Graden v. Conexant Sys Inc ( 2007 )

Opinions of the United
2007 Decisions States Court of Appeals
for the Third Circuit
7-31-2007
Graden v. Conexant Sys Inc
Precedential or Non-Precedential: Precedential
Docket No. 06-2337
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 06-2337
HOWARD GRADEN, individually and on behalf of all
others similarly situated,
Appellant
v.
CONEXANT SYSTEMS INC.; DWIGHT W. DECKER;
ARMANDO GEDAY; ROBERT MCMULLAN; MICHAEL
VISHNY; PLAN COMMITTEE MEMBERS; JOHN DOES
1– 10 fictitious names; J. SCOTT BLOUIN;
BALAKRISHNAN S. IYER;
DENNIS E. O’REILLY; KERRY K. PETRY;
BRADLEY W. YATES
Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil Action No. 05-cv-00695)
District Judge: Honorable Stanley R. Chesler
Argued April 19, 2007
Before: McKEE, AMBRO and MICHEL*, Circuit Judges
(Opinion filed July 31, 2007)
Robert Harwood, Esquire
Jeffrey M. Norton, Esquire (Argued)
Wechsler Harwood
488 Madison Avenue, 8th Floor
New York, NY 10022
Lisa J. Rodriguez, Esquire
Trujillo Rodriguez & Richards LC
8 King Highway West
Haddonfield, NJ 08033
Counsel for Appellant
Richard A. Rosen, Equire
Robyn F. Tarnofsky, Esquire (Argued)
Kerry L. Quinn, Esquire
Paul, Weiss, Rifkind, Wharton & Garrison LLP
1285 Avenue of the Americas
New York, NY 10019-6064
Gregory B. Reilly, Esquire
Deborah A. Silodor, Esquire
Lowenstein Sandler
65 Livingston Avenue
*
Honorable Paul R. Michel, Chief Judge, United States
Court of Appeals for the Federal Circuit, sitting by designation.
2
Roseland, NJ 07068
Counsel for Appellees
Jay E. Shushelsky, Esquire
Melvin R. Radowitz, Esquire
American Association of Retired Persons
601 E Street, N.W.
Washington, DC 20049
Howard M. Radzely
Solicitor of Labor
Timothy D. Hauser
Associate Solicitor
Karen Handorf, Esquire
Appellate and Special Litigation
Elizabeth Goldberg, Esquire (Argued)
United States Department of Labor
200 Constitution Avenue, N.W.
Room N-2700
Washington, DC 20210
Counsel for Amicus-Appellant
Jan S. Amundson, Esquire
National Association of Manufacturers
1331 Pennsylvania Avenue, N.W.
North Lobby, Suite 1500
Washington, DC 20004
Counsel for Amicus-Appellee
3
OPINION OF THE COURT
AMBRO, Circuit Judge
We decide whether the Employee Retirement Income
Security Act of 1974 (“ERISA”), 29 U.S.C. §§ 1001–1461,
gives an ostensibly cashed-out former employee the right to sue
the administrator of his former employer’s 401(k) plan for
allegedly mismanaging plan assets and thus reducing his share
of benefits. Because ERISA includes such a plaintiff in its
definition of “participant,” he has statutory standing to assert his
claim.
I. Facts and Procedural History
Howard Graden was a Conexant employee until
September 2002 and a participant in the Conexant Retirement
Saving Plan until October 2004. Like most 401(k) plans,
Conexant’s is a “defined contribution” one in which participants
and the employer contribute money into the participants’
individual accounts. Participants elect to invest their money in
various predetermined investment packages. Here, Graden
directed his money into Conexant Stock Fund B, a package
composed entirely of Conexant common stock.
Conexant develops semiconductor devices for broadband
4
communications equipment, and its common stock trades on the
NASDAQ. Graden’s claim centers on the period between
March and October 2004. On March 5, 2004, Conexant’s
common stock closed at a 52-week high of $7.42 per share. By
October 4, 2004 (when Graden voluntarily cashed out), it had
plummeted to $1.70 per share. According to Graden, the
March-to-October drop was the result of a risky and ultimately
failed merger. Conexant,1 he alleges, breached its fiduciary
duties to him and other plan participants by (1) offering the
stock fund as an investment option despite the fact that it was
not (and was known not to be) a prudent investment, and (2)
making false and misleading statements about the merger that
caused him to invest in the fund.
The District Court dismissed Graden’s action for lack of
statutory standing, ruling that he was not a “participant” for
purposes of ERISA because he had already cashed out of the
plan. Because statutory standing is an issue of subject matter
jurisdiction, the Court stopped after concluding that it had none
and did not consider Conexant’s alternative argument that
Graden failed to state a claim on which relief could be granted.
1
The defendants include Conexant, its officers, and the
individual members of the committee that administered the
Conexant Plan. For ease of use, we refer to them collectively as
“Conexant.”
5
Graden appeals to us.2 With him are two amici curiae:
the Secretary of Labor and AARP.3 Filing an amicus brief on
Conexant’s side is the National Association of Manufacturers.
II. Statutory Standing
As noted, the question presented is one of statutory
standing. There is no dispute about Article III or prudential
standing. Though all are termed “standing,” the differences
between statutory, constitutional, and prudential standing are
important. Constitutional and prudential standing are about,
respectively, the constitutional power of a federal court to
resolve a dispute and the wisdom of so doing. See Presbytery
of N.J. of the Orthodox Presbyterian Church v. Florio, 40 F.3d
1454, 1462 (3d Cir. 1994); Amato v. Wilentz, 952 F.2d 742, 748
(3d Cir. 1991). Statutory standing is simply statutory
interpretation: the question it asks is whether Congress has
accorded this injured plaintiff the right to sue the defendant to
redress his injury. To answer the question, we employ the usual
tools of statutory interpretation. We look first at the text of
2
We have appellate jurisdiction under 28 U.S.C. § 1291. We
review dismissals for lack of standing de novo, taking the facts
alleged in the complaint as true. Pa. Mines Corp. v. Holland,
197 F.3d 114, 119 n.2 (3d Cir. 1999).
3
Formerly known as the American Association of Retired
Persons, AARP adopted its popular four-letter acronym as its
official name in 1999. It thereby took the reference to
retirement out of its name in recognition of the fact that nearly
half of its members are still working.
6
statute and then, if ambiguous, to other indicia of congressional
intent such as the legislative history. See In re Mehta, 310 F.3d
308, 311 (3d Cir. 2002).
Graden alleges that Conexant’s mismanagement of plan
assets caused a loss to the plan that ultimately harmed him and
other plan participants. At the pleadings stage (where we accept
Graden’s allegations as true), this allegation clearly qualifies as
a concrete injury traceable to Conexant and redressable by a
court. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61
(1992). Moreover, we see no prudential concerns that would
prevent us from exercising jurisdiction.
It is undisputed that the Conexant plan is an employee
benefit plan governed by ERISA. In addition, we assume for
purposes of this appeal that the defendants are fiduciaries of the
Conexant plan. Graden brought this action under 29 U.S.C.
§ 1132(a)(2), which accords various parties the right to sue
ERISA plan fiduciaries for breaches of their fiduciary duties.
Section 1109(a) provides the following remedies for such
breaches:
[(1)] mak[ing] good to such plan any losses to the
plan resulting from each such breach, . . . [(2)] . .
. restor[ing] to such plan any profits of such
fiduciary which have been made through use of
assets of the plan by the fiduciary, and [(3)] . . .
such other equitable or remedial relief as the court
7
may deem appropriate, including removal of such
fiduciary.
As § 1132(a)(2) addresses losses to ERISA plans
resulting from fiduciary misconduct, the Supreme Court has
held that suits under it are derivative in nature—that is, while
various parties are entitled to bring suit (participants,
beneficiaries,4 fiduciaries, and the Secretary of Labor), they do
so on behalf of the plan itself. Mass. Mut. Life Ins. Co. v.
Russell, 473 U.S. 134, 144 (1985); see also In re Schering-
Plough Corp. ERISA Litigation, 420 F.3d 231, 241 (3d Cir.
2005). Consequently, the plan takes legal title to any recovery,
which then inures to the benefit of its participants and
beneficiaries.
The analogy that comes to mind quickest is to
shareholder derivative litigation, but the trust-law roots of
4
In ERISA, “participant” and “beneficiary” are distinct terms
of art. The former refers to an employee or former employee
who takes part in his employer’s plan. 29 U.S.C. § 1002(7).
The latter is a person designated by a participant to recover
benefits in the event of the participant’s death. 29 U.S.C.
§ 1002(8). The terms can be confusing because, while ERISA
is widely analogous to the common law of trusts, the
terminology differs. At common law, everyone entitled to a
beneficial interest in the principal or income of a trust is termed
a “beneficiary.” BLACK’S LAW DICTIONARY 165 (8th ed. 2004).
8
§ 1132(a)(2) run far deeper.5 When a common-law trustee
commits a breach of trust that results in a loss, any beneficiary
whose beneficial interests were affected may sue to compel the
trustee to make good on the loss. RESTATEMENT (SECOND) OF
TRUSTS § 214 & cmt. b (1959). When the trustee does so, he
restores money to the trust for the benefit of the
plaintiff/beneficiary. See AUSTIN W. SCOTT & WILLIAM F.
FRATCHER, THE LAW OF TRUSTS § 214 (4th ed. 1988); P.V.
BAKER & P. ST. J. LANGAN, SNELL’S EQUITY 284 (29th ed.
1990) (citing Bartlett & Others v. Barcaly’s Bank Tr. Co. Ltd.,
[1980] Ch. 514, 543); cf. UNIF. TR. CODE § 1002(a)(1)
(measuring trustee liability by “the amount required to restore
the value of the trust property and trust distributions to what
they would have been had the breach not occurred”). Thus,
§ 1132(a)(2) merely codifies for ERISA participants and
beneficiaries a classic trust-law process for recovering trust
losses through a suit on behalf of the trust.6
5
This is not surprising. As the Supreme Court noted in
Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110
(1989), “ERISA abounds with the language and terminology of
trust law.” Thus, we believe that the close analogy to suits on
behalf of a common law trust is hardly accidental.
6
Conexant urges that we analogize § 1132(a)(2) actions to
shareholder derivative suits, where the contemporaneous
ownership rule would prevent someone like Graden from having
standing. The analogy is inapt. Corporate shareholders own an
equity interest in the corporation; they do not own a right to any
particular asset or stream of payments. Any benefit they receive
from successfully prosecuting the corporation’s suit is
9
Graden claims that he may bring suit as a current
“participant” in the Conexant plan.7 ERISA defines a
participant as “any employee or former employee . . . who is or
necessarily indirect, as any damages go into the coffers of the
corporation. Those damages do not necessarily (or even
typically) come back out to the shareholders as a direct payment.
In the ERISA context, however, participants have a right to
receive certain monetary benefits. Unlike in the corporate
context, the loss to participants is direct, as any recovery made
“on behalf of the plan” must be paid out to the injured
participant in the form of augmented benefit payments.
7
There is an open question in our Court as to when statutory
standing must attach. Leuthner v. Blue Cross & Blue Shield of
Ne. Pa., 454 F.3d 120, 127 (3d Cir. 2006) (declining to decide
the issue with regard to a § 1132(a)(3) claim for equitable
relief). In Daniels v. Thomas & Betts Corp., 263 F.3d 66, 78 (3d
Cir. 2001), we held that, in the context of a § 1132(a)(1)(A) suit
(for failure to provide information), a person need only be a
participant at the time of breach to have statutory standing. We
expressly did not require that a person be a participant at the
time of suit. Id. Because the relevant language of
§ 1132(a)(1)(A) and (a)(2) are the same, one would expect the
Daniels holding to apply here. Graden, however, did not make
the argument in his brief; rather, his sole contention is that he is
a participant now. Absent compelling circumstances not present
here, failing to raise an argument in one’s opening brief waives
it. Laborers’ Int’l Union of N. Am. v. Foster Wheeler Corp., 26
F.3d 375, 398 (3d Cir. 1994). We therefore leave for another
day the question of whether the Daniels holding applies to
§ 1132(a)(2) actions.
10
may become eligible to receive a benefit of any type from an
employee benefit plan.” 29 U.S.C. § 1002(7). Applying this
definition, the Supreme Court has held that the term covers a
former employee with a colorable claim for “vested benefits.”
Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 118 (1989)
(quoting Saladino v. I.L.G.W.U. Nat’l Ret. Fund, 754 F.2d 473,
476 (2d Cir. 1985)). Graden’s argument is that because
Conexant’s breaches improperly reduced the value of plan assets
allocable to him, he is entitled to additional benefits that will
become available once Conexant makes good the loss to the
plan.
To evaluate Graden’s argument, we begin with the
definition of “benefit.” The term is not expressly defined in
ERISA, so we look to its ordinary meaning. A relevant
definition is a “payment or service provided for under an
annuity, pension plan, or insurance policy.” MERRIAM-
W E B S T E R ’ S O N L I NE D ICTIONARY , http://www.m-
w.com/dictionary/benefit. Essentially, “benefits” are simply the
money to which a person is entitled under an ERISA plan. In
this context, is what Graden seeks a benefit?
The Conexant plan is an “individual account plan.”8 See
29 U.S.C. § 1002(34). This means that a participant’s vested
benefits are the contents of his account: contributions (from both
the participant and employer) plus investment gains minus
8
The term “defined contribution plan” is interchangeable. 29
U.S.C. § 1002(34).
11
investment losses and any allocable expenses. 29 U.S.C.
§ 1002(34). In addition, ERISA imposes fiduciary duties on
plan administrators, 29 U.S.C. § 1104, so part of a participant’s
entitlement is the value of his account unencumbered by any
fiduciary impropriety. In other words, ERISA entitles
individual-account-plan participants not only to what is in their
accounts, but also to what should be there given the terms of the
plan and ERISA’s fiduciary obligations.
From this, it is not difficult to conclude that Graden has
standing as a plan participant. As an account-holder in the
Conexant plan, he was entitled to the net value of his account as
it should have been in the absence of any fiduciary
mismanagement. Because he colorably contends that he has yet
to receive that amount, he presses a claim for the remainder of
his monetary entitlement under his plan and ERISA—a claim
for benefits. That he presses it through § 1132(a)(2) is of no
moment (and, indeed, is sensible here). Rather than suing the
plan itself under § 1132(a)(1)(B),9 which would likely be
fruitless, as the very premise of the suit is that the plan itself
improperly lost money, he sued the person liable to make good
on the loss. If successful, this suit will restore assets to the plan
that are allocable to Graden’s account, and he will then get a
distribution from that restored account. Far from creating
p r o b l e ms , t h i s i s e x a c t l y t h e p r o c e s s t h a t
§ 1132(a)(2)—borrowing from trust law—contemplates.
9
Section 1132(a)(1)(B) allows participants to sue ERISA
plans for benefits due them.
12
Our holding accords with the reasoning of our sister
courts of appeals on this issue. In Harzewski v. Guidant Corp.,
___ F.3d ___, 2007 WL 1598097 (7th Cir. 2007) (Posner, J.),
the Court of Appeals for the Seventh Circuit decided this very
issue the same way. Explaining whether stock losses like
Graden’s are “benefits,” it stated:
Benefits are benefits; in a defined-contribution
plan they are the value of the retirement account
when the employee retires, and a breach of
fiduciary duty that diminishes that value gives rise
to a claim for benefits measured by the difference
between what the retirement account was worth
when the employee retired and cashed it out and
what it would have been worth then had it not
been for the breach of fiduciary duty.
Id. at *6.
In Coan v. Kaufman, 457 F.3d 250, 255–56 (2d Cir.
2006), the Second Circuit Court of Appeals noted that various
courts have held that former employees who accept lump-sum
distributions surrender their participant status and the right to
sue for breaches of fiduciary duty. The Court recognized,
however, that these holdings, while sensible in the context of
defined benefit plans,10 are more of a problem in defined
10
In a defined benefit plan, the amount of a participant’s
benefits are typically determined by a formula in the plan
13
contribution plans:
[W]hether acceptance of a lump-sum payment terminates
a person’s status as a participant may depend on whether
the plan is a “defined benefits” or a “defined
contribution” plan. Coan, unlike the plaintiffs discussed
in other circuits’ case law, participated in a 401(k) plan,
which is an “individual account” or “defined
contribution” plan under ERISA. See 29 U.S.C.
§ 1002(34). According to ERISA, an individual’s
“accrued benefit[s]” under such a plan are simply “the
balance of the individual’s account.” Id. § 1002(23)(B).
Arguably, therefore, Coan’s claim that the lump-sum
distribution of her account balance would have been
greater absent the defendants’ breach of fiduciary duty is
a claim “for benefits” which, if “colorable,” means that
she “may become eligible for benefits” and thus qualifies
as a “participant” under ERISA.
instrument. See Chait v. Bernstein, 835 F.2d 1017, 1019 n.1 (3d
Cir. 1987). Thus, once a participant takes a lump sum
distribution of the correct amount, he has all of his vested
benefits and may no longer sue for any alleged fiduciary
breaches. See Kuntz v. Reese, 785 F.2d 1410, 1411 (9th Cir.
1986) (per curiam). If, however, the lump sum were improperly
calculated or otherwise deficient, then the participant would
retain a claim for benefits and thus have standing to sue. See
Sommers Drug Stores Co. Employee Profit Sharing Trust v.
Corrigan, 883 F.2d 345, 349–50 (5th Cir. 1989).
14
Id. at 255–56. The Court ultimately did not decide the question,
but its analysis is compelling.
Similarly, in Crawford v. Lamantia, 34 F.3d 28, 33 (1st
Cir. 1994), the First Circuit Court of Appeals adopted the
general rule that former employees with claims for additional
benefits have standing, but ruled that the particular plaintiff in
that case lacked standing because he “failed to show that
defendants’ alleged breach of fiduciary duty had a direct and
inevitable effect on his benefits.” In our case, on the other hand,
it is clear that the alleged breach had an effect on Graden’s
benefits because their value dropped with the value of
Conexant’s common stock.
III. Additional Arguments
While we believe that our reasoning in Part II is
sufficient to resolve this case, we continue to respond more fully
to Conexant’s and its amicus’s arguments. Specifically,
Conexant contends that Graden’s claim is better characterized
as one for damages rather than benefits. Along those same lines,
it argues that because Graden cannot assert a § 1132(a)(1)(B)
claim, he cannot make a claim for benefits. In addition,
Graden’s alleged loss is, it claims, too speculative or difficult to
ascertain to be characterized as benefits. Finally, it argues that
public policy considerations counsel in favor of its
interpretation. We respond to each argument in turn.
15
The Fifth and Ninth Circuit Courts of Appeals decided
the first important cases in this area, and they both drew a line
between claims for “benefits” and claims for “damages.”
Sommers Drug Stores Co. Employee Profit Sharing Trust v.
Corrigan, 883 F.2d 345, 349–50 (5th Cir. 1989); Kuntz v. Reese,
785 F.2d 1410, 1411 (9th Cir. 1986) (per curiam). Having a
colorable claim for vested benefits gives a person participant
standing, even if his employer has ostensibly cashed him out of
the plan. Sommers, 883 F.2d at 350. In those cases, the dispute
is over whether the employee was properly accorded all of the
benefits due him; hence, for standing purposes all the employee
needs is a colorable claim that he is entitled to additional
benefits under the plan. The Sommers Court, relying on its
decision in Yancy v. Am. Petrofina, Inc., 768 F.2d 707 (5th Cir.
1985), contrasted having a claim for benefits with a claim for
damages. Sommers, 883 F.2d at 349–50.
However, relying on a benefits/damages dichotomy is
unsatisfying:
The distinction between “benefits” and
“damages” is not clear. This is in part attributable
to use of words with overlapping meaning to
describe mutually exclusive categories. The
statute simply grants rights of recovery only to a
distinct and limited type of claim which itself is
no more than a suit for damages, albeit personally
suffered because participants should have been
16
paid under the plan but were not. Clearly, a
plaintiff alleging that his benefits were wrongly
computed has a claim for vested benefits.
Payment of the sum sought by such a plaintiff will
not increase payments due him. On the other
hand, a plaintiff who seeks the recovery for the
trust of an unascertainable amount, with no
demonstration that the recovery will directly
effect payment to him, would state a claim for
damages, not benefits.
Id. In Sommers, the plaintiffs were former employees cashed
out of an ERISA plan when the trustees sold the assets of the
plan (shares of the employer’s common stock) for cash in a
transaction incident to a merger. The plaintiffs sued under
§ 1132(a)(2), alleging that the trustees breached their fiduciary
duties by agreeing to sell the shares for less than fair market
value. Like Graden, they sued to compel the trustees to make
good on the loss caused by their breach. The Court concluded
that the employees were participants with standing because they
“ha[d] a claim for an ascertainable amount allegedly owed them
at the time they received their lump sum.” Id. at 350.
The Ninth Circuit Court has also clarified that former
employees are participants with standing when they sue for
disgorgement of a plan fiduciary’s ill-gotten profits.
Amalgamated Clothing & Textile Workers Union v. Murdock,
861 F.2d 1406, 1411 (9th Cir. 1988). The Court held that such
17
profits are vested benefits because under ERISA (and the
common law of trusts) the plan has a legal interest in them.
Thus, ERISA allows a district court to order disgorging those
profits and placing a constructive trust on them for the ultimate
benefit of the plan participants. As the Court noted,
disgorgement and the imposition of a constructive trust are both
classic equitable remedies, id.; hence, they fit easily in ERISA’s
remedial scheme.
While we believe that Sommers was rightly decided, we
cannot endorse the distinction it makes between benefits and
damages.11 Per Sommers, suits for miscalculated benefits seek
monetary, compensatory relief which is, in common legal
parlance, “damages.” 883 F.2d at 349. Yet it is beyond dispute
that such relief is at the same time properly characterized as
“benefits” because it merely gives the participant what he is
entitled to receive under the plan. With this confusing overlap,
the dichotomy breaks down. Moreover, the dichotomy appears
nowhere in the statute, nor is it necessary to explain the
outcomes reached by this line of jurisprudence. In Yancy, for
example, the plaintiff sought to recover benefits that he argued
would have vested had he not retired early. 768 F.2d at 708–09.
Yancy claimed that he retired early because the plan
administrator intended illegally to reduce future benefits. Id. at
11
The Court of Appeals for the Seventh Circuit has also
noted that though Sommers reached the correct result, its
benefit/damages distinction is unpersuasive. Harzewski, 2007
WL 1598097, at *6.
18
708. The Court denied Yancy standing, but its reasoning, which
implied that he was not seeking “benefits,” needs clarification
because what Yancy sought were in fact plan payments. The
problem with Yancy’s claim was that he sought benefits for
which he could never become eligible because his voluntary
retirement occurred before those benefits came into existence.12
In reaching its decision, the Sommers Court did
emphasize what the plaintiff was entitled on the day of his
retirement. That, we believe, is the question that properly
governs these cases. If the plaintiff colorably claims that under
the plan and ERISA he was entitled to more than he received on
the day he cashed out, then he presses a claim for vested benefits
and must be accorded participant standing. If, on the other
hand, he claims that his benefits were all he was entitled to
under the plan the day they were paid but that he should yet
recover something more, then he presses a claim for something
other than vested benefits and is not entitled to standing.13
12
A fuller analysis of a similar situation appears in our
opinion in Miller v. Rite Aid Corp., 334 F.3d 335 (3d Cir. 2003).
There we held that if a plaintiff seeks plan payments for which
he did not qualify under the terms of the plan, then his claim,
though for benefits, is not colorable, and so he lacks standing.
Id. at 343.
13
Of use might be a dichotomy between suits for benefits and
suits for extracontractual damages. This distinction was
prominent in the Supreme Court’s Massachusetts Mutual
analysis because it is a sensible way of separating what the plan
and ERISA actually entitle the participant and claims for
19
Perhaps a stronger reason not to rely on the
benefits/damages dichotomy is the extent to which it causes
confusion with the damages/equitable relief dichotomy that is of
great import in § 1132(a)(3) claims. Unlike § 1132(a)(2), which
specifically imposes personal, monetary liability on trustees for
breaches of fiduciary duties, § 1132(a)(3) provides that courts
may “enjoin any act or practice which violates any provision of
this subchapter or the terms of the plan, or [grant] other
appropriate equitable relief.” 29 U.S.C. § 1132(a)(3) (internal
subparagraph divisions omitted). To determine what qualifies
as “equitable” relief, the Supreme Court has drawn a bright-line
distinction between traditional equitable relief (e.g., injunction,
equitable lien, constructive trust), which is available under
§ 1132(a)(3), and traditional legal relief (e.g., money damages),
which is not. Mertens v. Hewitt Assocs., 508 U.S. 248, 256–57
(1993); accord Great-West Life & Annuity Ins. Co. v. Knudson,
534 U.S. 204, 215 (2002). The argument to which the Court
was responding contended that any relief that a court of equity
would award in a breach of trust action should qualify as
“equitable” for § 1132(a)(3) purposes. Mertens, 508 U.S. at
255. Because courts of equity had exclusive jurisdiction over
breach of trust actions, all of the relief available—even relief
similar in kind to money damages—was awarded in equity. The
Court held that to construe the term “equitable” in that manner
would render it superfluous. Id. at 257.
compensatory or punitive relief that, though possibly cognizable
under some provision of ERISA or state law, are not actually
part of the ERISA entitlement. See 473 U.S. at 138, 144.
20
Much of Conexant’s briefing tries to convince us that
what Graden seeks are damages under the Mertens/Great-West
formulation. The problem is that whether the relief Graden
seeks is properly characterized as legal or equitable, which is the
question to which Mertens and Great-West speak, is not relevant
here. Unlike § 1132(a)(3), nothing in § 1132(a)(2) limits the
relief available to equitable relief. Similarly, nothing in the
definition of “participant” requires Graden to seek “equitable”
relief.
Conexant also relies on the supposed unavailability of
§ 1132(a)(1)(B) relief. That subparagraph allows a participant
“to recover benefits due to him under the terms of his plan.” 29
U.S.C. § 1132(a)(1)(B). Conexant argues that Graden could not
bring such a claim, and that he, therefore, lacks standing. We
disagree. One of the key differences between § 1132(a)(1)(B)
and (a)(2) is who is a proper defendant. In a § 1132(a)(1)(B)
claim, the defendant is the plan itself (or plan administrators in
their official capacities only). See Chapman v. ChoiceCare
Long Island Term Disability Plan, 288 F.3d 506, 509–10 (2d
Cir. 2002) (citations omitted). On the other hand, the defendant
in a § 1132(a)(2) claim is a plan fiduciary in its individual
capacity. See In re Schering-Plough, 420 F.3d 235. Under the
Conexant plan, Graden is entitled to the corpus and proceeds of
his prudently invested contributions. We believe that he could
demand a full benefit payment from the plan itself under
§ 1132(a)(1)(B). He, however, had good reason for not bringing
such an action. In individual account plans, all of the plan’s
21
money is allocable to plan participants. 29 U.S.C. § 1002(34).
Using a § 1132(a)(1)(B) suit to force the plan to use money
already allocated to others’ accounts to make good on Graden’s
loss would present a host of difficulties with which few sensible
plaintiffs would want to contend. Indeed, it may be that
ERISA’s fiduciary obligations prevent plans from paying
judgments out of funds allocable to other participants, in which
case the plan, though liable, would be judgment proof. Thus,
for most plaintiffs the sensible route is to use § 1132(a)(2) to get
the money in the first instance from a solvent party liable to
make good on the loss, not from the plan itself. This does not,
however, change the underlying nature of Graden’s claim as one
for benefits; it merely changes his mechanism for recovery.
Relying on some language in Sommers, Conexant also
argues that Graden’s claim is too speculative or difficult to
calculate to be a claim for benefits. Indeed, it is true that the
Sommers Court opined that someone asserting a claim for an
“unascertainable amount” would not state a claim for benefits.
883 F.2d at 350. This portion of Sommers, however, is
incorrect. As Judge Posner put it in Harzewski, “there is nothing
in ERISA to suggest that a benefit must be a liquidated amount
in order to be recoverable.” 20077 WL 1598097, at *6.
Moreover, here the amount is hardly unascertainable.
Rather, the measure of damages is the amount that affected
accounts would have earned if prudently invested.
22
In determining what the Plan would have earned
had the funds been available for other Plan
purposes, the district court should presume that
the funds would have been treated like other
funds being invested during the same period in
proper transactions. Where several alternative
investment strategies were equally plausible, the
court should presume that the funds would have
been used in the most profitable of these.
Donovan v. Bierwirth, 754 F.2d 1049, 1056 (2d Cir. 1985).
Thus, if Graden succeeds on the merits, the District Court will
look to the prudent investment alternatives that the Conexant
plan offered during this period to determine what the Conexant
Stock Fund B investors would have earned but for Conexant’s
breach.
Following the analysis in Part II, Graden’s status as a
participant flows naturally from the text of ERISA. Still, policy
concerns strengthen our conviction that we have properly
interpreted the statute. It is worth considering the ramifications
of holding that former employees in Graden’s situation are not
participants. Such a holding would allow an employer who had
mismanaged individual account plan assets to avoid liability by
cashing out the participants. By paying them the then-stated
balance of their accounts when cashed out, the employer would,
under Conexant’s logic, pay out all of the participants’
“benefits,” thereby ensuring that none would have standing to
23
sue for its breach of duty. Conexant’s protestations
notwithstanding, we find it hard to believe that Congress
intended such a result. Indeed, we have held that ERISA’s
legislative history indicates that its standing requirements should
be construed broadly to allow employees to enforce their rights.
Leuthner, 454 F.3d at 128 (citing S. REP. NO. 93–127, at 3
(1974), reprinted in 1974 U.S.C.C.A.N. 4639, 4871).
We pose another hypothetical: assume that an active
participant in the Conexant plan brings a § 1132(a)(2) action on
behalf of the plan and successfully recovers the loss caused by
Conexant’s breach (again, assuming, without deciding, there is
such a breach). The loss to the plan would necessarily include
losses suffered by former employees who were invested in the
Conexant Stock Fund, and the amount of recovery would have
to make good on those losses. Otherwise, the plan would not
recover the whole of its loss, which, according to plain text of
§ 1132(a)(2), is its right. Thus, the plan would recover money
that could only properly be allocated to people no longer in the
plan. This would be a serious problem for an individual account
plan because all of the plan’s money is allocated to individual
accounts; thus if the plan recovers money allocable to
individuals who no longer have accounts and cannot get
standing for the imposition of a constructive trust in their favor,
it is unclear what the plan would be entitled to do with the
money. Perhaps the plan would try to allocate it to current
account-holders pro rata, but if we are to take the trust-law
analogy seriously, then the recovered funds must go to the
24
people actually sustaining losses.14 The sensible holding,
therefore, is that former employees whose benefits would be
made whole by a restoration of losses to the plan are participants
with standing to sue on behalf of the plan—and take part in any
recovery.
Amicus National Association of Manufacturers urges that
we affirm because of the ramifications of labeling someone like
Graden a “participant.” The specific concern is that it will
require employers to make costly disclosures to people who, as
far as the employer is concerned, are cashed out. This worry
overstates, we believe, the concern. First, the inclusion of
ostensibly cashed-out employees in the category of participants
derives from the text of the definition and from Firestone, 489
U.S. at 103, not from our case. It was Firestone that held that
anyone asserting a colorable claim for benefits is a participant.
Id. In this case, we merely clarify that a benefit encompasses
both miscalculations of a person’s entitlement and reductions
traceable to fiduciary malfeasance.
Second, we cannot imagine holding a plan fiduciary
liable for failing to provide information to someone who, as far
as the fiduciary knows, is cashed out. Informational obligations
may reattach once the fiduciary is on notice that the person is
asserting a claim for benefits, see Daniels, 263 F.3d at 78–79,
14
As we explained in Part II, in trust-law derivative actions,
only those whose beneficial interests were harmed may sue on
behalf of the trust, for it is they who share in any recovery.
25
but until then, it seems within the fiduciary’s discretion to send
reports only those participants known to the fiduciary to
consider themselves as such.
IV. Conclusion
In sum, we hold that, when determining participant
standing under ERISA, the relevant inquiry is whether the
plaintiff alleges that his benefit payment was deficient on the
day it was paid under the terms of the plan and the statute. If so,
he states a claim for benefits, which, if colorable, makes him a
participant with standing to sue. If, on the other hand, he seeks
extracontractual damages or benefits that never vested, then he
is not a participant, and a federal court cannot entertain his suit.
Here, because Graden merely seeks the full amount of benefits
owed him given Conexant’s alleged breach of its duty of
prudent investment, he has standing to maintain this suit, and we
therefore vacate the District Court’s order dismissing Graden’s
complaint for lack of statutory standing and remand for further
proceedings.
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