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By Paige Topper

On June 8, 2015, in the civil case of Pender v. Bank of America Corp., a published opinion, the Fourth Circuit reversed the district court’s dismissal of the case for lack of standing. The Fourth Circuit found that William Pender and David McCorkle (“Plaintiffs”) had both statutory and Article III standing for their ERISA violation claim against NationsBank (“Bank”).

NationsBank Lined Its Own Pockets

In 1998, the Bank amended its contribution plan (“401(k) Plan”) to allow eligible participants a one-time opportunity to transfer their account balances to the Bank’s benefit plan (“Pension Plan”). Unknown to the participants the two plans operated differently in key ways. The 401(k) Plan accounts reflected the actual gains and losses of the participants’ investment options, meaning the money that 401(k) Plan participants directed to be invested in particular investment options was in fact being invested in those specified options. On the other hand, Pension Plan accounts reflected the hypothetical gains and losses of the participants’ investment options. Moreover, Pension Plan participants’ selected investment options were disregarded because the Bank invested the Pension Plan assets at its discretion. This discretion enabled the Bank to invest in options with a higher rate of return and retain the extra money in each Pension Plan participants’ accounts.

In 2000, the IRS opened an audit of the Bank’s plans and concluded that the transfers violated the Internal Revenue Code and the Treasury Regulations. As a result of the audit, the Bank and IRS entered into a closing agreement, in which the Bank paid a $10 million fine and returned the Pension Plan accounts to a new special-purpose 401(k) plan.

Plaintiffs were participants who elected to transfer their account balances into the Pension Plan. In 2004, Plaintiffs filed a complaint against the Bank in the District Court for the Southern District of Illinois alleging that the Bank violated ERISA § 204(g)(1) by decreasing the participants’ accrued benefit through the Pension Plan. The case was transferred to the Western District of North Carolina, where both parties moved for summary judgment. The District Court granted the Bank’s motion and dismissed the case on the basis that Plaintiffs lacked standing.

Plaintiffs Had Statutory Standing Under ERISA § 502(a)(3)

Under § 502(a)(3), a plaintiff may obtain “appropriate equitable relief” for any act or practice, which violates an ERISA provision. Here, the Fourth Circuit asked (1) did the transfers violate an ERISA provision and (2) does the relief Plaintiffs seek constitute “appropriate equitable relief?”

The Fourth Circuit concluded that the transfers violated ERISA § 204(g)(1), which provides that a plan amendment may not decrease a participant’s accrued benefit. The Fourth Circuit explained that a contribution plan’s separate account feature, which allots for contributions and actual earnings and losses with the risk of investment allocated to the participant, constitutes an accrued benefit that may not be decreased. The Pension Plan decreased this accrued benefit because there was no guarantee that the Bank’s gamble in other investment options would return at least the same amount as the investment options selected by each participant.

Furthermore, Plaintiffs sought appropriate equitable relief. Plaintiffs asked for the profit the Bank made using their assets (also known as “accounting for profits”). The Supreme Court has noted that an accounting for profits is an equitable remedy. Thus, the Fourth Circuit found Plaintiffs equitable relief appropriate in this case.

Plaintiffs Had Article III Standing

The three requirements for Article III standing are an injury in fact, causation, and redressability. The Fourth Circuit dismissed the Bank’s argument that Plaintiffs did not have standing because they had not suffered a financial loss. The injury-in-fact requirement is not limited to financial losses. The Fourth Circuit indicated that an injury refers to the invasion of a “legally protected interest.” Here, Plaintiffs suffered an individual loss, the difference between the profit the Bank earned from investing their assets and the amount the Bank paid to them.

The Fourth Circuit was unpersuaded by the Bank’s argument that the closing agreement between the IRS and the Bank mooted Plaintiffs’ claim. While the closing agreement restored the separate account feature to Plaintiffs and subjected the Bank to a fine, it did not force the Bank to give back its profit from the transfers. As a result, Plaintiffs still had a claim to relief.

Plaintiffs’ Claim was Not Barred by the Statute of Limitations

Since ERISA does not provide a statute of limitations, the Fourth Circuit applied the most analogous state-law statute of limitation: imposition of a constructive trust. Both North Carolina and Illinois recognize the remedy of a constructive trust. The statute of limitations is five years in Illinois and ten years in North Carolina.

Under the choice-of-law rules, the Fourth Circuit found that the Seventh Circuit’s choice-of-law rules would apply. The Seventh Circuit looks to the forum state (Illinois) as the starting point unless another state has a significant connection to the parties and the transaction and is more compatible with the federal policies underlying the federal cause of action. Due to this exception, the Fourth Circuit determined that North Carolina’s ten-year statute of limitations would apply. The decision to permit the transfers of the 401(k) Plan assets took place in North Carolina and all relevant witnesses resided in North Carolina. In addition, North Carolina’s longer limitations period advanced ERISA’s core policy to protect the interests of participants in employee benefit plans by providing for appropriate remedies, sanctions, and ready access to Federal Courts. Plaintiffs filed suit well within the statute of limitations (in six years) and thus were not time-barred by the applicable ten-year limitations period.

Fourth Circuit Reversed District Court’s Decision that Plaintiffs’ Lacked Standing

The Fourth Circuit held that Plaintiffs had both statutory and Article III standing for their ERISA violation claim. Furthermore, the Plaintiffs’ were not barred from bringing their claim due to the limitations period. Thus, the Fourth Circuit reversed the District Court’s grant of summary judgment for the Bank, vacated the portion of the District Court’s order denying Plaintiffs’ motion for summary judgment on lack of standing, and remanded for further proceedings.

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