July 10, 2019

The U.S. Supreme Court will hear a Minnesota case that could determine whether negligent private pension-fund fiduciaries can be held to account in civil court for plan shortages—even if they somehow scramble to maneuver plans back into the black in mid-litigation.

The lawsuit, Thole v. U.S. Bank, is a class action filed by a group of retired U.S. Bank employees. It accuses their former company of drastically mismanaging their pension portfolio between 2007 and 2010, needlessly deploying a high-risk/high-reward investment strategy that at one point drained the fund of almost $750 million.

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The retirees have backing from the Trump administration. In May, Solicitor General Noel Francisco filed an amicus brief urging the U.S. Supreme Court to take up the case.

Francisco described it as an important case that involves a question “that arises with some frequency.” His brief asserts that the litigants had standing to file both under Article III of the U.S. Constitution—which the 8th Circuit did not consider—and under ERISA laws.

The Court of Appeals was wrong, the solicitor general wrote, to rule that plaintiffs lacked statutory standing to sue under the Employee Retirement Income Security Act of 1974.

If you’re taken aback to hear the solidly pro-business Trump administration siding with a group of defined-benefit pensioners suing a major financial institution, plaintiff’s attorneys do not share your sense of surprise.

“I think basically it was such an egregious example of pension mismanagement that it was hard for any administration to endorse the 8th Circuit’s ruling,” said Michelle Yau, a partner at Washington, D.C.-based law firm Cohen Milstein, one of the firms representing plaintiffs.

The U.S. Supreme Court agreed on June 28 to review the case. Oral arguments are not yet scheduled.

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Far-Reaching Implications

Yau calls Thole v. U.S. Bank an important case with far-reaching implications. Some 37 million Americans have defined-benefit pensions of the kind offered by U.S. Bank, she said. That’s about $3 trillion in assets protected by ERISA law, she said.

That doesn’t even count millions of public-sector beneficiaries with similar retirement plans who are not covered by ERISA, Yau said. Nonetheless, she said, because many government-run plans operate under ERISA-style rules, their fiduciaries, too, are watching the case closely.

Yau said U.S. Bank’s arguments and the 8th Circuit’s decision alike imply that, if fiduciaries were to take money out of a plan and use it to buy lottery tickets, it wouldn’t matter as long as enough cash was left over to pay out benefits.

“You don’t even get into the courthouse doors unless the plan is underfunded,” she said. “Our case, I think, highlights that that can be manipulated.”

As Francisco points out in the amicus, as simple a factor as fluctuating interest rates could shift a plan’s financial position from over-funded to underfunded and back in the span of months.

To Yau, that means beneficiaries are put in a lose-lose position—they can’t sue to protect their mismanaged assets unless they get the timing right. And even if they do, they’ll likely to lose standing mid-litigation if the plan becomes overfunded—which is what precisely what happened to her plaintiffs.

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