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									Westlaw Journal                            Formerly Andrews Litigation Reporter

Litigation News and Analysis • Legislation • Regulation • Expert Commentary                               VOLUME 7, ISSUE 2 / MAY 28, 2010

   (ASBESTOS)                                 Automatic rollovers make retirement plan
   7   Judge OKs Congoleum’s
       pre-bankruptcy payments to
                                              administration easier when companies file
       asbestos plaintiffs’ lawyers
       In	re	Congoleum	Corp. (D.N.J.)
   DISCHARGES                                 Terry Dunne of Millennium Trust Co. discusses how employment retirement plan
   8   5th Circuit OKs drawdown               administrators of bankrupt companies can use the automatic-rollover process,
       to satisfy electricity retailer’s      especially when employees are “missing” or nonresponsive.
       debt                                                                                                                    SEE PAGE 3
   	   In	re	Texas	Commercial	Energy
       (5th Cir.)
                                              ESTATE PROPERTY
   9   Labor Department seeks
       to block Tribune plan                  Defunct banking firm’s ex-execs can tap
   	   In	re	Tribune	Co. (Bankr. D.
       Del.)                                  D&O policy for defense costs
   10 Debtors can’t escape balance
      owed on surrendered car,
      2nd Circuit says
   	   AmeriCredit	Fin.	Servs.	v.	
       Tompkins (2d Cir.)

   11 D&O insurer off the hook for
      defense of Delta Financial
   	   Delta	Fin.	Corp.	v.	Westchester	
       Surplus	Ins.	Co. (3d Cir.)

   12 Federal judge tosses Calif.
      claims against WaMu direc-
      tors, auditor
   	   In	re	Wash.	Mut.	Sec.	Litig.
       (W.D. Wash.)
   13 Mayer Brown not liable in
      Refco securities fraud case                                                                                 REUTERS/Fred Prouser
   	   Pac.	Inv.	Mgmt.	Co.	v.	Mayer	
       Brown (2d Cir.)                        Downey Financial Corp.’s former officers can access the defunct bank holding
                                              company’s D&O insurance to pay for their defense against charges that they hid
                                              from investors the extent of Downey’s exposure to risky subprime loans, a
                                              Delaware bankruptcy judge ruled May 7.
                                                                                                             CONTINUED ON PAGE 6

Automatic rollovers make retirement plan administration easier
when companies file bankruptcy
By Terry Dunne

Whenever a company files for bankruptcy             into their own individual retirement accounts,     of these participants, especially lower-paid
protection, it is almost certain to set off a       and many will elect a cash distribution,           employees with smaller retirement plan
chain of short- or long-term problems for           which will create tax consequences. A large        balances, remain in the plan after leaving the
both retirement plan administrators and             number will do nothing.                            company.
participants. The ultimate severity of these
                                                    To put this into perspective, a Charles Schwab     A recent survey by Vanguard Group Inc.
problems may be dictated by how quickly
                                                    survey conducted in spring 2009 noted that         showed that automatic enrollment increased
and in what manner they are addressed.
                                                    for plan participants who were terminated          plan participation significantly for key groups
Concerns and issues will develop for                from their jobs one year earlier, 43 percent       of employees. Participation increased from
retirement plans the moment a company               of the 401(k) assets were still sitting in their   44 percent to 80 percent for employees
announces it is planning to reorganize under        former employers’ plans.                           earning less than $30,000 and rose from
Chapter 11. These announcements are often                                                              56 percent to 86 percent for those between
                                                    If all participants diligently informed the
accompanied by the news that significant                                                               25 and 34 years of age. Such workers often
                                                    company of their whereabouts and confirmed
layoffs, perhaps numbering in the thousands,                                                           make up the majority of those laid off during
                                                    what they want the plan administrator to do
are forthcoming as a cost-saving measure.                                                              a bankruptcy.
                                                                                                       In addition to the layoffs or resignations
                                                                                                       related to the bankruptcy filing, many
            Filing bankruptcy does not reduce the company’s                                            companies have probably been managing
           responsibility to provide the dollars and manpower                                          the retirement plans for participants who
                 necessary to administer all its retirement                                            departed throughout the previous decades.

                              plan accounts.                                                           This can be a costly situation for companies
                                                                                                       that are in bankruptcy and trying to conserve
                                                                                                       cash, and even more costly if they decide
                                                                                                       to ignore the problem. It is estimated that
Even before these terminations take place,          with their retirement funds, it would be an
                                                                                                       companies are absorbing the time and
many employees participating in the plan            immense help. But, this is seldom the case,
                                                                                                       expense to manage plans for about 150,000
will decide to leave of their own volition to       and a lack of instruction is only the tip of the
                                                                                                       newly “missing” ex-employees each year,
seek other employment. These voluntary              iceberg.
                                                                                                       with a collective retirement plan balance of
resignations will continue even as the
                                                    Some of them actually may disappear as they        about $375 million.
promised layoffs are implemented.
                                                    move or travel to other parts of the country
                                                                                                       The U.S. Department of Labor recently
Filing bankruptcy does not reduce the               and leave without a forwarding address. The
                                                                                                       reported that employee retirement and
company’s responsibility to provide the             company has no way to contact them for plan
                                                                                                       savings plans are now costing employers
dollars and manpower necessary to                   communications, but is obligated to continue
                                                                                                       an average of $1.29 for every hour worked
administer all its retirement plan accounts,        to try to do so. Others will not disappear at
                                                                                                       by every employee. Managing ex-employee
including those owned by hundreds or                all. They will receive company information
                                                                                                       balances contributes a good portion to this
thousands of ex-employees. To add salt to           about their retirement accounts but, for
the wounds, some of the human resources             whatever reason, fail to respond.
staff most familiar with the company’s plan                                                            Improper compliance with plan fiduciary
may be among those laid off or leaving. This        THE MISSING AND NONRESPONSIVE                      responsibilities, even for ex-employees’ plan
can complicate matters even more.                   EX-EMPLOYEE PROBLEM                                accounts, carries legal and financial risk.
What happens to all the ex-employee                 Companies filing bankruptcy now and in the         Cases like LaRue	 v.	 DeWolff,	 Boberg	 &	
participants and their retirement plan              future will probably have more missing or          Associates,	 552 U.S. 248 (U.S. 2008),
balances? Some of them will find jobs               nonresponsive retirement plan participants         established the right for plan participants
with other companies and may want to                than in years past because more workers            to sue plan sponsors if they think their
transfer their funds to their new employers’        are enrolled in their plans. The Pension           retirement account has been mismanaged.
retirement plans.                                   Protection Act of 2006 encourages                  Therefore, companies must diligently follow
                                                    companies to automatically enroll employees        ERISA requirements, even for ex-employees’
Others may join a company that does not
                                                    in retirement plans and many companies             balances.
offer a plan. Many may not find work. Some
participants will decide to roll over their funds   are doing just that. A very high percentage

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                                                                                                                             VOLUME 7   n
                                                                                                                                            ISSUE 2 | 3
                                                                                                    Reconciliation Act, they are deemed to have
         Meeting the obligations of ERISA is obviously difficult                                    satisfied their fiduciary duties and no longer
         under bankruptcy conditions when plan participants                                         are responsible for the new IRAs or to monitor
                                                                                                    the actions of the custodians.
           cannot be located or when they ignore company
                                                                                                    There are specific steps a company must
                       communication efforts.                                                       take prior to adopting an automatic rollover.
                                                                                                    First, automatic rollovers must be permitted
                                                                                                    in the retirement plan documents. Many
They must conduct due-diligence searches,         continue to build their accounts on a tax-        companies include such a provision when
maintain proper communications of required        deferred basis. (Automatic rollovers are          the plan documents were first created.
information with all plan participants, ensure    available for most defined-contribution           Companies that have not done so must
a valid investment election is on file and        and defined-benefit retirement plans, but         amend their plan documents and notify all
in effect, and manage appropriate death           terminating and abandoned defined-benefit         participants, including ex-employees, before
benefit distributions to beneficiaries. Failure   plans should be handled in connection with        embarking on the automatic rollovers.
to do so can lead to fines, penalties and/or      the Pension Benefit Guaranty Corp.).              The Labor Department has laid out specific
lawsuits.                                         Automatic rollover IRAs were created              procedures for bankruptcy trustees to
Meeting these obligations obviously is very       by the Economic Growth and Tax Relief             follow when attempting to reach missing or
difficult under bankruptcy conditions when        Reconciliation Act of 2001, Pub. L. No. 107-      nonresponsive participants of plans slated
plan participants cannot be located or when       16, 115 Stat. 38 (2001). It allows companies,     for termination.
they ignore company communication efforts.        including those in bankruptcy, to roll over       The trustees must follow four steps:
Many companies using Chapter 11 as a means        the funds in their retirement plans for
                                                  missing and nonresponsive participants to a       •    A certified letter should be sent to their
of reorganizing and staying in business                                                                  last known address.
might elect to keep their retirement plans        custodian that will create and administer an
active during the entire bankruptcy period.       IRA in each individual’s name.                    •    If that brings no response, an attempt
Still, they are under significant pressure to     The custodian will also attempt to locate and          should be made to review plans and
reduce costs including the administering of       communicate with those individuals. The                employer and administrator records to find
dozens, hundreds or thousands of accounts         company can implement this process only                information that would help in the search.
for ex-employees.                                 after it has made a concerted effort to contact   •    Then the beneficiaries listed for their
However, there are other scenarios. While         and communicate with these ex-employees.               account should be contacted.
in Chapter 11, a company may just decide          Automatic rollovers are being used more           •    If this provides no information, letter-
to terminate the plan to reduce overall           frequently by financially healthy companies            forwarding services offered by the
expenses. In this case, it must follow            to move ex-employees’ plan accounts out                Internal Revenue Service and Social
required procedures to notify current and         of their own retirement plan, thus reducing            Security Administration must be
ex-participants and distribute their funds        administrative time and expenses. However,             utilized.
based on their instructions. But, again, what     these companies can only roll over accounts
                                                                                                    Depending on the number of participants
can it do about the problem of nonresponsive      with an asset value of $5,000 or less.
                                                                                                    and the dollar value of the funds in question,
or missing ex-employees?                          Rollovers for missing or nonresponsive
                                                                                                    the use of Internet tools, commercial locator
What if another company with its own plan         employees of companies that are terminating
                                                                                                    services and credit reporting agencies are
purchases a bankrupt company and wants            their plans have no account value limits.
to terminate the plan of the failed firm and      When these ex-workers’ retirement plan
                                                                                                    The preferred method of distributing
transfer its newly obtained employees to          balances are automatically rolled over
                                                                                                    the assets of missing or nonresponsive
its plan? This would be no different than if      to IRAs, they are no longer considered
                                                                                                    participants after all reasonable location
the original company terminated it except         participants in their companies’ plans.
                                                                                                    attempts have failed is the use of automatic
for the fact that now a new administrative        Assuming the companies have followed
team must address the issues of former and        all the requirements stipulated in the
current employee participants.

One solution to the problem of missing or
nonresponsive ex-employees is to implement
an automatic IRA rollover process. This has                      One solution to the problem of missing or
significant financial benefits for the company
and is also a very effective means of reuniting
                                                              nonresponsive ex-employees is to implement an
these individuals with their retirement funds                        automatic IRA rollover process.
and providing them with the potential to

4 | WESTLAW JOURNAL         n
THE AUTOMATIC ROLLOVER                              theirs, but they have no access to them.          Searching the online archives of trade
PROCESS                                             The financial institution with custody of         magazines and professional journals
                                                    the plan assets does not have the authority       covering financial and bankruptcy topics
The automatic rollover process begins when
                                                    to distribute the funds until a formal            is another method. It also pays to review
the plan sponsor or plan fiduciary enters
                                                    abandonment-resolution process has been           the agendas of upcoming trade shows and
into a written, automatic-rollover agreement
                                                    initiated.                                        conferences in a company’s own industry as
with an IRA custodian. This agreement must
                                                    This process typically requires about six         well as in the financial service industry as IRA
stipulate the initial investment to be used for
                                                    months. The assets of the plan must be held       automatic rollover firms may be exhibiting or
the transferred funds, services to be provided
                                                    by or transferred to the control of a custodian   conducting workshops.
to the company and the IRA account holders
by the custodian, plus all related fees and         such as a bank or trust company designated        Not all IRA custodians will go about the
expenses to be paid by the plan or charged          by the Labor Department as a qualified            rollover process in the same way. Companies
to account holders.                                 termination administrator. The QTA must           or trustees responsible for evaluating
                                                    then follow a carefully defined procedure         candidates should be certain to as specific
The initial investment must minimize risk,
                                                    to wind down the plan and to enable the           questions that may relate to their own
preserve principal, provide a reasonable rate
                                                    participants to determine what they want to       circumstances. Among those questions are:
of return and maintain liquidity. Examples
                                                    do with the retirement balances they have in      •     Is there a minimum-sized account they
include money market funds, interest-bearing
                                                    the abandoned plan.                                     will accept? Some will only accept
savings accounts, certificates of deposit and
stable value products. No fee or expense can        First, the QTA is appointed as custodian of             accounts of $1,000 or more. There
exceed those charged by the selected IRA            all the individual accounts in the plan. If the         may be missing or nonresponsive
custodian for its other comparable IRAs.            QTA is not the current custodian of the funds,          ex-employees in bankruptcy situations
                                                    the funds are transferred to the control of a           with smaller balances that must be
In most cases, regardless of the number of
                                                    QTA. At the same time, the QTA must locate              included in a rollover.
accounts involved, the automatic-rollover
                                                    and take possession of all plan records.          •     How many rollover accounts can they
process can be completed quickly after the
agreement is signed.                                Next, the QTA deposits these funds into a               accommodate?         Bankruptcies may
                                                    single, non-interest-bearing account and                result in large numbers of accounts
First, the plan sponsor, third-party adviser or
                                                    sends notice to the plan sponsor declaring              that must be rolled over, but not all
record-keeper must provide key information
                                                    its intent to terminate the plan. The plan              custodians have the capability to
to the custodian, including each participant’s
                                                    sponsor has 30 days to object. If it does               efficiently open and administer a large
name, last known address, Social Security
                                                    not, the QTA officially declares the plan               number of accounts at one time, and
number, birth date and account balance.
                                                    abandoned, notifies the Labor Department                thereafter initiate the process to find
This should be done as a secure electronic
                                                    and indicates it will serve as QTA for the              missing participants.
transfer to protect the confidentiality of the
                                                    assets. At this point, it also calculates the     •     How do they go about finding missing
participant’s information.
                                                    value of the assets at that time and assesses           plan participants? The approaches
Next, the funding must be sent to the IRA           administration fees.                                    for locating individuals can vary by
custodian. Preferably, this is in the form of
                                                    All participants are then notified that an IRA          custodian. Some have relationships
a single check or wire transfer equal to the
                                                    will be established in their name after 30              with search organizations that specialize
collective value of the account balances. The
                                                    days if they provide no other instructions.             in sophisticated searches.
IRA custodian then allocates the appropriate
                                                    After the 30-day period, funds are distributed    •     Will the custodian offer rollovers from
amount to each individual, opens up IRA
                                                    to those requesting them, while IRAs are                Roth 401(k) plans into Roth IRAs or
accounts for each one in their name and
                                                    established for missing and nonresponsive               allow for conversions from IRAs to Roth
notifies the company that the IRA rollovers
                                                    participants.                                           IRAs? The IRS allows IRA account
have been completed.
                                                                                                            holders to convert their traditional pre-
                                                    EVALUATING AUTOMATIC-
WHAT ABOUT ABANDONED PLANS?                                                                                 tax IRA balances into Roth IRAs and
                                                    ROLLOVER FIRMS                                          therefore allow their investments to
Several thousand retirement plans are
                                                    Fortunately for administrators and company              grow tax-free until and at distribution.
considered abandoned each year. Many
                                                    management or the bankruptcy trustees,
are abandoned by companies filing for                                                                 •     What transfer and administration
                                                    there are several firms that can provide
Chapter        7    bankruptcy        protection.                                                           technology does the custodian have?
                                                    appropriate IRA rollover services. Candidates
Abandonment is a specific legal status that is                                                              The transfer of information about
                                                    for such assignments can be identified
declared when there have been no deposits to or                                                             ex-employees participants and their
                                                    by contacting pension, employee benefit
distributions from the plan during 12 consecutive                                                           balances, as well as the transfer of
                                                    and retirement associations such as the
months, and the plan sponsor cannot be found                                                                the funds in those accounts, should
                                                    American Society of Pension Professionals
or is unable to administer the plan.                                                                        be accomplished quickly, accurately,
                                                    & Actuaries, the International Foundation
                                                                                                            seamlessly and securely.
When a retirement plan is abandoned, it puts        of Employee Benefits Plans, the National
all ex-employee participants in limbo. The          Institute of Pension Administrators and the       •     What is the custodian’s experience
retirement funds in their accounts remain           Profit Sharing/401k Council of America.                 with automatic IRA rollovers? This

                                                                                                          MAY 28, 2010   n
                                                                                                                             VOLUME 7   n
                                                                                                                                            ISSUE 2 | 5
     includes the number of years providing
     the service and the number of rollovers
     completed. It also relates to the size
     and experience of its client service team,
     the accounting and record-keeping                                                        Terry Dunne is senior vice president for automatic
     capabilities, and the reporting system it                                                rollovers at Millennium Trust Co. in Oak Brook, Ill.
                                                                                              The company works with numerous record-keepers
                                                                                              and TPAs to provide automatic rollover services to their
Predictions on the specific number of                                                         plan sponsor clients and as of May has agreements
                                                                                              with about 5,500 plan sponsors to provide automatic
business bankruptcies for 2010 and beyond                                                     rollover services. He can be reached at (630) 368-
vary, but there seems to be unanimous                                                         5675 or
certainty that they will continue at a strong
pace. As a result, more retirement plan
administrators and participants should be
able to benefit from the automatic rollover
process. WJ

Defunct banking                                              The policy proceeds are not the property of Downey
                                                             Financial’s bankruptcy estate, and even if they were,
In re Downey Financial Corp., No. 09-13041,
                                                             the officers can claim their share, Bankruptcy Judge
2010 WL 1838565 (Bankr. D. Del. May 7,
2010).                                                                    Christopher S. Sontchi ruled.
U.S. Bankruptcy Judge Christopher S.
Sontchi found that the policy proceeds (the
funds available to pay claims) are not the         consistently made subprime loans to                  At issue is the $10 million available under
property of the estate of the debtor company,      borrowers who lacked the ability to repay the        an insurance policy written for Downey by
and even if they were, the officers can claim      debts.                                               National Union Fire Insurance Co. The policy
their share of them since they were covered        They also said they were not informed about          covers both the corporate entity and the
under the policy.                                  the extent of Downey’s issuance of “option           directors and officers.

The District of Delaware judge addressed           ARMs,” exotic adjustable-rate mortgages              The executives have asked Judge Sontchi
a controversial overlap of bankruptcy and          that allow subprime borrowers to pay as              to let them tap the policy proceeds, but the
insurance law concerning whether a bankrupt        much as they want during the initial term,           trustee opposes that move, arguing that the
company or its officers and directors are first    with the unpaid amounts added to the loan            policy belongs to the debtor.
in line for what is often one of the firm’s last   balance. These loans often end up in default.        The judge said the guiding principle in
remaining assets: its insurance policies.          The shareholder suits, filed in May and June         this type of case is that if the officers and
That question has split federal appeals            2008, made state law breach-of-duty and              directors can use the policy proceeds without
courts, but the answer was more simple than        federal securities law charges, but both types       diminishing the money that the company
usual here, Judge Sontchi said. The corporate      of suits centered on allegations that Downey         itself might need, they should have access
entity is not named in the case against the        had more than $12 billion worth of option            to it.
executives and therefore does not need the         ARMs on its books and that the executives            Since Downey itself is not a defendant in
money to defend itself, he said, so the officers   knew these loans were risky.                         the derivative action, it does not need the
and directors should have access to it.            The securities fraud charges were dismissed,         money and loses nothing when the directors
In the underlying actions, Downey                  but the derivative state law claims have now         and officers get a benefit they were promised
shareholders said they lost their total            been taken over by the bankruptcy trustee,           when they signed on, Judge Sontchi said. WJ
investments because the company’s                  who is pursuing them against the officers            Related Court Document:
executives did not disclose that the bank          and directors in the name of the company’s           Opinion: 2010 WL 1838565

6 | WESTLAW JOURNAL          n

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