:: ERISA Section 502(a)(3) “Make Whole” Remedy Issue Headed To Seventh Circuit

“QUERY: Should a plaintiff who has suffered personal injury be allowed to pursue “make-whole” relief, consisting of lost wages and impaired earning capacity, against a fiduciary whose violation of the terms of a benefit plan has contributed to cause that plaintiff’s damage? . . . The Supreme Court has construed § 502(a)(3) not to authorize an award of money damages against a non-fiduciary, but the question of whether or not some form of “make-whole” relief may be pursued against a fiduciary remains unanswered.”

McDonald v. HSBC Finance Corp., 2006 WL 2669950 (S.D.Ind.) (September 18, 2006)

With that comment, the district court set the stage for what may be another landmark opinion in the ERISA Section 502(a)(3) debate. In McDonald, the district court drew the line of potential equitable relief under ERISA Section 502(a)(3) as potentially including “make whole” relief by denying the defendants’ motion to dismiss.

The issue returned to the district court this month on a motion to certify the ruling for interlocutory appeal.

The district court summarized the status of the issue as follows:

On August 1, 2006, this court entered its order denying each of the defendants’ dismissal motions, with the exception of any claim brought by Mrs. McDonald. In that entry the court noted that scholars and jurists have been debating the question of whether or not ERISA § 502(a)(3) allows for “make-whole” relief against fiduciaries of the sort being sought against by Mr. McDonald in this case . . .[T]he defendants have cited to recent decisions from other circuits which have found that money damages could not be obtained under § 502(a)(3). See Coan v. Kaufman, 457 F.3d 250, 2006 WL 2075129 (2nd Cir.2006); LaRue v. DeWolff, Boberg & Associates, Inc., 450 F.3d 570 (4th Cir.2006). However, as well written and reasoned as those decisions are, they have not persuaded this court that the riddle is solved.

The district court took encouragement from a remark in the Seventh Circuit opinion remanding the case. See, McDonald v. Household Intern., Inc. 425 F.3d 424, 430 (7th Cir. 2005). The Seventh Circuit stated:

they [the McDonald’s] may wish to take note of Justice Ginsburg’s comment in her concurring opinion in Davila, in which she drew attention to the Government’s suggestion that ERISA “as currently written and interpreted, may allo[w] at least some forms of ‘make-whole’ relief against a breaching fiduciary in light of the general availability of such relief in equity at the time of the divided bench.” Id. at 2504 (internal quotations omitted).

In this most recent development, the district court certified its order for interlocutory appeal. The court summarized the status of the issue as follows:

The riddle, as presented in this case (assuming the accuracy of the allegations at this stage), is as follows:

1. Plaintiff, a participant in a welfare benefit plan, suffered personal injury in the form of a stroke.

2. The defendant fiduciaries of the benefit plan violated the provisions of the plan, which contributed to the cause of plaintiff’s injured health.

3. ERISA preempts any state law theory of recovery against the fiduciaries of a covered benefit plan.

4. Section 502(a)(3) of ERISA provides a participant with what has been described by the Supreme Court as a “catchall” provision or “safety net” to remedy any violation of its provisions, but the relief provided by that safety net is limited to “equitable relief.”

5. The Supreme Court has construed § 502(a)(3) not to authorize an award of money damages against a non-fiduciary, but the question of whether or not some form of “make-whole” relief may be pursued against a fiduciary remains unanswered. At least that is the view of the two justices who joined in a relatively recent concurring opinion, See Aetna Health Inc. V. Davila, 542 U.S. 200, 223-224 (2004) and perhaps the Seventh Circuit panel that previously remanded this matter with a suggestion that plaintiff review that concurring opinion going forward. See McDonald v. Household International, Inc., 425 F.3d 424, 430 (7th Cir.2005).

Two U.S. Circuit Courts of Appeal, the Second Circuit and the Fourth Circuit, in decisions noted by the district court in McDonald, have found no place in Section 502(a)(3) for any form of “make whole” relief. In Coan, a shareholder alleged that she lost $500,000 when plan fiduciaries breached their fiduciary duties. The Second Circuit, relying on Mertens, Knudson and Sereboff, held that Section 502(a)(3) barred the shareholder’s claims against the fiduciaries in that the relief she sought constituted legal, not equitable relief.

In Coan, the United States Department of Labor filed an amicus brief in support of the plaintiff. The DOL’s position was the same as that being entertained by the Seventh Circuit and the district court in McDonald. The argument met a cold reception in the Second Circuit, however, as the Second Circuit stated:

Recognizing that “this Court has construed Section 502(a)(3) not to authorize an award of money damages against a non-fiduciary,” the Government suggests that the Act, as currently written and interpreted, may “allo[w] at least some forms of ‘make-whole’ relief against a breaching fiduciary in light of the general availability of such relief in equity at the time of the divided bench.” Brief for United States as Amicus Curiae 27-28, n.13 (emphases added)···· [T]he Government’s suggestion may indicate an effective remedy others similarly circumstanced might fruitfully pursue. Id. at 223-24, 124 S.Ct. 2488 (Ginsburg, J., concurring). But whether sought from a fiduciary or not, the type of relief a plaintiff requests must still be “equitable.”

The plaintiff in Coan had suggested that appropriate equitable relief might entail “make whole monetary relief” which, of course, does seem a bit thin on the equity side. On the other hand, she also sought an injunction “reinstating the terminated plans, requiring the trustees to pay into them additional benefits lost through a breach of fiduciary duty, and directing them to pay the additional benefits to Coan as required by the terms of the plans.” But the Second Circuit rejected that claim as well, stating that the injunction claim “does not transform what is effectively a money damages request into equitable relief.”

The Fourth Circuit, in LaRue, followed the same track as the Second Circuit, and on very similar facts. The plaintiff, again a shareholder, claimed a loss of $150,000 based upon a breach of fiduciary by plan fiduciaries. The Fourth Circuit rejected the plaintiff’s claims stating that:

the relief sought, namely payment of amount of losses into participant’s account, constituted compensatory damages rather than equitable restitution, given absence of unjust enrichment, unlawful possession or self-dealing on employer’s part, and thus fell outside scope of “equitable relief” permitted by subsection.

The Seventh Circuit thus stands alone at this point as holding out a possibility for some form of equitable relief under Section 502(a)(3). The most recent development in the McDonald case, the interlocutory appeal, suggests that we will soon know whether the Seventh Circuit will take the path suggested by the DOL and the Davilia concurring opinion in allowing for some form of make whole relief as against fiduciaries.

Note: The issue forms around the possibility of make whole relief against a fiduciary – distinguishing facts in cases such as in Knudson and Sereboff. The basis of the distinction lies in the suggestion that the scope of equitable remedies available against a fiduciary is broader than when when a fiduciary sues a beneficiary (the latter being the case in Knudson and Sereboff) or when a beneficiary sues a non-fiduciary (as was the case in Mertens).

The analogy is derived from the common law breach-of-trust action by a beneficiary seeking to recover lost trust profits from a fiduciary. Thus, the issue before the McDonald court should not be confused with the argument for make whole relief in subrogation cases which the Sereboff court rejected.

Comments