Attorney Fees Cannot be Paid with Participants Vested Benefits

February 27, 2009 ( - The 2nd U.S. Circuit Court of Appeals has ruled that a law firm cannot obtain fees from a distribution of retirement plan benefits that it claims it helped secure.

In overturning a lower court decision, the court said Kickham Hanley P.C. was attempting to avoid the application of the Employee Retirement Income Security Act’s (ERISA) anti-alienation provision “by asserting that the common fund doctrine grants Kickham an interest in that portion of the plan’s benefit funds that it allegedly helped to create or preserve and that, accordingly, the plan participants have no claim to Kickham’s part.”

However, the appellate court decided that the law firm cannot avoid the statutory protection ERISA extends to pension benefits while they are held by the plan administrator. Citing another case, the court said: “Only once the proceeds of the pension plan have been released to the beneficiary’s hands, can creditors and others pursue claims against the funds and the funds’ owner(s).”

Kickham argued that the Kodak defendants could cite no case precluding a common fund recovery based on the anti-alienation doctrine and that, in fact, numerous cases involving ERISA plans have awarded attorney’s fees based on the common fund doctrine without even mentioning ERISA’s anti-alienation provision. Rejecting that argument, the court noted that the cases Kickham pointed to were brought predominantly against employers and plan fiduciaries for violations of fiduciary duties and involved class action suits in which settlement negotiations resulted in the creation of a common fund.

“These common funds were all financed by parties other than the plans at issue, and the funds themselves were never designated as vested pension benefits,” the opinion said.

Kickham Hanley P.C. represented Michael Scanlan who was an employee of Kodak and participated in the Kodak Retirement Income Plan (KRIP) which required at least five years of service to be fully vested. When Kodak sold its Health Group to Onex Healthcare Holdings, Inc., Scanlan and approximately 3,500 other employees were divested to Carestream Health, Inc., a subsidiary or affiliate of Onex, which necessitated their termination from Kodak employment.

According to the court opinion, approximately 530 of these employees, including Scanlan, had not vested in their KRIP benefits yet because they had worked less than five years for Kodak. For this reason, the plan's administrative committee determined that Scanlan was not entitled to benefits.

Kickham challenged the denial of KRIP benefits to Scanlan and, purportedly, to similarly situated participants, arguing that there had been a partial termination of the plan, entitling these participants to benefits. Before the committee could resolve the administrative appeal, Kickham filed a complaint in federal court initiating a suit for attorney's fees. Kickham's complaint alleged that, in discussions between the parties, the committee had indicated that it was considering the option of declaring a partial termination of the plan and vesting all unvested, involuntarily terminated participants, but that it did not believe that Kickham would be entitled to fees based on any recovery by these plan participants.

Kickham moved for a preliminary injunction to the effect that, in the event the committee granted Scanlan's claim to benefits or declared a partial termination of the plan, Defendants-Appellants would be barred from distributing more than 70% of the newly vested funds to plan participants prior to the district court's ruling on Kickham's claim for attorney's fees. The district court concluded that Kickham had stated a claim under the common fund doctrine, but said the 30% the law firm was asking to be set back was excessive and reduced the amount to 15%.

The opinion is here .