Class Action Complaint for Breach of Fiduciary Duty Regarding the Diminution of Value of a Defined Contribution Retirement Plan States a Claim for Benefits under ERISA Eleventh Circuit Holds, Requiring Reversal of District Court Dismissal of ERISA Class Action
Plaintiffs filed a class action against their former employer, Home Depot, and certain of its officers and directors, alleging breach of fiduciary duty under ERISA (Employee Retirement Income Security Act of 1974); the class action complaint alleged that plaintiffs received benefit payments under a defined contribution retirement plan, but “that the payment were less than they should have been” because defendants had engaged in conduct that “artificially inflated the value of Home Depot stock.” Lanfear v. Home Depot, Inc., ___ F.3d ___ (11th Cir. July 31, 2008) [Slip Opn., at 1, 4]. Defense attorneys moved to dismiss the class action claim for lack of subject-matter jurisdiction because (1) the class action sought “damages,” not “benefits,” and (2) plaintiffs were not “participants” entitled to sue for breach of fiduciary duty. Id., at 1. The district court agreed and dismissed the class action complaint, id. Additionally, none of the class action plaintiffs pursued administrative remedies before filing the complaint, id., at 5; accordingly, the federal court alternatively concluded that plaintiffs failed to exhaust their administrative remedies, id., at 2, but the court did not rule on the impact of that failure on the class action complaint – specifically, “the district court did not decide whether it should dismiss the complaint without prejudice on that ground or stay the action to allow the former employees to pursue their administrative remedies,” id., at 2-3. The Eleventh Circuit affirmed in part, reversed in part, and remanded the class action for further consideration by the district court.
The class action presented an issue of first impression in the Eleventh Circuit: “whether a complaint for breach of fiduciary duty regarding the diminution of value of a defined contribution retirement plan states a claim for benefits under [ERISA].” Lanfear, at 1. The Circuit Court explained that participant payments under a defined benefits plan are not affected by the value of the plan’s assets; however, participant payments under a defined contributions plan are so affected because “[t]he participant is entitled to the value of the assets in his account, whatever that value may be.” Id., at 4. According to the class action complaint, “Home Depot violated its fiduciary duty by allowing the plan to invest in Home Depot stock even though corporate officials were backdating stock options and making fraudulent transactions, which artificially inflated the value of Home Depot stock.” Id. The complaint sought to restore to the plan the losses allegedly suffered as a result of this conduct. Id., at 4-5.
The Eleventh Circuit began its analysis by observing that, under existing circuit authority, so long as plaintiffs have a “plausible” argument in support of their claim of fiduciary status, whether that fiduciary status exists goes to the merits of the case, not to subject-matter jurisdiction. Lanfear, at 7-8 (citation omitted). Because the class action plaintiffs had a plausible argument for their entitlement to sue for breach of fiduciary duty, the district court erred in dismissing the class action for lack of subject-matter jurisdiction. Id., at 8. The Circuit Court also held that plaintiffs were “participants” under ERISA because the class action complaint sought benefits, not damages. Id. But this determination turned on whether plaintiffs “have a colorable claim to vested benefits,” id., at 9, which itself turned on “the distinction between benefits and damages” because ERISA permits the recovery of benefits but does not permit the recovery of damages, id., at 9-10.
On this point, the district court had concluded – based on a Fifth Circuit case – that the class action complaint sought damages because it “did not seek a readily ascertainable amount that would directly effect a payment to the plaintiffs.” Lanfear, at 10. The Eleventh Circuit disagreed, noting that “[t]he Third, Sixth and Seventh Circuits have rejected the reasoning of the Fifth Circuit,” id., and agreeing with those sister circuits that “[a] complaint for the decrease in value of a defined contribution account due to a breach of fiduciary duty is not for damages because it is limited to the difference between the benefits actually received and the benefits that would have been received if the plan management had fulfilled its statutory obligations,” id., at 11. The Circuit Court held, therefore, that plaintiffs qualified as “participants” because their class action complaint sought benefits, not damages. Id.
However, the Eleventh Circuit agreed with the district court that plaintiffs had failed to exhaust their administrative remedies, and that they were required to do so. See Lanfear, at 12-16. But the district court failed to address the impact of this failure, id., at 16-17. Accordingly, the Circuit Court remanded the class action to the district for a determination, in the first instance, of whether to dismiss the complaint without prejudice, or to stay the class action while plaintiffs pursued their administrative remedies. Id., at 16-17.