Supreme Court: Non-Fiduciary Parties-In-Interest Still Liable>
By Mitchell S. Ostwald
The U.S. Supreme Court ruled against a broker dealer for claims brought against it for violations under the Employment Retirement Income Security Act (ERISA) seeking to recover losses on a motel property investment. They alleged that the broker participated as a non-fiduciary party in interest in a prohibited transaction.
In the matter of Harris Trust & Savings Bank v. Salomon Smith Barney (99-579), which the U.S. Supreme Court decided on June 12, 2000, the court reviewed Section 406(a) of ERISA that bars a fiduciary of an employee benefit plan from causing the plan to engage in certain transactions with a "party in interest". The decision, which Justice Thomas wrote for the majority opinion of the court, was whether that authorization extends to a suit against the non-fiduciary "party in interest" to a transaction. The court held it does.
The litigation arose when Ameritech Pension Trust (APT) fiduciaries - its trustee, petitioner Harris Trust & Savings Bank and its administrator, petitioner, Ameritech Corporation - discovered that the motel interest that it had purchased from Salomon during the late 1980's was nearly worthless. APT had paid nearly $21 million dollars. Petitioner maintained that the interest had been worthless all along. Salomon asserted, to the contrary, that the interest declined in value due to a down turn in the motel industry. Whatever the true cause, petitioner sued Salomon in 1992 under Section 502(a)(3) which authorizes a "participant, beneficiary or fiduciary" to bring a civil action "to enjoin any act or practice which violates any provision of ERISA. "
The lower court's ruling, the Seventh Circuit, and Salomon's conclusion was that absent a substantive provision of ERISA expressly imposing a duty upon a non-fiduciary party in interest, the non-fiduciary party could not be held liable under Section 502(a)(3), one of ERISA's remedial provisions. The high court disagreed.
The court reasoned, while taking into account the common law, that it "leads us to reject Salomon's complaint that our view of Section 502(a)(3) would incongruously allow not only the harm to the beneficiaries, but also the culpable fiduciary, to seek restitution from the arguably less culpable counterparty-transferee. " It would seem then that the high court has provided fiduciaries and trustees with the ability to maintain actions, even in an ERISA context against the broker dealer for their negligence, breach of fiduciary duty, and then ill-gotten gain. Since large institutions turn to broker dealers for financial assistance, the added protection and interpretation of the law will provide additional consumer safeguards, even for large pension plans.
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