United States: Federal Court Rules Against Naming Service Provider In Fiduciary Responsibility Case

Last Updated: February 6 2018

The spotlight that the U.S. Department of Labor (DOL) has shined on fiduciary duties for retirement plans has heightened awareness among plan sponsors and their third-party administrators (TPAs). But the proposed rule hasn't necessarily made some plan sponsors more willing to accept the responsibility of the role.

In a federal court ruling related to fiduciary roles, a terminated pension plan's attempt to shift blame to a third-party service provider it claimed was responsible for underpaying participants when settling their annuity contracts was denied by a U.S. magistrate judge. The plan had filed a motion to make the TPA a defendant in the case.

The case, PBGC v. Idaho Hyperbarics, No. 4:16-cv-00325-CWD, (D. Idaho, November 15, 2017), was filed by the Pension Benefit Guaranty Corporation (PBGC) in July 2016, alleging Idaho Hyperbarics Inc. (IHI) violated Title IV of the Employee Retirement Income Security Act (ERISA) by failing to distribute plan assets in full after closing its pension in December 2008.

PBGC is a federal agency that administers payments from failed private-sector defined benefit (DB) plans through collection of insurance premiums from employer plan sponsors, investment proceeds, and funds from the pension plans it takes over.

Failure Blamed on Administrator

IHI argued in its defense that its plan failure was the product of service provider CJA & Associates' administration of the plan, and remaining liability for delayed payments to participants should transfer to CJA.

IHI had earlier filed a motion to dismiss an August 2016 amended complaint by PBGC but the court denied it on May 15, 2017.

While being audited by PBGC in 2011, IHI submitted documentation showing that a total of only $228,884 was distributed to participants, far less than the $575,900 reported on a 2010 post-termination distribution certification form for the agency and less than the aggregate value of the cash surrender checks that IHI's pension insurer issued in March 2009. The plan was small, with fewer than 100 participants at the time of its termination.

During the audit, PBGC determined that, contrary to the information reported, two participants received no distribution, 13 received their payments between April 14, 2011, and May 5, 2011, two participants received their distributions on April 27, 2009, and one participant received her benefit on March 1, 2010. The court decision said IHI still has not made any of the additional benefit payments to plan participants.

In her ruling, U.S. Magistrate Judge Candy Dale found that IHI's argument that underlying improper plan administration and termination by its service provider made CJA liable for the additional benefits due was "appealing [but] unpersuasive" for several reasons.

First, the judge wrote, IHI conflated ERISA liability with liability for breach of fiduciary duties, breach of contract, and negligence. "While IHI's claims against CJA may be based upon the alleged improper administration of the Plan, the claims are neither legally dependent upon nor derivative of the claims in the original suit," she said in the ruling.

It is insufficient for the third-party claim to be is a related claim—the claim must be derivatively based on the original plaintiff’s claim, the judge ruled.

She also cited prior case law involving Federal Rule of Civil Procedure 14 claims that states: "The mere fact that the alleged third-party claim arises from the same transaction or set of facts as the original claim is not enough." She said the crucial characteristic of a Rule 14 claim is that the defendant is attempting to transfer to the third-party defendant the liability asserted against him by the original plaintiff.

PBGC's Argument

PBGC had asserted that IHI's claims against CJA were not derivative of the underlying actions between PBGC and IHI.

The plan sponsor also said that, if the court denied its motion to transfer liability to CJA, it likely would file for bankruptcy, which is not in its plan participants' best interest. The judge dismissed this argument because ERISA concerns itself with proper plan administration and terminations that serve and protect participants and beneficiaries.

"The principal statutory duties imposed on plan trustees relate to the proper management, administration and investment of fund assets, the maintenance of proper records, the disclosure of specified information, and the avoidance of conflicts of interest. IHI's financial health, which exists independent of the Plan and its administration, is therefore not ERISA's concern," she wrote.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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