Supreme Court Considers When Pension Plans May Be Sued

Allen Smith, J.D. By Allen Smith, J.D. January 16, 2020
stacks of 100 dollar bills

​The U.S. Supreme Court heard oral arguments Jan. 13 in a case involving when plaintiffs may sue pension plans for violations of the Employee Retirement Income Security Act (ERISA). Several justices seemed reluctant to dismiss such lawsuits, and at least two conservative justices—Justices Samuel Alito Jr. and Brett Kavanaugh—indicated they were on the fence in the case.

If the plaintiffs win, "plaintiffs' lawyers would find it to be far easier to bring lawsuits challenging fiduciary decision-making in pension plans," said Brian Netter, an attorney with Mayer Brown in Washington, D.C.

If the defendants win, plan sponsors will have "a path for avoiding litigation," said David Olstein, an attorney with Stroock in New York City.

In the case before the high court, Thole v. U.S. Bank, a defined-benefits plan was invested exclusively in stocks. During the Great Recession, the plan lost $748 million, according to the plaintiffs. While it was underfunded, plan participants sued, alleging a breach of the duty of loyalty and prudence in violation of ERISA. The plan sponsors then made a substantial contribution to the plan, resulting in its becoming overfunded.

The district court dismissed the case, and the appeals court affirmed, determining that when a plan is overfunded, "there is no actual or imminent injury to the plan itself."
The plaintiffs appealed to the Supreme Court, which agreed to hear the case.

The case isn't just about money, according to Michael Klenov, an attorney with Korein Tillery in St. Louis. "There are remedies available other than simply restoring a plan's funded status—for example, removing a trustee, or imposing structural or procedural reforms—that would better ensure compliance with fiduciary duties in the future," he said.

Any Injury to the Plaintiffs?

The defendants in this case "take the incredible position, to quote their brief, that defined-benefits plan participants have no interest in plan assets," Peter Stris, an attorney with Stris & Maher in Los Angeles, argued before the court. "But a trust can't exist unless someone holds equitable title to its assets, and that someone here can only be the participants."

He also said the plan participants had a property interest. "A defined-benefits plan under ERISA is a private exchange of services," he said. "Workers forgo [higher] wages in exchange for a promise of a future payment secured by trust property. This is critical because there is an unsegregated, undivided pool of assets, the trust, that pays the pension of all the beneficiaries. So plan participants … have an equitable interest in those assets."

Chief Justice John Roberts Jr. asked Stris, "What did your clients lose?" Roberts noted that the U.S. Constitution requires that, for plaintiffs to sue, there must have been a tangible injury.

Joseph Palmore, an attorney with Morrison & Foerster in Washington, D.C., who represented the defendants, emphasized that the plaintiffs were getting their pension benefits and would continue to receive them.

Alito seemed to sympathize with the plaintiffs, saying they have "some strong arguments." But he echoed Roberts' concern about their arguments in more colorful language, asking if the risk to the plaintiffs is "greater than the risk of being hit by a meteorite?"

Stris answered, "The swings in funding of defined-benefits plans change incredibly quickly." Moreover, the Pension Benefit Guaranty Corp. (PBGC), which provides some benefits to those whose pension plans go bankrupt, doesn't fund anything above a minimum allowance, he added in response to Kavanaugh's suggestion that the PBGC is relevant to the lawsuit.

"In any individual case, you don't know whether you're going to need the surplus until it's gone," Stris said. "If the financial collapse in AIG and Lehman tells us anything, it's that."

After the assistant to the solicitor general with the U.S. Department of Justice, Sopan Joshi, argued on behalf of the plaintiffs, Kavanaugh said, "I think it's a close case." While he thought it would be odd to let plaintiffs sue when there was just a small chance that they would not get their pension benefits in the future, he liked Joshi's point that the beneficiary always has been able to sue a trustee for the breach of trust.

That's "been the law for hundreds of years of trust law, and it's expressly in ERISA's text as well," Joshi said.

[SHRM members-only toolkit: Defining and Administering Defined Benefit Retirement Plans]

Bank's Attorney Questioned

However, there is no ERISA exception to the Constitution's requirement that plaintiffs must be injured to sue, Palmore argued. The plaintiffs are receiving their pension benefits, so the claims don't matter to them, he maintained.

Moreover, the bank, not the plaintiffs, has the property interest in the trust underlying the pension plan, and the plaintiffs have no right to sue over fluctuations in the value of the trust, he added.

Kavanaugh pressed Palmore, asking if plaintiffs may sue so long as they can allege a sufficiently increased risk of harm that their benefits won't be paid. How do plaintiffs allege that?

Palmore answered that the test would be whether the company was significantly underfunded and struggling.

"That's just going to be a whole mess, isn't it?" Kavanaugh responded, questioning the workability of such a test in the courts.

Justice Elena Kagan asked, "What do you do about the fact that these plans can be underfunded in January and overfunded in February and underfunded in March again? And what do you do about the fact that the health of even … secure companies, if you're in 2008, all of a sudden it turns out they're not so secure?"

Palmore answered that he thought a claim should be dismissed if the plan is overfunded. He said that speculation about another market meltdown is not enough to entitle someone to bring a claim.



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