Monday, March 06, 2006

Milofsky Cleared for Take-Off

The Fifth Circuit as a whole has revived the Milofsky lawsuit. As previously reported here in For Your Benefit, American Airline pilots claimed that they lost money because plan fiduciaries botched the transfer of certain plan assets. Neither the district court nor the appeals panel believed that the pilots had a legal claim. Essentially, the pilots were out of luck because the alleged fiduciary breaches affected only them and not all members of the plan. Now, in a two page opinion, the Fifth Circuit as a whole has ruled that the pilots can proceed with their lawsuit.

The key seems to be that the panel and district court failed to accept the plaintiffs' allegation that the lawsuit was on behalf of the plan. Under the notice pleading rules in effect in the federal courts, the plaintiffs' allegation was sufficient. The Fifth Circuit also ruled that the plaintiffs' claim was not a "disguised" benefit claim requiring exahaustion of adminstrative remedies but was, as pled, a fiduciary breach claim that did not require exhaustion.

The Fifth Circuit, however, did not explicitly rule that the plaintiffs' claims were, as a matter of law, on behalf of the plan, rather than themselves. This is somewhat odd, because the issue is not one of first impression. Appeals courts in the Third and Sixth circuits have concluded that subclasses of 401(k) plan participants may seek money damages on behalf of the plan even though the fiduciary violations affected only a subset of the plan’s participants. So there was a legal framework in place to support the pilots if the Fifth Circuit wanted to use it. Perhaps the Fifth Circuit had in mind the Third Circuit's Schering-Plough decision, in which the court distinguished the Milofsky panel decision:

In Milofsky, the plaintiffs alleged that the value of their investments in the BEX plan decreased because of the failure of the defendants to transfer the funds to the American Eagle 401(k) plan. . . .Thus, this alleged loss occurred prior to the transfer of the BEX plan participants’ investments to the American Eagle 401(k) plan. In Milofsky, the plaintiffs sought damages on behalf of the BEX plan members, and did not seek to restore assets of the American Eagle 401(k) fund. Here, the Plaintiffs seek damages from the fiduciaries for their violation of their duty to a subclass which had transferred its funds to the trustee of the Savings Fund.

The pilots now return to the district court for "further development" of their claims.