Bureau Of National Affairs

Tuesday, June 13, 2000

 

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Prohibited Transactions

 

 

Supreme Court Rules on Non-Fiduciary Liability, Finding Party in Interest Subject to Lawsuit

 

WASHINGTON (BNA) - The U.S. Supreme Court ruled June 12 that a non-fiduciary party in interest to a pension plan governed by the Employee Retirement Income Security Act may be sued for equitable relief under ERISA Section 502(a)(3)'s civil enforcement provision for participating in an ERISA prohibited transaction (Harris Trust and Savings Bank v. Salomon Smith Barney Inc., U.S., No. 99-579, 6/12/00).

 

Justice Clarence Thomas, writing for the unanimous Supreme Court, rejected the opinion of the U.S. Court of Appeals for the Seventh Circuit that absent a substantive ERISA provision expressly imposing a duty on a non-fiduciary party in interest, the non-fiduciary party in interest may not be held liable under ERISA Section 502(a)(3).

 

According to the Supreme Court, although Section 502(a)(3) "does not authorize 'appropriate equitable relief' at large, but only for the purpose of 'redress[ing any] violations or . . . enforc[ing] any provisions' of ERISA or an ERISA plan. . . the section admits of no limit (aside from the 'appropriate equitable relief' caveat) on the universe of possible defendants." The focus of Section 502(a)(3) instead is the "act or practice" that violates an ERISA provision, the court said.

 

The Supreme Court said that, given Congress' precision in other ERISA provisions, it "would ordinarily assume" that the failure to specify proper defendants in Section 502(a)(3) "was intentional." However, given the intuitively appealing interpretation that Section 502(a)(3) authorizes suits only against defendants on whom a duty is imposed by ERISA's substantive provisions, the Supreme Court proceeded cautiously in "inferring remedies not expressly authorized by the text."

 

Nevertheless, the Supreme Court found that ERISA Section 502(l), which authorizes the Secretary of Labor to assess civil penalties against a plan fiduciary or "other person" who knowingly participates in a fiduciary's violation "resolves the matter" by compelling the "conclusion that defendant status under [Section] 502(a)(3) may arise from duties imposed by [Section] 502(a)(3) itself, and hence does not turn on whether the defendant is expressly subject to a duty under one of ERISA's substantive provisions."

 

 

Appeals Court Ruling

 

Salomon Brothers Inc., before its merger with Smith Barney Inc., provided brokerage services to the Ameritech Pension Trust, and was arguably a party in interest to the plan. During this time, Salomon sold to the plan mortgage participation notes that Salomon had prepared on behalf of another client. When the plan ended up losing virtually all the money that it invested in these notes, it sought to recover from Salomon.

 

The U.S. Court of Appeals for the Seventh Circuit ultimately held, contrary to the rulings of several other federal circuit courts that have addressed the issue of party in interest liability, that Salomon could not be liable under ERISA as a non-fiduciary party in interest for its participation in an alleged prohibited transaction. According to the appeals court, only fiduciaries may violate Section 406's prohibited transaction provisions (26 BPR 1859, 7/19/99; 23 EBC 1649).

 

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