By: Ian Morrison and Nadir Ahmed
The Fourth Circuit’s LaRue decision went largely unnoticed until the Supreme Court decided to take the case, and the ensuing opinion has had a significant impact on the development of ERISA law. Could the next Supreme Court ERISA decision be brewing in the Fourth Circuit?
On December 21, 2011, in David v. Alphin, Case No. 11-2181 (4th Cir.), plaintiffs, participants of Bank of America’s 401(k) Plan and Pension Plan, appealed to the Fourth Circuit after the district court partially dismissed and later entered summary judgment for the defendants on their claims that the defendants engaged in imprudence and self-dealing by offering Bank of America-affiliated mutual funds as plan investments.
Plaintiffs raise four issues on appeal. First, they challenge the district court’s statute of limitations ruling, which held that their prudence and loyalty claims arising from the offering of bank-affiliated mutual funds were untimely because the funds had been selected well before the applicable statute of limitations. Plaintiffs argue that the defendants had failed to remove the funds despite alleged excessive fees and poor performance and that they had only sued defendants responsible for plan management during ERISA’s six-year statute of limitations. Therefore, they assert it was error to treat their claims as relating solely to the initial selection of the investments, which admittedly occurred outside the limitations period. Plaintiffs also contend that the court ignored established authority holding that the failure to remove an investment is a distinct breach of fiduciary duty giving rise to a distinct cause of action.
Second, plaintiffs claim that the district court erred in treating their claim as one challenging the initial selection of imprudent investment options, because, according to the plaintiffs, the last act to constitute a breach was offering the investment options to participants, which had taken place within the limitations period. Specifically, plaintiffs argue that the funds were last used as investment options on August 7, 2000, well within the six-year statute of limitations under ERISA.
Third, plaintiffs argue that it was error for the judge, who was new to the case, to dismiss all claims with prejudice rather than allowing them to amend their complaint again. Plaintiffs contend that this decision was premised on the judge’s incorrect impression that the court had given the plaintiffs three opportunities to amend the complaint, when only one amendment had required court approval. However, plaintiffs concede that they had amended their complaint multiple times by the time the court dismissed the case.
Last, plaintiffs argue that the lower court misapplied the law of standing when it dismissed plaintiffs’ Pension Plan claims. The district court found that because the Pension Plan is a defined benefit plan, participants were entitled to fixed payments, funded by the employer, and therefore, were not harmed by the improper and excessive fees. Plaintiffs argue that the lower court erred and that they demonstrated four distinct injuries, each of which independently conferred constitutional standing. Plaintiffs argue at length that they satisfy the Article III standing requirements, that they have standing to sue for self-dealing transactions absent direct economic injury to themselves or the Pension Plan, that they suffered personal injuries from the Pension Plan’s losses, and that they have standing to enforce legal rights vested in them by statute.
Appellate briefing is still in its early stages, but the David case has the hallmarks of a potentially significant ERISA decision in the making. First, the district court decision is one of very few to dismiss claims relating to the continued inclusion of allegedly imprudent investments on the theory that the claim actually focuses on the initial offering of investments. Second, it touches on the cutting edge question of whether defined benefit plan participants have standing to sue for plan investment losses even though they do not claim the plan to be unable to satisfy benefit payment obligations. Third, the Fourth Circuit is sure to comment on the growing trend of plaintiffs in ERISA class actions attempting to amend their pleadings to avoid dismissal. Besides these issues, this case has already attracted the attention of a number of interested parties. In fact, while waiting for the defendants to file their brief, the Pension Benefit Guarantee Corporation, AARP, and the Secretary of Labor each filed Amicus Curiae briefs in support of the plaintiffs. We will continue to watch the appeal and will report back as it progresses.