Funds Misuse and the Importance of Fiduciary Responsibility

A Chicago-based federal judge recently issued a temporary restraining order and preliminary injunction against the fiduciaries of a multiple-employer welfare arrangement. The Department of Labor is alleging that the Fund’s council and fiduciaries misused nearly $3M to date. The order, issued by the Honorable Nancy L. Maldonado, appointed Receivership Management Inc. as an independent fiduciary for the Fund, which enables Receivership Management Inc. to appoint, replace, or remove administrators, trustees, attorneys, employees, and service providers as are necessary to protect the fund, as well as amend the trust agreement as necessary and conduct an accounting of the fund’s assets and attorney’s fees. This independent fiduciary helps to protect the public interest in preserving employee benefits, because of the potential harm to the Fund’s participants if assets continue to dwindle.  

That’s a lot of legal jargon! Let’s back up for a second and make sure we understand what this means, and why it’s important to our readers…

All this started when the DOL filed a motion alleging that the Fund’s fiduciaries (the people tasked with acting in the financial best interests of the group) had nearly depleted the Fund’s assets by allowing escalating and unreasonable legal and administrative fees. A former Fund attorney, L. Steven Platt, used more than $200,000 of the funds' assets to defend himself in a separate lawsuit, a gross violation of the Employee Retirement Income Security Act (ERISA). In addition to this, the fiduciaries misused a total of over $2.8 million in Fund assets belonging to employee benefit plans. In doing so, they failed to fulfill their legal obligation to protect the assets of the affected employees. Under ERISA, employees have the right to sue for benefits and breaches of duty. In this case, the Plaintiffs are seeking to recover equitable damages lost in this breach of duty. The bottom line is the people who were supposed to be protecting the financial interests of the employees used their funds for costly personal endeavors.  

The purpose of issuing a preliminary injunction is to halt the activity taking place within the Fund and protect the remaining assets. As explained in the docket entry, “to obtain a preliminary injunction, the moving party must make an initial showing that (1) it will suffer irreparable harm in the period before final resolution of its claims; (2) traditional legal remedies are inadequate; and (3) the claim has some likelihood of success on the merits.” BBL, Inc. v. City of Angola, 809 F.3d 317, 323–24 (7th Cir. 2015) (citations omitted). The court walked through each of these tests, and we’ll do the same: 

Irreparable harm: irreparable harm is established when the harm cannot be prevented or fully rectified by the final judgment after trial. In this case, there was a strong risk that there would be a continued loss of assets to pay unreasonable and excessive legal and administrative costs in the period before final judgment. This would cause irreparable harm to the Secretary’s ability to seek equitable relief. There is an additional risk of harm because Defendants have indicated that they wish to terminate the Fund completely, which would leave the employees with nothing in their accounts.  

Traditional legal remedies are inadequate: the Plaintiffs in this case are only eligible to seek relief under ERISA and are not seeking damages, meaning they have no other recourse but to file for an injunction pursuant to ERISA statutes.  

Claim has some likelihood of success on the merits: the chances of success in a lawsuit must be “better than negligible” (Valencia v. City of Springfield, Ill., 883 F.3d 959, 966 (7th Cir. 2018)). To this effect, the court stated, “at this stage, the Secretary has provided more than sufficient evidence demonstrating that the transactions at issue were not in the interest of the Fund and its beneficiaries but were made for the benefit of the Trustee Defendants…  and to the detriment of the Fund”.  

The Plaintiffs seem to be proceeding in this case with the confidence of knowing that the law is on their side. Though you as an employer may never find yourself in this exact situation, there are broad legal principles that are applicable to anyone with employees. The law favors employee rights and attempts by employers to undermine those rights, or strip employees of their rightful compensation and money, will be stopped by legal action. It’s possible to succeed without encroaching on the rights of your workers, but partnering with Onsi can make compliance so much easier. Stay up to date with the latest in Labor Compliance and Prevailing Wage news by reading our newsletter, The Prevailing Wire, and sharing our blog articles.

- Hailey Soupiset, Intern & Joshua Hinckley, VP Business Development