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Supreme Court reduces exposure for knowing participants in fiduciary breach.

The Employee Retirement Income Security Act (ERISA) imposes substantial personal liability on. benefit plan fiduciaries and provides a clear definition of who is and is not subject to it. However, when there is a fiduciary breach plaintiffs often allege that persons who were not fiduciaries should be held liable for damages as "knowing participants," relying not on the explicit language of ERISA but, rather, on general principles of trust law.

Accountants, bankers, lawyers, actuaries and third-party administrators have been named as knowing participants in ERISA fiduciary actions. The courts have been divided on the extent of their liability.

In Mertens v. Hewitt Associates, the U.S. Supreme Court voted 5-4 to construe ERISA strictly, rejecting the argument that nonfiduciaries could be liable for compensatory damages for their knowing participation in a fiduciary breach. However, knowing participants still are subject to additional equitable remedies, including the requirement to make restitution, which generally is limited to restoring ill-gotten gains--usually in the form of nonfiduciaries' fees--instead of the entire amount of the questionable plan transaction.

Some nonfiduciary defendants in benefit plan cases have alleged they were not liable under traditional state malpractice statutes for advice rendered to a benefit plan. They argue ERISA is the only law governing employee benefit plans and since the Supreme Court held they were not liable under ERISA, they are immune from liability of any kind.

In at least one post-Mertens case, Air-parts Co. v. Custom Benefit Services of Austin (D. Kansas 1993, LEXIS 10909), a nonfiduciary benefit plan consultant successfully defended itself against a state law claim for negligence on the theory that the claim was pre-empted by ERISA. Taken together with Mertens, Air-parts seems to imply that nonfiduciary benefit plan advisers are exempt from liability for damages under almost any theory, no matter what wrong they may have committed.

The respite for nonfiduciaries may be short-lived, however. Senator Howard Metzenbaum (D-Ohio) and the Department of Labor already have begun work on legislation to amend ERISA and reverse the Mertens decision. (Mertens v. Hewitt Associates, 61 USLW 4510, 1993)
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Dec 1, 1993
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