The 4th U.S. Circuit Court of Appeals has affirmed a U.S. District Court’s opinion that current and former employees of Bank of America are due no more relief in their case challenging the company’s transfer of 401(k) accounts to establish a cash balance plan.
Plaintiffs originally filed their cash balance plan lawsuit in 2004, claiming the way their employer created a cash balance plan by essentially transforming an existing 401(k) represented impermissible benefit cutbacks. After that, in 2005, an audit of the bank’s plan by the Internal Revenue Service (IRS) resulted in a technical advice memorandum order, in which the IRS concluded that the transfers of 401(k) plan participants’ assets to the cash balance plan between 1998 and 2001 violated relevant Internal Revenue Code provisions and Treasury regulations.
According to the IRS, the transfers impermissibly eliminated the 401(k) plan participants’ “separate account feature,” meaning that participants were no longer being credited with the actual gains and losses “generated by funds contributed on the participant[s’] behalf.” The IRS determination led the district court to move the participants’ case forward. However, the bank entered into a closing agreement with the IRS, paying a $10 million fine and setting up a special-purpose 401(k) plan to restore participants’ accounts. The district court determined that, following the closing agreement, the participants no longer had standing to sue.
On appeal to the 4th Circuit, the appellate court determined that the plaintiffs did have standing to sue under the Employee Retirement Income Security Act (ERISA) Section 502(a)(3), which provides that a plan beneficiary may obtain “appropriate equitable relief” to redress “any act or practice which violates” ERISA provisions contained in a certain subchapter of the United States Code. The court found that the transfers violated ERISA’s anti-cutback provisions, as determined by the Internal Revenue Service during a plan audit, and that the relief the plaintiffs are seeking—the profits Bank of America made from the assets transferred—is “appropriate equitable relief.”
On remand, the district court determined the bank did not make any profits and participants were due no more relief. The plaintiffs appealed that decision.
The bank’s argument is that the cash balance plan’s investment strategy for the unlawfully transferred funds performed far worse than the plaintiffs’ investment strategies, and because the cash balance plan was responsible for making up any shortfall between the performances of the bank’s investment strategy and the plaintiffs’ allocations, it did not profit from the transfers.
In its opinion, the appellate court found it important to note that as a result of the transfers to the special-purpose 401(k) plan and the additional payments to certain plan participants, all the plaintiffs’ current account balances are at least as large as they would have been had the funds in the plaintiffs’ accounts actually been invested in accordance with their chosen allocations.
The plaintiffs argue that the district court reversibly erred in relying on the bank’s investment strategy to determine whether it profited from the unlawfully transferred funds rather than calculating all profits accruing to the cash balance plan during the course of the commingling of the funds and awarding the plaintiffs a proportionate share of those profits. The plaintiffs claim the bank earned more than a 28% return from investment of the commingled funds.
The appellate court’s opinion notes that the proportionate-share-of-the-whole approach advanced by the plaintiffs finds substantial support in Restatements, treatises, and case law. Likewise, authoritative legal commentators support the proportionate-share-of-the-whole approach. In addition, it says the 4th Circuit itself and the Supreme Court also have endorsed use of the proportionate-share-of-the-whole approach to determine the profit obtained by a defendant as a result of its use of unlawfully commingled funds. And other circuits also have applied the proportionate-share-of-the-whole approach in such circumstances.
However, the appellate court said this does not necessarily mean that the district court was required to follow that approach in this case. By contrast, ERISA Section 502(a)(3), under which the plaintiffs seek relief, expressly empowers courts to invoke their equitable authority and determine whether equitable relief is “appropriate.” In addition, the 4th Circuit said, the Supreme Court recognized that, notwithstanding a statement that courts of equity “must be governed by rules and precedents no less than the courts of law,” the “exercise of a court’s equity powers . . . must be made on a case-by-case basis.”
In upholding the district court’s decision denying the plaintiffs equitable relief, the appellate court noted that the lower court’s decision rested on extensive factual findings, none of which the plaintiffs challenge on appeal as clearly erroneous. The district court found it would not be “appropriate” to award the plaintiffs equitable relief under the proportionate-share-of-the-whole approach because that approach would not measure whether any profits accrued to the Bank “due to the transfer.”
The lower court also said to apply the proportionate-share-of-the-whole approach because “doing so would have the effect of being a penalty, and, conversely, would create a windfall for Plaintiffs, because much of what would be captured as ‘profits’ under such a methodology would be investment returns the Plan would have realized in any event regardless of the transfer.”
The 4th Circuit held that the district court did not err in determining that the extensive contemporaneous evidence outlining the investment strategy for the unlawfully transferred funds and separately tracking the performance of the funds invested under that strategy made it possible to “identif[y]” the performance of the unlawfully mingled funds, thereby rendering application of the proportionate-share-of-the-whole methodology inappropriate in this particular case.”
The appellate court also cited the Restatement (Third) of Restitution and Unjust Enrichment Section 51 (2011), which says, “The unjust enrichment of a conscious wrongdoer . . . is the net profit attributable to the underlying wrong. The object of restitution in such cases is to eliminate profit from wrongdoing while avoiding, so far as possible, the imposition of a penalty.”It again pointed out that as a result of the transfers and payments required by the IRS closing agreement, the plaintiffs’ current 401(k) account balances are at least as large as they would have been had the funds in their accounts actually been invested in accordance with their chosen allocations.
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