To Boldly Go Where No Class Action Plaintiff Has Gone Before: Church Plan Class Actions

One of the interesting developments that caught my eye recently, and likely many of yours as well, was the filing of class action complaints challenging whether certain plans were, in fact, church plans for purposes of ERISA and thus, exempt from many of its requirements. This excellent paper on this development, by Wilber Boies and a cast of thousands at McDermott Will, delves into this issue with great insight. It is worth a read in and of itself if you want to understand both this development, and the legal arguments being pressed to challenge the status as church plans of the defendants in those cases.

Separately, though, I wanted to comment on a few points that the article focuses on, and how it relates to some of the thoughts on ERISA litigation and class action litigation that I have developed in posts over the years. First, I have discussed over the years that ERISA, to a large extent, is based on a private attorney general approach to plan discipline. There are limits to the resources of the DOL when it comes to enforcing the fiduciary obligations, funding requirements, prohibited transaction rules, and other aspects of benefit plans. ERISA, primarily through its breach of fiduciary duty provisions and the availability of the class action mechanism, relies on private enforcement actions to enforce those rules and obligations in the many, many cases where problems with a plan arguably exist, but for one reason or another are not resolved by action by the designated regulator. No matter what one thinks of class action plaintiffs’ firms, the reality is that both the threat of breach of fiduciary duty class actions and the changes imposed by suits that are successful play a significant role in maintaining the standards and integrity of benefit and pension plans. I have often written that most plan sponsors and fiduciaries, in my experience, want to run a sound and successful plan. They don’t, however, always succeed, and there are enough exceptions to this rule to demonstrate that at least some plans aren’t run with that goal in mind. The threat of breach of fiduciary duty class actions serves as a kind of Damocles’ sword hanging over the heads of all fiduciaries – both those who are trying to do a good job and those who have other motivations – leading, in my opinion, to better run plans in the cases of those sponsors who mean well and less egregiously run plans in the cases of those sponsors who mean less well. Of course, successful class action cases alleging breach of fiduciary duty in instances where a plan truly is poorly run also have the effect of actually fixing, to one degree or another, problems in those plans.

Second, the article explains the theories being pressed by the class action bar in these cases, which can be summed up in a soundbite as: the regulators have given plans a free pass in this area for years; the plans in question should not rightly be considered church plans; and the courts should now actually look closely at this issue and narrow the scope of the exception for church plans. I am not sure how persuasive an argument this will be, given the decades of regulatory rulings the argument challenges. However, the argument itself is a perfect example of my first point, above, concerning the beneficial private attorney general role played in the system by the class action plaintiffs’ bar: here, they are testing whether the controlling standards for church plans are correct, and giving the courts an opportunity to address this in detail. Eventually, these cases and this argument will almost certainly end up in the appeals courts, giving rise to a body of modern, well-developed authority on the issue. In the end, this can only benefit everyone (even if it ends up being expensive for the particular plans who are sued and/or for their insurers); plan sponsors, participants, and their lawyers will have a much better sense at the end of the day of exactly where the borders of church plan status rightly rest. There is a perfect corollary for this in the run of employer stock drop class action cases prosecuted over the past several years, which resulted in a series of extensive, well-reasoned appeals court opinions discussing and adopting what has come to be known as the Moench presumption. If you think about it honestly, without a bone to pick dependent on which side of the “v” you normally sit, this was an important and beneficial development for ERISA plans, and not just for litigation, but also for designing and running benefit plans: we now know, but did not before, exactly the context in which holding employer stock in a falling market can and cannot give rise to fiduciary liability. This is a tremendous boon to anyone designing a plan going forward, or trying to advise a plan sponsor or fiduciary of its obligations with regard to employer stock holdings in an existing plan.
 

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