Cashed-out retiree has standing to sue

A former employee who has "cashed out" his 401(k) plan retains standing to sue the administrator of the plan under the Employee Retirement Income Security Act (ERISA) for alleged mismanagement of the fund, the 3d U.S. Circuit Court of Appeals has ruled. The suit alleged that the company's stock price plummeted in 2004 as the result of a risky and ultimately failed merger and that the administrators made false and misleading statements about the merger causing the plaintiff Graden and others to invest.

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A former employee who has “cashed out” his 401(k) plan retains standing to sue the administrator of the plan under the Employee Retirement Income Security Act (ERISA) for alleged mismanagement of the fund, the 3d U.S. Circuit Court of Appeals has ruled. A three-judge panel reversed a lower court’s decision to dismiss the suit on the ground that such a former employee, once he is cashed out, is no longer a “participant” in the plan and has therefore lost standing under ERISA. Graden v. Conexant Systems Inc., No. 06-2337. “When determining participant standing under ERISA, the relevant inquiry is whether the plaintiff alleges that his benefit payment was deficient on the day it was paid under the terms of the plan and the statute,” 3d Circuit Judge Thomas Ambro wrote. “If so, he states a claim for benefits, which, if colorable, makes him a participant with standing to sue,” Ambro wrote. The ruling revived a proposed ERISA class action that accuses the administrators of the Conexant Systems 401(k) plan of breaching their fiduciary duty by allowing some employees to choose a plan that contained only Conexant common stock. The suit alleged that the company’s stock price plummeted in 2004 as the result of a risky and ultimately failed merger with Globespan Virata Inc., and that the administrators made false and misleading statements about the merger that caused plaintiff Howard Graden and others to invest in the fund. U.S. District Judge Stanley Chesler of the District of New Jersey dismissed the suit for lack of statutory standing, ruling that Graden was not a “participant” for purposes of ERISA because he had already cashed out of the plan. On appeal, the case attracted significant attention: Amicus briefs supporting Graden were filed by the U.S. Department of Labor and older Americans’ advocate AARP; Conexant was supported by an amicus brief from the National Association of Manufacturers. Ambro ruled that Chesler erred by failing to recognize that a cashed-out former employee may still have standing to sue if he alleges a valid claim for a lost benefit that resulted from mismanagement of the fund prior to his cash-out. “Statutory standing is simply statutory interpretation: The question it asks is whether Congress has accorded this injured plaintiff the right to sue the defendant to redress his injury,” Ambro wrote. Graden qualified under that test, Ambro continued, because his suit alleged that Conexant’s mismanagement of plan assets caused a loss to the plan that ultimately harmed him and other plan participants. “This allegation clearly qualifies as a concrete injury traceable to Conexant and redressable by a court,” Ambro wrote. Graden had sued under Section 1132(a)(2), a provision in ERISA that allows for suits addressing losses resulting from fiduciary misconduct. Ambro noted that the U.S. Supreme Court has held that suits under Section 1132(a)(2) are derivative in nature, meaning that while various parties are entitled to bring suit � participants, beneficiaries, fiduciaries and the U.S. Department of Labor � they do so “on behalf of the plan itself.” But while a comparison to derivative shareholder suits may come to mind, Ambro said, it is important to remember that ERISA law is deeply rooted in the law of trusts. Section 1132(a)(2), he said, “merely codifies for ERISA participants and beneficiaries a classic trust-law process for recovering trust losses through a suit on behalf of the trust.” Graden’s lawyers argued that because Conexant’s breaches improperly reduced the value of plan assets allocable to him, he is entitled to additional benefits that will become available once Conexant makes good on the loss to the plan. Ambro agreed, finding that the term “benefits,” as used in ERISA, is “simply the money to which a person is entitled under an ERISA plan.

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