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Ninth Circuit Goes Medieval over Self-Dealing ERISA Admins

By Casey C. Sullivan, Esq. | Last updated on

If you're an ERISA lawyer or a history nerd, the Ninth Circuit has a case just for you.

Administrators of a California firefighters' pension plan breached their trust duty when they paid their own fees and expenses from the plan's assets, the Ninth Circuit ruled on Tuesday. That's some classic self-dealing, according to the court, and a breach of the administrators' fiduciary duty.

The pension plan in question was covered under ERISA, which requires that assets be held in trust and which prohibits fiduciary self-dealing. The court delves deep, with scholastic glee, into the history of trusts when finding that ERISA plans don't need to be labeled "trust instruments." Its holding that administrators may not pay themselves from the funds is, sadly, less ornate, if not less important.

You Pay Me and I Pay Me

Retired firefighter David Barboza sued the California Association of Professional Firefighters (CAPF) and California Administration Insurance Services Inc. (CAISI), the administrators of his pension plan. Under the plan, CAPF holds all assets in its name, for the benefit of plan participants, calling for day-to-day administration by a third party, CAISI.

Participants, firefighters such as Barboza from across California, make monthly contributions which are deposited to a checking account for which CAISI officers are signatories. Pension and disability payments were paid directly from these accounts, but so were CAISI's own fees.

Cestui Que Uses -- Get Ready History Nerds!

Did you know that trusts originated in medieval England as a way to pass property to friars? Judge Ikuta (or his clerks) certainly did, engaging in a bit of historical explication when addressing Barboza's claim that the administrators had violated ERISA's hold-in-trust provisions. Yes, trusts began as property transfers, a way to help monks get around their vows of poverty -- or at least farm some peat owned for their benefit, if not in their name. The agreement was called the "cestui que uses." King Henry VIII, when he wasn't busy executing his wives, managed to dispossess the monks, but not eliminate the use of trusts -- though he tried!

And so, from the English Reformation we pass, through several pages of dicta, we arrive at ERISA, which, like a medieval "feoffee to uses" requires administrators to hold assets in trust. Contrary to Barboza and the Department of Labor's arguments, no specifically labeled "trust instrument" is required. Therefore, the plan complied with ERISA's hold-in-trust provisions.

Self-Dealing, Though, is Rather Simple

Less historicism was needed to examine ERISA's self-dealing provisions, which prohibit a fiduciary from engaging with "a party in interest," including other fiduciaries or administrators. While there are plenty of exemptions to this rule, none applied here. While an administrator may be compensated, he is not allowed to compensate himself directly from plan funds. CAISI had engaged, the court found, in just such a per se violation.

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