ST. PAUL, Minn. -A federal appeals court has ruled participants and beneficiaries do not have the right to sue a sponsor of an overfunded pension plan for investment losses suffered by the plan.
If the decision is upheld, experts said, it could weaken policing of pension funds.
The decision in Carol Harley vs. Minnesota Mining and Manufacturing Co. is the first of its kind. The 8th U.S. Circuit Court of Appeals in St. Paul stated the participants and beneficiaries of the pension plan had no constitutional right to sue because their ability to receive benefits had not been affected since the plan was overfunded.
"The limits on judicial power imposed by Article III (of the U.S. Constitution) counsel against permitting participants or beneficiaries who have suffered no injury in fact from suing to enforce ERISA fiduciary duties on behalf of the plan," the court stated in its March 26 decision.
The court's decision in the case flies in the face of the Employee Retirement Income Security Act of 1974, which states only participants, beneficiaries, fiduciaries and the U.S. Secretary of Labor have the right to sue for damages incurred by a pension plan.
The suit stems from a 1990 hedge fund investment by the 3M defined benefit plan. The pension fund invested $20 million in Granite Corp., a hedge fund containing collateralized mortgage obligations. The fund was run by David Askin, former head of Askin Capital Management, New York; Mr. Askin gained notoriety because he lost $600 million of investors' money through derivatives, and his company and his funds eventually went into liquidation.
Rising rates doom fund
The investment in Granite appreciated to $33 million by the end of 1993, but rising interest rates in early 1994 caused the hedge fund to go belly up and the pension fund lost its entire investment. At the time, the pension fund had assets of $3.4 billion. The company contributed $101 million above the required minimum contributions to the plan within six months after it suffered the losses, and contributed $683 million more than it was required to by 1998, racking up a hefty surplus in the process.
But the company's surplus seems to have evaporated. Although it recognized $263 million of pension income in 2001 from previous built up gains, the pension fund had a $500 million shortfall at the end of 2001, with assets of $6.05 billion and liabilities of $6.55 billion, according to the company's latest filing with the Securities and Exchange Commission in March.
If the decision is not overturned on appeal, it could weaken policing of pension funds because the Labor Department, whose resources are already stretched thin, would not be able to rely on participants and fiduciaries to file lawsuits for breach of fiduciary duties, pension experts said. The appellate court's decision also could embolden sponsors of overfunded plans to engage in risky investment strategies in the hope of fattening the surplus even more, if they believe they are less likely to be sued for losses, sources said.
Increasing their risk
Fiduciaries might "invest money pretty much any way they want without fear of repercussions, because the only one who can sue them is the secretary of labor," said David Preminger, partner in the New York law firm of Rosen Preminger & Bloom, and an expert on federal pension law.
The court's decision, if upheld, also could hurt the ability of collectively bargained plans to push for benefit increases that are dependent on the existence of surplus pension assets, if employers feel free to engage in risky investment strategies with impunity, some suggested.
"The court has stood on its head the right to bring a lawsuit, and the right to recover," said Mary Ellen Signorelle, a staff attorney at the AARP in Washington. The AARP had filed papers supporting the plaintiffs' claim. She noted that not even the defendants, nor the American Benefits Council and the ERISA Industry Committee - both of which filed legal briefs supporting 3M - had argued participants did not have the right to sue the plan sponsor for losses incurred by the plan.
"It's a ridiculous opinion. It's totally wrong," said Sherwin S. Kaplan, of counsel to the Washington law firm Piper Marbury Rudnick & Wolfe and previously deputy associate solicitor in the Labor Department's plan benefits security division. "This opinion is so wrong it can't stand," Mr. Kaplan said, adding that he hoped the full appellate court will hear the case and withdraw the opinion.
Mr. Kaplan noted the appellate court's reasoning is wrong because it assumes the plaintiffs sought to collect damages, but in fact they were seeking for recovery of damages to the plan.
Marc I. Machiz, partner in the Washington law firm of Cohen, Milstein, Hausfeld & Toll, also argued the appellate court's decision could make it impossible for participants and beneficiaries to ever sue for damages because ultimately the employer and the Pension Benefit Guaranty Corp. stand behind the promised benefits and arguably the benefits are never at risk.
"It's a very, very strange result," said Mr. Machiz, previously assistant solicitor in the Labor Department's plan benefits security division.
Alan Sandals, founding partner of Sandals, Langer & Taylor LLP, Philadelphia, and the lawyer representing the plaintiffs, confirmed he intends to ask the three-judge panel as well as the entire court for a rehearing. If the court declines, Mr. Sandals said he intends to take the case before the U.S. Supreme Court. But few expect the nation's highest court would agree to review such a case because of its unique facts.
Bill Hanrahan, a partner at the Groom Law Group, Washington, who represented the American Benefits Council, conceded the decision is "unusual" but said the court reached the right outcome.
"Obviously we are very pleased with this decision and continue to remain confident about our pension fund," said Mary Auvin, a spokeswoman for 3M. She acknowledged the plaintiffs are expected to appeal, and said, "If they appeal, that is certainly their right, but we remain confident that our case will prevail."
The appellate court, referring to a Supreme Court decision that participants have no claim to a pension fund's surplus assets, decreed that 3M participants had not been hurt in any way, and because they had not been hurt, they could not sue for fiduciary breaches in connection with the Granite Corp. investment.
The court also dismissed the plaintiffs' claim that 3M had engaged in a self-dealing prohibition of federal pension law by paying Mr. Askin a $1.7 million fee and letting Granite set its own fees. In so doing, the court rejected Labor Department regulations, which have been accepted by several courts, that fiduciaries cannot determine how much they will collect in fees for investments of pension fund assets.
"It has been a long-standing position of the Labor Department that fiduciaries cannot set their own fees, even if the fee is reasonable," said Robert N. Eccles, a partner in the Washington office of the law firm of O'Melveny & Myers.