Supreme Court justices heard arguments Monday on whether defined benefit plan participants can sue for fiduciary breaches even if a plan is overfunded and participants have not experienced a monetary loss.
Joseph R. Palmore, a partner at Morrison & Foerster in Washington, who represented U.S. Bancorp, the plan sponsor at the heart of the case, argued that to have legal standing, the plaintiffs must demonstrate injury, which they cannot do.
Peter K. Stris, founding partner at Los Angeles-based Stris & Maher, who represented the plan participants, felt differently. He argued that DB plan participants have "equitable interest" in all assets of a plan and therefore are the only logical ones to file suit when an Employee Retirement Income Security Act violation is alleged.
Justice Brett Kavanagh highlighted the intricacies of the case during a line of questioning to Sopan Joshi, assistant to the solicitor general, who argued in favor of the plaintiff's position. Mr. Kavanagh said that since it's "99.9% certain" the participants will get their promised benefits, it's difficult to grant standing. However, he said trust law history backs the participants' right to sue. "I think it's a close case," Mr. Kavanagh said.
The case began in 2013, when some participants in the U.S. Bancorp Pension Plan filed suit, claiming that plan fiduciaries engaged in prohibited transactions, including failing to diversify investments and investing in an affiliate's mutual funds. When the participants questioned the investments involved, U.S. Bank replaced those amounts.
According to the participants' Supreme Court petition, the plan had $2.8 billion in assets as of 2007, but that changed when plan fiduciaries ignored their investment consultants and invested all plan assets in high-risk equities, including 40% in a proprietary mutual fund, in violation of prohibited-transaction rules. The market crash of 2008 caused the plan to lose $1.1 billion, which the plaintiffs claim was $748 million more than a diversified portfolio would have lost, and caused a once-overfunded plan to drop to 84% funded. The sponsor contributed $339 million, restoring the plan to its overfunded status.
Mr. Palmore said that no matter what the case decides, the participants who initially filed suit will continue to receive the same monthly benefits payments, so no harm has come to them. If their benefits were tied to the value of the trust, "They'd have standing, but these are fixed payments," he argued.
Justice Elena Kagan asked Mr. Palmore if participants would have standing to sue if they had an equitable interest in the plan, to which he affirmed. "Yes, a loss of a dollar from the trust corpus is loss of a dollar to them, but they don't (have an equitable interest)," Mr. Palmore said. "That's the critical point."
Ms. Kagan said that argument "falls apart" when ERISA is examined. She said Congress expressly gave "all of the beneficiaries and participants an equitable interest in the integrity of the trust" when creating ERISA.
During Mr. Stris' arguments, Justice Samuel Alito asked if the risk of these participants not receiving their promised benefits is "greater than the risk of being hit by a meteorite?"
Mr. Stris said that just because a plan is overfunded or funded adequately one year doesn't mean it will be the next. At a later point in his argument, Mr. Stris pointed to the 2008 financial crisis. "You don't know whether you're going to need the surplus until it's gone," he said.
The Supreme Court accepted the case, Thole vs. U.S. Bank, after it was dismissed by a lower court and the 8th U.S. Circuit Court of Appeals in St. Louis. Both courts said participants did not have statutory standing to assert fiduciary breach because the participants had not suffered any individual financial harm and there were enough plan assets to cover benefits.
Staff writer Hazel Bradford contributed to this report.