Is it okay for a fiduciary to abandon a good claim because the plan lacks money to pay lawyers?

[Peter Gulia]

Here's the hypothetical situation that a plan fiduciary faces:

Her predecessor obviously breached his duties to the retirement plan, and it is clear that the breach caused a loss of at least $1 million. The fiduciary found that the predecessor has sufficient assets so that he could pay a judgment up to about $5 million. The small plan lacks money that it could use to pay lawyers to pursue the plan's fiduciary-breach claim. The fiduciary asked a few law firms if they would take the case with no current fee payments but the right to court-awarded fees. Each of the law firms said "no dice; the case is too small for us to take any risk." The fiduciary also talked about this situation with the Labor department, and it too said that the Department lacks the resources to litigate this fiduciary-breach claim.

Any bright ideas about what the fiduciary can or should do?

[jpod]

Why not a contingency fee arrangement? I don't recall ever hearing anything that would prohibit a contingency arrangement under ERISA, and while the fiduciary should negotiate the best arrangement possible isn't $0.67 on the dollar better than $0.00 (could be a lot better than $0.67 with attorney's fees although the fee agreement would have to include a commitment by the attorney to seek attorney's fees)? Alternatively, aren't there finance companies that would bankroll this case (if the breach is as "obvious" and the pockets as deep as you suggest)?

[david rigby]

Do your facts (lack of funds for attorney) alter your classification as a "good claim"?

(Hey, just asking, not expressing an opinion.)

[Peanut Butter Man]

Would Circular 230's prohibit on contingency fees apply in this situation? I can't tell from the facts presented.

If the plan sponsor cannot afford to litigate, have they explored the cost of alternative dispute resolution, such as mediation or arbitration?

Has the plan sponsor also weighed the cost of litigation against the former fiduciary compared to the cost of defending a lawsuit brought by the participants and beneficiaries once they learn of the loss in their account balances due to the failure by the plan sponsor to adequate monitor the former fiduciary? Or the cost of defending a lawsuit brought by the participants and beneficiaries for the plan sponsor's decision not to attempt to recover from the former fiduciary.

[Peter Gulia]

Out-of-court dispute resolution seems unlikely because none of those who would be defendants has agreed to it. Moreover, the plan might need court-ordered discovery and interrogatories to prove the breach that the fiduciary knows happened.

About a contingency fee, some plaintiffs' lawyers are concerned that ERISA (through a combinatoin of ERISA 514 and ERISA 502's fee-shifting provision) might preempt State law that provides a charging lien on a client's recovery, leaving the lawyers with a contract right to a fee but no property from which to self-enforce it if the plan breaches its agreement. Litiigation-funding businesses are even more concerned about a practical ability to control the recovery proceeds.

Yes, the currently-serving fiduciary is worried about her responsibility to participants, which is the source of the query about what she might do if arbitrating or litigating the plan's claim isn't practical.

[Guest Sieve]

As an aside, in contingency fee cases the recovery check is cut jointly in the name of the plaintiff & the attorney, so the attroeny will get paid because the plaintiff cannot get paid without the attorney agreeing to sign the check. And, the contingency fee contract with the plaintiff should lay that out clearly.

[jpod]

FGC: Interesting comment about what plaintiff's lawyers may fear about contingency cases, but it's a moot point if you find one to take it on a contingency basis. Was your comment intended to tell us that the fiduciary has searched high and low for someone to take it on a contingency basis and everybody turned her down because of the issue you describe, or is the issue you describe merely an academic one? Same query regarding finance companies.

[Peter Gulia]

To jpod, Sieve, Peanut Butter Man, and David Rigby, thanks for the further thoughts.

The issues are not academic; they come from real-life law firms and litigation-funding businesses. (As I sometimes do on BenefitsLink, the hypothetical describes essential facts of the issue we're thinking about, while varying some facts to preserve confidences.)

The law firm also was worried that, on a $1 million claim, its contingency fee might be no more than $400,000 and that - after discounting for even a slight probability of not winning or not collecting - the amount is not enough for the time and opportunity cost that they would invest.

The currently-serving fiduciary is worried about her responsibility from a moral perspective, not a fear of liability. (The fiduciary believes that the plan's participants would have even more difficulty finding help to pursue claims.) The fiduciary simply wants to do the best of what she can do in a difficult situation.

[K2retire]

The law firm also was worried that, on a $1 million claim, its contingency fee might be no more than $400,000 and that - after discounting for even a slight probability of not winning or not collecting - the amount is not enough for the time and opportunity cost that they would invest.

I am told that the same is also true for many legitimate personal injury cases. It's a sorry commentary on our judicial system when valid claims are dropped because they are not sufficiently profitable.

[jpod]

I'm not buying it (if the facts are as good as stated).

[mbozek]

This is no different that the decision of the plan admin not to commence a suit to recover excess payments b/c the plan participant is dead or the person who received the funds has declared bankruptcy or no longer has possession of the funds so a lawsuit would not recover the payments. Its a prudent business decision not to bring a suit if the plan does not have surplus assets needed to pay for the cost of recovering the amount caused by the breach of fiduciary duty. Also there is no guarantee of an adequate recovery even with the best of facts.