Bussian v. RJR Nabisco Inc ( 2000 )

REVISED - September 14, 2000
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 98-20867
_____________________
ROBERT A BUSSIAN; JAMES J KEATING
Plaintiffs - Appellants
v.
RJR NABISCO INCORPORATED
Defendant - Appellee
_________________________________________________________________
Appeal from the United States District Court
for the Southern District of Texas
_________________________________________________________________
August 14, 2000
Before KING, Chief Judge, and REYNALDO G. GARZA and EMILIO M.
GARZA, Circuit Judges.
KING, Chief Judge:
Plaintiffs-Appellants Robert A. Bussian and James J. Keating
appeal from the district court’s grant of summary judgment to
Defendant-Appellee RJR Nabisco, Inc. and its denial of class
certification. We reverse in part, vacate in part, and remand
for further consideration by the district court.
I. FACTUAL AND PROCEDURAL BACKGROUND
This case is yet another litigating who must bear the cost
of the collapse of Executive Life Insurance Company of California
(“Executive Life”) in the late 1980s and early 1990s. The issue
before us is whether Defendant-Appellee RJR Nabisco, Inc. (“RJR”)
acted consistently with its fiduciary obligations under § 1104 of
the Employee Retirement Income Security Act of 1974, 29 U.S.C.
§ 1001 et seq. (1994) (“ERISA”), when it chose to purchase a
single-premium annuity from Executive Life in August, 1987.
Because this case comes to us from a grant of RJR’s motion
for summary judgment, our presentation of the facts reflects in
part the requirement that we view the evidence in the light most
favorable to Plaintiffs-Appellants Robert A. Bussian and James J.
Keating (“Appellants”). Many of the underlying facts are
uncontested. RJR’s involvement in this case comes about through
its purchase, in 1976, of Aminoil USA, Inc. (“Aminoil”), a
Houston-based oil company. Aminoil administered a pension plan
for its employees that was governed by ERISA. RJR sold Aminoil
in 1984, and the purchaser assumed the pension obligations for
all then-current employees. At the time of the sale, other
employees had ceased employment with the oil company and were
either already receiving pension benefits or were vested in the
Aminoil pension plan but were not yet eligible to receive
benefits. RJR retained the obligation of administering pension
2
benefits for these former employees, including Appellants, under
an ERISA-defined benefit pension plan (“the Plan”).1
On October 16, 1986, RJR’s Board of Directors approved
resolutions authorizing the termination of the Plan and several
other plans of former RJR subsidiaries. The Board also approved
the purchase of an annuity to cover all pension obligations to
the participants and beneficiaries of all the plans. The Plan’s
documents provided that upon termination any excess funds would
revert to RJR.2 At the time the decision to terminate was made,
the Plan was over-funded, and the Board was informed that a
reversion could be expected. By December 1986, RJR was assuming
that an annuity would cost about $62.5 million, and allowing for
a $10 million cushion, was anticipating a reversion of about $55
million.
Members of RJR’s Pension Asset Management Department were
given the responsibility of selecting an annuity provider. Paul
Tyner was involved from the beginning; Robert Shultz, hired in
March, 1987 as RJR’s Vice President of Pension Asset Management,
had responsibility for making the final decision. In October,
1
Prior to April 22, 1987, RJR’s Retirement Board was
responsible for the Plan’s administration; subsequent to that
date, that responsibility fell to RJR’s Employee Benefits
Committee.
2
RJR’s decision to terminate was consistent with the
provisions of the Plan and with ERISA. The Plan allowed RJR to
terminate it by purchasing an annuity from an insurance company
to provide benefits under the Plan. Upon doing so, the Plan
provided that RJR could recover any residual assets.
3
1986, RJR hired Buck Consultants, Inc. (“Buck”) to assist in the
endeavor. William Overgard, an investment consultant with Buck
Pension Funds Services, was asked to participate in the process
in January, 1987.
Overgard was told that his role in the transaction was to
identify insurance companies and to provide those companies with
appropriate information in order to solicit the best bid from
each one that was interested in the business so that RJR could
select the carrier that was appropriate to its needs. Overgard
compiled an initial list of insurance companies that could
provide the annuity. That list included providers with which
Buck was familiar, that had a reputation for providing good
service to their clients, and that would have the capacity for a
placement covering approximately 10,000 individuals. In January,
1987, a letter was sent to thirteen companies inviting comments
on several issues related to the purchase of the annuity. In the
letter, RJR was not identified as the buyer of that annuity.
Executive Life was not among those receiving the January
letter.3 This was because it was involved in a nontraditional
investment strategy: its portfolio had a higher percentage of
low-quality bonds and a lower percentage of other investments
than other insurance companies. Low-quality bonds, which are
3
Overgard also did not send initial letters to three
companies Tyner suggested be added to the list because those
companies indicated they did not want to participate.
4
also referred to as “high-yield” or “junk” bonds, are rated below
investment grade, i.e., ratings agencies have determined that the
issuing entity is a greater than average credit risk. In order
to compensate for the increased risk of default, such bonds must
offer a higher interest rate. See, e.g., Levan v. Capital
Cities/ABC, Inc., 190 F.3d 1230, 1235 (11th Cir. 1999). After
Overgard discussed Executive Life’s strategy with one of his
colleagues, the two decided that the company should not be
included on the initial list.
Overgard understood that by 1987, over 50% of Executive
Life’s portfolio was in low-quality bonds. In this Executive
Life was indeed unusual compared to its competitors in the
insurance industry. Information in the record suggests that the
average percentage of low-quality bond holdings was on the order
of 6% to 7%. Executive Life allegedly held the largest original
issue low-quality bond portfolio ever assembled, with most of its
acquisitions coming through Drexel Burnham Lambert (“Drexel”).
Overgard understood Executive Life’s low-quality bond holdings to
be broadly diversified.
Based on his experience with Executive Life in the course of
bidding he conducted for guaranteed investment contracts, and his
desire to increase the competitiveness of the final bidding for
the annuity contract, on or about April 3, 1987, Tyner requested
that Executive Life be added to the list of carriers. In Tyner’s
opinion, Executive Life’s inclusion would facilitate bringing
5
other bidders down in price because it would come in with a lower
quote. According to William J. Wolliver, a former Manager of
Annuity Pricing for Prudential Insurance Company, Executive
Life’s low-quality bond portfolio enabled the company to underbid
his firm. At the time he requested that Executive Life be added,
Tyner did not think that the provider would be seriously
considered in the final bidding process. Instead, he believed
that RJR would go with a more well-known company.
To check up on Executive Life’s solvency and financial
health, Overgard reviewed the reports and ratings of four rating
agencies (Standard & Poor’s Corp. (“S&P”), Moody’s Investor’s
Services (“Moody’s”), A.M. Best (“Best”), Conning & Company
(“Conning”)). He reviewed the pros and cons of including
Executive Life on the list of carriers to be contacted with Henry
Anderson, an actuarial expert with Buck who, as the account
executive, had brought Overgard in on the RJR purchase. They
discussed the high-quality ratings that Executive Life had
received, the company’s interest in doing business, its
reputation for providing good service and for being knowledgeable
in the business, and its nontraditional investment portfolio.
Overgard believed that a broadly diversified portfolio of low-
quality bonds was a viable investment strategy. Based on his
investigation, Overgard determined that Executive Life should be
included on the bid list because the ratings the company received
from S&P, Best, and Conning were high; its low-quality bond
6
portfolio was broadly diversified and its investment strategy
sound; and its administrative capabilities and reputation in the
annuity business were strong.
On April 8, 1987, Buck solicited bids from fourteen
potential annuity providers, including Executive Life. Buck had
previously explained to RJR that companies would make initial
bids and that Buck would select possibly three companies from
which final bids would be solicited. In May, five potential
providers submitted preliminary bids: AIG Life Insurance Company
(“AIG”), Aetna Life Insurance (“Aetna”), Executive Life, Mutual
Life Insurance Company of New York, and Prudential Asset
Management Company (“Prudential”).4 The other companies declined
to participate, primarily because of the complexity associated
with the numerous plans.
Between May and August, Overgard provided additional
information to the companies interested in bidding. The bulk of
his time was spent working with the companies to make sure they
had correct data and enough data to enable them to submit a
qualified bid, testing whether alternative strategies might be
available for placing the bid on the final bid day, and assessing
how hard he could push the companies in final negotiations.
Sometime prior to August, 1987, Overgard learned that
Moody’s had given Executive Life a rating of A3, which was two
4
At some point after May, Mutual Life of New York dropped
out of the bidding.
7
grades below that of S&P’s AAA rating for the company.5 He also
read media reports speculating that problems in the market for
low-quality bonds might affect Executive Life. Overgard
determined from a discussion with an individual at Moody’s that
the rating agency had not talked with Executive Life management
prior to issuing its rating, and he pursued “industry
intelligence” regarding the company. Overgard concluded that the
lower Moody’s rating was an attempt on the part of the agency to
gain publicity, but did not recall a specific discussion with the
individual at Moody’s regarding why the agency rated Executive
Life as it did, or how the agency viewed the provider’s
nontraditional portfolio. He found that the opinions of other
insurance companies were mixed: “some were not concerned about
Executive Life and some were willing to put the fear of God into
us,” the latter describing low-quality bonds as a bad investment
strategy. Concerned about what would happen to the market for
low-quality bonds should Drexel collapse, Overgard talked to
investment bankers. In Overgard’s opinion, those bankers were
quite eager to move into the market for low-quality bonds.
Overgard also viewed Executive Life as working the case harder
and asking more questions during the bid solicitation process
5
The top ten Moody’s ratings are: Aaa, Aa1, Aa2, Aa3, A1,
A2, A3, Baa1, Baa2, and Baa3. The top ten S&P’s ratings are AAA,
AA+, AA, AA-, A+, A, A-, BBB+, BBB, and BBB-.
8
than the other companies. Overgard concluded that Executive Life
should remain on the bid list.
Final bid day was set for August 12, 1987. On that day,
Overgard met with representatives of RJR (Tyner, and
representatives from RJR’s Employee Benefits and Legal
Departments) to review the preliminary bids. The sole
documentation RJR had comparing providers was a listing of the
final companies’ ratings and their initial bids. Buck did not
recommend any particular company; instead, it saw each of the
four remaining companies as qualified and competent to provide
the annuity. As a result, Overgard saw his role on final bid day
as obtaining from each company its best (lowest) bid. Overgard
negotiated with the four companies in one room; RJR
representatives were in another room. Overgard determined midday
that Aetna and AIG had given their best bid, and so concentrated
for the remaining period on obtaining lower bids from Prudential
and Executive Life. The following provides the final bids along
with other information Buck supplied RJR:
INSURER S&P BEST MOODY’S CONNING BID
Aetna AAA A+ AAA 102/104 $61.9 M
AIG AAA A AAA N/A $60.2 M
Executive Life AAA A+ A3 100/106 $54 M
Prudential AAA A+ AAA 98/91 $56.7 M
9
Aetna’s bid was the highest at $61.9 million, and Executive
Life’s was the lowest at $54 million. According to Overgard, the
numeric Conning ratings reflected historical information on
liquidity over two years. Thus, Aetna’s rating of 102/104
reflected an improvement, while Prudential’s ratings reflected a
decline.
RJR had established three requirements that “at a minimum”
the company providing the annuity would have to meet:
(1) receipt of an AAA rating from S&P; (2) capacity to administer
the plans; and (3) approval from Buck. On the final bid day,
Shultz had a number of other things to do. Because he had full
confidence in the RJR representatives present, and “because the
dollar value of the assets involved in the transaction was
insubstantial in comparison to RJR’s total pension portfolio,” he
attended the meeting for about an hour and fifteen minutes at its
outset. After the final bids came in, RJR representatives
present identified Executive Life as the insurer from which to
purchase the annuity, as it was the lowest bidder, had at least
one AAA rating, and was capable of administering the annuity.
Tyner telephoned Shultz to inform him of the recommendation.
After a fifteen- or twenty-minute conversation, Shultz gave the
go-ahead to select Executive Life.
Unlike Tyner, Shultz was aware of a number of facts
regarding Executive Life, its chairman, Fred Carr, and the market
for low-quality bonds. For example, Shultz was aware (1) of the
10
percentage of Executive Life’s portfolio that was devoted to low-
quality bonds, (2) of allegations regarding a connection between
Executive Life and Drexel’s Michael Milken, (3) that Executive
Life was one of Milken’s largest customers, (4) that Drexel and
Milken were the targets of SEC and Attorney General
investigations of the 1986 insider trading scandal, (5) that
Executive Life and Carr came within the scope of those
investigations, and (6) that Executive Life of New York, a
subsidiary of Executive Life, had been fined by New York
insurance regulators due to the insurer’s reinsurance practices,
had $150 million of reinsurance disallowed, and had received from
Executive Life $150 million to make up the difference.6 Shultz
had not seen as much negative press regarding Aetna’s or
Prudential’s holdings of low-quality bonds as he had seen with
regard to the holdings of Executive Life, and he had not seen the
diversity of reviews of the other companies that he had seen with
respect to Executive Life. Shultz stated that he relied
primarily on Tyner’s input, and that his decision to concur in
the purchase of Executive Life’s annuity was made taking into
account the fact that “Executive Life had the same S&P rating as
did Prudential, had a reputation equal to or better than
6
Neither Shultz nor Tyner was aware that regulators in
California were looking into $188 million of Executive Life’s
reinsurance.
11
Prudential’s for being able to service complex annuity contracts
and was recommended by Buck.”
On August 17, 1987, RJR caused $54 million to be wired to
Executive Life. A letter agreement was signed November 23 of the
same year. RJR formally terminated the Plan on June 30, 1988.7
The total pre-tax reversion associated with the termination of
all plans covered under the annuity was $82,080,000; this
resulted in RJR receiving on May 27, 1989 a net reversion of
$43,051,510.
Tyner was aware that by 1989, Executive Life was suffering
financially. To his knowledge, however, no one at RJR considered
extracting himself from the deal to buy Executive Life’s annuity.
7
The Pension Benefit Guarantee Corporation (“PBGC”) later
audited the termination of the Plan, and on February 7, 1989,
found it to be “in accordance with the plan provisions and in
compliance with the appropriate laws and regulations administered
by the Pension Benefit Guarantee Corporation.” The PBGC was
established to administer and enforce Title IV of ERISA. See
Pension Benefit Guaranty Corp. v. LTV Corp., 496 U.S. 633, 637
(1990). “Title IV includes a mandatory Government insurance
program that protects the pension benefits of over 30 million
private-sector American workers who participate in plans covered
by the Title. In enacting Title IV, Congress sought to ensure
that employees and their beneficiaries would not be completely
‘deprived of anticipated retirement benefits by the termination
of pension plans before sufficient funds have been accumulated in
the plans.’” Id. (footnote omitted) (quoting Pension Benefit
Guaranty Corp. v. R.A. Gray & Co., 467 U.S. 717, 720 (1984)). A
statement that a termination is in accordance with the laws and
regulations administered by the PBGC is not a statement that the
PBGC considers the termination to be in accordance with fiduciary
standards set forth in Title I of ERISA. Cf. Waller v. Blue
Cross, 32 F.3d 1337, 1343-44 (9th Cir. 1994) (holding that plan
terminations must be consistent with both Title IV and Title I of
ERISA and noting that the two Titles protect pension benefits in
different ways).
12
RJR accepted the provider’s annuity contract on December 13,
1989.
By late 1989, the low-quality bond market was suffering
significant losses. Because well over half of Executive Life’s
portfolio consisted of low-quality bonds, it felt the brunt of
those losses. In January, 1990, First Executive Corporation, the
parent of Executive Life, announced that its low-quality bond
portfolio had lost $1 billion in market value and that it would
take a $515 million writedown. In April, 1991, California
insurance regulators placed Executive Life in conservatorship,
and for a period of time, certain Executive Life policyholders
received reduced benefits. Eventually, the market for low-
quality bonds rebounded, and Executive Life was taken over by a
consortium of French companies, which formed Aurora National Life
Assurance Company. Unfortunately, Appellants and some other Plan
participants have not received their full benefits.
Appellants filed suit, on their own behalf and on behalf of
a class, against RJR in Texas state court in 1991, alleging
violations of RJR’s fiduciary duties. RJR removed the case to
federal court and moved for summary judgment in 1992. In 1998,
the district court granted summary judgment and, consequently,
denied Appellants’ motion to certify a class. See Bussian v. RJR
Nabisco, Inc., 21 F. Supp. 2d 680 (S.D. Tex. 1998). Appellants
timely appeal.
13
II. SUMMARY JUDGMENT
A. Standard of Review
We review the granting of summary judgment de novo, applying
the same criteria used by the district court in the first
instance. See Norman v. Apache Corp., 19 F.3d 1017, 1021 (5th
Cir. 1994); Conkling v. Turner, 18 F.3d 1285, 1295 (5th Cir.
1994). Summary judgment is proper “if the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party
is entitled to a judgment as a matter of law.” FED. R. CIV. P.
56(c); see Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986).
“[T]here is no issue for trial unless there is sufficient
evidence favoring the nonmoving party for a jury to return a
verdict for that party. If the evidence is merely colorable, or
is not significantly probative, summary judgment may be granted.”
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986)
(citations omitted). We must view all evidence in the light most
favorable to the party opposing the motion and draw all
reasonable inferences in that party’s favor. See id. at 255.
B. The Standard
14
Section 1104(a) sets forth the general duties imposed upon
ERISA fiduciaries:8
(1) Subject to sections 1103(c) and (d), 1342, and 1344
of this title, a fiduciary shall discharge his duties
with respect to a plan solely in the interest of the
participants and beneficiaries and —
(A) for the exclusive purpose of:
(i) providing benefits to participants and their
beneficiaries; and
(ii) defraying reasonable expenses of administering the
plan;
(B) 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;
(C) by diversifying the investments of the plan so as to
minimize the risk of large losses, unless under the
circumstances it is clearly prudent not to do so; and
(D) in accordance with the documents and instruments
governing the plan insofar as such documents and
instruments are consistent with the provisions of this
subchapter and subchapter III of this chapter.
29 U.S.C. § 1104(a)(1). We have recognized that this provision
imposes several overlapping duties. See, e.g., Metzler v.
Graham, 112 F.3d 207, 209 (5th Cir. 1997) (involving the duty to
diversify and the duty of loyalty); Donovan v. Cunningham, 716
F.2d 1455, 1464 (5th Cir. 1983) (“Section [1104] imposes upon
fiduciaries a duty of loyalty and a duty of care.”). Appellants
8
RJR does not argue that activities conducted in
implementing a plan termination, such as the selection of an
annuity provider, fall outside the standard set forth in
§ 1104(a). Cf. Waller, 32 F.3d at 1343-44 (“We find ERISA’s
failure to exempt purchasing annuities from § [1104]’s fiduciary
obligations to be a powerful indicator of Congress’ intent not to
exempt the process for choosing annuity providers — possibly the
most important decision in the life of the plan — from fiduciary
scrutiny.”).
15
assert that the district court erred in holding that, as a matter
of law, RJR satisfied its obligations under ERISA. They argue
that RJR was required to attempt to select the safest available
annuity to satisfy its duty of loyalty. They also contend that
RJR failed to conduct an investigation that satisfied its duty of
care, and that it acted inconsistently with its duty to diversify
in selecting an insurance carrier that held 50% to 60% of its
portfolio in low-quality bonds.
1. The Duty to Diversify
We first narrow the focus of our inquiry by disposing of one
of Appellants’ arguments. They assert that § 1104(a)(1)(C)
imposes on a fiduciary selecting an annuity the duty to select an
insurance provider whose portfolio is sufficiently diversified.
We disagree. Section 1104(a)(1)(C) deals specifically with
“investments of the plan.” As RJR points out, the purchase of an
annuity to facilitate plan termination is not an investment of
the plan. It is, as 29 U.S.C. § 1341(b)(3) provides, a “final
distribution of assets.” Section 1104(a)(1)(C) therefore does
not impose upon a plan fiduciary the obligation to investigate or
ensure the adequate diversification of an annuity provider’s
portfolio. This is not to say that a plan fiduciary has no
obligation to consider the diversification of an annuity
provider’s portfolio; such an obligation may exist under
16
§ 1104(a)(1)(B), a possibility we address infra. Cf. 29 U.S.C.
§ 1104(a)(2) (stating that the “diversification requirement of
paragraph (1)(C) and the prudence requirement (only to the extent
that it requires diversification) of paragraph (1)(B)” do not
apply to certain transactions). We are therefore left to
determine the proper standard to guide our inquiry into whether
summary judgment is appropriate to dispose of Appellants’ claims
that RJR breached its duties of loyalty and care in purchasing
Executive Life’s annuity.
2. The Duty of Loyalty
ERISA’s duty of loyalty is “the highest known to the law.”
Donovan v. Bierwirth, 680 F.2d 263, 272 n.8 (2d Cir.), cert.
denied, 459 U.S. 1069 (1982); cf. Meinhard v. Salmon, 164 N.E.
545, 546 (1928) (Cardozo, J.) (“Many forms of conduct permissible
in a workaday world for those acting at arm’s length, are
forbidden to those bound by fiduciary ties. A trustee is held to
something stricter than the morals of the market place. Not
honesty alone, but the punctilio of an honor the most sensitive,
is then the standard of behavior.”). The Supreme Court recently
had occasion to describe ERISA’s duty of loyalty, in so doing
again recognizing the duty’s source in the common law of trusts.
See Pegram v. Herdrich, — S. Ct. — , 2000 WL 743301, at *7 (U.S.
June 12, 2000) (“‘The most fundamental duty owed by the trustee
17
to the beneficiaries of the trust is the duty of loyalty. . . .
It is the duty of a trustee to administer the trust solely in the
interest of the beneficiaries.’” (quoting 2A A. SCOTT & W. FRATCHER,
TRUSTS § 170, at 311 (4th ed. 1987))).
Although ERISA’s duties gain definition from the law of
trusts, the usefulness of trust law to decide cases brought under
ERISA is constrained by the statute’s provisions. See Varity
Corp. v. Howe, 516 U.S. 489, 497 (1996) (“We also recognize . . .
that trust law does not tell the entire story.”); Cunningham, 716
F.2d at 1464. Under ERISA, for example, a fiduciary may have
financial interests adverse to beneficiaries, but under trust law
a “trustee ‘is not permitted to place himself in a position where
it would be for his own benefit to violate his duty to the
beneficiaries.’” See Pegram, 2000 WL 743301, at *8 (quoting 2A
SCOTT & FRATCHER, § 170, at 311)). Despite the ability of an ERISA
fiduciary to wear two hats, “ERISA does require . . . that the
fiduciary with two hats wear only one at a time, and wear the
fiduciary hat when making fiduciary decisions.” Id. (citing
Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 443-44 (1999));
see also Varity, 516 U.S. at 497.
That ERISA contemplates that a plan fiduciary may have
multiple roles is reflected in the language of § 1104(a). That
section begins with the phrase “[s]ubject to sections 1103(c) and
(d), 1342, and 1344 of this title,” which explicitly refers to
ERISA provisions that allow plan assets to be returned to the
18
employer under some circumstances. See Borst v. Chevron Corp.,
36 F.3d 1308, 1320 (5th Cir. 1994), cert. denied, 514 U.S. 1066
(1995); District 65, U.A.W. v. Harper & Row, Publishers, Inc.,
576 F. Supp. 1468, 1477-78 (S.D.N.Y. 1983); Daniel Fischel & J.H.
Langbein, ERISA’s Fundamental Contradiction: The Exclusive
Benefit Rule, 55 U. CHI. L. REV. 1105, 1154 (1988). As a result,
although the balance of § 1104(a)(1) would appear to make a
return of assets to an employer a violation of the duty to act
“solely in the interest of participants and beneficiaries and for
the exclusive purpose of providing benefits to participants,”
§ 1104(a)(1)(A)(i), the provision’s initial phrase precludes such
an interpretation.
Under ERISA, neither the decision to terminate an overfunded
plan, nor a reversion of plan assets that is consistent with
§ 1344(d), is a per se violation of § 1104(a)(1). See
§ 1108(a)(9) (exempting from prohibited transactions “[t]he
making by a fiduciary of a distribution of the assets of the plan
in accordance with the terms of the plan if such assets are
distributed in the same manner as provided under § [1344] . . .
.”); Lockheed Corp. v. Spink, 517 U.S. 882, 890-91 (1996)
(extending to pension benefit plans the notion that when
employers terminate employee welfare plans, they do not act as
fiduciaries and instead are analogous to settlors of a trust);
Izzarelli v. Rexene Prods. Co., 24 F.3d 1506, 1524 (5th Cir.
1994). Prior to termination, a defined benefit plan, such as the
19
one involved in the case before us, “consists of a general pool
of assets,” Hughes Aircraft, 525 U.S. at 439, and “no plan member
has a claim to any particular asset that composes a part of the
plan’s general asset pool.” Id. at 440. Instead, plan members
have a right only to their accrued benefit — a plan’s surplus9
need not be made available for distribution to plan members. See
id. at 440-41; Borst, 36 F.3d at 1315. Because an employer may,
consistent with ERISA’s provisions, receive a plan’s surplus upon
termination, the fact that the employer terminates a plan
specifically to gain access to that surplus is not a violation.
See District 65, 576 F. Supp. at 1478 (dismissing plaintiffs’
breach of fiduciary-duty claim challenging a sponsor’s
termination of a plan in order to use the surplus to prevent a
third party from taking control of the company).
However, simply because ERISA allows an employer to recoup
surplus assets does not mean that a fiduciary’s acts undertaken
to implement a plan’s termination may deviate from ERISA’s
command that a “fiduciary shall discharge his duties with respect
to a plan solely in the interest of the participants and
beneficiaries.” § 1104(a)(1). The question whether an employer
has access to a reversion because of a plan’s termination is
9
“Surplus assets, or ‘residual assets’ as termed in ERISA,
are ‘assets in excess of those necessary to satisfy defined
benefit obligations . . . .’” Borst v. Chevron Corp., 36 F.3d
1308, 1311 (5th Cir. 1994) (quoting Wilson v. Bluefield Supply
Co., 819 F.2d 457, 464 (4th Cir. 1987)).
20
separate from the issue of the size of that reversion. See
District 65, 576 F. Supp. at 1478. Undertaking steps to maximize
the size of the reversion with the direct result of reducing
benefits would be a violation of ERISA’s commands. See Cooke v.
Lynn Sand & Stone Co., 673 F. Supp. 14, 27 (D. Mass. 1986)
(denying summary judgment where a material fact question existed
regarding whether sponsor had used higher interest rate to
maximize its reversion); cf. Reich v. Compton, 57 F.3d 270, 291
(3d Cir. 1995) (“[T]rustees violate their duty of loyalty when
they act in the interests of the plan sponsor rather than ‘with
an eye single to the interests of the participants and
beneficiaries of the plan’” (quoting Donovan v. Bierwirth, 680
F.2d 263, 271 (2d Cir.), cert. denied, 459 U.S. 1069 (1982))).
The Secretary of the Department of Labor (the “Secretary”),
as amicus curiae, urges us to hold that the duty of loyalty
requires that a fiduciary disposing of plan assets as part of a
termination purchase “the safest annuity available.”
Interpretive Bulletin Relating to the Fiduciary Standard Under
ERISA When Selecting an Annuity Provider, 29 C.F.R. § 2509.95-
1(c) (1999) (hereafter “IB 95-1” or the “Bulletin”). Although
the Bulletin was first published in March 1995 in response to the
failure of Executive Life, the Federal Register notes an
effective date for IB-95 of January 1, 1975. See Interpretive
Bulletins Relating to the Employee Retirement Income Security Act
of 1974 (hereafter “IB-ERISA”), 60 Fed. Reg. 12328, 12328 (1995).
21
According to the Secretary, we owe deference to the
interpretation of ERISA’s fiduciary duties expressed in IB-95,
see Chevron U.S.A., Inc. v. Natural Resources Defense Council,
Inc., 467 U.S. 837 (1984), and should apply it to RJR’s selection
of Executive Life’s annuity.
In Christensen v. Harris County, 120 S. Ct. 1655 (2000), the
Supreme Court rejected an argument that it should give “Chevron
deference” to a Department of Labor opinion letter. Noting that
such interpretations are not “arrived at after, for example, a
formal adjudication or notice-and-comment rulemaking” and “lack
the force of law,” id. at 1662, it concluded that interpretations
in opinion letters and similar documents are instead “‘entitled
to respect’ under [its] decision in Skidmore v. Swift & Co., 323
U.S. 134, 140 (1944), but only to the extent that those
interpretations have the ‘power to persuade’.” Id. at 1663; see
also Martin v. Occupational Safety & Health Review Comm’n, 499
U.S. 144, 157 (1991) (noting that interpretive rules and
enforcement guidelines are “not entitled to the same deference as
norms that derive from the exercise of the Secretary’s delegated
lawmaking powers”).
IB-95 is a Department of Labor interpretative bulletin that
is not the product of notice-and-comment procedures established
by the Administrative Procedure Act.10 See 5 U.S.C. § 553
10
The Secretary has the power to promulgate regulations.
(continued...)
22
(1994). Although the Department gave advance notice of proposed
rulemaking, see Annuitization of Participants and Beneficiaries
Covered Under Employee Pension Plans (hereafter “Annuitization”),
56 Fed. Reg. 28638 (1991), the focus of that notice was not the
proper application of § 1104 to a fiduciary’s selection of an
annuity provider as part of plan terminations. Instead, the
notice described the possibility of amending existing regulations
defining the circumstances under which an individual is a
participant covered under a plan.11 See id. at 28639. After
receiving some responses, see IB-ERISA, 60 Fed. Reg. at 12329,
the Department determined that “no regulatory action should be
10
(...continued)
See 29 U.S.C. § 1135. Under 29 U.S.C. § 1137, the rulemaking
provisions of the Administrative Procedure Act are applicable to
Title I of ERISA.
11
The Department indicated that its advance notice
was being published in order to obtain information and
comments from the public for consideration by the Department
in deciding whether to propose a regulation relating to the
purchase of annuity contracts for plan participants and
beneficiaries, and, if so, whether and to what extent any
such regulation should provide minimum standards for
determining whether the purchase of an annuity contract
would relieve the plan of future liability with respect to
the participant or beneficiary for whom the annuity is
purchased.
Annuitization, 56 Fed. Reg. at 28639. It acknowledged that “one
method for providing such minimum standards would be to amend 29
C.F.R. 2510.3-3(d)(2)(ii)(A). A consequence of such an approach
would be that a participant would cease to be a participant
covered under the plan only to the extent that prescribed minimum
standards are satisfied.” Id. The regulation at 29 C.F.R.
2510.3-3(d)(2)(ii) describes when an individual becomes a
participant covered under an employee benefit plan.
23
taken at this time to amend the minimum standards under the
regulation at 29 CFR 2510.3-3(d)(2)(ii).” Id.
Rather than undertaking regulatory action, the Department,
seeing a need for “further guidance regarding the selection of .
. . annuity providers by plan fiduciaries,” published the
Bulletin. IB-ERISA, 60 Fed. Reg. at 12328. The Department noted
that the “bulletin concerns solely the fiduciary standard and is
published in addition to and independent of the regulatory
minimum standard at 29 C.F.R. 2510.3-3(d)(2)(ii).” Id. at 12329.
The Secretary’s position is that the Bulletin “announce[s] to the
public the Department’s legal view of ERISA.” Secretary’s Brief
at 17-18. Because the Bulletin is not the product of notice-and-
comment rulemaking, and does not have the force of law, we apply
the standard referred to in Christensen, and determine the extent
to which the Bulletin is “entitled to respect.” Skidmore, 323
U.S. at 140.
We begin our inquiry with a discussion of the Bulletin’s
provisions. Subsection (c) provides that in discharging its duty
of loyalty in purchasing an annuity, a fiduciary “must take steps
calculated to obtain the safest annuity available, unless under
the circumstances it would be in the interests of participants
and beneficiaries to do otherwise.”12 29 C.F.R. § 2509.95-1(c)
12
We note that nowhere in the Bulletin is the “safest
available annuity” defined, and nowhere are its identifying
characteristics described.
24
(1999). Although this would appear to impose on fiduciaries an
obligation to attempt to obtain the safest annuity, the Bulletin
also states that “there are situations where it may be in the
interest of the participants and beneficiaries to purchase other
than the safest available annuity.” Id. § 2509.95-1(d). In
cases involving overfunded plans, the Bulletin provides that a
fiduciary “must make diligent efforts to assure that the safest
available annuity is purchased.” Id. This language strongly
suggests that the Secretary interprets ERISA’s duty of loyalty as
requiring that a fiduciary selecting an annuity for purposes of
plan termination actually purchase the safest annuity, unless
circumstances of the type indicated exist.13 These circumstances
include where the safest annuity is only marginally safer yet
disproportionately more expensive and where the insurer offering
the safest annuity is unable to administer the plan. See id.
The Secretary’s brief also argues that a fiduciary under the
circumstances of this case is obligated to purchase the safest
13
The Bulletin claims that a fiduciary could conclude
“that more than one annuity provider is able to offer the safest
annuity available.” 29 C.F.R. § 2509.95-1(c). However, under
the Bulletin’s language, where distinctions are possible a
fiduciary would be obligated to choose the “safest available
annuity” unless limited exceptions apply. The Bulletin provides
no guidance as to how that annuity is to be identified. Given
this, and given variations among insurance companies, we see it
as likely that distinctions between providers and the annuities
they offer could always be made. As a result, we question
whether a fiduciary could conclude that “more than one annuity
provider is able to offer the safest annuity available” and not
leave itself open to challenge by the Secretary.
25
annuity available. The Secretary contends that the relevant
issue before us is not whether Executive Life was a viable or
sound candidate, as RJR argues, but instead “whether Executive
Life’s annuity was the safest available annuity.” According to
the Secretary, Shultz and Tyner acted consistently with their
fiduciary duties only if they could answer this question in the
affirmative.
We agree with the Bulletin and the Secretary that once the
decision to terminate a plan has been made, the primary interest
of plan beneficiaries and participants is in the full and timely
payment of their promised benefits.14 We agree that
beneficiaries and participants whose plan is being terminated
gain nothing from an annuity offered at a comparative discount by
a provider that brings to the table a heightened risk of default.
We would even add that the purchase of such an annuity can be
considered an example of the imposition on annuitants of
uncompensated risk — the risk of default is borne by the
annuitants and, in those states that have guaranty associations,
by those associations, while the benefit is granted to the
sponsor in the form of a lower price and larger reversion.
However, we are not persuaded that § 1104(a) imposes on
fiduciaries the obligation to purchase the “safest available
14
Because some beneficiaries in the Plan had not yet
retired at the time of termination, completion of an obligation
to pay in full all promised benefits could occur at a time twenty
or more years in the future, when the last beneficiary died.
26
annuity” in order to fulfill their fiduciary duties. We hold
that the proper standard to be applied to this case is the
standard applicable in other situations that involve the
potential for conflicting interests: fiduciaries act
consistently with ERISA’s obligations if “their decisions [are]
made with an eye single to the interests of the participants and
beneficiaries.” Bierwirth, 680 F.2d at 271; see, e.g., Metzler,
112 F.3d at 213; Pilkington PLC v. Perelman, 72 F.3d 1396 (9th
Cir. 1995); Compton, 57 F.3d at 291; Deak v. Masters, Mates &
Pilots Pension Plan, 821 F.2d 572, 580 (11th Cir. 1987), cert.
denied, 484 U.S. 1005 (1988); Leigh v. Engle, 727 F.2d 113, 125
(7th Cir. 1984) (“Leigh I”). That standard does not require that
a fiduciary under the circumstances of this case purchase the
“safest available annuity.” Cf. Riley v. Murdock, No. 95-2414,
1996 WL 209613, at *1 (4th Cir. Apr. 30, 1996) (unpublished)
(rejecting the standard advocated by the Department of Labor).
The Bulletin’s standard focuses on the quality of the
selected annuity. The standard we apply focuses instead on the
fiduciary’s conduct. It requires that fiduciaries keep the
interests of beneficiaries foremost in their minds, taking all
steps necessary to prevent conflicting interests from entering
into the decision-making process. See Metzler, 112 F.3d at 213
(noting that steps necessary to reduce the effects of potential
conflicts are dependent upon the circumstances); Bierwirth, 680
F.2d at 276 (stating that the conflicted trustees “were bound to
27
take every feasible precaution to see that they had carefully
considered the other side . . . .”). Although a fiduciary’s
ultimate choice may be evidence that the duty of loyalty has been
breached, the proper inquiry has as its central concern the
extent to which the fiduciary’s conduct reflects a subordination
of beneficiaries’ and participants’ interests to those of a third
party. Cf. Leigh v. Engle, 858 F.2d 361 (7th Cir. 1988) (“Leigh
II”) (“[W]hether the investments were speculative is irrelevant.
The administrators’ breach did not consist of investment in
speculative assets. Rather, the administrators breached their
duties when they made investment decisions out of personal
motivations, without making adequate provision that the trust’s
best interests would be served.”).
3. The Duty of Care
We recently addressed an ERISA fiduciary’s duty of care in
Laborers National Pension Fund v. Northern Trust Quantitative
Advisors, Inc., 173 F.3d 313 (5th Cir.), cert. denied sub nom,
Laborers Nat’l Pension Fund v. American Nat’l Bank & Trust Co.,
120 S. Ct. 406 (1999). The issue in Laborers was whether a
pension fund’s investment manager violated its duty of care when
it purchased interest-only mortgage-backed securities. Although
the case before us arises in a different context, we find the
discussion in Laborers instructive:
28
In determining compliance with ERISA’s prudent man
standard, courts objectively assess whether the fiduciary,
at the time of the transaction, utilized proper methods to
investigate, evaluate and structure the investment; acted in
a manner as would others familiar with such matters; and
exercised independent judgment when making investment
decisions. [ERISA’s] test of prudence . . . is one of
conduct, and not a test of the result of performance of the
investment. The focus of the inquiry is how the fiduciary
acted in his selection of the investment, and not whether
his investments succeeded or failed. Thus, the appropriate
inquiry is whether the individual trustees, at the time they
engaged in the challenged transactions, employed the
appropriate methods to investigate the merits of the
investment and to structure the investment.
Id. at 317 (alterations in original) (internal citations and
quotation marks omitted); see also In re Unisys Sav. Plan Litig.,
173 F.3d 145, 153 (3d Cir.) (“Unisys II”) (noting that the
prudence requirement focuses on whether “a fiduciary employed the
appropriate methods to investigate and determine the merits of a
particular investment”), cert. denied sub nom, Meinhardt v.
Unisys Corp., 120 S. Ct. 372 (1999); DeBruyne v. Equitable Life
Assurance Soc’y, 920 F.2d 457, 465 (7th Cir. 1990) (agreeing with
the lower court that ERISA’s duty of care requires “prudence, not
prescience”). What the appropriate methods are in a given
situation depends on the “character” and “aim” of the particular
plan and decision at issue and the “circumstances prevailing” at
the time a particular course of action must be investigated and
undertaken. 29 U.S.C. § 1104(a)(1)(B); see also Cunningham, 716
F.2d at 1467.
A fiduciary’s duty of care overlaps the duty of loyalty.
See Bierwirth, 680 F.2d at 271. The presence of conflicting
29
interests imposes on fiduciaries the obligation to take
precautions to ensure that their duty of loyalty is not
compromised. As we have noted, “[t]he level of precaution
necessary to relieve a fiduciary of the taint of a potential
conflict should depend on the circumstances of the case and the
magnitude of the potential conflict.” Metzler, 112 F.3d at 213.
To ensure that actions are in the best interests of plan
participants and beneficiaries, fiduciaries under certain
circumstances may have to “at a minimum” undertake an “intensive
and scrupulous independent investigation of [the fiduciary’s]
options.” Leigh I, 727 F.2d at 125-26 (citing Bierwirth, 680 F.2d
at 272). In some instances, the only open course of action may
be to appoint an independent fiduciary.15 See Leigh I, 727 F.2d
at 125; Bierwirth, 680 F.2d at 271-72.
With regard to the duty of care in the circumstances of this
case, IB 95-1 states that ERISA “requires, at a minimum, that
plan fiduciaries conduct an objective, thorough and analytical
search for the purpose of identifying and selecting providers
from which to purchase annuities.” Id. § 2509.95-1(c). The
15
The district court noted that “[a]lthough the statute
lists loyalty separately from prudence, they certainly overlap;
satisfying the prudence requirement may fulfill the duty of
loyalty.” Bussian v. RJR Nabisco, Inc., 21 F. Supp. 2d 680, 685
(S.D. Tex. 1998) (citing Riley v. Murdock, 890 F. Supp. 444, 459
(E.D.N.C. 1995), aff’d, No. 95-2414, 1996 WL 209613 (4th Cir.
Apr. 30, 1996) (unpublished)). We agree that conducting an
investigation that is structured to remove the taint associated
with conflicting interests goes a long way toward satisfying the
duty of loyalty.
30
Bulletin notes several factors that should be considered in the
search, including the “quality and diversification” of an
insurer’s portfolio, the size of the insurer, the insurer’s
exposure to liability, and the safety provided by the structure
of the annuity contract. See id. § 2509.95-1(c)(1)-(5).
“Reliance solely on ratings provided by insurance rating services
would not be sufficient . . . .” Id. § 2509.95-1(c). The
Bulletin suggests that fiduciaries with a conflict of interest
take special precautions in a reversion situation. It exhorts
such fiduciaries “to obtain and follow independent expert advice
calculated to identify those insurers with the highest claims-
paying ability willing to write the business.” Id. § 2509.95-
1(e).
We view the Bulletin’s description of the nature of the
investigation to be undertaken in the circumstances of this case
as fully consistent with ERISA’s provisions and with courts’
holdings, including our own. See, e.g., Laborers, 173 F.3d at
317. When selecting an annuity provider to facilitate the
termination of a vastly over-funded defined benefit pension plan,
the plan’s fiduciary must structure and conduct a “careful and
impartial investigation” aimed at identifying providers whose
annuity the fiduciary may “reasonably conclude best to promote
the interests of participants and beneficiaries” of the plan.
Bierwirth, 680 F.2d at 271. Of course, many factors must be
31
weighed in determining which provider or providers are best-
suited to promote those interests.
In this regard, we find the factors enumerated in IB 95-1
instructive. The relevant inquiry in any case is whether the
fiduciary, in structuring and conducting a thorough and impartial
investigation of annuity providers, carefully considered such
factors and any others relevant under the particular
circumstances it faced at the time of decision. If so, a
fiduciary satisfies ERISA’s obligations if, based upon what it
learns in its investigation, it selects an annuity provider it
“reasonably concludes best to promote the interests of [the
plan’s] participants and beneficiaries.” Bierwirth, 680 F.2d at
271. If not, ERISA’s obligations are nonetheless satisfied if
the provider selected would have been chosen had the fiduciary
conducted a proper investigation. See Unisys II, 173 F.3d at
153-54 (affirming district court’s holding, after a bench trial,
that a hypothetical prudent person would have invested in
Executive Life guaranteed investment contracts for an ongoing
plan); Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 919 (8th
Cir. 1994) (“Even if a trustee failed to conduct an investigation
before making a decision, he is insulated from liability if a
hypothetical prudent fiduciary would have made the same decision
anyway.”).16
16
But see Brock v. Robbins, 830 F.2d 640, 646-47 (7th Cir.
(continued...)
32
A fiduciary must consider any potential conflict of
interest, such as a potential reversion of plan assets, and
structure its investigation accordingly. Engaging the services
of an independent, outside advisor may serve the dual purposes of
increasing the thoroughness and impartiality of the relevant
investigation, and of relieving the fiduciary of any taint of a
potential conflict. In the circumstances of this case, such
purposes are served when the outside advisor’s task is directed
to identifying the provider or providers that best promote the
beneficiaries’ interests.
Fiduciaries investigating annuity providers to facilitate
the termination of an over-funded defined benefit plan, like
fiduciaries in other circumstances, are entitled to rely on the
advice they obtain from independent experts. See Cunningham, 716
F.2d at 1474 (“ERISA fiduciaries need not become experts in the
valuation of closely-held stock—they are entitled to rely on the
expertise of others.”). Those fiduciaries may not, however, rely
blindly on that advice. See id. (“An independent appraisal is
not a magic wand that fiduciaries may simply waive over a
16
(...continued)
1987) (declining to apply the hypothetical prudent person
standard in a case where injunctive relief was sought because
“[w]hile monetarily penalizing an honest but imprudent trustee
whose actions do not result in a loss to the fund will not
further the primary purpose of ERISA, other remedies such as
injunctive relief can further the statutory interests”).
Therefore, the relief sought may impact whether the hypothetical
prudent person standard is appropriate.
33
transaction to ensure that their responsibilities are fulfilled.
It is a tool and, like other tools, is useful only if used
properly.”); Howard v. Shay, 100 F.3d 1484, 1490 (9th Cir. 1996)
(“Conflicted fiduciaries do not fulfill ERISA’s investigative
requirements by merely hiring an expert.”), cert. denied, 520
U.S. 1237 (1997); Donovan v. Mazzola, 716 F.2d 1226, 1234 (9th
Cir. 1983) (“[R]eliance on counsel’s advice, without more, cannot
be a complete defense to an imprudence charge.”), cert. denied,
464 U.S. 1040 (1984); Bierwirth, 680 F.2d at 272. In order to
rely on an expert’s advice, a “fiduciary must (1) investigate the
expert’s qualifications, (2) provide the expert with complete and
accurate information, and (3) make certain that reliance on the
expert’s advice is reasonably justified under the circumstances.”
Howard, 100 F.3d at 1489 (citing Cunningham, 716 F.2d at 1467,
1474) (other citation omitted); see also Hightshue v. AIG Life
Insurance Co., 135 F.3d 1144, 1148 (7th Cir. 1998); In re Unisys
Sav. Plan Litig., 74 F.3d 420, 435-36 (3d Cir. 1996) (“Unisys I”)
(“[W]e believe that ERISA’s duty to investigate requires
fiduciaries to review the data a consultant gathers, to assess
its significance and to supplement it where necessary.”).
A determination whether a fiduciary’s reliance on an expert
advisor is justified is informed by many factors, including the
expert’s reputation and experience, the extensiveness and
thoroughness of the expert’s investigation, whether the expert’s
opinion is supported by relevant material, and whether the
34
expert’s methods and assumptions are appropriate to the decision
at hand. See, e.g., Hightshue, 135 F.3d at 1148; cf. Howard, 100
F.3d at 1490 (“To justifiably rely on an independent appraisal, a
conflicted fiduciary need not become an expert in the valuation
of closely held corporations. But the fiduciary is required to
make an honest, objective effort to read the valuation,
understand it, and question the methods and assumptions that do
not make sense.”). The goal is not to duplicate the expert’s
analysis, but to review that analysis to determine the extent to
which any emerging recommendation can be relied upon. Cf.
Cunningham, 716 F.2d at 1474 (holding that fiduciaries, who had
information available to them indicating that assumptions
underlying an expert’s appraisal were no longer valid, breached
their duties under ERISA by not analyzing the effect of changes
on those assumptions).
Just as with experts’ advice, blind reliance on credit or
other ratings is inconsistent with fiduciary standards. See
Pilkington, 72 F.3d at 1400 (“Legal authority does not support
[the fiduciaries’] contention that a mere ratings scan satisfied
their fiduciary duty of loyalty to the plan.”); Unisys I, 74 F.3d
at 436-37 (citing Cunningham in support of its determination that
whether a “rating was a reliable measure of Executive Life’s
financial status under the circumstances and whether Unisys was
capable of using the rating effectively” were matters to be
decided at trial). Reviewing the ratings assigned by different
35
rating agencies may be a good place to begin the inquiry, but it
certainly is not a proper place to end it.
As with an expert’s advice, fiduciaries must determine the
extent to which reliance on ratings is reasonably justified under
the circumstances. Some ratings agencies are more highly
regarded than others. Ratings in general reflect an agency’s
evaluation of a company, not its evaluation of a company’s
particular product line. Different agencies’ ratings reflect the
application of different methodologies. At any given time,
agencies’ ratings will vary as to their recency. As evidence in
the record before us suggests, an agency’s rating of a particular
company may be perceived by investors and industry insiders as
incorrect. Reports accompanying ratings provide fiduciaries with
a means of assessing the basis for the particular rating and of
identifying what additional information may need to be
considered. As with the use of experts, a fiduciary need not
duplicate the analysis conducted by the ratings agencies.
However, the duty of care imposes on the fiduciary an obligation
to ascertain the extent to which the ratings can be relied upon
in making the decision at hand.
Assuming a proper investigation has been conducted, a
fiduciary does not violate its duties under ERISA simply because
an action it determines best promotes participants’ and
beneficiaries’ interests “incidentally benefits the corporation.”
Bierwirth, 680 F.2d at 271. Appellants charge that RJR selected
36
Executive Life because it submitted the lowest bid and in so
doing, violated its duty of loyalty. RJR does not deny that cost
was a basis for its decision, and instead contends that it could
choose the lowest-cost provider under the circumstances. Under
the standard we apply, an annuity’s price cannot be the
motivating factor until the fiduciary reasonably determines,
through prudent investigation, that the providers under
consideration are comparable in their ability to promote the
interests of participants and beneficiaries. Without such a
prior determination, consideration of an annuity’s price, because
it directly benefits the employer, can be taken as evidence that
a fiduciary has placed an interest in a reversion above the
interests of plan beneficiaries.
Of course, the comparison of annuity providers must be made
considering factors relevant to plan beneficiaries’ and
participants’ interests.17 As a general matter, we expect that a
proper investigation of potential annuity providers will reveal
that each has its own “warts.” We do not view the presence of
such blemishes, by itself, to be sufficient to cause a fiduciary
17
Price alone is not a good indicator, one way or the
other, of an annuity provider’s ability to promote the interests
of participants and beneficiaries. While a lower price may be
related to the provider’s belief that it will earn a higher rate
of return on its portfolio, which may indicate that its portfolio
contains riskier investments, its bid may also be indicative of
its ability to administer the annuity more efficiently, of its
willingness to write the business based on its business strategy,
or of its view of how the proposed obligations will compliment
its investment portfolio.
37
to eliminate those providers from further consideration. The
issue is whether a provider’s warts, viewed qualitatively and
quantitatively, are such that a prudent person in like
circumstances would determine that the purchase of that
provider’s annuity was not in the best interests of plan
beneficiaries and participants. Having concluded that all
remaining providers are comparable in their ability to serve the
best interests of plan beneficiaries and participants, a
fiduciary does not violate ERISA’s commands by subsequently
considering which provider offers its annuity at a lower price.
C. RJR’s Compliance with its Fiduciary Obligation
Keeping in mind the standards set forth above, we must
determine whether reasonable and fair-minded persons could
conclude from the summary judgment evidence that RJR breached its
fiduciary duties in selecting Executive Life’s annuity. Based
upon a careful review of the record in this case, we conclude
that it was inappropriate for the district court to grant summary
judgment in favor of RJR. Viewing the evidence in the light most
favorable to Appellants, a reasonable factfinder could conclude
that RJR failed to structure, let alone conduct, a thorough,
impartial investigation of which provider or providers best
served the interests of the participants and beneficiaries. Even
if the factfinder were to conclude that RJR’s investigation was
38
appropriate, it could conclude, based on the evidence, that RJR
could not reasonably determine that Executive Life best promoted
the interests of plan participants and beneficiaries. Finally,
moving on to the hypothetical prudent person standard, a
reasonable factfinder could also conclude that Executive Life was
not an objectively reasonable choice based upon the information
RJR should have gathered.
1. The Investigation
A reasonable factfinder could conclude that RJR did not
structure or conduct an independent and impartial investigation
directed to identifying a carrier that it could “reasonably
conclude [was] best to promote the interests of participants and
beneficiaries” of the plan.18 Bierwirth, 680 F.2d at 271. Given
the decision to terminate a defined benefit plan, the primary
interest of participants and beneficiaries was in the full and
timely payment of their promised benefits. The record shows that
RJR employed Buck to assist it in selecting an annuity provider,
and looked to Buck to assess the solvency and safety of the
18
It may be inferred from our conclusion that we reject
the standard apparently applied below: “The plaintiffs could
show imprudence only if [RJR] knew of the problems [of Executive
Life] and what eventually would happen and then, without
additional investigation or consideration, blindly charged
ahead.” Bussian, 21 F. Supp. 2d at 686.
39
bidding companies.19 Overgard, a Buck consultant, stated in his
deposition that his analysis of the insurers’ financial health
was limited to a review of the rating agencies’ ratings and
reports. He also stated that he had spent less time on
evaluating companies than, as Overgard put it, “on stuff that
[Buck] had been hired to do, and that is to work with the
insurance companies to get the best bids.”
Overgard, who was responsible for compiling an initial list
of insurance companies that could provide the annuity,
determined, after a discussion with a colleague, that Executive
Life ought not be included on that list because it used a
nontraditional investment strategy that featured a high
percentage of low-quality bonds. When the list compiled by its
expert did not include Executive Life, Tyner specifically
requested that the company be added because its expected lower
bid could be used to drive down the bids of other providers.
Tyner, at the time he requested Executive Life be included, did
not think that “Executive Life should be seriously considered in
the final bidding process.” He anticipated that another, “more
well-known” company would ultimately be selected.
19
It is unclear from the record whether RJR explicitly
told Buck of its selection criteria. Tyner indicated that RJR
required that Buck identify AAA companies. Overgard, on the
other hand, stated that he assumed that RJR would want companies
that received an AAA rating from at least one agency.
40
The record contains evidence that Overgard undertook some
investigation of Executive Life beyond his examination of the
ratings (e.g., determining that Moody’s had not talked with
Executive Life management prior to assigning its rating, talking
with investment bankers, pursuing industry intelligence).20 He
found opinions regarding Executive Life to be mixed, with some
industry insiders viewing the company’s investment strategy as
bad. Again, Overgard did not review any of Executive Life’s
financial statements, reports, or disclosures, or conduct a
special financial analysis of Executive Life or any other
provider. The record indicates that Overgard was not aware that
California regulators were looking into Executive Life’s
reinsurance practices, and did not recall whether he knew, prior
to the final bid day, that states’ regulators had capped, or were
considering capping, insurance companies’ investment in low-
quality bonds. In Overgard’s opinion, positive attributes, such
as Executive Life working the case harder, being more
professional, and asking more questions, kept the company on the
20
Although Overgard stated in his affidavit that he also
made inquiries into the reinsurance problems of Executive Life of
New York because he had learned prior to August 12, 1987 that the
company had been fined by New York regulators, he indicated in
his deposition that he did not recall whether he was aware of the
fine levied against the New York insurer, or of New York
regulators disallowing $150 million of reinsurance prior to final
bid day. He also stated in his deposition that he may have
talked to someone at Executive Life about the reinsurance issue,
but had no recollection of the conversation. Overgard’s
deposition was dated March 18, 1992; his affidavit was dated
April 21, 1992.
41
list. A reasonable factfinder could conclude that Buck included
Executive Life on the final list of bidders in spite of its
nontraditional investment strategy specifically because of the
request of RJR, its client. Executive Life’s low bid could not
be used to drive down the bids of other providers unless it was
included on the final list.
The record also includes indications that RJR did not
ascertain, prior to selecting Executive Life, what Overgard had
done to assess the safety of the companies interested in RJR’s
business other than look at the ratings, which Overgard had
provided to RJR.21 It could be concluded based on evidence in
the record that despite RJR’s request that Executive Life be
placed on the list to drive down other providers’ bids, RJR did
not ascertain the basis for Buck’s statement that the company was
“qualified.” A reasonable factfinder could also conclude that
RJR failed to assess the basis for Buck’s statement that all four
providers were “qualified” to provide the annuity, cf. Unisys I,
74 F.3d at 435-36 (concluding, when confronted with similar
evidence, that summary judgment in favor of the defendant was
inappropriate), and failed to ascertain whether Buck’s statement
meant that RJR could view each of the companies as comparable.
21
Although Executive Life’s administrative capability is
not challenged in this litigation, the record also contains
indications that RJR did not ascertain what Overgard had done to
assess that capability. Shultz’s view that all four companies
were able to perform the contract was based on the fact that Buck
included each company on its final list.
42
Focusing on whether RJR undertook activities to investigate
the safety of the carriers interested in bidding, a reasonable
factfinder could conclude that the company relied entirely on
ratings that Buck provided it.22 The record indicates that RJR
looked to those ratings to examine the safety of Executive
Life.23 Both Shultz and Tyner stated that they had not read the
accompanying reports. Tyner assumed that negative information
that existed would be reflected in agency ratings. In his
deposition, Tyner stated that to his knowledge, no one checked
why Moody’s had given Executive Life a lower rating. Tyner also
stated that he did not look at Executive Life’s annual reports or
SEC filings. As with Buck’s recommendation, a factfinder could
conclude that RJR failed to assess the extent to which it was
justified in relying upon the ratings assembled by Buck, and that
the bulk of RJR’s investigation was a review of those ratings.24
22
There is arguably a fact question as to which of the
ratings RJR relied upon. For example, Tyner stated in his
deposition (1) that all four ratings were used, (2) that the
Moody’s rating was ignored, and (3) that the S&P rating was the
main criterion. Shultz suggested that three ratings were used:
S&P’s, Conning’s and Best’s.
23
In evaluating Executive Life for purposes of the earlier
bidding on guaranteed investment contracts, Tyner looked only to
the provider’s ratings.
24
The court below suggested that the investigation
undertaken by RJR was similar to that undertaken by the defendant
in Riley v. Murdock, 890 F. Supp. 444 (E.D.N.C. 1995). See
Bussian, 21 F. Supp. 2d at 685. We disagree with this assessment.
The defendant in Riley undertook an extensive independent
investigation:
(continued...)
43
A factfinder could conclude that the absence of an
independent investigation by RJR is made more egregious by the
fact that Shultz (who bore the responsibility for making the
final decision on behalf of RJR) apparently possessed a good deal
of information about Executive Life and the emerging problems in
the market for low-quality bonds. See Part I supra. Yet he did
nothing to ascertain whether Tyner was in possession of that
information, let alone whether he had conducted further
investigation (either personally or through Buck) to determine
24
(...continued)
The committee also retained a law firm and conducted its own
investigation of each insurance company that bid on the
annuity contract. This investigation included: (1) a
financial analysis; (2) personal contact with the companies’
senior management; (3) a review of financial statements,
quarterly reports and other relevant financial documents;
(4) consultation with Conning & Company, a firm specializing
in the evaluation of insurance companies; (5) consulting
with independent sources about Executive Life; and, (6)
consulting with other companies that had bought annuity
contracts from Executive Life. The committee also relied on
the fact that Executive Life had received a high rating in
1986 from A.M. Best, the preeminent authority rating
insurance companies. The committee also knew that Executive
Life received a AAA rating from Standard & Poor’s, the
highest rating that company gives, and the stock of its
parent company was also highly rated. The committee also
made certain that Executive Life had the administrative
capabilities to oversee disbursement of Plan funds.
Riley, 890 F. Supp. at 458 (citations omitted). In reproducing
this list of activities, we do not intend to suggest that a
fiduciary must, in all circumstances, undertake each activity.
We wish merely to highlight the substantial difference in the
nature of the independent investigation undertaken in Riley and
that undertaken by RJR.
44
that Executive Life was a provider qualified to be on the final
list.
A factfinder could conclude that as far as RJR knew on
August 12, 1987, its investigation of the providers involved (1)
hiring Buck, which scanned the ratings, and (2) scanning the
ratings itself. RJR asserts that this represents the normal
investigation undertaken at the time by fiduciaries purchasing
annuities from insurance companies that are heavily regulated by
the states, and points to a statement of one of its experts, who
had not acted as a fiduciary, for support for this contention.
However, the record also contains statements from Appellants’
experts, three of whom had acted as a fiduciary, that RJR’s
practices breached its fiduciary duties. Given this case is
before us on summary judgment, we leave to the factfinder the
task of making credibility assessments. See Anderson, 477 U.S.
at 255 (“Credibility determinations, the weighing of the
evidence, and the drawing of legitimate inferences from the facts
are jury functions, not those of a judge, whether he is ruling on
a motion for summary judgment or for a directed verdict.”). We
note that a reasonable factfinder could conclude from the
evidence that application of the “normal” investigation was not
sufficient under the circumstances. Executive Life’s investment
strategy deviated significantly from the norm, was comparatively
untested, and was the subject of debate among industry insiders.
45
Moreover, evidence in the record suggests that some investors
viewed Executive Life’s S&P rating as incorrect.
In short, a reasonable factfinder could conclude from
evidence in the record that RJR made an insufficient attempt to
identify which provider or providers was best positioned to
promote the interests of the participants and beneficiaries.
Based upon its lack of understanding of the basis for Buck’s
statement that all four bidders on the final list were
“qualified,” its failure to assess the extent to which ratings
could be reasonably relied upon, and its failure to consider
factors beyond ratings provided by Buck, a reasonable factfinder
could conclude that RJR failed to structure and conduct a prudent
investigation. Even if it had long been the practice of those
purchasing annuities to rely solely on a ratings scan, a
factfinder could conclude that such an investigation was
inappropriate in light of lack of experience that the industry,
and its regulators, had with Executive Life’s investment
strategy. Were a factfinder to conclude that RJR’s investigation
was inadequate under the circumstances, RJR would no longer be
entitled to rely on the reasonableness of its final selection
based upon the information its investigation produced.
Even if RJR’s investigation were to be found proper, a
reasonable factfinder could conclude that RJR, based on the
information it had, was unreasonable in considering the four
providers comparable in their ability to serve the interests of
46
plan beneficiaries and participants. The record indicates that
the four companies were identical in only one dimension — the
ratings given by S&P. Beyond this, there was variation in the
ratings given to the four companies, with Executive Life
receiving a Moody’s rating two grades lower than AAA. A
factfinder could conclude that Shultz was aware of a number of
facts regarding Executive Life, including that over 50% of its
portfolio was in low-quality bonds, that in this way Executive
Life was unusual among insurance companies, and that there was
mixed opinion regarding both Executive Life’s strategy
(involving, as it did, investing over 50% of its portfolio in
low-quality bonds) and the soundness of investing in low-quality
bonds generally. Shultz understood the connection between Drexel
and Executive Life, and that Executive Life came within the scope
of then-ongoing government investigations. Shultz had not seen
the same variation in views of the other companies as he had seen
with Executive Life. There is evidence in the record that of the
final four companies, RJR first used price to reduce the field to
two, and then simply went with the lowest bidder. For example,
Aetna was dropped from consideration midday because of price;
Prudential and Executive Life were considered further because
they were the low bidders. Executive Life was chosen over
Prudential because of price. From this, and other evidence in
47
the record,25 a reasonable factfinder could conclude that RJR
placed its interests in the reversion ahead of the beneficiaries’
interests in full and timely payment of their benefits.
2. The Hypothetical Prudent Person Standard
Similarly, a reasonable factfinder could conclude that
Executive Life was not an appropriate choice based upon the
investigation that RJR should have conducted. There is evidence
that many voices in the industry had concerns about Executive
Life’s investment strategy — a strategy that was substantially
different from that used by the industry and that had not stood
the test of time. As such, there was more uncertainty (and more
associated risk) with Executive Life than with the other
candidates. A factfinder could conclude on this basis alone that
a prudent person would not select Executive Life’s annuity over
the annuities offered by those candidates.
25
For example, when Tyner was asked if, taking price out
of consideration and assuming that Aetna, Prudential and
Executive Life had an AAA rating, he had also known of eight
publicly available facts about Executive Life and the market for
low-quality bonds (e.g., the percentage of Executive Life’s
portfolio in low-quality bonds, the relationship between First
Executive and Drexel, the fine on Executive Life of New York,
California regulators’ examination of $188 million of Executive
Life’s reinsurance, that California regulators were considering
capping insurance companies’ investment in low-quality bonds), it
would be prudent to choose Executive Life, Tyner responded,
“Well, if all other things are equal, then it would obviously be
better to go with another one but all other things weren’t equal
. . . There was a difference in price.”
48
The record supplies the factfinder with considerable
additional evidence that leads to the same conclusion. A
factfinder could conclude from evidence in the record that the
vast majority of insurance companies at the time rejected the
type of investment strategy that Executive Life had adopted,
despite Executive Life’s ability to underbid other firms and
their resulting economic incentive to adopt a similar strategy.
Evidence in the record also suggests that some were critical of
S&P giving a high rating to Executive Life, that Duff & Phelps
gave the company its ninth rating, and that Moody’s had assigned
its lower rating to Executive Life in part because of the quality
of its bonds. Moreover, Executive Life was, during the relevant
period, under investigation by both New York and California
regulators. New York regulators had levied a hefty fine against
Executive Life’s New York subsidiary, and had placed a cap (of
20%) on the low-quality bond holdings of insurance companies that
state regulated. Documentation filed by First Executive
indicated that the company saw adoption of caps by New York
regulators as threat to its future growth, competitiveness, and
profitability. Other states’ regulators, including those in
California, were considering capping investment in such bonds.
Although evidence was presented that investment banking firms (in
addition to Drexel) were eager to make a market in low-quality
bonds, there is also evidence that the low-quality bond market as
a whole would suffer as a result of investigations of Drexel that
49
were ongoing at the time RJR chose Executive Life. There is
evidence that one reputable consultant had removed Executive Life
from its Approved List in 1985. A reasonable factfinder could
conclude that an appropriate investigation would have revealed
this information and that such information, when weighed against
the information that should have been gathered on other
providers, would cause a fiduciary to eliminate Executive Life as
a final candidate well before price could be legitimately
considered. Cf. Pilkington, 72 F.3d at 1401-02 (holding that
summary judgment in favor of defendant was inappropriate where
evidence in the record indicated the investigation of Executive
Life relied on a “mere ratings scan,” that “voices in the
insurance industry had expressed misgivings about the soundness
of those ratings,” and that “reversion maximization figured
prominently in [the sponsor’s] spin-off/plan termination
decision”); Unisys I, 74 F.3d at 435-37 (holding that summary
judgment in favor of the defendant was inappropriate given, inter
alia, evidence that allowed a factfinder to infer that Unisys
“failed to analyze the bases underlying [its expert’s] opinion of
Executive Life’s financial condition and to determine for itself
whether credible data supported [the expert’s] recommendation,” a
subsequent investigation “consisted of nothing more than
confirming that Executive Life’s credit ratings had not changed,”
and evidence in the record that raised issues as to whether
reliance on ratings was justified).
50
Given the factual differences between the two cases and the
fact-specific nature of our inquiry, we do not view Unisys II,
173 F.3d 145 (3d Cir. 1999), as dictating a different conclusion.
In that case, the court affirmed the lower court’s determination,
after a bench trial and additional findings of fact, that the
fiduciaries’ purchase of Executive Life guaranteed investment
contracts did not violate ERISA. We note that although those
fiduciaries were buying products sold by Executive Life, they
were not buying an annuity to facilitate the termination of a
defined benefit pension plan. The investments at issue
constituted only 15-20% of a fund that was just part of the
retirement plan at issue in that case. See id. at 152 n.10. As
a result, we do not find Unisys II’s ultimate conclusion
dispositive.26
For similar reasons, we also do not regard Riley v. Murdock,
890 F. Supp. 444 (E.D.N.C. 1995), aff’d, No. 95-2414, 1996 WL
209613 (4th Cir. Apr. 30, 1996) (unpublished), as dispositive.
In that case, as in this, an Executive Life group annuity was
purchased to facilitate the termination of an over-funded defined
benefit pension plan. The Riley court explained that to assess
prudence it first inquired “whether the fiduciary employed the
26
For the same reasons, the district court’s ultimate
finding in Bruner v. Boatmen’s Trust Company, 918 F. Supp. 1347,
1354 (E.D. Mo. 1996), that plan fiduciaries had breached their
duties under ERISA by investing a significant portion of plan
assets in Executive Life guaranteed investment contracts is not
dispositive.
51
appropriate methods to diligently investigate the transaction.”
890 F. Supp. at 458. Next, it determined whether “the decision
ultimately made was reasonable based upon the information
resulting from the investigation.” Id. The court detailed the
extensive actions taken by the fiduciaries in that case,
explained that the plaintiffs had presented no evidence that the
fiduciaries should have known about problems with Executive Life
in 1986, and concluded, “[a]ll of these efforts establish that
[the fiduciaries] thoroughly investigated the purchase of the
annuity from Executive Life and that the decision to purchase was
reasonable based on the results of that investigation.” Id.
(emphasis added).
The Riley court’s conclusion can not be translated into a
pronouncement that the purchase of an Executive Life group
annuity to facilitate plan termination was objectively reasonable
in 1987 regardless of the investigation conducted. Not only did
RJR have an additional year of information available to it, but
the Riley court never addressed the objective prudence of a
decision to invest in an Executive Life group annuity. Finding
that the fiduciaries in that case conducted a prudent
investigation and that their decision was reasonable based upon
that investigation, the Riley court did not have cause to apply
the hypothetical prudent person standard.
52
III. CLASS CERTIFICATION
The district court denied the motion to certify a class for
the reason that “neither of the named plaintiffs will recover
anything by this suit.” Bussian, 21 F. Supp. 2d at 684. We have
concluded that summary judgment was inappropriate. Under the
circumstances, it seems appropriate to vacate the district
court’s order denying class certification and allow it to
consider the issue more fully on remand.
IV. CONCLUSION
For the foregoing reasons, the grant of summary judgment in
favor of RJR is REVERSED, and the order denying class
certification is VACATED. The case is REMANDED to the district
court. Costs shall be borne by RJR.
53