Moench v. Robertson ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
8-10-1995
Moench v Robertson
Precedential or Non-Precedential:
Docket 94-5637
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"Moench v Robertson" (1995). 1995 Decisions. Paper 215.
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_________________
No. 94-5637
_________________
CHARLES MOENCH
in his own right and on behalf of those similarly
situated, and on behalf of the Statewide
Bancorp Employee Stock Option Plan
v.
JOSEPH W. ROBERTSON, RICHARD D. SUTTON,
JOSEPH P. IARIA, FRANK J. EWART, JACK MEYERS,
LEONARD G. LOMELL, JOHN C. FELLOWS, JR.,
RAYMOND A. TAYLOR, ESTATE OF FRANK EWART, JOHN
EWART, ADMINISTRATOR
Charles Moench, in his own right
and on behalf of all those
similarly situated,
Appellant
_________________
On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 92-4829)
_______________
Argued June 26, 1995
BEFORE: MANSMANN, GREENBERG, and SAROKIN, Circuit Judges
(Filed: August 10, 1995)
______________
Philip Stephen Fuoco (argued)
Joseph A. Osefchen
24 Wilkins Place
Haddonfield, NJ 08033
Fredric J. Gross
7 East Kings Highway
Mount Ephraim, NJ 08059
Attorneys for Appellant
1
Christopher J. Carey (argued)
Lisa W. Santola
Tompkins, McGuire & Wachenfeld
Four Gateway Center
100 Mulberry Street
Newark, NJ 07102
Attorneys for Appellees
Thomas S. Williamson, Jr.
Solicitor of Labor
Marc I. Machiz
Associate Solicitor
Karen L. Handorf
Counsel for Special Litigation
Eric G. Serron
Wayne R. Berry
Trial Attorneys
U.S. Department of Labor
Office of the Solicitor
Plan Benefits Security Division
P.O. Box 1914
Washington, D.C., 20013
Attorneys for Amicus
Curiae The Secretary of
Labor
John F. Zabriskie
Raymond T. Goetz
Hopkins & Sutter
Three First National Plaza
Chicago, Ill 60602
Attorneys for Amicus
Curiae The
Federal Deposit Insurance
Corporation as Receiver
for First National Bank
of Toms River
2
_______________________
OPINION OF THE COURT
_______________________
GREENBERG, Circuit Judge.
This case requires us to decide the following difficult
question: To what extent may fiduciaries of Employee Stock
Ownership Plans (ESOPs) be held liable under the Employee
Retirement Income Security Act (ERISA) for investing solely in
employer common stock, when both Congress and the terms of the
ESOP provide that the primary purpose of the plan is to invest in
the employer's securities. The district court held that
fiduciaries cannot be liable in such cases, and therefore it
granted the fiduciaries' motion for summary judgment. Because we
conclude that in limited circumstances, ESOP fiduciaries can be
liable under ERISA for continuing to invest in employer stock
according to the plan's direction, we will vacate the district
court's grant of summary judgment in favor of the plan
fiduciaries and will remand the case to the district court for
further proceedings. In this opinion we will refer to the
plaintiff-appellant Charles Moench, a plan beneficiary, as
"Moench," and the defendants-appellees, the Plan Committee, the
fiduciaries with investment responsibilities, singularly as the
"Committee."
I. Introduction
3
A. Statewide's Demise
Statewide Bancorp was a bank holding company with its
principal office in Toms River, New Jersey. During the time
relevant to this appeal, it operated through two wholly owned
subsidiaries, The First National Bank of Toms River, New Jersey
(FNBTR), and The First National Bank of New Jersey/Salem County.
Statewide began experiencing financial difficulties in
1989. "Between July 1989 and December 1989, the market value of
Statewide Bancorp common stock fell from $18.25 per share to
$9.50 per share." Dist. Ct. op. at 2. During the next year, the
price fell even more precipitously -- to $6.00 per share in July
1990, to $2.25 per share in December, and finally to less than 25
cents per share in May 1991. During this period -- from 1989
through 1991 -- federal regulatory authorities repeatedly
expressed concern to Statewide's Board of Directors over problems
with Statewide's portfolio and financial condition. On July 31,
1989, the Office of the Comptroller of the Currency (OCC)
informed the Statewide Board that "[c]ompliance management in the
two subsidiary banks was found to be satisfactory in virtually
all areas." Letter of July 31, 1989 at Expanded Appendix (EA)
606.0 Nevertheless, the OCC letter indicated that "[v]iolations
0
We cite the appendix as "app.," the supplemental appendix as
"SA" and the expanded appendix as "EA." There is an expanded
appendix because the Committee made a motion which Moench opposed
to expand the appendix to include materials which were not before
the district court. Ordinarily we would have denied the motion.
Here, however, a significant portion of the expanded appendix
consists of actual copies of documents that were summarized to
the district court pursuant to Fed. R. Evid. 1006. Rule 1006
states that "[t]he contents of voluminous writings . . . which
cannot conveniently be examined in court may be presented in the
4
of law and regulation were found across a number of areas in the
subsidiary banks [and] [w]hile management has shown a commitment
to promptly correct all violations, the need to develop in
certain cases and otherwise improve policies and procedures is
clearly evident." Id. A March 1990 report of an off-site review
of FNBTR revealed "lack of depth and quality of management,
unsafe and unsound credit practices, the resulting rapid
deterioration in the quality of the loan portfolio, unreliable
regulatory and management reports on loans, the inadequacy of the
Allowance for Loan and Lease Losses, and the adverse impact of
asset quality upon earnings and capital adequacy." EA 690.
Ultimately, on May 22, 1991, the Federal Deposit Insurance
Corporation took control of FNBTR and on May 23, 1991, Statewide
filed a voluntary petition under Chapter 11 of the Bankruptcy
Code.
B. Statewide's ESOP Plan
form of a chart, summary, or calculation," provided that "[t]he
originals, or duplicates, shall be made available for examination
[and t]he court may order that they be produced in court." For
all practical purposes, then, these actual documents were before
the district court, though the court did not feel a need to
examine them. It seems to us that when a party relies on a Rule
1006 summary to support its position on an appeal, at least when,
as here, the appellate court exercises de novo review over the
district court decision, the appellate court similarly may
examine the actual documents. Therefore, we will grant the
Committee's motion to expand the appendix. We note, though, that
we cite to the expanded appendix only to make clear the factual
underpinnings of this appeal, and whenever possible, we include
parallel citations to similar propositions in the appendix or the
supplemental appendix.
5
This case involves not so much Statewide's demise but
the fate during the period of its decline of funds invested in
its ESOP. Beginning on January 1, 1986, Statewide offered its
employees the opportunity to participate in the ESOP, which was
designed to invest primarily in Statewide common stock. See
Summary Plan Description at app. 174. The ESOP named various
entities and gave them specific administrative and fiduciary
duties. First, an ESOP Committee was set up "to administer the
Plan." The Statewide Bancorp Employee Stock Ownership Plan Art.
10.1 at EA 451; app. 150 (Trust Agreement); SA 306-07 (Summary
Plan Description). The plan provided that the Committee "shall
adopt rules for the conduct of its business and administration of
the Plan as it considers desirable, provided they do not conflict
with the Plan." EA 451 (Plan, Art. 10.2); SA 307 (Summary Plan
Description). The documents authorized the Committee to
"construe the Plan, correct defects, supply omissions or
reconcile inconsistencies to the extent necessary to effectuate
the Plan, and such action shall be conclusive." EA 451 (Plan,
Art. 10.4); SA 298a-299, 307 (Summary Plan Description). To
allow the Committee fully and adequately to perform its duties,
the plan authorized it to "contract for legal, actuarial,
investment management . . . and other services to carry out the
Plan." EA 451 (Plan, Art. 10.3); App. 150 (Trust Agreement); SA
307 (Summary Plan Description). According to the Trust Agreement
implementing the plan, the Committee:
shall have responsibility and authority to
control the operation and administration of
the Plan in accordance with the terms of the
6
Plan and of this Agreement, including . . .
(i) establishment, in its discretion, of
investment guidelines which shall be
communicated to the Trustee in writing.
Trust Agreement Art. 7.2 at app. 150-51. The Trustee of the plan
had "exclusive responsibility for the control and management of
the assets of the Trust Fund," Trust Agreement at app. 150.
The plan provided that:
Except as otherwise provided in this Section,
the Trustee shall invest the Fund as directed
by the Committee. Generally, within 30 days
of receipt, the Trustee shall invest all
contributions received under the terms of the
plan not applied to the repayment of
principal and interest on any Acquisition
Loan in ESOP stock, except that the Trustee
shall be authorized to invest a portion of
the contributions received in other
securities as a reserve for the payment of
administrative expenses and cash
distributions.
App. 148 (ESOP Plan, Amended and Restated Effective Jan. 1,
1989). The plan documents gave Statewide, as the plan sponsor,
"the authority and responsibility for . . . the design of the
Plan, including the right to amend the Plan." Trust Agreement
Art. 7.3 at app. 151. The plan documents also required Statewide
to exercise "all fiduciary functions provided in the Plan or in
this [Trust] Agreement or necessary to the operation of the Plan
except such functions as are assigned to other fiduciaries
pursuant to the Plan or this Agreement." Id.
The ESOP created and governed by these documents worked
as follows: Employees became eligible to participate in the plan
after one year of service. Employees who chose to participate
7
had their contribution deducted from their salary; the employer
then would match up to 50% of the employee's voluntary
contribution. The plan also provided for an Employer Profit
Sharing Contribution, to be made at the end of the Plan year,
though only at the option of the Statewide Board of Directors.
Throughout the relevant time period, the Committee
regularly invested the ESOP fund in Statewide common stock,
despite the continual and precipitous drop in its price and
despite the Committee's knowledge of Statewide's precarious
condition by virtue of the members' status as directors. Yet the
record reflects that several Statewide insiders began to have
misgivings regarding the investment. Jack Breda, FNBTR's
Director of Personnel, testified that when the price of Statewide
stock started to drop, he began thinking it would be
inappropriate to continue such investments. App. 119. He
further testified that he relayed to Statewide's chief executive
officer (CEO) the pension committee's recommendation that "we
[should] look for other vehicles to invest money in," and that
the CEO should relay that advice to the executive committee or
the Board of Directors. App. 120. Apparently, the CEO reported
back that the Board of Directors had rejected the proposal
because "the original intent of the plan was to invest [in]
Statewide Bancorp stock." App. 120. On May 13, 1991, C.T.
Bjorklund, Statewide's Benefits and Compensation Manager, wrote a
memorandum to Breda stating the following:
The Statewide [ESOP] permits employees to
voluntarily suspend contributions at any time
during the year. The Bank can also cease
8
contributions at any time without notice.
Such discontinuance would not trigger a full
vesting situation. Only a complete plan
termination would cause immediate full
vesting of all participants.
Although the ESOP gives us a beginning bias
to hold Statewide Stock and the plan says
that amounts contributed are to be invested
in company stock, the trustee has the power
to invest in other vehicles. Potentially the
trustee should consider investing in short
term money market instruments with current
and future contributions.
App. 90. A notation from Breda to Bjorklund at the bottom of the
memorandum states "I have been notified by [the CEO] on 5/21/91
that the Executive Committee of Statewide Bancorp voted not to
accept the revised or restated ESOP plan . . . ." App. 90.
Kevin William Bless, Assistant Vice President and
Senior Pension Trust Officer of FNBTR testified that as
Statewide's stock price fell, FNBTR's Trust Division held general
discussions "about the permissibility of investing moneys in ESOP
in a stock that had potential problems." App. 136. The Trust
Division decided that since the Committee's knowledge of
Statewide's precarious state was based on confidential reports
issued by the OCC, it would be inappropriate to use the
information in making investment decisions. Thus, Bless
testified that "the nature of the ESOP dictated that we invest
solely in [Statewide] securities absent any public knowledge that
it would be an imprudent investment." App. 139. In these
discussions, then, the ESOP was not seen as absolutely requiring
investment in Statewide stock. Indeed, in early 1991 the Trustee
9
decided to cease investing in Statewide stock and to place all of
the ESOP assets in money market accounts.
The Committee has not directed our attention to
anything in the record to suggest that while the stock price was
falling and the OCC was issuing its warning letters, the
Committee met to discuss any possible effects on the ESOP or any
actions that it should take and we have not found any indication
that there was such a meeting. Moreover, although on June 12,
1990, investors filed a class action securities fraud suit
against Statewide and certain of its directors (the Lerner
action), which eventually settled for $3,200,000.00, the
Committee did not participate on behalf of the ESOP and therefore
the ESOP did not share in the settlement. Ultimately,
Statewide's descent rendered the employees' ESOP accounts
virtually worthless.
C. The Litigation
On November 16, 1992, Moench, a former Statewide
employee who participated in the ESOP plan, brought this action
against the members of the Committee. These defendants were also
members of Statewide's Board of Directors. However, he did not
sue either the Trustee or the plan sponsor, Statewide. In his
first complaint, he charged the Committee with breaching its
fiduciary duties under ERISA and pleaded a securities fraud suit
on behalf of the ESOP. Moench moved to certify the class and the
Committee moved to dismiss the complaint. In an August 17, 1993
opinion and order (entered four days later), the district court
10
dismissed a count Moench advanced that the plan should have been
amended or terminated because "[r]egardless of whether
terminating or modifying the Plan would have proved to be prudent
conduct, such action is not that which is encompassed within a
director's fiduciary duties under ERISA." Op. at SA 256 (citing
Hozier v. Midwest Fasteners, Inc., 908 F.2d 1155, 1161 (3d Cir.
1990)). The court denied the motion to dismiss the remaining
ERISA counts but dismissed the securities fraud count without
prejudice for failure to plead with the particularity required by
Fed. R. Civ. P. 23.1. The court requested further briefing on
Moench's class certification motion. Op. at 4-5.
Moench responded by filing an amended complaint,
principally under 29 U.S.C. § 1132(a)(2), for breach of fiduciary
duty under 29 U.S.C. §§ 1104 and 1109. Count 1 charged the
Committee with breaching its fiduciary obligations under ERISA;
Count 2 sought to hold the members of the Committee liable for
breaches of their co-fiduciaries; Count 3 charged it with failing
to disclose and misrepresenting pertinent information concerning
Statewide's condition, that affected employees' decision to
invest in the ESOP; Count 4 charged breaches of fiduciary duties
on behalf of the ESOP, including failing to file a securities
fraud action on behalf of the plan; and Count 5 plead on behalf
of the ESOP a securities fraud claim under 15 U.S.C. § 78 et seq.
On December 20, 1993, the district court issued an order
certifying a class as to the first three counts and allowing
Moench to prosecute the derivative actions on behalf of the ESOP.
On July 18, 1994, Moench filed a motion for a partial
11
summary judgment declaring that the individual Committee members
were fiduciaries governed by the standard of care provided in
ERISA. The Committee did not oppose Moench's motion, and thus it
admitted that its members were ERISA fiduciaries. The Committee
nevertheless filed a cross-motion for summary judgment dismissing
the complaint on the ground that it did not breach its ERISA
obligations. The district court issued an opinion and order on
September 21, 1994, granting both motions.
Noting that the Committee had conceded its fiduciary
status, the court granted Moench's motion without analysis. The
court then held that the Committee had no discretion under the
terms of the plan to invest the ESOP funds in anything other than
Statewide common stock. And since the plan complied with ERISA,
"[Moench] has failed to establish that [the Committee's] actions
in directing the purchases of stock for the Plan were other than
in accordance with the requirements of the Plan or otherwise in
violation of ERISA." Op. at 12. The court found no merit in
Moench's allegations that the Committee gave inaccurate,
incomplete and false information about the plan. Rather, it
observed, "[t]he Plan specifically provides that it 'is a capital
accumulation Plan [and therefore] . . . does not provide for a
guaranteed benefit at retirement,'" op. at 12 (first alteration
added), and that "the very nature of ESOP plans contemplates that
the value and security of the employees' retirement fund will
necessarily fluctuate with the fortunes of the employer because
ESOPs invest primarily in employer stock." Id. Finally, the
12
court held that the statute of limitations barred Moench's
derivative securities fraud suit. Id. at 16.
Moench timely filed this appeal. He argues that the
district court erred in deciding that the plan documents absolved
the Committee from any liability resulting from investing the
ESOP funds in Statewide stock. He also contends that the
district court should not have dismissed his purported claim that
the Committee violated ERISA by failing to file a securities
fraud action on behalf of the plan. He does not challenge the
dismissal of the securities fraud suit, and, though he is not
entirely clear on this point, does not appear to challenge the
district court's conclusions concerning the Committee's alleged
misrepresentations and omissions. Thus, in his brief he recites
that he appeals from the summary judgment on counts 1, 2, and 4
but not from the summary judgment on counts 3 and 5 of the
amended complaint. We have jurisdiction pursuant to 28 U.S.C.
§1291. The district court exercised jurisdiction under 28 U.S.C.
§ 1331 and 29 U.S.C. § 1132(e). We exercise plenary review over
the district court's grant of summary judgment.
II. Discussion
A. Introduction: ERISA's Broad Purpose
Congress enacted ERISA in 1974, "after 'almost a decade
of studying the Nation's private pension plans' and other
employee benefit plans." Central States, Southeast and Southwest
Area Pension Fund v. Central Transp., Inc., 472 U.S. 559, 569,
105 S.Ct. 2833, 2839 (1985) (quoting Nachman Corp. v. Pension
13
Benefit Guar. Corp., 446 U.S. 359, 361, 100 S.Ct. 1723, 1726
(1980)). Noting the rapid growth of such plans, Congress set out
to "'assur[e] the equitable character of [employee benefit plans]
and their financial soundness.'" Central States, 472 U.S. at
570, 105 S.Ct. at 2840 (quoting statute) (alterations in
original). ERISA seeks to accomplish this goal by requiring such
plans to name fiduciaries and by giving them strict and detailed
duties and obligations. Specifically, ERISA requires benefit
plans to "provide for one or more named fiduciaries who jointly
or severally shall have authority to control and manage the
operation and administration of the plan." 29 U.S.C. § 1102(a)
(1). An ERISA fiduciary "shall discharge his duties . . . solely
in the interest of the participants and beneficiaries" and must
act "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." 29
U.S.C. § 1104(a)(1)(B). These requirements generally are
referred to as the duties of loyalty and care, or as the "solely
in the interest" and "prudence" requirements. This case requires
us to decide how these requirements apply to fiduciaries of ESOP
plans.
B. Are Defendants Fiduciaries as to Investment Decisions?
Before considering the substantive questions on this
appeal, we must address the Committee's argument that for the
purposes of this lawsuit, dealing principally with investment
14
decisions, its members are not ERISA fiduciaries, but rather
either the Trustee or Statewide was the fiduciary with respect to
investments. Under ERISA, "a person is a fiduciary with respect
to a plan to the extent (i) he exercises any discretionary
authority or discretionary control respecting management of such
plan or exercises any authority or control respecting management
or disposition of its assets . . . or (iii) he has any
discretionary authority or discretionary responsibility in the
administration of such plan." 29 U.S.C. § 1002(21)(A). As
these definitions imply, "'[f]iduciary status . . . is not an
"all or nothing concept . . . . [A] court must ask whether a
person is a fiduciary with respect to the particular activity in
question."'" Maniace v. Commerce Bank of Kansas City, N.A., 40
F.3d 264, 267 (8th Cir. 1994) (quoting Kerns v. Benefit Trust
Life Ins. Co., 992 F.2d 214 (8th Cir. 1993)) (first alteration
added), cert. denied, 115 S.Ct. 1964 (1995); American Fed'n of
Unions Local 102 Health and Welfare Fund v. Equitable Life
Assurance Soc'y of the United States, 841 F.2d 658, 662 (5th Cir.
1988) ("A person is a fiduciary only with respect to those
portions of a plan over which he exercises discretionary
authority or control."). The Statewide ESOP, like most benefit
plans, names several fiduciaries and allocates duties among them.
The Committee's argument that it was not the fiduciary
vis a vis investment decisions faces a procedural hurdle because
it did not advance that position before the district court. To
the contrary, in its "Brief in Support of Defendants' Cross-
Motion for Summary Judgment," the Committee stated the following:
15
Plaintiff has filed a motion for Summary
Judgment on the issue of whether the
defendants were fiduciaries. Defendants do
not dispute that they were fiduciaries of the
ESOP. However, defendants argue that they
did not breach any of their fiduciary duties.
Dist. Ct. Br. at 1. Based on this representation, the district
court quite naturally interpreted the Committee's admission
consistently with the relief Moench sought in his motion. In
that motion, Moench sought a partial summary judgment declaring
that the Committee members were fiduciaries vis a vis, among
other things, investment decisions regarding the ESOP. See
Memorandum in Support of Plaintiff's Motion for Partial Summary
Judgment at 1 ("the members of the committee were given the power
to, inter alia, . . . create investment guidelines for the ESOP,
appoint investment mangers for the ESOP . . . ."). After all,
that is what this case always has been about. Thus, in the
absence of any distinctions or qualifications drawn by the
Committee with respect to the capacities in which its members
were fiduciaries, the court granted Moench's motion and treated
the Committee members as fiduciaries vis a vis investment
decisions.
At the very least, then, the Committee failed to raise
before the district court the argument that its members were not
fiduciaries regarding investment decisions. This omission is
decisive for "[i]t is well established that failure to raise an
issue in the district court constitutes a waiver of the
argument." American Cyanamid Co. v. Fermenta Animal Health Co.,
54 F.3d 177, 187 (3d Cir. 1995) (quoting Brenner v. Local 514,
16
United Bhd. of Carpenters and Joiners of America, 927 F.2d 1283,
1298 (3d Cir. 1991)).
In fact, the Committee's representation in the district
court, when read in conjunction with the arguments it advanced in
its district court brief, shows that it actually conceded that
its members were fiduciaries vis a vis investment decisions. The
Committee did not qualify the concession it made at the outset of
its brief. To the contrary, in the argument section, the
Committee contended that it "had absolutely no [discretion]
regarding where to invest the plan's assets," br. at 8, and that
"the [Committee] had no choice except to continue purchasing
Statewide stock." Br. at 16. In other words, the Committee
conceded that it was responsible for making investment decisions
but argued that by complying with the ESOP provisions it complied
with ERISA's fiduciary requirements. Thus, the Committee is
changing course when it now argues that either the Trustee or the
Sponsor was the fiduciary regarding investing the ESOP assets and
that it was simply not an ERISA fiduciary in the relevant
capacity. We will not permit this. See Eichleay Corp. v.
International Ass'n of Iron Workers, 944 F.2d 1047, 1056 n. 9 (3d
Cir. 1991), cert. dismissed, 503 U.S. 915, 112 S.Ct. 1285 (1992);
Cowgill v. Raymark Indus., Inc., 832 F.2d 798, 803 (3d Cir.
1987). Thus, we hold that the Committee acted in a fiduciary
capacity regarding decisions about how to invest the ESOP
17
assets.0 We next turn to the district court's grant of the
Committee's motion for summary judgment.
C. The Committee's Duties Under ERISA
The first issue we address is the one on which the
district court focused -- the requirements of the Statewide ESOP
and ESOPs generally. This inquiry raises the following
questions: (1) Did the district court err in concluding that
the Committee was required by the plan to invest the plan assets
in Statewide stock; (2) If so, was the Committee nevertheless
constrained by the nature of ESOPs themselves to invest solely in
Statewide stock?; (3) If the plan required the Committee to
invest in Statewide stock, did its fiduciary responsibilities
under ERISA nevertheless require it to ignore the provisions of
the plan and to diversify the plan's investments?
1. The district court's decision
The district court concluded that the plan documents
mandated that the Committee invest the ESOP assets solely in
Statewide stock, and thus it granted the Committee's motion for
summary judgment. It appears that in reaching this result the
court deferred to the Committee's interpretation of the plan.
0
For the reasons set forth later in this opinion, Judge Mansmann
agrees that the Committee acted in a fiduciary capacity regarding
investment decisions of the ESOP assets. She does not believe,
however, that the Committee conceded the point since it
maintained from the commencement of the suit that the ESOP
documents did not grant it discretion in the investment of the
plan's assets.
18
Specifically, it held that "[j]udicial review of the decisions of
fiduciaries in the exercise of their powers is highly deferential
and will be upheld unless the decisions are shown to be arbitrary
and capricious, not supported by substantial evidence, or
erroneous on a question of law." Op. at 11. Against this
backdrop, it reasoned:
the terms of the Plan required [the
Committee] to invest the Plan funds in
Statewide Bancorp Common Stock within 30 days
after the end of the month in which the funds
were received. It is clear by the terms of
the Plan that it did not afford any
discretion in directing the investment of the
Plan funds in any other manner.
Op. at 11-12.
Therefore, we initially must decide the scope of a
court's review over an ERISA fiduciary's decisions. Moench and
his amici argue that the district court applied an incorrect
standard of review, as in their view, in cases not involving a
trustee's decision to deny benefits to a particular beneficiary,
courts do not apply the deferential arbitrary and capricious
standard. Rather, they contend that the courts in such cases
apply the prudent person standard.
2. The Scope of Review Over an ERISA Fiduciary's Decisions
Moench relies heavily on Struble v. New Jersey Brewery
Employees' Welfare Trust Fund, 732 F.2d 325 (3d Cir. 1984), to
support his argument that the arbitrary and capricious standard
does not apply. In that case, the plaintiff beneficiaries
charged the defendant trustees with breaching their fiduciary
19
obligations under ERISA by failing to collect employer
contributions to the plan and by applying surpluses to benefit
the employers rather than the retirees. The defendants argued
that the court only should have asked whether their actions were
arbitrary or capricious.
At that point in ERISA's history, courts routinely
borrowed the "arbitrary and capricious" standard of review
governing claims brought under section 302(c)(5) of the Labor
Management Relations Act, a statute that permits employer
contributions to a welfare trust fund "only if the contributions
are used 'for the sole and exclusive benefit of the employees . .
. .'" Struble, 732 F.2d at 333 (citing LMRA). After surveying
the ERISA caselaw, we observed that "[a]lthough the courts have
described the applicability of the arbitrary and capricious
standard in rather overbroad language, they nonetheless have
limited the use of the standard to cases involving personal
claims for benefits. In other cases they have consistently
applied the standards set forth explicitly in ERISA." Id. And,
we reasoned, there exists a qualitative difference between a
personal claim for benefits and a contention that an ERISA
trustee failed to act in the interest of the beneficiaries at
all. We explained:
In actions by individual claimants
challenging the trustees' denial of benefits,
the issue is not whether the trustees have
sacrificed the interests of the beneficiaries
as a class in favor of some third party's
interests, but whether the trustees have
correctly balanced the interests of present
claimants against the interests of future
claimants. . . . In such circumstances it is
20
appropriate to apply the more deferential
'arbitrary and capricious' standard to the
trustees' decisions. In the latter type of
action, the gravamen of the plaintiff's
complaint is not that the trustees have
incorrectly balanced valid interests, but
rather that they have sacrificed valid
interests to advance the interests of non-
beneficiaries.
Id. at 333-34. Because in Struble "[t]he plaintiffs allege[d]
that the Employer Trustees voted to give the . . . surplus to the
Employers and to reduce the Employers' contributions in order to
promote the Employers' interests rather than the retirees'
interests," id. at 334, we held that the trustees' actions were
subject to the prudent person standard. We then applied a de
novo standard of review.
Although the plaintiff and their amici urge the
mechanical application of Struble here, the facts of that case
are not directly apposite. Struble involved a decision by an
ERISA fiduciary to give a benefit to the employer rather than to
the beneficiary -- the fiduciary was required to decide which of
two classes to favor. And a decision in favor of one class
necessarily meant that the other class "lost," that is, could not
share in the benefit. When the fiduciary's alignment with the
the employer class was added to the mix, its stark, conflicted
position became evident. Here, by contrast, Moench does not
contend that the Committee's interpretation of the plan and its
investment decisions favored non-beneficiaries at the necessary
expense of beneficiaries. Rather, the Committee's interpretation
of the plan and its investment decisions occurred prior to, as
21
well as during, the period in which Statewide declined
financially. Thus, the Committee did not engage in the kind of
zero-sum, conflicted analysis that we looked at so warily in
Struble. Actually, Moench's conflict of interest allegations
really go to the second issue raised on appeal -- that the
Committee members' positions as Statewide directors as well as
ESOP fiduciaries made impartial decision-making regarding whether
to pursue an action on behalf of the ESOP impossible. See
typescript, infra, at 46-47. Moreover, unlike the situation in
Struble, the Committee's investment decision was squarely in
keeping with the purpose of all ESOP plans.
While Struble does not directly control, we must
inquire whether its reasoning properly may be expanded to the
facts here after Firestone Tire and Rubber Co. v. Bruch, 489 U.S.
113, 109 S.Ct. 948 (1989), a case in which the Supreme Court
addressed the standard of review governing claims for benefits
under 29 U.S.C. § 1132(a)(1)(B). We turn to that case now.
The Firestone Court began its analysis by addressing
ERISA decisions borrowing the LMRA standard of review. The Court
pointed out that the arbitrary and capricious standard of review
under the LMRA arose in large part because the LMRA did not
provide for judicial review of decisions of LMRA trustees. Thus,
the courts adopted the deferential standard of review "as a means
of asserting jurisdiction over suits under § 186(c) by
beneficiaries of LMRA plans who were denied benefits by
trustees." Id. at 109, 109 S.Ct. at 953. ERISA, on the other
hand, explicitly authorizes private causes of action. Therefore,
22
"the raison d'etre for the LMRA arbitrary and capricious standard
. . . is not present in ERISA." Id. at 110, 109 S.Ct. at 954.
However, after declining to apply the LMRA caselaw, the
Firestone Court did not assume that the strict standards of ERISA
necessarily should be applied in a de novo fashion. To the
contrary, the Court proceeded to point out that "ERISA abounds
with the language and terminology of trust law" and that "ERISA's
legislative history confirms that the Act's fiduciary
responsibility provisions . . . 'codif[y] and mak[e] applicable
to [ERISA] fiduciaries certain principles developed in the
evolution of the law of trusts.'" Id. (citation omitted)
(elipses added). The Court previously had interpreted the
statute and its legislative history as authorizing courts to
develop a "'federal common law of rights and obligations under
ERISA-regulated plans,'" id. (quoting Pilot Life Ins. Co. v.
Dedeaux, 481 U.S. 41, 56, 107 S Ct. 1549, 1558 (1987)), and in
Firestone the Court further held that "[i]n determining the
appropriate standard of review for actions under § 1132(a)(1)(B),
we are guided by principles of trust law." Id. at 111, 109 S.Ct.
at 954.
After examining the common law of trusts, the Court
concluded that the language of the trust controls the ultimate
standard of judicial review. Thus, "'[w]here discretion is
conferred upon the trustee with respect to the exercise of a
power, its exercise is not subject to control by the court except
to prevent an abuse by the trustee of his discretion.'" Id.(quoting Restatement (Second) of Trusts § 187 (1959)). However,
23
where the trust agreement does not give the trustee power to
construe uncertain provisions of the plan, or to make eligibility
determinations, the trustee is not entitled to deference and
courts exercise de novo review. Id. at 111-12, 109 S.Ct. at 955.
Firestone's analytical framework mandates a fresh look
at the appropriate standard of review in light of the particular
action being challenged. After all, Firestone seemed to require
courts in all ERISA cases to examine the common law of trusts for
guidance in determining the scope of review over a particular
ERISA question. The situation is complicated, however, by
Firestone's caveat at its outset that "[t]he discussion which
follows is limited to the appropriate standard of review in
§1132(a)(1)(B) actions challenging denials of benefits based on
plan interpretations." Id. at 108, 109 S.Ct. at 953. The Court
then continued, "[w]e express no view as to the appropriate
standard of review for actions under other remedial provisions of
ERISA." Id.A number of courts, relying on Firestone's express
limitation, have refused to apply the arbitrary and capricious
standard of review to ERISA cases falling outside the category of
claims for benefits even though the fiduciary involved had
discretionary powers. For instance, in Ches v. Archer, 827 F.
Supp. 159 (W.D.N.Y. 1993), the plaintiffs alleged that the plan
administrators violated ERISA by refusing to enforce a
contribution agreement against an employer. The administrators
urged that Firestone compelled application of the arbitrary and
capricious standard of review, because the plan granted them
24
broad discretion in their administration of the plan. The court,
relying primarily on Struble, rejected the argument:
[T]he discussion in Firestone was expressly
limited to the appropriate standard of review
in actions challenging denials of benefits
based on plan interpretations, . . . and its
holding therefore does not encompass the
present case where the fiduciaries' failure
to enforce the contribution payments
agreement is challenged. . . . In evaluating
fiduciaries' administration of ERISA plans,
courts have typically applied the stricter,
statutory standard of care, limiting the
applicability of the more lenient, arbitrary
and capricious standard only to cases where
the legality of the trustees' benefit
determination was at issue.
Id. at 165. More recently the Court of Appeals for the Second
Circuit, relying in part on Ches v. Archer, interpreted Firestone
narrowly and explicitly held that the Struble holding survived
the Supreme Court's decision. In that case, John Blair
Communications, Inc. Profit Sharing Plan v. Telemundo Group, Inc.
Profit Sharing Plan, 26 F.3d 360 (2d Cir. 1994), a profit sharing
plan brought an ERISA claim against the committee charged with
administering the plan, and alleged that by allocating certain
surpluses as an employer contribution rather than to the
individual beneficiaries' accounts, the committee violated its
fiduciary obligations under ERISA. The court "decline[d] to
apply the arbitrary and capricious standard to the fiduciary
conduct at issue here because this case does not involve a simple
denial of benefits, over which the plan administrators have
discretion." Id. at 369. Rather, the court held that
"Firestone's proposition that the more lenient arbitrary and
25
capricious standard applies where the plan grants discretion to
the administrators does not alter Struble's holding that
decisions that improperly disregard the valid interest of
beneficiaries in favor of third parties remain subject to the
strict prudent standard articulated in § 404 of ERISA." Id. In
reaching its decision, the court expressed concern about the
policy implications of expanding Firestone's reach: "Any other
rule would allow plan administrators to grant themselves broad
discretion over all matters concerning plan administration,
thereby eviscerating ERISA's statutory command that fiduciary
decisions be held to a strict standard." Id.
We agree with these courts that the arbitrary and
capricious standard of review allowed in Firestone should not be
applied mechanically to all ERISA claims, and that claims
analogous to those addressed by Struble merit de novo review. But
that does not mean that Firestone has nothing to say about ERISA
claims falling outside the purview of section 1132(a)(1)(B) and
not controlled by Struble. While the Firestone Court
"express[ed] no view as to the appropriate standard of review for
actions under other remedial provisions of ERISA," id. at 108,
109 S.Ct. at 953, the Court's mode of analysis is certainly
relevant to determine the standard of review pertaining to all
claims filed under ERISA challenging a fiduciary's performance.
Specifically, the Court looked to trust law in large part because
the terms used throughout ERISA -- participant, beneficiary,
fiduciary, trustee, fiduciary duties -- are the "language and
terminology of trust law." Firestone, 489 U.S. at 110, 109 S.Ct.
26at 954. That being the case, we believe that after Firestone,
trust law should guide the standard of review over claims, such
as those here, not only under section 1132(a)(1)(B) but also over
claims filed pursuant to 29 U.S.C. § 1132(a)(2) based on
violations of the fiduciary duties set forth in section 1104(a).
After all, section 1104(a) also abounds with the language of
trust law, and the Supreme Court previously has noted that
"Congress invoked the common law of trusts to define the general
scope of [fiduciaries'] authority and responsibility." Central
States, 472 U.S. at 570, 105 S.Ct. at 2840. Indeed, in Central
States, the Court went on to say that "[t]he manner in which
trustee powers may be exercised . . . is further defined in the
statute through the provision of strict standards of trustee
conduct, also derived from the common law of trusts -- most
prominently, a standard of loyalty and a standard of care." Id.;
see also Acosta v. Pacific Enter., 950 F.2d 611, 618 (9th Cir.
1991) ("common law trust principles animate the fiduciary
responsibility provisions of ERISA.").
Our conclusion is supported by a recent decision by the
Court of Appeals for the First Circuit discussing both Firestone
and Struble. In that case, Mahoney v. Board of Trustees, 973
F.2d 968 (1st Cir. 1992), the plaintiffs claimed that the
trustees of a plan violated ERISA by increasing the size of
retirement pensions unevenly, in a manner that "treat[ed]
longshoremen who had already retired less favorably than those
who were still working." Id. at 969. The plaintiffs, relying in
part on Struble, contended that because several of the trustees
27
were working longshoremen, who benefitted from the trustees'
decision, the court should apply "an especially strict standard
of review." Id. at 970. The court disagreed, noting that in
determining the appropriate standard of review after Firestone,
trust law "guides, but does not control, our decision." Id. at
971. The court then reviewed ordinary principles of trust law,
as well as cases applying common law trust principles in
analogous situations, and concluded that even though the trustees
arguably made a decision to benefit themselves rather than the
plaintiff class, trust law permitted them to be beneficiaries of
the plan. Therefore, as long as they were making discretionary
decisions, the arbitrary and capricious standard of review
applied.
3. The Scope of Review Over the Committee's Interpretation
In this case, Firestone itself gives us guidance as to
the standard of review over the Committee's interpretation of the
plan. The Supreme Court's analysis of trust law led it to the
conclusion that "[a] trustee may be given power to construe
disputed or doubtful terms, and in such circumstances the
trustee's interpretation will not be disturbed if reasonable."
Firestone, 489 U.S. at 111, 109 S.Ct. at 954. This conclusion is
in accord with general principles of trust law, which provides
that "[w]here discretion is conferred upon the trustee with
respect to the exercise of a power, its exercise is not subject
to control by the court, except to prevent an abuse by the
trustee of his discretion." Restatement (Second) of Trusts §187.
Indeed, in Central States, the Court gave significant weight to
28
the trustees' interpretation of the trust agreement, because "the
trust agreement explicitly provide[d] that 'any construction [of
the agreement's provisions] adopted by the Trustees in good faith
shall be binding upon the Union, Employees and Employers.'"
Central States, 472 U.S. at 568, 105 S.Ct. at 2839 (first
alteration added).
Here, the plan gave the Committee unfettered discretion
to interpret its terms; it further provided that the Committee's
interpretations are conclusive. Thus, assuming that the
Committee interpreted the plan, the arbitrary and capricious
standard applies and we will disturb its interpretation only if
its reading of the plan documents was unreasonable.0
In this regard, the Court of Appeals for the Eighth
Circuit has enumerated a series of helpful factors to consider in
determining whether an interpretation of a plan is reasonable:
(1) whether the interpretation is consistent
with the goals of the Plan; (2) whether it
renders any language in the Plan meaningless
or internally inconsistent; (3) whether it
conflicts with the substantive or procedural
requirements of the ERISA statute; (4)
whether the [relevant entities have]
interpreted the provision at issue
consistently; and (5) whether the
interpretation is contrary to the clear
language of the Plan.
Cooper Tire & Rubber Co. v. St. Paul Fire & Marine Ins. Co., 48
F.3d 365, 371 (8th Cir. 1995) (citing Finley v. Special Agents
0
Our result is in complete harmony with the prudent man standard
of care obligations imposed by 29 U.S.C. § 1104 on fiduciaries,
as our holding implicates only the standard of review of the
conduct of a fiduciary and not the standards governing that
conduct.
29
Mut. Benefit Ass'n, 957 F.2d 617, 621 (8th Cir. 1992)). The
first factor clearly weighs in favor of the interpretation
suggested by the Committee during the course of this litigation
in both the district court and on appeal, i.e., that it was
required without any discretion to invest in Statewide stock. As
the district court recognized, ESOP plans are formulated with the
primary purpose of investing in employer securities. That being
the case, the Committee's interpretation is consistent with the
purpose of the trust. See Restatement (Second) of Trusts § 187
Comment d (court should consider "the purposes of the trust" in
determining whether trustee has abused the discretion conferred
on him or her by the terms of the plan.).
However, the Committee's purported interpretation
renders other language in the plan documents meaningless. For
instance, the plan documents state that assets are to be invested
primarily in Statewide stock. Therefore, it seems
counterintuitive for the Committee to interpret the plan as
requiring it to invest exclusively in Statewide stock. More
importantly, the history of the Trustee's investment decisions --
actually relied upon by the Committee -- belie the reasonableness
of the Committee's interpretation. The Committee concedes in its
brief (apparently without realizing the consequences) that "in
March, 1991 . . . the Trust Division voted not to invest any more
money in Statewide's stock until the issue was clarified and
instead held the fund in money market instruments." Br. at 11.
With this statement, the Committee admits that the plan has been
interpreted -- by the entity investing the assets -- as
30
permitting the Trustee to refrain from investing the plan assets
in Statewide stock. Therefore, the language of the trust
documents has not been interpreted consistently in the manner the
Committee suggests. Similarly, the Committee makes inconsistent
arguments on this appeal, which make us wary of adopting its
interpretation. On the one hand, it argues that the plan
documents did not permit it to invest in securities other than
Statewide stock. On the other, it argues that it could diversify
the investments only when information about Statewide's impending
collapse became public.
Finally, the Committee's interpretation, particularly
in light of the ambiguous language of the plan, is inconsistent
with ERISA inasmuch as it constrains the Committee's ability to
act in the best interest of the beneficiaries. Kuper v. Quantum
Chem. Corp., 852 F. Supp. 1389, 1395 (S.D. Ohio 1994) (ESOP plan
"must be interpreted, consistent with ERISA to provide that the .
. . ESOP fiduciaries did possess discretion to place ESOP funds
into investments other than [employer] stock, in the event that
the interests of the plan participants and beneficiaries so
required"); cf. Restatement (Third) of Trusts § 228(a) ("In
investing the funds of the trust, the trustee has a duty to the
beneficiaries to conform to any applicable statutory provisions
governing investment by trustees."). Moreover, as we discuss
more fully below, it is at odds with a fiduciary's responsibility
under the common law of trusts, which mandates that the trustee
in certain narrow instances must take actions at odds with how it
31
is directed generally to act. Therefore, the Committee's
interpretation of the plan is unreasonable and we reject it.0
We need not rely solely on the unreasonableness of the
Committee's interpretation during this litigation, however,
because the record is devoid of any evidence that the Committee
construed the plan at all. Thus, this is not a case implicating
the arbitrary and capricious standard of review. The Committee
points to nothing in the record indicating that it -- the
Committee -- actually deliberated, discussed or interpreted the
plan in any formal manner. To the contrary, in support of its
supposed interpretation, the Committee cites actions taken by the
Pension and Benefits Committee of Statewide, which it concedes
"was an entity separate and distinct from the Plan Committee
comprised of the defendants," br. at 9, and actions taken by the
"Trust Division of FNBTR, the Trustee of the Plan," br. at 10,
which also was not the Committee in charge of construing the
terms of the plan. The deferential standard of review of a plan
interpretation "is appropriate only when the trust instrument
allows the trustee to interpret the instrument and when the
trustee has in fact interpreted the instrument." Trustees of
Central States, Southeast and Southwest Areas Health and Welfare
0
In view of our result, we are not concerned with a situation in
which an ESOP plan in absolutely unmistakeable terms requires
that the fiduciary invest the assets in the employer's securities
regardless of the surrounding circumstances. Consequently, we
should not be understood as suggesting that there never could be
a breach of fiduciary duty in such a case. We similarly do not
reach Moench's argument that if the plan directed the Committee
to invest the funds solely in Statewide stock, ERISA nevertheless
required the Committee to ignore the plan terms when those terms
conflicted with its fiduciary obligations under ERISA.
32
Fund v. State Farm Mut. Auto Ins. Co., 17 F.3d 1081, 1083 (7th
Cir. 1994) (emphasis added). As the Restatement (Second) of
Trusts § 187, comment (h) puts it:
The court will control the trustee in the
exercise of a power where its exercise is
left to the judgment of the trustee and he
fails to use his judgment. Thus, if the
trustee without knowledge of or inquiry into
the relevant circumstances and merely as a
result of his arbitrary decision or whim
exercises or fails to exercise a power, the
court will interpose.
Here, there is no indication that the Committee actually made an
effort to construe the plan. In the absence of such evidence:
'The extent of the duties and powers of a
trustee is determined by rules of law that
are applicable to the situation, and not the
rules that the trustee or his attorney
believes to be applicable, and by the terms
of the trust as the court may interpret them,
and not as they may be interpreted by the
trustee or by his attorney.'
Firestone, 489 U.S. at 112, 109 S.Ct. at 955 (citation omitted).
As such, applying a de novo interpretation of the plan,
we have no hesitation concluding that the Statewide ESOP, while
designed with the primary purpose of investing in Statewide
securities, did not absolutely require the Committee to invest
exclusively in Statewide stock.0 We therefore believe that the
district court erred in determining that the Committee had no
latitude but to continue investing in Statewide stock.
The Committee nevertheless argues that it cannot be
liable under ERISA because, consistent with the nature of ESOPs
0
As we have explained, we would have reached the same result
applying the arbitrary and capricious standard of review.
33
themselves, it cannot be accountable for investing the assets
solely in Statewide stock. We turn to that argument now, which
again requires a detailed inquiry into the standard of review
over an ESOP fiduciary's decisions.
4. ESOPs and ERISA
a. General policies and the developed caselaw
ERISA contains specific provisions governing ESOPs.
While fiduciaries of pension benefit plans generally must
diversify investments of the plan assets "so as to minimize the
risk of large losses," see section 1104(a)(1)(C), fiduciaries of
ESOPS are exempted from this duty. Specifically, "the
diversification requirement . . . and the prudence requirement
(only to the extent that it requires diversification) . . . is
not violated by acquisition or holding of . . . qualifying
employer securities . . . ." 29 U.S.C. § 1104(a)(2). In other
words, under normal circumstances, ESOP fiduciaries cannot be
taken to task for failing to diversify investments, regardless of
how prudent diversification would be under the terms of an
ordinary non-ESOP pension plan. ESOPs also are exempted from
ERISA's "strict prohibitions against dealing with a party in
interest, and against self-dealing, that is, 'deal[ing] with the
assets of the plan in his own interest or for his own account.'"
Martin v. Feilen, 965 F.2d 660, 665 (8th Cir. 1992) (citing 29
U.S.C. § 1106(b)(1)), cert. denied, 113 S.Ct. 979 (1993).
The reason for these specific rules arises out of the
nature and purpose of ESOPs themselves. "[E]mployee stock
34
ownership plan[s are] designed to invest primarily in qualifying
employer securities." 29 U.S.C. § 1107(d)(6)(A). Thus, unlike
the traditional pension plan governed by ERISA, ESOP assets
generally are invested "in securities issued by [the plan's]
sponsoring company," Donovan v. Cunningham, 716 F.2d 1455, 1458
(5th Cir. 1983), cert. denied, 467 U.S. 1251, 104 S.Ct. 3533(1984). In keeping with this, ESOPs, unlike pension plans, are
not intended to guarantee retirement benefits, and indeed, by its
very nature "an ESOP places employee retirement assets at much
greater risk than does the typical diversified ERISA plan."
Martin v. Feilen, 965 F.2d at 664. The summary plan description
in this case, for example, explicitly stated that the plan "does
not provide for a guaranteed benefit at retirement." App. 174.
Rather, ESOPs serve other purposes. Under their
original rationale, ESOPS were described "as . . . device[s] for
expanding the national capital base among employees -- an
effective merger of the roles of capitalist and worker." Donovan
v. Cunningham, 716 F.2d at 1458. Thus, the concept of employee
ownership constituted a goal in and of itself. To accomplish
this end, "Congress . . . enacted a number of laws designed to
encourage employers to set up such plans." Id. The Tax Reform
Act of 1976 was one of those statutes, and in passing it,
Congress explicitly stated its concern that courts should refrain
from erecting barriers that would interfere with that goal:
'The Congress is deeply concerned that the
objectives sought by [the series of laws
encouraging ESOPs] will be made unattainable
by regulations and rulings which treat
employee stock ownership plans as
35
conventional retirement plans, which reduce
the freedom of the employee trusts and
employers to take the necessary steps to
implement the plans, and which otherwise
block the establishment and success of these
plans.'
Tax Reform Act of 1976, Pub. L. No. 94-455, § 803(h), 90 Stat.
1590 (1976) (quoted in Donovan v. Cunningham, 716 F.2d at 1466
n.24).
Notwithstanding all of this, ESOPs are covered by
ERISA's stringent requirements, and except for a few select
provisions like the ones we quote above, ESOP fiduciaries must
act in accordance with the duties of loyalty and care. In other
words, "Congress expressly intended that the ESOP would be both
an employee retirement benefit plan and a 'technique of corporate
finance' that would encourage employee ownership." Martin v.
Feilen, 965 F.2d at 664 (quoting 129 Cong. Rec. S16629, S16636
(Daily ed. Nov. 7, 1983) (statement of Sen. Long)). ESOP
fiduciaries must, then, wear two hats, and are "expected to
administer ESOP investments consistent with the provisions of
both a specific employee benefits plan and ERISA." Kuper v.
Quantum Chem. Corp., 852 F. Supp. at 1395.
All of this makes delineating the responsibilities of
ESOP trustees difficult, because they "must satisfy the demands
of Congressional policies that seem destined to collide." Donovan
v. Cunningham, 716 F.2d 1455, 1466 (5th Cir. 1983) (footnotes
omitted), cert. denied, 467 U.S. 1251, 104 S.Ct. 3533 (1984). As
the Cunningham court explained:
On the one hand, Congress has repeatedly
expressed its intent to encourage the
36
formation of ESOPs by passing legislation
granting such plans favorable treatment, and
has warned against judicial and
administrative action that would thwart that
goal. Competing with Congress' expressed
policy to foster the formation of ESOPs is
the policy expressed in equally forceful
terms in ERISA: that of safeguarding the
interests of participants in employee benefit
plans by vigorously enforcing standards of
fiduciary responsibility.
Id. See also Martin v. Feilen, 965 F.2d at 665 ("the special
statutory rules applicable to ESOPs inevitably affect the
fiduciary's duties under § 1104"); Kuper, 852 F. Supp. at 1394(quoting Cunningham). So with the goals of ESOPs on the one
hand, and ERISA's stringent fiduciary duties on the other, the
courts' "task in interpreting the statute is to balance these
concerns so that competent fiduciaries will not be afraid to
serve, but without giving unscrupulous ones a license to steal."
Donovan v. Cunningham, 716 F.2d at 1466. The goals of the two
statutes often serve consistent ends -- ensuring that the
fiduciary acts in the interest of the plan -- and in those cases
the nature of a plaintiff's claim will not create tension. But
when the plaintiff claims that an ESOP fiduciary violated its
ERISA duties by continuing to invest in employer securities, the
conflict becomes particularly stark.
Nevertheless, cases addressing the duties of ESOP
fiduciaries in this area generally have allowed ERISA's strict
standards to override the specific policies behind ESOPs. In
Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978), for example, an
ESOP fiduciary argued that he was bound by both the terms of the
37
ESOP plan and ERISA itself to invest the plan assets in employer
securities. The court, relying extensively on the legislative
history underlying ERISA, interpreted the statutory exception as
only prohibiting per se liability based on failure to diversify.
It justified this conclusion by reasoning that "the structure of
the Act itself requires that in making an investment decision of
whether or not a plan's assets should be invested in employer
securities, an ESOP fiduciary, just as fiduciaries of other
plans, is governed by the 'solely in the interest' and 'prudence'
tests. . . ." Id. at 459.
Other decisions are more specific and have held that
notwithstanding ERISA's diversification provisions, an ESOP
fiduciary must diversify if diversification is in the best
interests of the beneficiaries. The Court of Appeals for the
District of Columbia Circuit has stated:
[T]he requirement of prudence in investment
decisions and the requirement that all
acquisitions be solely in the interest of
plan participants continue to apply. The
investment decisions of a profit sharing
plan's fiduciary are subject to the closest
scrutiny under the prudent person rule, in
spite of the 'strong policy and preference in
favor of investment in employer stock.'
Fink v. National Sav. and Trust Co., 772 F.2d 951, 955-56 (D.C.
Cir. 1985) (citations omitted). And in an opinion heavily relied
upon by Moench and his amici, a district court in this circuit
has held that the ERISA provisions exempting ESOP fiduciaries
from the duty to diversify "merely entail that 'acquisition of
employer securities . . . does not, in and of itself, violate any
38
of the absolute prohibitions of ERISA.'" Canale v. Yegen, 782 F.
Supp. 963, 967 (D.N.J. 1992) (quoting Fink, 772 F.2d at 955),
reargument denied in part, granted in part, 789 F. Supp. 147(D.N.J. 1992). Rather, the court continued, "the allegation that
[an ESOP] administrator has failed to prudently diversify plan
assets invested exclusively in the stock of the beneficiaries'
employer can state a claim for breach of fiduciary duties under
ERISA." Id. at 967-68.
Notwithstanding the fact that none of these decisions
specifically delineate a standard of review, Moench and his amici
read these cases as requiring that a court not be deferential
when reviewing an ESOP fiduciary's actions in investing in
employer securities. There are numerous problems with their
argument. First, by subjecting an ERISA fiduciary's decision to
invest in employer stock to strict judicial scrutiny, we
essentially would render meaningless the ERISA provision
excepting ESOPs from the duty to diversify. Moreover, we would
risk transforming ESOPs into ordinary pension benefit plans,
which then would frustrate Congress' desire to encourage employee
ownership. After all, why would an employer establish an ESOP if
its compliance with the purpose and terms of the plan could
subject it to strict judicial second-guessing? Further still,
basic principles of trust law require that the interpretation of
the terms of the trust be controlled by the settlor's intent.
That principle is not well served in the long run by ignoring the
general intent behind such plans in favor of giving beneficiaries
the maximum opportunities to recover their losses.
39
In short, the sheer existence of ESOPs demonstrates
that there is some value in employee ownership per se, even
though participants inevitably run some risk in terms of their
financial gain. Therefore, the policies behind ERISA's rules
governing pension benefit plans cannot simply override the goals
of ESOPs, and courts must find a way for the competing concerns
to coexist. Indeed, the position taken by Moench and the
Secretary of Labor leaves numerous questions unanswered: How is
an ESOP fiduciary to determine when diversification is in the
best interest of the beneficiaries? Is the fiduciary always to
seek the return-maximizing investment, or is there some non-
tangible loyalty interest served by retaining ESOP investments in
employer stock? Additionally, to what extent should ESOPs be
considered retirement plans, notwithstanding the qualification
contained in most of them, including Statewide's, that they are
not designed to guarantee retirement income? We are uneasy with
the answers Moench and the Secretary would give to these
questions. Both seem ready and willing to sacrifice the policies
behind ESOPs and employee ownership in order to make "ESOP
fiduciaries virtual guarantors of the financial success of the
[ESOP] plan." Martin v. Feilen, 965 F.2d at 666. That we
cannot, should not and will not do.
In this regard, we point out that the participants in
the plan effectively became investors in Statewide and thus
should have expected to run risks inherent in that role. The
Statewide plan was voluntary and the summary plan description
provides that "[e]ach individual Employee's account will
40
experience gains or losses according to the performance of the
investments held by the Plan. The primary investment of the Plan
shall be Statewide Bancorp Common Stock." App. 174. Therefore,
the participants should have recognized that the value of their
interests was dependent on Statewide's performance.
b. Developing a standard
We again look to trust law for guidance in determining
the standard of review. We can formulate a proper standard of
review of an ESOP fiduciary's investment decisions by recognizing
that when an ESOP is created, it becomes simply a trust under
which the trustee is directed to invest the assets primarily in
the stock of a single company. More than that, the trust serves
a purpose explicitly approved and encouraged by Congress.
Therefore, as a general matter, "ESOP fiduciaries should not be
subject to breach-of-duty liability for investing plan assets in
the manner and for the . . . purposes that Congress intended."
Martin v. Feilen, 965 F.2d at 670. And while trustees -- of both
ordinary trusts and pension benefit plans -- are under a duty to
"diversify the investments of the trust," see Restatement (Third)
§ 227(b), that duty is waivable by the terms of the trust.
Section 227(d) ("The trustee's duties under this Section are
subject to the rule . . . dealing with contrary investment
provisions of a trust or statute."). Seen in light of these
principles, the provision in ERISA exempting ESOPs from the duty
to diversify is simply a statutory acknowledgement of the terms
41
of ESOP trusts. And the common law of trusts in fact guides us
in this difficult area.
The Restatement of Trusts provides that in investing
trust funds, "the trustee . . . has a duty to the beneficiaries
to conform to the terms of the trust directing . . . investments
by the trustee." Restatement (Third) § 228. Thus, "[a]s a
general rule a trustee can properly make investments in such
properties and in such manner as expressly or impliedly
authorized by the terms of the trust." Id. comment (d). However,
trust law distinguishes between two types of directions: the
trustee either may be mandated or permitted to make a particular
investment. If the trust requires the fiduciary to invest in a
particular stock, the trustee must comply unless "compliance
would be impossible . . . or illegal" or a deviation is otherwise
approved by the court. Id. comment (e). When the instrument
only allows or permits a particular investment, "[t]he fiduciary
must still exercise care, skill, and caution in making decisions
to acquire or retain the investment." Id. comment (f).
In a case such as this, in which the fiduciary is not
absolutely required to invest in employer securities but is more
than simply permitted to make such investments, while the
fiduciary presumptively is required to invest in employer
securities, there may come a time when such investments no longer
serve the purpose of the trust, or the settlor's intent.
Therefore fiduciaries should not be immune from judicial inquiry,
as a directed trustee essentially is, but also should not be
subject to the strict scrutiny that would be exercised over a
42
trustee only authorized to make a particular investment. Thus, a
court should not undertake a de novo review of the fiduciary's
actions similar to the review applied in Struble. Rather, the
most logical result is that the fiduciary's decision to continue
investing in employer securities should be reviewed for an abuse
of discretion.
In light of the analysis detailed above, keeping in
mind the purpose behind ERISA and the nature of ESOPs themselves,
we hold that in the first instance, an ESOP fiduciary who invests
the assets in employer stock is entitled to a presumption that it
acted consistently with ERISA by virtue of that decision.
However, the plaintiff may overcome that presumption by
establishing that the fiduciary abused its discretion by
investing in employer securities.
In attempting to rebut the presumption, the plaintiff
may introduce evidence that "owing to circumstances not known to
the settlor and not anticipated by him [the making of such
investment] would defeat or substantially impair the
accomplishment of the purposes of the trust." Restatement
(Second) § 227 comment g.0 As in all trust cases, in reviewing
the fiduciary's actions, the court must be governed by the intent
behind the trust -- in other words, the plaintiff must show that
the ERISA fiduciary could not have believed reasonably that
continued adherence to the ESOP's direction was in keeping with
0
This quote derives from the Second Restatement, though the
section we quote has been amended by the Restatement (Third) of
Trusts.
43
the settlor's expectations of how a prudent trustee would
operate. In determining whether the plaintiff has overcome the
presumption, the courts must recognize that if the fiduciary, in
what it regards as an exercise of caution, does not maintain the
investment in the employer's securities, it may face liability
for that caution, particularly if the employer's securities
thrive. See Kuper, 852 F. Supp. at 1395, ("defendants who
attempted to diversify its ESOP assets conceivably could confront
liability for failure to comply with plan documents").
In considering whether the presumption that an ESOP
fiduciary who has invested in employer securities has acted
consistently with ERISA has been rebutted, courts should be
cognizant that as the financial state of the company
deteriorates, ESOP fiduciaries who double as directors of the
corporation often begin to serve two masters. And the more
uncertain the loyalties of the fiduciary, the less discretion it
has to act. Indeed, "'[w]hen a fiduciary has dual loyalties, the
prudent person standard requires that he make a careful and
impartial investigation of all investment decisions.'" Martin v.
Feilen, 965 F.2d at 670 (citation omitted). As the Feilen court
stated in the context of a closely held corporation:
[T]his case graphically illustrates the risk
of liability that ESOP fiduciaries bear when
they act with dual loyalties without
obtaining the impartial guidance of a
disinterested outside advisor to the plan.
Because the potential for disloyal self-
dealing and the risk to the beneficiaries
from undiversified investing are inherently
great when insiders act for a closely held
corporation's ESOP, courts should look
closely at whether the fiduciaries
44
investigated alternative actions and relied
on outside advisors before implementing a
challenged transaction.
Id. at 670-71. And, if the fiduciary cannot show that he or she
impartially investigated the options, courts should be willing to
find an abuse of discretion.
When all is said and done, this is precisely the
argument Moench makes in this case: that the precipitous decline
in the price of Statewide stock, as well as the Committee's
knowledge of its impending collapse and its members' own
conflicted status, changed circumstances to such an extent that
the Committee properly could effectuate the purposes of the trust
only by deviating from the trust's direction or by contracting
out investment decisions to an impartial outsider.
Because the record is incomplete, we cannot determine
whether the Committee is entitled to summary judgment. Therefore,
we will remand the matter to the district court for further
proceedings in which the record may be developed and the case may
be judged on the basis of the principles we set forth.0
D. Failure to bring derivative action
Moench and the Secretary of Labor appear to argue that
the district court erred by failing to address Moench's claim
0
Moench contends that he raised a number of other fiduciary
breaches before the district court, independent of the
Committee's investment in Statewide stock. Furthermore, Moench
contended at oral argument that the Committee engaged in self-
dealing prohibited by ERISA. This opinion is limited to the
issues discussed; it is up to the district court to determine
whether these other claims are adequately plead, and if so, how
to proceed with them.
45
that the Committee violated ERISA by failing to file a claim
against Statewide's directors on behalf of the ESOP.
Actually, Moench's argument is somewhat unclear. In
his statement of issues presented, Moench asks whether "ERISA
[is] violated when pension plan administrators exonerate
themselves of personal liability to the plan by excluding the
plan from participation in the settlement of a class action
securities fraud suit against some of the plan administrators,
and by letting limitations run out without investigating the
wisdom of the plan bringing its own securities fraud suit?"0 Br.
at 1. However, the corresponding portion of the brief's argument
section is entitled "Failure to have the ESOP pursue any
securities fraud claim was a prejudicial and actionable breach of
fiduciary duty." Br. at 24 (emphasis added). In that section,
Moench argues that "the defendant[s] . . . clearly and
unequivocally had a duty to pursue a derivative action against
three of their own number as well as the plan sponsor, whom the
members served as corporate directors." Br. at 27. For his
part, the Secretary of Labor makes a different, more general
argument: "The district court did not address the plaintiff's
claim that the defendants breached their fiduciary duties under
ERISA by failing to take steps on the ESOP's behalf as
0
The record shows that a shareholder's derivative action was
filed against Statewide, Lerner v. Statewide Bancorp., Civ. No.
90-1552, which named, among others, three of the defendants in
this suit. That action eventually settled, and the ESOP was
excluded from the settlement.
46
shareholder to remedy corporate fiduciary breaches committed by
FNBTR's directors." Amicus Br. at 23.
The confused arguments urged on this appeal, and the
conflicting descriptions of what was raised in the district
court, is not surprising, considering that Moench made an
entirely different argument before the district court. The issue
of the Committee's duty to take affirmative legal action was
raised below only as part of a still different argument that
"[t]here are numerous questions of fact surrounding defendants'
conflict of interest." Plaintiff's Mem. of Law in Opp. to Def.
Mot. for Sum. Jud. at 25. Moench argued in the district court
that "the defendants, having knowledge that the bank was
fraudulently understating the true extent of its financial
difficulties, had a duty to act on this knowledge, even if it was
not public knowledge. Moreover, this duty may have included a
duty to bring a derivative action on behalf of the ESOP, even if
it meant suing themselves as directors." Id. at 29 (emphasis
added). It appears from a fair reading of his brief in the
district court -- though it is by no means crystal clear -- that
Moench was urging that the Committee breached its ERISA duties by
failing either to resign as ESOP trustees or to assign the
investment decisions to an independent outside source. Thus,
Moench concluded the conflict of interest section in the brief
below by stating: "It is submitted that after receipt of the
March 1990 OCC report, and the filing of the Lerner action, these
two duties [of director and ESOP fiduciary] became
irreconcilable." Id. at 30.
47
At any rate, our resolution of the issues discussed
above, which requires that we vacate the grant of summary
judgment and hence resurrects Moench's complaint, makes it
unnecessary for us to reach this issue. Upon remand, Moench may
seek to file a motion to amend his complaint to make clear
precisely what he is arguing on this score.0
III. Conclusion
For the foregoing reasons, we will vacate the district
court's order of September 21, 1994, granting summary judgment on
counts 1, 2, and 4 of the amended complaint, and will remand the
matter to the district court for further proceedings consistent
with this opinion.
0
We stress that the standard of review we apply over an ESOP
fiduciary's investment decisions does not necessarily apply over
a claim that an ESOP fiduciary failed to take action to protect
the ESOP assets. If the district court reaches this "failure to
sue" issue on remand, it should determine in the first instance
the appropriate standard of review. In making that
determination, the court should consider whether Struble
controls.
48