U.S. Supreme Court Agrees to Hear Key 401(k) Fiduciary Breach Case
Monday’s decision by justices to take the case means the high court could shape participants’ power to remedy situations where they charge an Employee Retirement Income Security Act (ERISA) fiduciary breach caused their 401(k) balance to fall below what it would have been without the breach.
Earlier this year, justices asked the U.S. Solicitor General for input on whether ERISA Section 502(a)(3) permits a participant to sue to recover funds the participant says were lost when his or her account was mishandled (See Supreme Court Requests Govt. Input on 401(k) Plan Restoration Case ) .
“It makes little sense that plans and their participants should be left with no relief when plan assets are lost through fiduciary mismanagement,” U.S. Solicitor General Paul Clement responded in legal briefs filed with the court. The Solicitor General represents the federal government before the Supreme Court.
The issue, according to court documents, was whether ERISA allowed an individual to sue a plan beneficiary for that person’s own benefit and not for the benefit of the plan as a whole.
The case, now set for the court’s 2007-2008 term that begins in October, centers around allegations leveled by James LaRue that his employer did not follow his investment instructions in 2001 and 2002 causing him to lose approximately $150,000. LaRue sued his employer, management-consulting firm DeWolff Boberg & Associates, in federal court inCharleston, South Carolina, seeking to have his account made whole.
LaRue’s long legal trek to the Supreme Court has included two setbacks, one before U.S. District Judge David C. Norton of the U.S. District Court for the District of South Carolina and the other at the 4th U.S. Circuit Court of Appeals. Norton concluded that ERISA did not allow LaRue to sue for his own gain – a decision later affirmedby the appellate court (See Court Turns Down Participant Claim for Account Restoration ).
In its opinion, the appellate court said LaRue had not proven unjust enrichment, unlawful possession, or self-dealing on the part of DeWolff, BoBerg and Associates Inc., and the remedy he was seeking fell outside the scope of “equitable relief” authorized by ERISA.
Circuit Judge J. Harvie Wilkinson III, who wrote the 4 th Circuit opinion, rejected the notion that LaRue's requested relief - making his 401(k) account whole - could be construed as being in the interest of the plan as a whole.
"It is difficult to characterize the remedy plaintiff seeks as anything other than personal," Wilkinson wrote. "He desires recovery to be paid into his plan account, an instrument that exists specifically for his benefit. The measure of that recovery is a loss suffered by him alone. And that loss itself allegedly arose as the result of defendants' failure to follow plaintiff's own particular instructions, thereby breaching a duty owed solely to him."
Further, Wilkinson asserted, LaRue's requested action by the courts could not be interpreted as being equitable.
"Plaintiff does not allege that funds owed to him are in defendants' possession, but instead that these funds never materialized at all," Wilkinson wrote. "He therefore gauges his recovery not by the value of defendants' nonexistent gain, but by the value of his own loss - a measure that is traditionally legal, not equitable."
The case now before the Supreme Court is LaRue v. DeWolff,Boberg & Associates, U.S., No. 06-856.