Thole v. U.S. Bank, N.A.

Issues 

Does a defined-benefit pension plan participant have standing to seek injunctive relief or restoration of plan losses without demonstrating any personal financial loss?

Oral argument: 

In this case, the Supreme Court will decide whether ERISA plan participants have standing to sue for breaches of fiduciary duty where the underlying employee benefit plan is overfunded. Thole and Smith argue that they have standing under 29 U.S.C. § 1132(a)(2)–(3) and the common law of trusts because neither conditions standing on a showing of individual financial loss. U.S. Bank counters that Thole and Smith have not suffered an injury sufficient to support standing because their retirement benefits were never actually at risk and they have no interest in a plan’s overfunded surplus. The outcome of this case will determine the circumstances in which certain plan participants may enforce ERISA violations.

Questions as Framed for the Court by the Parties 

(1) Whether an ERISA plan participant or beneficiary may seek injunctive relief against fiduciary misconduct under 29 U.S.C. § 1132(a)(3) without demonstrating individual financial loss or the imminent risk thereof; (2) whether an ERISA plan participant or beneficiary may seek restoration of plan losses caused by fiduciary breach under 29 U.S.C. § 1132(a)(2) without demonstrating individual financial loss or the imminent risk thereof; and (3) whether petitioners have demonstrated Article III standing.

Facts 

James Thole and Sherry Smith are retirees of U.S. Bank, N.A. (“U.S. Bank”) and participants in its defined benefit pension plan (the “Plan”). Thole v. U.S. Bank, Nat’l Ass’n at 621–22. In 2013, Thole and Smith brought a class action in the United States District Court for the District of Minnesota (the “District Court”) against U.S. Bank and some of its directors, alleging that they had mismanaged the Plan. Id. at 621, 623. Specifically, Thole and Smith claimed that U.S. Bank violated multiple Employee Retirement Income Security Act of 1974 (“ERISA”) provisions by breaching its fiduciary duties and improperly investing Plan assets in mutual funds managed by a subsidiary, FAF Advisors, Inc. (“FAF”). Id. at 624. Thole and Smith argued that these violations caused the Plan to suffer significant losses, leaving it underfunded from 2008 through the commencement of the suit in 2013. Id. at 621, 624. Thole and Smith sought several forms of relief, including (1) having U.S. Bank restore to the Plan any losses caused by its alleged breach of its fiduciary duties pursuant to 29 U.S.C. § 1132(a)(2), and (2) “any injunctive relief that the Court deems appropriate” pursuant to 29 U.S.C. § 1132(a)(3). Id. at 621, 629.

In 2014, while litigation was ongoing, the Plan became overfunded. Id. at 622. In other words, the Plan’s position improved such that it had more money than it needed to meet its obligations. Id. U.S. Bank accordingly sought to dismiss the suit, claiming that Thole and Smith had no standing to sue because they did not suffer any financial loss that could support a claim for damages. Id. The District Court agreed to dismiss the suit, not for plaintiffs’ lack of standing, but because the lawsuit was now moot as a result of the Plan being overfunded. Id.

Thole and Smith appealed to the United States Court of Appeals for the Eighth Circuit (the “Eighth Circuit”). Id. at 622. On appeal, Thole and Smith claimed that the District Court confused the doctrine of mootness with the related Article III doctrine of standing, under which a party may bring a lawsuit only if he or she has suffered a cognizable “injury-in-fact.” See id. at 626–27. Thole and Smith argued that such an injury existed when they commenced the suit in 2013 due to the Plan’s then underfunded status. Id. at 626. As such, Thole and Smith contended, they did not need to demonstrate Article III standing again in 2014. See id. The Eighth Circuit disagreed, explaining that more than traditional Article III standing concerns apply here. Id. at 628. The court reasoned that because Section 1123(a)(2) authorizes only a specific “class of plaintiffs” to sue for breaches of fiduciary duties, Section 1123(a)(2) represents a sort of “statutory standing” requirement distinct from Article III standing. Id. The Eighth Circuit stated that where a defined benefit plan is overfunded, as it is here, plan participants are not within the class of plaintiffs authorized to bring suit under Section 1123(a)(2). Id. According to the Eighth Circuit, participants in an overfunded plan do not suffer an “actual injury” when the plan’s investment losses erode only its overfunded surplus. Id. at 630. As such, the Eighth Circuit concluded that the District Court properly dismissed the suit with respect to any relief sought under Section 1123(a)(2). Id. at 628.

The Eighth Circuit also affirmed dismissal for any injunctive relief sought under Section 1123(a)(3). Id. Reasoning similarly, the court explained that Section 1123(a)(3) likewise endows only certain plaintiffs, those who can show “actual or imminent injury to the Plan itself,” with standing to sue for injunctive relief. Id. at 630. Because the Plan was now overfunded, the court concluded that no actual or imminent injury was present. Id. The Eighth Circuit therefore affirmed the dismissal, even though the District Court dismissed for mootness and not standing. Id. at 622, 628.

Analysis 

NATURE OF PETITIONERS’ INJURY

Petitioners Thole and Smith assert that they have suffered an injury sufficient to confer Article III standing. Brief for Petitioners, James J. Thole and Sherry Smith at 20. According to Thole and Smith, ERISA requires employee benefit plan fiduciaries to “discharge their duties in the interest of the [plan] participants.” Id. Any breach of these duties, Thole and Smith continue, harms a plan participant’s “substantive rights” which supports standing to sue. Id. Thole and Smith also point to the common law of trusts, which they contend defines the scope of fiduciary duties under ERISA. Id. at 21. As such, Thole and Smith argue that ERISA fiduciaries owe plan participants, who are analogous to trust beneficiaries, the traditional duties of loyalty and prudent investment. Id. And like trust beneficiaries, Thole and Smith go on, plan participants hold equitable title to the managed property. Id. at 23–24. Thole and Smith therefore conclude that any breach of fiduciary duties results in “concrete” harm to a plan’s participants, who have a personal interest in redressing any breach. Id. at 23. Whether a plan is overfunded is irrelevant, Thole and Smith assert, because plan participants hold an equitable interest in plan assets regardless; a breach of fiduciary duties still gives rise to a concrete injury. Id. at 25–28.

Respondent U.S. Bank counters that Thole and Smith lack Article III standing because they have not suffered the required “injury-in-fact” necessary to support standing. Brief for Respondents, U.S. Bank, N.A., et al. at 18. U.S. Bank explains that an injury-in-fact must be “concrete and particularized,” meaning that the injury must “actually exist” and “affect the plaintiff in a personal and individual way.” Id. at 19–20. U.S. Bank claims that Thole and Smith never suffered a concrete injury because U.S. Bank’s ability to deliver Plan benefits on time was never in question, even when the Plan was underfunded. Id. at 21. U.S. Bank furthermore argues that, even if the Plan’s underfunded status was sufficient to create a “cognizable risk” that could support Article III standing, then that risk disappeared once the Plan became overfunded. Id. U.S. Bank also argues that Thole and Smith’s injury is not sufficiently particularized because their suit is not needed to ensure that they receive their retirement benefits. Id. According to U.S. Bank, merely suing to ensure ERISA compliance represents a “generalized” and “wholly abstract” concern. Id. U.S. Bank thus concludes that Thole and Smith have “no direct stake in the outcome” of the case because they will continue to receive their retirement benefits regardless of the case’s outcome. See id. at 22.

BREACH OF FIDUCIARY DUTIES

Thole and Smith assert that they have standing because the common law of trusts allows trust beneficiaries to bring suits for breaches of fiduciary duties without a beneficiary having to show an “individualized financial loss.” Brief for Petitioners at 28–29. For example, Thole and Smith explain, the common law has allowed beneficiaries to sue to restore trust losses that result from a fiduciary’s breach of the duty of loyalty. Id. at 29. Here, Thole and Smith claim that U.S. Bank violated its duty of loyalty by investing Plan assets in (1) only equity securities and (2) mutual funds managed by a U.S. Bank subsidiary, FAF Advisors (“FAF”). Id. Thole and Smith contend that this investment strategy enabled U.S. Bank to increase its profits, in part via additional management fees that FAF collected. Id. In this way, Thole and Smith argue that U.S. Bank inappropriately advanced its own interests over those of the Plan participants. Id. at 29–30.

Thole and Smith further argue that, when assessing a breach of fiduciary duty, the focus is on the financial loss to the trust itself and not the loss to the beneficiary. Id. at 31. Whether a beneficiary has suffered personal financial loss is irrelevant, Thole and Smith continue, because a beneficiary who sues for breach of fiduciary duty “sues as representative of the trust.” Id. at 33. Thole and Smith assert that requiring a personal financial loss to the beneficiary is incompatible with this representative capacity. Id. at 34. And in any case, Thole and Smith contend, the common law “no further inquiry” rule applies here to grant standing. Id. at 35. Under this rule, Thole and Smith explain, a trustee automatically breaches the duty of loyalty when the trustee engages in self-dealing. Id. Thole and Smith assert that this rule of strict liability shows that beneficiaries need not demonstrate personal financial loss in order to sue. Id. Thole and Smith point to extensive case law and other authorities for support, also arguing that these authorities provide for several forms of relief. Id. at 39­–41. According to Thole and Smith, a breaching fiduciary may be replaced, and any improper investments may be unwound. Id.

U.S. Bank responds that not every breach of fiduciary duty necessarily creates standing for a beneficiary to sue. Brief for Respondents at 22. According to U.S. Bank, only fiduciary breaches that harm a beneficiary’s “interest in the trust” are actionable. Id. at 24. While conceding that fiduciary breaches create standing in simple trusts where there is only one beneficiary, U.S. Bank contends that trusts with multiple beneficiaries must be considered differently. Id. at 25–26. For example, argues U.S. Bank, a remainder beneficiary’s interest in a trust will not be harmed if a trustee breaches its duty by failing to support a life beneficiary. Id. at 26. In that case, U.S. Bank continues, only the life beneficiary’s interest in the trust would have been harmed. Id. U.S. Bank implies that this reasoning extends here, because plan participants do not have an interest in the surplus of an overfunded plan. Id. at 42.

U.S. Bank also counters that Thole and Smith have misconstrued trust law. See id. at 32–33. According to U.S. Bank, trust law has historically granted trustees standing to sue to protect trust assets. Id. It does not follow, U.S. Bank contends, that beneficiaries also have a personal right to sue on behalf of the trust for every breach of fiduciary duty. Id. U.S. Bank similarly asserts that the “no further inquiry” rule does not excuse beneficiaries from having to demonstrate personal financial injury. Id. at 29–30. According to U.S. Bank, the rule merely indicates that certain breaches necessarily harm the trust itself; it is not always the case that such breaches also result in a “concrete harm” to the beneficiary. Id. U.S. Bank also asserts that, in any case, the common law of trusts does not overlap perfectly with ERISA. Id. at 34. In particular, U.S. Bank continues, ERISA contemplates the fiduciary relationship as running between only the fiduciary and the given employee benefit plan, not between the fiduciary and the plan participants. Id. at 34–35. For example, explains U.S. Bank, ERISA’s provisions frame fiduciary obligations as “duties with respect to a plan.” Id.

STATUTORY STANDING

Thole and Smith argue that Congress explicitly provided for ERISA plan participants to have standing here. Brief for Petitioners at 41. Thole and Smith point to Section 1132(a)(2), which authorizes “participants” and “beneficiaries” to sue for breaches of fiduciary duties. Id. at 44. In addition, Thole and Smith state that Section 1132(a)(3) similarly authorizes participants and beneficiaries to seek injunctive or other equitable relief. Id. According to Thole and Smith, the right to sue under Section 1132 is not conditioned on a plan being underfunded. Id. Rather, they continue, the statute unambiguously gives participants and beneficiaries the right to sue for any fiduciary breach. Id. Because Section 1132’s meaning is so clear, Thole and Smith argue, the Eighth Circuit was wrong to interpret participants in an overfunded plan as being outside that statute’s “zone of interests.” Id. at 46–47. Thole and Smith additionally contend that they have met the remaining two requirements of Article III standing: causation and redressability. Id. at 49. Thole and Smith claim that U.S. Bank’s fiduciary breach caused the Plan to lose “hundreds of millions of dollars,” and that the requested relief—restoring these losses, replacing the Plan’s fiduciary managers, and withdrawing Plan assets from FAF’s management—are the appropriate ways to “make good” the Plan’s losses. Id. at 50–51.

U.S. Bank disagrees that Section 1132 provides Thole and Smith with any sort of “statutory standing” to sue. Brief for Respondents at 58–59. While recognizing that Section 1132 provides plan participants with a cause of action generally, U.S. Bank argues that this cause of action is available only to plaintiffs whose interests are within the “zone of interests” that Congress sought to protect. Id. at 59. According to U.S. Bank, this does not include the interests of plaintiffs like Thole and Smith, whose interests in the Plan were never injured. See id. at 59–60. U.S. Bank further argues that, even if Thole and Smith have an injury, that injury cannot be redressed by removing the Plan’s fiduciaries. Id. at 56­–57. According to U.S. Bank, this sort of forward-looking relief is appropriate only where the plaintiff demonstrates “a real and immediate threat [that] the challenged conduct will recur,” and there is no likelihood of any future misconduct here. Id. at 56–57. U.S. Bank also asserts that any supposed injury will not be redressed by forcing it to make additional payments to an already overfunded plan. Id. at 58. Any such payments, U.S. Bank explains, would only reduce its future funding requirements, which is tantamount to U.S. Bank paying itself. Id.

Discussion 

POTENTIAL FOR FRIVOLOUS LAWSUITS

The AARP and AARP Foundation (the “AARP”), in support of Petitioners, argue that allowing plan participants to sue to recover plan losses, regardless of a plan’s funded status, is necessary for a plan’s financial security. Brief of Amicus Curiae AARP and AARP Foundation (“AARP”), in Support of Petitioners at 19–20. The AARP claims that there is no reason that fiduciaries of overfunded plans should be held to a lesser standard of care, because Congress intended that all employee benefit plans be well managed. See id. at 20. According to the AARP, allowing plan participants to sue for fiduciary breach irrespective of a plan’s funded status has not, and will not, open the floodgates to frivolous lawsuits. Id. at 21. And in any case, notes the AARP, there are sufficient safeguards already in place to screen out frivolous claims. Id. For example, explains the AARP, plan participants must always demonstrate that a breach of fiduciary duty caused a loss in order to have standing; mere allegations of a loss cannot support a claim. Id. Additionally, the AARP trusts that district courts are competent enough to assess which claims are plausible, thereby preserving judicial efficiency by dismissing meritless suits. See id. at 21.

Arguing in support of Respondents, the Chamber of Commerce et al. (the “Chamber”) counters that if every fluctuation in plan value could support a claim for fiduciary breach, then plan participants would overwhelm the courts with frivolous ERISA claims. Brief of Amicus Curiae the Chamber of Commerce et al., in Support of Respondents at 20–21. Such a hair-trigger standard, the Chamber cautions, could cause ERISA fiduciaries to adopt overly conservative investment strategies for fear of being sued. Id. at 21–22. The Chamber contends that this would “paradoxically” put plans at greater risk of failing, as plans would not be able to earn high enough returns to support their obligations. Id. The Chamber furthermore suggests that, because ERISA allows attorneys to recover their fees, “entrepreneurial attorneys” would target any pension that dipped in value, even if the lost value is fully restored thereafter. See id. at 20–21. The Chamber asserts that these meritless lawsuits are especially concerning in the context of well-funded defined benefit plans, because employer contributions to such plans would not be affected even by a “successful” lawsuit. Id. at 22. Requiring employers to bear the risk and the costs of excessive meritless litigation, the Chamber concludes, would inflate costs, lead to less generous pension offerings, and discourage attractive plan options. Id. at 26.

ENFORCING ERISA

Arguing in support of Petitioners, the Pension Rights Center (the “PRC”) and the United States claim that ERISA’s foremost policy is to protect plan participants and their beneficiaries. Brief of Amicus Curiae the Pension Rights Center (“PRC”), in Support of Petitioners at 6; Brief of Amicus Curiae the United States, in Support of Petitioners at 26. According to the United States, it was Congress’s intent to provide participants and beneficiaries with “ready access” to the courts in order to further this policy. Brief of the United States at 26. Congress intended for such ready accessibility, the United States contends, because it understood that the government could not itself police every ERISA violation. Id. For example, explains the United States, the Department of Labor does not have sufficient resources to “monitor every plan in the country.” Id. The United States adds that this policy of allowing participants and beneficiaries to enforce ERISA should not turn on the funded status of the underlying plan. Id. at 27. The PRC agrees, arguing that it is impractical to condition standing on a plan’s funded status. Brief of the PRC at 9–10. Determining whether a plan is sufficiently funded, explains the PRC, is a complicated calculation that is subject to numerous assumptions and uncertainties. Id. at 10–13.

U.S. Bank counters that there are adequate means to enforce ERISA without granting standing to plaintiffs like Thole and Smith. See Brief for Respondents at 54. For example, U.S. Bank notes, the Department of Labor has the authority to enforce fiduciary obligations under ERISA. Id. at 55. In addition, U.S. Bank continues, ERISA provides for state and federal criminal sanctions for certain fiduciary breaches. Id. U.S. Bank also asserts that are several ways in which private parties can hold ERISA fiduciaries accountable. Id. For instance, explains U.S. Bank, plan participants and beneficiaries who suffer a cognizable injury always have standing to sue. See id. In addition, U.S. Bank goes on, the employer-sponsors of benefit plans also have standing to enforce ERISA. Id. According to U.S. Bank, employer-sponsors have an incentive to enforce ERISA because it is the employer-sponsor who is ultimately responsible for a plan’s investment risk. Id. And in the event that an employer fails to enforce ERISA, U.S. Bank continues, the employer’s corporate shareholders could hold the corporation’s directors accountable. Id. at 56.

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