In an opinion covering two cases, the Sixth Circuit recently held that ERISA confers fiduciary status to any entity that controls plan assets. The cases are Guyan International Inc. v. Professional Benefits Administrators Inc., No. 11-3126, 2012 WL 3553281 (6th Cir. Aug. 20, 2012) and Pritchard Mining Co. Inc. v. Professional Benefits Administrators Inc., No. 11-3640 (6th Cir. Aug. 20, 2012).
The plaintiffs had established ERISA-governed employee benefit plans. The respective plans were funded by a combination of employer contributions and covered employee payroll deductions. Each plaintiff entered into a Benefit Management Service Agreement with Professional Benefits Administrators (“PBA”), which detailed the various services that PBA would provide for the plans. PBA agreed, among other things, to pay medical providers for claims submitted under the plans. Each Agreement also required PBA to establish a segregated bank account for each plan, in which to deposit the funds that PBA received from each of the plaintiffs for paying the medical claims. In turn, PBA was authorized by each Agreement to pay medical claims by writing checks from these accounts. However, PBA also agreed to not commingle the funds from the plans with PBA’s own assets and to not use the funds for any other purposes.
Despite its contractual promises, the United States District Court of the Northern District of Ohio found that not only did PBA fail to use the funds supplied by the plaintiffs to pay the claims incurred by the corresponding plans, it commingled and misused plan funds for its own purposes. For example, the court determined that when PBA received too many complaints from medical providers or plan participants regarding its services, PBA would withdraw funds from a main, commingled account and put that money into the respective plan account, to pay the claims in question. Ultimately, the district court concluded that PBA failed to pay all of the claims, despite receiving money for payment from the respective plaintiffs.
Although the district court determined that ERISA preempted the plaintiffs’ breach of contract claims, it granted partial judgment in favor of the respective plaintiffs regarding breach of fiduciary duty claims under ERISA. The plaintiffs were ultimately awarded monetary damages equal to the amount of claims that PBA had not paid.
PBA appealed the partial judgments that the district court awarded to the plaintiffs. PBA contended that it was not a fiduciary under ERISA because it did not have discretionary authority or control over the plan assets and that the Agreements with each plaintiff expressly state that PBA is not a fiduciary. PBA also argued that to extend fiduciary status to any entity that exercises any control or authority over plan funds would extend fiduciary status beyond what Congress intended (i.e. potentially extending fiduciary status to a bank which merely holds deposited funds).
However, the Sixth Circuit rejected PBA’s arguments and held that PBA was a fiduciary under ERISA because it exercised control over plan assets. The Court noted that PBA had control over where plan funds were deposited, as well as when and how the funds were paid out. PBA had the authority to write checks from each of the plan accounts, and it exercised that authority. PBA decided to commingle the plan assets into a general account and then used those plan funds for its own purposes, which demonstrated that PBA had actual control over the plan funds that it received from each of the plaintiffs.
The Sixth Circuit was not moved by PBA’s argument that the Agreements state that it was not a fiduciary, noting that “a contract purporting to limit fiduciary status does not “override [ ] [a third-party administrator's] functional status as a fiduciary.” Guyan International, 2012 WL 3553281, at *3 (quoting Briscoe v. Fine, 444 F.3d 478, 492 (6th Cir. 2006)). The Court was also not persuaded by PBA’s “parade of horribles” regarding its argument that extending fiduciary status to any entity that exercises any control over plan funds would run afoul of Congressional intentions. The Court cited again to Briscoe, in which the Sixth Circuit had previously stated that the interpretation of “fiduciary” under ERISA would not include entities that ““exercise[ ] mere possession or custody over the plans’ assets.” Guyan International, 2012 WL 3553281, at *3 (quoting Briscoe, 444 F.3d at 494 (internal quotation marks omitted)). Here, however, the trial court had determined that the defendant exercised more than possession or custody, but actually commingled and eventually distributed plan assets to service providers.
Having confirmed that PBA was a functional fiduciary under ERISA, the Sixth Circuit made short work of determining that PBA breached its fiduciary duty, finding that PBA blatantly violated ERISA’s statutory commands against using plan assets for its own purposes.
The Sixth Circuit also affirmed the district court’s determination regarding the damages awarded to plaintiffs and affirmed the determination that the plaintiffs’ breach of contract claims were preempted by ERISA because PBA is a fiduciary under ERISA, warranting the application of the enforcement provision in 29 U.S.C. § 1132(a)(2).
The Sixth Circuit’s reasoning in this combined opinion reflects its prior approach to determining fiduciary status under ERISA. As outlined by the Sixth Circuit, if an entity exercises any actual control over plan funds, that entity is an ERISA fiduciary. However, “control” still means real control; an entity that merely possesses the plan funds and acts only under the direction of plan fiduciaries is not really exercising control. But deciding whether plan assets will be paid to a third party constitutes control, at least in the eyes of the Sixth Circuit.