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Delaware Chancery Court “Green Lights” Claims against Directors for Approving Excessive Stock Option Grants

The Delaware Chancery Court denied a motion to dismiss a shareholder derivative action claiming that the company’s directors breached their fiduciary duty to shareholders by approving stock option grants to the president in excess of amounts permitted under the company’s stock incentive plan and by issuing a materially misleading 2012 proxy statement.  The action also asserted claims against the company’s president for breaching his fiduciary duty and for unjust enrichment by accepting the grant.  The directors sought to dismiss the claims for demand futility and failure to state a claim.  The court denied the motion to dismiss for futility because the grants were a clear violation of the terms of the plan.  The motion to dismiss for failure to state a claim was dismissed because the clear violation of the stockholder-approved plan implicates the duty of loyalty and therefore states a viable claim.  Pfeiffer v. Leedle, C.A. No. 7831-VCP (Del.… Continue Reading

Seventh Circuit Holds that ERISA Fiduciary Breach Claims under Defined Contribution Plan May Be Brought as Class Action

Participants in a 401(k) plan filed a class action suit in federal district court claiming that their employer breached its ERISA fiduciary duty to the plan relating to the plan’s investments. Ultimately, the U.S. Court of Appeals for the Seventh Circuit held that an action for breach of fiduciary duty under ERISA Section 502(a)(2) may be maintained as a class action. Abbott v. Lockheed Martin Corp., No. 12-3736 (7th Cir. Aug. 7, 2013).

Court Orders Third-Party Administrator to Pay Over $5.1 Million for Breach of Fiduciary Duty

In Hi-Lex Controls Inc. et al. v. Blue Cross Blue Shield of Michigan, Blue Cross Blue Shield of Michigan (“BCBSM”), as the third-party claims administrator of various self-funded ERISA group health plans, was withholding as additional administrative fees a portion of the amounts transferred by plaintiffs to BCBSM to fund claim payments (“Disputed Fees”).  In a prior ruling, the court held that BCBSM was a fiduciary of the plans because the amounts involved were plan assets over which BCBSM exercised practical control.  With respect to plaintiffs’ breach of fiduciary duty claims, the court found that BCBSM violated its ERISA fiduciary duty of loyalty by supplying false and misleading information to plaintiffs about the nature and extent of the Disputed Fees and by supplying false information for plaintiffs’ Form 5500 filings, and ordered BCBSM to pay plaintiffs the full amount of the Disputed Fees plus costs, interest, and attorneys’ fees, totaling… Continue Reading

Court Finds Breach of Fiduciary Duty Against Broker for Failure to Explain Interaction of Stop-Loss and Self-Funded Health Plan Coverage

In Express Oil Change, LLC v. ANB Insurance Services, Inc., the sponsor of an employee health plan (the “Employer”) decided to convert its funding for the plan from a fully-insured to a self-funded basis. In preparation for the conversion, the Employer sought the advice and expertise of ANB Insurance Services, Inc. (the “Broker”) with implementation of the self-funded plan (the “Plan”) and procurement of the associated stop-loss insurance coverage. Apart from providing benefit consulting services to the Employer, the Broker had a long-standing and close relationship with the Employer as its agent for various other types of insurance coverage. The terms of the newly self-funded Plan provided for a $1 million lifetime maximum per participant on out-of-network benefits, but no such limit on in-network benefits. The Employer erroneously thought that the lifetime maximum applied to both in-network and out-of-network benefits and purchased a stop-loss policy with a deductible of $75,000… Continue Reading

Second Circuit Reaffirms that Moench Presumption Applies Only When Plan Terms Require Investment in Employer Stock

The U.S. Court of Appeals for the Second Circuit affirmed, in part, and vacated, in part, a fiduciary breach lawsuit against the investment committees of two eligible individual account plans. Participants sued the investment committees claiming that the decision to offer an employer stock fund was imprudent. The Second Circuit recognizes the Moench presumption—the presumption of prudence when a plan fiduciary retains employer securities as an investment option as required by the terms of the plan document. Although the district court applied the Moench presumption to both plans, the terms of only one plan required investment in employer stock; the other plan merely permitted investment in employer stock. Thus, with respect to the second plan, the Second Circuit vacated the dismissal and reinstated the claims and the derivative claims against the investment committee. McKevitt v. UBS AG, No. 12-1662 (2d Cir. Feb. 27, 2013).

4th Circuit Holds that the Limitations Period for ERISA Claims of Imprudent Plan Investments Commences with Initial Fund Selection and Does Not Continue With Ongoing Monitoring of Funds, Absent Material Change in Circumstances

A group of participants in Bank of America’s 401(k) plan sued alleging the bank engaged in prohibited transactions and breached its fiduciary duty by selecting bank-affiliated mutual funds despite the funds’ poor performance and higher fees in comparison to other available investment alternatives. The participants conceded that the initial fund selection was outside of ERISA’s general six-year limitations period. Nevertheless, the participants argued that the bank’s failure to remove the bank-affiliated mutual funds at meetings of its benefits committee, which occurred within the limitations period, constituted new prohibited transactions and new breaches of its fiduciary duty to monitor plan investments. The 4th Circuit disagreed, reasoning that a decision to continue certain investments, or even the bank’s failure to act, cannot constitute a “transaction” for ERISA purposes; therefore, the only transaction upon which the participants could assert a prohibited transaction claim was the bank’s initial selection of the bank-affiliated mutual funds.… Continue Reading

Liability for Fiduciary Breach Not Dischargeable in Personal Bankruptcy

The Department of Labor (“DOL”) sued the president of several related companies to establish his personal liability for more than $67,000 in employee contributions never remitted to the employer sponsored benefit plans and to prevent him from discharging this liability in his pending personal bankruptcy action.  Over a nearly three-year period, the companies withheld but never remitted the employee contributions to the companies’ group health and 401(k) plans (the “Plans”).  The court concluded that, under ERISA, the president was a “functional fiduciary” of the Plans because he exercised discretionary control over plan assets—the employee contributions—when he retained those funds in the companies’ general assets to pay other corporate debts, rather than timely remitting them to the Plans as required by ERISA.  The president’s conduct also violated several other ERISA provisions, including the duty of loyalty, exclusive benefit rule, and prohibited transactions rule.  Accordingly, he was personally liable for the unremitted… Continue Reading

Presumption of Reasonableness Standard Does Not Apply at Pleading Stage and SEC Filings Incorporated by Reference in a Summary Plan Description are Fiduciary Communications

Plan participants sued claiming breach of fiduciary duty relating to an employee stock ownership plan (“ESOP”) offered as one investment option in the employer’s defined contribution, participant directed retirement plan.  The trial court dismissed the suit for failure to state a plausible claim for relief.  The 6th Circuit reversed the dismissal, holding that (1) the presumption of reasonableness standard applied to an ESOP fiduciary’s decision to remain invested in employer securities does not apply at the pleading stage and (2) SEC filings, when incorporated by reference into a Summary Plan Description (“SPD”), are a fiduciary communication under ERISA.  First, the court clarified that the presumption of reasonableness standard is not appropriately applied at the pleading stage because the presumption can be overcome “when applied to a fully developed evidentiary record.”  The court reasoned that while ERISA 404(a)(2) generally abrogates an ESOP fiduciary’s duty to diversify investments, the fiduciary is not… Continue Reading

IRS Issues Final Regulations Permitting Plan Sponsors to Eliminate Prohibited Payment Options

Under Internal Revenue Code (“Code”) section 436, unless a defined benefit pension plan sponsored by a debtor in bankruptcy is fully funded, the plan may not make “prohibited payments” (i.e., lump sum payments or payments in any other form that exceed the monthly amount under a single life annuity). Moreover, the anti-cutback rule in Code section 411(d)(6) prohibits a plan from being amended to eliminate an optional form of benefit. On November 8, the IRS issued a limited exception to the anti-cutback rules to permit a plan sponsor in bankruptcy to amend its plan to eliminate prohibited payments such as lump sums. The exception applies if the following four conditions are satisfied: first, the enrolled actuary certifies that the plan is less than fully funded; second, the prohibition on making prohibited payments arises because the plan sponsor is a debtor in bankruptcy; third and fourth, the bankruptcy court must issue… Continue Reading

Liability for Fiduciary Breach Not Dischargeable in Personal Bankruptcy

The Department of Labor (“DOL”) sued the president of several related companies to establish his personal liability for more than $67,000 in employee contributions never remitted to the employer sponsored benefit plans and to prevent him from discharging this liability in his pending personal bankruptcy action. Over a nearly three-year period, the companies withheld but never remitted the employee contributions to the companies’ group health and 401(k) plans (the “Plans”). The court concluded that, under ERISA, the president was a “functional fiduciary” of the Plans because he exercised discretionary control over plan assets—the employee contributions—when he retained those funds in the companies’ general assets to pay other corporate debts, rather than timely remitting them to the Plans as required by ERISA. The president’s conduct also violated several other ERISA provisions, including the duty of loyalty, exclusive benefit rule, and prohibited transactions rule. Accordingly, he was personally liable for the unremitted… Continue Reading

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