VOL. 21, NO. 3
AUTUMN 2008
BENEFITS LAW
JOURNAL
From the Editor
DeWolff in Sheep’s Clothing: Can a
Participant Sue for a Fiduciary Breach?
S
upreme Court Justices must be the type of people who racked
up straight A’s from their newborn APGAR test right through law
school and felt compelled on Friday afternoons to remind their grammar school teachers to assign weekend homework. How else can
one explain their muddled three-tiered decision in LaRue v. DeWolff,
Boberg & Associates, Inc.?
To a nonlawyer, the facts and resolution of the case appear straightforward. In 2000, James LaRue maintains that he directed his 401(k)
plan administrator, which also was his employer, to move his account
from equity funds into government-backed bonds and a money market. (This suggests that Mr. LaRue probably missed his true calling as
a day trader.) But the employer, Texas-based consulting firm DeWolff,
Boberg & Associates, did not follow Mr. LaRue’s instructions, and his
account remained in equities as the stock market tumbled. By the
time the dust settled the following year, Mr. LaRue had left his job
and his account had plummeted by nearly $150,000. The employer,
as the plan administrator, declined to make good on the loss. So,
Mr. LaRue sued for “make-whole” or other equitable relief under
ERISA Section 502(a)(3).
The District Court dismissed the case, ruling that Mr. LaRue was
merely seeking monetary damages not available under ERISA Section
502(a)(3). Appealing to the Fourth Circuit, Mr. LaRue added a Section
502(a)(2) claim for “appropriate relief” on behalf of the plan for the
loss caused by the administrator’s breach of its Section 409 fiduciary
duties in not following his investment directions. The Fourth Circuit
From the Editor
had no problem concluding that Mr. LaRue could not reconfigure his
request for the $150,000 in lost value as equitable relief under Section
502(a)(3). To determine whether Mr. LaRue could sue under ERISA
Section 502(a)(2) for the employer-fiduciary’s breach of duty, the
Fourth Circuit turned for guidance to the Supreme Court’s 1985 decision in Massachusetts Mutual v. Russell. In Russell, which involved
a disability plan participant seeking damages for delayed benefit
payment, the Supreme Court held that Section 502(a)(2) “provides
remedies only for the entire plans, not for individuals.” Based on
Russell, the Fourth Circuit determined that Mr. LaRue only was making an individual claim on behalf of himself and was, therefore, out
of luck.
If we stop the tape right here and take Mr. LaRue at his word,
common sense and fair play would seem to dictate that he be able
to recover his loss. After all, Mr. LaRue followed the plan rules
in exercising his right to switch investments. His loss was clearly
caused solely by the plan administrator’s error. While the fiduciary did not in any way benefit from the transaction, it did cause
Mr. LaRue real injury—something akin to “fiduciary malpractice.”
The difficulty comes in figuring out in which ERISA-relief box to fit
Mr. LaRue’s claim.
And this is exactly where the Supreme Court got lost. (Incidentally,
a peek at the transcript of oral argument finds the Court seemingly
befuddled by mutual fund investing and self-directed 401(k) plans
and perhaps wishing that ERISA would, somehow, just go away.)
All nine Justices accepted that Mr. LaRue was an innocent bystander
entitled to his day in court, and they remanded the case for further proceedings. They also seemed unanimous in recognizing that
Mr. LaRue had no chance of winning on his Section 502(a)(3) claim for
equitable relief, as the $150,000 he was seeking was classic monetary
damages. But once the Court got specific and focused on Mr. LaRue’s
argument that he should be able to recover under Section 502(a)(2)
for the fiduciary’s breach, the Justices not only failed to agree on why
they were remanding the case, but did not even provide the lower
court with instructions on how to proceed.
First, the majority opinion written by Justice Stevens informed the
Fourth Circuit (and just about everybody else in the ERISA world) that
they’d in fact misread the Russell decision. As a fiduciary, the Court
noted, the plan administrator had a duty to manage the assets of the
401(k) plan with care. (Okay so far.) In the “old days,” most plans
were defined benefit plans in which all participants ate out of the
same pension pot. Russell’s “emphasis on protecting the ‘entire plan’
from fiduciary misconduct reflects the former landscape of employee
benefit plans.” (Under this rationale, would Mr. LaRue have lost his
case in 1982 because 401(k) plans were hardly known?) Now that
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From the Editor
401(k) plans are generally replacing pension plans, the Court noted
that it matters less whether the fiduciary caused a loss to the entire
plan, or just one participant’s individual account. Meandering back
toward the ruling in Russell, the majority held that, although Section
502(a)(2) does not “provide a remedy for individual injuries…[it] does
authorize recovery for fiduciary breaches that impair…a participant’s
individual account.” (By definition, under Russell, isn’t a loss solely to
one person an individual injury?)
Not to be outdone in creating confusion, Chief Justice Roberts
concurred that maybe (but not definitely) Mr. LaRue was simply
suing for plan-promised benefits. As a benefit claimant, he would
need to exhaust his administrative remedies before bringing suit and
the administrator might be entitled to an arbitrary and capricious
standard of review. Along with never actually saying that Mr. LaRue’s
claim should be refashioned as an old-fashioned claim for benefits
under Section 502(a)(1)(B), the Chief Justice ignored the important
detail that Mr. LaRue had already received his entire plan account.
The problem was that the value was smaller than it would have
been had his instructions been followed properly. A benefit claim
therefore probably would do him no good. Even worse, if Mr. LaRue
was entitled to an extra $150,000 in benefits the money would have
to come from the plan, not the fiduciary’s pocket. This could lead to
the absurd result that the other participants’ plan accounts would be
reduced to fund Mr. LaRue’s loss!
Justice Thomas added his own concurrence and (finally) some
common sense. Noting that the wording of ERISA is not affected by
“trends in the pension plan market,” he said Russell still holds that
ERISA does not authorize individual causes of actions for breaches of
fiduciary duty. However, Mr. LaRue is asking the fiduciary to restore
to his plan account the losses caused by its breach. Section 502(a)(2)
authorizes a participant (Mr. LaRue) to sue a fiduciary (plan administrator) for losses to the plan (Mr. LaRue’s plan account). It doesn’t
matter whether the suit is for a small slice of the plan or the entire
plan; it’s still for the plan.
So where are we? Clearly, every plaintiff’s lawyer will be adding
LaRue to his or her pleadings. But it’s hard to predict to what extent
the decision will really expand the scope of a fiduciary’s exposure
for breaches of duty. Of course, some courts will misread LaRue
and grasp selected parts of the Court’s meanderings to add more
participant-initiated causes of actions to the ERSIA “landscape.”
However, it may turn out in many cases that LaRue won’t change the
results so much as force the defense to do some extra explaining to
the court—i.e., more homework!
Two side comments and then Benefit Law Journal’s first (and likely
last) ERISA poem. First, in this issue’s Litigation column you’ll find
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From the Editor
James Baker’s incisive take on how this decision may influence the
course of future disputes; and, our next issue will provide an extensive analysis of LaRue that our publishing deadlines prevented us
from getting into this issue. Second, while errors are made in recordkeeping for investment funds from time to time, this type of litigation
has been rare. I believe the reason is that professional record keepers,
as a matter of course and even if they are not fiduciaries, generally
are willing to make a participant whole for their occasional goof.
Moreover, taped toll-free calls and electronic investment direction
make it fairly easy to identify when, what, and by whom a mistake
was made. In contrast, in LaRue the employer was the plan administrator, the participant was an ex-employee, and the dispute took an
entirely different tack.
There once was a man named LaRue
Who claimed he had some money due.
The Supremes said with a sigh
(Though they couldn’t agree why)
ERISA allows him to sue.
David E. Morse
Editor-in-Chief
K & L Gates LLP
New York, NY
Reprinted from Benefits Law Journal Autumn 2008, Volume 21,
Number 3, pages 1-4, with permission from Aspen Publishers, Inc.,
Wolters Kluwer Law & Business, New York, NY, 1-800-638-8437,
www.aspenpublishers.com
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