The Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq. requires that employee benefit plan fiduciaries comply with the terms of plan documents and their ERISA fiduciary duties of loyalty and prudence. In Su v. Johnson, No. 22-2204, __F.4th__, 2023 WL 3335733 (7th Cir. May 10, 2023), Defendant Shirley T. Sherrod was the owner and operator of an ophthalmology practice (Shirley T. Sherrod, M.D., P.C.) in Detroit, Michigan. In 1987, Sherrod established a defined-benefit retirement plan for the practice’s employees, including herself, and named herself as trustee of the retirement plan. In 2012, after she committed a series of undiscovered ERISA violations with respect to the plan, she appointed Defendant Leroy Johnson as the plan administrator. Thereafter, from 2013 to 2017, Sherrod directed payment to herself in an amount close to $825,000 from the Plan in 123 transactions. Though Sherrod had reached retirement age in 2011, the payments to her were treated as plan expenses rather than payment of her retirement benefits.
In 2016, the Secretary of Labor brought a civil enforcement action against Sherrod and Johnson under ERISA section 502(a)(2) for past and ongoing violations of their fiduciary duties. “The district court granted summary judgment in favor of the Secretary and entered a permanent injunction against defendants removing them as fiduciaries.” The Seventh Circuit Court of Appeals affirmed on the basis that, “[t]he undisputed facts show that both defendants breached their fiduciary duties of loyalty and prudence under ERISA. Hundreds of thousands of dollars of plan assets were used for defendant Sherrod’s personal benefit but were accounted for as plan expenses or losses rather than as distributions of retirement benefits to her. The permanent injunction was well within the scope of reasonable responses to the breaches.”
The court found that defendants breached the duty to follow plan documents, the ERISA fiduciary duties of care and loyalty, and that there was harm to the plan. Sherrod acted at her own direction and not at the discretion of the Administrator by unilaterally withdrawing funds from the plan. Johnson was required to authorize and direct Sherrod with respect to all discretionary or otherwise directed disbursements and to maintain records of all actions. These constituted violations of the plan documents. The court also found that a $250,000 bond payment that Sherrod made out of the plan for a lawsuit unrelated to plan business (she was sued by the person who bought her practice) and Johnson’s reporting of this payment as a plan “loss” was a breach of fiduciary duty. With respect to the multiple distributions of plan assets, the court explained that the defendants have the burden of showing that the payments were permissible, and defendants did not carry that burden. Defendants produced 70 pages of money orders, invoices, and communications with counsel about attorneys’ fees, but they did not offer an accounting of these documents or match them up with Sherrod’s withdrawals. “It is neither the district court’s nor this Court’s job to piece together an argument for Sherrod and Johnson.” The plan was harmed by Sherrod’s improper distributions.
The court also found that the district court’s denial of defendants’ motion to amend their original answer to add a statute of limitations defense was not an abuse of discretion. There was no indication that the Secretary had actual knowledge of the defendants’ breaches. “The three-year statute of limitations applies only when the plaintiff has actual knowledge of a violation, not when the plaintiff arguably should have known of a violation.” Given the gravity of defendants’ breaches, the district court’s grant of summary judgment and the permanent injunction are affirmed.
*Please note that this blog is a summary of a reported legal decision and does not constitute legal advice. This blog has not been updated to note any subsequent change in status, including whether a decision is reconsidered or vacated. The case above was handled by other law firms, but if you have questions about how the developing law impacts your ERISA benefit claim, the attorneys at Roberts Disability Law, P.C. may be able to advise you so please contact us.
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