The Latest in a Series of ERISA “Checkbook” Cases

By Melanie A. Houghton

Beginning late last year, a number of lawsuits, now commonly known as “checkbook” cases, appeared on the federal docket.  While each of these cases is somewhat different on the facts, they share a common basic scenario:  Upon the death of an insured, the life insurance company creates an account for the beneficiaries from which the beneficiaries can write checks to withdraw funds up to the total amount of the life insurance proceeds, either in a lump sum or over time.  During the period the account is open, the life insurance company retains the funds backing the account in its general account and invests those funds for its own profit, earning the difference between its return on investment and any guaranteed interest paid on the account.  According to the plaintiffs in these cases, the insurance companies breached their fiduciary duties under ERISA and engaged in self-dealing (in violation of ERISA’s prohibited transaction rules) by investing and retaining plan assets for their own profit.

The insurance companies in most of these cases have filed motions to dismiss without success.  However, on August 5, 2011, in Faber v. Metropolitan Life Insurance Company, Case No. 09-4901, the Second Circuit sided with MetLife, holding that the complaint filed on behalf of a putative class of life insurance beneficiaries failed to state a viable claim for injunctive relief under ERISA.  Under the ERISA plans at issue in Faber, if the life insurance proceeds due to a beneficiary exceeded a specified amount, MetLife established an interest-bearing “Total Control Account” (TCA) in the name of the beneficiary.  In each case, MetLife credited the TCA with the amount of benefits due and issued the beneficiary a “checkbook” that could be used at any time to draw on the TCA for some or all of the balance.  MetLife fully guaranteed the balance of the TCA and that the annual yield on the account would be at least 1.5%.  As with other “checkbook” cases, MetLife retained the funds backing the TCA in its general account and invested them for its own profit, earning the spread between its return on investment and the interest paid on the TCA. 

Plaintiffs argued that MetLife violated its fiduciary duties and engaged in self-dealing  by using the TCA mechanism to “misappropriate plan assets.”  After hearing the U.S. Department of Labor’s views on the relevant legal issues, the Second Circuit disagreed.  It held that MetLife discharged its fiduciary duties when, in accordance with the governing plan documents, it established the TCAs, credited the accounts with the benefits owed, and enabled plaintiffs to withdraw the funds by issuing the checkbooks.  Thereafter, MetLife’s relationship with the beneficiaries became one of ordinary creditor-debtor, outside of ERISA.  Because MetLife was not acting as a fiduciary when it later invested the funds backing the TCAs, it could not be held liable for any alleged fiduciary breach under ERISA.  The court also rejected the argument that the funds backing the TCAs and any profits thereon constituted “plan assets,” thereby triggering fiduciary duties with respect to their management.  Relying on DOL opinions and cases defining “plan assets” in the delinquent contribution setting, the court concluded that plaintiffs had no ownership interest in the funds because nothing in the plan documents suggested that MetLife’s general account funds became plan assets once a beneficiary gained access to the funds in the TCA.  To the contrary, plaintiffs “received all of the benefits promised to them by the Plans, in the form provided by the Plans.”  Accordingly, the court found that MetLife did not breach ERISA’s fiduciary or prohibited transaction provisions and that plaintiffs’ claims had no merit.

Although the case may appear to be of limited relevance beyond the “checkbook” context, it serves as an important reminder to plan administrators that the determination of whether you are acting in a fiduciary capacity may be dependent on the scope of the benefits provided to plan beneficiaries in the plan document.