LaRue v. DeWolff, Boberg & Assoc.

The Section 502(a)(2) Question

Section 502(a)(2) of ERISA permits a benefit plan participant to sue for "appropriate relief" under ERISA section 409(a). LaRue sued under the first clause of section 409(a), which requires a breaching fiduciary to make good to the plan any losses the plan suffers due to the breach of fiduciary duty.

In Mass. Mut. Life Ins. Co. v. Russell, the Supreme Court articulated that any recovery under section 409(a) must benefit the plan as a whole. The Court stated that in enacting ERISA, Congress was "primarily concerned with . . . remedies that would protect the entire plan, rather than with the rights of an individual beneficiary." In Russell, a beneficiary receiving disability benefits under an ERISA welfare plan brought suit against the fiduciary for a delay in payments. Although she had already received retroactive payments, she sought compensatory, pain and suffering, and punitive damages. She argued that the third clause of section 409(a), which subjects fiduciaries "to other equitable or remedial relief as the court may deem appropriate," included such relief. The Court disagreed and held that section 502(a)(2) did not authorize her claim.

Based on Russell's standard of benefiting the plan as a whole, the Fourth Circuit held that section 502(a)(2) did not authorize LaRue's claim for two reasons. First, LaRue sought a personal remedy -- any money awarded would benefit him individually rather than "the plan." Second, any breach of fiduciary duty was a breach of duty owed to LaRue individually rather than to the plan. The court emphasized that any loss resulted from a failure to follow LaRue's instructions and the loss was suffered by him alone. It distinguished the case from cases which permit an individual to sue on behalf of the plan as a whole or a class of similarly-situated beneficiaries, where the remedy would benefit many.

LaRue distinguishes his claim from the claim in Russell. The plaintiff in Russell sought pain and suffering and punitive damages, which LaRue does not. Also, Russell sued under the third clause of section 409(a), while LaRue sued under the first. LaRue claims that the Supreme Court only addressed the language of the third clause and that Russell is therefore irrelevant. Finally, he notes that Russell involved an ERISA welfare plan, which entails reimbursement for medical expenses/disability benefits. Unlike LaRue's 401(k), the plan in Russell did not involve loss of plan assets and was thus unrelated to Congress' intent in passing ERISA.

LaRue refutes the Fourth Circuit's individual benefit argument by claiming that the text of sections 502(a)(2) and 409(a) does not indicate that the breach of fiduciary duty must affect multiple beneficiaries. He emphasizes that the text of section 409(a) says "any losses to the plan." In addition, he contends the Supreme Court has historically recognized the expansive meaning of "any." Similarly, LaRue refutes the individual duty theory by citing section 409(a)'s text, which targets "breach of any of the responsibilities, obligations or duties." According to LaRue, a duty to follow individual instructions is a duty to the plan. Otherwise, fiduciaries could mismanage accounts as long as their actions affect only one individual.

LaRue further argues that due to the nature of 401(k) plans, any loss to an individual account is automatically a loss to the plan. Similarly, any reimbursements awarded in this case would be given to the plan rather than to LaRue. He asserts that it is irrelevant that the money would then be allocated to his individual account.

According to DeWolff, LaRue's argument merely "imagin[es] a kind of straw transaction where the recovery would be funneled through the Plan and then immediately into LaRue's pocket." The true nature of LaRue's claim is individual, DeWolff insists, for it was not brought in a representative capacity or to financially improve the plan overall. Finally, DeWolff argues that there is no indication in the text or legislative history of ERISA that Congress intended section 502(a)(2) to provide a remedy for individuals.

The Section 502(a)(3) Question

Section 502(a)(3) of ERISA allows a participant suing for fiduciary breach "to obtain other appropriate equitable relief" not offered under section 502(a)(2). To recover under Section 502(a)(3), LaRue must seek equitable relief as opposed to a legal remedy.

Historically, plaintiffs could sue in courts of law or courts of equity. Courts of law typically granted monetary relief, such as compensation, damages for pain and suffering, and punitive damages. Equity courts typically ordered someone to act or to refrain from acting. Remedies at equity included injunctive relief and restitution. Courts of equity could occasionally award legal remedies in cases which could not be heard in courts of law. In the United States, the two courts have merged, so both kinds of relief are available from any court. However, the pre-merger distinction between equitable and legal relief persists in statutes such as ERISA.

The Supreme Court first reviewed the meaning of section 502(a)(3)'s equitable relief provision in Mertens et al. v. Hewitt Assocs. and held that "equitable relief" only includes "those categories of relief that were typically available in equity." It held that compensatory damages were not typically available in equity.

The Fourth Circuit held that LaRue's claim for reimbursement was for compensatory damages and thus did not fall under section 502(a)(3). Relying on Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), the circuit court stated that LaRue was seeking to impose personal liability on DeWolff rather than seeking to recover money wrongfully in DeWolff's possession. DeWolff echoes the Fourth Circuit's reasoning on appeal to the Supreme Court.

LaRue argues that his claim falls under section 502(a)(3) because it satisfies Knudson's two-prong test. In Knudson, the Supreme Court held that relief was typically available in equity if 1) the basis for the claim was equitable and 2) the remedy sought would have been available for the case in traditional courts of equity.

LaRue states that similar claims were historically equitable. The United States elaborates on this argument by analogizing LaRue's claim to a lawsuit by a trust beneficiary against a trustee for a breach of trust. Before the courts of equity and law merged, only courts of equity could hear trust cases. In a trust, the trustee holds the legal title. The beneficiary thus has only an equitable interest in the trust. As courts of law did not recognize equitable interests, claims against a trustee for breach of fiduciary duty could only be heard in equity courts. As a 401(k) plan is a trust, the fiduciaries of a 401(k) plan have the legal title to the plan's assets, and the beneficiaries only have an equitable interest. Therefore, the United States maintains that LaRue's claim would traditionally have been brought in a court of equity.

LaRue argues that the damages he seeks would typically have been awarded in equity courts because they are analogous to the equitable concept of surcharge. Historically, when a beneficiary sued a trustee for breach of trust, any monetary recovery was called surcharge. LaRue distinguishes surcharge from compensatory damages, claiming surcharge imposes personal liability upon the trustee and does not include damages for pain and suffering, nominal damages or punitive damages. See

The Fourth Circuit rejected LaRue's surcharge argument, stating that "typically available in courts of equity" has a narrower meaning. It held that a typically available remedy must be available for more than one type of case. Since surcharge was only a remedy for breaches of trust, it could not be a "typically available in courts of equity. On appeal, DeWolff reiterates this reasoning, claiming that surcharge was merely an exception to the usual remedies given by equity courts. The United States insists that this narrow reading is incorrect and that the Supreme Court in Mertens meant to exclude remedies typically available in courts of law rather than remedies only available in atypical equity cases.

Mootness

The Supreme Court held in City News & Novelty, Inc. v. City of Waukesha that when a petitioner voluntarily changes their status during litigation, the change may eliminate the petitioner's legal interest in his claim and thus render the matter moot. The Supreme Court may not decide a moot issue. Thus, if the Supreme Court finds the issue to be moot, it cannot decide the sections 502(a)(2) and 502(a)(3) questions, although it can state what it would have decided in dicta.

DeWolff argues that LaRue is no longer a participant for the purposes of ERISA because he left the plan. ERISA only authorizes claims by participants, beneficiaries, or fiduciaries, and no courts have held that this language includes former participants. Furthermore, DeWolff claims that LaRue, as a former participant, has no legal interest in whether the plan is reimbursed. Therefore, DeWolff insists that the issue is moot.

LaRue argues that he is a participant. He cites definition of "participant" in ERISA section 3(7), which includes former employees who may become eligible to receive a benefit. LaRue insists that he may benefit from the plan if he recovers in these proceedings. LaRue further proposes that a former employee does not lose interest in the plan when his account balance is zero, particularly where the account assets were altered due to a breach of fiduciary duty. He asserts that it is irrelevant that he voluntarily withdrew his assets. LaRue states that a dispute over whether he is a participant does not render his claims moot. Finally, LaRue insists his status as a participant is a defense on the merits and thus need not be decided before the sections 502(a)(2) and 502(a)(3) issues.