“..the protective purposes of ERISA would be subverted if the section covering fiduciary breach required beneficiaries to ask trustees to sue themselves.” – Judge Vanaskie
The Third Circuit has decided to allow three participants to pursue their claims directly against the John Hancock Life Insurance Company for allegedly charging their 401(k) retirement plans excessive fees on annuity insurance contracts offered to plan participants. In Santomenno v. John Hancock Life Insurance Company, No. 11-2520 (April 16, 2012), the U.S. Court of Appeals for the Third Circuit vacated the district court’s grant of summary judgment in favor of John Hancock regarding the plaintiffs’ ERISA claims and remanded the case back to the U.S. District Court for the District of New Jersey for further proceedings.
In Santomenno, three participants filed a lawsuit against John Hancock Life Insurance Company, alleging that John Hancock had charged their 401(k) retirement plans excessive fees on annuity insurance contracts offered to plan participants pursuant to group annuity contracts entered into between plan trustees and John Hancock, and John Hancock charged a variety of excessive fees providing investment services to these plans. The plaintiffs used a two-prong approach, claiming John Hancock’s actions violated both ERISA and the Investment Company Act of 1940. John Hancock filed a motion to dismiss on both claims, which the district court granted.
The Third Circuit agreed with the district court’s dismissal of the claims based on the Investment Company Act of 1940 because plaintiffs’ had no interest in John Hancock funds at the time the 2nd Amended Complaint was filed on Oct. 22, 2010. To pursue a claim based on the Investment Company Act of 1940 (ICA), plaintiffs are required to be classified as “security holders” under Section 36(b) of the Act. Two of the plaintiffs had terminated their interest in John Hancock funds before the original Complaint was filed, and the third plaintiff terminated their interest in John Hancock funds before the 2nd Amendment Complaint was filed with the district court. This meant that none of the three plaintiffs had a continuous interest or a contemporaneous interest in John Hancock funds during the pendency of the litigation. Thus, the Third Circuit found the district court’s dismissal of the ICA claims proper.
The Third Circuit then turned to whether dismissal of the plaintiffs’ ERISA claims was proper. Plaintiffs filed the lawsuit against John Hancock before making a demand on the plan trustees to take appropriate action. Additionally, plaintiffs failed to join the trustees as parties in the lawsuit. The district court found that these were fatal defects to their ERISA claims, stating that any lawsuit involving these types of claims must join the plan’s trustees, and dismissed the plaintiffs’ lawsuit.
In reviewing the language of ERISA sections 502(a)(2) and 502(a)(3), the Third Circuit determined that ERISA is silent as to a pre-lawsuit demand and mandatory joinder of trustees, and therefore mandatory joinder of trustees is not required. The Court said:
“In addition to the text, structure, and purpose of ERISA, the legislative history of the statute also indicates that Congress did not intend to impose obstacles such as pre-suit demand or mandatory joinder of trustees with respect to claims brought under Section 502(a).”
An interesting part of this opinion is that the Third Circuit discussed how ERISA claims are separate and distinct from claims based on the common law of trusts. The Court said that the district court had erroneously relied on guidance from the common law of trusts in making the decision to dismiss plaintiffs’ claims against John Hancock because trust law was not incorporated en masse into ERISA. Instead, the Court said trust law only offers a starting point after which the courts must look to ERISA’s statutory language and legislative history when deciding claims based on ERISA.