Court Agrees With Participants and DOL Regarding Pre-Suit Demand Under ERISA
Key Holding: Breach-of-fiduciary-duty claims under ERISA Sections 502(a)(2) and (a)(3) do not require pre-suit demand or joinder of parties.
A pension plan participant’s breach-of-fiduciary-duty claims under the Employee Retirement Income Security Act should not have been dismissed for lack of pre-suit demand and joinder of trustees as parties, the U.S. Court of Appeals for the Third Circuit held April 16 (Santomenno v. John Hancock Life Insurance Co., 3d Cir., No. 11-2520, 4/16/12).
Writing for the court, Judge Thomas I. Vanaskie determined that ERISA Section 502(a) does not require participants in Section 401(k) plans to make a pre-suit demand on plan trustees prior to bringing derivative claims on behalf of the plan under 502(a). The court also concluded that ERISA Section 502(a) did not require joinder of the plan trustees as parties.
Arnold C. Lakind of Szaferman Lakind Blumstein & Blader in Lawrenceville, N.J., who argued on behalf of the participants, told BNA April 16 that the court’s outcome on the ERISA claims was “just the right decision” and would have been a “pretty serious departure” if the Third Circuit had not vacated the district court decision. Lakind said he was also “pretty confident” after the Labor Department filed an amicus brief arguing against the district court’s demand requirement (201 PBD, 10/18/11; 38 BPR 1975, 10/25/11).
The U.S. District Court for the District of New Jersey found that ERISA Section 502(a) required both pre-suit demand upon the trustees and joinder of the trustees after concluding that Section 502(a) claims are akin to Section 502(g) claims. The district court, relying on U.S. Court of Appeals for the Second Circuit precedent, determined that ERISA Section 502(g) required pre-suit demand and joinder before a participant may bring a derivative claim.
No Preconditions Under ERISA Section 502(a)(2), (a)(3)
The plaintiffs were participants and beneficiaries of employer-sponsored 401(k) benefit plans operated by John Hancock Life Insurance Co. (U.S.A.). John Hancock offered employers several investment options, generally drawn from three John Hancock trusts, and employers selected a subset of the funds. Plan participants could then direct money into their own subaccounts and the money was allocated into particular funds.
John Hancock charged fees to plan sponsors and participants for their investments in the subaccounts. Other John Hancock entities provided investment advice and made distributions to participants and beneficiaries from the John Hancock trusts’ individual funds or portfolios.
The participants invested assets in the John Hancock trusts and alleged that the John Hancock companies charged excessive fees for their services and wrongfully received revenue-sharing payments from the participant’s investments into subaccounts.
The participants sued John Hancock for breach of fiduciary duty. John Hancock filed a motion to dismiss, arguing that the participants were required to make a demand on the plans’ trustees before bringing their derivative claims, which they failed to do (101 PBD, 5/25/11; 38 BPR 1057, 6/7/11).
In reviewing the district court’s conclusion, the appeals court held that ERISA Sections 502(a)(2) and (a)(3) do not require joinder of trustees and that no court of appeals had found a pre-suit demand requirement for civil actions under those sections. ERISA Sections 502(a)(2) and (a)(3) require “no preconditions on a participant or beneficiary’s right to bring a civil action to remedy a fiduciary breach,” the court said.
The appeals court examined the district court’s reliance on Diduck v. Kaszycki & Sons Contractors, Inc., 874 F.2d 912 [10 EBC 2673] (2d Cir. 1989), which held that pre-suit demand upon trustees and joinder of the trustees as parties were prerequisites to the participants’ claims under ERISA Section 502(g)(2). The district court determined that claims under ERISA Section 502(g) were akin to claims under Section 502(a), and therefore the participants’ claims against John Hancock were precluded because they failed to make a pre-suit demand on the trustees or join the trustees as parties to the suit.
The appeals court concluded that the district court’s reliance on Diduckwas “misplaced, as [ERISA Sections 502(a)(2) and (a)(3)] unambiguously allows for beneficiaries or participants to bring suits against fiduciaries without pre-suit demand or joinder or trustees.” Furthermore, “the Second Circuit itself has explained that its holding in Diduck is limited to claims brought under [ERISA] Section 502(g)(2),” the appeals court said.
According to the appeals court, “the language of the statute, the legislative history, and the structure of this remedial legislation compel the conclusion that neither a pre-suit demand requirement nor joinder of the plan trustees is a prerequisite to Participants’ claims.”
The appeals court affirmed the district court’s judgment on the participants’ claims under the Investment Company Act.
The decision was joined by Judge Dolores K. Sloviter and Senior Judge Louis H. Pollak, sitting by designation from the U.S. District Court for the Eastern District of Pennsylvania.
The participants were represented by Arnold C. Lakind and Robert L. Lakind of Szaferman Lakind Blumstein & Blader, Lawrenceville, N.J. John Hancock was represented by James O. Fleckner, Alison V. Douglass, and Daniel P. Condon of Goodwin Procter, Boston, and Brian J. McMahon of Gibbons, Newark, N.J.
The full text of the opinion is at https://about.bloomberg.com/blaw2/files/2013/01/Santomenno_16Apr2012.pdf
By Matthew R. Madara