Compliance February 12, 2008

Loss from Delay in Distribution of Stock not Eligible for ERISA Relief

February 12, 2008 (PLANSPONSOR.com) - The U.S. District Court for the Eastern District of Michigan has found a former 401(k) plan participant alleging a loss of income due to a custodian's errors in processing her company stock certificates has failed to state a claim for relief under the Employee Retirement Income Security Act (ERISA).
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In dismissing the case, the court said that to determine whether the Carol Kline has standing to assert a claim for relief under § 1132(a)(2) of ERISA, it must determine whether the money damages Kline seeks are tangential to the plan or would be paid directly to the plan, allocated to Kline’s individual accounts, and then paid to her in the form of benefits. The court pointed out that even Kline conceded that she was not alleging a denial of ERISA benefits, but that she had already obtained all her ERISA plan benefits.

The court said the claim that Fidelity Investments Institutional Operations Company was negligent in processing Kline’s requested stock certificate in connection with the rollover of her benefits, thus causing her to suffer a loss in investment income that could have been earned in her rollover account was not a claim for relief under ERISA – even assuming Fidelity is a “fiduciary” as defined under ERISA. According to the opinion, Kline failed to state a claim for relief under § 1132(a)(2) because she was not an ERISA plan beneficiary seeking recovery for losses to her ERISA plan caused by Fidelity’s breach of its fiduciary duties under ERISA.

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In addition, the court dismissed Kline’s state law breach of contract and negligent performance of contract claims, saying they are preempted by ERISA. The contract underlying Kline’s state law claims arise out of her 401k plan, which is governed by ERISA.

Kline retired from Compuware in June 2005, and requested a rollover of all assets held in her (Employee Stock Ownership Plan) ESOP/401k Plan at Compuware, including 3,095 shares of Compuware stock. Kline alleged that, despite her directions to Fidelity, it incorrectly titled her stock certificate, lost the incorrect certificate, re-issued more incorrect certificates and thus prevented her new account custodian from accepting the stock certificate.

It was not until late in 2006 that another entity succeeded in providing Kline with a correctly titled stock certificate.

Kline claimed she suffered losses due to Fidelity’s negligence from the decrease in value of her Compuware stock from the date she requested the stock certificate to the date she received a correctly titled certificate and her delayed ability to reinvest the proceeds of the sale of her Compuware stock into other investments.

The case is Kline v. Fidelity Investments Institutional Operations Co., E.D. Mich., No. 07-13368, 2/8/08.

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