On August 5, 2011, the Second Circuit Court of Appeals issued its much-anticipated decision in Faber v. Metropolitan Life Insurance Co ., affirming the dismissal of the plaintiff's putative class action that alleged MetLife breached its ERISA fiduciary duties by distributing ERISA-governed life insurance benefits through Retained Asset Accounts ("RAAs"). Plaintiffs sought disgorgement of profits and injunctive relief by claiming that MetLife's use of RAAs to retain and invest life insurance proceeds owed to beneficiaries was (1) a violation of ERISA § 404(a)(1) because the RAAs were not being used solely in the interests of the plan participants and beneficiaries, and (2) a violation of ERISA § 406(b)(1) because MetLife, as a fiduciary, was selfdealing in plan assets.
In affirming the Southern District of New York, the Second Circuit, in essence, adopted the Department of Labor's opinions expressed in its February 17, 2011, letter brief. (See February 22, 2011, Jorden Burt LLP Client Alert). Specifically, the Court concluded that MetLife could not be held liable for breach of fiduciary duty in this case because the express terms of the plaintiffs' ERISA-governed plans permitted MetLife to pay benefits through RAAs. Accordingly, once the benefits were paid into the RAAs, MetLife's ERISA fiduciary duties ceased and MetLife no longer had an ERISA-governed relationship with the plan beneficiaries.
Additionally, the Court rejected plaintiffs' argument that MetLife continued to be a plan fiduciary because the funds in MetLife's general account that supported the RAAs were plan assets. The Court, relying on a prior DOL opinion regarding the definition of "plan assets," concluded that MetLife's general account funds were not plan assets because the Plans did not have ownership interests in such funds and there was nothing in the relevant Plan documents creating such ownership interests.
Finally, as in the DOL's letter brief, the Court reconciled its opinion with that of the First Circuit in Mogel v. UNUM Life Ins. Co. of America, by commenting that the outcome of the two cases turned on the relevant plans' language - in Faber, the Plans permitted the payment of benefits through RAAs, while, in Mogel, the plan mandated that benefit payments be made in a "lump sum." Notably, the Court also acknowledged that its decision is at odds with several district court decisions from the past year. See e.g. Otte v. Life Ins. Co. of N. Am., No. 09-CV-11537-RGS (D. Mass.); Vader Luitgaren v. Sun Life Assur. Co. of Canada, No. 1:09-cv-11410-NG (D. Mass.); Edmonson v. Lincoln Nat'l Life Ins. Co., No. 10-4919 (E.D. Pa.).
The Second Circuit's decision in Faber is the first circuit court decision to consider the DOL's position regarding insurers' common use of RAAs to pay ERISA-governed insurance benefits. While this decision will be relied upon by the insurance industry in the other pending cases challenging RAAs in the ERISA context, the extent to which Faber will be applied to those cases remains to be seen (see e.g. Edmonson).