On the Docket: Supreme Court Cases, Week of Nov. 26, 2007

The following is a summary of cases the U.S. Supreme Court will hear for the week of Nov. 26-Dec. 1, 2007:

Case: LaRue v. DeWolff

Argument Date: Monday, Nov. 26

Law in Question: ERISA (Employee Retirement Income Security Act of 1974

Concern: Can an individual employee sue his company for allegedly mishandling his 401(k) retirement account.

Impact: James LaRue says his company's mishandling of his retirement account cost him $150,000. An interested party to this case is the largest life insurance trade group which argues a victory for LaRue would lead to an increase in costs for all sorts of employer-sponsored benefit plans, and that such increased costs would lead to more employers not offering these plans. Conversely, a number of law school professors argue to the court that Congress intended for people like LaRue, and the 50 million Americans who have 401(k) plans, to be able to sue under ERISA.

Questions Presented: 1. Section 502(a)(2) of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. 1132(a)(2), provides that a civil action may be brought by a participant for appropriate relief under section 1109 of this title. 29 U.S.C. 1109 states that a fiduciary with respect to a plan who breaches any duties imposed upon fiduciaries shall be personally liable to make good to such plan any losses to the plan resulting from each such breach.

The first question presented is: Does §502(a)(2) of ERISA permit a participant to bring an action to recover losses attributable to his account in a defined contribution plan that were caused by fiduciary breach?

2. Section 502(a)(3) of ERISA, 29 U.S.C. 1132(a)(3), provides that a civil action may be brought by a participant to obtain other appropriate equitable relief to redress violations of the statute. The second question presented is: Does §502(a)(3) permit a participant to bring an action for monetary make-whole relief to compensate for losses directly caused by fiduciary breach (known in pre-merger courts of equity as surcharge)?

Background: James LaRue is one of an estimated 50 million Americans who hold $5.5 trillion in retirement savings through employee-sponsored 401(k) plans. As an employee with the management consulting firm of DeWolff, Boberg & Associates, LaRue sought to make several changes in his plan. But those changes never actually took place and he sued the company seeking $150,000 in damages. He says the money was lost because of the firm's failure to process the changes he wanted to his account. The trial court and the Fourth Circuit both ruled against him.

The lower courts concluded LaRue was unable to sue under the ERISA statues which allow for lawsuits but only in cases in which an entire 401(k) plan was harmed. Not in individual cases like this one. LaRue has appealed again to the Supreme Court and contends "[at] its core, this case presents one broad question. Can an individual whose 401(k) account balance is depleted by fiduciary misconduct recover the monetary losses under ERISA? The court of appeals answered this question in the negative. It was wrong."

Case: Knight v. Commissioner of Internal Revenue

Argument Date: Tuesday, Nov. 27

Law in Question: Internal Revenue Code

Concern: Are trusts and estates allowed to claim tax deductions for its investment management and advisory services.

Impact: This is certainly a big case for anyone who is responsible for or interested in the finances of trusts and estates. Normally these are multi-million dollar entities and as such any tax matter is likely to involve a large sum of money. In this case, the issue surrounds the trust management costs and if they are fully tax deductible.

Questions Presented: Whether 26 U.S.C. § 67(e) permits a full deduction for costs and fees for investment management and advisory services provided to trusts and estates

There is a deep, irreconcilable and widely noted conflict among the Second, Fourth, Sixth and Federal Circuits about the meaning of 26 U.S.C. § 67(e), which permits trusts and estates to deduct on their income tax returns certain administrative expenses, and whether the statute permits fees for investment management and advisory services to be fully deducted on trusts and estates income tax returns. This is an important and recurring question of federal tax law that involves deductions by trusts and estates that total in the billions of dollars annually. .

Background: William L. Rudkin and his wife Margaret were the founders of Pepperidge Farm, the noted cookie and cracker company. Prior to his death, Rudkin sold the firm to the Campbell Soup Company and put some the proceeds of that sale into a trust for his family and its later generations. There is a dispute over the ability of the trust to fully deduct its administrative costs. In this case and as is often the case with trusts and estates, administrative costs are the single biggest expense.

The trustee of the Rudkin trust, Michael Knight, hired a professional investment firm to help advise him on how to properly manage the funds. Knight then deducted from the trust's income taxes, the fees charged by the investment firm. A deduction the Internal Revenue Service rejected. While the IRS does allow for full deductions on certain administrative costs, it ruled and lower courts in this case have affirmed that fees for investment-advice services are not covered by the code and as such are not fully deductible. The Second Circuit ruled that such advice if given to an individual would not be deductible and therefore the trust could not do so either. In his appeal to the Court, Knight argues "[t]here is no basis for the assertion that Congress intended [the tax law] to work the significant change to trust and estate taxation that the [IRS] posits, a change that would have serious consequences for the very beneficiaries trusts and estates are designed to protect."

Case: New Jersey v. Delaware

Argument Date: Tuesday, Nov. 27

Law in Question: Boundary dispute between New Jersey and Delaware

Concern: Whether New Jersey can approve a liquefied natural gas (LNG) facility on its shoreline that requires some dredging of the Delaware River in Delaware's territorial waters.

Impact: This is your good old fashioned boundary dispute. Instead of bickering neighbors who have long-running feuds over fences and trees this one involves the river that runs between two of the original 13 states. The center of the dispute is a $600 million LNG plant that would figure to be an economic boon. But Delaware has environmental concerns and has blocked construction of the plant—even though it would sit on the New Jersey side of the river. It would be difficult to draw out any long-standing impact of this case beyond the specifics presented to Court here.

Background: Generations of American schoolchildren learned how General George Washington crossed an icy Delaware to surprise the Hessians on Christmas night 1776. The crossing was depicted in Emanuel Gottlieb Leutze's famous painting of a focused Washington standing at the bow of a small boat while his soldiers battle the elements including a ferocious Delaware River. Today, the Delaware River isn't so full of whitecaps and the battle in front of the Supreme Court isn't as significant as the one Washington faced in Trenton, but it does trace its origins to Colonial days. It’s a boundary dispute between New Jersey and Delaware. And that boundary is the Delaware River.

Over the years, both states have held opposing views on the border and how it's managed and this is not the first time the Supreme Court has stepped in to resolve the conflict. An 1872 dispute over fishing rights led to some Delaware officers arresting at gunpoint New Jersey residents boating in the river. And a 1934 Supreme Court ruling permanently established that Delaware's border rights extend to the "low water mark" on the New Jersey shoreline.

The current case involves a plan by a subsidiary of energy giant British Petroleum to build a LNG plant on the New Jersey shoreline. But construction of the plant will require underwater dredging in parts of the River under Delaware's control. Various Delaware state agencies have blocked the dredging and by extension the construction of the plant citing environmental concerns.

The dispute has once again raised tempers on both sides of the river. A special master authorized by the court noted that "New Jersey considered a range of legislative resolutions and threats to withdraw state pension funds from Delaware banks. Delaware considered legislation authorizing the National Guard to step in to protect Delaware’s borders from encroachment. And one New Jersey legislator even explored the seaworthiness of the decommissioned battleship New Jersey, currently docked as a museum on the Camden waterfront, in the event the state was forced to repel an armed invasion by Delaware. Despite -- or perhaps because of -- these diverse responses to the current dispute, the states have been unable to break their impasse."

In its arguments to the special master, New Jersey claimed a 1905 compact between the states gives it the sole authority to regulate activity on its own shoreline. Delaware disagreed saying the proposed project interferes with its own territorial waters as established by the Court in 1934 and is legally justified to prohibit the plant. In April, the Court-ordered special master ruled in Delaware's favor saying the "First State" was within its rights to prohibit dredging in the river. The special master's report is not binding and that's why the Supreme Court will hear the case.

Case: Rowe v. New Hampshire Motor Transport Association

Argument Date: Wednesday, Nov. 28

Law in Question: Federal Aviation Administration Authorization Act (FAAAA)

Concern: Whether the Maine law making tobacco sales to minors more difficult violate a congressional statute protecting companies responsible for legally transporting tobacco products

Impact: As long as there have been laws prohibiting minors from getting tobacco (or alcohol for that matter) there have been kids trying to find a way around the system. And to some extent there have always been certain proprietors who have been less than vigilant in following through on the legislative mandates. Lawmakers in Maine viewed Internet and phone orders as an emerging threat to public health (and declining tax revenues) and as a way for retailers and juveniles to get around pre-existing tobacco laws. So the Legislature moved to put restrictions on "remote" tobacco sales similar to those for over-the-counter transactions. But lower courts have ruled those restrictions are too broad and put too much of a burden on carriers who are forced to spend time and money unnecessarily. Not surprisingly, most of your anti-tobacco groups have come out in favor of the law. FedEx and the United States solicitor general have sent briefs to the court against the Maine law and in favor of the federal authority.

Questions Presented: 1. Whether the Federal Aviation Administration Authorization Act of 1994, 49 U.S.C. §14501(c)(1) and 41713(b)(4)(A), preempts states from exercising their historic public health police powers to regulate carriers that deliver contraband such as tobacco and other dangerous substances to children.

2. Whether the FAAAA preempts states from exercising their historic public health police powers to require shippers of contraband such as tobacco and other dangerous substances to utilize a carrier that provides age verification and signature services to ensure that such substances are not delivered to children.

Background: Maine has historically been on the forefront of laws limiting access to tobacco products by minors. The American Lung Association has given Maine "perfect grades" for its efforts in this area. In 2003, Maine's Legislature passed The Tobacco Delivery Law to force certain tobacco retailers to make sure its customers were of legal age. Two decades earlier, the state passed an identical law for over-the-counter purchases (at gas stations, convenience stores, grocery stores etc.) but this law touched upon retailers (primarily Internet operations) that take advance orders and deliver the tobacco products to a given address. The 2003 law mandated that retailers make sure the address was accurate and that the addressee was at least 18 years old. It further required retailers to force anyone younger than 27 years old to show proof of age. The law also forced retailers to use shipping companies that would vigilantly comply with the law.

Transport companies like the one named in this case argue the Maine law is onerous by slowing down deliveries for burdensome record-keeping and as a result costs them money. They argue the 1994 FAAAA prohibits states like Maine from writing laws that unduly interfere with the movement of goods. The trial court struck down the Maine law and state Attorney General Steven Rowe appealed to the First Circuit Court of Appeals, which affirmed the lower court ruling that “in the end, the attorney general's argument founders because it cannot be reconciled with the FAAAA's text.”