In Guyan International, Inc. v. Pritchard Mining Company, Inc., No. 11-3126/3640 (6th Cir. 2012), the plaintiffs each established and administered an employee benefit plan (each a “Plan”; collectively, the “Plans”) that provided health benefits for their employees. The plaintiffs hired Professional Benefits Administrator (“PBA”) as a claims administrator to pay medical providers for claims incurred under the Plans. Although PBA was contractually obligated-by agreement with the plaintiffs (the “Agreement”)-to use the funds it received from the plaintiffs solely to pay these claims, PBA instead used the funds for its own purposes, causing hundreds of thousands of dollars of medical claims to go unpaid. The plaintiffs sued PBA for, among other things, breaching its fiduciary duties under ERISA. The district court granted summary judgment to the plaintiffs on this issue and awarded damages to the plaintiffs on behalf of the Plans, in the amount of the unpaid medical claims (e.g., plaintiff Permco was awarded $501,380.75 on behalf of its Plan). PBA appealed.
In analyzing the case, the Court said that the first issue is whether PBA was a fiduciary under ERISA when it managed or disposed of plan assets. ERISA provides, in pertinent part, that a person is a fiduciary with respect to a plan to the extent he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets (29 U.S.C. § 1002(21)(A)). As such, the Court concluded that PBA was a fiduciary under ERISA because it exercised authority or control over Plan assets. PBA had the authority under the Agreement to write checks on the Plan accounts and exercised that authority. Moreover, PBA had control over where Plan funds were deposited and how and when they were disbursed. PBA commingled Plan assets by depositing these funds into its general account rather than into the Plaintiffs’ separate accounts as the Agreement required. And then PBA used these Plan funds for its own purposes, again contrary to the dictates of the Agreement. The fact that PBA used Plan funds in ways contrary to how it had agreed to use them demonstrates that PBA had practical control over Plan funds once it received them from the plaintiffs.
Having determined that PBA was a fiduciary under ERISA, the Court then concluded that PBA breached its fiduciary duty. ERISA requires fiduciaries to act solely in the interest of the Plan participants and beneficiaries, and prohibits a fiduciary from dealing with the assets of the Plans in his own interest or for his own account. (29 U.S.C. §§ 1104(a)(1) and1106(b)(1). The Court ruled that PBA blatantly violated these statutory requirements by using Plan assets for its own purposes-a classic case of self-dealing- and causing hundreds of thousands of dollars of claims to be unpaid. As a result, the Court upheld the district court’s award of damages in the amount of the unpaid medical claims.