The Sixth Circuit recently decided to allow individual plan participants to sue for damages on their own behalf for breaches of fiduciary duty under ERISA. Until now, ERISA plaintiffs could seek damages for breaches of fiduciary duty only on behalf of the plan – not in their individual capacity as plan participants.
In Tullis v. UMB Bank, No. 06-4632/4633 (6th Cir. January 28, 2008), plaintiffs, two doctors from Toledo, maintained pension funds through the Toledo Clinic Employees’ 401(k) Profit Sharing Plan, an ERISA-governed “defined contribution” pension plan. Plaintiffs chose William Davis of Continental Capital Corporation (“Capital”) as their investment advisor. In October 1999 the U.S. Securities and Exchange Commission entered a Temporary Restraining Order against Capital because two of its brokers were engaged in fraudulent activities. Plaintiffs argued that UMB Bank, which served as trustee of the Plan, knew of the fraud and failed to inform them. In 2001, UMB filed suit for fraudulent activity against Davis and a subsidiary of Capital on behalf of the Plan. Plaintiffs alleged that defendant again failed to inform them of Davis’ and Capital’s fraudulent activities.
Plaintiffs alleged that defendant, a fiduciary under ERISA, breached its fiduciary obligations by failing to warn them of the fraudulent investments and should, therefore, be liable for the resulting damage. The district court held that plaintiffs did not have standing to pursue their ERISA § 1132(a)(2) claims after concluding that the damages sought did not benefit the plan directly but rather only the individual plaintiffs.
The Sixth Circuit reversed, finding instead that an individual plan participant can seek recovery of losses due to fiduciary breach. In so doing, the Sixth Circuit disagreed with the district court’s reasoning, which relied heavily on the Fourth Circuit’s logic in LaRue v. Dewolff, 450 F.3d 570 (4th Cir. 2006), a case currently pending before the U.S. Supreme Court. In LaRue, the Fourth Circuit found that a plaintiff did not have standing to bring a claim under § 1132(a)(2) if the recovery existed solely for the plaintiff’s benefit, the measure of that recovery was a loss suffered by plaintiff alone, and the loss itself arose from a duty owed solely to the plaintiff.
The Sixth Circuit, in contrast, held that the goal of ERISA was to ensure that relief was available in cases of fiduciary breach. According to the Sixth Circuit, the district court’s opinion vitiated that goal by precluding relief for plaintiffs whose recovery could be characterized as benefiting only an individual. The court also said that the “plain language” of the statute was clear and did not require relief for the benefit of all participants; nor did it require that suits be brought by a “sub-class” of participants or as a class action.
Interestingly, the Sixth Circuit decided a strikingly similar issue less than two months before the Tullis decision in Pfahler v. National Latex Products Company, No. 06-3677 (6th Cir. December 14, 2007). Yet the court did not mention Pfahler in the Tullis opinion (citing only the district court opinion). In Pfahler, plaintiffs brought an action on behalf of the plan for breach of fiduciary duty to their individual accounts, and the court found that they could recover damages to their individual plan accounts. In Tullis, plaintiffs did not plead that they were taking action on behalf of the plan and, instead, alleged that they, as individuals, “suffered damages.” The Sixth Circuit found that this was not fatal because the complaint indicated that plaintiffs, as participants in an ERISA-governed plan, were seeking recovery for losses to their plan accounts caused by fiduciary breaches.
The Supreme Court will ultimately decide this issue when it decides LaRue. In the meantime, fiduciaries should be mindful that, at least in Ohio, a breach of fiduciary duty as to even one defined contribution plan account could result in individual lawsuits and damages to individual plan accounts.