Legal and Legislative Reporter: Fiduciary Duties Breached

Every month, the International Foundation releases the Legal and Legislative Reporter, a compilation of new employee benefits-related case summaries. Below is a summary we thought you’d be interested in. Content provided by Morgan, Lewis & Bockius LLP.

The U.S. District Court for the Eastern District of Pennsylvania grants the Department of Labor’s motion for default judgment regarding its claims against defendants for breach of fiduciary duties and prohibited transactions.

The plaintiff is the United States Department of Labor. The defendants include a defunct printing company, two former executives of the company, the company’s 401(k) plan and the employee health plan. The 401(k) plan and health plan are both governed by the Employee Retirement Income Security Act of 1974 (ERISA).

The plaintiff asserted claims against the defendants under ERISA for breach of their fiduciary duties and engaging in prohibited transactions in connection with their administration of the 401(k) plan and health plan for the company’s former employees.

The company established and maintained a 401(k) plan and health plan for the benefit of employees. The 401(k) plan allowed employees to make contributions via payroll deductions and the health plan was self-funded by employer contributions and employee payroll deductions. The company was the plan administrator for both plans and acted as the fiduciary along with the defendant executives.

In 2018, the company went into bankruptcy and stopped operating. At that time, the former employees that participated in the 401(k) plan were entitled to distributions. The defendant executives did not begin termination of the 401(k) plan or distribution of its remaining assets until May 10, 2021. When the plaintiff filed suit, the 401(k) plan participants still had not received distributions of over $3 million in assets.

In addition, the health plan offered medical benefits through a third-party administrator and agreed to forward insurance premiums to pay for medical claims filed by the health plan’s participants. The plaintiff alleges that from at least January 1, 2016 through December 31, 2017, the company and executives withheld over $228,000 in health plan contributions from employees’ paychecks, but did not forward those funds to the third-party administrator. Instead, the company and executives placed the funds in the general accounts associated with the business and used it for other purposes. As a result, the third-party administrator retracted coverage for over 1,300 claims incurred in 2016 and 2017, and the health plan participants and beneficiaries will be billed for that instead.

In response to the defendants’ failure to respond to the plaintiff’s complaint, the plaintiff moved for default judgment seeking to (1) remove the defendants as fiduciaries of the plans, (2) authorize the plaintiff to appoint an independent fiduciary of the plans and (3) enjoin the defendants from serving as fiduciaries of ERISA-covered plans in the future. The court first reviews the motion for default judgment.

Three factors control whether a default judgment should be granted: (1) prejudice to the plaintiff if default is denied; (2) whether the defendant appears to have a litigable defense and (3) whether the defendant’s delay is due to culpable conduct. When a defendant has failed to appear or respond in any fashion to the complaint, this analysis is necessarily one-sided; entry of default judgment is typically appropriate in such circumstances at least until the defendant comes forward with a motion to set aside the default judgment pursuant to Section 55(c) of the Rules of Civil Procedure.

Here, the court finds that all three factors weigh in favor of granting a default judgment against the defendants. The defendants have failed to respond to the plaintiff’s claims and without a default judgment, the plaintiff will be left with no other means to vindicate its claims. Further, the court is unable to consider whether the defendants have any litigable defenses because they never answered or responded to the complaint or otherwise participated in any part of the litigation. Finally, the defendants’ failure to answer or otherwise respond to the complaint, without providing any reasonable explanation, permits the court to draw an inference of culpability on its part. Therefore, the court finds that default judgment is appropriate.

Regarding the relief the plaintiff requested, the court also finds that it is appropriate to grant the plaintiff’s request to remove the defendants as fiduciaries of the plans, bar the defendants from serving as fiduciaries of ERISA-covered plans in the future and appoint an independent fiduciary of the plans. The court notes that this action is appropriate due to the defendants’ failure to comply with their fiduciary duties and their use of plan assets for their own benefit. Therefore, they cannot be trusted to manage ERISA plans or their assets in the future. The court also finds that the defendants are responsible to pay for all the costs and fees associated with the new independent fiduciary.

Accordingly, the court grants the plaintiff’s motion for default judgment.

Walsh v. Great Atlantic Graphics Inc., No. 2:21-cv-03280 (E.D. Pa., September 19, 2022).

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