The ERISA Litigation Newsletter - December 2014

Editor's Overview

This month's newsletter focuses on how Plan Trustees can appropriately settle ERISA breach of fiduciary duty claims in order to achieve "complete peace." The article provides a check list and discusses strategies for handling settlement of fiduciary breach claims including, barring future claims by non-settling parties, baring future claims by non-settling co-defendants, protecting against future claims with adequate insurance coverage, and moving on after settlement.

As always, be sure to review the section on Rulings, Filings, and Settlements of Interest including, the Supreme Court's decision to review the subsidy issue, the IRS closing the "loophole" on in health care reform; new FAQ's regarding premium reimbursement arrangements and marketplace dumping; the 2015 Proxy voting updates; and the DOL's focus on audits and enforcement actions.

How to Settle an ERISA Breach of Fiduciary Duty Case and Sleep at Night: A Checklist for Plan Trustees to Consider*

By Myron D. Rumeld & Anthony S. Cacace 1

Plan trustees often look to settle ERISA fiduciary breach claims brought against them as a way to put the past behind them. Assuming there is enough fiduciary liability insurance coverage available to pay the proposed settlement sum, the trustees may be prepared to put aside their desire to vindicate themselves for a challenged course of conduct, avoid the risks of a horrific outcome that exceeds insurance coverage limits—potentially causing them to use personal assets to satisfy a judgment against them—and move on. Unfortunately, however, ERISA is structured in a manner that creates obstacles to achieving the goal of "complete peace."

First, ERISA accords standing to bring fiduciary breach claims to multiple parties, not all of which may have participated in the lawsuit being settled. A settlement of the claims alleged may not extinguish the rights of the other parties with standing to sue, thereby leaving the settling trustees subject to additional liability exposure.

Second, courts in some jurisdictions have taken a rather expansive view of the right of parties defending ERISA fiduciary breach claims and other claims brought on behalf of plans to file third-party claims against other parties who contributed to the losses suffered by the plans. As a result, even after settling the claims brought directly against them, trustees may face exposure from third-party claims.

Notwithstanding these obstacles, there are a number of litigation strategies that trustees can pursue in order to potentially reduce or eliminate these risks of continued exposure following a settlement. Although the effectiveness of these strategies will vary, depending on the circumstances presented, trustees are well-served by considering each of them with their attorneys, before determining whether, and under what conditions, they wish to enter into a settlement.

Barring Future Claims by Non-Settling Parties with Standing to Bring Direct Claims against the Settling Trustees

Under ERISA's statutory scheme, there are three categories of plaintiffs who have standing to sue plan trustees for breach of fiduciary duty: (i) the U.S. Department of Labor (DOL); (ii) participants and beneficiaries of the plan; and (iii) co-fiduciaries of the plan. See 29 U.S.C. § 1132(a)(2); ERISA § 502(a)(2). Rare is the case when trustees are settling a lawsuit in which all three categories are the plaintiffs. As a result, before agreeing to settle claims brought against them, the trustees should consider their potential exposure to "copy-cat" claims brought by other parties who to date have not sued them.

In some instances, the trustees can gain comfort from a potential statute of limitations defense. Absent allegations of fraud or concealment, which will extend the limitations period, ERISA breach of fiduciary duty claims will expire on the earlier of three years from when a plaintiff has actual knowledge of the claim or six years from when the claim accrued. Unfortunately, there is considerable uncertainty as to how these statute of limitations rules apply. For example, in the cases of investment losses, courts are not consistent in their rulings about whether a claim accrues from the time of the original investment that precipitated the losses, or when the losses were actually experienced. As a result, even where substantial time has elapsed since the events giving rise to the fiduciary breach claims, it may be difficult to reach the conclusion that all residual claims are necessarily time-barred.

In the absence of a blanket protection from the statute of limitations, trustees may wish to consider other strategies for protecting against future claims, including the following:

Define Settled Claim as Being Brought on Behalf of the Plan. Be sure to define plaintiffs in your case as having brought the lawsuit in a representative capacity on behalf of the plan and seeking relief that would inure to the benefit of the plan. See Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 142 (holding that ERISA fiduciary breach claims are brought in a representative capacity on behalf of the plan as a whole). Although there is no case law explicitly endorsing this principle, crafting the settlement agreement in this fashion should increase the likelihood of a court to find that a subsequent claim seeking relief on behalf of the plan is barred. Settle on a Class-Wide Basis. Where a claim has been brought by a single participant, the trustees may wish to consider structuring the settlement such that it is conditioned on the court first certifying a class of participants. This way, the release entered into in consideration for the settlement payment will bind all plan participants. Furthermore, a class settlement that is approved by the court as fair and reasonable will likely satisfy the DOL that no further action should be taken against the trustees. Request an Order Barring Claims of Other Potential Claimants. Ordinarily, a bar order is entered into for the purpose of facilitating partial settlement by barring the claims of other, non-settling defendants. However, there is some authority, pursuant to the All Writs Act, for barring claims of non-parties. The All Writs Act grants authority to enjoin and bind non-parties to an action when needed to preserve the court's ability to reach or enforce its decision in a case over which it has proper jurisdiction. See, e.g., In re Baldwin-United Corp., 770 F.2d 328, 338 (2d Cir. 1985). In the context of ERISA settlements, where there are multiple parties with the ability to pursue the same claims, courts have sometimes been willing to bar claims by these potential plaintiffs for the sake of facilitating a settlement that is viewed to be in their best interests. See, e.g., In re Worldcom, Inc. ERISA Litig., 2005 WL 3107725, at *4 (S.D.N.Y. 2005). Note that a bar order will need court approval because, much like a class action, the court needs to determine the agreement's fairness to all parties and to give the non-settlers the opportunity to object to the order and non-parties a chance to potentially file a claim. See In re Masters Mates & Pilots Pension v. Riley, 957 F.2d 1020, 1025 (2d Cir. 1992). Secure Assurances from the DOL. It is frequently the case that, during the pendency of a fiduciary breach lawsuit brought by the plan's fiduciaries or plan participants, the DOL conducts a parallel investigation of the same claims. The defendant trustees can ill afford the risk of a lawsuit commenced by the DOL sometime after the first lawsuit has been settled. If the DOL has been kept apprised of the litigation proceedings, and is accorded an opportunity to review the terms of the contemplated settlement, the DOL may communicate in advance its willingness to close its administrative file if the settlement is consummated. Barring Future Claims by Non-Settling Co-Defendants

If the trustees are not the only party being sued for breach of fiduciary duty to recover certain losses suffered by the plans, it is important that the trustees protect themselves from potential third-party claims by other defendants. Consider, for example, the following familiar scenario: the funds suffer investment losses and participants sue both the trustees and the investment consultant for breach of fiduciary duty. The trustees are prepared to reach a settlement of the claims brought against them, but no settlement has yet been reached with the investment consultant. If the trustees...