, 2006)
Kayes v. Pac. Lumber Co., 51 F.3d 1449 (9th Cir.
1995)
Kuntz v. Reese, 785 F.2d 1410 (9th Cir.
1986)
LaLonde v. Textron, Inc., 418 F. Supp. 2d 16 (D.R.I.
2006), appeal docketed, No. 06-1546 (1st Cir.
Apr. 3, 2006)
Martin v. Feilen, 965 F.2d 660 (8th Cir.
1992)
Martin v. Harline, No. 87-NC-115J, 1992 WL
12151224 (D. Utah Mar. 30, 1992)
Mitchell v. Mobil Oil Corp., 896 F.2d 463 (10th Cir.
1990)
Mullins v. Pfizer, Inc., 23 F.3d 663 (2d Cir.
1994)
Nachman Corp. v. Pension
Benefit Guar. Corp., 446 U.S. 359 (1980)
Phillips v. Alaska Hotel &
Rest. Employees Pension Fund, 944 F.2d 509 (9th Cir.
1991)
Rankin v. Rots, 220 F.R.D. 511 (E.D.
Mich. 2004)
Raymond v. Mobil Oil Corp., 983 F.2d 1528 (10th
Cir. 1993)
Reich v. Valley Nat'l Bank, 837 F. Supp. 1259 (S.D.N.Y.
1993)
Secretary of Labor v.
Fitzsimmons, 805 F.2d 682 (7th Cir.
1986)
Sommers Drug Stores Co.
Employee Profit Sharing Trust v. Corrigan, 883 F.2d 345 (5th Cir.
1989)
Stanton v. Gulf Oil Corp., 792 F.2d 432 (4th Cir.
1986)
Swinney v. Gen. Motors Corp., 46 F.3d 512 (6th Cir.
1995)
Wilson v. Bluefield Supply Co., 819 F.2d 457 (4th Cir.
1987)
Yancy v. Am. Petrofina, Inc., 768 F.2d 707 (5th Cir.
1985)
Statutes and regulations:
Employee
Retirement Income Security Act of 1974, Title I, 29 U.S.C. §§
1001 et seq.:
Section 2(b), 29 U.S.C. § 1001(b)
Section 3(7), 29 U.S.C. § 1002(7)
Section 3(34), 29 U.S.C. § 1002(34)
Section 404(a)(1), 29 U.S.C. § 1104(a)(1)
Sections 404-409, 29 U.S.C. §§ 1104-1109
Section 409, 29 U.S.C. § 1109
Section 502, 29 U.S.C. § 1132
Section 502(a)(2), 29 U.S.C. § 1132(a)(2)
Pension
Annuitants Protection Act of 1994, Pub. L. No. 103-401,
108 Stat. 4172
Miscellaneous:
H.R. Rep. No.
93-533 (1974), reprinted in 1974 U.S.C.C.A.N. 4639
2
Legislative History of the Employee Retirement Income Security Act
of 1974 (Comm. Print 1976)
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STATEMENT OF THE ISSUE
The plaintiffs in this case are former employees of Defendant Bay
Environmental, who participated in two terminated defined contribution plans
sponsored by Bay Environmental. They claim that, prior to termination of
these plans, and while they were still employees, the defendants breached
their fiduciary duties to the plans and caused resulting losses that
diminished their benefits. The question presented is whether, under these
circumstances, the plaintiffs have standing to sue on behalf of the plans as
"participant[s]" within the meaning of ERISA section 502(a)(2). 29 U.S.C. §
1132(a)(2).
INTEREST OF THE SECRETARY OF LABOR
The Secretary of Labor has primary authority to interpret and enforce the
provisions of Title I of the Employee Retirement Income Security Act of 1974
(ERISA), 29 U.S.C. §§ 1001 et seq. 29 U.S.C. §§ 1104-1109;
see also Secretary of Labor v. Fitzsimmons, 805 F.2d 682,
689-94 (7th Cir. 1986) (en banc) (Secretary's interests include promoting
the uniform application of the Act, protecting plan participants and
beneficiaries, and ensuring the financial stability of plan assets). The
Secretary therefore has a strong interest in ensuring that ERISA is not
interpreted to deny plaintiffs standing to sue to remedy fiduciary breaches
that allegedly caused losses to the defined contribution plans in which they
participated, merely because those plans were subsequently terminated and
the plans' assets distributed to the participants. If the allegations of
the complaint are correct, there was a loss to the plans occasioned by the
breaches of the fiduciaries and a corresponding diminution in the amount of
benefits the plaintiffs received when the plans were terminated. Because
the plaintiffs thus have a "colorable claim" to increased benefits based on
these losses, ERISA cannot be read to deny them standing to sue.
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STATEMENT OF THE FACTS
1. This ERISA case was brought as a class action by Jerry Vaughn
and Theresa Travers, former employees of Defendant Bay Environmental. Excerpts of Record (E.R.) 14.
Bay Environmental sponsored two pension plans – the Bay Environmental
Pension Plan (Pension Plan) and the Bay Environmental Retirement Plan
(Retirement Plan) – both of which were defined contribution or individual
account plans under ERISA. E.R. at 14, 16. The Pension Plan was a money
purchase plan that did not allow for participant-directed investments, while
the Retirement Plan had both a profit-sharing plan component, under which
only the employer contributed, and a 401(k) component, under which employees
could elect to contribute and could chose among an array of investment
options. Vaughn and Travers participated in both plans during the relevant
period.
The trustees voted to terminate both plans in 2000 or early 2001 at
roughly the same time that the parent company of Bay Environmental was
purchased by another company. The plans' investments were then liquidated to
cash in August 2001, and the proceeds distributed to plaintiffs some time in
2002. E.R. 15.
The plaintiffs brought suit under ERISA section
502(a)(2), 29 U.S.C. § 1132(a)(2), for relief under ERISA sections 404(a)(1)
and 409, 29 U.S.C. §§ 1104(a)(1), 1109. E.R. 10-12 ¶¶ 56-67. They allege that the plans'
fiduciaries violated their duties in two ways: (1) by failing to transfer
the plans' assets from risky equity investments once they knew that the
plans would be terminated, into investments more appropriate for the shorter
time-horizons (a factor that the fiduciaries were required to consider under
the express plan terms) (E.R. 7, 11 ¶¶ 39, 60-61); and (2) by imprudently
investing the plans' assets regardless of whether the plans were going to
terminate (E.R. 12 ¶¶ 66-67). They claim that the former breaches actually
resulted in a reduction of the plans' total assets, while the latter
breaches caused losses to the plans in the sense that they had significantly
lower returns than they would have earned had their assets been more
prudently invested.
The defendants moved to dismiss, arguing that the plaintiffs are not
"participants" under ERISA and thus lack standing to bring their suit
because the plans were terminated and their proceeds fully distributed to
plaintiffs in 2002. Relying on this Court's per curiam decision on
rehearing in Kuntz v. Reese, 785 F.2d 1410 (9th Cir. 1986), the
defendants argued that the plaintiffs seek only damages, and do not have a
colorable claim to benefits.
The plaintiffs countered that, unlike the situation in Kuntz,
because the plans at issue here were defined contribution plans, the
participants' benefits are determined by the value of the plans' assets.
Thus, the plaintiffs argued that they have a colorable claim to the
increased benefits that would result from a recovery of plan losses from the
breaching fiduciaries.
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2. In an order dated September 26, 2005, the district court granted
the defendants' motion to dismiss. E.R. 14-19. The court rejected the
plaintiffs' attempt to limit the holding of Kuntz to cases where the
plaintiffs have received their full benefits under a defined benefit plan. The court noted that neither Kuntz nor any other Ninth Circuit case
has distinguished between defined benefit and defined contribution plans in
determining standing. E.R. 18. The court instead relied on two district
court decisions that applied the Kuntz holding to cases involving
defined contribution plans. E.R. 17 (citing Flynn v. Ballinger,
No. C 94-0190, 1994 WL 758662, at *2 (N.D. Cal. May 9, 1994), aff'd,
76 F.3d 386 (9th Cir. 1996) (attached as Appendix C to this brief), and
Gilquist v. Becklin, 675 F. Supp. 1168, 1170-71 (D. Minn. 1987),
aff'd, 871 F.2d 1093 (8th Cir. 1988) (table)).
The district court acknowledged that the Ninth Circuit has limited the
applicability of Kuntz and found participant standing in two
situations where participants had already been given their benefits. E.R.
16. First, in Amalgamated Clothing & Textile Workers Union v. Murdock,
861 F.2d 1406 (9th Cir. 1988), the Ninth Circuit found standing where
plaintiffs sought disgorgement of ill-gotten plan assets from breaching
fiduciaries of a terminated plan. Id. Second, in Kayes v.
Pacific Lumber Co., 51 F.3d 1449 (9th Cir. 1995), the Ninth Circuit
found that plaintiffs had standing under the Pension Annuitants Protection
Act of 1994, Pub. L. No. 103-401, 108 Stat. 4172 (codified as amended at 29
U.S.C. 1132), "to seek relief where, as here, a fiduciary breach has
occurred involving the purchase of insurance contracts . . . in connection
with their termination as plan participants." 51 F.3d at 1455. The
district court found, however, that neither of those two exceptions
pertained in this case. E.R. 18.
The court thus concluded that "[o]nce Plaintiffs
received their lump sum payments from the Plans' assets in 2002, they were
no longer 'participants' under ERISA" and therefore "lack standing to pursue
their ERISA claims." E.R. 19. Accordingly, the district court granted the defendants' motion to
dismiss with prejudice. This appeal followed.
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SUMMARY OF THE ARGUMENT
Plaintiffs have standing under ERISA to sue as former employees
who seek to recover losses to be paid to the two Bay Environmental defined
contribution plans in which they participated, or to successor trusts set up
for that purpose.
1. ERISA allows plan participants to sue to remedy
fiduciary breaches, and it defines "participant" as "any employee or former
employee of an employer . . . who is or may become eligible to receive a benefit of any type from
an employee benefit plan which covers employees of such employer." 29 U.S.C.
§ 1002(7). The Supreme Court in Firestone Tire & Rubber Co. v. Bruch,
489 U.S. 101, 117-18 (1989), and this Court in Kuntz v. Reese, 785
F.2d 1410 (9th Cir. 1986), have stated that former employees have standing
under this definition where they have a "colorable claim" to plan benefits. The plaintiffs have just such a claim here.
The plaintiffs' claim is that fiduciary breaches caused losses
to the plan, and, because their benefits under these defined contribution
plans are linked directly to the performance of the plans' assets, 29 U.S.C.
§ 1002(34), caused a corresponding diminution in the amount of the benefits
that they received upon pay-out. This case is therefore analogous to
Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan, 883
F.2d 345, 350 (5th Cir. 1989), where the court correctly held that
plaintiffs had standing to sue on behalf of a liquidated defined
contribution plan, because if the plaintiffs prove their claim they will be
eligible to receive an increased benefit – the additional amount that they
would have received at distribution if the defendants had not breached their
fiduciary duties. ERISA's primary remedial goal to protect individual
pension rights and to ensure that retirees receive the pensions to which
they are entitled requires that former employees who have not received all
of the benefits to which they are entitled be able to bring suit to make
them whole.
2. Nor is there any significance to the fact that the
plans have been terminated. There is no merit to defendants' argument made
below that, even if plaintiffs have colorable claims, they cannot sue on
behalf of a terminated plan. This Court in Murdock, like the Fifth
Circuit in Sommers, found that plaintiffs who have a colorable claim
can sue on behalf of a terminated plan. If the
plaintiffs here are successful, the district court may set up constructive
or successor trusts to distribute the assets to the participants and
beneficiaries.
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ARGUMENT
PLAINTIFFS – WHO CLAIM THAT FIDUCIARY BREACHES CAUSED A DIMINUTION IN THE
AMOUNT OF BENEFITS THEY WERE PAID WHEN DEFENDANT BAY ENVIRONMENTAL
TERMINATED THE DEFINED CONTRIBUTION PLANS IN WHICH THEY PARTICIPATED – HAVE
STANDING UNDER ERISA TO BRING THEIR SUIT
Congress enacted ERISA following the economic collapse of the
Studebaker-Packard Corporation as a direct response to the inadequacies of
the existing pension laws, which failed to ensure that the terminated
Studebaker employees received the pensions that they had been promised.
Nachman Corp. v. Pension Benefit Guar. Corp., 446 U.S. 359, 374 (1980)
(quoting, 2 Legislative History of ERISA at 1599 (Comm. Print 1976)
(statement of Sen. Williams, one of the chief sponsors of the bill)). In
enacting ERISA, Congress thus sought "to protect . . . the interests of
participants in employee benefit plans . . . by establishing standards of
conduct, responsibility, and obligation for fiduciaries of [such] plans,"
and by "providing for appropriate remedies, sanctions, and ready
access to the Federal courts." 29 U.S.C.
§ 1001(b) (emphasis added).
To this end, ERISA's comprehensive civil enforcement
scheme provides, in section 502(a)(2), 29 U.S.C. § 1132(a)(2), that "[a]
civil action may be brought" by a plan "participant" to obtain "appropriate
relief " under the section of ERISA (section 409, 29 U.S.C. § 1109) that
makes a breaching plan fiduciary personally liable to the plan for any
losses stemming from its breaches. Moreover, to serve its broad remedial
purposes, the statute broadly defines "participant" as "any employee or
former employee of an employer . . . who is or may be eligible to receive a
benefit of any type from an employee benefit plan which covers employees of
such employer." 29 U.S.C. § 1002(7).
As we demonstrate, the plaintiffs here are "participant[s]" within the
meaning of the statute because they are "former employees" who claim that
they received less than all of the benefits to which they are entitled
because the defendants' fiduciary breaches caused losses to the plans. Thus, they may sue under section 502(a)(2) as former employees who seek to
recover losses to be paid to the two Bay Environmental defined contribution
plans in which they participated (or to successor trusts set up for that
purpose).
Defendants essentially claim that when former employees receive a payment
of benefits – no matter how far short it falls of the benefits to which they
are actually entitled – it deprives them of standing to sue under ERISA. That position cannot be squared with the text of ERISA or the Supreme
Court's decision in Firestone Tire & Rubber Co. v. Bruch, 489 U.S.
101 (1989), and would produce the absurd result that employees could be
deprived of the right to sue simply by giving them a payment of benefits
that is less than all of the benefits to which they are entitled. Plaintiffs clearly have standing under ERISA to assert their claim for
augmented benefits, and defendants' position must be rejected.
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A. Plaintiffs have a colorable claim that alleged fiduciary
breaches have affected their plan benefits and thus they meet the statutory
standing criteria
In Firestone , 489 U.S. at 117, the Supreme Court considered the
statutory definition of "participant" in the context of a suit to enforce
ERISA's plan document disclosure provisions. Citing this Court's decision
in Kuntz v. Reese, 785 F.2d 1410 (9th Cir. 1986), the Supreme Court
held that, in order to be considered a participant, an employee must either
have "a reasonable expectation of returning to covered employment" or "a
colorable claim that (1) he or she will prevail in a suit for benefits, or
that (2) eligibility requirements will be fulfilled in the future." 489
U.S. at 117-18. The plaintiffs here have just such a claim that they
received reduced benefits as a result of fiduciary misconduct. This alleged
misconduct occurred when plaintiffs were still employees accruing benefits
under the plans, and the relief that they seek (restoration of losses to the
plans), if granted, would lead to an upward adjustment of the plan benefits
that they have received.[1] The plaintiffs thus have colorable claims to benefits under the Firestone
criteria.
Significantly, the plaintiffs in this case are
participants in two defined contribution or individual account plans. Under
such plans, "benefits [are] based solely upon the amount contributed to the
participant's account, and any income, expenses, gains and losses, and any
forfeitures of accounts of other participants which may be allocated to such
participant's account." 29 U.S.C. § 1002(34). Thus, the amount of
participants' vested benefits in a defined contribution plan increases in
direct proportion to any increase in plan assets, and diminishes in
proportion to any losses.
As participants in ERISA-covered defined contribution plans, the
plaintiffs were entitled to a distribution of the earnings in their accounts
as managed by plan fiduciaries in accordance with ERISA's fiduciary
obligations. If, as the plaintiffs allege, they received smaller
distributions than they would otherwise have received as a result of the
defendants' fiduciary breaches, they have yet to obtain all of the benefits
to which they were entitled under ERISA, and have standing to bring suit as
plan participants. In seeking restoration to the Bay Environmental Plans
for alleged fiduciary breaches that took place before their disbursement of
benefits, the plaintiffs seek amounts that can and should be allocated in a
manner that ultimately augments their individual benefits. These amounts
are precisely the "benefits" to which a plan participant in a defined
contribution plan is entitled under ERISA. 29 U.S.C. § 1002(34). Thus, the
plaintiffs have a colorable claim to benefits within the meaning of
Firestone and Kuntz that gives them standing to bring a fiduciary
breach claim seeking to restore losses to the plans.
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Indeed, the plaintiffs in this case have standing to sue for precisely
the same reason as the plaintiffs had standing in Sommers Drug Stores Co.
Employee Profit Sharing Trust v. Corrigan, 883 F.2d 345, 348-50 (5th
Cir. 1989). In Sommers, the court held that plaintiffs who had been
participants in a terminated defined contribution, profit-sharing plan had
standing to bring an ERISA action against fiduciaries for losses allegedly
resulting from the sale of the trust's stock for less than fair market
value. The Fifth Circuit reasoned that this claim was akin to a claim by a
former participant for miscalculated benefits, and thus concluded that the
plaintiffs had a colorable claim to vested benefits even though they had
already received a lump-sum distribution from the terminated plan. Id.
at 349-50.
The plaintiffs in this case seek relief that clearly could affect the
amount of benefits to which they were entitled at plan termination, as did
the plaintiffs in Sommers. The plaintiffs were participants in the
Pension and Retirement Plans when alleged fiduciary breaches occurred that
they claim caused losses to the plans. See E.R. 8 ¶ 48. Just as in
Sommers, the plaintiffs here allege that their benefits on
termination were adversely affected by the fiduciaries' imprudence and
disloyalty and, if the plaintiffs are successful in their suit and losses to
the plans are restored, their benefits should be augmented. See E.R.
13 ¶ D (Prayer For Relief).[2] Thus, despite having received benefits on plan termination, the plaintiffs
have colorable claims that they are still "eligible to receive a benefit of
any type" from the plans and accordingly are "participant[s]" for purposes
of ERISA standing. 29 U.S.C. § 1002(7).
To hold otherwise would produce the absurd result that
when a fiduciary breach cause significant financial losses to a defined
contribution plan thereby substantially diminishing the benefits payable to
all of the plan's participants, affected employees who stay in the plan can
bring an action to recover their lost benefits, while employees who retire
and take a diminished distribution can recover nothing at all. That cannot
be correct; either all affected employees have a "colorable claim" to
recover benefits or none do. Certainly, if two participants with equal
account balances incur equal losses on the same date, it would neither
promote ERISA's remedial objectives nor comport with its broad definition of
"participant," to find that the participant who had not yet retired retains
standing to recover the losses sustained in his account, but that the
participant who had actually received a retirement distribution, which was
reduced to the same extent because of the exact same breach, did not have
standing. Nothing in ERISA compels such an arbitrary or illogical result.
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The district court erroneously believed that because the plans were
terminated and the plaintiffs received a final disbursement of vested
benefits, their statutory standing is foreclosed by this Court's Kuntz
decision. Kuntz, however, involved a defined benefit plan. See
Amalgamated Clothing & Textile Workers Union v. Murdock, 861 F.2d
1406, 1410 (9th Cir. 1988) ("In Kuntz we held that plan participants
and beneficiaries have no standing to seek monetary damages
for breach of fiduciary duty after they receive their contractually defined
and vested benefits from an ERISA plan.") (emphasis in original). Such
a plan is one that is "designed and administered to provide fixed – or
'defined' – benefits to the participants based on a benefit formula set
forth in the Plan." Wilson v. Bluefield Supply Co., 819 F.2d 457,
459 (4th Cir. 1987); accord Phillips v. Alaska Hotel & Rest.
Employees Pension Fund, 944 F.2d 509, 512 (9th Cir. 1991). In that
context, this Court held that former employees who, at the time suit was
filed, had received all of their vested benefits in a defined benefit plan,
but who contended that the defendants had misrepresented their level of
benefits, lacked standing under ERISA. Kuntz, 785 F.2d at 1411. There were no allegations in Kuntz that the amount of the plaintiffs'
benefits had been reduced or in any way impaired by the alleged fiduciary
misconduct. Instead, because the plaintiffs, as participants in a defined
benefit plan, received benefits at the correct level on retirement, the
court there concluded that, as a factual matter, even "if successful, the
plaintiffs' claim would result in a damage award, not in an increase of
vested benefits." Id. The plaintiffs had already received every
dollar they were entitled to receive under the terms of the plan. In
contrast, the plaintiffs here allege that, because fiduciary breaches cause
losses to the plans while they were employees accruing benefits under the
plans, they did not receive all the benefits to which they were entitled at
the time of distribution.
Moreover, as the Fifth Circuit correctly recognized in Sommers,
883 F.2d at 349, Kuntz clearly did not hold, or even imply, that a
plaintiff lacks standing whenever he has received a "final" disbursement
from a pension plan. In Murdock, 861 F.2d at 1418-19, this
Court considered participant standing in the context of plan termination and
held that plan fiduciaries could not immunize themselves from liability
under ERISA by the expedient of terminating a plan and distributing all
actuarially vested benefits. Murdock held that plaintiffs who had
received all of their actuarially vested benefits from a terminated defined
benefit plan nevertheless had standing to seek a constructive trust over
ill-gotten gains obtained by a plan fiduciary through a fiduciary breach
prior to termination of the plan and distribution of its benefits. Id.
at 1409. [3] The
Court concluded that, in seeking to recover such ill-gotten gains, the
plaintiffs were "participants" seeking to establish their eligibility to
"equitably vested" benefits. Id. at 1419.
The same is true of the plaintiffs here, who seek, through the plans or
successor trusts, to recover the equitably vested benefits that they would
have received at termination but for the defendants' alleged breaches. E.R.
13 ¶ D (Prayer For Relief). The plaintiffs here have every bit as colorable
a claim as did the plaintiffs in Murdock that they are entitled to
additional benefits, and it would be at least as contrary to ERISA to deny
them standing to sue.
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Other courts of appeals that have denied standing to former
employee-participants in a defined contribution plan have done so where,
according to the courts, the plaintiffs suffered no injury and thus no
diminution in benefits See Cunningham v. Adams, 106 F. App'x
693, 696 (10th Cir. 2004) (holding that plaintiff could not demonstrate how
he had been injured by the defendant's actions in taking a distribution of
the amounts in the defendant's own individual account, and thus could not
establish "injury in fact" for purposes of constitutional standing)
(attached as Appendix A to this brief); Crawford v. Lamantia, 34 F.3d
28, 33 (1st Cir. 1994) (holding that a former employee who had already
received a distribution of all the benefits due him from an employee stock
ownership plan (ESOP) had no standing to bring suit against the trustees for
purchasing employer stock at an excessive price because "plaintiff ha[d]
failed to show that [the] defendants' . . . breach of fiduciary duty had a
direct and inevitable effect on his benefits") (emphasis in
original).[4]
These cases are thus distinguishable from the present matter, where the
plaintiffs allegedly have suffered a diminution in benefits.
Recent district court decisions that have held that
standing under ERISA does not extend to plaintiffs, like Vaughn, who took
distributions of their benefits before filing suit for fiduciary breach,
have not accounted for the nature of benefits under a defined contribution
plan, and for that reason are wrongly decided. See, e.g., Graden v. Conexant Sys.,
Inc., No. 05-0695, 2006 WL 1098233 (D.N.J. Mar. 31, 2006), appeal
docketed, No. 06-2337 (3d Cir. Apr. 27, 2006) (attached as Appendix D
to this brief); Dickerson v. Feldman, ___F. Supp. 2d ___, No.
04-7935, 2006 WL 838999 (S.D.N.Y. Mar. 30, 2006), appeal docketed,
No. 06-1616 (2d Cir. Apr. 5, 2006) (attached as Appendix B to this brief);
In re RCN Litig., No. 04-5068, 2006 WL 753149 (D.N.J. Mar. 21, 2006)
(attached at Appendix G to this brief); Holtzscher v. Dynegy, Inc.,
No. 05-3293, 2006 WL 626402 (S.D. Tex. Mar. 13, 2006), appeal
docketed, No. 06-20297 (5th Cir. Apr. 18, 2006) (attached at Appendix E
to this brief); LaLonde v. Textron, Inc., 418 F. Supp. 2d 16 (D.R.I.
2006), appeal docketed, No. 06-1546 (1st Cir. Apr. 3, 2006);
In re Admin. Comm. ERISA Litig., No. C03-3302, 2005 WL 3454126 (N.D.
Cal. Dec. 16, 2005) (attached as Appendix F to this brief).
Moreover, a number of these decisions, including the decision below,
incorrectly focus on the distinction between a claim for damages, as in
Kuntz, and a claim for benefits, as in Sommers. E.R.18; see
also, e.g., Graden, 2006 WL 1098233, at *3-*5. In some
sense, all plaintiffs who sue to recover plan losses under ERISA section
502(a)(2) seek "damages" on behalf of the plan. But where plaintiffs claim,
as did the plaintiffs in Sommers, and as do the plaintiffs here, that
they received less than all of the benefits to which they are entitled as a
direct result of a fiduciary breach that caused losses to their plans, they
clearly also state a colorable claim for benefits. The same cannot be said
of the plaintiffs in Kuntz, however, because by the time that they
filed their lawsuit they had already indisputably received every dollar of
benefit to which they were entitled; any further recovery they might have
obtained would have been in the form of damages only.
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Two recent district court decisions have correctly analyzed the issue and
concluded that plaintiffs similar to Vaughn do have standing under ERISA. For instance, the court in Rankin v. Rots, 220 F.R.D. 511, 519-20 (E.D.
Mich. 2004), held that a former employee of Kmart had standing to bring suit
against the bankrupt company's officers and directors alleging breaches of
fiduciary duties in connection with Kmart stock held by the
company-sponsored 401(k) plan. The court noted that the plaintiff "was a
participant in the Kmart plan during the time when the alleged breaches of
fiduciary duty occurred." Id. at 519. The court thus declined to hold
that the plaintiff lacked standing under such circumstances, noting that
such a holding "would permit Kmart to exclude potential class members by
simply paying them their vested benefits." Id. at 519-20. Thus,
the court correctly recognized that denying standing to a plaintiff in such
a case would raise the same kinds of perverse incentives that the court
found problematic in Murdock, 861 F.2d at 1418 ("It would be ironic
if the very acts of benefit payment and plan termination that allegedly
resulted in a fiduciary personally obtaining ill-gotten profits should also
serve to deny plan beneficiaries standing to seek a constructive trust on
those profits to redress the fiduciaries' alleged breach of the duty of
loyalty.").
Similarly, the District Court of Maryland found that a
named plaintiff who "is a former employee who has accepted a lump-sum
pay-out (or rollover) of his vested benefits" had standing to sue. In re Mut. Funds Inv. Litig.,
403 F. Supp. 2d 434, 441 (2005). Noting that the plaintiffs argued that
"the defendants' breaches of fiduciary duty diminished the value of the
shares in the mutual fund families in which their retirement accounts were
invested, . . . and thus they received less money than they were entitled to
when they left the Plans," the court concluded that their claims were
closely analogous to those in Sommers and in Rankin. Id.
The court thus correctly rejected a reading of the statute that would cause
employees to "forfeit a cause of action under ERISA to recover what is
rightfully theirs under their plan by taking a pay-out." Id. at 442.
Here the plaintiffs have a colorable claim that the defendants breached
their fiduciary duties, thereby causing losses to the plans and a
concomitant diminution in the amount of benefits they received on
distribution. This fully satisfies the requirements for standing as
established by Firestone and Kuntz.
A more cramped reading of ERISA's standing requirements would undermine
the remedial goals of ERISA, "[t]he primary purpose of [which] is the
protection of individual pension rights." H.R. Rep. No. 93-533, at 1
(1974), reprinted in 1974 U.S.C.C.A.N. 4639, 4639; see
also Martin v. Feilen, 965 F.2d 660, 671 (8th Cir. 1992) (one
of ERISA's basic remedies for a breach of fiduciary duty is "to restor[e]
plan participants to the position in which they would have occupied but for
the breach of trust") (internal quotation marks omitted; court's
alteration). As in Murdock, there is no cause to read the term
"participant" so as to close the courthouse doors to retirees like the
plaintiffs here, who claim that they received diminished pensions because of
the defendants' breaches. See Donovan v. Mazzola, 716 F.2d
1226, 1232 (9th Cir. 1983) (fiduciaries personally liable to make good plan
losses stemming from breaches where the district court properly concluded
that the fiduciaries did not employ "the appropriate methods to investigate
the merits of the investment and to structure the investment"). It is
inconsistent with ERISA to hold, as the district court did, that retirees
who claim that they received less than they were due because of fiduciary
breaches with regard to mismanagement of pension plan assets – precisely the
type of plaintiffs that the statute was designed to protect and the type of
misconduct that the act was designed to prohibit – do not have standing
under ERISA to sue. Because such plaintiffs present a colorable claim that
they are entitled to additional vested benefits under their defined
contribution plans, they have standing under the statute.
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B. Termination of the plans does not destroy standing
Defendants also argued below that even plaintiffs whose claims
will lead to additional benefits lack standing if their plan has been
terminated. This Court's decision in Murdock disposes of this
argument. In Murdock, this Court concluded that plaintiffs had
standing to sue, despite the fact that the plan at issue had been
terminated. Indeed, in concluding that the suit could go forward, the Court
relied, in part, on its view that a constructive trust imposed on the
breaching fiduciary's ill-gotten profits in favor of the participants and
beneficiaries could be viewed as a "benefit" under the plan sufficient to
confer participant standing on the plaintiffs. 861 F.2d at 1417-19.
Similarly, in Sommers, the Fifth Circuit held that the
plaintiffs had standing to sue as participants because they alleged that an
undervaluation of the employer's stock in the plan resulted in their receipt
of a lower amount of benefits than they would have received had the breach
not occurred, attaching no significance to the fact that the plan had been
terminated. 883 F.2d at 350. Other courts have soundly rejected the
argument that participant status is defeated by plan termination. See,
e.g., Gruber v. Hubbard Bert Karle Weber, Inc., 675 F. Supp.
281, 284 (W.D. Pa. 1987) ("To deny plaintiffs relief on this basis would
reward defendants for the thoroughness of their mismanagement. If
defendants wound the victim they may be sued, but kill it and the claim dies
with it. Such a construction is absurd and unsupportable."); Horn v.
McQueen, 353 F. Supp. 2d 785, 801 n.20 (W.D. Ky. 2004) (allowing the
plaintiffs to sue "because the loss to the ESOP, and, by extension, to the
ESOP participants, occurred prior to termination"). Courts generally have
the power to establish a successor trust to hold any recovered assets where
the original trust is no longer in effect, see British Motor Car
Distribs., Ltd. v. San Francisco Auto. Indus. Welfare Fund, 882 F.2d 371, 378-79 (9th Cir. 1989), or to
establish a constructive trust to distribute equitably vested benefits, as
the court did in Murdock. If the plaintiffs here prove their claims,
the district court may set up constructive or successor trusts to distribute
any recovery to the participants and beneficiaries.
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CONCLUSION
For the reasons stated above, the Secretary respectfully
requests that this Court reverse the decision of the district court
dismissing the case.
Respectfully submitted,
HOWARD M.
RADZELY
Solicitor of Labor
TIMOTHY
D. HAUSER
Associate Solicitor
KAREN L. HANDORF
Counsel
for Appellate and
Special
Litigation
_______________________
ELIZABETH
HOPKINS
Senior
Appellate Attorney
United
States Department of Labor
Plan
Benefits Security Division
200
Constitution Avenue, N.W.
Room
N4611
Washington, D.C. 20013-1914
Phone:
(202) 693-5584
Fax: (202) 693-5610
JUNE 2006
CERTIFICATE OF
COMPLIANCE PURSUANT TO FED.
R. APP. P. 32(A)(7)(C) AND CIRCUIT RULE 32-1 FOR CASE NUMBER
05-17100
I certify that pursuant to Fed. R. App. P. 29(d) and the Ninth
Circuit Rule 32-1, the attached amicus brief is proportionally spaced, has a
typeface of 14 points or more and contains 7,000 words or less.
Dated: June 7, 2006
ELIZABETH
HOPKINS
Senior
Appellate Attorney
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CERTIFICATE OF SERVICE
I hereby certify that on June 7, 2006, two paper
copies of the foregoing Brief for the Secretary of Labor as Amicus Curiae
were served using Federal Express, postage prepaid, upon the following
counsel of record:
Theresa S Renaker
Cassie Springer-Sullivan
Lewis, Feinberg, Renaker & Jackson, P.C.
1330
Broadway
Suite 1800
Oakland, CA
94612
Nicole A. Diller
D.
Ward Kallstrom
Andrew C. Sullivan
Morgan, Lewis & Bockius
One
Market, Spear Street Tower
San
Francisco, CA 94105
James D. Boughey
Bernard Gehlhar
Reina G. Minoya
Wilson, Elser, Moskowitz, Edelman &
Dicker, LLP
525
Market Street, 17th Floor
San
Francisco, CA 94105-2725
ELIZABETH
HOPKINS
Senior
Appellate Attorney
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________________________________
Footnotes:
[1] Here, the complaint expressly
requests that any losses recovered for the plans under section 502(a)(2) be
distributed as benefits to the plaintiffs. See E.R. 13 ¶ C (Prayer For Relief) (asking that the
court "[o]rder the establishment of a successor trust for benefits owing to
participants and beneficiaries whose Plan accounts have been distributed"). It is not necessary, however, for plaintiffs to bring a claim such as this
both as a benefits claim and as a claim for plan losses under ERISA section
502(a)(2) in order to have standing. The issue is not whether the
plaintiffs have brought a claim for benefits, but whether the former
employees "may be eligible to receive a benefit," and thus are participants
with standing to bring the claim. Plaintiffs such as Vaughn and Travers,
who seek to recover losses to their defined contribution plans stemming from
alleged fiduciary breaches that took place while they employees, necessarily
"may be eligible to receive a benefit" because any recovered plan assets
must be allocated among the individual accounts of the participants and
directly affect the amount of benefits they receive.
[2] For this same reason, the claims in this case are easily
distinguishable from the claims at issue in the Fifth Circuit's earlier
decision in Yancy v. American. Petrofina, Inc., 768 F.2d 707 (1985)
and the Tenth Circuit's decision in Mitchell v. Mobil Oil Corp., 896
F.2d 463 (1990). In Yancy, the plaintiff argued that a planned
change in the plan's method for calculating lump sum benefits caused him to
retire before he otherwise would have, and to forego additional wages and
corresponding benefits that he would have earned. 768 F.2d at 708-09. Similarly, the plaintiffs in Mitchell received all the benefits to
which they were entitled, but complained that they had been deprived by
fiduciary breaches of the opportunity to accrue additional benefits that he
would have earned had they remained in employment. 896 F.2d at 474. Thus,
unlike the claims for additional benefits made by Vaughn and Travers in this
case, the plaintiffs in Yancy and Mitchell indisputably had
received all the benefits that were due them, and thus did not have a
colorable claim to benefits under Firestone.
[3] Thus, in Murdock, this Court
addressed standing in the context of a case where the plaintiffs would still
be active employees and participants "but for" the alleged breaches. See Murdock,
861 F.2d at 1418. Other courts of appeals have adopted a similar "but for"
test applicable to cases where the plaintiffs claims that the challenged
fiduciary breaches led to their status as former plan participants. See
Swinney v. Gen. Motors Corp., 46 F.3d 512, 519 (6th Cir. 1995);
Mullins v. Pfizer, Inc., 23 F.3d 663, 667-68 (2d Cir. 1994);
Christopher v. Mobil Oil Corp., 950 F.2d 1209, 1221 (5th Cir. 1992);
but see
Raymond v. Mobil Oil Corp., 983 F.2d 1528, 1536 (10th Cir. 1993)
(reasoning that "[t]o say that but for [the employer's] conduct, plaintiffs
would have standing is to admit that they lack standing");
Stanton v. Gulf Oil Corp., 792 F.2d 432, 435 (4th Cir. 1986) ("The
effect of reading in a 'but for' test is to impose participant status on
every single employee who but for some future contingency may become
eligible.") (emphasis omitted). While this case does not present a "but
for" situation, nor does it involve the recovery of ill-gotten profits, it
does present a situation, distinguishable from Kuntz, where former
employees are seeking a recovery that ultimately will increase the benefits
to which they are entitled.
[4] Any suggestion to the contrary in Crawford
notwithstanding, participants in ESOPs do suffer a loss if trustees cause
the plan to acquire stock at an inflated price. See Reich v. Valley Nat'l Bank,
837 F. Supp. 1259, 1274 (S.D.N.Y. 1993) (rejecting a similar argument,
holding that "[i]f the investment [decision] is not prudent, the fiduciary
duty owed by Valley is not to invest"); Martin v. Harline, No.
87-NC-115J, 1992 WL 12151224, at *16 (D. Utah Mar. 30, 1992) (holding that
overpayment for employer stock resulted in losses which "include the
difference between the price paid by the plan for the shares purchased . . .
and the fair market value of the shares, plus interest on the purchase price
from the date of each transaction to the present") (attached as Appendix H
to the brief). Furthermore, the court in Crawford was wrong to
require the plaintiff to show a "direct and inevitable effect on his
benefits" in order to establish standing. Under Firestone, in order
to establish statutory standing, a litigant need only show that he has a
"colorable claim" that there has been an adverse effect on his benefits from
the alleged breach.
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