Ream v. Frey ( 1997 )

Opinions of the United
1997 Decisions States Court of Appeals
for the Third Circuit
2-14-1997
Ream v. Frey
Precedential or Non-Precedential:
Docket 96-1339
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 96-1339
JEFFREY REAM
v.
JEFFREY E. FREY; FULTON BANK;
LAURIE L. FREY
Fulton Bank,
Appellant
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civ. No. 95-01827)
Argued January 13, 1997
BEFORE: SLOVITER, Chief Judge, and GREENBERG
and SCIRICA, Circuit Judges
(Filed: February 14, l997)
Gerald S. Berkowitz (argued)
625 B. Swedesford Road
Swedesford Corporate Center
Malvern, PA 19355
Attorney for Appellee
Michael A. Moore (argued)
Barley, Snyder, Senft & Cohen
126 East King Street
Lancaster, PA 17602
Attorneys for Appellant
OPINION OF THE COURT
GREENBERG, Circuit Judge.
1
Fulton Bank (the “Bank”) appeals from a grant of
summary judgment by the district court in favor of appellee
Jeffrey Ream on April 1, 1996. Ream brought suit against the
Bank alleging that it breached its fiduciary duty by resigning as
plan trustee and transferring to Jeffrey Frey, the plan
administrator and the principal in Ream's employer, the assets of
an Employee Retirement Income Security Act of 1974 ("ERISA")
pension fund plan which Frey subsequently converted and used for
his own purposes. This appeal raises questions concerning the
scope of the fiduciary duties of a plan trustee under ERISA when
the trustee is resigning. We have jurisdiction pursuant to 28
U.S.C. § 1291 as this appeal is from a final order of the United
States District Court for the Eastern District of Pennsylvania.
This case arises under ERISA, and thus the district court had
subject matter jurisdiction pursuant to 28 U.S.C. § 1331 and
ERISA § 502(e)(1) and (f), 29 U.S.C. § 1132(e)(1) and (f).
I. FACTUAL AND PROCEDURAL HISTORY
The material facts are not in dispute. See
Supplemental Appendix, Stipulation of Uncontested Facts
(“Stipulated Facts”). Ream was an employee of JLC Construction
Co., Inc. (“Company”). Stipulated Fact ¶ 3. Effective January
1, 1989, the Company established the JLC Construction Company
Profit Sharing 401(k) Plan (the “plan”) under 26 U.S.C. § 401 et
seq. The Company first established the plan pursuant to written
plan documents consisting of a Standardized Adoption Agreement
2
and Basic Plan Document.1 Stipulated Fact ¶ 4. Ream was a
participant in the plan with a 100% vested account. Stipulated
Fact ¶ 3. Fulton Bank, the designated plan trustee, deposited
all of the plan's funds in a trust account it maintained at the
Bank.
In addition to designating Fulton Bank as plan trustee,
the Basic Plan Document designated the Company as the plan
administrator, and the Adoption Agreement designated Frey, the
sole shareholder of the Company, as the plan administrator on
behalf of the Company. App. at 62-63. The Plan Document also
specified the responsibilities of the administrator and the
trustee. The administrator had the duties of establishing a
funding policy consistent with ERISA, determining and making
contributions to the plan, communicating with plan beneficiaries
and participants, and complying with ERISA and other governmental
reporting requirements. Basic Plan Document § 11.1. The
trustee's duties were limited to receiving contributions,
investing the contributions once received, and making
distributions in accordance with instructions from the Company.
Basic Plan Document § 11.2. However, the Basic Plan Document
placed the responsibility solely on the Company to collect and
remit the contributions to the trustee. Basic Plan Document §
3.3. Further, the plan specifically allocated to the Company, as
1. Fulton Bank, which also serves as plan trustee for other
pension plans and charges a fee for its services, provided all
plan documents to the Company. Stipulated Fact ¶ 7.
3
the plan administrator, all other administrative duties required
by either applicable law or by the plan.
The Plan Document specifically limited the liability of
the trustee. Section 11.4 of the Plan Document, entitled
“Division of Duties and Indemnification,” exempted the trustee
from any guarantee “against investment loss or depreciation in
asset value, or [from any] guarantee [about] the adequacy of the
Fund to meet and discharge all or any liabilities of the Plan.”
However, the trustee could be liable for its actions “to the
extent it is judicially determined that the Trustee/Custodian has
failed to exercise the care, skill, prudence and diligence under
the circumstances then prevailing that a prudent person acting in
a like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character with like aims.”
Furthermore, Section 11.4 stated that “[t]he duties and
obligations of the Trustee/Custodian shall be limited to those
expressly imposed upon it by this instrument or subsequently
agreed upon by the parties. Responsibility for administrative
duties required under the Plan or applicable law not expressly
imposed upon or agreed to by the Trustee/Custodian, shall rest
solely with the Employer.”
During Fulton Bank's tenure as trustee, the Company
sometimes would delay its remittance of employer contributions
for several months. Fulton Bank then would call or write to the
Company to expedite remittance of the contributions. The Company
caused the Bank additional difficulties because it was
uncooperative in providing the Bank with information regarding
4
the plan's administration. Stipulated Fact ¶ 17. By the spring
of 1993, the Company had failed to provide Fulton Bank with
employer matching contributions for 1992 and 1993. The Bank sent
the Company letters “admonishing” it to pay over the monies and
warning that it would resign as trustee if salary deferral
remittances continued to be delinquent. Finally, the Bank
forwarded a letter to Frey stating that it was resigning as
trustee pursuant to its prior correspondence and pursuant to
Article 15.6 of the Basic Plan Document. See app. at 284,
Exhibit 6, app. at 286, Exhibit 7. Article 15.6 provides that
the trustee may resign by written notice to the Company followed
by delivery of the fund assets to the Company's chosen successor
trustee. If the Company failed to appoint a successor, the Bank
could deliver the assets to the Company which then would be
deemed the successor trustee.
The Bank then attempted to contact the Company to
persuade it to appoint a successor trustee for the plan assets,
but Frey never responded to the Bank's repeated requests for an
appointment. Stipulated Fact ¶ 23. Thus, a successor trustee
never was appointed. Ultimately, the Bank sent a letter to Frey
stating that unless Frey notified Fulton Bank of the successor
within 15 days, the Bank would issue a check to Frey and
designate him as the successor trustee in accordance with the
plan. App. at 291. Frey did not respond, and Fulton Bank sent
him a letter on October 5, 1993, informing him of the status of
the plan and forwarding the plan assets consisting of a check in
the amount of $53,008.15 and three promissory notes. App. at
5
293. The Bank appointed Frey as the successor trustee of the
plan. The check was payable to “Jeffrey Frey, successor Trustee
for the JLC Construction Co., Inc. Profit Sharing 401(k) plan.”
The check was endorsed “Jeffrey Frey” and honored by the Bank.
Frey subsequently converted all of the assets of the plan to his
own use.
Ream's account balance in the plan at the end of 1992
was $13,829.92, and he continued to make weekly contributions to
the plan through 1993 totaling $1,180.80. As we indicated, the
Bank sent Frey a check for $53,008.15, an amount exceeding Ream's
balance. At oral argument counsel advised us that there were ten
to fifteen of other beneficiaries to the plan, but except for
Ream no beneficiary has brought any action against the Bank.
On November 3, 1994, the Company filed for bankruptcy
under Chapter 7 of the Bankruptcy Code in the Eastern District of
Pennsylvania and shortly thereafter Ream demanded payment of his
plan assets from Frey. Until this time, Ream was not aware that
Fulton Bank had transferred the plan assets to Frey, and neither
the Bank nor the Company ever had notified Ream of the delays in
payments to the plan, of Fulton Bank's intention to resign, or of
Fulton Bank's final resignation. Ream's wife contacted Fulton
Bank after the Company filed for bankruptcy. In response to her
inquiry as to why the trustee had not notified the plan
beneficiaries as to what had happened, the Bank responded that
“while we are not having cooperation from the Company, that did
not mean bad things were happening . . . .” App. at 347.
6
By letter dated January 4, 1995, Frey acknowledged that
he owed Ream $16,206.00 pursuant to the plan and proposed paying
that money in installments. App. at 346; Stipulated Fact ¶ 34.
Though Ream initially rejected this offer, instead instituting
suit against both Frey and the Bank for breach of fiduciary duty,
Ream later agreed to settle with Frey for $21,556.93. However,
Frey paid only $18,556.93 to Ream before disappearing. It
appears that the settlement figure exceeded the amount due Ream
under the plan because Frey owed him additional money on other
items. App. at 306.
This appeal concerns the $3,000.00 which Frey did not
pay to Ream plus interest owed to Ream as well as the substantial
attorney's fees that Ream has incurred. Frey has been dismissed
from the suit as he is no longer within the jurisdiction and the
parties do not know his whereabouts. Stipulated Fact ¶ 36.
On cross-motions for summary judgment, the district
court held that Ream could recover damages on his own behalf for
a breach of fiduciary duty under ERISA, that Fulton Bank violated
its fiduciary duty by not acting as a prudent person when it
forwarded the plan assets to Frey who had a history of failing in
his fiduciary duties to the plan, and that Fulton Bank was liable
for Frey's subsequent breach of fiduciary duties because its own
failure to comply with the required standard of care enabled
Frey, a co-fiduciary, to convert the assets of the plan for his
own use.2 The court, however, dismissed Ream's common law tort
2. We need not reach the question of whether Fulton Bank is
liable as a co-fiduciary under ERISA § 405(a), 29 U.S.C. §
1105(a), inasmuch as we will affirm the district court judgment
7
claims as preempted by ERISA - a holding he does not dispute on
this appeal. Although it had reserved the issue of damages for
trial, based on the parties' stipulated agreement the court
entered a judgment against the Bank on April 15, 1996, in the
amount of $3,200.00 and awarded Ream $18,000.00 in attorney's
fees and costs.3 Fulton Bank then appealed. We are undertaking
a plenary review of the district court's decision.
II. DISCUSSION
A “person is a fiduciary with respect to a plan,” and
therefore subject to ERISA fiduciary duties, “to the extent” that
“he exercises any discretionary authority or discretionary
control respecting management” of the plan, or “has any
discretionary authority or discretionary responsibility in the
administration” of the plan. ERISA § 3(21)(A), 29 U.S.C. §
1002(21)(A). Fulton Bank was the trustee of the plan. As
described in the Plan Document, “the Trustee/Custodian shall have
the authority and discretion to manage and govern the Fund to the
extent provided in this instrument.” App. at 250. Clearly, this
provision evidences an express allocation of discretionary
authority to Fulton Bank as trustee. Further, the Plan Document
on the basis that the Bank violated its fiduciary duties as
trustee and the damages are the same whether the Bank is found
liable as trustee or as co-fiduciary.
3. We note that Frey paid Ream all but $3,000.00 of the
settlement but Ream and the Bank stipulated his damages at
$3,200.00. We cannot explain this discrepancy. The Bank does
not challenge the amount of the attorney's fees and costs the
court awarded.
8
holds the trustee liable only to the extent that “it is
judicially determined that the Trustee/Custodian has failed to
exercise the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person acting in a
like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character with like aims."
Id. These words are the very ones used in ERISA to describe
fiduciary duties. ERISA § 404(a)(1)(B), 29 U.S.C. §
1104(a)(1)(B). There is thus no question but that under the
plan, Fulton Bank was intended to be and was a fiduciary with all
of its corresponding duties and responsibilities and, indeed, it
does not contend otherwise.
a. Recovery as an Individual Beneficiary
Fulton Bank argues that the Supreme Court in
Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134, 139,
105 S. Ct. 3085, 3089 (1985), an action under ERISA § 502(a)(2),
29 U.S.C. § 1132(a)(2), precluded an ERISA beneficiary from
recovering damages on his own behalf from an ERISA fiduciary for
breaches of fiduciary duty. Thus, the Bank contends "that
remedies for an alleged breach of fiduciary duty under ERISA must
enure to the benefit of the entire [p]lan or to all plan
participants." Br. at 19. Accordingly, in its view Ream cannot
maintain this action as he is seeking relief for himself. In a
sense, of course, this may be a strange argument for the Bank to
make. Ream unquestionably does have standing to bring an action
on behalf of the plan, and it is entirely possible that such an
9
action would have resulted in a greater judgment against the Bank
than the judgment Ream recovered as the Bank sent Frey all of the
plan's assets, not just those reflecting Ream's interest. ERISA
§ 502(a)(2).
In any event, as Ream points out, the Supreme Court in
Varity Corp. v. Howe, 116 S. Ct. 1065 (1996), held that in some
circumstances beneficiaries could make personal recoveries from
an ERISA fiduciary for breach of fiduciary obligations. In
Varity, the Court agreed with our decision in Bixler v. Central
Pennsylvania Teamsters Health and Welfare Fund, 12 F.3d 1292 (3d
Cir. 1993), that ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3),
authorizes lawsuits for individualized equitable relief for
breach of fiduciary obligations.4 As the Court explained in
Varity, “one can read § 409 [29 U.S.C. § 1109] [which establishes
liability for breach of fiduciary duty] as reflecting a special
congressional concern about plan asset management without also
finding that Congress intended that section to contain the
exclusive set of remedies for every kind of fiduciary breach.”
4. In Bixler v. Central Pennsylvania Teamsters Health-
Welfare Fund, 12 F.3d at 1298, we upheld the right of an
individual beneficiary to recover from a fiduciary, pointing to
the narrowness of the Supreme Court's holding in Russell, 473
U.S. 134, 105 S. Ct. 3085. We stressed ERISA's grounding in the
law of trusts, and reiterated that “fundamental in the law of
trusts is the principle that ‘courts will give to beneficiaries
of a trust the remedies necessary for the protection of their
interests.’” 12 F.3d at 1299 (quoting Russell, 473 U.S. at 157,
105 S.Ct. at 3098) (concurring opinion)). In permitting a
beneficiary to bring a direct action for breach of fiduciary duty
against the trustees and administrators of an ERISA plan, we
concluded that “[a]llowing an injured beneficiary recourse
through the courts is, furthermore, essential to fulfilling the
purpose of ERISA.” Bixler, 12 F.3d at 1299.
10
Varity, 116 S. Ct. at 1077. The Court found this reading
“consistent with [ERISA] § 502's overall structure” which
provides two “catchalls” which “act as a safety net, offering
appropriate equitable relief for injuries caused by violations
that § 502 does not elsewhere adequately remedy.” Id. at 1077-
78. The Supreme Court did caution, however, that in fashioning
“appropriate” equitable relief, courts should “keep in mind the
special nature and purpose of employee benefit plans, and . . .
respect the policy choices reflected in the inclusion of certain
remedies and the exclusion of others.” Id. at 1079 (citations and
internal quotation marks omitted). Where Congress otherwise has
provided for appropriate relief for the injury suffered by a
beneficiary, further equitable relief ought not be provided.
The Court in Varity distinguished Russell, explaining
that Russell was confined to suits under ERISA § 502(a)(2) and
did not limit the relief available under ERISA § 502(a)(3) which
permits “appropriate equitable relief” to “redress any act or
practice which violates any provision of this title.” Varity,
116 S. Ct. at 1076 (internal quotation marks omitted). Ream, like
the plaintiffs in Varity, has no alternative means of recovering
for his losses. In Varity, the plaintiffs were no longer members
of the plan and therefore had no “benefits due [them] under the
terms of [the] plan." Varity, 116 S. Ct. at 1079; see also ERISA
§ 502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B). Nor could they
proceed under ERISA § 502(a)(2) because that provision does not
allow for individual recovery. See Russell, 473 U.S. at 144, 105
S.Ct. at 3091. Thus, to recover the plaintiffs in Varity had to
11
rely on ERISA § 502(a)(3) which provides for “other appropriate
equitable relief,” a reliance the Court found justified as there
was no ERISA-related purpose for denying a remedy.
Ream is in a position similar to that of the plaintiffs
in Varity and he, too, should have a remedy under ERISA §
502(a)(3). He suffered a direct, clearly defined personal loss
from the Bank's conduct. Furthermore, this is not a case in
which an individual plan beneficiary charges a fiduciary with a
breach of fiduciary duties with respect to a functioning plan.
In that situation it might be inappropriate to permit a
beneficiary to seek personal relief as a recovery by the plan
effectively would make the beneficiary whole. We emphasize,
therefore, that a court must apply ERISA § 502(a)(3)(B)
cautiously when an individual plan beneficiary seeks "appropriate
equitable relief."5 Such caution would be consistent with the
concerns the Supreme Court expressed in Varity about a court
being too expansive in granting relief. Varity, 116 S. Ct. at
1079.
5. “Appropriate equitable relief” generally is limited to
traditional equitable relief such as restitution and injunctions
rather than money damages. Hein v. FDIC, 88 F.3d 210, 223-24 &
n.11 (3d Cir. 1996). However, ERISA § 502(a)(3) does not
“necessarily bar all forms of money damages.” Id. at 224, n.11.
Here, though the district court seemed to treat Ream's complaint
as one seeking money damages, Ream sought only to recover his
vested interest in the plan which largely reflected his own
contributions. See app. at 298. This relief, regardless of the
language in the complaint, easily may be characterized as
restitution and the Bank does not contend otherwise. See Howe v.
Varity Corp., 36 F.3d 746, 756 (8th Cir. 1994), aff’d, 116 S. Ct.
1065 (1996).
12
The legislative history of ERISA supports our view that
the personal recovery Ream obtained constituted “appropriate
equitable relief.”
[ERISA] imposes strict fiduciary obligations on those
who have discretion or responsibility respecting the
management, handling or disposition of pension or
welfare plan assets. The objectives of these
provisions are to make applicable the law of trusts; to
prohibit exculpatory clauses that have often been used
in this field; to establish uniform fiduciary standards
to prevent transactions which dissipate or endanger
plan assets; and to provide effective remedies for
breaches of trust.
120 Cong. Rec. 15737 (1974) (Comments of Sen. Williams when
introducing the Conference Report), reprinted in (1974)
U.S.C.C.A.N. 5177, 5186. This excerpt evidences Congress'
intention to impose on ERISA fiduciaries a strict code of conduct
to protect adequately pension and welfare plan assets. Allowing
an ERISA trustee to escape liability after disregarding the
interests of plan beneficiaries would undermine Congress' intent.
Thus, this case falls squarely within the category of cases the
Supreme Court envisioned as necessitating a broad reading of
ERISA § 502(a)(3). The district court was correct in allowing
Ream, an ERISA beneficiary, to bring an action seeking individual
relief under ERISA § 502(a)(3) against Fulton Bank, an ERISA
fiduciary, for breach of its fiduciary duties.
b. Breach of Fiduciary Duties
The district court was also correct in finding that in
the circumstances of this case Fulton Bank breached its fiduciary
duties. Ream claims that the Bank breached these duties in three
13
distinct ways: (1) by transferring the plan funds to Frey with
knowledge that: (a) the Company was failing; (b) the Company had
failed to make contributions for the two prior years; and (c)
Frey was neglecting his duties as plan administrator by failing
to communicate with the Bank or even to respond to its
correspondence; (2) by resigning as trustee without notifying the
beneficiaries that the Company was severely delinquent in making
employer contributions; and (3) by failing to notify the
beneficiaries that it had resigned as trustee and forwarded the
plan assets to Frey. The district court held that Fulton Bank
breached its fiduciary duties because, aware that Frey was
failing in his fiduciary duties, it nevertheless sent the plan
assets to him. In support of its finding, the district court
pointed to Frey's lack of cooperation in providing the Bank with
information necessary for the administration of the plan, to the
Company's consistent tardiness in paying and failure to pay both
employee and employer contributions, and to Frey's failure to
respond to the Bank's repeated attempts to have Frey appoint a
successor trustee and to remit loan payments.
As a fiduciary, Fulton Bank had the duty to perform its
functions solely in the interest of the beneficiaries of the plan
and “with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a like
capacity and familiar with such matters would use in the conduct
of an enterprise of a like character and with like aims.” ERISA
§ 404(a)(1)(B). A fiduciary's duties under ERISA are based both
on ERISA, particularly the prudent person standard as set forth
14
in ERISA § 404, 29 U.S.C. § 1104, and on the common law of
trusts. “Congress intended by § 404(a) to incorporate the
fiduciary standards of trust law into ERISA, and it is black-
letter trust law that fiduciaries owe strict duties running
directly to beneficiaries in the administration and payment of
trust benefits.” Bixler, 12 F.3d at 1299 (quoting Russell, 473
U.S. at 152-53, 105 S.Ct. at 3095-96) (concurring opinion)).
The law of trusts, however, serves as no more than a
guide for interpreting ERISA's provisions. “In some instances,
trust law will offer only a starting point, after which courts
must go on to ask whether, or to what extent, the language of the
statute, its structure, or its purpose require departing from
common-law trust requirements.” Varity, 116 S. Ct. at 1070. This
process is necessary because ERISA's standards and procedural
protections partly reflect a congressional determination “that
the common law of trusts did not offer completely satisfactory
protection.” Id. Congress passed ERISA, in part, to address the
problem of exculpatory clauses in trust documents. See 120 Cong.
Rec. 15737 (1974) (Comments of Sen. Williams when introducing the
Conference Report), reprinted in (1974) U.S.C.C.A.N. 5177, 5186.
Nevertheless, we have stated clearly that an ERISA fiduciary's
duties do include the common law duties of trustees:
Acknowledging, as we do today, that ERISA's fiduciary
duty section incorporates the common law of trusts, the
appellate court found the duty to disclose material
information 'is the core of a fiduciary's
responsibility.' [Eddy v. Colonial Life Ins. Co., 919
F.2d 747, 750 (D.C. Cir. 1990)]. As set forth in the
Restatement (Second) of Trusts, '[The Trustee] is under
a duty to communicate to the beneficiary material facts
affecting the interest of the beneficiary which he
knows the beneficiary does not know and which the
15
beneficiary needs to know for his protection in dealing
with a third person.' Restatement (Second) of Trusts
Section 173, comment d (1959). This duty to inform is
a constant thread in the relationship between
beneficiary and trustee; it entails not only a negative
duty not to misinform, but also an affirmative duty to
inform when the trustee knows that silence might be
harmful.
Bixler, 12 F.3d at 1300.6
Under traditional trust law, a trustee is permitted to
resign in accordance with the terms of the trust, with the
consent of the beneficiaries, or with a court's permission. See
Glaziers and Glassworkers Union Local No. 252 Annuity Fund v.
Newbridge Secs., Inc., 93 F.3d 1171, 1183-84 (3d Cir. 1996);
Restatement of the Law (Second) Trusts § 106. Most of the
relevant case law, which involves trustees failing to comply with
these requirements, suggests that a trustee may be liable for a
breach of fiduciary duty for resigning without providing for a
“suitable and trustworthy replacement.” Friend v. Sanwa Bank
California, 35 F.3d 466, 471 (9th Cir. 1994) (concurring
opinion). See Glaziers, 93 F.3d at 1183 ("Courts that have
considered the issue have held that an ERISA fiduciary's
obligations to a plan are extinguished only when adequate
provision has been made for the continued prudent management of
plan assets.").
6. But we emphasize that the Supreme Court has recognized
that trust law does not control completely in the ERISA setting.
Varity, 116 S. Ct. at 1070. Consequently, the Court has
indicated that courts must create federal common law to flesh out
the meaning of ERISA and effectuate fully its meaning and
purpose.
16
Here, there was no provision in the plan requiring the
trustee to notify plan participants of the Company's failure to
make contributions or of the trustee's intention to resign. But
allowing a fiduciary to resign without notice to the plan
beneficiaries in a situation in which the fiduciary has
information indicating that the beneficiaries may need protection
because of the change of trustee would undermine the goals of
ERISA. Thus, even if Fulton Bank's resignation complied with the
terms of the plan, it would be overly formalistic (and contrary
to the explicit statutory directives in ERISA) to hold that the
Bank's resignation in the circumstances here necessarily was
acceptable behavior for a fiduciary.
Thus, Ream is correct in asserting that: “[a]
fiduciary must satisfy ERISA's fiduciary standard of care, in
addition to whatever contractual duties may be set forth in the
plan documentation.” Br. at 20. The Supreme Court has
recognized expressly this broad duty of an ERISA fiduciary:
There is more to plan (or trust) administration than
simply complying with the specific duties imposed by
the plan documents or statutory regime; it also
includes the activities that are 'ordinary and natural
means' of achieving the 'objective' of the plan.
[Citation omitted.] Indeed, the primary function of
the fiduciary duty is to constrain the exercise of
discretionary powers which are controlled by no other
specific duty imposed by the trust instrument or the
legal regime. If the fiduciary duty applied to nothing
more than activities already controlled by other legal
duties, it would serve no purpose.
Varity, 116 S. Ct. at 1073-74.
We need not decide today whether Fulton Bank could be
liable merely because it did not notify the beneficiaries of the
17
plan that the Company was delinquent in failing to make
contributions. The issue of whether the Bank could be liable for
that omission in itself is not before us as there are other,
distinct factors supporting the district court's judgment holding
the Bank liable. Furthermore, Ream's loss is not attributable to
the Company's failure to make contributions. Moreover, we
recognize that it might be unreasonably burdensome on a trustee
to give notification to a large number of beneficiaries of every
apparent shortcoming of an employer. We also realize that, while
we have held that in some circumstances a fiduciary can be liable
for failing to notify beneficiaries that an employer is not
making required contributions to a plan, Rosen v. Hotel and
Restaurant Employees and Bartenders Union, 637 F.2d 592, 600 (3d
Cir. 1981), a rule requiring in all cases that a fiduciary notify
the beneficiaries when an employer is delinquent in contributions
seems to be inappropriate. After all, the delinquency might be
nothing more than a quickly remedied clerical oversight. As we
pointed out with respect to an analogous situation in Glaziers:
We do not, of course, hold that one who may
have attained a fiduciary status thereby has
an obligation to disclose all details of its
personnel decisions that may somehow impact
upon the course of dealings with a
beneficiary/client. Rather, a fiduciary has
a legal duty to disclose to the beneficiary
only those material facts known to the
fiduciary but unknown to the beneficiary,
which the beneficiary must know for its own
protection.
Glaziers, 93 F.3d at 1182.
Glaziers, though clearly distinguishable on the facts,
nevertheless has a certain similarity to this case and is useful
18
as a precedent to us. In Glaziers an employee of a brokerage
firm left the firm in circumstances of which the firm was aware
and which suggested that he was dishonest. Prior to leaving the
firm's employ, the employee acted as the firm's representative to
the plaintiff employee benefits funds. When the employee left
the firm's employ, the firm assigned a new executive to the
plaintiffs' accounts but did not inform the plaintiffs of the
circumstances surrounding the employee's departure.
Subsequently, at the plaintiffs' request, the firm transferred
the plaintiffs' funds through an intermediary to a new firm that
the departed employee had established, again without advising the
plaintiffs of the negative information regarding its former
employee. The employee then wasted and stole the plaintiffs'
assets. The plaintiffs sued the brokerage firm alleging, inter
alia, breach of fiduciary duty under ERISA. The district court
granted summary judgment to the brokerage firm holding that if it
was a fiduciary it was only with respect to investment advice.
Thus the court concluded that the firm could not be liable as its
breaches of duty were unrelated to investment advice.
We reversed and remanded the case for the district
court to determine whether, in fact, the brokerage firm was a
fiduciary. In our opinion we discussed the scope of fiduciary
duties. We pointed out that "[u]nder the common law of trusts, a
fiduciary has a fundamental duty to furnish information to a
beneficiary." Id. at 1180. We criticized the brokerage firm
because it "sat silently by knowing that the [plaintiffs] were
placing their assets under" the departed employee's control. Id.
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at 1181. We cited with approval Restatement (Second) of Trusts §
173, comment (d) (1959), that a fiduciary can have an affirmative
obligation to disclose material facts to a beneficiary which the
beneficiary does not know but needs to know for his protection in
dealing with a third person. Id. at 1181. We summed up by
holding that if on the remand the fact-finder determined that the
firm was an ERISA fiduciary it "had a duty to disclose to the
[plaintiffs] any material information which it knew, and which
the [plaintiffs] did not know, but needed to know for [their]
protection." Id. at 1182. See also Barker v. American Mobile
Power Corp., 64 F.3d 1397, 1403 (9th Cir. 1995).
Here, Fulton Bank made no effort to ensure the
continued viability of the plan after its resignation. The Bank
knew that the Company was having financial difficulties and that
it owed significant monies to the plan. In a file memorandum
dated May 6, 1992, Geoffrey Platt, the Bank's Employee Benefit
Administrator, noted that the Company's controller told him that
the Company was "currently experiencing a severe cash flow
problem." Platt also pointed out that Frey was late making his
own loan payments. Thus, Platt recommended that the Bank discuss
resigning because of the Company's delay in remitting
contributions and its “prior history of slow remittance, and an
obvious cash flow problem.” App. at 283.
This knowledge of the Company's problems in conjunction
with Frey's failure to respond to the Bank's numerous attempts to
communicate about the future administration of the plan should
have led the Bank as a reasonably prudent trustee to recognize
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that turning over the assets to Frey posed a real threat to the
plan assets. While the Bank suggests in its brief that it would
have had to have been clairvoyant to anticipate that Frey would
convert the funds, we think that ordinary common sense should
have warned it of this possibility. Indeed, we cannot help but
wonder whether, when it turned over the plan's assets to Frey,
the Bank would have entrusted him with its own money.
Overall, we think it is clear that the Bank failed to
act prudently in sending the plan assets to Frey and neglecting
to inform plan beneficiaries of the circumstances -- even when
the wife of one beneficiary called and asked specifically about
the situation. While we do not hold that the Bank was required
to remain as plan trustee, we do hold that it could not appoint
Frey as the successor trustee and turn over the assets to him, at
least without giving the plan beneficiaries reasonable advance
notice that it intended to take these steps and advising the
beneficiaries of why it was resigning. If it had given that
notice, the beneficiaries would have had the opportunity to take
steps to protect the plan assets.
While the parties cannot rerun the course, and it is
impossible to know exactly what steps the beneficiaries could or
would have taken on the basis of that information, at a minimum
they would have been able to attempt to negotiate with Frey for
installation of a procedure to secure the funds. Failing that,
we believe that they could have sought equitable relief under
ERISA § 502(a)(3)(B) on behalf of the plan to the same end.
Furthermore, we think it likely that a court would have
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recognized that placing the fund assets in Frey's hands would
have posed a threat to the interests of the beneficiaries and
thus have granted relief. In sum, therefore, we conclude that
the Bank's breach of fiduciary duties led to Ream's loss and that
the district court thus properly granted Ream summary judgment.
Consequently, we will affirm its summary judgment.
We caution, however, that our opinion is limited in
scope. Certainly, a trustee may resign in accordance with the
terms of a plan. Moreover, we do not hold that a resigning
trustee always must investigate a successor trustee. Thus, this
case probably would have been different if the Bank had turned
the plan assets over to a reputable financial institution and the
assets thereafter were converted. We also recognize that we
might have reached a different result if the Bank had made a full
disclosure to the beneficiaries of the circumstances leading to
its resignation before it resigned and the beneficiaries did not
take steps to protect the plan assets. Consequently, we
emphasize that we affirm the district court because of the
convergence of the circumstances in this case that led to Ream's
loss.
III. CONCLUSION
In view of the aforesaid, the order for summary
judgment of April 1, 1996, will be affirmed.7
7. The parties have treated the appeal as if it included an
appeal from the damages judgment entered April 15, 1996. Thus,
we effectively are affirming that judgment.
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