Plan Custodian’s Response to State Court Order Supported

October 11, 2013 ( – A federal court dismissed a case against a retirement plan custodian related to the custodian’s actions following a court order to freeze an account.

The 7th U.S. Circuit Court of Appeals said the plan administrator is required to show an injury that is fairly traceable to a challenged action by Merrill Lynch, the plan’s custodian, and not the result of the independent action of some third party. The court noted both parties agreed that a plan participant had been injured, but the plan administrator also conceded the participant was injured by an action of a state court that issued an order freezing her account. The court dismissed the case for lack of standing.

In its opinion, the appellate court supported all of Merrill Lynch’s efforts to do the right thing, noting that “Merrill Lynch has continued to support Sherrod and Johnson’s position on multiple occasions in multiple courts—in spite of all the roadblocks that Sherrod and Johnson have thrown in its way.” Leroy Johnson is the administrator of the Shirley T. Sherrod M.D. P.C. Target Benefit Pension Plan and Trust, and Shirley T. Sherrod is the participant who had all personal and other accounts frozen at Merrill Lynch after Michael S. Sherman and his affiliated medical practice filed suit against Sherrod and her affiliated medical practice over a contract dispute.

Previously, Merrill Lynch filed a motion to release the freeze on the plan account in Wayne County (Michigan) Court, arguing it was an employee benefit pension plan as defined by the Employee Retirement Income Security Act (ERISA) and thus protected from garnishment. As part of its effort to release the freeze, Merrill Lynch drafted and circulated an order proposing that the garnishment on the plan account be “hereby released and further withholdings discontinued.” Merrill Lynch successfully negotiated this order with Sherman, and, as a result, Sherman stated at a hearing in the court that he had “no objection to Merrill Lynch releasing the funds … [and] withdrawing our garnishment” of the plan account. After Sherman’s statement, the Wayne County judge initially agreed to grant the motion to release and enter Merrill Lynch’s proposed order.

However, surprisingly, at the hearing Sherrod opposed Merrill Lynch’s motion and proposed order to release the plan account freeze. Despite the fact that the proposed order would have granted Sherrod immediate relief from the freeze, she urged the judge to deny Merrill Lynch’s motion until the Michigan Court of Appeals had reached a decision on her appeal to the Wayne County Court’s earlier ruling denying release of the account.

The opinion in Johnson v. Merrill Lynch is here.