ERISA Case For A Subset of Participant Losses Proceeds

>US District Judge Morris Lasker of the US District Court for the District of Massachusetts determined that even though the alleged misdealings did not affect every participant, the lawsuit would still be allowed to go forward under ERISA Section 409, which allows plan participants to bring fiduciary breach claims on behalf of the plan.   This determination was based on the United States Supreme Court’s ruling in Massachusetts Mutual Life Insurance Co. v. Russell , that found an individual may bring an action against a plan fiduciary under Section 409, but only on behalf of the plan, according to Washington-based legal publisher BNA.

>Lasker denied the company’s motion to dismiss the claims against it.   The company contented that actions seeking recovery for a subset of participants rather than for the plan as a whole are not permitted under ERISA.  “(The plantiff) does sue on behalf of the Plan, and thus meets the requirements of [Section] 409 as interpreted by the Supreme Court in Russell . That the harm alleged did not affect every single participant does not alter this conclusion,” the court said.

Additionally, the court refused to dismiss a claim against the plan’s directed trustee, saying there were enough facts alleged to leave it up to a jury to determine if the trustee had followed directions that were contrary to the plan or ERISA, thus making it liable for breach of fiduciary duty.

Plan Decline

>John Kling, an employee with manufacturer Harnischfeger Industries Inc., participated in the company’s ERISA-governed Employee’s Savings Plan, a plan that was administered by an investment committee, with a board of directors pension committee reviewing the actions of the investment committee. Fidelity Management Trust Co. was the plan trustee.

>The plan allowed participants to choose among a plethora of investment options, including the Harnischfeger Common Stock Fund, an undiversified fund investing almost exclusively in Harnischfeger common stock. Between October 1997 and April 1998, Harnischfeger engaged in accounting improprieties, and in June 1998, the company announced it would restate its 1997 fiscal fourth quarter earnings. This led to massive writeoffs, closed businesses, and employees layoffs, culminating in June 1999, when Harnischfeger filed for bankruptcy.

>The subsequent fund losses of $31 million affected approximately 3,500 plan participants, Kling alleged.   After the collapse of the company, Kling contended:

• the pension committee and investment committee knew of or should have known of the financial problems as early as October 1997 and should have closed the stock fund to participants at that time because it was no longer a prudent investment
• Fidelity breached its fiduciary duty by failing to close the stock fund, by failing to disclose to plan participants its selloff of half its stock holdings, and by engaging in self-dealing and prohibited transactions.

Subset Actions

>In addition to the company’s motion for dismissal, Fidelity also moved to dismiss the claims against it.   Fidelity argued it owed no fiduciary duty to Kling or the plan because it was a “directed” trustee and that it could not be held liable under ERISA Section 403(a)(1) because it did not follow directions that were contrary to ERISA or the plan.

>Section 403(a)(1) exempts directed trustees from fiduciary status, and consequently, from fiduciary responsibility, where the plan expressly provides that the directed trustee is subject to the discretion of a named fiduciary that is not a trustee, the court said.

>However, even though Fidelity’s directed trustee status exempted it from fiduciary status, the court found Fidelity may still be found liable if a jury determined that Fidelity followed directions that were contrary to the plan or ERISA, the court said. Therefore, this question should be saved for trial, the court said in denying Fidelity’s motion to dismiss.

>Turning to the broader issue of if the action concerned a loss to the plan or to an individual, the court said this case fell within a “gray area” between these two extremes because Kling was suing for damages resulting from the decline of the value in the stock fund, but on behalf of a subset of participants who placed money in the stock fund.   Therefore the lawsuit remained intact and allowed to proceed.

The case is Kling v. Fidelity Management Trust Co., D. Mass., No. 01-CV-11939-MEL, 6/3/03.