Today, the Supreme Court issued two decisions, described below, of interest to the business community.
- ERISA—Statute of Limitations and the Duty to Monitor
- Bankruptcy Code—Disposition of Funds Held By Chapter 13 Trustee After Conversion to Chapter 7
ERISA—Statute of Limitations and the Duty to Monitor
The Employee Retirement Income Security Act (ERISA) imposes personal liability on fiduciaries who fail to discharge their duty of prudence. Today, in Tibble v. Edison Int'l, the Supreme Court held that—despite ERISA's six-year limitations period—fiduciaries remain on the hook to correct mistakes made by fiduciaries more than six years earlier, to the extent the evidence shows that a prudent fiduciary monitoring the plan would undertake remedial actions.
Although such a holding may appear to expand fiduciary liability, the decision does little to alter the expectations and obligations of sophisticated companies, which generally engage in routine monitoring of ERISA-governed plans.
In Tibble, plan participants in a multi-billion dollar 401(k) plan sued to challenge the inclusion of higher-fee retail-class mutual funds as plan investment options when lower-fee institutional-class funds were available. The district court granted summary judgment to the defendants as to certain funds, holding that ERISA's six-year statute of limitations barred plaintiffs' claim because the defendants initially selected the mutual funds more than six years before the complaint was filed. The Ninth Circuit affirmed.
The plaintiffs petitioned for certiorari, arguing that if it was imprudent to include retail-class mutual funds, then it was imprudent to retain them in the plan, as well. The defendant argued that plaintiffs' theory amounted to the elimination of the six-year time limit and that—absent a material change in circumstances since the original selection—fiduciaries have no duty to revisit and reverse earlier decisions.
In a unanimous opinion authored by Justice Breyer, the Court vacated and remanded the judgment of the Ninth Circuit. The Court recognized the parties' agreement that fiduciaries have some ongoing responsibility to monitor plan investments and held that a claim addressing the duty to monitor would not be time-barred, if the alleged monitoring failure had occurred within the six-year look-back period. The Court declined to address what a fiduciary must do to engage in prudent monitoring, leaving that issue for remand.
This decision is significant for employers offering ERISA-regulated retirement and welfare benefit plans. As before Tibble, such employers are advised to create and follow processes for prudent fiduciary decision-making, and to undertake periodic and systematic reviews of the plans they have a duty to monitor. To reduce litigation risks, plan fiduciaries should document their processes and the results of their monitoring efforts. Fiduciaries should not pick and choose among existing investments to monitor; rather, they should implement a regular, well documented procedure for periodic reviews of every plan investment.
Bankruptcy Code—Disposition of Funds Held By Chapter 13 Trustee After Conversion to Chapter 7
Chapter 13 of the Bankruptcy Code allows debtors to keep certain assets (such as their home and car) and to repay their creditors in installments by turning over to a trustee a portion of the wages that they earn after filing their bankruptcy petition. At any time, however, a debtor may convert a Chapter 13 proceeding into a Chapter 7 proceeding—a common occurrence because debtors are often unsuccessful in getting Chapter 13 repayment plans approved and then meeting their obligations under those plans. Under Chapter 7, debtors do not retain any prepetition assets but they get to keep all postpetition wages, making a "fresh start" as of the date of the petition. Today, in Harris v. Viegelahn, No. 14-400, the Supreme Court held that "a debtor who converts to Chapter 7 is entitled to return of any postpetition wages not yet distributed [to creditors] by the Chapter 13 trustee."
Harris, the debtor, filed for relief under Chapter 13 and later converted to Chapter 7. At that point, the Chapter 13 trustee happened to be holding several thousand dollars of Harris's garnished postpetition wages that had not yet been distributed to Harris's creditors. The trustee went ahead and distributed most of that money to the creditors anyway. The bankruptcy court ordered the trustee to refund the money to Harris and the district court affirmed, but the Fifth Circuit reversed, acknowledging that its decision conflicted with the Third Circuit's ruling in In re Michael, 699 F.3d 305 (3d Cir. 2012).
Today, the Supreme Court reversed the Fifth Circuit. In an opinion by Justice Ginsburg, the Court unanimously held that the conversion from Chapter 13 to Chapter 7 "removes [postpetition] earnings from the pool of assets that may be liquidated and distributed to creditors" as long as the conversion is made in good faith. The Court explained that the service of the Chapter 13 trustee terminates immediately upon conversion, and therefore that distributing assets to creditors after conversion exceeds the trustee's authority. Thus, how much creditors might receive from a debtor's postpetition wages in the event of conversion will depend on how quickly the Chapter 13 trustee distributes those assets in accordance with the provisions of the approved plan.
Today's decision is of interest to the business community because it provides greater certainty to creditors regarding the scope of a debtor's estate following conversion of a failed Chapter 13 plan. To minimize the risk of a windfall to the debtor on possible conversion to Chapter 7, creditors may wish to consider a strategy, recommended by the Court, of "seeking to include in a Chapter 13 plan a schedule for regular disbursement of funds the trustee collects." The Court's decision may also lead to increased litigation regarding the contours of the exception to return of postpetition wages when a debtor converts from Chapter 13 to Chapter 7 under circumstances that the challenging creditor or the Chapter 13 trustee believes to have been in bad faith.
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