A significant split among circuit courts on this issue remains unresolved.
When Pioneer Centres Holding Co. v. Alerus Financial on September 20 was settled instead of going before the Supreme Court, many people in the retirement legal profession and retirement industry were disappointed. With the case settled confidentially, the expected clarity the decision would offer has been lost. What remains is a significant split among circuit courts regarding the burden of proof in Employee Retirement Income Security Act (ERISA) fiduciary-breach cases.
The 10th U.S. Circuit Court of Appeals found that Pioneer Centres was required to prove a transitional trustee was at fault for a failed transaction and failed to do so.
ERISA and employee stock ownership plan (ESOP) litigator Chris Nemeth, partner at McDermott Will & Emory in Chicago said, "This particular issue that we thought was going to be decided by the Supreme Court is an issue, from an ESOP litigation perspective, that we had been dealing with at a significant level in matters that are publicly filed and in pre-litigation matters and it is an issue that crops up again and again."
Nemeth summarizes the issue in his own words: "There's a split of authority at the Federal circuit level about who bears the burden of proving what is called loss causation—if a plan participant has sued because of harm that the participant alleges is due to action taken by a fiduciary. Certain circuits courts have said causation is an element of a cause of action. Certain circuits have said that it's the plaintiffs burden to show that the harm was attributable to the fiduciary. Other courts have said that once a participant makes out a prima facia case, alleging the elements, that the burden shifts to the fiduciary to say whatever harm that is alleged to have been caused is not harm that fiduciaries caused. The basis for that is a shifting rule grounded largely in trust law.
"That is, different courts have used these issues differently. For practical purposes what that has meant over the last several years is that in certain instances, people have tried to file lawsuits in different jurisdictions because perhaps certain jurisdictions have a rule that may be more favorable to plaintiffs than defendants."
The issue behind this case also has implications outside of ESOP litigation because of the way it's positive for purposes of showing harm. It would be equally applicable in a straight ERISA case that didn't involve any ESOP, says Erin Turley, partner at McDermott Will & Emery in Dallas.
"While it's not going to be settled in this instance, it will continue to be split among the circuits and we're still going to have to know who bears this burden. That's why I think it's bigger than just an ESOP case, because that same causation and burden issue is applicable in any case involving a stock bonus, a 401(k) or any type of qualified retirement plan."
Were Nemeth or Turley surprised that the case was dismissed and the case was settled? Nemeth says, "These cases are expensive to litigate and pursue, and settlements at any stage of litigation are not surprising. We were hopeful that we would have some kind of articulation in this case from the Supreme Court, but there will be another opportunity in the near future for the court to comment on it."
Turley says, "Aside from the forum shopping that plaintiffs do because of the non-uniformity of the law, the problems with inconsistencies in the law is that decisions come out in different ways based on similar facts, which is why we're all the more hopeful that the SCOTUS in the near future will weigh in on it."