Richard Tatum v. RJR Pension Investment Committee

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 13-1360
RICHARD G. TATUM, individually and on behalf of a class of
all other persons similarly situated,
Plaintiff - Appellant,
v.
RJR PENSION INVESTMENT COMMITTEE; RJR EMPLOYEE BENEFITS
COMMITTEE; R.J. REYNOLDS TOBACCO HOLDINGS, INC.; R.J.
REYNOLDS TOBACCO COMPANY,
Defendants - Appellees.
---------------------------------------------------
AARP; NATIONAL EMPLOYMENT LAWYERS ASSOCIATION; THOMAS E.
PEREZ, Secretary of the United States Department of Labor,
Amici Supporting Appellant,
CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA;
AMERICAN BENEFITS COUNCIL,
Amici Supporting Appellees.
Appeal from the United States District Court for the Middle
District of North Carolina, at Greensboro. N. Carlton Tilley,
Jr., Senior District Judge. (1:02-cv-00373-NCT-LPA)
Argued: March 18, 2014 Decided: August 4, 2014
Before WILKINSON, MOTZ, and DIAZ, Circuit Judges.
Affirmed in part, vacated in part, reversed in part, and
remanded by published opinion. Judge Motz wrote the majority
opinion, in which Judge Diaz joined. Judge Wilkinson wrote a
dissenting opinion.
ARGUED: Catha Worthman, LEWIS, FEINBERG, LEE, RENAKER & JACKSON,
P.C., Oakland, California, for Appellant. Adam Howard Charnes,
KILPATRICK TOWNSEND & STOCKTON LLP, Winston-Salem, North
Carolina, for Appellees. Michael R. Hartman, UNITED STATES
DEPARTMENT OF LABOR, Washington, D.C., for Amicus Thomas E.
Perez, Secretary of the United States Department of Labor. ON
BRIEF: Jeffrey G. Lewis, LEWIS, FEINBERG, LEE, RENAKER &
JACKSON, P.C., Oakland, California; Robert M. Elliot, Helen L.
Parsonage, ELLIOT MORGAN PARSONAGE, Winston-Salem, North
Carolina; Kelly M. Dermody, Daniel M. Hutchinson, LIEFF CABRASER
HEIMANN & BERNSTEIN, LLP, San Francisco, California, for
Appellant. Daniel R. Taylor, Jr., Richard D. Dietz, Chad D.
Hansen, Thurston H. Webb, KILPATRICK TOWNSEND & STOCKTON LLP,
Winston-Salem, North Carolina, for Appellees. Ronald Dean,
RONALD DEAN ALC, Pacific Palisades, California; Rebecca Hamburg
Cappy, NATIONAL EMPLOYMENT LAWYERS ASSOCIATION, San Francisco,
California; Mary Ellen Signorille, AARP FOUNDATION LITIGATION,
Washington, D.C.; Melvin Radowitz, AARP, Washington, D.C., for
Amici AARP and National Employment Lawyers Association. Hollis
T. Hurd, THE BENEFITS DEPARTMENT, Bridgeville, Pennsylvania;
Kathryn Comerford Todd, Steven P. Lehotsky, Jane E. Holman,
NATIONAL CHAMBER LITIGATION CENTER, Washington, D.C.; Janet M.
Jacobson, AMERICAN BENEFITS COUNCIL, Washington, D.C., for Amici
Chamber of Commerce of the United States of America and American
Benefits Council. M. Patricia Smith, Solicitor of Labor,
Timothy D. Hauser, Associate Solicitor for Plan Benefits
Security, Elizabeth Hopkins, Counsel for Appellate and Special
Litigation, Stephanie Lewis, UNITED STATES DEPARTMENT OF LABOR,
Washington, D.C., for Amicus Thomas E. Perez, Secretary of the
United States Department of Labor.
2
DIANA GRIBBON MOTZ, Circuit Judge:
This is an appeal from a judgment in favor of R.J. Reynolds
Tobacco Company and R.J. Reynolds Tobacco Holdings, Inc.
(collectively “RJR”). Richard Tatum brought this suit on behalf
of himself and other participants in RJR’s 401(k) retirement
savings plan (collectively “the participants”). He alleges that
RJR breached its fiduciary duties under the Employee Retirement
Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq., when it
liquidated two funds held by the plan on an arbitrary timeline
without conducting a thorough investigation, thereby causing a
substantial loss to the plan.
After a bench trial, the district court found that RJR did
indeed breach its fiduciary duty of procedural prudence and so
bore the burden of proving that this breach did not cause loss
to the plan participants. But the court concluded that RJR met
this burden by establishing that “a reasonable and prudent
fiduciary could have made [the same decision] after performing
[a proper] investigation.” Tatum v. R.J. Reynolds Tobacco Co.,
926 F. Supp. 2d 648, 651 (M.D.N.C. 2013) (emphasis added). We
affirm the court’s holdings that RJR breached its duty of
procedural prudence and therefore bore the burden of proof as to
causation. But, because the court then failed to apply the
correct legal standard in assessing RJR’s liability, we must
3
reverse its judgment and remand the case for further proceedings
consistent with this opinion.
I.
A.
In March 1999, fourteen years after the merger of Nabisco
and R.J. Reynolds Tobacco into RJR Nabisco, Inc., the merged
company decided to separate its food business, Nabisco, from its
tobacco business, R.J. Reynolds. The company determined to do
this through a spin-off of the tobacco business. The impetus
behind the spin-off was the negative impact of tobacco
litigation on Nabisco’s stock price, a phenomenon known as the
“tobacco taint.” As the district court found, “[t]he purpose of
the spin-off was to ‘enhance shareholder value,’ which included
increasing the value of Nabisco by minimizing its exposure to
and association with tobacco litigation.” Id. at 658-59.
Prior to the spin-off, RJR Nabisco sponsored a 401(k) plan,
which offered its participants the option to invest their
contributions in any combination of eight investment funds. The
plan offered six fully diversified funds -- some containing
investment contracts, fixed-income securities, and bonds; some
containing a broad range of domestic or international stocks;
and some containing a mix of stocks and bonds. The plan also
offered two company stock funds -- the Nabisco Common Stock
4
Fund, which held common stock of Nabisco Holdings Corporation,
and the RJR Nabisco Common Stock Fund, which held stock in both
the food and tobacco businesses. After the spin-off, the RJR
Nabisco Common Stock Fund was divided into two separate funds:
the Nabisco Group Holdings Common Stock Fund (“Nabisco
Holdings”), which held the stock from the food business, and the
RJR Common Stock Fund, which held the stock from the tobacco
business. 1
The 401(k) plan at issue in this case (“the Plan”) was
created on June 14, 1999, the date of the spin-off, by amendment
to the existing RJR Nabisco plan. The Plan expressly provided
for the retention of the Nabisco Funds as “frozen” funds in the
Plan. Freezing the Nabisco Funds permitted participants to
maintain their existing investments in the Nabisco Funds, but
prevented participants from purchasing through the Plan
additional shares of those funds. As the district court found,
“[t]here was no language in the [Plan] eliminating the Nabisco
Funds or limiting the duration in which the Plan would hold the
funds.” Id. at 657-58. The Plan also retained as investment
1
Thus, as a result of the spin-off, there were two funds
holding exclusively Nabisco stock: the Nabisco Common Stock
Fund, which existed prior to the spin-off, and the Nabisco Group
Holdings Common Stock Fund, which was created as a result of the
spin-off. We refer to these two funds collectively as the
“Nabisco Funds.”
5
options the six diversified funds offered in the pre-spin-off
plan, as well as the RJR Common Stock Fund.
The Plan named as Plan fiduciaries two committees composed
of RJR officers and employees: the Employee Benefits Committee
(“Benefits Committee”), responsible for general Plan
administration, and the Pension Investment Committee
(“Investment Committee”), responsible for Plan investments. The
Plan vested the Benefits Committee with authority to make
further amendments to the Plan by a majority vote of its members
at any meeting or by an instrument in writing signed by a
majority of its members.
Notwithstanding the requirement in the governing Plan
document that the Nabisco Funds remain as frozen funds in the
Plan, RJR determined to eliminate them from the Plan. RJR
further determined to sell the Nabisco Funds approximately six
months after the spin-off. These decisions were made at a March
1999 meeting by a “working group,” which consisted of various
corporate employees. Id. at 656-57. But, as the district court
found, the working group “had no authority or responsibility
under the then-existing Plan documents to implement any decision
regarding the pre-spin[-off] RJR Nabisco Holdings Plan, nor [was
it] later given authority to make or enforce decisions in the
[RJR] Plan documents.” Id. at 655.
6
According to testimony from members of the working group,
the group spent only thirty to sixty minutes considering what to
do with the Nabisco Funds in RJR’s 401(k) plan. The working
group “discussed reasons to remove the funds [from the plan] and
assumed that [RJR] did not want Nabisco stocks in its 401(k)
plan due to the high risk of having a single, non-employer stock
fund in the Plan.” Id. at 656. The members of the working
group also discussed “their [incorrect] belief that such funds
were only held in other [companies’] plans as frozen funds in
times of transition.” Id. Several members of the working group
“believed that a single stock fund in the plan would be an
‘added administrative complexity’ and incur additional costs.”
Id. But the group “did not discuss specifically what the
complexities were or the amount of costs of keeping the fund in
the Plan, as balanced against any benefit to participants.” Id.The working group agreed that the Nabisco Funds should be frozen
at the time of the spin-off and eventually eliminated from the
Plan. In terms of the timing of the divestment, a member of the
working group testified that “[t]here was a general discussion,
and different ideas were thrown out, would three months be
appropriate, would a year be appropriate, and everybody got very
comfortable with six months.” Id. There was no testimony as to
why six months was determined to be an appropriate timeframe.
7
The working group’s recommendation was reported back to
Robert Gordon, RJR’s Executive Vice President for Human
Resources and a member of both the Benefits Committee and the
Investment Committee. Gordon testified at trial that the
members of the Benefits Committee agreed with the working
group’s recommendation. But the district court found that aside
from this testimony, there was no evidence that the Benefits
Committee “met, discussed, or voted on the issue of eliminating
the Nabisco Funds or otherwise signed a required consent in lieu
of a meeting authorizing an amendment that would do so.” Id. at
657. 2
In the months immediately following the June 1999 spin-off,
the Nabisco Funds declined precipitously in value. Markets
reacted sharply to numerous class action tobacco lawsuits
pending against RJR, which continued to impact the value of
Nabisco stock as a result of the “tobacco taint.” Id. at 659-
60. Despite this decline in value, however, analyst reports
throughout 1999 and 2000 rated Nabisco stock positively,
“overwhelmingly recommending [to] ‘hold’ or ‘buy,’ particularly
after the spin-off.” Id. at 662.
2
In November 1999, Gordon drafted a purported amendment to
the Plan calling for the removal of Nabisco Funds from the Plan
as of February 1, 2000. Because a majority of the Benefits
Committee members neither voted on nor signed this amendment,
the district court found it invalid. Id. at 674 n.19. No party
challenges this ruling on appeal.
8
In early October 1999, various RJR human resources
managers, corporate executives, and in-house legal staff met to
discuss possible reconsideration of the decision made by the
working group in March to sell the Nabisco Funds. Id. at 661.
They decided against changing course, however, largely because
they feared doing so would expose RJR to liability from
employees who had already sold their shares of the Nabisco Funds
in reliance on RJR’s prior communications. Id. at 661-62. 3 The
working group considered that this perceived liability risk
could have been mitigated by temporarily unfreezing the Nabisco
Funds and allowing Plan participants to reinvest if desired.
But RJR was concerned that participants might view such action
as a recommendation to hold or reinvest in Nabisco Funds and
then blame RJR if the funds further declined. Id. at 661.
Moreover, RJR was concerned that keeping Nabisco Funds in
the Plan would require the fiduciaries “to monitor and
investigate them on a continuing basis and at significant
expense paid from the Plan’s trust.” Id. at 662. Nevertheless,
RJR decided against hiring “a financial consultant, outside
3
Apparently, no meeting attendee knew how many employees
had already sold their shares of the Nabisco Funds. Following
the meeting, RJR ascertained that the number of participants in
each of the Nabisco Funds had decreased by approximately 15-16%
as of September 30, 1999. Id. at 662. Thus, at the time the
attendees considered whether to change course, the vast majority
of employees still retained their shares in the Nabisco Funds.
9
counsel, and/or independent fiduciary to assist” it in resolving
these questions and “deciding whether and when to eliminate the
Nabisco Funds.” Id. Assertedly, this was so because RJR
believed that the Plan would have to pay the cost of such
assistance. Id. But, as the district court found, “[t]he issue
of monitoring the funds and how independent consultants were
paid was not discussed at length or investigated.” Id.Later in October 1999, RJR sent a letter to Plan
participants informing them that it would eliminate the Nabisco
Funds from the Plan as of January 31, 2000. Id. at 663-64. The
letter erroneously informed participants that the law did not
permit the Plan to maintain the Nabisco Funds. Specifically,
the letter stated: “Because regulations do not allow the Plan
to offer ongoing investment in individual stocks other than
Company stock, the ‘frozen’ [Nabisco] stock funds will be
eliminated.” Id. at 664 (alteration in original).
The human resources manager who drafted the letter
testified at trial that she did so at the direction of Gordon,
and that, at the time she prepared this letter, she knew the
statement was incorrect. Id. No lawyer reviewed the letter
before it was sent to participants. And, as the district court
found, the statement “was never corrected, even after
responsible RJR officials were informed that it was wrong.” Id.Rather, a second letter, sent in January 2000, repeated the
10
incorrect statement. “By that time,” the district court found,
“RJR’s managers, including its lawyers, had become aware that
the statement was false, but nevertheless permitted the
communication to be sent to participants.” Id.On January 27, 2000, days before the scheduled sale,
plaintiff Richard Tatum sent an e-mail to both Gordon and Ann
Johnston, Vice President for Human Resources and a member of the
Benefits Committee and the Investment Committee. In this e-
mail, Tatum asked that RJR not go through with the forced sale
of the Plan’s Nabisco shares because it would result in a 60%
loss to his 401(k) account. Tatum indicated that he wanted to
wait to sell his Nabisco stock until its price rebounded, and he
noted that company communications had been “optimistic” that
Nabisco stock would increase in value after the spin-off. He
also related his understanding that former RJR employees of
Winston-Salem Health Care and Winston-Salem Dental Care still
retained frozen Nabisco and RJR funds in their 401(k) plans,
even though those companies had been acquired by a different
company, Novant, in 1996. (This claim was later substantiated
through evidence at trial. See id. at 667 n.15.) In response
to Tatum’s concerns, Johnson replied that nothing could be done
to stop the divestment. Id. at 667.
On January 31, 2000, RJR went through with the divestment
and sold the Nabisco shares held by employees in their 401(k)
11
accounts. Between June 15, 1999 (the day after the spin-off)
and January 31, 2000, the market price for Nabisco Holdings
stock had dropped by 60% to $8.62 per share, and the price for
Nabisco Common Stock had dropped by 28% to $30.18 per share.
Id. at 665.
RJR invested the proceeds from the sale of the Nabisco
stock in the Plan’s “Interest Income Fund,” which consisted of
short-term investments, such as guaranteed investment contracts
and government bonds. Id. The proceeds remained in the
Interest Income Fund until a participant took action to reinvest
them in one of the other six funds offered in the Plan. Id. At
the same time as RJR eliminated Nabisco stocks from the
employees’ 401(k) Plan, several RJR corporate officers opted to
retain their personal Nabisco stock or stock options. Id. at
665-66.
A few months after the divestment, in the early spring of
2000, Nabisco stock began to rise in value. On March 30, Carl
Icahn made his fourth attempt at a takeover of Nabisco in the
form of an unsolicited tender offer to purchase Nabisco Holdings
for $13 per share. Id. at 666. The district court noted that
“[b]efore his unsolicited offer, Icahn had made three previous
attempts to take over Nabisco, between November 1996 and the
spring of 1999, and was well known to have an interest in the
company.” Id. This tender offer provoked a bidding war, and,
12
on December 11, 2000, Philip Morris acquired Nabisco Common
Stock at $55 per share and infused Nabisco Holdings with $11
billion in cash. RJR then purchased Nabisco Holdings for
approximately $30 per share. As compared to the January 31,
2000 divestment prices, these share prices represented an
increase of 247% for Nabisco Holdings stock and 82% for Nabisco
Common Stock. Id.B.
In May 2002, Tatum filed this class action against RJR as
well as the Benefits Committee and the Investment Committee,
asserting that they acted as Plan fiduciaries. Tatum alleged
that these Plan fiduciaries breached their fiduciary duties
under ERISA by eliminating Nabisco stock from the Plan on an
arbitrary timeline without conducting a thorough investigation.
He further claimed that their fiduciary breach caused
substantial loss to the Plan because it forced the sale of the
Plan’s Nabisco Funds at their all-time low, despite the strong
likelihood that Nabisco’s stock prices would rebound.
In 2003, the district court granted RJR’s motion to
dismiss, concluding that Tatum’s allegations involved “settlor”
rather than “fiduciary” actions, meaning that the decision to
eliminate the Nabisco Funds from the Plan was non-discretionary.
We reversed, holding that the Plan documents did not mandate
divestment of the Nabisco Funds, and thus did not preclude Tatum
13
from stating a claim against the defendants for breach of
fiduciary duty. Tatum v. R.J. Reynolds Tobacco Co., 392 F.3d
636, 637 (4th Cir. 2004).
On remand, the district court granted RJR’s motion to
dismiss the Benefits Committee and the Investment Committee as
defendants. After the limitations period had expired, Tatum
filed a motion seeking leave to amend his complaint to add the
individual committee members as defendants, which the court
denied. 4 The court then held a bench trial from January 13 to
February 9, 2010 to determine whether RJR breached its fiduciary
duties in eliminating the Nabisco Funds from the Plan.
On February 25, 2013, the court issued its final judgment,
containing detailed and extensive factual findings. The court
recognized (as we had held) that RJR’s decision to remove the
Nabisco Funds from the Plan was a fiduciary act subject to the
duty of prudence imposed by ERISA. Tatum, 926 F. Supp. 2d at
673. The court then held that (1) RJR breached its fiduciary
duties when it “decided to remove and sell Nabisco stock from
the Plan without undertaking a proper investigation into the
prudence of doing so,” id. at 651, and (2) as a breaching
4
Shortly thereafter, the district court certified a class
of Plan participants and beneficiaries whose investments in the
Nabisco Funds were sold by RJR in connection with the spin-off.
See Tatum v. R.J. Reynolds Tobacco Co., 254 F.R.D. 59, 62
(M.D.N.C. 2008). On appeal, RJR raises no challenge to this
certification.
14
fiduciary, RJR bore the burden of proving that its breach did
not cause the alleged losses to the Plan. But the court further
held that (3) RJR met its burden of proof because its decision
to eliminate the Nabisco Funds was “one which a reasonable and
prudent fiduciary could have made after performing such an
investigation.” Id. (emphasis added).
Tatum noted a timely appeal.
II.
Congress enacted ERISA to protect “the interests of
participants in employee benefit plans and their
beneficiaries . . . by establishing standards of conduct,
responsibility, and obligation for fiduciaries of employee
benefit plans, and by providing for appropriate remedies,
sanctions, and ready access to the Federal courts.” 29 U.S.C.
§ 1001(b). Consistent with this purpose, ERISA imposes high
standards of fiduciary duty on those responsible for the
administration of employee benefit plans and the investment and
disposal of plan assets. As the Second Circuit has explained,
“[t]he fiduciary obligations of the trustees to the participants
and beneficiaries of [an ERISA] plan are . . . the highest known
to the law.” Donovan v. Bierwirth, 680 F.2d 263, 272 n.8 (2d
Cir. 1982).
15
Pursuant to the duty of loyalty, an ERISA fiduciary must
“discharge his duties . . . solely in the interest of the
participants and beneficiaries.” 29 U.S.C. § 1104(a)(1). The
duty of prudence requires ERISA fiduciaries to 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.”
Id. § 1104(a)(1)(B). The statute also requires fiduciaries to
act “in accordance with the documents and instruments governing
the plan insofar as such documents and instruments are
consistent with [ERISA].” Id. § 1104(a)(1)(D). And fiduciaries
have a duty to “diversify[] 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.” Id.
§ 1104(a)(1)(C). However, legislative history and federal
regulations clarify that the diversification and prudence duties
do not prohibit a plan trustee from holding single-stock
investments as an option in a plan that includes a portfolio of
diversified funds. 5 Moreover, the diversification duty does not
5
See H.R. Rep. No. 93-1280 (1974) (Conf. Rep.), reprinted
at 1974 U.S.C.C.A.N. 5038, 5085-86 (clarifying that, in plans in
which the participant exercises individual control over the
assets in his individual account -- like the plan at issue here
-- “if the participant instructs the plan trustee to invest the
(Continued)
16
apply to investments that fall within the exemption for employer
stocks provided for in § 1104(a)(2).
A fiduciary who breaches the duties imposed by ERISA is
“personally liable” for “any losses to the plan resulting from
[the] breach.” Id. § 1109(a). Section 1109(a), ERISA’s
fiduciary liability provision, provides in full:
Any person who is a fiduciary with respect to a plan
who breaches any of the responsibilities, obligations,
or duties imposed upon fiduciaries by this subchapter
shall be personally liable to make good to such plan
any losses to the plan resulting from each such
breach, and to restore to such plan any profits of
such fiduciary which have been made through use of
assets of the plan by the fiduciary, and shall be
subject to such other equitable or remedial relief as
the court may deem appropriate, including removal of
such fiduciary.
Id. ERISA thus provides for both monetary and equitable relief,
and does not (as the dissent claims) limit a fiduciary’s
liability for breach of the duty of prudence to equitable
relief.
In determining whether fiduciaries have breached their duty
of prudence, we ask “whether the individual trustees, at the
time they engaged in the challenged transactions, employed the
appropriate methods to investigate the merits of the investment
full balance of his account in, e.g., a single stock, the
trustee is not to be liable for any loss because of a failure to
diversify or because the investment does not meet the prudent
man standards” so long as the investment does not “contradict
the terms of the plan”); see also 29 C.F.R. § 2550.404c–1(f)(5).
17
and to structure the investment.” DiFelice v. U.S. Airways,
Inc., 497 F.3d 410, 420 (4th Cir. 2007). Our focus is on
“whether the fiduciary engaged in a reasoned decision[-]making
process, consistent with that of a ‘prudent man acting in [a]
like capacity.’” Id. (quoting 29 U.S.C. § 1104(a)(1)(B)).
When the fiduciary’s conduct fails to meet this standard,
and the plaintiff has made a prima facie case of loss, we next
inquire whether the fiduciary’s imprudent conduct caused the
loss. For “[e]ven if a trustee failed to conduct an
investigation before making a decision,” and a loss occurred,
the trustee “is insulated from liability . . . if a hypothetical
prudent fiduciary would have made the same decision anyway.”
Plasterers’ Local Union No. 96 Pension Plan v. Pepper, 663 F.3d
210, 218 (4th Cir. 2011) (quoting Roth v. Sawyer-Cleator Lumber
Co., 16 F.3d 915, 919 (8th Cir. 1994)).
ERISA’s fiduciary duties “draw much of their content from
the common law of trusts, the law that governed most benefit
plans before ERISA’s enactment.” DiFelice, 497 F.3d at 417(quoting Varity Corp. v. Howe, 516 U.S. 489, 496 (1996)). Thus,
in interpreting ERISA, the common law of trusts informs a
court’s analysis. Id. “[T]rust law does not tell the entire
story,” however, because “ERISA’s standards and procedural
protections partly reflect a congressional determination that
the common law of trusts did not offer completely satisfactory
18
protection.” Varity Corp., 516 U.S. at 497. Therefore, courts
must be mindful that, in “develop[ing] a federal common law of
rights and obligations under ERISA,” Congress “expect[s] that”
courts “will interpret th[e] prudent man rule (and the other
fiduciary duties) bearing in mind the special nature and purpose
of employee benefit plans.” Id. (internal citations and
quotation marks omitted).
On appeal, Tatum argues that, although the district court
correctly determined that RJR breached its duty of procedural
prudence and so bore the burden of proving that its breach did
not cause the Plan’s loss, the court applied the wrong standard
for determining loss causation. He contends that the court
incorrectly considered whether a reasonable fiduciary, after
conducting a proper investigation, could have sold the Nabisco
Funds at the same time and in the same manner, as opposed to
whether a reasonable fiduciary would have done so.
In response, RJR contends that the district court applied
the appropriate causation standard. In the alternative, RJR
urges us to reverse the district court’s holdings that it
breached its duty of procedural prudence and that, as a
breaching fiduciary, it bore the burden of proving that its
breach did not cause the Plan’s loss.
“We review a judgment resulting from a bench trial under a
mixed standard of review -- factual findings may be reversed
19
only if clearly erroneous, while conclusions of law are examined
de novo.” Plasterers’, 663 F.3d at 215 (internal quotation
marks omitted).
III.
We first consider the district court’s finding that RJR
breached its duty of procedural prudence. 6
A.
ERISA requires fiduciaries to employ “appropriate methods
to investigate the merits of the investment and to structure the
investment” as well as to “engage[] in a reasoned decision[-
]making process, consistent with that of a ‘prudent man acting
in [a] like capacity.’” DiFelice, 497 F.3d at 420. The duty of
6
We can quickly dispose of RJR’s claim that it was not a
fiduciary subject to ERISA’s duty of prudence. RJR argues that
the Plan fiduciaries, the Benefits Committee and the Investment
Committee, exercised “exclusive fiduciary authority” over the
management and administration of the Plan and that RJR qua
employer is thus not liable as a Plan fiduciary. Appellee’s Br.
49. ERISA, however, does not limit fiduciary status to the
fiduciaries named in a plan document. Instead, ERISA provides
that a person or entity is a “functional fiduciary” to the
extent that he, she, or it “exercises any discretionary
authority or discretionary control respecting management . . .
or disposition of [the plan’s] assets.” 29 U.S.C. § 1002(21)(A)
(emphasis added). Recognizing this standard, the district court
held that RJR “made and implemented the elimination decision
before any official committee action was ever attempted and
failed to use the committees designated in the Plan . . . for
any of the discretionary decisions.” Tatum, 926 F. Supp. 2d at
672 n.18. Thus, we think it clear that RJR exercised actual
control over the management and disposition of Plan assets, and
so acted as a functional fiduciary.
20
prudence also requires fiduciaries to monitor the prudence of
their investment decisions to ensure that they remain in the
best interest of plan participants. Id. at 423.
“The evaluation is not a general one, but rather must
‘depend on the character and aim of the particular plan and
decision at issue and the circumstances prevailing at the
time.’” Id. at 420 (alteration omitted) (quoting Bussian v. RJR
Nabisco, Inc., 223 F.3d 286, 299 (5th Cir. 2000)). Of course, a
prudent fiduciary need not follow a uniform checklist. Courts
have found that a variety of actions can support a finding that
a fiduciary acted with procedural prudence, including, for
example, appointing an independent fiduciary, seeking outside
legal and financial expertise, holding meetings to ensure
fiduciary oversight of the investment decision, and continuing
to monitor and receive regular updates on the investment’s
performance. See, e.g., id. at 420-21; Bunch v. W.R. Grace &
Co., 555 F.3d 1, 8-9 (1st Cir. 2009); Laborers Nat’l Pension
Fund v. N. Trust Quantitative Advisors, Inc., 173 F.3d 313, 322
(5th Cir. 1999). 7 In other words, although the duty of
procedural prudence requires more than “a pure heart and an
7
By contrast, courts have found that a fiduciary’s failure
to act in accordance with plan documents serves as evidence of
imprudent conduct -- in addition to independently violating
Subsection (D) of § 1104(a)(1) –- so long as the plan documents
are consistent with ERISA’s requirements. See, e.g., Dardaganis
v. Grace Capital, Inc., 889 F.2d 1237, 1241 (2d Cir. 1989).
21
empty head,” DiFelice, 497 F.3d at 418 (internal quotation marks
and citation omitted), courts have readily determined that
fiduciaries who act reasonably –- i.e., who appropriately
investigate the merits of an investment decision prior to acting
-- easily clear this bar.
B.
The district court carefully examined the relevant facts
and made extensive factual findings to support its conclusion
that RJR failed to engage in a prudent decision-making process.
The court found that “the working group’s decision in March
1999 was made with virtually no discussion or analysis and was
almost entirely based upon the assumptions of those present and
not on research or investigation.” Tatum, 926 F. Supp. 2d at
678. Indeed, the court found that the group’s discussion of the
Nabisco stocks lasted no longer than an hour and focused
exclusively on removing the funds from the Plan.
The court further found “no evidence that the [working
group] ever considered an alternative [to divestment within six
months], such as maintaining the stock in a frozen fund
indefinitely, making the timeline for divestment longer, or any
other strategy to minimize a potential immediate loss to
participants or any potential opportunity for gain.” Id. at
680. Instead, the “driving consideration” was the “general risk
of a single stock fund,” as well as “the emphasis on the
22
unconfirmed assumption that RJR would no longer be exempt from
the ERISA diversification requirement because the funds would no
longer be employer stocks.” Id. at 678. Yet the evidence
adduced at trial showed that “no one researched the accuracy of
that assumption, and it was later determined that nothing in the
law or regulations required that the Nabisco Funds be removed
from the Plan.” Id. at 680.
The district court found that “the six month timeline for
the divestment was chosen arbitrarily and with no research.”
Id. at 679. The working group failed to consider “[t]he idea
that, perhaps, it would take a while for the tobacco taint to
dissipate” or “the fact that determining for employees exactly
when the stocks would be removed could result in large and
unnecessary losses to the Plan through the individual accounts
of employees.” Id. Similarly, there was no consideration of
“the purpose of the Plan, which was for long term retirement
savings,” or “the purpose of the spin-off, which was, in large
part, to allow the Nabisco stock a chance to recover from the
tobacco taint and hopefully rise in value.” Id. at 678. The
court found the failure to consider these issues particularly
notable “[g]iven that the strategy behind the spin-off was
largely to rid Nabisco stock prices of the ‘tobacco taint.’”
Id. at 680.
23
The court also found that the only time following the spin-
off that RJR “actually discussed the merits of the [March]
decision was at the October 8, 1999 meeting.” Id. at 681. In
that meeting, Gordon raised the concern from RJR’s CEO that
“participants were questioning the timing of the elimination
given the Nabisco stocks’ continued decline in value.” Id.
Although RJR engaged in this additional discussion, it undertook
no investigation into the assumptions underlying its March
decision to sell the Plan’s Nabisco stock. Id. at 682.
Rather, those involved in the October discussion expressed
“their view that the employees who cashed out their Nabisco
stock at a loss were a problem,” and there was “fear that
[these] early sellers might sue RJR.” Id. at 681 (internal
quotation marks and alterations omitted). The court found that
the discussion “focused around the liability of RJR, rather than
what might be in the best interest of the participants.” Id. at
682 (emphasis in original). As a result, RJR failed to explore
the option of amending the Plan to temporarily unfreeze the
Nabisco Funds and give “the early sellers the opportunity to
repurchase the stock.” Id. Nor did RJR consider any “other
alternatives for remedying the problem.” Id. The court noted
that, despite fearing liability, RJR “still did not engage an
independent analyst or outside counsel to analyze the problem.”
Id. at 681-82.
24
The court found no evidence of any other discussions in
which RJR ever “contemplated any formal action other than what
had already been decided at the March meeting.” Id. at 680.
Instead, the evidence showed that RJR’s focus after the spin-off
“was on setting a specific date for divestment and on providing
notice to participants regarding the planned removal of the
funds.” Id. at 680-81. “Indicative of the pervading mindset
against reexamining the original decision were the
communications known to be false when sent to participants” by
RJR with the October 1999 and January 2000 401(k) statements.
Id. at 681.
In sum, the district court found that “there [wa]s no
evidence -- in the form of documentation or testimony -- of any
process by which fiduciaries investigated, analyzed, or
considered the circumstances regarding the Nabisco stocks and
whether it was appropriate to divest.” Id. at 679. The court
explained that, in light of the fiduciary duty to act “solely in
the interest of participants and beneficiaries,” it was clearly
improper for the fiduciaries “to consider their own potential
liability as part of the reason for not changing course on their
decision to divest the Plan of Nabisco stocks.” Id. at 681
(emphasis in original). The district court concluded that
“[t]he lack of effort on the part of those considering the
removal of the Nabisco Funds –- from March 1999 until the stock
25
was removed from the plan on January 31, 2000 –- compel[led] a
finding that the RJR decision-makers in this case failed to
exercise prudence in coming to their decision to eliminate the
Nabisco Funds from the Plan.” Id. at 682.
C.
Despite these extensive factual findings, RJR contends that
it did not breach its duty of procedural prudence and that the
district court too rigorously scrutinized its procedural process
in so holding. We cannot agree.
As a threshold matter, RJR provides no basis for this court
to question the district court’s well-supported factual finding
that RJR failed to present evidence of “any process by which
fiduciaries investigated, analyzed, or considered the
circumstances regarding the Nabisco stocks and whether it was
appropriate to divest.” Id. at 679 (emphasis added). By
conducting no investigation, analysis, or review of the
circumstances surrounding the divestment, RJR acted with
procedural imprudence no matter what level of scrutiny is
applied to its actions.
Instead of grappling with its failure to conduct any
investigation, RJR urges us to hold that it did not breach its
duty of procedural prudence because certain types of investment
decisions assertedly trigger a lesser standard of procedural
prudence. Thus, RJR contends that “[n]on-employer, single stock
26
funds are imprudent per se” due to their inherent risk.
Appellee’s Br. 35. 8 But this per se approach is directly at odds
with our case law and federal regulations interpreting ERISA’s
duty of prudence. See DiFelice, 497 F.3d at 420 (explaining
that, in all cases, evaluating the prudence of an investment
decision requires a totality-of-the-circumstances inquiry that
takes into account “the character and aim of the particular plan
and decision at issue and the circumstances prevailing at the
time” (internal quotation marks omitted)); 29 C.F.R.
§ 2550.404a-1(b)(1) (stressing the importance of a totality-of-
the-circumstances inquiry). Indeed, in promulgating its
regulations, the Department of Labor expressly rejected the
suggestion that a particular investment can be deemed per se
prudent or per se imprudent based on its level of risk. See
Investment of Plan Assets under the “Prudence” Rule, 44 Fed.
Reg. 37,221, 37,225 (June 26, 1979); see also id. at 37,224-25(declining to create “any list of investments, classes of
investment, or investment techniques” deemed permissible or
impermissible under the prudence rule).
Nor is there any merit to RJR’s contention that its
decision to sell the employees’ Nabisco shares merits less
8
We note that at the time plan participants purchased
shares of the Nabisco Funds through the Plan, they were indeed
employer funds.
27
scrutiny because that decision was assertedly made “in the face
of financial trouble” to “protect[] participants and advance[] a
fiduciary’s duty to ‘minimize the risk of large losses.’”
Appellee’s Br. 34 (citation omitted). To adopt this argument,
we would have to ignore the findings of the district court as to
the actual context in which RJR acted.
The court found that, without undertaking any
investigation, RJR forced the sale, within an arbitrary
timeframe, of funds in which Plan participants had already
invested. The court found that RJR adhered to that decision in
the face of sharply declining share prices and despite
contemporaneous analyst reports projecting the future growth of
those share prices and “overwhelmingly” recommending that
investors “buy” or at least “hold” Nabisco stocks. The court
also found that RJR did so without consulting any experts,
without considering that the Plan’s purpose was to provide for
retirement savings, and without acknowledging that the spin-off
was undertaken in large part to enhance the future value of the
Nabisco stock by eliminating the tobacco taint.
The district court further found that RJR sold the Nabisco
funds when it did because of its fear of liability, not out of
concern for its employees’ best interests. RJR blinks at
reality in maintaining that its actions served to “protect[]
participants” or to “minimize the risk of large losses.” To the
28
contrary, RJR’s decision to force the sale of its employees’
shares of Nabisco stock, within an arbitrary timeframe and
irrespective of the prevailing circumstances, ensured immediate
and permanent losses to the Plan and its beneficiaries.
In sum, in support of its holding that RJR breached its
duty of procedural prudence, the district court made extensive
and careful factual findings, all of which were well supported
by the record evidence. RJR’s challenge to those findings
fails.
IV.
We next address the district court’s holding with respect
to which party bears the burden of proof as to loss causation.
A breach of fiduciary duty “does not automatically equate to
causation of loss and therefore liability.” Plasterers’, 663
F.3d at 217. ERISA provides that a fiduciary who breaches its
duties “shall be personally liable” for “any losses to the plan
resulting from each such breach.” Id. (quoting 29 U.S.C.
§ 1109(a)). Accordingly, in Plasterers’, we adopted the Seventh
Circuit’s reasoning that “[i]f trustees act imprudently, but not
dishonestly, they should not have to pay a monetary penalty for
their imprudent judgment so long as it does not result in a loss
to the Fund.” Id. (emphasis added) (quoting Brock v. Robbins,
830 F.2d 640, 647 (7th Cir. 1987)). We cautioned, however, that
29
“imprudent conduct will usually result in a loss to the fund, a
loss for which [the fiduciary] will be monetarily penalized.”
Id. at 218 (quoting Brock, 830 F.3d at 647). But in Plasterers’
we did not need to answer the question of which party bore the
burden of proof on loss causation.
In this case, the district court had to resolve that
question. The court held that the burden of both production and
persuasion rested on RJR at this stage of the proceedings. The
court explained that “once Tatum made a showing that there was a
breach of fiduciary duty and some sort of loss to the plan, RJR
assumed the burden (that is, the burden of production and
persuasion) to show that the decision to remove the Nabisco
stock from the plan was objectively prudent.” Tatum, 926 F.
Supp. 2d at 683. 9 RJR contends that in doing so, the court
erred. We disagree.
Generally, of course, when a statute is silent, the default
rule provides that the burden of proof rests with the plaintiff.
Schaffer ex rel. Schaffer v. Weast, 546 U.S. 49, 56 (2005). But
“[t]he ordinary default rule . . . admits of exceptions,” id. at
57, and one such exception arises under the common law of
9
Thus, contrary to RJR’s passing comment on appeal, see
Appellee’s Br. 22 n.4, the district court did find that Tatum
made a prima facie showing of loss. Moreover, no party disputes
that, on January 31, 2000, when RJR sold all of the Plan’s
Nabisco stock, that stock’s value was at an all-time low.
30
trusts. “[I]n matters of causation, when a beneficiary has
succeeded in proving that the trustee has committed a breach of
trust and that a related loss has occurred, the burden shifts to
the trustee to prove that the loss would have occurred in the
absence of the breach.” Restatement (Third) of Trusts § 100,
cmt. f (2012) (internal citation omitted); see also Bogert &
Bogert, The Law of Trusts and Trustees § 871 (2d rev. ed. 1995 &
Supp. 2013) (“If the beneficiary makes a prima facie case, the
burden of contradicting it . . . will shift to the trustee.”).
The district court adopted this well-established approach.
It reasoned that requiring the defendant-fiduciary, here RJR, to
bear the burden of proof was the “most fair” approach
“considering that a causation analysis would only follow a
finding of [fiduciary] breach.” Tatum, 926 F. Supp. 2d at 684;
see also Roth, 16 F.3d at 917 (stating that once the ERISA
plaintiff meets this burden, “the burden of persuasion shifts to
the fiduciary to prove that the loss was not caused by . . . the
breach of duty.” (alteration in original) (internal quotation
marks omitted)); McDonald v. Provident Indem. Life Ins. Co., 60
F.3d 234, 237 (5th Cir. 1995); cf. Sec’y of U.S. Dep’t of Labor
v. Gilley, 290 F.3d 827, 830 (6th Cir. 2002) (placing the burden
of proof on the defendant-fiduciary to disprove damages); N.Y.
31
State Teamsters Council v. Estate of DePerno, 18 F.3d 179, 182-
83 (2d Cir. 1994) (same). 10
We have previously recognized the burden-shifting framework
in an analogous context. In Brink v. DaLesio, 667 F.2d 420 (4th
Cir. 1982), modified and superseded on denial of reh’g, (1982),
we considered the impact of a breach of fiduciary duty under the
10
None of the cases RJR and the dissent cite to support
their contrary view persuade us that the district court erred.
See Silverman v. Mut. Benefit Life Ins. Co., 138 F.3d 98, 105
(2d Cir. 1998); Kuper v. Iovenko, 66 F.3d 1447, 1459 (6th Cir.
1995), abrogated by Fifth Third Bancorp v. Dudenhoeffer, No. 12–
751, 573 U.S. -- (2014); Willett v. Blue Cross & Blue Shield of
Ala., 953 F.2d 1335, 1343 (11th Cir. 1992). Neither Kuper nor
Willett addressed a situation in which plaintiffs had already
established both fiduciary breach and a loss. Moreover, in
Silverman, the decision not to shift the burden of proof was
based in large part on the unique nature of a co-fiduciary’s
liability under § 1105(a)(3). See 138 F.3d at 106 (Jacobs, J.,
concurring). That reasoning does not apply to the present case,
in which plan participants sued under § 1104(a)(1) and alleged
losses directly linked to the defendant-fiduciary’s own
fiduciary breach. Nor does it appear that the Second Circuit
would apply the Silverman reasoning to a case brought under
§ 1104(a). See N.Y. State Teamsters Council, 18 F.3d at 182,
182-83 (acknowledging “the general rule that a plaintiff bears
the burden of proving the fact of damages” but concluding in an
ERISA case that “once the beneficiaries have established their
prima facie case by demonstrating the trustees’ breach of
fiduciary duty, the burden of explanation or justification
shifts to the fiduciaries” (internal quotation marks and
alterations omitted)). Furthermore, Willett, which the dissent
quotes at length, actually undercuts its position. There the
court held that the burden of proof remained with the plaintiff,
prior to establishing breach, but that “in order to prevail as a
matter of law,” it was the defendant-fiduciary who had to
“establish the absence of causation by proving that the
beneficiaries’ claimed losses could not have resulted from
[defendant-fiduciary’s] failure to cure [the co-fiduciary’s]
breach.” 953 F.2d at 1343 (emphasis added).
32
Labor-Management Reporting and Disclosure Act, 29 U.S.C. § 501.
We explained that “[i]t is generally recognized that one who
acts in violation of his fiduciary duty bears the burden of
showing that he acted fairly and reasonably.” Id. at 426.
Thus, we held that the district court in that case had erred
when, after finding that the defendant breached his fiduciary
duty, it placed the burden on the plaintiffs to prove what, if
any, damages were attributable to that breach. Id. 11
Moreover, this burden-shifting framework comports with the
structure and purpose of ERISA. As stated in its preamble, the
statute’s primary objective is to protect “the interests of
participants in employee benefit plans and their beneficiaries.”
29 U.S.C. § 1001(b). To achieve this purpose, ERISA imposes
fiduciary obligations on those responsible for administering
11
RJR and the dissent suggest that our holding in U.S. Life
Insurance Co. v. Mechanics & Farmers Bank, 685 F.2d 887 (4th
Cir. 1982), supports their view that RJR did not bear the burden
of proof. They contend that in U.S. Life, we held that “placing
the burden of proof on a plaintiff [here Tatum] to prove
causation is supported by trust law.” Appellee’s Br. 21. But,
in fact, in U.S. Life, we dealt with the unique situation in
which a trustee breached the terms of an indenture agreement and
so assertedly violated state contract law. 685 F.2d at 889.
Because the parties’ relationship was principally contractual in
nature (a critical fact that both RJR and the dissent ignore),
we declined to apply a burden-shifting framework in what we held
was, in essence, a “typical breach of contract type of case.”
Id. at 896. Here, by contrast, ERISA –- not a contract –-
governs the parties’ relationship, and expressly imposes
fiduciary -- not contractual -- duties. Thus, U.S. Life offers
no support to RJR and the dissent.
33
employee benefit plans and plan assets, and provides for
enforcement through “appropriate remedies, sanctions, and ready
access to the Federal courts.” Id. As amicus Secretary of
Labor notes, “[i]mposing on plaintiffs who have established a
fiduciary breach and a prima facie case of loss the burden of
showing that the loss would not have occurred in the absence of
a breach would create significant barriers for those (including
the Secretary) who seek relief for fiduciary breaches.” Amicus
Br. of Sec’y of Labor 19-20. Such an approach would “provide an
unfair advantage to a defendant who has already been shown to
have engaged in wrongful conduct, minimizing the fiduciary
provisions’ deterrent effect.” Id. at 20.
In sum, the long-recognized trust law principle -- that
once a fiduciary is shown to have breached his fiduciary duty
and a loss is established, he bears the burden of proof on loss
causation -- applies here. Overwhelming evidence supported the
district court’s finding that RJR breached its fiduciary duty to
act prudently and that this breach resulted in a prima facie
showing of loss to the Plan. Thus, the court did not err in
requiring RJR to prove that its imprudent decision-making did
not cause the Plan’s loss. Accordingly, we turn to the question
of whether the district court correctly held that RJR carried
its burden of proof on causation.
34
V.
To carry its burden, RJR had to prove that despite its
imprudent decision-making process, its ultimate investment
decision was “objectively prudent.” Because the term “objective
prudence” is not self-defining, in Plasterers’, we turned to the
standard set forth by our sister circuits. Thus, we explained
that a decision is “objectively prudent” if “a hypothetical
prudent fiduciary would have made the same decision anyway.”
663 F.3d at 218 (quoting Roth, 16 F.3d at 919) (emphasis added);
see also Peabody v. Davis, 636 F.3d 368, 375 (7th Cir. 2011);
Bussian, 223 F.3d at 300; In re Unisys Sav. Plan Litig., 173
F.3d 145, 153-54 (3d Cir. 1999). Under this standard, a
plaintiff who has proved the defendant-fiduciary’s procedural
imprudence and a prima facie loss prevails unless the defendant-
fiduciary can show, by a preponderance of the evidence, that a
prudent fiduciary would have made the same decision. Put
another way, a plan fiduciary carries its burden by
demonstrating that it would have reached the same decision had
it undertaken a proper investigation.
Somewhat surprisingly, the dissent accuses us of concocting
a new standard for loss causation, never adopted in Plasterers’.
We cannot agree. We are simply applying the standard set forth
by this court in Plasterers’, a case on which the dissent itself
heavily relies. The dissent’s claim that Plasterers’ decided
35
nothing more than that “causation of loss is not an axiomatic
conclusion that flows from a breach” is baseless. For in
Plasterers’, immediately after recognizing that the district
court had been “without the benefit of specific circuit guidance
on this issue,” 663 F.3d at 218 n.9, we stated what loss
causation means. Thus, we then explained: “Even if a trustee
failed to conduct an investigation before making a decision, he
is insulated from liability [under § 1109(a)] if a hypothetical
prudent fiduciary would have made the same decision anyway.”
Id. at 218 (quoting Roth, 16 F.3d at 919). This language would
serve no purpose in the opinion if not to instruct the district
court regarding the proper analysis on remand. 12
12
Moreover, the dissent is simply mistaken in contending
that the standard applicable for loss causation “was not
discussed, was not briefed, and was not before the court” in
Plasterers’. In urging the court to adopt the loss causation
requirement, the appellants’ brief in Plasterers’ cited the
language from then-Judge Scalia’s concurrence in Fink v. Nat’l
Sav. & Trust Co., 772 F.2d 951, 962 (D.C. Cir. 1985), see infra
at 40, and then recognized that:
The Eighth Circuit’s formulation of the rule [of loss
causation in Roth] is more common, if less colorful:
“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.” This rule
follows directly from § 409 of ERISA, which provides
that fiduciaries are liable only for “losses to the
plan resulting from . . . a breach.”
Br. of Appellants 21-22, Plasterers’, 663 F.3d 210 (emphasis
added) (citations omitted). Thus, both the loss causation
requirement and the standard used to define it were indeed
discussed, briefed, and before the court in Plasterers’.
36
The district court properly acknowledged the “would have”
standard that we and our sister circuits have adopted. See
Tatum, 926 F. Supp. 2d at 683. But the court nonetheless
applied a different standard. Thus, it required RJR to prove
only that “a hypothetical prudent fiduciary could have decided
to eliminate the Nabisco Funds on January 31, 2000.” Id. at 690
(emphasis added). The manner in which the district court
evaluated the evidence unquestionably demonstrates that it
indeed meant “could have” rather than “would have.” See, e.g.,
id. at 689 n.29, 690. For instead of determining whether the
evidence established that a prudent fiduciary, more likely than
not, would have divested the Nabisco Funds at the time and in
the manner in which RJR did, the court concluded that the
evidence did not “compel a decision to maintain the Nabisco
Funds in the Plan,” and that a prudent investor “could [have]
infer[red]” that it was prudent to sell. Id. at 686 (emphasis
added). 13
13
For this analysis, the court relied on Kuper v. Quantum
Chemicals Corp., 852 F. Supp. 1389, 1395 (S.D. Ohio 1994), aff’d
sub nom. Kuper v. Iovenko, 66 F.3d at 1447. But Kuper is
inapposite because it applied a presumption of reasonableness to
a fiduciary’s decision to retain company stock, a presumption
that plaintiffs failed to rebut by establishing breach of
fiduciary duty. See 66 F.3d at 1459. We have never applied
this presumption, and the Supreme Court has recently clarified
that ERISA contains no such presumption. See Dudenhoeffer, No.
12–751, 573 U.S.--, at 1. Moreover, this case differs from
Kuper in two critical respects. First, Tatum challenges the
(Continued)
37
RJR recognizes that the district court applied a “could
have” standard, but argues that this is the proper standard for
determining whether its divestment decision was objectively
prudent. Alternatively, RJR maintains that, even if the
district court erred in applying the “could have” rather than
“would have” standard, the error was harmless. We address these
arguments in turn.
A.
RJR acknowledges that the causation inquiry requires a
finding of objective prudence. But it contends that a court
measures a fiduciary’s objective prudence by determining whether
its “decision, when viewed objectively, is one a hypothetical
prudent fiduciary could have made.” Appellee’s Br. 16 (emphasis
added).
But we, like our sister circuits, have adopted the “would
have” standard to determine a fiduciary’s objective prudence.
As the Supreme Court has explained, the distinction between
“would” and “could” is both real and legally significant. See
divestment of stock, while Kuper involved a challenge to the
retention of stock. Second, Tatum has established that RJR
breached its fiduciary duty; Kuper never established this.
Notably, the Sixth Circuit, which decided Kuper, has since
expressly recognized, at least with respect to the amount of
damages, that when a fiduciary breach is established,
“uncertainty should be resolved against the breaching
fiduciary.” Gilley, 290 F.3d at 830 (emphasis added).
38
Knight v. Comm’r, 552 U.S. 181, 187-88, 192 (2008). In opining
that this distinction is simply “semantics at its worst,” the
dissent ignores Knight. There, the Court instructed that
“could” describes what is merely possible, while “would”
describes what is probable. Id. at 192. “[D]etermining what
would happen if a fact were changed . . . necessarily entails a
prediction; and predictions are based on what would customarily
or commonly occur.” Id. (emphasis added). Inquiring what could
have occurred, by contrast, spans a much broader range of
decisions, encompassing even the most remote of possibilities.
See id. at 188 (“The fact that an individual could . . . do
something is one reason he would . . ., but not the only
possible reason.”).
The “would have” standard is, of course, more difficult for
a defendant-fiduciary to satisfy. And that is the intended
result. “Courts do not take kindly to arguments by fiduciaries
who have breached their obligations that, if they had not done
this, everything would have been the same.” In re Beck Indus.,
Inc., 605 F.2d 624, 636 (2d Cir. 1979). ERISA’s statutory
scheme is premised on the recognition that “imprudent conduct
will usually result in a loss to the fund, a loss for which [the
fiduciary] will be monetarily penalized.” Plasterers’, 663 F.3d
at 218 (quoting Brock, 830 F.3d at 647). We would diminish
ERISA’s enforcement provision to an empty shell if we permitted
39
a breaching fiduciary to escape liability by showing nothing
more than the mere possibility that a prudent fiduciary “could
have” made the same decision. As the Secretary of Labor notes,
this approach would “create[] too low a bar, allowing breaching
fiduciaries to avoid financial liability based on even remote
possibilities.” Amicus Br. of Sec’y of Labor 23. 14
To support its contrary argument, RJR heavily relies on
then-Judge Scalia’s concurrence in Fink v. Nat’l Sav. & Trust
Co., 772 F.2d 951 (D.C. Cir. 1985), in which he states:
I know of no case in which a trustee who has happened
–- through prayer, astrology or just blind luck –- to
make (or hold) objectively prudent
investments . . . has been held liable for losses from
those investments because of his failure to
investigate or evaluate beforehand.
Id. at 962 (Scalia, J., concurring in part and dissenting in
part). But, despite the protestations of RJR and the dissent,
14
Moreover, notwithstanding the suggestion of RJR and the
dissent, the Supreme Court in Dudenhoeffer did not hold that the
“could have” standard applies in determining whether a trustee,
like RJR, who has utterly failed in its duty of procedural
prudence, has nonetheless acted in an objectively prudent manner
and so not caused loss to the plan. Rather, Dudenhoeffer
addressed an allegation that a fiduciary failed to act on
insider information. In this very different context, the Court
held that when “faced with such claims,” courts should “consider
whether the complaint has plausibly alleged that a prudent
fiduciary in the defendant’s position could not have concluded
that [acting on insider information] would do more harm than
good.” Dudenhoeffer, No. 12-751, 573 U.S. --, at 20 (emphasis
added). The Court’s use of “could not have” in this limited
context does not cast doubt on our instruction that a “would
have” standard applies to determine loss causation after a
fiduciary breach has been established.
40
this observation is entirely consistent with the “would have”
standard we adopted in Plasterers’. It is simply another way of
saying the same thing: that a fiduciary who fails to
“investigate and evaluate beforehand” will not be found to have
caused a loss if the fiduciary would have made the same decision
if he had “investigat[ed] and evaluat[ed] beforehand.” Id.Stated yet another way, the inquiry is whether the loss would
have occurred regardless of the fiduciary’s imprudence.
Of course, intuition suggests, and a review of the case law
confirms, that while such “blind luck” is possible, it is rare.
When a plaintiff has established a fiduciary breach and a loss,
courts tend to conclude that the breaching fiduciary was liable.
See Peabody, 636 F.3d at 375; Allison v. Bank One-Denver, 289
F.3d 1223, 1239 (10th Cir. 2002); Meyer v. Berkshire Life Ins.
Co., 250 F. Supp. 2d 544, 571 (D. Md. 2003), aff’d, 372 F.3d
261, 267 (4th Cir. 2004); cf. Chao v. Hall Holding Co., 285 F.3d
415, 434, 437-39 (6th Cir. 2002); Donovan v. Cunningham, 716
F.2d 1455, 1476 (5th Cir. 1983). As explained above, that is
precisely the result anticipated by ERISA’s statutory scheme.
B.
Alternatively, RJR maintains that, even if the district
court erred in applying the “could have” rather than “would
have” standard, the error was harmless. This is so, in RJR’s
view, because the facts found by the district court as to the
41
high-risk nature of the Nabisco Funds unquestionably establish
that a prudent fiduciary would have eliminated them from the
Plan. Appellee’s Br. 20. This argument also fails.
Although risk is a relevant consideration in evaluating a
divestment decision, risk cannot in and of itself establish that
a fiduciary’s decision was objectively prudent. Indeed, in
promulgating the regulations governing ERISA fiduciary duties,
the Department of Labor expressly rejected such an approach. In
its Preamble to Rules and Regulations for Fiduciary
Responsibility, the Department explained, as we noted above,
that “the risk level of an investment does not alone make the
investment per se prudent or per se imprudent.” Investment of
Plan Assets under the “Prudence” Rule, 44 Fed. Reg. 37,221,
37,225 (June 26, 1979). Moreover, the Department instructed
that:
an investment reasonably designed –- as part of a
portfolio –- to further the purposes of the plan, and
that is made upon appropriate consideration of the
surrounding facts and circumstances, should not be
deemed to be imprudent merely because the investment,
standing alone, would have, for example, a relatively
high degree of risk.
Id. at 37,224 (emphasis added); see also Dudenhoeffer, No. 12-
751, 573 U.S. --, at 15 (“Because the content of the duty of
prudence turns on ‘the circumstances . . . prevailing’ at the
time the fiduciary acts, § 1104(a)(1)(B), the appropriate
inquiry will necessarily be context specific.” (alteration in
42
original)); DiFelice, 497 F.3d at 420 (holding that, when
determining whether an ERISA fiduciary has acted prudently, a
court must consider the “character and aim of the particular
plan and decision at issue and the circumstances prevailing at
the time”). In sum, while the presence of risk is a relevant
consideration in determining whether to divest a fund held by an
ERISA plan, it is not controlling. We must therefore reject
RJR’s contention that it would necessarily be imprudent for a
fiduciary to maintain an existing single-stock investment in a
plan that, like the Plan at issue here, offers participants a
diversified portfolio of investment options.
Moreover, we cannot hold that the district court’s error in
adopting the “could have” standard was harmless when the
governing Plan document required the Nabisco Funds to remain as
frozen funds in the Plan. ERISA mandates that fiduciaries act
“in accordance with the documents and instruments governing the
plan insofar as such documents and instruments are consistent
with [ERISA].” 29 U.S.C. § 1104(a)(1)(D). 15 Accordingly, courts
15
On appeal, RJR suggests that following the Plan terms
would have been inconsistent with ERISA. Specifically, RJR
asserts that if it had maintained the Nabisco Funds as frozen
funds after the spin-off, it would have violated ERISA’s
requirement that fiduciaries “diversify[] investments of the
plan so as to minimize the risk of large losses.” Id.§ 1104(a)(1)(C). Thus, RJR argues that it “was required to
divest the Nabisco Funds from the Plan.” Appellee’s Br. 27.
Before the district court, however, RJR properly “admit[ted]
(Continued)
43
have found a breaching fiduciary’s failure to follow plan
documents to be highly relevant in assessing loss causation.
See Allison, 289 F.3d at 1239; Dardaganis, 889 F.2d at 1241. 16
Tatum stipulated at trial that he would not assert that RJR’s
failure to adhere to the Plan’s terms rendered RJR automatically
liable under § 1109(a). But he expressly preserved his argument
that the Plan terms are “highly relevant” to the causation
analysis and that “a prudent fiduciary would have taken [them]
into account” in deciding whether to divest. Appellant’s Br. 28
n.13; see also Mem. re: Legal Effect of Invalid Plan Amendment
at 2, Tatum v. R.J. Reynolds Pension Inv. Comm. (2013)(No. 1:02-
cv-00373-NCT-LPA), ECF No. 365. Therefore, the district court
erred by failing to factor into its causation analysis RJR’s
lack of compliance with the governing Plan document.
For all of these reasons, after careful review of the
record, we cannot hold that the district court’s application of
that there are no regulations prohibiting single stock funds of
any kind in an ERISA plan.” Tatum, 926 F. Supp. 2d at 681. See
supra note 5; see also H.R. Rep. No. 93-1280, reprinted at 1974
U.S.C.C.A.N. 5038, 5084-85 (explaining that whether a
fiduciary’s investment of plan assets violates the
diversification duty depends on the “facts and circumstances of
each case”).
16
Of course, this does not mean, as the dissent suggests,
that plan terms trump the duty of prudence. It simply means
that plan terms, and the fiduciary’s lack of compliance with
those terms, inform a court’s inquiry as to how a prudent
fiduciary would act under the circumstances.
44
the incorrect “could have” standard was harmless. Particularly
given the extraordinary circumstances surrounding RJR’s decision
to divest the Nabisco Funds, including the timing of the
decision and the requirements of the governing Plan document, we
must conclude that application of the incorrect legal standard
may have influenced the court’s decision. Reversal is required
when a district court has applied an “incorrect [legal]
standard[]” that “may . . . have influenced its ultimate
conclusion.” See Harris v. Forklift Sys., Inc., 510 U.S. 17, 23
(1993).
The district court’s task on remand will be to review the
evidence to determine whether RJR has met its burden of proving
by a preponderance of the evidence that a prudent fiduciary
would have made the same decision. See Plasterers’, 663 F.3d at
218. 17 In doing so, the court must consider all relevant
17
In evaluating the evidence, the district court abused its
discretion to the extent it refused to consider the testimony of
one of Tatum’s experts, Professor Lys, regarding what a prudent
investor would have done under the circumstances. Even though
Professor Lys lacked expertise as to the specific requirements
of ERISA, his testimony was relevant as to what constituted a
prudent investment decision. See Plasterers’, 663 F.3d at 218;
see also Hecker v. Deere & Co., 556 F.3d 575, 586 (7th Cir.
2009) (“A fiduciary must behave like a prudent investor under
similar circumstances . . . .”); Katsaros v. Cody, 744 F.2d 270,
279-80 (2d Cir. 1984) (noting that an investment expert’s lack
of experience with pension fund management did not affect his
qualifications to testify as to what constituted a prudent
investment decision in an ERISA case). On remand, the court
should consider this with all other relevant evidence.
45
evidence, including the timing of the divestment, as part of a
totality-of-the-circumstances inquiry. See Dudenhoeffer, No.
12-751, 573 U.S. --, at 15; DiFelice, 497 F.3d at 420. Perhaps,
after weighing all of the evidence, the district court will
conclude that a prudent fiduciary would have sold employees’
existing investments at the time and in the manner RJR did
because of the Funds’ high-risk nature, recent decline in value,
and RJR’s interest in diversification. Or perhaps the court
will instead conclude that a prudent fiduciary would not have
done so, because freezing the Funds had already mitigated the
risk and because divesting shares after they declined in value
would amount to “selling low” despite Nabisco’s strong
fundamentals and positive market outlook. In either case, the
district court must reach its conclusion after applying the
standard this court announced in Plasterers’ -- that is, whether
“a hypothetical prudent fiduciary would have made the same
decision anyway.” 663 F.3d at 218 (quotation marks omitted)
(emphasis added).
C.
Before concluding our discussion of loss causation, we must
briefly address the dissent’s apparent misunderstanding of our
holding, the facts found by the district court, and controlling
legal principles.
46
The dissent repeatedly charges that we hold RJR “monetarily
liable for objectively prudent investment decisions.” It
further charges that we have “confuse[d] remedies” -- claiming
that fiduciaries who act with procedural imprudence should be
released from their fiduciary duties but not held monetarily
liable. These charges misstate our holding.
Our decision is a modest one. We affirm the district
court’s holdings that RJR breached its duty of procedural
prudence and that a substantial loss occurred. We simply remand
for the district court to determine whether, under the correct
legal standard, RJR’s imprudence caused that loss. If the court
determines that a fiduciary who conducted a proper investigation
would have reached the same decision, RJR will escape all
monetary liability, notwithstanding its procedural imprudence.
But if the court concludes to the contrary, then the law
requires that RJR be held monetarily liable for the Plan’s loss.
For, as noted above, Congress has expressly provided that a
fiduciary “who breaches any of the . . . duties imposed [by
ERISA] shall be personally liable to make good to [the] plan any
losses to the plan resulting from [the] breach.” 29 U.S.C.
§ 1109(a) (emphasis added).
Thus, contrary to the dissent’s rhetoric, nothing in our
holding requires a fiduciary to “make a decision that in the
light of hindsight proves best.” Instead, a fiduciary need only
47
adhere to its ERISA duties to avoid liability. So long as a
fiduciary undertakes a reasoned decision-making process, it need
never fear monetary liability for an investment decision it
determines to be in the beneficiaries’ best interest. This is
so even if that investment decision yields an outcome that in
hindsight proves, in the dissent’s language, less than
“optimal.” Indeed, our holding, like ERISA’s statutory scheme,
acknowledges the uncertainty of outcomes inherent in any
investment decision. Precisely for this reason, ERISA requires
fiduciaries to undertake a reasoned decision-making process
prior to making such decisions. Only because RJR failed to do
so here will it be monetarily liable under § 1109(a) for any
losses caused by its imprudence.
The dissent paints RJR as a faultless victim that, after
following a “prudent investment strategy” has fallen prey to
“opportunistic litigation.” In the dissent’s view, we are
“penalizing the RJR fiduciaries for doing nothing more than
properly diversifying the plan.” But the district court’s well-
supported factual findings establish that RJR did a good deal
more (or, more precisely, a good deal less). It made a
divestment decision that cost its employees millions of dollars
with “virtually no discussion or analysis,” without
consideration of any alternative strategy or consultation with
any experts, and without considering “the purpose of the Plan,
48
which was for long term retirement savings,” or “the purpose of
the spin-off, which was, in large part, to allow the Nabisco
stock a chance to recover from the tobacco taint and hopefully
rise in value.” Tatum, 926 F. Supp. 2d at 678-79. RJR carried
out this decision by adhering to a timeline that was “chosen
arbitrarily and with no research.” Id. at 679. And in doing
so, RJR failed to act “solely in the interests of participants
and beneficiaries” and instead “improperly considered its own
potential liability.” Id. at 681. Indeed, the extent of
procedural imprudence shown here appears to be unprecedented in
a reported ERISA case.
The dissent eschews the loss-causation standard that this
court articulated in Plasterers’, and would instead apply a new
standard that it dubs “objective prudence simpliciter.” Because
this standard is not self-defining (and the dissent does not
attempt to define it) it is unclear how this standard would
operate in practice. At times, the dissent’s analysis suggests
that its “objective prudence simpliciter” test is in fact a
“could have” standard. But, of course, the application of a
“could have” standard contravenes our instructions in
Plasterers’ and elides the critical distinction between “could
have” and “would have” that the Supreme Court drew in Knight.
Far from “fuss[ing]” over “semantics,” we are merely applying
the law.
49
Moreover, the dissent fails to acknowledge the alarming
consequences of its “objective prudence simpliciter” standard.
Pursuant to this standard, ERISA’s protections would be
effectively unenforceable any time a fiduciary invokes the
talisman of “diversification.” Under the dissent’s reading of
the statute, any decision assertedly “made in the interest of
diversifying plan assets” would be automatically deemed
“objectively prudent.” This approach would put numerous
investment decisions beyond the reach of ERISA’s fiduciary
liability provision. As a result, in any case in which a
fiduciary could claim that it acted in pursuit of
diversification, ERISA would neither deter a fiduciary’s
imprudent decision-making, nor provide a make-whole remedy for
injured beneficiaries. Congress certainly did not intend this
result when it expressly provided that a fiduciary who breaches
“any” of its ERISA duties “shall be personally liable” for “any
losses to the Plan resulting from [the] breach.” 29 U.S.C.
§ 1109(a).
The Department of Labor, the body Congress specially
authorized to promulgate regulations interpreting ERISA, has
expressly rejected the dissent’s approach. Thus, the Department
explains that “the relative riskiness of a specific investment
or investment course of action does not render such investment
or investment course of action either per se prudent or per se
50
imprudent.” 44 Fed. Reg. 37,221, 37,222. Rather, “the prudence
of an investment decision should not be judged without regard to
the role that the proposed investment or investment course of
action plays within the overall plan portfolio.” Id. A court
cannot, as the dissent does, impose its own construction of a
statute instead of that of the agency that Congress has vested
with authority to interpret and administer it. See Chevron v.
Natural Res. Def. Council, 467 U.S. 837, 843 (1984).
By applying a new standard of its own making, by ignoring
the command in § 1109(a), and by refusing to follow precedent
or defer to appropriate regulations, it is the dissent who, in
its words, employs “linguistic contortions” to “obfuscate rather
than illuminate” the law and “overrid[e] the statute.” Unlike
the dissent, we refuse to make up and then apply an approach, at
odds with the law, that would render ERISA a nullity in the face
of any after-the-fact diversification defense.
VI.
Finally, we address the district court’s orders dismissing
the Benefits Committee and Investment Committee as defendants
and denying Tatum leave to amend his complaint to name the
individual committee members as defendants. We review the
former de novo, Smith v. Sydnor, 184 F.3d 356, 360-61 (4th Cir.
51
1999), and the latter for an abuse of discretion, Galustian v.
Peter, 591 F.3d 724, 729 (4th Cir. 2010).
A.
The court dismissed the Benefits Committee and Investment
Committee as defendants because it concluded that “committees”
are not “persons” capable of being sued under ERISA. That
statute defines “person” to include “an individual, partnership,
joint venture, corporation, mutual company, joint-stock company,
trust, estate, unincorporated organization, association, or
employee organization.” 29 U.S.C. § 1002(9). The district
court erred in reading this list as exhaustive. That the
provision does not expressly list “committees” does not mean
that committees cannot be “persons who are fiduciaries” under
ERISA.
We need look no further than the statute itself to conclude
that a committee may be a proper defendant-fiduciary. ERISA
provides that a “named fiduciary” is a “fiduciary who is named
in the plan instrument.” Id. § 1102(a)(2). The statute
requires that a plan document “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.” Id. § 1102(a)(1). This requirement ensures that
“responsibility for managing and operating the [p]lan -- and
liability for mismanagement -- are focused with a degree of
52
certainty.” Birmingham v. SoGen-Swiss Int’l Corp. Ret. Plan,
718 F.2d 515, 522 (2d Cir. 1983)(emphasis added). Here, the
Committees are the only named fiduciaries in the governing Plan
document. As such, these entities are proper defendants in a
suit alleging breach of fiduciary duty with respect to the Plan.
Accord H.R. Rep. No. 93-1280 (1974) (Conf. Rep.), reprinted in
1974 U.S.C.C.A.N. 5038, 5075-78 (noting that a board of trustees
could be a plan fiduciary even though “board” is not expressly
listed as “person” under ERISA).
Furthermore, Department of Labor regulations interpreting
the statute clearly state that a committee may serve as the
named fiduciary in a plan document. See 29 C.F.R. § 2509.75-5,
at FR-1. And this and other courts have routinely found
committees to be proper defendant-fiduciaries in ERISA suits.
See, e.g., Harris v. Amgen, Inc., 573 F.3d 728, 737 (9th Cir.
2009); In re Schering-Plough Corp. ERISA Litig., 420 F.3d 231,
233, 242 (3d Cir. 2005); Dzinglski v. Weirton Steel Corp., 875
F.2d 1075, 1080 (4th Cir. 1989). The district court’s contrary
holding is at odds with the Department of Labor regulations and
these cases. 18 Accordingly, we must reverse the court’s
dismissal of the Benefits Committee and Investment Committee.
18
To the extent there is any ambiguity in the relevant
provisions, we conclude that in interpreting the word “person”
and its corresponding definition at 29 U.S.C. § 1002(9), we
(Continued)
53
B.
After limitations had run, Tatum moved for leave to amend
his first amended complaint to name the individual committee
members. The court denied the motion on the ground that Tatum’s
claims against the individual committee members did not “relate
back” to those in his first amended complaint, and thus the
statute of limitations barred suit against them.
As the district court correctly recognized, an amendment to
add an additional party “relates back” when (1) the claim
asserted in the proposed amendment arises out of the same
conduct set forth in the original pleading, and (2) the party to
be added (a) received timely notice of the action such that he
would not be prejudiced in maintaining a defense on the merits,
and (b) knew or should have known that he would have been named
as defendant “but for a mistake concerning the proper party’s
identity.” Fed. R. Civ. P. 15(c)(1). The district court
concluded that the individual committee members were not on
notice that they would have been named as defendants but for a
mistake concerning their identity. The court did not abuse its
discretion in so holding.
should take into account “Congress’s broad remedial goals,” In
re Beacon Assocs. Litig., 818 F. Supp. 2d 697, 706 (S.D.N.Y.
2011), which is consistent with our holding that “committees”
are proper defendant-fiduciaries in ERISA suits.
54
In both his original complaint and in his first amended
complaint, Tatum named as defendants only RJR and the
Committees. Tatum’s decision not to include as defendants the
individual committee members reflected “a deliberate choice to
sue one party instead of another while fully understanding the
factual and legal differences between the two parties.” Krupski
v. Costa Crociere S. p. A., 560 U.S. 538, 549 (2010). This, the
Supreme Court has explained, “is the antithesis of making a
mistake concerning the proper party’s identity.” Id.Accordingly, the Court has held that Rule 15(c)’s requirements
are not satisfied when, as here, “the original complaint and the
plaintiff’s conduct compel the conclusion that the failure to
name the prospective defendant in the original complaint was the
result of a fully informed decision.” Id. at 552.
VII.
For the foregoing reasons, we affirm the district court’s
holding that RJR breached its duty of procedural prudence and so
carries the burden of proof on causation, but vacate the
judgment in favor of RJR. We reverse the order dismissing the
Benefits Committee and the Investment Committee as defendants,
but affirm the order denying Tatum’s motion for leave to amend
his complaint to add additional defendants. We remand the case
for further proceedings consistent with this opinion.
55
AFFIRMED IN PART, VACATED IN
PART, REVERSED IN PART,
AND REMANDED
56
WILKINSON, Circuit Judge, dissenting:
After a four-week bench trial, the district court found
that the investment decisions of the R.J. Reynolds Tobacco Co.
(RJR) fiduciaries were objectively prudent. It thus properly
refused to hold the RJR fiduciaries personally liable for
alleged plan losses.
Yet this court, breaking new ground, reverses the district
court. With all respect for my two fine colleagues, I do not
believe ERISA allows plan fiduciaries to be held monetarily
liable for prudent investment decisions, and especially not for
those made in the interest of diversifying plan assets. Market
conditions can, of course, create fluctuations, but a prudent
investment decision does not by definition cause a plan loss,
the precondition under 29 U.S.C. § 1109(a) for imposing personal
monetary liability upon fiduciaries.
The statutory remedy for a breach of procedural prudence
that precedes a reasonable investment decision includes,
explicitly, the removal of plan fiduciaries. The majority goes
much further, forcing fiduciaries to face the prospect of
personal monetary liability instead. This confusion of remedies
is wrong three times over, and its consequences will be
especially unfortunate for those who rely on ERISA plans for the
prudent administration of their retirement savings. As for
57
those who might contemplate future service as plan fiduciaries,
all I can say is: Good luck.
First, and yet again, under the remedial scheme laid out by
ERISA, fiduciaries should not be held monetarily liable for
objectively prudent investment decisions. This is true for
whatever standard -- "would have,” “could have,” or anything
else -- one adopts for loss causation. As I shall show, the
majority has adopted the wrong standard, one that strays from
the statutory test of objective prudence under then existing
circumstances, and one that trends toward a view of prudence as
the single best or most “likely” decision rather than a range of
reasonable judgments in the uncertain business of investing.
Despite the majority’s protestations, its reversal of the
district court’s well-grounded finding of objective prudence and
its imposition of a far more stringent test signals fiduciaries
that henceforth they had better make a decision that in the
light of hindsight proves the best.
Second, monetary liability is even less appropriate where,
as here, the reasonable decision was taken in the interests of
asset diversification. And third, on this record, the notion
that the RJR fiduciaries’ decision to liquidate the Nabisco
stocks was anything but prudent borders on the absurd.
ERISA is, first and foremost, meant to protect plan
participants from large, unexpected losses, including those that
58
result from holding undiversified single-stock non-employer
funds. The fiduciaries knew this fact and acted upon it, only
to find that prudent decisions, like good deeds, do not go
unpunished when the breezes of legal caprice blow in the wrong
direction.
As judges, we tend to regard the parties before us as
antagonists. It is, after all, an adversary system. But, in a
larger sense, the interests of plan participants and plan
fiduciaries often align. It does neither any good to run up
plan overhead with litigation over investment decisions taken,
as this one was, to diversify plan assets and protect employees
down life’s road. All will be losers -- perhaps fiduciaries
most immediately but plan participants, sadly, in the end.
I.
A.
It is, to repeat, doubtful that ERISA-plan fiduciaries
should ever be held monetarily liable for objectively reasonable
investment decisions. This follows from § 1109 of ERISA, which
provides that fiduciaries that breach their duties of procedural
prudence “shall be personally liable to make good to such plan
any losses to the plan resulting from each such breach.” 29
U.S.C. § 1109(a) (emphasis added). In other words, monetary
liability under § 1109 lies for a fiduciary’s breach of the duty
of procedural prudence only where a plaintiff also establishes
59
loss causation. Because investment outcomes are always
uncertain, not every investment decision that leads to a
diminution in plan assets counts as a loss for § 1109 purposes.
Rather, loss causation only exists if the substantive decision
was, all things considered, an objectively unreasonable one.
If, by contrast, we might expect a hypothetical prudent investor
to consider the decision prudent, the loss cannot be attributed
to the actual fiduciaries.
This interpretation of § 1109’s text is well established.
Then-Judge Scalia’s opinion in Fink v. National Savings & Trust
Co., 772 F.2d 951 (D.C. Cir. 1985), is the locus classicus for
the need to prove substantive imprudence prior to the imposition
of personal monetary liability under § 1109. In Fink, he
observed that he knew of
no case in which a trustee who has happened -- through
prayer, astrology or just blind luck -- to make (or
hold) objectively prudent investments (e.g., an
investment in a highly regarded “blue chip” stock) has
been held liable for losses from those investments
because of his failure to investigate and evaluate
beforehand.
Id. at 962 (Scalia, J., concurring in part and dissenting in
part). The majority misreads the Fink concurrence to require
that a hypothetical prudent fiduciary make “the same decision.”
Maj. Op. at 41. In so doing, the majority imputes its own
erroneous interpretation of loss causation into Justice Scalia’s
invocation of “objectively prudent investments.” Indeed, the
60
example Justice Scalia gave -- an investment in a highly
regarded blue chip stock -- demonstrates the obvious: just as
there is more than one such blue chip stock, there is a
reasonable range of investments that qualify as objectively
prudent.
Although there is an evidentiary relationship between the
breach of a fiduciary’s duty of procedural prudence and loss
causation, these two elements of fiduciary liability under ERISA
are distinct: “It is the imprudent investment rather than the
failure to investigate and evaluate that is the basis of suit;
breach of the latter duty is merely evidence bearing upon breach
of the former, tending to show that the trustee should have
known more than he knew.” Fink, 772 F.2d at 962 (Scalia, J.,
concurring in part and dissenting in part).
The question posed by this case has in fact already been
decided. This circuit has embraced Justice Scalia’s approach.
In Plasterers’ Local Union No. 96 Pension Plan v. Pepper, 663
F.3d 210 (4th Cir. 2011), we considered a suit for breach of
fiduciary duty under ERISA against former plan fiduciaries. We
noted that “simply finding a failure to investigate or diversify
does not automatically equate to causation of loss and therefore
liability.” 663 F.3d at 217. Rather, in order to hold
fiduciaries “liable for damages based on their given breach of
[their] fiduciary dut[ies]” described in 29 U.S.C. § 1104, a
61
“court must first determine that the [fiduciaries’] investments
were imprudent.” Id.; see also id. at 218 (quoting Justice
Scalia’s opinion in Fink). The loss, in other words, must
“result[] from” the breach, 29 U.S.C. § 1109(a), which it cannot
if the investment itself was a prudent one. 1
Our sister circuits have also generally adopted Justice
Scalia’s reasoning as to loss causation in Fink. See, e.g.,
Renfro v. Unisys Corp., 671 F.3d 314, 322 (3d Cir. 2011)
(approving of the objective-prudence test for fiduciary
liability under ERISA); Kuper v. Iovenko, 66 F.3d 1447, 1459-60
(6th Cir. 1995), abrogated on other grounds by Fifth Third
Bancorp v. Dudenhoeffer, No. 12-751, 573 U.S. __, slip op. at 8
(June 25, 2014); Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915,
919 (8th Cir. 1994) (“Even if a trustee failed to conduct an
1
The majority claims that “in Plasterers’, we turned to the
standard set forth by our sister circuits. Thus, we explained
that a decision is ‘objectively prudent’ if ‘a hypothetical
prudent fiduciary would have made the same decision anyway.’”
Maj. Op. at 35 (quoting Plasterers’, 663 F.3d at 218). Nothing
could be more in error. Nothing -- no combination of phrases,
words, or syllables -- in Plasterers’ amounts to an adoption of
a “would have” standard. The quotation the majority treats as a
holding was used merely to demonstrate that “causation of loss
is not an axiomatic conclusion that flows from a breach” of a
procedural duty. 663 F.3d at 218. In actuality, the holding of
the court was that fiduciaries “can only be held liable for
losses to the Plan actually resulting from their failure to
investigate.” Id. The brief snippet the majority quotes from
appellants’ brief in Plasterers’, Maj. Op. at 36 n.12, only
fortifies the central point: “Would have” versus “could have”
was not discussed, was not briefed, and was not before the
court.
62
investigation before making a decision, he is insulated from
liability if a hypothetical prudent fiduciary would have made
the same decision anyway.”). To be sure, the insufficiently
studious fiduciary may be (and quite possibly should be)
relieved of his responsibilities. But for monetary liability to
attach, it matters not whether the fiduciary spent a relatively
longer or shorter time on a decision, so long as that investment
decision was prudent in the end.
B.
The requirement of loss causation has three important
corollaries. First, loss causation remains part of the
plaintiff’s burden in establishing monetary liability under
ERISA. This is because, as I have noted above, loss causation
is an element of a claim under § 1109, which requires that the
losses “result[] from” the breach of fiduciary duty. 29 U.S.C
§ 1109(a); see also Plasterers’, 663 F.3d at 217 (“[W]hile
certain conduct may be a breach of an ERISA fiduciary’s duties
under [29 U.S.C.] § 1104, that fiduciary can only be held liable
upon a finding that the breach actually caused a loss to the
plan.”).
Even if, as the district court found, the burden of
production shifts to the defendant once the plaintiff makes a
prima facie case for breach and loss, see Tatum v. R.J. Reynolds
Tobacco Co., 926 F. Supp. 2d 648, 683 (M.D.N.C. 2013), the
63
burden of proof (persuasion) must lie with the plaintiff, where,
as here, Congress has not provided for burden shifting to the
defendant. Leaving the burden of proof with the plaintiff is
consistent with the Supreme Court’s recognition of the “ordinary
default rule that plaintiffs bear the risk of failing to prove
their claims,” including each required element. Schaffer ex
rel. Schaffer v. Weast, 546 U.S. 49, 56 (2005). It also accords
with this court’s observation that, “[w]hen a statute is silent,
the burden of proof is normally allocated to the party
initiating the proceeding and seeking relief.” Weast v.
Schaffer ex rel. Schaffer, 377 F.3d 449, 452 (4th Cir. 2004),
aff’d, 546 U.S. 49.
The weight of circuit precedent supports keeping the burden
of proof on the party bringing suit. See, e.g., Silverman v.
Mut. Ben. Life Ins. Co., 138 F.3d 98, 105 (2d Cir. 1998)
(Jacobs, J., with Meskill, J., concurring) (“Causation of
damages is . . . an element of the [ERISA] claim, and the
plaintiff bears the burden of proving it.”); Kuper, 66 F.3d at
1459 (“[A] plaintiff must show a causal link between the failure
to investigate and the harm suffered by the plan.”); Willett v.
Blue Cross & Blue Shield of Ala., 953 F.2d 1335, 1343 (11th Cir.
1992) (noting that “the burden of proof on the issue of
causation will rest on the beneficiaries” who must “establish
64
that their claimed losses were proximately caused” by the
fiduciary breach).
The cases cited by Tatum and the majority to justify
shifting the burden of proof to RJR on loss causation are
distinguishable. 2 Several deal with self-dealing, a far more
serious breach of fiduciary duty than simple lack of prudence.
See, e.g., McDonald v. Provident Indem. Life Ins. Co., 60 F.3d
234, 237 (5th Cir. 1995); N.Y. State Teamsters Council v. Estate
of DePerno, 18 F.3d 179, 182 (2d Cir. 1994); Martin v. Feilen,
965 F.2d 660, 671–72 (8th Cir. 1992). The majority’s reliance
on our opinion in Brink v. DaLesio, 667 F.2d 420 (4th Cir.
1982), is also unavailing, since that case not only dealt with
self-dealing, but also concerned the burden of proof regarding
the extent of liability, not the existence of loss causation.
See 667 F.2d at 425-26. More relevant to this case is United
States Life Insurance Co. v. Mechanics & Farmers Bank, 685 F.2d
887 (4th Cir. 1982), in which we rejected
the novel proposition that, whenever a breach of the
obligation by a trustee has been proved, the burden
shifts to the trustee to establish that any loss
suffered by the beneficiaries of the trust was not
proximately due to the default of the trustee, and
that, unless the trustee meets this burden, recovery
2
For clarity, this opinion also refers to the various other
RJR-related entities, such as R.J. Reynolds Tobacco Holdings,
Inc., and the RJR Pension Investment and Employee Benefits
Committees, simply as RJR.
65
against the trustee for the full loss follows in
course.
685 F.2d at 896. Our precedent and the first principles of
civil liability indicate that, while the burden of production
may shift as a case progresses, the burden of persuasion should
remain with the plaintiff in a § 1109 action.
The second notable consequence of § 1109’s requirement of
loss causation is a practical one: it is generally difficult to
establish loss causation when a fiduciary’s substantive decision
is objectively prudent. This is because objectively prudent
decisions tend not to lead to losses to the plan. But even
where they do, they are not the sort of losses contemplated by
the § 1109 remedial scheme, since it is unreasonable to fault a
prudent investment strategy for the statistical reality that
even the best-laid investment plans often go awry. Because
“[t]he entire statutory scheme of ERISA demonstrates that
Congress’[s] overriding concern in enacting the law was to
insure that the assets of benefit funds were protected for plan
beneficiaries,” it follows that fiduciaries who “act
imprudently, but not dishonestly, . . . should not have to pay a
monetary penalty for their imprudent judgment so long as it does
not result in a loss to the [f]und.” Plasterers’, 663 F.3d at
217 (internal quotation marks omitted) (quoting Brock v.
Robbins, 830 F.2d 640, 647 (7th Cir. 1987)).
66
Thirdly, the loss-causation requirement shows how the
majority has misconceived ERISA’s remedial scheme. Section 1109
sets out the appropriate remedies in those situations where a
fiduciary’s breach of procedural prudence does not result in
losses: “other equitable or remedial relief . . . , including
removal of such fiduciary.” 29 U.S.C. § 1109(a); see also
Brock, 830 F.2d at 647 (“If [a plaintiff] can prove to a court
that certain trustees have acted imprudently, even if there is
no monetary loss as a result of the imprudence, then the
interests of ERISA are furthered by entering appropriate
injunctive relief such as removing the offending trustees from
their positions.”); Fink, 772 F.2d at 962 (“Breach of the
fiduciary duty to investigate and evaluate would sustain an
action to enjoin or remove the trustee . . . . But it does not
sustain an action for the damages arising from losing
investments.”) (citation omitted). This provision for such
relief as removal is in direct contrast to the monetary
liability that ERISA imposes only upon a finding of loss
causation. ERISA is a “comprehensive and reticulated statute,”
Mertens v. Hewitt Assocs., 508 U.S. 248, 251 (1993) (internal
quotation marks omitted), and Congress crafted its provisions
with care. Removing a fiduciary is one thing; holding that same
fiduciary personally liable for a prudent investment decision is
something else altogether. Where, as here, the statutory text
67
speaks clearly to the proper use of monetary versus other, more
traditionally equitable remedies, it should be followed, not
flouted.
The majority gets this all wrong. It states that § 1109(a)
“provides for both monetary and equitable relief, and does not
(as the dissent claims) limit a fiduciary’s liability for breach
of the duty of prudence to equitable relief.” Maj. Op. at 17
(emphasis in original). Of course it provides for both, but it
provides for monetary liability only to make good losses to the
plan resulting from the breach. And here the court found after
a month-long trial that such losses did not result, because the
investment decision was itself objectively prudent. It is
astounding that ERISA fiduciaries are henceforth going to be
held personally liable when losses did not “result from” any
breach on their part. The majority decision quite simply reads
the words “resulting from” right out of the statute.
C.
The majority, Tatum, and Tatum’s amici focus on supposed
distinctions between whether a hypothetical prudent fiduciary
“would have” or merely “could have” made the same decision that
the RJR fiduciaries did. They then fault the district court for
using the latter standard. Tatum argues that the “could have”
standard used by the district court will turn ERISA’s demanding
fiduciary obligations into a “corporate business judgment rule,”
68
since it “renders irrelevant the prudence or non-prudence of the
fiduciaries’ actions in making those decisions.” Br. of
Appellant at 36, 37. The Acting Secretary of Labor argues that
a “could have” standard “creates too low a bar, allowing
breaching fiduciaries to avoid financial liability based even on
remote possibilities.” Br. of Acting Sec’y of Labor at 23.
The majority’s claim that the district court’s approach
“encompass[es] even the most remote of possibilities,” Maj. Op.
at 39, is a serious mischaracterization. As the district court
observed, this is a “strained reading” of its view, which was
simply that objective prudence does not dictate one and only one
investment decision. Tatum, 926 F. Supp. 2d at 683. ERISA
requires that a fiduciary 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); see
also 29 C.F.R. § 2550.404a-1(a). As a result, the district
court’s standard would not be satisfied merely by imagining any
single hypothetical fiduciary that might have come to the same
decision. Rather, it asks whether hypothetical prudent
fiduciaries consider the path chosen to have been a reasonable
one. The Supreme Court recently came to a similar conclusion.
The Court suggested that where a plaintiff alleges that ERISA
69
plan fiduciaries should have utilized inside information in
administering single-stock funds, courts “should also consider
whether the complaint has plausibly alleged that a prudent
fiduciary in the defendant’s position could not have concluded
that” acting on the inside knowledge “would do more harm than
good.” Fifth Third, slip op. at 20 (emphasis added).
That ERISA’s duty of prudence allows for the possibility
that there may be several prudent investment decisions for any
given scenario should not be a surprise. Investing is as much
art as science, in which there are many options with uncertain
outcomes, any number of which may be prudent. Tatum’s own
experts conceded at trial that prudent minds may disagree,
indeed diametrically, over the preferable course of action in a
particular situation. Tatum, 926 F. Supp. 2d at 683 n.27, 690.
Thus, a decision may be objectively prudent even if it is not
the one that plaintiff, armed with all the advantages of
hindsight, now thinks is optimal. Optimality is an impossible
standard. No investor invariably makes the optimal decision,
assuming we know what that decision even is.
Ultimately, the majority’s and Tatum’s minute parsings of
the differences between “would have” and “could have” obfuscate
rather than illuminate. It is semantics at its worst. The same
is true of their definition of a reasonable investment decision
as the one that hypothetical prudent fiduciaries would “more
70
likely than not” have come to. This provides no legal basis on
which to reverse the district court’s simple finding, after a
month-long bench trial, that defendants made an objectively
prudent investment decision here.
What might plaintiffs’ new semantics mean? Reading the
plaintiffs’ “would have” standard to permit fiduciaries to
escape monetary liability only if they make the decision that
the majority of hypothetical prudent fiduciaries would “more
likely than not” have made is all too treacherous. Not only
does the “more likely than not” language insistently urged by
the majority, plaintiff, and his various amici find no support
in statute or regulation. Not only is it a transparent gloss
upon the Act. It seeks to shift the standard of objective
prudence to one of relative prudence: whether prudent
fiduciaries would “more likely than not” have come to “the same
[investment] decision” that defendants did. Maj. Op. at 37; Br.
of Appellant at 7; see also Br. of Acting Sec’y of Labor at 23;
Br. of AARP & Nat’l Emp’t Lawyers Ass’n at 14. The majority
orders the district court on remand to divine whether “a
fiduciary who conducted a proper investigation would have
reached the same decision.” Maj. Op. at 47 (emphasis added).
The only possible effect of such language is to squeeze and
constrict and, once again, to ignore the fact that there is not
71
one and only one “same decision” that qualifies as objectively
prudent.
Thus plaintiff would substitute for the fiduciary’s duty to
make a prudent decision a duty to make the best possible
decision, something ERISA has never required. Take a scenario
in which 51% of hypothetical prudent fiduciaries would act one
way and 49% would act the other way. What sense, let alone
justice, is there in penalizing a fiduciary merely for acting in
accordance with a view that happens to be held by a bare
minority? And how, absent an unhealthy dose of hindsight, could
we ever know the precise breakdown of hypothetical fiduciaries
with regard to a particular investment decision? See Br. of
Chamber of Commerce of U.S. of Am. & Am. Benefits Council at 15-
16.
While the majority protests it has not adopted the most
prudent standard, its actions speak louder than words. It has
reversed a “merely” prudent, eminently sensible decision, and
demanded much more. Moreover, all its fuss over “would
have/could have” carries us far from the general standard of
objective prudence embodied in § 1104(a)(1)(B). That is, of
course, the straightforward test that Plasterers’ articulated
when it remanded back to the district court to “determine the
prudence of the [fiduciaries’] actual investments.” 663 F.3d at
219. The majority complains that the dissent fails “to define”
72
the objective prudence standard or to say precisely “how this
standard would operate in practice.” Maj. Op. at 49. But the
trial here showed exactly how that standard operates in
practice. Prudence depends inescapably upon the particular
circumstances confronting fiduciaries; it is a fool’s errand to
attempt to sketch every situation that might arise. Even
without the majority’s linguistic contortions, the law of
fiduciary obligations under ERISA is complex enough. The layer
of scholasticism the majority adds to what should be a
straightforward factual inquiry into objective prudence helps no
one. One can, of course, play the endless permutations of the
“would have”/”could have” game. But the test is one of objective
prudence simpliciter, taking the circumstances as they existed
at the time.
To make matters worse, the majority all but directs a
finding of personal liability on remand. In affirming the
district court’s finding that RJR was procedurally imprudent,
the majority falls over itself in its rush to defer to the
district court’s “extensive factual findings.” Id. at 22.
Fair enough: I have no quarrel with the trial court’s “extensive
factual findings” that the RJR fiduciaries acted in a
procedurally imprudent fashion. Yet when it comes to
substantive prudence, the majority slams the door on the
district court’s “extensive factual findings” when the majority
73
even so much as deigns to discuss them. Moreover, the majority
minimizes risk as a factor, stressing instead “the timing of the
decision and the requirements of the governing Plan document,”
id. at 45, despite ERISA’s express command that fiduciaries
“diversify[] 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.” 29 U.S.C. § 1104(a)(1)(C)
(emphasis added). Further, the majority ignores the Supreme
Court’s statement that § 1104 “makes clear that the duty of
prudence trumps the instructions of a plan document.” Fifth
Third, slip op. at 11. According to the majority, “plan
documents [are] highly relevant” to the objective prudence
inquiry, Maj. Op. at 44, but risk is merely “relevant,” id. at
43. It is difficult to see how fiduciaries can survive this
loaded calculus, one in which procedural imprudence all but
ensures the obliteration of the loss causation requirement. 3
3
The majority contends that “[u]nder the dissent’s reading
of the statute, any decision assertedly ‘made in the interest of
diversifying plan assets’ would be automatically deemed
‘objectively prudent.’” Maj. Op. at 50. That statement is
patently incorrect, for if there were any per se rule of the
sort that the majority suggests, there would have been no need
for the district court to conduct an extended trial considering
all the circumstances, including the timing of the decision and
the governing plan document, that bore on the investment
judgment. In point of fact, it is the majority that minimizes
the importance of asset diversification as one of the factors
bearing upon the objective prudence inquiry despite ERISA’s
clear instruction to the contrary.
74
D.
There is one final point. The majority tries to justify
what it is doing with the thought that its approach is necessary
to deter fiduciaries from imprudent behavior. But that in no
way justifies overriding the statute –- in particular § 1109,
which establishes a requirement of loss causation, and § 1104,
which establishes a standard of prudence under all the
circumstances. This is a rewriting of the statute, and,
frankly, Congress’s wisdom is a lot more persuasive than the
majority’s.
Under the statute as written, the standard used by the
district court deters fiduciaries from procedural imprudence by
the threat of removal and from substantive imprudence by the
knowledge that resulting losses to the fund will in fact lead to
liability. As we said in Plasterers’, quoting the Seventh
Circuit:
The only possible statutory purpose for imposing a
monetary penalty for imprudent but harmless conduct
would be to deter other similar imprudent conduct.
However, honest but potentially imprudent trustees are
adequately deterred from engaging in imprudent conduct
by the knowledge that imprudent conduct will usually
result in a loss to the fund, a loss for which they
will be monetarily penalized. This monetary sanction
adequately deters honest but potentially imprudent
trustees. Any additional deterrent value created by
the imposition of a monetary penalty is marginal at
best. No ERISA provision justifies the imposition of
such a penalty.
75
663 F.3d at 217-18 (internal quotation marks omitted) (quoting
Brock, 830 F.2d at 640).
II.
Even if one thinks that monetary liability should somehow
attach to prudent investment decisions, it should almost never
lie where the decision was made, as this one was, in the
interest of diversifying plan assets. The importance of
diversification in retirement plans is reflected in ERISA’s
text, which explicitly requires plan fiduciaries to “diversify[]
the investment of the plan so as to minimize the risk of large
losses, unless under the circumstances it is clearly prudent not
to do so.” 29 U.S.C. § 1104(a)(1)(C) (emphasis added).
“Diversification is fundamental to the management of risk
and is therefore a pervasive consideration in prudent investment
management.” Restatement (Third) of Trusts § 227 cmt. f (1992).
Diversification’s ability to reduce risk while preserving
returns is a major focus of modern portfolio theory, which has
been adopted both by the investment community and by the
Department of Labor in its implementing regulations for ERISA.
See DiFelice v. U.S. Airways, Inc., 497 F.3d 410, 423 (4th Cir.
2007) (citing 29 C.F.R. § 2550-404a-1). Diversification is even
more important in the context of retirement savings, where the
avoidance of downside risk is of paramount concern. “A trustee
is not an entrepreneur. . . . He is supposed to be careful
76
rather than bold.” Armstrong v. LaSalle Bank Nat’l Ass'n, 446
F.3d 728, 733 (7th Cir. 2006).
Although ERISA does not in so many words require every fund
in an investment plan to be fully diversified, each fund, when
considered individually, must be prudent. See DiFelice, 497
F.3d at 423. This is because 401(k) participants could easily
view the inclusion of a fund as an endorsement of it by the plan
fiduciaries and invest a sizeable portion or even the entirety
of their assets in a high-risk fund. The RJR fiduciaries were
concerned about this very possibility when they decided to
maintain a prohibition on making new investments into the
Nabisco funds. See Tatum v. R.J. Reynolds Tobacco Co., 926 F.
Supp. 2d 648, 661-62 (M.D.N.C. 2013).
In addition, once plan participants allocate their assets
among various funds, there is a substantial risk that inertia
will keep them from carefully monitoring and reallocating their
retirement savings to take into account changing risks. Indeed,
a witness for RJR testified at trial that over 40% of plan
participants who had invested in the Nabisco funds did not make
a single voluntary plan transfer over a five-and-a-half-year
period from 1997 to 2002. See J.A. 846-48. Because the RJR
plan already contained an employer-only single-stock fund,
maintaining the Nabisco funds would multiply the number of
77
risky, single-stock funds in which RJR plan participants could
invest. See Tatum, 926 F. Supp. 2d at 685.
The requirement that management of retirement plans be
prudent rather than aggressive strongly supports diversifying
each fund. As the district court recognized, a “single stock
fund carries significantly more risk than a diversified fund.”
Id. at 684; see also Summers v. State St. Bank & Trust Co., 453
F.3d 404, 409 (7th Cir. 2006). For this reason, single-stock
funds are generally disfavored as ERISA investment vehicles.
See, e.g., DiFelice, 497 F.3d at 424 (noting that “placing
retirement funds in any single-stock fund carries significant
risk, and so would seem generally imprudent for ERISA
purposes”). To be sure, Congress has provided a limited
exception from ERISA’s general diversification requirements for
certain types of employer-only single-stock funds. See 29
U.S.C. §§ 1104(a)(2), 1107(d)(3). Still, single-stock funds
inherently “are not prudently diversified.” Fifth Third Bancorp
v. Dudenhoeffer, No. 12-751, 573 U.S. __, slip op. at 5 (June
25, 2014) (emphasis in original). And absent this narrow
congressional carve-out for employer-only single-stock funds,
“[t]here is a sense in which, because of risk aversion, [a
single-stock fund] is imprudent per se.” Armstrong, 446 F.3d at
732.
78
In this case, the Nabisco funds were even more dangerous
than an ordinary single-stock fund. Because of the “tobacco
taint” and the risk that a massive tobacco-litigation judgment
against RJR could also harm Nabisco, the performance of the
Nabisco funds was potentially correlated with that of RJR
itself. Thus, retirement plans containing the Nabisco funds
were doubly undiversified. First, they included the stocks of a
single company rather than a range of companies. Second, the
same external forces that could harm RJR –- and thus imperil the
employment of plan participants -– could simultaneously tank the
value of the Nabisco funds. See Tatum, 926 F. Supp. 2d at 685.
In other words, keeping the Nabisco funds in the RJR plan would
create the risks of an Enron-like situation, in which the health
of an employer and the retirement savings of its employees could
be adversely affected simultaneously. See Richard A. Oppel Jr.,
Employees’ Retirement Plan Is a Victim as Enron Tumbles, N.Y.
Times, Nov. 22, 2001, at A1. But unlike the employer single-
stock funds that might have legislative sanction, no such
congressional approval existed for the Nabisco funds.
By penalizing the RJR fiduciaries for doing nothing more
than properly diversifying the plan, the majority and Tatum
threaten to whipsaw investment managers of pension and
retirement funds. The majority’s approach falls into the trap
of seeing plan fiduciaries and participants as inveterate
79
adversaries. In fact, nothing could be further from the truth.
Fiduciaries often act to the inestimable benefit of plan
participants, and they do so most clearly when they follow
ERISA’s mandate to diversify plan holdings. But the majority’s
approach will wreak havoc upon this harmony, encouraging
opportunistic litigation to challenge even the most sensible
financial decisions. Here, the RJR fiduciaries knew they had a
ticking time bomb on their hands. Had the plan fiduciaries
failed to diversify and the Nabisco stocks had continued to
decline, the fiduciaries would have been sued for keeping the
stocks. As the Supreme Court noted:
[I]n many cases an ESOP fiduciary who fears that
continuing to invest in company stock may be imprudent
finds himself between a rock and a hard place: If he
keeps investing and the stock goes down he may be sued
for acting imprudently in violation of
§ 1104(a)(1)(B), but if he stops investing and the
stock goes up he may be sued for disobeying the plan
documents in violation of § 1104(a)(1)(D).
Fifth Third, slip op. at 14. Putting plan managers in a cursed-
if-you-do, cursed-if-you-don’t situation is unfair to them and
damaging to ERISA-plan administration generally.
III.
Even if prudent decisions made in the interest of asset
diversification could ever lead to monetary liability, it is
inconceivable that they could do so on these facts. As the
80
district court well understood, if monetary liability lies here,
then it will lie for a great many other prudent choices as well.
“[W]hether a fiduciary’s actions are prudent cannot be
measured in hindsight . . . .” DiFelice v. U.S. Airways, Inc.,
497 F.3d 410, 424 (4th Cir. 2007). This is because “the prudent
person standard is not concerned with results; rather it is a
test of how the fiduciary acted viewed from the perspective of
the time of the challenged decision rather than from the vantage
point of hindsight.” Roth v. Sawyer-Cleator Lumber Co., 16 F.3d
915, 918 (8th Cir. 1994) (alteration and internal quotation
marks omitted). “Because the content of the duty of prudence
turns on ‘the circumstances . . . prevailing’ at the time the
fiduciary acts, § 1104(a)(1)(B), the appropriate inquiry will
necessarily be context specific.” Fifth Third Bancorp v.
Dudenhoeffer, No. 12-751, 573 U.S. __, slip op. at 15 (June 25,
2014) (alteration in original).
In addition to the diversification imperatives described
above, there were at least three reasons for the RJR fiduciaries
to eliminate, at the time they had to make the decision, the
Nabisco stocks from the RJR 401(k) plan. First, as found by the
district court, there was a substantial threat to the Nabisco
stocks’ share prices from the “tobacco taint.” Tatum v. R.J.
Reynolds Tobacco Co., 926 F. Supp. 2d 648, 659-60 (M.D.N.C.
2013). Although Nabisco had theoretically insulated itself from
81
liability for RJR’s tobacco-related litigation by entering into
indemnification agreements with RJR, there was always a danger
that holders of judgments against RJR might sue Nabisco for any
amount that RJR could not pay. This danger became especially
acute after a Florida jury ruled in July 1999 against RJR in a
class-action lawsuit. Id. at 659. As the damages portion of
the trial began in the fall of 1999, RJR began to worry that it
would not be able to fully pay a multibillion dollar award and
that members of the class would sue Nabisco for the unpaid
remainder. Id. at 660. In a June 1999 report to the SEC,
Nabisco acknowledged these very risks. Id. at 659. And when
RJR lost an important punitive-damages ruling in the Florida
suit, the stock prices of RJR and Nabisco both dropped sharply.
Id. at 660. Indeed, the Florida jury ultimately awarded the
class over $140 billion in punitive damages. Id. at 660 n.9.
(Related litigation is ongoing. On July 18, 2014, a Florida
jury awarded $23.6 billion in punitive damages against RJR in an
individual case stemming from that class action.)
Second, Nabisco’s stock prices had been steadily falling
since the two companies split. Between June 15, 1999, when the
split was finalized, and January 31, 2000, when RJR sold the two
Nabisco stocks in its 401(k) plan, their prices had fallen
substantially in value, one by 60% and the other by 28%. Id. at
666. Cautious fiduciaries would naturally view optimistic
82
glosses on Nabisco’s continuing stock decline with skepticism.
Not only were analyst reports during the dot-com bubble colored
by “optimism bias,” but even the neutral and positive reports
noted the effect of the tobacco taint and that the current share
price might well be accurate. Id. at 662-63. And even had RJR
chosen to keep the Nabisco stocks, there was, as the district
court noted, no reason to think that the stocks would have
provided above-market returns, given the public nature of the
relevant financial information and the general efficiency of the
stock market. Id. at 686-88. As the Supreme Court has
recognized, “a fiduciary usually ‘is not imprudent to assume
that a major stock market . . . provides the best estimate of
the value of the stocks traded on it that is available to him.’”
Fifth Third, slip op. at 17 (quoting Summers v. State Street
Bank & Trust Co., 453 F.3d 404, 408 (7th Cir. 2006)) (alteration
in original).
Third, the ultimate cause of the dramatic appreciation in
Nabisco stock prices in 2000 -- the bidding war sparked by
investor Carl Icahn’s takeover bid -- was totally unexpected by
RJR, analysts, and the broader market. Notably, when Icahn
acquired a large block of Nabisco shares in November 1999,
Nabisco’s stock prices did not react and analyst reports did not
mention a possible takeover bid. Tatum, 926 F. Supp. 2d at 688.
In addition, the RJR-Nabisco split was structured such that the
83
spinoff would be tax-free as long as, broadly speaking, Nabisco
did not initiate a corporate restructuring within two years.
Id. at 653. Thus, a takeover by Icahn was only feasible if he
initiated it. This limitation made an Icahn offer, and the
consequent bidding war, even less likely. Id. at 688-89.
Ultimately, the RJR fiduciaries had little reason to think
that the Nabisco stocks in the 401(k) plan would appreciate in
value, and every reason to worry that they would continue to
decline. The fiduciaries’ decision to liquidate the Nabisco
funds was prudent, and certainly not “clearly imprudent.”
Plasterers’ Local Union No. 96 Pension Plan v. Pepper, 663 F.3d
210, 219 (4th Cir. 2011). Arguably, it was the most prudent of
the options available, for it protected plan participants from
the dangers of risky shares held in undiversified plan funds.
To hold otherwise requires viewing the RJR fiduciaries’ actions
through the lens of hindsight, a grossly unfair practice that
our precedent categorically forbids.
IV.
The majority has reversed the most substantiated of
district court findings under the most stringent of hindsight
tests. To impose personal monetary liability upon fiduciaries
for prudent investment decisions made in the interest of asset
diversification makes no sense. What this decision will lead
to, despite all the words from the majority and Tatum, is
84
litigation at every stage behind reasonable investment decisions
by ERISA-plan fiduciaries. Who would want to serve as a
fiduciary given this kind of sniping?
ERISA was “intended to ‘promote the interests of employees
and their beneficiaries in employee benefit plans.’” DiFelice
v. U.S. Airways, Inc., 497 F.3d 410, 417 (4th Cir. 2007)
(quoting Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 90 (1983)).
Yet far from safeguarding the assets of ERISA-plan participants,
the litigation spawned by the majority will simply drive up
plan-administration and insurance costs. It will discourage
plan fiduciaries from fully diversifying plan assets. It will
contribute to a climate of second-guessing prudent decisions at
the point of market shift. It will disserve those whom ERISA
was intended to serve when fiduciaries are hauled into court for
seeking, sensibly, to safeguard retirement savings.
I had always entertained the quaint thought that law
penalized people for doing the wrong thing. Now the majority
proposes to penalize those whom the district court found after a
month-long trial did indisputably the right thing -- in
professional parlance, the objectively prudent thing.
I would affirm.
85