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Fiduciary Responsibility

 

Judge Orders Troubled Insurer to Pay $9.5 Million to Settle Trustee Pension Cases

 

By Tom Alkire

Friday, April 5, 2002

 

PORTLAND, Ore.--An Oregon federal court judge March 29 ordered a troubled Pennsylvania insurance company to pay $9.5 million to union trust funds as a settlement of union members' lawsuits against their pension fund trustees (Kirkland v. Legion Insurance Co., D. Or., No. CV-01-317-KI, 3/29/02).

 

In mid-March, members of five unions settled lawsuits against their pension fund trustees that alleged breach of fiduciary duty. The pension funds had invested large sums of money with Capital Consultants LLC, a Portland investment management company that has been charged with pension fraud.

 

Capital Consultants has been under federal receivership since September 2000. The U.S. Department of Labor estimated that a large number of unions lost more than $100 million due to risky investments made by Capital Consultants.

 

In their attempt to recoup their losses, the union pension funds have sued Capital Consultants and their legal and financial advisors. Also, members of a number of unions have sued their pension fund trustees. As of last month it appeared that most of the lawsuits involving the trustees were settled. The settlements called for a payment of $16 million to the trust funds administered by the five unions. All the settlements were to be funded by the funds' fiduciary liability policies.

 

However, three of the unions involved had liability coverage through the Legion Insurance Company, headquartered in Philadelphia. Legion has experienced financial difficulties lately and on March 29 was taken over by the Pennsylvania Insurance Commissioner. It was unclear what outstanding claims against Legion might be paid by the state, which is now controlling the company.

 

"The Orders of Rehabilitation give the Insurance Department statutory control of the companies, put numerous policyholder safeguards in place, and preserve the remaining assets of the companies," said a March 29 statement from Pennsylvania Insurance Commissioner M. Diane Koken about Legion.

 

As the trustees' insurer, Legion was closely involved in the settlement negotiations, Judge Garr King of the U.S. District Court for the District of Oregon said in his March 29 order. On behalf of its insured trustees, Legion had agreed to pay $3.7 million to trust funds administered by Local No. 290 Plumber, Steamfitter and Shipfitter Industries; $5.2 million to trust funds administered by the Eighth District of the International Brotherhood of Electrical Workers; and $578,000 to trust funds administered by Local 11 of the Office and Professional Employees International Union based in Portland.

 

Legion was to make its first payment to the Local 29 trust funds by March 21. The payment was not made and therefore Legion is in breach of its obligation in that case, King said in his order. Based on this breach, King also found that Legion is in anticipatory breach of its obligations in the other two settlements as well. One of those payments was due April 1 and the other on April 11.

 

King ordered Legion to pay the total $9.5 million immediately to the three unions.

 

A spokeswoman at Commissioner Koken's office had no comment on King's order as of April 3.

 

Seattle lawyer Richard Birmingham represents members of Local 290 and the Eighth District of the IBEW in their lawsuits against their pension fund trustees. He told BNA April 2 that the members will continue to seek the settlement amounts from a variety of sources that could include Legion, its reinsurance companies, and any state funds that insure against the losses of insurance companies.

 

Birmingham noted that the rehabilitation order for Legion does not prohibit the state from paying outstanding claims against Legion.

 

Also, members may pursue action against the trustees as individuals if the settlement money is not forthcoming from insurance carriers or the state, Birmingham said. The settlement in the Local 290 case was with the trustees and Legion. The settlement with IBEW obligated only Legion, he said.

 

Local 11 trustees are defendants in the class action suit titled Schultz v. Kirkland, D. Or., No. CV-00-1377-HA. The IBEW trustees are defendants in McPherson v. Eighth District Electrical, D. Or., No. CV-00-1445-HA. Local 290 trustees are defendants in Eidem v. Plumbers Local 290, D. Or., No. CV-001446-HA.

 

King's order was part of a related lawsuit by some of the trustees against Legion.

 

The settlement amounts in the trustee cases do not reflect the total estimated losses of the union pension trust funds. The Eighth District IBEW funds are estimated to have $50 million at risk due to investment losses at Capital Consultants. Local 290 is estimated to have $29 million at risk and Local 11 is estimated to have $10 million at risk.

 

Funds from dozens of Taft-Hartley plans and other union plans accounted for $407 million of high-risk investments made by Capital Consultants, many of which may now be nearly worthless, according to court documents

 

The full text of the opinion can be found at http://pub.bna.com/pbd/cv01317ki.htm.


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