Compliance Corner

Retirement Updates

Seventh Circuit Affirms Breach of Duties of Loyalty and Prudence by Plan Fiduciaries

May 23, 2023

On May 10, 2023, in Su v. Sherrod, the Seventh Circuit affirmed the district court’s grant of summary judgment to the DOL in a case involving breaches of ERISA duties of loyalty and prudence. The rulings follow a civil enforcement action brought against Dr. Shirley Sherrod and Leroy Johnson, the trustee and plan administrator, respectively, of a defined benefit retirement plan established in 1987 for employees of Sherrod’s ophthalmology practice.

The case involved the plan’s trust account, which had been closed to deposits since the practice was sold and all employees were terminated in 2008. The buyer later prevailed in a breach of contract action against Sherrod in 2011, after which Sherrod took a $250,000 distribution from the plan’s cash bond for her appeal of that case, launching a five-year-long pattern of distributions to herself from the plan. Johnson, whom Sherrod appointed as the plan’s administrator in May of 2012, was also involved. All of these distributions were either improperly accounted for as plan expenses or losses or otherwise unaccounted for.

The DOL brought its action against Sherrod and Johnson in 2016, by which time the defendants had distributed almost $1.1 million of plan assets for Sherrod’s personal benefit. The DOL asked the court to remove the two from their plan fiduciary positions, to enjoin them permanently from serving as fiduciaries for any ERISA-covered plan, and to appoint an independent fiduciary to administer and terminate the plan.

Finding no genuine dispute of fact material as to whether Sherrod and Johnson had repeatedly violated their fiduciary duties, the district court granted summary judgment for the DOL. The defendants then appealed this decision to the Seventh Circuit, arguing (in part) that the granted relief was “excessive” given the “extraordinary circumstances” Sherrod faced and her assertions of good faith efforts to protect the plan, including a purported attempt to reimburse the plan for the initial $250,000 distribution, but for which she could provide no direct documentation and which occurred (if at all) three years after the fact.

The appellate court rejected all the defendants’ arguments, observing that the defendants “d[id] not dispute that Sherrod often acted at her own direction and not ‘at the direction of the Administrator,’” unilaterally withdrawing funds from the plan without consulting Johnson. Accordingly, the Seventh Circuit found there was no dispute that Johnson did not "authorize and direct" those payments as required by the plan. The Seventh Circuit observed that, in effect, “Sherrod gave herself the keys to the bank vault, and Johnson let her use them.”

Affirming all the relief imposed upon the defendants by the trial judge, the Seventh Circuit panel concluded that “[g]iven the gravity and frequency of defendants' breaches of their fiduciary duties, they are fortunate that the relief against them has thus far been relatively modest.”

While this case doesn’t break any new legal ground—raiding plan assets for one’s own personal benefit is the classic example of an ERISA fiduciary violation—it is for that very reason a useful reminder of how strong the urge can be for ostensible fiduciaries under financial strain to misappropriate retirement plan assets for their own benefit. ERISA plan fiduciaries must ensure they never violate their duties of prudence and loyalty with respect to plan assets, regardless of their financial circumstances.

Su v. Sherrod »