The ERISA Litigation Newsletter - November 2012

Editors' Overview

In this month's edition, we feature two articles addressing hot-button issues in ERISA litigation. Our lead article reviews the recent decision in Janese v. Fay, in which the Second Circuit held that the trustees of multiemployer plans act in a non-fiduciary capacity when amending the plans they administer. Our authors examine the decision and its implications, and conclude by discussing some of the unresolved issues that may arise in the aftermath of the decision.

Following up on previous coverage, our second article looks at the impact of the Affordable Care Act (ACA) on benefits claims under ERISA. The authors illustrate the changes ACA will bring to existing benefits-determination procedures. The article also considers two open issues that are likely to result in litigation: the fiduciary status of independent review organizations (IROs) established by the ACA, and the standard of judicial review applicable to those IROs.

As always, be sure to review the section on Rulings, Filings, and Settlements of Interest.

Second Circuit Rules That Amending A Multiemployer Plan Is Not a Fiduciary Act, But Leaves Many Questions Unanswered*

Contributed by Myron Rumeld and Anthony Cacace

In Janese v. Fay, No. 10-5369-cv(L), — F.3d — 2012 WL 3642315 (2d Cir. Aug. 27, 2012)(166 PBD, 8/28/12; 39 BPR 1679, 9/4/12), the Second Circuit put to rest the question of whether trustees of multiemployer benefit plans are acting in a fiduciary capacity when they amend the terms of their plans.

Contrary to prior Second Circuit authority, but based on intervening Supreme Court authority governing single-employer plans, the court unequivocally stated that trustees of multiemployer benefit plans do not act in a fiduciary capacity under the Employee Retirement Income Security Act when amending plan terms, but rather are acting in a settlor capacity.

While the holding is clear, questions still linger as to the broader implications of this decision, including: whether there are circumstances under which trustees can nevertheless face exposure to claims arising from plan amendments and, if so, the standard of conduct that will govern those claims.

Background and Procedural History

The lawsuit was brought by participants and beneficiaries of the former Niagara-Genesee & Vicinity Carpenters Local 280 Pension and Welfare Funds (funds) against present and former trustees and managers of the funds. The complaint alleged that the defendants depleted the assets of the funds by passing amendments designed to manipulate pension calculations in order to grant higher payouts to certain trustees and the manager of the funds.

The complaint also alleged that other trustees failed to monitor the conduct of their co-fiduciaries, thereby permitting the adoption of the improper amendments of the plans, and also voted in favor of inappropriate amendments.

Defendants asserted that all but one of the counts of the complaint were time-barred because the alleged wrongful conduct on which they were based occurred outside of the six-year limitations period for breaches of fiduciary duty under ERISA. Plaintiffs argued that their claims were governed by the "fraud and concealment" exception set forth in ERISA's statute of limitations, pursuant to which the limitations period does not run until six years from the date the breach is, or should have been with due diligence, discovered; and that they did not become aware of the alleged breaches committed by defendants until discovery had been conducted in an earlier lawsuit that suggested that the Fund manager had breached his fiduciary duty in connection with his improper weighting of fringe benefits due to him.

Defendants also argued that those claims specifically challenging plan amendments (including several of the claims alleged to be time-barred) should be dismissed because amending the plan documents was not fiduciary conduct under ERISA. Plaintiffs contended that the trustees acted in a fiduciary capacity in amending the plans, relying on prior Second Circuit authority (as discussed below) indicating that amendment of a multiemployer plan was a fiduciary function.

The district court dismissed several of the claims as time-barred. However, the court rejected the defendants' arguments that the illegal plan amendment claims should be dismissed on the grounds that plan amendments are not fiduciary actions. In so ruling, the court relied on Second Circuit case law that had previously been understood to establish that amendments to multiemployer plans that concern "'the allocation of a finite asset pool to which each participating employer has contributed' could properly be treated as fiduciary functions." Siskind v. Sperry Ret. Program, 47 F.3d 498, 506 (2d Cir. 1995).

Following the judgment in the district court, the parties cross-appealed to the Second Circuit. Plaintiffs challenged the district court's ruling that certain claims were time-barred, while defendants challenged the district court's conclusion that amending a multiemployer plan was a fiduciary function.

The Second Circuit's Decision

The issue of whether plan amendments are fiduciary decisions turned on whether pre-existing Second Circuit pronouncements on this issue were still valid, notwithstanding intervening Supreme Court precedent.

Chambless v. Masters, Mates & Pilots Pension Plan, 772 F.2d 1032 (2d Cir. 1985), has been cited for the proposition that the act of amending multiemployer pension plans should be treated as a fiduciary function under ERISA, and as such, obligates the fiduciaries of the plan to discharge their duties solely in the interest of the participants and beneficiaries of the plan.

In a subsequent opinion, the Second Circuit noted that amendments of single-employer plans were not fiduciary decisions, but in so doing adhered to the view expressed in Chambless with respect to multiemployer plans because "trustees amending a pension plan 'affect the allocation of a finite asset pool' to which each participating employer has contributed." Siskind v. Sperry Ret. Program, 47 F.3d 498 (2d Cir. 1995) (quoting Musto v. American General Corp., 861 F.2d 897, 912 (6th Cir. 1988)). The distinction between a finite and non-finite asset pool was considered important because with a finite asset pool the interests of the plan trustees would be aligned with those of the participants and beneficiaries of the plan, rather than the collective bargaining parties who created the plan, and thus would tend to be fiduciary, and not settlor, in nature. See Siskind, 47 F.3d at 506.

Since the time of these decisions, the Supreme Court issued a number of rulings concerning the distinction between settlor and fiduciary functions in the single-employer setting, including:

Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73 (1995), which, in connection with a welfare plan, noted that employers and plan settlors are "generally free under ERISA, for any reason at any time, to adopt, modify, or terminate welfare plans"; Lockheed v. Spink, 517 U.S. 882 (1999), which extended the ruling of Curtiss-Wright to include pension plans and found that plan sponsors amending the terms of a plan "do not fall into the category of fiduciaries," and are analogous to "settlors of a trust"; and Hughes Aircraft Co. v. Jacobson, 525 U.S. 432 (1999), which concluded that the holding in Lockheed applied to plans funded by both employer and employee contributions and added that "without exception" plan settlors that amend plan terms do not act as fiduciaries. Plaintiffs contended that the Second Circuit's prior pronouncements in Chambless and Siskind were still controlling since the Supreme Court had not specifically ruled on the settlor/fiduciary issue in connection with multiemployer plans.

The Second Circuit rejected plaintiffs' contention and held the distinction between multiemployer and single-employer plans drawn in Chambless and Siskind was abrogated by the Supreme Court's reasoning in Curtiss-Wright, Lockheed, and Hughes Aircraft.1 In so ruling, the Second Circuit cited decisions by the Third, Sixth, and Federal Circuit Courts of Appeals that all concluded, based on these Supreme Court rulings, that amending a benefit plan was not a fiduciary function and that nothing in those Supreme Court decisions could be interpreted to "create [ ] an exemption for multiemployer plans."

The court cited a decision from the Third Circuit that reasoned that since Lockheed ruled that a "plan sponsor" amending a plan did not act as a fiduciary, and ERISA defines "plan sponsor" for both single and multiemployer plans, there is no reason to analyze actions of the plan sponsor differently in the multiemployer context. See Walling v. Brady, 125 F.3d 114 (3d Cir. 1997).

The court also took note of various district court decisions within the Second Circuit that held that in light of these three Supreme Court rulings, the multiemployer plan distinction set forth in Chambless and Siskind was no longer valid. The court further opined that there was no "compelling reason" to rule contrary to its sister circuits, and maintaining a circuit split on the "issue of trustee liability as fiduciaries for amending multiemployer plans is inadvisable."

Accordingly, the court vacated the district court's ruling and held that plaintiffs' claims asserting a breach of fiduciary duty in connection with defendants' amendment of the plans were subject to dismissal because defendants were not acting as fiduciaries when amending the plan documents. In addition, the court reversed the district court's dismissal of certain counts of the complaint as time-barred, finding that there was a question of fact as to when plaintiffs knew or should have known of the alleged wrongful...