Lightening strikes twice! For the second day in a row, Judge Richard Posner writes a decision affirming a judgment for an ERISA participant, and this time remands the plaintiff back for more relief on her cross-appeal. (And look for my editorial at the end of the post.)
Leister v. Dovetail, Inc., No. 07-2242 (7th Cir. Oct. 23, 2008): The opinion lays out the facts tidily enough. The defendants are Dovetail and its two co-owners, who hired Sandra Leister to work for them:
“[T]he terms of employment included Dovetail’s agreeing to deposit a specified portion of her salary in a 401(k) retirement account and to match a specified portion of these elective deferrals of compensation with its own contributions. The defendants complied with the agreement only for the first year of Leister’s employment. After that they diverted corporate receipts that should have been contributed to her 401(k) account to their own pockets. They also failed, despite her repeated requests, to provide her with copies of the documents that defined her rights with regard to the retirement account.”
The plaintiff brought claims for refusal to supply requested information (ERISA § 502(a)(1)(A)), denial of benefits (ERISA § 502(a)(1)(B)), breach of fiduciary duties (ERISA § 502(a)(2)), and a supplemental Illinois law claim for unpaid wages (not discussed further here).
At a bench trial, the district court awarded plaintiff, jointly against all defendants,
“$82,741 for the defendants’ failure to make the required deposits in her 401(k) account – a failure that the judge deemed a willful breach of the defendants’ fiduciary duties, 29 U.S.C. § 1104-but [the judge] refused, because of their precarious financial condition, to award her any statutory penalty for their failure to give her copies of the retirement-plan documents. At $110 a day, the maximum statutory penalty, 29 U.S.C. § 1132(c)(1); 29 C.F.R. § 2575.502c-1, Leister would be entitled to receive at least $200,000 in statutory penalties and maybe much more, because while the defendants have finally given her some of the plan documents they have not given her all of them. Her cross-appeal seeks an award of statutory penalties but does not specify an amount.”
On appeal, Judge Posner characteristically wrestled with several vexing issues under ERISA, some actually related to the case at hand:
1. Competing limitations periods: While ERISA provides for a six-year limitations period for breach of fiduciary duty claims (or three years, after actual knowledge), it borrows the state limitations period for plan-enforcement claims to unpaid benefits — by analogy, the period for enforcing a written contract (ten years in Illinois).
Had the entire relied on the fiduciary duty theory to make the award, the participant would possibly have been out of time. For the fiduciary-duty limitations period, the panel holds that each failure of the defendants to deposit matching funds for the participant would be barred by the three-year period if the plaintiff knew that they were repudiating the entire agreement. Otherwise, “if every default was pursuant to a fresh decision by the defendants not to comply with the agreement each such decision would be a fresh breach.”
The panel ultimately decided that the entire judgment could be affirmed on the claim not decided by the district court judge — denial of benefits — with a longer limitations period.
2. Equitable estoppel: The panel also veered into the question, presenting a split in the circuits (an undecided in the Seventh Circuit), about whether a participant may claim in a breach of fiduciary duty case that “the defendants lulled her into delaying her suit by promising to work things out. If so (the judge made no finding), the doctrine of equitable estoppel . . . would allow her to delay suing until the fog lifted.” It did not need to decide the question because it affirmed on the alternative plan-enforcement ground.
3. Absence of a written plan instrument: The panel was also vexed by the absence of a full, written plan instrument, but found that a fragmentary “Plan Adoption Agreement” (between the employer and the bank that managed parts of the plan) was enough of a toehold to constitute a writing.
4. Proper defendant for denial of benefits: It also struggled with the problem that Leister neglected to sue the plan itself, only the employer and its owners. The circuits are split over whether the plan must be named, but the panel holds that “in cases such as this, in which the plan has never been unambiguously identified as a distinct entity, we have permitted the plaintiff to name as defendant whatever entity or entities, individual or corporate, control the plan.”
5. Valuation: Yet another split in the circuits concerns how courts should value the return that the plan assets ought to have realized had they had been timely deposited. Should the participant get the benefit of the maximum return possible over that period, or just the average performance of such investments? The panel suggests the latter measure: “There was money in Leister’s 401(k) account, and assuming that if there had been more in it she would have continued to allocate her investments as she had in the past, the return on the existing investment would have been the appropriate benchmark.” But because the defendant waived the issue below, the panel did not decide it.
The Seventh Circuit also agrees that tax benefits to the participant should have been considered, and remands the claim for recalculation: “the tax benefits from investing in a 401(k) plan should be considered in deciding what value the unpaid contributions would have had if they had been paid as they should have been.”
6. Court’s discretion to waive statutory penalties for failure to supply information: The district court awarded no penalties, but the Seventh Circuit held that this was an abuse of discretion where the employer’s refusal to abide by the law was both in bad faith and prejudicial to the participant.
EDITORIAL: This is twice in two days where the Seventh Circuit found, against a district court’s findings, that the defendants denied participants’ ERISA rights in bad faith (or, at least, not in good faith). There are times — as these cases show — where the employer is bent on defeating the participants’ rights, and it costs them little under ERISA if all they are required to do is pay the benefits back. There are proposals afoot to put punitive damages (and other legal remedies) into ERISA. At the very least, I think that the statutory penalty model applied here deserves a second look, as it shifts the risks onto the plan administrators to do their job. Plans should be insulated from penalties for good-faith errors, but clear-cut cases like this ought to hurt a little more. And then, after the penalties are awarded against the plan, the plan (or its participants) can sue to recover the penalties directly from the fiduciaries who committed the malfeasance.