9th Circuit Joins Sister Courts in Ex-Participant ERISA Lawsuit Rulings

September 22, 2008 (PLANSPONSOR.com) - The 9th U.S. Circuit Court of Appeals became the seventh appellate panel to rule that participants who have cashed out their defined contribution plan balances can still pursue fiduciary breach lawsuits.

The 9 th Circuit overturned a lower court ruling by holding that allowing former participants to pursue fiduciary claims under the Employee Retirement Income Security Act (ERISA) to recover their losses fit with the true meaning of the federal benefits rights law.

Circuit Judge Betty B. Fletcher, in writing for the court, said the decision in a case involving Bay Environmental Management Inc. was the way to allow participants to “prevent the misuse and mismanagement of plan assets by fiduciaries.” The 9 th Circuit’s decision joins similar holdings from the 1 st , 3 rd , 4 th , 6 th , 7 th , and 11 th appellate circuits.

According to the opinion, plaintiffs Jerry Vaughn and Theresa Travers worked for Bay Environmental and participated in either a pension plan funded by contributions by Bay Environmental, or a retirement plan consisting of a profit-sharing component and a 401(k) component.

Plan Terminations

In April 2001, Bay Environmental notified its employees that it was going to terminate its retirement plans. According to the court, the plan’s investments were liquidated into cash in August 2001 and the participants received lump-sum distributions of their individual accounts.

After receiving his distribution, Vaughn filed a lawsuit in the U.S. District Court for the Northern District of California alleging that Bay Environmental and the plan’s fiduciaries breached their ERISA fiduciary duties by:

  • failing to adjust the plans’ investments to reflect the likelihood that the plans would terminate early,  
  • delaying the transfer of the plan’s non participant-directed assets to appropriate investments once the defendants knew or should have known that the plans would terminate, and
  • imprudently investing the plans’ assets.

The district court ruled that Vaughn lacked standing to sue Bay Environmental for fiduciary breaches because he had received the lump-sum distribution of his accounts and therefore was not entitled to additional benefits.

For his part, Vaughn alleged he did not receive all of the benefits due to him under the plan because the accounts contained less than they would have if the fiduciaries had not breached their duty to invest prudently, the court said.

The case is Vaughn v. Bay Environmental Management Inc., 9th Cir., No. 05-17100, 9/19/08.