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A defined benefit plan administrator lacked Article III standing to challenge Merrill Lynch's freeze on plan assets because the injury suffered by the administrator was not “fairly traceable” to Merrill Lynch, the U.S. Court of Appeals for the Seventh Circuit ruled May 20 (Johnson v. Merrill Lynch, Pierce, Fenner & Smith Inc., 7th Cir., No. 12-3869, 5/20/13).
Judge John D. Tinder, writing for the court, found that the account freeze imposed by Merrill Lynch was done in compliance with a state court order. Because Merrill Lynch was obligated to comply with the order, it could not be held responsible for any injury suffered by the plan administrator.
Finding that there was no live case or controversy between the plan administrator and Merrill Lynch, the Seventh Circuit concluded that the case was properly dismissed for lack of standing.
In 2010, a state court in Wayne county, Mich., entered a $181,048 judgment against Shirley T. Sherrod and her medical practice following a contract dispute between Sherrod and an affiliated practice owned by Michael S. Sherman. Sherman then filed a writ of garnishment on Sherrod's accounts held by Merrill Lynch, including a defined benefit pension plan that Sherrod contended was governed by the Employee Retirement Income Security Act.
The Wayne county court issued a “blanket order” prohibiting Sherrod or anyone acting on her behalf from “selling, transferring…or otherwise disposing of…assets, real or personal property, money, or things in action now held or hereafter acquired by or becoming due to them.” Following this blanket order, Merrill Lynch froze the pension plan account with respect to Sherrod and prohibited any distributions to her “until further court order.” Sherrod filed a motion to quash the garnishment proceeding with respect to the plan, but the Wayne county court initially denied the motion.
Merrill Lynch then negotiated with Sherrod, Sherman, and the Wayne county judge in an attempt to unfreeze the plan assets. According to the Seventh Circuit, “[i]t seemed that [the parties] had at last reached a consensus regarding the Plan account--until Sherrod suddenly reversed course.” In April 2013, Sherrod opposed Merrill Lynch's attempts to unfreeze the plan account, arguing that the Wayne county court lacked jurisdiction to rule on the motion because Sherrod had appealed the issue to the Michigan Court of Appeals. Merrill Lynch continued to take the position that the plan account should be unfrozen.
In 2012, the plan's new administrator, Leroy Johnson, filed a federal court lawsuit against Merrill Lynch, challenging the allegedly improperly freeze on plan assets. In moving to dismiss the action, Merrill Lynch argued that it was not “adverse” to Sherrod's position and that the federal court therefore lacked subject-matter jurisdiction. Merrill Lynch pointed out its “continual support of Sherrod and Johnson throughout the related Michigan litigation” and contended that “[a]ny past injury that the Plan administrator had suffered was traceable to the Wayne County Circuit Court, not to Merrill Lynch.”
The U.S. District Court for the Northern District of Illinois granted Merrill Lynch's motion to dismiss. It concluded that, because no “case or controversy” existed between Merrill Lynch and the plan administrator, the case failed to satisfy the standing and ripeness requirements necessary for federal jurisdiction to exist.
On appeal, the Seventh Circuit said that its review of the case against Merrill Lynch “both begins and ends with the issue of standing.” Although it “d[id] not dispute” that the plan administrator had an “injury in fact” stemming from the denial of Sherrod's distribution request, the appeals court explained that such injury was “not fairly traceable to the defendant, Merrill Lynch.”
According to the appeals court, the Wayne county judge--and not Merrill Lynch--was responsible for the freeze on Sherrod's plan account. “Merrill Lynch simply followed the directions of that court order--even though Merrill Lynch disagreed with it,” the appeals court found. Although the plan administrator “seems to think that Merrill Lynch should have ignored the Wayne County Circuit Court order if it truly believed that the order was in violation of federal ERISA law,” the appeals court disagreed, reasoning that “Merrill Lynch had no choice but to comply” with the order.
Concluding that the plan administrator lacked standing under Article III of the U.S. Constitution to bring its action against Merrill Lynch, the Seventh Circuit affirmed the district court's ruling.
Judges Diane P. Wood and David F. Hamilton joined in the decision.
Sherrod and Johnson were represented by Edwin H. Conger of Tenney & Bentley, Chicago. Merrill Lynch was represented by Robert C. Levels of Miller Canfield Paddock & Stone, Chicago.
The full text of the opinion is at http://www.bloomberglaw.com/public/document/Leroy_Johnson_v_Merrill_Lynch_Pierce_Fenner_Docket_No_1203869_7th.
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