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ERIC
Judiciary

THE ERISA COMMITTEE

<nobr>Mar 27, 2006</nobr>

Pension Impact Seen for Bankruptcy Case Seeking Certiorari

Morton Klevan, senior policy adviser to the assistant secretary for employee benefits security, said a case currently seeking certiorari before the United States Supreme Court, Pereira v. Farace, could be the most important legal case affecting pension law in the last year. The case involved the trustee of a bankrupt corporation suing the chairman, officers, and directors for alleged self-dealing and breach of fiduciary duty. Klevan’s remarks to the American Law Institute-American Bar Association meeting in San Francisco were reported in BNA’s Daily Executive Report.

The Second Circuit Court of Appeals last June held the bankruptcy trustee's breach of corporate fiduciary duty claims seeking damages from the directors and officers were legal in nature and thus should have been tried by a jury (Pereira v. Farace, 2d Cir., No. 03-5053(L), 6/30/05). The ruling upsets a multimillion-dollar judgment entered after a bench trial against various individual defendants. Although the remedies for common law breach of fiduciary duty historically have been considered equitable (i.e. restorative), the remedy the bankruptcy trustee sought here was compensatory (money) damages, rather than equitable restitution of corporate funds in the individual defendants' possession, the court said.

The petition for certiorari before the U.S. Supreme Court asks whether a prior U.S. Supreme Court ruling, Great-West Life & Annuity Ins. Co. v. Knudson can be correctly read as overruling long-settled law that actions against fiduciaries are exclusively equitable and therefore did not provide defendants the right to a jury.

According to BNA reporters, Klevan told the American Law Institute-American Bar Association pension conference meeting, “The implication of this decision, if upheld, is immensely significant.” It would mean that there could be no monetary recovery against fiduciaries under the Employee Retirement Income Security Act's civil enforcement Section 502(a)(3) for losses caused by a fiduciary breach, absent the narrow situation where unjust enrichment could be proved, he said.

"What's really at issue in this case is not restitution, which measures losses based on the defendants' gains, and not on losses suffered by the plaintiffs, but the classic equitable remedy known as surcharge, which seeks to put the beneficiary back in the position he would have been in but for the trustee's breach," Klevan said.

Most courts, including the Second Circuit, have recognized the inherently equitable nature of ERISA claims for fiduciary duties, he said.
Text Files:

Pereira v. Farace

Great-West Life & Annuity Ins. Co v. Knudson


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