Larue v. Dewolff, Boberg & Associates, Inc.: Investing More Erisa Fiduciary Breach Protection for Individuals' Retirement Plans - Jonathan Jarrell

• Citation: Vol. 60 No. 3
• Publication year: 2009

Casenote

LaRue v. DeWolff, Boberg & Associates, Inc.:

Investing More ERISA Fiduciary Breach Protection for Individuals' Retirement Plans

I. Introduction

In early 2008, the United States Supreme Court handed down the unanimous decision of LaRue v. DeWolff, Boberg & Associates, Inc.,¹ which clarified recovery under sections 409(a) and 502(a)(2) of the Employee Retirement Income Security Act of 1974 (ERISA)² for individual accounts within defined contribution plans harmed by fiduciary breaches.³ Prior to LaRue, some courts had interpreted the Supreme Court's decision in Massachusetts Mutual Life Insurance Co. v. Russell⁴ to mean that individual participants could not recover for harm caused by fiduciary breaches unless the entire plan suffered losses and would benefit from recovery.⁵ However, the Court's decision in LaRue provides enhanced protection for individual account holders of defined contribution plans by allowing recovery under section 502(a)(2) for fiduciary breaches that harm only a particular individual's account.⁶ Such an expansion of protection will prove crucial as an aging American population and failing Social Security system require American employees to take more individual responsibility for their own retirement accounts and planning.

II. Factual Background

The essence of the dispute in LaRue v. DeWolff, Boberg & Associates, Inc.¹ was a claim for breach of fiduciary duty.⁸ DeWolff, Boberg & Associates, Inc. (DeWolff) was the former employer of the petitioner, James LaRue. While employed by DeWolff, LaRue participated in a 401(k) retirement savings plan, which was regulated by the Employee Retirement Income Security Act of 1974 (ERISA).⁹ DeWolff administered the 401(k) savings plan, thus acting as the fiduciary for the plan.¹⁰

The DeWolff 401(k) plan provided certain procedures and requirements through which participants were permitted to direct the plan administrator to invest the participants' contributions. In 2001 and 2002, LaRue directed DeWolff, as the plan administrator, to make certain changes to the investment allocations of his individual 401(k) account. DeWolff never carried out LaRue's directions. DeWolff's failure depleted the value of LaRue's individual account by approximately $150,000. LaRue filed an action against DeWolff in the United States District Court for the District of South Carolina, claiming that DeWolff breached its fiduciary duty under ERISA. Using section 502(a)(3),¹¹ LaRue sought equitable relief to make whole his individual account, as well as any other just and proper relief.¹²

In the district court, DeWolff filed a motion for judgment on the pleadings, arguing that the claim was essentially for monetary relief, which is unavailable under section 502(a)(3). LaRue countered that his claim did not request a monetary award to him as an individual.¹³ Instead, he argued that the claim simply requested an adjustment to his individual account value to "properly reflect" the value of his account had DeWolff not breached its fiduciary duty.¹⁴

The district court found that DeWolff did not wrongfully possess any funds that belong to LaRue. Therefore, it concluded that LaRue sought damages rather than equitable relief, and no remedy for damages was available to him under section 502(a)(3) even if DeWolff did breach its fiduciary duty. The district court granted DeWolff's motion for judgment on the pleadings.¹⁵

LaRue then appealed to the United States Court of Appeals for the Fourth Circuit, renewing his claim under section 502(a)(3). He also argued that he had a valid section 502(a)(2)¹⁶ claim for breach of fiduciary duty. The court of appeals characterized the remedy that LaRue sought as inuring to the individual beneficiary, since any funds recovered would benefit only his individual account. The court recognized that LaRue's recovery could, in a narrow sense, be construed as accruing to the entire plan, since his individual account is part of the entire plan. However, the court refused to accept this interpretation because it was unsupported by the statutory text and contrary to the legislative purpose of these sections. Reasoning that LaRue's remedy would not actually benefit the entire plan, the court of appeals refused to recognize his individual claim as a proxy for a claim on behalf of the entire plan. Even though LaRue raised the section 502(a)(2) claim for the first time on appeal,¹⁷ the court rejected it on the merits. The court of appeals also rejected LaRue's section 502(a)(3) claim, agreeing with the district court's finding that his remedy would not be equitable in nature.¹⁸

The United States Supreme Court granted LaRue's petition for certiorari on both claims.¹⁹ The Court did not address the section 502(a)(3) claim because it concluded that the court of appeals erred in its reading of both the statutory text and Massachusetts Mutual Life Insurance Co. v. Russell.²⁰ Therefore, the Court vacated the court of appeals decision and remanded the case in a unanimous judgment with two concurring opinions.²¹

III. Legal Background

A. ERISA Passage

Congress passed ERISA²² following substantial growth in the number and size of private pension plans in the United States.²³ While the prevalence of these private retirement plans grew exponentially in the United States following World War II, the government was slow to pass any comprehensive regulatory schemes.²⁴ In fact, much of the regulation that predated ERISA only dealt with pension plans in a piecemeal manner.²⁵ Thus, Congress's purpose in passing ERISA was to provide for a comprehensive regulatory scheme for private pensions without impeding their growth.²⁶

Much of this legislation was aimed at providing protection for the plan and its beneficiaries from fiduciary breaches and general mismanagement.²⁷ For instance, Part IV of ERISA²⁸ is dedicated to defining the scope of fiduciary responsibilities.²⁹ Meanwhile, Part V of ERISA³⁰ outlines criminal, civil, and administrative enforcement for violations of the Act.³¹ More specifically, section 409(a)³² provides in pertinent part:

Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach . . . and shall be subject to such other equitable or remedial relief as the court may deem appropriate . . . .³³

Section 502(a)(2)³⁴ states, "A civil action may be brought . . . by the Secretary, or by a participant, beneficiary or fiduciary for appropriate relief under section 1109 of this title."³⁵ As the text of section 502(a)(2) suggests, Congress meant for these sections to be read together to impose personal fiduciary liability and a remedy for breaches of fiduciary duties.³⁶

Congress's major concern in enacting the fiduciary standards and liability portion of ERISA was to protect the "financial integrity of [retirement] plan[s],"³⁷ and, by extension, the individual beneficiaries of those plans.³⁸ By including these sections in the ERISA regulatory scheme, Congress intended to prevent fiduciary mismanagement of plan assets, whether caused by intentional improprieties or incompetence.³⁹ However, many courts, following the lead of the United States Supreme Court in Massachusetts Mutual Life Insurance Co. v. Russell,⁴⁰ have interpreted these statutory provisions as providing reliefonly to the plan as a whole, rather than to individual beneficiaries.⁴¹

B. The Supreme Court's Interpretation of Sections 409(a) and 502(a)(2) in Massachusetts Mutual Life Insurance Co. v. Russell

The Supreme Court substantially examined and interpreted the text of sections 409(a) and 502(a)(2) for the first time in Massachusetts

Mutual Life Insurance Co. v. Russell,⁴² which involved the improper processing of benefit claims.⁴³ The Court held that section 409(a) does not provide for extra-contractual damages caused by a breach of fiduciary duty.⁴⁴ The Court acknowledged that a beneficiary may bring an action pursuant to section 502(a)(2) to recover for a section 409(a) violation.⁴⁵ However, the Court explained that any recovery under such an action must "inure[] to the benefit of the plan as a whole."⁴⁶ This latter language has lead to much confusion in ERISA litigation.⁴⁷

The Russell litigation began in California Superior Court, where the respondent brought several state law claims and ERISA claims against the petitioner. After the petitioner removed the case to the United States District Court for the Central District of California, the court granted the petitioner's motion for summary judgment. The district court determined that ERISA preempted the state claims, and held that ERISA barred all extra-contractual or punitive damages that resulted from a fiduciary breach and would have been paid to the individual beneficiary.⁴⁸

On appeal, the United States Court of Appeals for the Ninth Circuit agreed that the respondent's state law claims were preempted by ERISA. However, the court held that ERISA, itself, afforded the respondent a viable claim. The court determined that the petitioner violated its fiduciary duty regarding diligent, good faith claim processing by taking 132 days to process the respondent's benefit claim. According to the court, the petitioner's actions constituted a section 409(a) violation. Therefore, the respondent, a plan beneficiary, could assert the claim pursuant to section 502(a)(2).⁴⁹

The court of appeals reasoned that the text of section 409(a) gave broad discretion to courts to determine the remedies to be awarded, even including punitive and compensatory damages. The court held that the availability of compensatory damages to the individual beneficiary extends beyond just contractual damages—such as losses to plan benefits—to include extra-contractual losses, provided they were a proximate cause of the fiduciary breach.⁵⁰ The court explained that...