:: Make-Whole Claim Against Fiduciary Survives Motion To Dismiss

“Defendants now attempt to complete the invocation of what amounts to a ‘Catch 22′ by having this court dismiss Plaintiffs’ ERISA claim for failure to state a claim upon which relief can be granted. For the reasons discussed in this entry, the court will not dismiss the Complaint . . .”

Mcdonald v. HSBC Finance Corp., Slip Copy, 2006 WL 2193072 (S.D.Ind.)

The facts of this case led a federal district court to open the door, if but slightly, to the notion that “some forms of ‘make-whole’ relief ” may be available against a breaching fiduciary “in light of the general availability of such relief in equity at the time of the divided bench.” (quoting Justice Ginsburg’s concurring opinion in AETNA Health, Inc. V. Davila, 542 U.S. 200 (2004). If that position is sustained, ERISA fiduciaries will have a much larger liability profile than commonly thought.

James McDonald began working for HSBC Financial Corporation (“HSBC”) on November 19, 2001. He received a letter stating that “[y]our health and life insurance will be effective 30 days from your start date.”

McDonald had a prescription for a blood pressure medication which he had been taking before coming to work for HSBC. After the 30-day waiting period, he repeatedly tried to get the prescription filled, but each time, he was told that “his paperwork had not come through”.

Despite several subsequent appeals to his employer and Defendant United Healthcare Corporation (“United”), the insurer under the HSBC health benefits plan, McDonald’s benefits were not approved and, on January 15, 2002, he suffered a catastrophic hypertensive stroke. McDonald filed suit, asserting “six counts against HSBC and United, including breach of contract, negligence, loss of consortium and other state law theories of recovery.”

The District Court granted the Defendants’ motion to dismiss based upon ERISA preemption of the State law claims. Upon appeal, the Seventh Circuit reversed, stating that:

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).

McDonald v. Household Intern., Inc. (7th Cir. 2005), 425 F.3d 424, 430.

After remand, the McDonalds filed a complaint sounding in ERISA, alleging violations of Section 502(a)(3). When the Defendants moved to dismiss, the federal District Court, taking its cue from the Seventh Circuit, denied the motion, stating:

this matter is at the pleading stage and there is no evidence of record yet as to what caused McDonald not to be on the list of those entitled to coverage under the benefit plan. Under ERISA a fiduciary is defined as a person who exercises discretionary authority with respect to the administration of the plan, the management of plan assets or offers investment advice for a fee with respect to plan property or assets. 29 U.S.C. § 1002(21). At this point it is impossible to know whether the failure to list McDonald as a covered employee was intentional, a mistake or the result of inaction. Nor can it be said with any assurance that it was the responsibility of a particular person or entity, fiduciary or otherwise. These are questions of fact and the latter is an important one . . .

Mcdonald v. HSBC Finance Corp., Slip Copy, 2006 WL 2193072 (S.D.Ind.)

And in this way, at least for now, Mr. McDonald got some help from the Court in escaping the apparent Catch 22. Moreover, if the argument hinted at by the Seventh Circuit gains support, what appeared to be a routine preemption matter will develop into an invitation for future fiduciary litigation. This will be a case to watch.

Note: The issue outside the Seventh Circuit has been addressed in various cases such as LaRue v. DeWolff, Boberg & Assocs., Inc., No. 05-1756 (4th Cir., Aug. 8, 2006) (”the fact that a plaintiff happens to be a participant or beneficiary suing a fiduciary is entirely beside the point in the § 1132(a)(3) inquiry; the status of the parties does not determine the nature of the relief”).