Fiduciary Breach Claims Must Seek Relief for Whole Plan

In doing so, the court dismissed the claims of two 401(k) plan participants that accused the trustee of their plan of breaching its fiduciary duty by not telling them about fraudulent activities by an investment adviser to the plan.

David Tullis and Michael Mack – two medical doctors who maintained a 401(k) Profit Sharing Plan – claimed the trustee’s failure to tell them about fraudulent activities by their investment adviser William Davis, of Continental Capital Corporation (CCC) led to a significant drop in their pension assets.

Judge Jack Zouhary wrote in the opinion that any actions for breach of fiduciary duty, under the Employee Retirement Income Security Act (ERISA), must be brought “in a representative capacity on behalf of the plan as a whole,” and that the recovery for a breach of fiduciary duty “inures to the benefit of the plan as a whole.”

The two plaintiffs tried to circumvent the requirement that a suit be brought on behalf of the plan as a whole by suing on behalf of a “subclass” of the plan which consisted of themselves. Tullis and Mack’s argument hinged on a 1995 decision by the US 6 ^th Circuit Court of Appeals in which a “subclass” of plan participants included all former salaried employees of a company that participated in the plan at issue during a specific period of time.

However, the District Court said that the two plaintiffs in this case are seeking individual compensation. “It is quite clear that Plaintiffs seek individualized compensatory damages to remunerate for their individual claims, not relief to the Plan either as a whole or in part,” the opinion said.

The court also rejected plaintiffs’ claim that they were entitled to recover “benefits due to them under the terms” of the plan. Zouhary wrote that Tullis’ and Mack’s complaint alleged that the benefits no longer exist because of Davis’ actions.

“Plaintiffs are apparently arguing that the “benefit” due in this instance is the difference between the actual and stated values of the assets in their individual pension accounts,” the opinion stated. “It is only logical, however, that in a self-directed 401(k) account, the only “benefits” that can be “due” are those assets which actually exist in the account and can be liquidated.”

UMB Bank, the trustee of the plans held by Tullis and Mack, filed a lawsuit in 2001 against Davis and a subsidiary of CCC on behalf of other plan participants, alleging that several investments made by Davis were “not liquid, had rapidly declined in value, had no marketability, or were non-existent.”

Mack and Tullis contend that they continued relying on the advice of Davis and CCC because UMB failed to inform them of the adviser’s fraudulent activities, which they argued led to a plunge in their retirement accounts.  

The two plaintiffs alleged that the actual amounts in their pension accounts were far less than they were told. Tullis argued that in December 2003, the defendant told Tullis he had a retirement balance of $724,561,29, while the actual value stood at $142,269.41. Mack contended that the actual value of his plan assets was overstated by $1,192,614.30 – a fact he found out when he tried to withdraw his balance upon retirement.

In addition to dismissing the fiduciary breach claim, because ERISA preempts state law, the court threw out the plaintiffs’ claims that hinged on state law, including breach of fiduciary duty, negligence, failure to warn, fraud, negligent misrepresentation, and violation of Ohio securities laws. 

The case is Tullis v. UMB Bank N.A., N.D. Ohio, No. 3:06 CV 7029, November 21, 2006.