Debt Collector

Thole v. US Bank is Now Before the US Supreme Court. Is it for Self-Serving Financial Gain by Lawyers or for the Rule of Law?

U.S. Bank is accused of mismanaging its pension plan by over-investing in high-risk equities and funds offered by a bank subsidiary, leading to $750 million in losses.


Jan. 12th, 2020

After the Fifth Cirucuits’ recent and mandatory dismantling of a RESPA class action by two new Trump appointees, this case before the US Supreme Court is now on LIT’s calendar. The two cases are discussed below.

Justices to Weigh ERISA Suits Targeting Well-Funded Pensions

Standing to sue over pension losses at issue

The U.S. Supreme Court is gearing up to hear oral arguments Jan. 13 in a case accusing U.S. Bank NA of causing $750 million in pension plan losses. The parties disagree about nearly everything, including the stakes of the case.

A ruling in favor of the bank would mean that pension plan participants can “virtually never” sue to rectify plan mismanagement, even if plan fiduciaries “bet $750 million on black,” plaintiff James Thole told the court in December.

But a victory for Thole would benefit no one but his lawyers, who have requested $31 million in fees, U.S. Bank said.

“Win or lose, Plaintiffs will receive the exact same pension payments for the rest of their lives,” the bank told the court in November.

The case asks whether a pension plan participant’s ability to sue the plan’s fiduciaries over alleged mismanagement varies based on how well the plan is funded.

Thole has the potential to be a pivotal case,” Nancy G. Ross, a partner in Mayer Brown LLP’s Chicago office and co-chair of the firm’s ERISA litigation practice, told Bloomberg Law.

No Harm, No Foul?

U.S. Bank is accused of mismanaging its pension plan by over-investing in high-risk equities and funds offered by a bank subsidiary, leading to $750 million in losses.

The U.S. Court of Appeals for the Eighth Circuit rejected Thole’s proposed class action after the bank made additional contributions that brought the plan into compliance with the Employee Retirement Income Security Act. Because the plan was adequately funded, Thole couldn’t show that he’d been injured by the bank’s conduct and therefore lacked standing to sue, the Eighth Circuit reasoned.

Thole says this is all wrong, because it turns pension plan participants into mere “bystanders” to their own plans.

The federal government supports Thole’s position, arguing that a pension plan participant’s ability to sue over fiduciary misconduct doesn’t depend on how well the plan is funded. According to the government’s September brief, a pension plan fiduciary’s breach of duty is an “invasion of a private legal right held by the beneficiary,” which supports standing to sue without the need to demonstrate additional injury.

The federal appeals courts are split on the question.

‘Insufficient Protection’

Determining standing based on how well a pension plan is funded could put participants in a tough position, said David Pratt, a professor at Albany Law School who specializes in employee benefits and tax law. That’s because by the time a large shortfall emerges, it may be too late to properly address the situation.

“The idea that people in a defined benefit plan don’t have standing until you get to the point where they’ve actually lost benefits really gives them insufficient protection, because by that stage, the risk is that it’s not going to be possible to remedy the underfunding,” Pratt told Bloomberg Law.

According to Pratt, funding a pension plan is a “long-term project” that becomes increasingly difficult as the shortfall grows.

“If participants didn’t have standing unless and until they’d actually been denied benefits, by that stage it may not be possible to make the plan whole, because the plan sponsor may have gone bankrupt or be in dire financial straits,” Pratt said.

“If you have an issue relating to adequate funding, in my mind that’s an issue that should be addressed at the earliest moment it can be detected,” he said.

Pratt is Albany Law School’s Jay and Ruth Caplan Distinguished Professor of Law. He’s among a group of eight law professors who filed a brief supporting Thole in the case.

Allocation of Risk

Others frame the issue differently, pointing to the fundamental differences between defined benefit pension plans and defined contribution plans like 401(k)s, which have become more prevalent in recent years.

In a defined contribution plan, workers typically receive a set amount of money from their employers and must then assume the risk of investing that money to save for retirement. In a defined benefit plan like U.S. Bank’s, workers are promised a specified retirement benefit, and the employer is responsible for investing appropriately and ensuring there’s enough money to pay benefits.

“A material difference between a DC and a DB plan is that with a DB plan, the employer bears the risk of insufficient funding to provide benefits,” said Mayer Brown’s Ross. “Where that risk is not present, plan participants have not been harmed.”

Ross, who filed a brief supporting U.S. Bank on behalf of the U.S. Chamber of Commerce, said the private retirement system has been threatened by “decades of lawsuits to which there is no end in sight.”

Denying standing to participants who have suffered no harm would “go far in recalibrating and setting upright the protections that Congress intended in enacting ERISA for both the provider and the recipient of such programs,” she said.

The case is Thole v. U.S. Bank, NA, U.S., No. 17-1712, oral arguments 1/13/20.

Fifth Circuit Unravels FDCPA Class Action After Finding No Common Issue

A panel of the U.S. Court of Appeals for the Fifth Circuit, including two Trump appointees, also found there were “substantial questions” about the standing of unnamed class members but based its ruling on the plaintiff’s lack of commonality, typicality and predominance.

A federal appeals court has decertified a class action brought under the federal Fair Debt Collection Practices Act after finding that the lead plaintiff had no claims that were common or typical to the class.

The U.S. Court of Appeals for the Fifth Circuit ruled Wednesday that a district judge should not have certified a Texas class of 7,650 customers of Seton Medical Center Hays who received letters from a debt collection services provider. The panel, two of whom are appointees of President Donald Trump, found there were too many variances in how Seton’s customers might have interpreted the letter to establish a common issue, as required under the federal Rule 23 of Civil Procedure.

“As the Supreme Court explained in Dukes, commonality requires more than a shared cause of action or common allegation of fact—it requires a common legal contention capable of class-wide resolution,” wrote Judge James Ho, whom Trump nominated for the bench in 2018, referencing the U.S. Supreme Court’s 2011 opinion in Wal-Mart Stores Inc. v. Dukes. “Every member of the putative class received the same allegedly threatening letter from Medicredit. But the FDCPA penalizes empty threats, not all threats. So the letter alone is insufficient to certify a class.”

The ruling is a rare appeals court decision on class certification in a case that, according to the defendant’s appeal brief, “presents novel questions about he interplay of class action procedure and the Fair Debt Collection Practices Act that have not been addressed by this court nor, to the best of counsel’s knowledge, any other U.S. Court of Appeals.”

Maura Kathleen Monaghan, a partner at New York’s Debevoise & Plimpton, who represented defendants Medicredit Inc., the debt collection service provider, and its surety bondholder, Fidelity and Deposit Co. of Maryland, declined to comment.

Plaintiffs attorney Robert Zimmer, of Zimmer & Associates in Austin, did not respond to a request for comment.

Nina Flecha filed the class action in 2016 after she received a letter from Medicredit that she believe threatened legal action. The letter said, “At this time, a determination must be made with our client as to the disposition of your account. Your failure to cooperate in satisfying this debt indicates voluntary resolution is doubtful.”

Under the Fair Debt Collections Practices Act, a company must not “false, deceptive, or misleading” representations, such as false legal threats. According to Flecha, Medicredit does not file lawsuits to collect payments. A Seton representative, however, told Flecha in a telephone call that a lawsuit was a possibility.

In court documents, Zimmer referred to Medicredit’s argument as “frivolous” and based on an “erroneous view of the law.”

But Medicredit argued that Flecha’s fear of legal action was based on the Seton telephone call, not the wording in the letter.

The Fifth Circuit concluded that she provided no evidence about Seton’s debt collection practices that might reveal whether it actually intended to sue her. U.S. District Judge Lee Yeakel, of the Western District of Texas, also had wrongly presumed, for the purpose of class certification, that Seton’s potential legal action was a veiled threat because Medicredit didn’t sue its customers.

“But courts must certify class actions based on proof, not presumptions,” Ho wrote.

The panel, citing Supreme Court precedent, did not rule on Medicredit’s alternative argument that unnamed class members who suffered no injuries lacked standing to sue under Article III of the U.S. Constitution. But Ho wrote that there were “substantial questions” about standing in the case. “Countless unnamed class members lack standing,” he wrote, such as those who threw away the letter assuming it was junk mail.

In a concurring opinion, Judge Andy Oldham, another 2018 Trump appointee, said standing issues should apply at the class certification stage.

“In my view, that lack of standing is sufficient to decide the case,” he wrote.

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