Warren v. Society Nat. Bank, 89-3331
| Decision Date | 22 June 1990 |
| Docket Number | No. 89-3331,89-3331 |
| Citation | 905 F.2d 975 |
| Court | U.S. Court of Appeals — Sixth Circuit |
| Parties | , 12 Employee Benefits Ca 1697 Robert WARREN, et al., Plaintiffs-Appellants, v. SOCIETY NATIONAL BANK, et al., Defendants-Appellees. |
William D. Beyer (argued), George A. Vince, Jr., Wuliger, Fadel & Beyer, Cleveland, Ohio, for plaintiffs-appellants.
Michael E. Brittain (argued), Jeffrey L. Nischwitz, Calfee, Halter & Griswold, Cleveland, Ohio, for defendants-appellees.
Before WELLFORD and NELSON, Circuit Judges, and LIVELY, Senior Circuit Judge.
This case arises under ERISA, the Employee Retirement Income Security Act of 1974, 29 U.S.C. Sec. 1001, et seq. (1982). The issue relates to damages recoverable by a participant or beneficiary against an administrator or other fiduciary of a retirement plan. More specifically, the question is whether a plan participant may recover damages for a plan fiduciary's failure to follow the participant's instructions, under The district court held that such damages are not recoverable under section 502(a)(3) of ERISA, 29 U.S.C. Sec. 1132(a)(3). We disagree.
an option provided in the plan, for handling the participant's share of plan assets.
Because the district court dismissed this action pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim, we treat the factual allegations of the amended complaint as true.
Robert Warren, a physician, was employed by Westgate Medical Anesthesia Group and participated in two of the group's retirement plans--a pension plan and a profit sharing plan and trust. The Society National Bank (SNB) was trustee of both plans. Both plans provided several options under which a participant could withdraw his or her share of plan assets, including "Option 4: A single lump-sum payment."
Dr. Warren was advised that it would be advantageous for him to "roll over" his interests in the two retirement plans into a self-directed individual retirement account (IRA). Documents from the plans specifically allowed such a rollover as a means for continued deferral of income taxes on plan assets. In order to carry out the advice to cause a rollover from the retirement plans to the IRA, SNB was directed to transfer all of the assets in Dr. Warren's retirement plan accounts to the investment banking firm of Prescott, Ball and Turbine, Inc. (PBT). As of September 30, 1984, Dr. Warren's balance in the two plan accounts totalled $556,242. SNB transferred approximately $388,148 in two distributions to PBT on December 5 and 11, 1984. The balance of $168,094 was transferred on January 9 and May 23, 1985.
Dr. Warren filed suit in district court. His amended complaint charged that SNB's failure to transfer all of the assets in his retirement plan accounts to the IRA in calendar year 1984 constituted a breach of the trustee's fiduciary duty. The amended complaint alleged that, either through negligence or in order to earn additional fees as trustee, SNB failed to distribute all of Dr. Warren's plan assets during a single calendar year. Under the Internal Revenue Code, the complaint alleged, the transfer to an IRA would have been a tax-free rollover if accomplished within a single calendar year. Because SNB failed to transfer all of the funds in 1984, that portion transferred in 1985 was subject to income taxes. Dr. and Mrs. Warren paid $74,476 to the Internal Revenue Service and $12,729 to the State of Ohio, all out of funds received from the retirement plans.
In addition, according to the amended complaint, the funds that SNB transferred in 1985 lost their eligibility for rollover treatment and could no longer be retained in the IRA. Thus, future income earned on these funds has lost the benefit of "the compunding effect of tax deferment" and will be taxed as received rather than at the time of ultimate distribution from the IRA. The amended complaint alleged that the loss of rollover treatment damaged Dr. Warren in the total amount of $375,430.
As a beneficiary of the plans and a joint filer, Mrs. Warren joined Dr. Warren as a plaintiff. They sued SNB and an employee of the bank responsible for management of the plans. For convenience we will refer to the plaintiffs collectively as Dr. Warren or the plaintiff, and the defendants as SNB or the bank.
In support of its motion to dismiss the amended complaint for failure to state a claim the bank filed a brief in which it argued that the plaintiff was seeking to recover "extra-contractual" damages, a type it claimed was not recoverable under any section of ERISA. The bank relied on Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985), and a line of court of appeals decisions applying Russell. The bank argued that it had distributed all of Dr. Warren's assets and that his complaint sought no benefits due under the retirement Dr. Warren responded that his action for compensatory damages states a claim upon which relief can be granted because the damages it seeks are in fact "contractual." He equated contractual damages with "general" damages, and extracontractual damages with "special" damages, and asserted that the damages he sought were "general." Dr. Warren also attempted to distinguish Russell insofar as that case involved a delay in processing the plaintiff's claim for disability benefits in a situation where the plaintiff's entitlement to such benefits was disputed. The plaintiff in Russell sought punitive damages and compensatory damages for emotional distress and the cashing-out of the retirement savings of plaintiff's husband. Unlike Russell, in the present case Dr. Warren was fully vested in the retirement plan assets held by the bank, and he sought compensatory damages that flowed directly and proximately from the bank's failure to provide a contractual benefit, i.e., a single lump-sum distribution.
plans. ERISA provides only for recovery from a fiduciary of "contractual" damages, i.e., damages for failure to pay to a participant or a beneficiary funds or other benefits to which the participant is entitled under the terms of the plans.
Dr. Warren filed copies of a "Summary Plan Description" for each plan. In addition to describing the plan and available optional settlements, each summary plan description contained the following statement:
(6) TREATMENT OF DISTRIBUTIONS
Whenever you receive a distribution from the Plan, it will normally be subject to income taxes. However, you may reduce, or defer entirely, the tax due on your distribution through use of one of the following methods:
(a) The rollover of all or a portion of the distribution to an IRA or another qualified employer plan. This will result in no tax being due until you begin withdrawing funds from the IRA or other qualified employer plan. BUT, the rollover of the distribution MUST be made within strict time frames (normally, within 60 days after you receive your distribution). Further, under certain circumstances all or a portion of a distribution may not qualify for this rollover treatment.
(b) Subjecting the distribution to favorable income tax treatment under the "10 year forward averaging" or "capital gains" method of taxation.
WHENEVER YOU RECEIVE A DISTRIBUTION, THE PLAN ADMINISTRATOR WILL DELIVER TO YOU A MORE DETAILED EXPLANATION OF THESE OPTIONS. HOWEVER, YOU SHOULD CONSULT QUALIFIED TAX COUNSEL BEFORE MAKING A CHOICE.
The district court granted the bank's motion to dismiss on two grounds. First, the court held that the amended complaint did not allege sufficient facts to state a claim. The court stated that Dr. Warren did not allege that the terms of the summary plan descriptions explicitly imposed a duty on the bank to act within the calendar year. Further, the complaint did not allege that Dr. Warren advised the bank of the necessity of transferring all the funds during 1984, and "it is clear that the participant has the burden to instruct SNB concerning the particulars of his distribution before any duty could possibly arise on the part of the trustee to act accordingly." The court found nothing in the papers submitted by the plaintiff to suggest that it would be proper to infer a duty on the part of the bank to distribute Dr. Warren's retirement funds within one calendar year.
After granting the bank's motion on the basis of its finding that the amended complaint was defective, the district court proceeded to consider whether the damages claimed by Dr. Warren are recoverable under section 502(a)(3) of ERISA. The court discussed Russell and noted that it does not define "extracontractual" damages. Then, after noting that several courts have held that Russell precludes the recovery of extracontractual damages in actions brought pursuant to section 502(a)(3), the The district court then determined that the damages sought by Dr. Warren for "tax and tax interest liability and loss of investment earnings" are extracontractual in nature. It reached this determination by relying principally upon the statement in Drinkwater v. Metropolitan Life Ins. Co., 846 F.2d 821, 824 (1st Cir.), cert. denied, 488 U.S. 909, 109 S.Ct. 261, 102 L.Ed.2d 249 (1988), that damages sought by a plan participant in that case were extracontractual "in that the relief is not within the terms of [the] ERISA-governed benefit plan." The district court also concurred in the Drinkwater court's conclusion that "other appropriate equitable relief," as used in Sec. 502(a)(3) is limited to injunctive or declaratory relief. The court found that its conclusions are fully supported by the common law of trusts.
district court stated that it agreed with those decisions.
In Russell, a beneficiary sought compensatory and punitive damages for the improper or untimely processing of her claim for employee disability benefits. 473 U.S. at 136, 138, 105 S.Ct. at 3087, 3088. The action was brought under section 502(a)(2) 1 of ERISA...
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