ERISA-Tenth Circuit Holds That The Plan Fiduciary Is Not Liable For The Employer’s Failure To Adequately Fund A Medical Benefits Plan

The case: In Holdeman v. Devine, No. 07-4235 (10th Cir. 2009), the Court ruled that the plan fiduciary was not liable for the employer’s failure to adequately fund its self-funded medical benefits plan.

In this case, the plaintiff was the representative of a class of employees and their dependents who were participants in a self-funded medical benefits plan, known as the State Line & Silver Smith Casino Resorts Employee Benefits Plan (“the Plan”). The Plan was sponsored and funded by State Line Hotel, Inc. and its related entities (“State Line”). The plaintiff and his class members were left with significant outstanding medical bills when State Line failed properly to fund the Plan, and then terminated the Plan and filed for bankruptcy. The plaintiff sued Michael Devine, in his capacity as the Plan’s fiduciary, for violations of ERISA alleging that Devine had failed to assure that the Plan was sufficiently funded to pay all submitted medical claims. Devine was the Plan’s trustee and plan administrator, and thus the Plan’s fiduciary. He was also an officer, and eventually the Chief Executive Officer, of State Line.

In analyzing the case, the Court stated that it was reviewing the district court’s factual findings for clear error and its legal conclusions de novo. The Court noted that, under the liability-creating provision of Section 409 of ERISA, any individual who is a fiduciary with respect to a plan, and who breaches any of his fiduciary duties to that plan, is liable for any losses resulting from that breach. Section 502(a)(2) of ERISA provides that beneficiaries of the plan may bring a private cause of action against a fiduciary to enforce Section 409. To prevail on this claim, however, there must be a showing of some causal link between the alleged breach and the loss the beneficiaries seek to recover.

The Court continued by noting that, under ERISA, a fiduciary has a duty to collect all funds to which the plan is entitled, so those funds can be used on behalf of plan participants and beneficiaries . In this case, however, the plaintiff cannot prevail. Even assuming that Devine breached his duty to collect all funds, the plaintiff has failed to establish that the district court’s factual finding on cause of loss is clearly erroneous. The district court had found that it was more likely than not that Devine’s breach of his collection duty did not cause the under-funding of the Plan and consequently the Plan’s inability to pay participants’ medical bills. The district court indicated that State Line had serious financial problems, for example, it needed any available funds to pay its creditors or face being shut down or other adverse consequences. Even if Devine, as trustee of the Plan, had pursued aggressive tactics to make State Line fund the Plan, such as, for example, threatening to sue State Line for its outstanding obligations to the Plan, it was highly unlikely that the Plan would have been able to receive additional funding from State Line. Thus, it was State Line’s poor financial condition, not anything Devine did or failed to do, that caused the loss in the form of unpaid medical bills. Without a causal link between Devine’s breach and the losses claimed by the plaintiff, Devine has no liability as plan fiduciary.

Note to Employers: The plan fiduciary may have escaped liability here, but that was due to the employer’s precarious financial situation. This case serves as a reminder that at least one plan fiduciary has responsibility, under ERISA, to collect delinquent contributions and to otherwise make sure that a plan receives the funds to which it is entitled.

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