High Court Ponders Scope of Fiduciary Breach Suits

The case, James LaRue v. DeWolff, Boberg & Associates Inc., et al., turns on whether a participant can sue under the Employee Retirement Income Security Act (ERISA) to recover losses of their own rather than to recover planwide damages, according to a Law.Com news report.

James LaRue sued his employer, DeWolff, Boberg & Associates Inc., to regain $150,000 that he charged was lost from his 401(k) account because the plan administrators twice disregarded his order to move funds to different investment options.

U.S. District Judge David C. Norton of the U.S. District Court for the District of South Carolina ruled against LaRue in 2005 and the 4th U.S. Circuit Court of Appeals agreed in June 2006 (See U.S. Supreme Court Agrees to Hear Key 401(k) Fiduciary Breach Case).

Plain Meaning

During Monday’s Supreme Court arguments, LaRue attorney Peter K. Stris, asserted that the plain meaning of the statutory language providing that “any losses to the plan” caused by fiduciary breach are recoverable “includes any diminution in value of defined contribution plan assets, regardless of the number of participants ultimately affected,” according to the Law.com report.

Justice Antonin Scalia demanded to know from Stris why LaRue did not first try to get his money back from the plan as a whole rather than focusing his legal fight on a fiduciary. “[O]nly that manner of proceeding preserves the structure of … the legislation which is that you’re supposed to first apply to the plan and exhaust your remedies there before you come into court,” Scalia said, according to the Law.com report.

In response, Stris labeled the administrative exhaustion requirement a “judicial gloss on the statute” instead of part of the statute’s plain meaning.

Attorney for the employer, Thomas P. Gies, insisted in his presentation the term “losses to the plan” connotes a collective loss. “[W]e think it’s unlikely that Congress intended every one of these he said/she said cases to give rise to a cause of action for damages. There would be no end to the kinds of claims that one could imagine,” Gies said, according to the news report.

A Hypothetical Question

Justice Stephen Breyer posed a hypothetical question to Gies: Say a trustee of a plan with a thousand members invests in a thousand diamonds and puts them in a bank deposit vault, Breyer said.

“One day he takes … 500 diamonds and runs off to Martinique. We catch him enjoying the sun,” Breyer said. That would result in a valid claim under the statute, but what if “everything is the same except each of the thousand diamonds was put in [an] individual safe deposit box with the participant’s name on it. Everything else is the same. Why should it matter?” Breyer asked, according to the news report.

Justice Ruth Bader Ginsburg quizzed Gies how many plan participants would have to be affected by a loss to support a fiduciary claim “You said it has to be more than one. How do we get that number between more than one and less than everybody?” she wondered.

Gies said the breach alleged would have to be “something systemic, something that affects the interests of the plan as a whole.”

According to the news report, Scalia told Gies: “You say at some ineffable point it becomes a loss to the plan. I can’t understand how your system works. You’re telling me it depends on how big the diamond is and — and what kind of a breach it was. How can we write an opinion like that?” Scalia asked him.

“I’m fortunate to have that not as my job, Justice Scalia,” Gies responded.

The district court ruling is here. The 4th Circuit ruling is here.