Misunderstanding Public Pension Fund Implications of Thole v. US Bank and Mayberry v. KKR
The press has described how pension fund beneficiaries have taken setbacks in two recent court decisions: the US Supreme Court case Thule v. US Bank, and Mayberry v. Kentucky Retirement Systems. I am late to post on these cases, and yet feel it is important to do so, since the commentary on them, particularly from parties who support holding public pension fund trustees and other fiduciaries accountable, has misread the importance of these cases. The fact that both rulings are deeply offensive, in the sense that they allowed investment bad guys to get away with it, does not mean that future public pension cases are doomed.1
The short version is that Thole v. US Bank has no precedential force in most US states. The Mayberry v. Kentucky Retirement System decision was strained and effectively ignored two of the three plaintiff arguments as to why they had standing. As one expert put it, “The Kentucky Supreme Court appear to be local elites protecting the prerogatives of local elites.”
Thole v. US Bank
Thole was a uphill battle, since the plaintiffs had lost on standing at the trial and appellate court. level. Two retired employees, presenting themselves as representatives of a class, argued that US Bank had engaged in self-dealing and made investments, according to Supreme Court filings, designed to generate “excessive management fees… boost their reported incomes, inflate their stock prices, and exercise lucrative stock options to their own (and their shareholders’) benefit,” resulting in about $750 million in losses.
The National Law Review summarized the ruling, which you can read in full here. From the article:
The Court observed that the outcome of the lawsuit would not change the plaintiffs’ financial status: they have received all of the benefits to which they are entitled to date, and their future benefit payments would not be affected by the outcome of the lawsuit— they win or lose the lawsuit, their monthly payments will be the same. Thus, the Court concluded that the plaintiffs had no concrete stake in the lawsuit, and therefore lacked standing to sue….
The Court rejected the plaintiffs’ argument, based on an analogy to trust law, that participants in a defined benefit pension plan have an equitable or property interest in the plan as a whole, such that injuries to the plan are by definition injuries to the participants…
The Court also rejected the plaintiffs’ arguments based on representative standing and statutory standing under ERISA. First, the Court noted that the plaintiffs could not sue as representatives of the plan without having suffered a concrete injury-in-fact themselves or having been legally or contractually assigned the plan’s claims. Second, the Court held that Article III requires a concrete injury even in the context of statutory violations, so ERISA’s statutory standing provisions cannot confer Article III standing.
What may not be obvious to most readers is that the US Supreme Court rejection (which came in a 5-4 vote) rests in a very large measure on “Article III standing”. Among other things, Article III requires a plaintiff to have suffered an actual loss. Interestingly, the Trump Solicitor General submitted an amicus brief on Thole that argued in favor of the plaintiffs and is dramatically at odds with the eventual ruling. A relevant section:
A. An ERISA Plan Participant Or Beneficiary HasStanding To Sue ForBreach Of Fiduciary Duty Even Without A Monetary Loss
To have Article III standing, a plaintiff must show, among other things, that hesuffered a “concrete” injury. Spokeo, Inc.v. Robins, 136 S. Ct. 1540, 1548 (2016). A concrete injury is one that is “‘real,’ and not ‘abstract.’” Ibid.(citation omitted). Generally that means the injury must be tangible, but an “intangible” injury can be concrete under some circumstances. Id.at 1549. “[B]oth history and the judgment of Congress play important roles” in determining whether an intangible injury is sufficiently concrete. Ibid. Courts thus ask “whether an alleged intangible harm has a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in English or American courts.” Ibid. And “because Congress is well positioned to identify intangible harms that meet minimum Article III requirements,” it “may ‘elevate to the status of legally cognizable injuries’” certain intangible harms “‘that were previously inadequate in law.’” Ibid. (brackets and citation omitted)…..
Reflecting both traditional trust law and congressional judgment, ERISA supports a participant or beneficiary’s standing to sue a planfiduciary under three distinct yet overlapping theories. First, a participant or beneficiary may sue on behalf of the plan in a representative capacity. Second, a participant or beneficiary may sue on his own behalf because a breach of fiduciary duty constitutes an invasion of his own legal right. Third, a participant or beneficiary may sue because of an increased risk of monetary harm resulting from a breach of fiduciary duty. All three theories support standing regardless of whether the defined-benefit plan is overfunded or underfunded.
Most states have not adopted Article III. Dave in Santa Cruz explained how California would have applied considerably different standards, with the odds that its courts would have come to a different conclusion (emphasis his):
You are quite wrong that a CalPERS member or beneficiary “cannot sue CalPERS for breach of fiduciary duty because you do not have standing.”
First of all, California is but one of the majority of states which do not follow the Federal Article III “case or controversy” standing doctrine interpreted in Thole. The Article III standing limitation is intended to limit “the judicial power of the United States,” not that of the states. “Unlike the federal Constitution, our state Constitution has no case or controversy requirement imposing an independent jurisdictional limitation on our standing doctrine.” Weatherford v. City of San Rafael, 2 Cal. 5th 1241, 1247-48 (2017).
Secondly, the CalPERS Board has a duty exclusively mandated under Article XVI sec. 17 of the California State Constitution to act as fiduciaries for the members and beneficiaries of the trust, a higher duty than that under the Common Law of trusts interpreted in the Thole decision. “A retirement board’s duty to its participants and their beneficiaries shall take precedence over any other duty.”
Thirdly, California has a broadly-written qui tam “Private Attorney General” statute, the False Claims Act, found at California Government Code 12650 et seq. The linked Forbes article’s dismissal of litigators who are going-after the gross breaches of fiduciary duty that are and have been perpetrated against pension funds as “ambulance chasers” as they are dismissively called by the author is far from the truth.
What may not be obvious from this discussion is that the plaintiffs in Thole v. US Bank were beneficiaries in a corporate defined benefit plan. They are governed by ERISA, which is administered by the Department of Labor. That is why Federal rules applied.
By contrast,public pensions, which now constitute the majority of defined benefit plans, are governed by state law.
Mayberry v. Kentucky Retirement Systems
Mayberry v. KKR got a lot of media attention because it involved big names and salacious conduct. Kentucky Retirement System is both one of the most corrupt and underfunded plans in the US. It’s only 13% funded. As its performance continued to fall short, its desperation increased.
To simplify a much longer story, three hedge fund operators, KKR/Prisma, Blackstone, and PAAMCO pitched dedicated funds which had the financial-gravity-defying properties of being high return and low risk. All of the vehicles fell well short of their promised outcomes. Kentucky has extremely strong, statutory fiduciary duties, so a lot of the selling practices, which sure looked like bad faith, appeared to set up a solid case, particularly since some key insiders looked to be playing both sides of the street.
Trial court judge Phillip Shepherd, who is the Jed Rakoff of Kentucky, a progressive and highly respected jurist, considered a raft of Motions to Dismiss by the defendants and dismissed them all, ordering the case to proceed. The defendants quickly appealed and got a ruling in their favor that lawyers for the defendants admitted was so strained that they didn’t expect it to survive.
Thole made it easier for the Kentucky Supreme Court to swat down a case that would have shaken up the Kentucky establishment (among other things, the principals at Prisma were from Kentucky).
The plaintiffs had three major arguments regarding standing, and recall they filed their arguments before the Thole decision. The judges do a sleight of hand by acting as if Thole is a magic talisman and deals with all of the standing issues the plaintiffs raised. It doesn’t, as shown by the fact that the ruling dismisses two important, stand-alone standing arguments with legal handwaves.
The awkwardly-written decision (always a bad sign) hangs its argument on Article III notions from Thole, that the plaintiffs have to have suffered an actual, particularlized loss in order to be able to sue. There’s no such notion as is pervasive in finance, of marking to market. Funny how the economics part of law and economics gets applied only so as to favor big commercial interests.
A lawyer elaborated by e-mail as to how it was a bit of a contortion to apply Thole, a ruling on private sector pensions which are governed by Federal law, to a state law matter:
States that are hostile to plaintiff’s lawyers like to say that they “follow” the Federal Article III standing rules. The problem is that Article III is intended to limit the “judicial power of the United States” in deference to the jurisdiction of the state courts. Under the U.S. Constitution, it is the state courts that are supposed to confer “standing” to sue upon their citizens. The Kentucky Supreme Court engages in circular reasoning of “following” the Federal limitation on jurisdiction in order to rob their citizens of their right to sue in state court.
The Supreme Court further argues that even if the plan runs totally out of money (which at 13% funding is a given; one group estimated that will take place in 2027), not to worry, the State of Kentucky is on the hook and has made an “inviolate promise” and so surely will make up any shortfall.
Anyone who has been paying the slightest amount of attention knows that argument is an insult to intelligence. The Kentucky Retirement System has been getting sicker with each passing year, yet the state has taken no meaningful steps to shore it up. Perhaps the judges labor in such ignorance because they have a completely separate plan that is fully funded.
And it’s also spurious legally, since the plaintiffs came before the court both as beneficiaries and as taxpayers. Raising contributions high enough to continue to pay full pensions would mean large increases to taxpayers, including fund beneficiaries! Their gains (assuming they actually did get a full pension) would be offset by the big tax hikes. The court effectively ignored this argument.
The other standing argument the Supreme Court blew off was on qui tam grounds, that the attorneys were stepping in to act as private attorneys general, enforcing state laws where the attorney general declines to step up. The Supreme Court dismissed the qui tam standing argument by saying that Kentucky has no qui tam statute. That’s true but irrelevant. As Judge Shepherd pointed out in his decision, with citations, Kentucky has ample qui tam case law. From a lawyer by e-mail: “This is the part of the Supreme Court decision that is complete garbage. Kentucky courts have found standing in the past for taxpayers derivative suits.”
The qui tam argument is in such obvious bad faith that it suggests, just as the appellate court did, that the Kentucky Supreme Court was bound and determined to rule against the plaintiffs no matter how dodgy their logic was. A contact close to the case argues otherwise, that absent Thole, the ruling would have been 5-2 in favor of the plaintiffs based on the body language of the jurists, particularly the Chief Justice, during oral arguments.
But regardless of what coulda-shoulda been, the Kentucky court appears to be handing this hot mess over to the governor, Andy Beshear, who when he was the Attorney General who declined to take up this lawsuit. And Beshear may have assumed there was a long enough time before even this pension fund failed for him to be able to dump the problem on his successor. Covid-19 has made that a less likely bet.
1 In fact, we learned today of a new legal team, one that is politically well-connected, seeking to take a new, promising-sounding strategy towards private equity grifting.