Trust Law Meets Statutory Interpretation
posted by Anita Krishnakumar
For my final guest post, I want to talk about a case argued before the Supreme Court on Monday (November 26): LaRue v. DeWolff, Boberg, & Assoc. The case involves the appropriate interpretation of ERISA provisions governing individual pension plan participants’ right to sue the fiduciaries who administer their plans. While the subject might bore the average lawyer, as one who teaches courses both on statutory interpretation and on trusts, I find it intriguing. So, here goes: LaRue is a participant in an ERISA-covered Section 401(k) pension plan that is sponsored by his employer, DeWolff. DeWolff administers the plan and so qualifies as an ERISA fiduciary. Under the plan, participants may choose among several investment options and may direct DeWolff, as plan administrator, to invest the amounts allocated to their individual accounts in specified percentages. LaRue claims that DeWolff breached its fiduciary duties to him by failing to follow his investment allocation instructions, resulting in a loss of approximately $150,000.
Enter ERISA Sections 502(a)(2) & (a)(3), 29 U.S.C. 1132(a)(2) & (a)(3), under which LaRue seeks to have the plan reimbursed for that alleged $150,000 loss (after which the plan would allocate the funds to his individual account). ERISA Section 502(a)(2) authorizes a participant and others to sue a fiduciary (like DeWolff) to recover “losses to the plan” resulting from a breach of fiduciary duty. Section 502(a)(3) is a catch-all provision that authorizes a plan participant and others to sue for, among other things, “appropriate equitable relief . . . to redress” “any act or practice which violates” ERISA.
The issues thus become: (1) Does Section (a)(2) authorize a plan participant to sue for recovery that would inure to his individual account rather than to the benefit of the plan as a whole?; and (2) Does LaRue’s claim to recover the alleged $150,000 loss constitute a claim for equitable relief (as opposed to a legal claim for compensatory damages), as required under (a)(3)?
The Fourth Circuit answered both of these questions in the negative. LaRue, joined by the United States (whose views were solicited by the Supreme Court), argues that both of these questions should be answered in the affirmative, hanging his hat primarily on purpose-based arguments. The amicus brief filed by the United States likewise focuses primarily on purpose-based arguments: To wit, ERISA’s express statement that it is designed “to protect . . . participants . . . and their beneficiaries” by establishing standards of conduct for fiduciaries and “providing . . . appropriate remedies . . . and ready access to the Federal courts” to enforce those standards. (Emphasis added). Both LaRue and the United States emphasized this purpose during oral argument, maintaining that given its aim to empower plan participants to enforce their rights against plan fiduciaries, Congress could not have intended to deprive individual plan participants of the right to sue under Section 502(a)(2). Notably, although they did not speak in terms of statutory purpose, the Justices — particularly Justices Ginsburg, Souter, Breyer, and Stevens — seemed sympathetic to this idea that the statute must provide some remedy for individual investors whose instructions are ignored by a plan fiduciary.
But perhaps the most interesting aspect of this case to me is a canon, and an aspect of trust law, upon which no one seems to have focused enough attention. That canon is the reference, or extrinsic source, canon that authorizes courts to look to the common law of trusts to fill in gaps and give meaning to ambiguous ERISA provisions. The idea behind the common law reference canon is that Congress legislates against the backdrop of the common law and is presumed to incorporate accepted common law principles into the legislation it enacts, so that common law understandings are an acceptable extrinsic reference for courts to consult when construing statutes. This is particularly true where, as here, ERISA explicitly acknowledges that its fiduciary duties are derived from the common law of trusts. LaRue and the United States (and some amici) do invoke the common law of trusts to an extent — as part of their argument that the catch-all provision in Section 502(a)(3) permits claims of the kind LaRue is making. (They argue that if equitable relief would have been available at common law against a trustee who failed to follow a beneficiary’s investment instructions, then a 502(a)(3) “equitable” claim should be available here against an ERISA fiduciary who committed the same breach.)
But it seems to me that the parties are missing a broader common-law-based argument, one that supports LaRue’s right to sue under both Section 502(a)(3) and Section 502(a)(2): One of the foundational principles of the common law of trusts, at least in the modern era in which trustees are given wide discretion to manage trusts comprised mostly of financial instruments, is that the trust system would fall apart —i.e., that trustees would be free, at best, to slack off and, at worst, to steal from beneficiaries with impunity— unless an adequate mechanism existed through which beneficiaries could punish trustees for misconduct. Thus much of modern trust law is designed to ensure that beneficiaries have the ability to haul trustees into court and hold them personally liable if they violate their fiduciary duties. It is for this reason that trust law requires trustees to provide annual accountings to beneficiaries and that certain limits are placed on who can be named a trust beneficiary (pets, for example, cannot be valid beneficiaries because they cannot sue a trustee for fiduciary breach — though in some states, this rule can be bypassed by designating a human caretaker for the pet). In other words, LaRue’s purpose-based argument could be strengthened by not only referencing ERISA’s express purpose to protect plan participants, but also reminding the Court of trust law’s fundamental obsession with ensuring that beneficiaries have the power to haul trustees into court to redress fiduciary breaches (and of the common law notion that the very viability of the trust system depends on this after-the-fact power). In this light, construing ERISA to strip individual plan participants of the power to bring suit when the injury caused by the fiduciary affects only an individual account, rather than the plan as a whole, would run contrary to the common law backdrop against which Congress avowedly legislated when it enacted ERISA. (Note: Such a common-law-based argument, unlike statutory purpose arguments, would have had a greater likelihood of appealing to ardent textualists like Justice Scalia).
Not that LaRue is likely to lose without this additional common-law-based argument: My reading of the oral argument is that the Court will rule in his favor and interpret Section 502(a)(2) to allow individual plan participants to sue the plan fiduciary for breaches of the kind alleged (and then decline to reach the 502(a)(3) issue as “unripe” or “unnecessary”). It may even do so in a unanimous opinion. But I would have liked to see the argument made in those terms, and referenced at oral argument.
November 30, 2007 at 7:24 pm
Posted in: Supreme Court
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Responses (2)
Michael Risch - December 1, 2007 at 7:55 am
Interesting post. I know just about nothing about the law of trusts, so my question is more of a plain reading question of logic.
p has money in plan P. F’s breach of duty (seems to be assumed here) causes p to lose 150K. Thus, if p’ = p-150, then P’ =P – 150. In other words, loss to participant = loss to plan, and the fact that the breach here is allocated to only one account versus a more general breach that would be allocated to all accounts (or maybe just some of them, who happen to hold stock X or bond Y) is beside the point.
Am I missing the boat here? It seems like even the plain language folks would have to grant relief.
Anita Krishnakumar - December 4, 2007 at 3:13 pm
That certainly is a fair reading; I’d agree with you, and yours is the reading for which the United States as amicus and LaRue as Petitioner pressed. But there has been disagreement on this point, and the Fourth Circuit ruled that a loss of that kind to an individual account did not constitute a loss to the plan.
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