Court: Participant Can Still Sue Despite PBGC as DB Plan Trustee

August 6, 2007 ( - A federal appellate court has ruled that a defined benefit plan participant can still pursue a fiduciary breach claim against the plan's investment manager even though the plan had been turned over to the nation's private-sector pension insurer.

With that decision, the 4 th U.S. Circuit Court of Appeals threw out a ruling by Senior District Judge Malcolm J. Howard of the U.S. District Court for the Eastern District of North Carolina that the participant’s breach claim could not go forward because only the Pension Benefit Guaranty Corporation (PBGC) could mount a breach case on the plan’s behalf as the trustee for a terminated plan.

In writing for the appellate court, Chief Circuit Judge Karen J. Williams said that the Employee Retirement Income Security Act (ERISA) did not qualify participantPeter Brown Ruffin Jr.’s right to sue for breach of fiduciary duty as existing only before a plan termination.

The appellate court also found that ERISA preempted plan sponsor Wilmington Shipping Company’s (WSC) state law claims against investment manager New England Life Insurance Co., including a claim that the adviser violated the North Carolina Unfair and Deceptive Trade Practices Act.

Addressing Ruffin’s constitutional standing, Williams said Ruffin had suffered an “injury in fact” because he lost his right to a lump-sum payment when the PBGC became trustee. Not only that, the appellate judges asserted, Ruffin’s injury would be redressed by a favorable decision because, if he prevails in his mismanagement claims against New England Life, the loss of his right to receive a lump-sum payment of his benefits would be restored when enough money is awarded to the plan to pay all of its liabilities.

“In that case, the PBGC, acting as statutory trustee, could continue to pay full benefits under the Plan and could take any action authorized under the Plan, including paying Ruffin his benefits in a lump sum,” Williams wrote.  While ERISA regulations generally preclude PBGC from paying guaranteed benefits from PBGC’s insurance funds in lump-sum form, the regulation “says nothing about PBGC’s powers as statutory trustee,” Williams said.

Case History

WSC,which offers services to the steamship industry, including vessel maintenance, repair, and warehousing, established the DB plan in 1970, according to the appellate opinion.

WSC hired New England Life in 1970 as the plan’s investment adviser and manager. The appellate opinion said New England Life issued the plan a group investment account policy in 1970 that consisted of a general investment account and other specialized investment accounts for equity securities, capital growth, bonds, mortgage, and real estate.

New England Life issued a second policy in 1982 called the Developmental Properties Account (DPA). According to the court, under the DPA policy WSC would deposit plan funds to be used by one of New England Life’s subsidiaries for real estate investments.

A Liquidity Problem

In 1991, after an ownership change, WSC tried to terminate the DB plan in favor of a 401(k) program, but New England Life advised WSC that it could not go forward because the DPA was “not currently liquid” due to “all cash going into properties.”

New England Life told WSC to freeze future benefit accruals and wait until the DPA was liquid to terminate the plan, according to the opinion. The court noted that New England Life estimated that it would take roughly two years to complete the termination.

However, according to the ruling, by 1996, the plan still had not been terminated because the DPA’s value had “spiraled downward.” New England Life informed WSC that it would need to contribute more than $130,000 to bring the plan to a 100% funding level. Again in 2000, New England Life told WSC that the plan was still underfunded by between $150,000 and $200,000 and that WSC would need to contribute this amount if it still wanted to terminate the plan.

In March 2003, WSC and Ruffin sued New England Life, alleging its ERISA fiduciary breach caused the plan severe financial loss. WSC and Ruffin also asserted several state law claims against New England Life.

With the WSC-Ruffin lawsuit pending, according to the appellate ruling, the PBGC determined that the plan was radically underfunded and needed to be terminated. The company and the insurer agreed to the termination in January 2005, effective December 31, 2004.

The opinion in Wilmington Shipping Co. v. New England Life Insurance Co., 4th Cir., No. 06-2052, 8/3/07 is here .