Should the U.S. Department of Labor sue in bankruptcy court or in district court to remove the trustee of an employee benefit plan for violation of fiduciary duties?
Although authorities are “scant and inharmonious,” District Judge Francisco A. Besosa of San Juan, Puerto Rico, followed the Second Circuit’s Robert Plan opinion from 2015 and held on March 1 that this type of suit is properly prosecuted in district court.
At first blush, the suit seemed properly lodged in bankruptcy court because Section 704(a)(11) of the Bankruptcy Code provides that a trustee shall perform the duties of the administrator of a debtor’s employee benefit plan. Robert Plan, however, held to the contrary.
The Second Circuit held that there is no “arising in,” “arising under,” or even “related to jurisdiction” because disputes regarding the Employee Retirement Income Security Act, or ERISA, typically arise outside of bankruptcy. Furthermore, the duties of a bankruptcy trustee under Section 704(a)(11) are prescribed by ERISA, not the Bankruptcy Code, according to the Robert Plan court.
In addition, assets of the benefit plan are not assets of the bankrupt estate, and the Labor Department was suing an individual who was the plan trustee, not the bankruptcy trustee.
Because there was no bankruptcy jurisdiction and therefore no automatic referral to the bankruptcy court, the suit should unfold in district court, Judge Besosa held.
Judge Besosa’s decision and Robert Plan are both problematic because they give little effect to the delegation of authority to a bankruptcy trustee under Section 704(a)(11). Both cases might have been better situated in the district courts under the concept of mandatory withdrawal of the reference.