Saving the Boss from ERISA Liability
Your company's chief financial officer has an important decision to make: The company's business is primarily seasonal, and current cash flow is tight. But the company's most important vendor is demanding to be paid. The CFO must choose between paying the vendor and making timely, required contributions to the company's pension plan. What advice should you give?
Since the pension plan is an internal obligation, doesn't it make more sense to delay making the retirement plan contribution and keep the vendor happy? The answer is yes, but only if the CFO wants to risk personal liability under the Employee Retirement Income Security Act of 1974 (29 USC §§1001 et seq). The risk is especially acute if your company is a party to a collective bargaining agreement, with a union watchdog that monitors retirement plan contributions.
ERISA fiduciary liability can attach in two circumstances: The first is when the plan expressly designates a person as a fiduciary, generally as the plan administrator, plan trustee, or member of an administrative committee. The second is when a manager performs a function that ERISA deems a fiduciary function. Such functions include (1) discretionary authority or control over the management of the plan or any authority or control over management or disposition of the plan assets, (2) the rendering of investment advice for a fee or other compensation, and (3) discretionary authority or control in the administration of the plan. If a court determines that a person is a fiduciary and has breached his or her fiduciary duty, personal liability attaches, and the fiduciary is personally liable to make good the losses to the plan.
Not every act by an officer or director affecting a benefit plan is a fiduciary act. The law distinguishes between purely "corporate" functions and "fiduciary" functions. Unfortunately, it isn't always clear where corporate functions end and fiduciary functions begin. In the recent case of LoPresti v Terwilliger(1997) 126 F3d 34, the Second U.S. Circuit Court of Appeals found that one of the officers crossed the line.
Donald and John Terwilliger, brothers, owned 100 percent of the stock of a unionized print shop. Donald oversaw the financial side; John focused on production. The corporation was a party to a collective bargaining agreement with a local union and regularly withheld money from employees' paychecks for contributions to the union's pension fund. The monies withheld were deposited into the corporation's general account and were periodically paid over to the pension fund. When the business had a money crunch, Donald, acting on the advice of the company's vice president of finance, paid creditors in the order of who "screamed the loudest" or was "most threatening." The pension fund didn't receive the required contributions.
The pension trustee brought claims against both Terwilligers for breach of fiduciary duty under ERISA. The Terwilligers argued that they were "simply exercising business judgment in deciding which Company creditors to pay and in what order." They claimed they were acting in their capacities as corporate officers, not as ERISA fiduciaries. The U.S. Department of Labor (DOL) and the pension trustee made the same argument they make when sponsors of single employer plans fail to timely segregate their employees' 401(k) plan deferrals. When the Terwilligers failed to timely segregate the employees' contributions from the corporation's assets, they became fiduciaries under ERISA and were thus personally liable to make good the losses to the plan.
Although the district court had found in favor of both Terwilligers, emphasizing that they did not administer the pension funds, the court of appeals reversed as to Donald. According to the appellate court, "[C]ommingling ... plan assets with the Company's general assets, and [using] those plan assets to pay Company creditors, rather than forwarding the assets to the [pension fund], means that [Donald] 'exercised ... authority or control respecting ... disposition of [plan] assets,' and hence is a fiduciary for purposes of imposing personal liability under ERISA." 126 F3d at 40. The court of appeals held that John had no actual decision-making responsibility regarding who got paid and when and therefore exercised no fiduciary role with respect to the plan.
As this case and others signal, anyone who makes decisions regarding the timing of payments to pension plans, including corporate officers and directors and the in-house counsel who advise them, should have a working knowledge of DOL regulations regarding the segregation of "plan assets." Once a required contribution comes due, it becomes a plan asset. Failure to segregate plan assets from general corporate funds may constitute a breach of fiduciary duty for which the officer, director, or other employee is personally liable.
Generally speaking, employers must segregate from their general assets plan contributions that a participant pays to the employer or that have been withheld by the employer at the earliest date on which the contributions can reasonably be segregated. The latest possible date is the 15th business day of the month following the month in which the participant contributions are received by the employer or would have been payable to the participant in cash. Moreover, any use of plan assets for corporate or business use once they become plan assets is a prohibited transaction under ERISA. Fiduciaries, as well as employers, officers, directors, and 10 percent shareholders, can be held personally liable for prohibited transactions. CFO knowledge of these regulations should be as automatic as knowledge of state payroll regulations.
House counsel also should be aware that courts are unlikely to sympathize with officers and directors who spend lavishly on themselves while treating their retirement plan responsibilities cavalierly. In Connors v Paybra Mining Co. (SD W Va 1992) 807 F Supp 1242, the shareholders of closely held corporations that participated in a union pension plan were also the corporations' officers and directors. In considering which bills to pay, they decided to favor general creditors over the pension fund. In a footnote, the court noted that the corporate defendants often made expenditures on their wives and children, who performed no corporate services. The court gave as an example the purchase of a Porsche sports car for the daughter of one of the defendants. Although the timing of the payment of personal expenses may have been irrelevant to the question of the company's timely contributions to the retirement plans, the expenditures certainly provided the court with ammunition to find a breach of fiduciary duty.
ERISA appears to compel the result in Connors. Other courts, however, have concluded that officers and directors were acting in a purely corporate capacity when making decisions regarding the timing of payments to ERISA-governed plans. For instance, in Local Union 2134 v Powhatan Fuel Inc. (11th Cir 1987) 828 F2d 710, the mining company defendant experienced financial difficulties following a national mine workers' strike. In the two years following the strike, some of the health insurance premiums, which the bargaining agreement required the signatory companies to pay, were not paid when due. As a consequence, some medical expenses of employees and their dependents were not paid. The plaintiffs alleged that Powhatan's president was a fiduciary of Powhatan's health plan and thus personally liable for the company's failure to pay insurance premiums and benefits incurred by the participants.
The district court held the president personally liable, reasoning that his decision to pay other business expenses rather than the employees' insurance premiums was a breach of his fiduciary duties. The court of appeals reversed, noting ERISA's recognition that corporate officers often wear two hats. In some circumstances they owe a duty to act on behalf of the corporation and in others they owe a duty to act in the best interest of the plan's beneficiaries. Contrary to the later holdings in LoPresti and Connors, the Powhatan court downplayed the funding obligation, concluding that the company president was not acting in his capacity as a plan fiduciary when he decided not to pay the insurance premiums required by the collective bargaining agreement.
The Powhatan decision is largely irreconcilable with LoPresti and Connors. Though the facts of the cases differed, all three involved ERISA-governed plans. The distinguishing feature in Powhatan may be the court's perception that the corporate officer was acting in the long-term interests of the employees by keeping the mining venture alive. If the evidence had shown that the company president was acting solely in his own best interest (for instance, by granting himself stock options while the health insurance premiums went unpaid), the result might have been different.
Powhatan is not likely to be followed in other circuits. LoPresti and Connors, which arose in different circuits and were decided later, reached an opposite conclusion on the same issue. In addition, the DOL's position is directly contrary to the result in Powhatan. So despite the apparent conflict among the circuits, no corporate officer or director should feel safe in failing to segregate assets that are earmarked for employee benefit plans. When corporations are sued by general business creditors, their officers and directors usually are not personally liable. That is often not true for suits under ERISA.
Even if you decide that the financial officers of your company may be at risk for breaching a fiduciary duty under ERISA, you may be tempted to ask yourself whether you should really be concerned. After all, won't your company's directors and officers liability insurance cover such claims? The answer is probably not. Most directors and officers policies specifically exclude coverage for ERISA claims. This coverage is available, but for an extra premium.
Given the risks involved, house counsel should familiarize themselves with the company's procedures for making required retirement or health plan contributions and with the people who carry out these responsibilities. Counsel must then ensure that those responsible comply with the necessary legal requirements and that the company has adequate insurance in the event of a claim for breach of fiduciary duty under ERISA.
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Employee Benefits
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