The case of Perez v. Bruister, Nos. 14-60811 and 14-60816 (5th Cir. 2016), raises numerous issues involving the sales of closely-held stock from a corporation’s owner to its tax-preferred Employee Stock Ownership Plan. The dispute is whether individual defendants breached fiduciary duties under ERISA when allegedly acting as trustees for an Employee Stock Ownership Trust (“ESOT”) that purchased company stock from the owner for an Employee Stock Ownership Plan (“ESOP”). The plaintiffs claim that the defendants-when acting as trustees- paid too much for the stock.  There are also numerous valuation and remedies issues, over which the parties have fought bitterly.

Upon reviewing the case, the Fifth Circuit Court of Appeals (the “Court”) said that it largely affirmed the district court’s thorough and conscientious opinion under a clearly erroneous standard of review, but also clarified some of the legal issues surrounding leveraged ESOP sales presented by this case. Here is a summary of what the Court held:

–The owner, Bruister, who sold stock to the ESOP, was a fiduciary of the ESOP. Even though he abstained from voting on the sales, he undertook enough activity with respect to the ESOP, e.g., hiring and firing the appraiser and participating in related meetings, so that he exercised authority and control respecting management or disposition of ESOP assets for purposes of the ERISA definition of a fiduciary in section 3(21)(A)(i) of ERISA.

In Central States, Southeast and Southwest Areas Pension Fund v. Bulk Transport Corp., Docket Nos. 15-3208 and 15-3346 (7th Cir. 2016), the plaintiff, Central States, Southeast and Southwest Areas Pension Fund (the “Fund”), is a multiemployer pension plan. The defendant, Bulk Transport Corp. (“Bulk”), is an employer and a member of the Fund, and has made contributions to the pension account in the Fund of Terry Loniewski (“Loniewski”), one of its employees. Bulk had certified that Loniewski was entitled by a collective bargaining agreement between Bulk and a Teamsters local to participate in the Fund, even though the agreement was limited by its terms to the drivers that Bulk employed and Loniewski was a mechanic—he had never been a driver in the more than 40 years that he had worked for the company.

Although for decades Bulk had treated Loniewski as though he were covered under the company’s collective bargaining agreements, it now denies that he was covered and has demanded that Central States refund the $49,000 that Bulk had contributed to Loniewski’s pension account between 2002 and 2012. (The rules of the Fund limit refunds to money contributed to the Fund during the ten years preceding the refund request.) The Fund denied the request and filed this suit, in which it seeks a declaratory judgment that Bulk is not entitled to the refund. Bulk counterclaimed, arguing that it is entitled to the refund, because it contributed to Loniewski’s account by mistake. The district judge rejected Bulk’s counterclaim. He concluded that Bulk was at fault for the erroneous contributions, and could not believe that Bulk had employed Loniewski for more than 40 years as a mechanic, contributing to the Central States Pension Fund on his behalf, without knowing he’d never been a driver. Bulk appeals the rejection.

There was a further issue, as to what rules govern the arbitration proceedings to determine Bulk’s withdrawal liability. ERISA imposes such liability on employers who withdraw, partially or completely, from an underfunded multiemployer pension fund. The Fund assessed Bulk with withdrawal liability of about $740,000 for the years 2010 through 2012, and Bulk contends that the amount is excessive. The issue of Bulk’s obligation to contribute to Loniewski’s pension account bears on (though it is distinct from) the issue of withdrawal liability because if Bulk was never obligated to make those contributions, it follows that it withdrew from the Fund completely in 2009, when the last member of the Teamsters local other than Loniewski retired, rather than in 2012, as the Fund contends. The consequence should Bulk prevail would be to reduce its withdrawal liability from $739,700 to $473,300.

In Employee Plans News, Issue No. 2016-5, April 4, 2016, the IRS cautions against the use of certain discriminatory plan designs. Here is what the IRS says:

Qualified retirement plans must ensure “the contributions or benefits provided under the plan do not discriminate in favor of highly compensated employees.” (Internal Revenue Code Section 401(a)(4)). A plan that meets statutory or regulatory checklists, but primarily or exclusively benefits highly compensated employees (HCEs) with little to no benefits for nonhighly compensated employees (NHCEs), may still discriminate and violate IRC Section 401(a)(4).

Discriminatory plan designs

The case of Youngblood v. Life Ins. Co. of North America, 2016 U.S. Dist. LEXIS 50081 (W.D. Ky 2016), came before the District Court (the “Court”) upon the motion to transfer venue filed by defendant Life Insurance Company of North America (“LINA”).

The case arises out of the claim of plaintiff Janice Youngblood (“Youngblood”), under ERISA, for long-term disability benefits from a policy issued and administered by LINA. Youngblood is a resident of Winfield, Alabama, which is located in the Northern District of Alabama. Youngblood worked for Joy Global, Inc. (“Joy Global”), a company headquartered in Milwaukee, Wisconsin. However, Youngblood worked for a Joy Global office located in Alabama. In support of her claim, Youngblood submitted medical records from her doctors who are also located in Alabama. LINA is a Pennsylvania company with its principal place of business in Philadelphia. Youngblood filed this action in the Western District of Kentucky. LINA now moves to transfer this case to the Northern District of Alabama. Youngblood request that this case remain in Kentucky or, alternatively, be transferred to the Eastern District of Wisconsin.

In analyzing the case, the Court noted that the law (28 U.S.C. § 1404(a)) provides that, for the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought. The Court then concluded that (i) venue is proper in both the Northern District of Alabama and the Eastern District of Wisconsin and (ii) the interest of justice and convenience to parties and witnesses weigh in favor of a transfer to the Northern District of Alabama.

In Kresich v. Metropolitan Life Ins. Co., No. 15-cv-05801 (N.D. Cal. Apr. 4, 2016), plaintiff John Kresich (the “Plaintiff”) asserted a claim for intentional infliction of emotional distress (“IIED”) arising from Defendant Metropolitan Life Insurance Company’s (the “Defendant”) conduct during the processing of his claim for long-term disability benefits. Defendant moves for judgment on the pleadings, arguing that Plaintiff’s complaint is preempted under section 514(a) of ERISA. After reviewing the case, the District Court (the “Court”) denied Defendant’s motion.

As to ERISA preemption, the Court said that there are two pieces to ERISA’s preemption rule. First, ERISA preempts state laws that “relate to” an ERISA plan. 29 U.S.C. § 1144(a). Second, ERISA preemption bars state-law causes of action that fall within the scope of ERISA’s comprehensive scheme of civil remedies to enforce ERISA’s provisions, even if those causes of action would not necessarily be preempted by § 1144(a). In this case, Defendant’s motion is based on the second piece. It argues there can be no dispute that Plaintiff’s action is for the alleged improper processing of a claim for benefits under an insured employee benefit plan and that his IIED claim therefore springs from the handling and disposition of his claim.

However, the Court did not accept this argument. The Court noted that there is no allegation in Plaintiff’s complaint that his benefits have been granted or denied, and Plaintiff’s suit is not based on the processing of his claim. It said that courts have denied preemption where the common law or state law claims are too tangentially related to the administration of the employee benefits plans. To avoid preemption, the Court must determine whether Plaintiff’s IIED claim relies on a legal duty that arises independently of ERISA and that would exist whether or not an ERISA plan existed. Reviewing case-law precedent, the Court found that Plaintiff’s allegations involve harassing and oppressive conduct independent of the duties of administering an ERISA plan and are only tangentially related to the administration of the plan in question. Therefore, no preemption.

To continue my blogs of the two previous days, the VCP Submission Kit, according to the IRS, is for plan sponsors that maintain a pre-approved defined contribution plan but failed to adopt a new plan document by April 30, 2016, and are correcting the failure by adopting a pre-approved defined contribution retirement plan that reflects the provisions of the Pension Protection Act (the “PPA”). The discussion about the VCP Submission Kit is here.

Continuing yesterday’s blog, in Employee Plans News, Issue No. 2016-5, April 4, 2016, the IRS announces a new way to correct the failure to timely adopt a pre-approved plan. Here is what the IRS says:

Previously, the only way an employer could correct not signing a pre-approved defined contribution (DC) retirement plan by the deadline was to complete a submission under the Voluntary Correction Program (VCP) as outlined in 1 below.

A new option, 2 below, allows the financial institution or service provider that offers the plan document to request a closing agreement on behalf of all adopters who missed the deadline.

In Employee Plans News, Issue No. 2016-5, April 4, 2016, the IRS discusses deadlines pertaining to pre-approved retirement plans. Here is what the IRS says:

April 30, 2016, is the deadline for employers using pre-approved retirement plan documents to sign an updated version of their 401(k), profit-sharing or other defined contribution retirement plans.

April 30, 2017, is the extended deadline for any defined contribution pre-approved plan adopted on or after January 1, 2016, other than a plan that is adopted as a modification and restatement of a defined contribution pre-approved plan that had been maintained by the employer prior to January 1, 2016. This extension is to facilitate a plan sponsor’s ability to convert an existing individually designed plan into a current defined contribution pre-approved plan. See Notice 2016-3.

In Estate of Barton v. ADT, No. 13-56379 (9th Cir. 2016), Bruce Barton appeals from the district court’s judgment concluding that the ADT Security Services Pension Plan Administrator did not abuse its discretion in denying Barton’s request for pension benefits. In analyzing the case, the Ninth Circuit Court of Appeals (the “Court”) concluded that, since the district court did not have the benefit of the Court’s analysis regarding the burden of proof in a case such as this, the Court reversed the case and remand it for proceedings consistent with this opinion.

The Court said the following as to the burden of proof. A claimant may bear the burden of proving entitlement to ERISA benefits. This rule makes sense in cases where the claimant has better–or at least equal–access to the evidence needed to prove entitlement. But in other contexts, the defending entity solely controls the information that determines entitlement, leaving the claimant with no meaningful way to meet his burden of proof. This is one of those cases.

The district court had placed the burden of proof on Barton to establish that his various ADT-related employers participated in defendants’ Plan, and that he worked the requisite hours per year. There are two problems with this approach. First, defendants are in a far better position to ascertain whether an entity was a participating employer. It should not greatly burden an ERISA-compliant entity to determine what companies were authorized as “participating employers,” so the entity, not the claimant, should bear the risk of insufficient records. Second, a shift in the burden of proof follows naturally from ERISA’s disclosure requirements. One such requirement, ERISA section 104(b)(4), mandates supplying participants with certain plan information, such as the summary plan description, annual report, or other instruments under which the plan is established or operated. These disclosure requirements, and corresponding penalties for failure to disclose found in ERISA section 502(c)(1), function to ensure that an individual is duly informed of basic information relating to his pension plan.

In Kresich v. Metropolitan Life Ins. Co., No. 15-cv-05801 (N.D. Cal. Apr. 4, 2016), plaintiff John Kresich (the “Plaintiff”) asserted a claim for intentional infliction of emotional distress (“IIED”) arising from Defendant Metropolitan Life Insurance Company’s (the “Defendant”) conduct during the processing of his claim for long-term disability benefits. Defendant moves for judgment on the pleadings, arguing that Plaintiff’s complaint is preempted under section 514(a) of ERISA. After reviewing the case, the District Court (the “Court”) denied Defendant’s motion.

As to ERISA preemption, the Court said that there are two pieces to ERISA’s preemption rule. First, ERISA preempts state laws that “relate to” an ERISA plan. 29 U.S.C. § 1144(a). Second, ERISA preemption bars state-law causes of action that fall within the scope of ERISA’s comprehensive scheme of civil remedies to enforce ERISA’s provisions, even if those causes of action would not necessarily be preempted by § 1144(a). In this case, Defendant’s motion is based on the second piece. It argues there can be no dispute that Plaintiff’s action is for the alleged improper processing of a claim for benefits under an insured employee benefit plan and that his IIED claim therefore springs from the handling and disposition of his claim.

However, the Court does not accept this argument. The Court noted that there is no allegation in Plaintiff’s complaint that his benefits have been granted or denied, and Plaintiff’s suit is not based on the processing of his claim. It said that courts have denied preemption where the common law or state law claims are too tangentially related to the administration of the employee benefits plans. To avoid preemption, the Court must determine whether Plaintiff’s IIED claim relies on a legal duty that arises independently of ERISA and that would exist whether or not an ERISA plan existed. Reviewing case-law precent, the Court found that Plaintiff’s allegations involve harassing and oppressive conduct independent of the duties of administering an ERISA plan and are only tangentially related to the administration of the plan in question. Therefore, no preemption.