Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

PEABODY v. DAVIS (April 12, 2011)

Jonathan Peabody joined the Rock Island Corporation, a closely held operation, in 1998. He first invested in the company’s pension plan in 1999 when he rolled over a $167,000 IRA into the Plan. Almost all of the rolled over funds were used to purchase Rock Island stock. There was no market for, and therefore no easy way to value, the stock. The Plan's trustee issued valuation statements periodically. At different times between 2000 and 2004, it was assigned values of $757, $500, $625 and $550 per share. Peabody left Rock Island in 2004. At the time he had 835 Rock Island shares. Peabody and Rock Island entered into a loan agreement pursuant to which Rock Island agreed to purchase the stock and to pay $350 per share in one year. However, when the loan became due, Rock Island was unable to pay. It went out of business in 2005. Peabody brought suit against the company, the Plan trustees, and two insurance companies that had issued policies protecting Rock Island against employee dishonesty. Judge Coar (N.D. Ill.) held a bench trial and ruled that: a) Peabody had waived any fiduciary duty claim with respect to the initial rollover or the defendants' failure to diversify his account, b) the Plan and the trustee's violated their fiduciary duties by maintaining the Rock Island investment and by failing to distribute the benefit, c) one trustee breached his fiduciary duty by offering the loan, d) ERISA prohibited the loan transaction, e) Rock Island itself was not liable, and f) Peabody did not have standing to assert a claim against the insurance company defendants. The court awarded damages based on a $500 per-share valuation in reliance on the fact that the Plan purchased shares for Peabody's account at that price in 2001. Peabody and the defendants appealed.

In their opinion, Judges Cudahy, Flaum, and Kanne affirmed in part and reversed and remanded in part. The Court first noted it was dealing with three separate claims: a) a § 502(a)(2) claim against the fiduciaries on behalf of the Plan, b) a § 502(a)(1)(b) claim for benefits, and c) a § 502(a)(3) equitable claim against the insurance companies. The Court first concluded that the trustees breached their fiduciary duties under § 502(a)(2). A new SEC rule had substantial negative implications for the company's profit margins and its stock steeply declined over a five-year period. The trustee's knew of the changed rule, knew it was prominent, and knew of its significant impact on Rock Island’s business model. The company did not require employees to invest in Rock Island stock. In fact, Peabody apparently had a greater percentage of company stock than any other employee. A prudent investor would have divested earlier. The Court also concluded that Peabody's initial consent to the stock purchase did not affect the trustee's continuing fiduciary duty over the course of the investment. The Court rejected Peabody's alternative theory of liability arising from the loan for stock transfer. Although the Court agreed that the transaction violated ERISA, it concluded that Peabody suffered no damages from the transaction. As the Court pointed out, it was simply the trade "of worthless stock for a worthless loan." The district court erred, however, in computing damages when it applied the $500 per-share figure to all of the stock. The Court remanded for a damages recalculation, advising the district court to start with Peabody's original investment , consider using average values over the length of the investment, and assume that 25% to 33% of the stock could have been left in the account without violating a duty of prudence. The Court also affirmed the district court's rejection of Peabody's § 502(a)(1)(B) benefits claim on the grounds that it would result in no additional relief. Finally, the Court agreed with the district court’s rejection of the § 502(a)(3) claim against the insurance companies. That section allows for "other appropriate equitable relief." The Supreme Court has limited the section to "typical" equitable relief. Peabody's request for money damages from the insurance policies is not typical equitable relief.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

GEORGE v. KRAFT FOODS GLOBAL, INC. (April 11, 2011)

Kraft Foods Global, Inc. sponsored an ERISA defined contribution plan for its employees. Each participating employee had an account and was able to choose where to invest. The plan offered up to nine different funds, including two company stock funds and a number of multi-stock funds. The plan contracted with Hewitt & Associates to track the accounts and transactions and State Street Bank to manage the fund's assets. A number of Plan participants filed suit against seven defendants in 2006, alleging that the defendants mismanaged the company stock funds and paid excessive fees to the service providers. The original fact discovery deadline was March of 2008. The parties completed the class certification motion briefing by January 2008. In May 2008, plaintiffs sought to amend their complaint to add 21 defendants and to add claims challenging a number of investment decisions. Magistrate Judge Schenkier (N.D. Ill.) denied the motion, concluding that the plaintiffs had known about the facts in support of the amendment for quite some time, that the plaintiffs never advised the court of their desire to amend, and that the new claims were substantially different from the original claims. The court then certified a class and granted summary judgment to the defendants. Plaintiffs appeal.

In their opinion, Circuit Judges Cudahy (concurring in part and dissenting in part) and Rovner and District Judge Adelman affirmed in part and reversed and remanded in part. The Court first addressed the district court's denial of the motion to amend. The district court found that the plaintiffs were aware of the facts supporting the amendment early on, that they never asked for a amendment deadline, and that the addition of the new defendants and claims would prejudice both the defendants and the court. The Court found no abuse of discretion. The Court also found no error in the district court's refusal to allow an expert witness. The expert's opinion related only to the claims in the amended complaint and was not relevant to the case without it. On the merits, the Court first addressed the plaintiffs allegations with respect to the company stock funds. The plaintiffs complained of the defendants' decision to operate these funds on a unitized basis. The benefits of unitization are that it allows transactions to consummate more quickly and it allows the Plan to save on transaction costs by offsetting purchase orders with sell orders. Two alleged downsides of unitization are: a) the Fund gets lower returns when the stock appreciates because of the need to keep a portion of the fund in cash or other liquid investments, and b) unitization incentivizes more transactions and higher transaction costs, since transaction costs are deducted from the fund value rather than allocated to individual traders. Plaintiffs' legal theory is that defendants breached their fiduciary duty by not eliminating unitization or at least adopting measures to limit the number of transactions. Notwithstanding contrary conclusions by the district court, the Court could find nothing in the record establishing that a decision was ever made. But a failure to make a decision, one way or the other, when a prudent man would have done so, is also a breach of ERISA’s fiduciary obligation. The Court therefore reversed and remanded for further consideration. The Court turned to the allegations regarding the Hewitt and State Street fees. With respect to Hewitt, the Court reversed the summary judgment in defendants' favor. Plaintiffs' allegations are that the fiduciaries should have, but did not, solicit competitive bids before extending the Hewitt contract. Plaintiffs’ expert testified to that opinion and further opined that the plan overpaid Hewitt. Defendants assert that they received consultants’ opinions that the Hewitt contract was prudent. The district court erred when it weighed the expert opinion at the summary judgment stage and also erred when it concluded that reliance on experts was sufficient for judgment as a matter of law. With respect to the State Street claims, the court affirmed summary judgment for defendants. Plaintiffs' allegations here are that the fiduciaries allowed State Street to retain as income interest from "float" without even knowing the amount of that income. The Court noted, however, that the defendants submitted a declaration that they received annual income reports. Plaintiffs did not contradict the declaration. Plaintiffs point to no other breach of duty evidence. Summary judgment for the defendants was appropriate.

Judge Cudahy concurred in part and dissenting in part. He would have affirmed the district court decision in its entirety. First, unitization is a "universally accepted investment practice" and whether or not to adopt it is a routine investment consideration. Nothing in ERISA requires a fiduciary to create a record of the balancing of its pluses and minuses. Second, with respect to the Hewitt claim, Judge Cudahy agreed with the district court that the long relationship between the Fund and Hewitt and the Fund's reliance on consultants to evaluate the fee’s prudence satisfies its fiduciary duties.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

CDX LIQUIDATING TRUST v. VENROCK ASSOCIATES (March 29, 2011)

Cadant was founded in 1998 to develop systems for home Internet access. It was based in Illinois but it was incorporated in Maryland. Two venture capital firms, Venrock and J.P. Morgan, invested in the company and received preferred stock in exchange. Eric Copeland, a Venrock principle, also became a Cadant board member. In early 2000, the Cadant board rejected a tentative $300 million purchase offer. Several months later, the company started experiencing financial difficulties. After considering several options, the board approved an $11 million bridge loan from Venrock and J.P. Morgan. Copeland negotiated the loan on behalf of Cadant. On January 1, 2001, the company reincorporated in Delaware. In May, the company entered into a second bridge loan from Venrock and J.P. Morgan, this time for $9 million. Again, Copeland negotiated for Cadant. The agreement provided that the lenders would be entitled to twice the outstanding principal if Cadant was liquidated. Cadant defaulted and sold its assets for stock valued at $55 million. The sale amount was just enough to pay off creditors and preferred shareholders. It was approved by the board and also a simple majority of shareholders. The common stock shareholders brought suit charging several directors with breaches of their duty of loyalty and also alleging that Venrock and J.P. Morgan aided and abetted the directors. In an earlier appeal to the Seventh Circuit, the Court held that the case was improperly brought and should be brought as a derivative suit. Judge Norgle (N.D. Ill.) bifurcated the trial and granted defendants' motion for judgment as a matter of law at the end of the plaintiffs' liability case. Plaintiffs appeal.

In their opinion, Judges Posner, Flaum, and Sykes reversed and remanded. The Court first addressed choice of law. Illinois choice of law principles direct the Court to the law of the state of incorporation in a breach of fiduciary duty case. Maryland law therefore applied to the first alleged breach (the purchase offer rejection). That allegation was properly dismissed because Maryland imposes no duty on directors to accept, or even respond, to a purchase proposal. The other allegations, relating principally to the bridge loans, straddled the Delaware reincorporation. The negotiations for the first loan began before the reincorporation but the loan was finalized shortly after. Since it could not apply the laws of both states, the Court looked to which state’s law the parties would have expected to govern and which state had the higher regulatory interest. The answer to both questions was Delaware. So the court turned to the merits, applying Delaware law. The district judge had given too grounds for granting judgment: insufficient evidence of proximate cause, and insufficient evidence of a breach of fiduciary duty. The Court disagreed with the district court's approach to causation. Under Delaware law, once a plaintiff rebuts the business judgment defense with evidence of a breach of fiduciary duty, the burden shifts to the directors to prove the transaction's "entire fairness" to the shareholders. If the transaction at issue is the sale of the company, for example, the directors can prove that they obtained the highest reasonable value and therefore "caused" no loss. Here, the defendant directors had to rebut the breach evidence by proving that their misconduct had no effect on the outcome of the deal. In addition to the fact that the district court applied the burden of causation improperly, the Court also concluded that there was enough causation evidence to send the case to a jury. A similar company brought $300 million in the marketplace shortly after Cadant brought $55 million. There is evidence that the oppressive terms of the bridge loans negotiated by Copeland contributed to Cadant's inability to bring fair value. The Court also rejected the defendant directors' argument that there could be no breach of loyalty when their conflict of interest was fully disclosed. But the directors are not accused of disloyalty because they had a conflict of interest -- they are accused of actually being disloyal. Actual disloyalty is not excused by disclosing a conflict of interest. Finally, the Court concluded that the evidence of aiding and abetting on the part of Venrock and J.P. Morgan was sufficient to get the plaintiffs to a jury.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

SMITH v. MEDICAL BENEFIT ADMINISTRATORS GROUP (March 15, 2011)

Brenner Tanks of Fond du Lac, Wisconsin employs Jeffrey Smith. It also offers a group health plan, to which Smith belongs. Taking the allegations of the complaint as true: In 2006, Smith's doctors advised that he undergo gastric bypass surgery. Smith sought preauthorization for the surgery from the plan's third party claims administrator, Auxiant. Auxiant took four months to act on his request and authorized the surgery, but they later denied his claims based on a plan exclusion for obesity related surgeries. In fact, according to Smith, Auxiant routinely takes a long time in responding to authorization requests and routinely denies coverage for procedures that it has already preauthorized. Smith brought suit under ERISA, seeking damages, restitution, and other relief. Judge Randa (E.D. Wis.) dismissed the complaint, concluding that Smith was not entitled to the relief he sought under ERISA. Smith appeals.

In their opinion, Judges Flaum, Rovner, and Sykes affirmed in part and reversed and remanded in part. The Court first concluded that Smith had adequately alleged that Auxiant breached a fiduciary duty. Auxiant is an ERISA fiduciary, has a duty of loyalty, must exercise reasonable care, and must not mislead an insured. Accepting the factual allegations as true, the Court concluded that Auxiant’s preauthorization practices could be considered a breach of a fiduciary duty. But is Smith entitled to relief? The Court identified three possibilities. Under § 502(a)(1)(B), a plan beneficiary is entitled to recover benefits due him -- but Smith has conceded that Auxiant’s ultimate denial of benefits was proper under the plan terms. Under § 502(a)(2), a plan beneficiary is entitled to recover losses to the plan that result from a breach of fiduciary duty -- but Smith is seeking damages for himself, not the recovery of plan losses. The plan had no losses. Finally, under § 502(a)(3), a plan beneficiary may seek to enjoin an improper practice or obtain other equitable relief for ERISA or plan violations. Smith has a cause of action under (a)(3), but only for equitable relief. The Court concluded that Smith adequately requested such relief in his complaint. The Court warned that any such relief should be carefully crafted so as not to modify the plan terms.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

HOWELL v. MOTOROLA (January 21, 2011)

Motorola has a ERISA defined-contribution pension plan that it offers its employees. The Plan Administrator, called the Profit Sharing Committee, was appointed by the Board of Directors. The Committee selected the investments that the plan offered and monitored the plan. The participants in the plan had complete authority over their investment choices. Before 2000, the plan offered four investment options, one of which was a Motorola Stock Fund. After 2000, nine options were available, still including a Motorola Stock Fund. Motorola stock had done quite well in the 1990s, increasing in value tenfold. It was trading around $30 in May 2000. It was in May 2000 that Motorola filed an SEC report in which it reported a significant agreement with a Turkish company. The report failed to mention that Motorola had provided almost $2 billion in financing to the company. The Turkey project did not go well. By May 2001, Motorola stock was trading at about $15 a share. Bruce Howell, a former Motorola employee and plan member, filed suit in 2003. Stephen Lingis and others later intervened. The suit alleges three breaches of fiduciary duty: a) imprudence in offering the Motorola Stock Fund, b) misrepresentation or failure to disclose information about the Turkey project, and c) failure to appoint and monitor competent fiduciaries. The defendants included Motorola, the Profit Sharing Committee, and a number of individual defendants. Judge Pallmeyer (N.D. Ill.) certified a class, dismissed Howell's claims on the grounds that he signed an enforceable release, and granted summary judgment to the defendants. She concluded that no defendant breached an ERISA duty and that the defendants were entitled to the section 404(c) safe harbor. Howell and the plaintiff class appeal.

In their opinion, Judges Bauer, Wood, and Tinder affirmed. The Court first addressed Howell's appeal. He had signed a General Release as part of a severance program in 2001. The release specifically included ERISA claims but excluded claims under the "employee benefits plan" and claims which could not be released by law. Howell claimed that the release was either not voluntary or fit within one of the exclusions. On the voluntariness point, the Court concluded that Howell failed to create an issue of fact. The Court addressed the "benefits plan" exclusion as a contract matter and concluded that the only rational reading of the clause was that Howell reserved the right to assert a claim for benefits already accrued but waived the right to challenge the plan as a whole. Finally, the Court rejected the argument that the release was an agreement that purported to relieve a fiduciary from responsibility prohibited under ERISA § 410(a). The release does not relieve any fiduciary of responsibility, it merely settles claims he might have. Turning to the merits of the class appeal, the Court identified three issues: a) which of the defendants were fiduciaries, b) whether there was a breach of a fiduciary duty, and c) whether the class was harmed. On the question of which defendants were fiduciaries, the Court addressed them in categories. With respect to Motorola and the Committee, as entities, the Court identified some thorny issues. Since it would later conclude that there was no breach, it assumed that both the company and the Committee fiduciaries. The Court then concluded that each of the individual defendants was an ERISA fiduciary, either as a Committee member, a Board member responsible for selecting Committee members, or as the Vice President of benefits. The Court thus turned to the evidence of a breach. It addressed each of the three theories of liability separately. On the theory that the fiduciaries were imprudent in even offering the Motorola Stock Fund, the Court found that the “safe harbor" did not apply. The safe harbor only protects a fiduciary from responsibility as a result of choices made by someone beyond his control. The choice of funds to offer, however, is exclusively within the fiduciary's control -- the safe harbor is unavailable. It found the class' evidence on the imprudence theory quite thin, however. The participants were always provided with other options, they were almost always allowed to move investment money out of the Motorola Stock Fund, and Motorola was a fundamentally sound company. It concluded that offering a Motorola Stock fund was not a breach. The class’ failure to disclose theory is that the fiduciaries breached a duty by failing to provide information on the Turkey project to the plan participants. The same failure to provide information, argued the class, defeats their safe harbor argument. In fact, the Court accepted the district court's approach that basically equated the two standards. The Court concluded, however, that the class presented insufficient evidence of an intentionally misleading statement or material omission. Therefore, the defendants did not violate a fiduciary duty and were entitled to the safe harbor. Finally, on the failure to monitor allegations, the Court found that the same safe harbor analysis it undertook with respect to disclosure theory applied. Even without safe harbor, there would be no liability as the Court thought the allegations were close to frivolous.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

KENSETH v. DEAN HEALTH PLAN (June 28, 2010)

In 1987, Deborah Kenseth decided to do something about her serious weight problem. She underwent a surgical procedure known as vertical banded gastroplasty (“VBG”) and shed 120 pounds. Kenseth joined Highsmith, Inc., a library furniture and supply distributor, in 1996. Kenseth elected to participate in the Dean Health Plan through her employer. The plan did not cover surgical treatment for gross obesity such as VBG. It also generally excluded any services "related to" a non-covered service. Several years later, Kenseth began to experience complications arising from the VBG. In 2004, she had a surgical procedure to address one of those complications. Notwithstanding the plan language, Dean paid for the procedure. The procedure, however, was not totally successful. Her physician recommended a gastric bypass procedure as a long-term solution to her situation. After the surgery was scheduled, the physician's office provided standard instructions to Kenseth. Included in the instructions was a direction to call her insurance company to check on coverage. Kenseth did just that. Kenseth described the procedure to the Dean customer service agent as one dealing with the "bottom of the esophagus." She did not disclose, she says unintentionally, that the procedure was related to her 1987 VBG surgery. The plan representative told her that the procedure would be covered. The day after the surgery, Dean made its initial decision to deny coverage. Its rationale was that the procedure addressed a complication arising from, and therefore related to, the VBG, a non-covered service. Kenseth unsuccessfully challenged Dean's decision internally. She then brought suit under ERISA and state law. She asserted that: a) Dean breached its fiduciary obligation because the plan was unclear both as to coverage and as to how she could determine coverage and because Dean failed to provide a pre-approval authorization procedure, b) Dean was collaterally estopped from denying benefits because of the representative's "approval," and c) Dean violated Wisconsin law on an insurer's ability to deny coverage for pre-existing conditions. Judge Crabb (W.D. Wis.) granted summary judgment to Dean on all counts. Kenseth appeals.

In their opinion (as amended), Judges Manion, Rovner, and Tinder affirmed in part, vacated in part, and remanded. First, the Court affirmed summary judgment on collateral estoppel. Kenseth failed to advise the Dean customer service agent of the connection between the procedure and her earlier surgery, even if unintentionally. Equitable estoppel should not be applied when the party being estopped is unaware of a material fact. Second, the Court also affirmed with respect to the state statutory argument. The Wisconsin statute deals with pre-existing conditions. The exclusion on which Dean relies focuses on the nature of the benefit, not whether it was pre-existing. Third, the Court addressed the breach of fiduciary duty claim. Such a claim requires a plan fiduciary, a breach, and harm. Dean is a plan fiduciary, not because it is the customer service agent's employer, but because it is a claims administrator with discretionary authority to assess a plan participant's entitlement to benefits. Thus, it owes the plan participants duties of loyalty and reasonable care. One core duty to beneficiaries is the duty to disclose all material information. That duty has a negative component (not to mislead or misrepresent) but also has an affirmative component (to communicate material facts). Here, on the record before the Court, it concluded that a fact finder could determine the Dean had a duty to a) advise callers to its customer service line that they were not entitled to rely on any advice recieved, and b) inform callers how to obtain a binding determination of coverage. Dean could have avoided that liability by providing plan beneficiaries with a clear and unambiguous statement of benefits. Although the Court concluded that Dean's statement of benefits was clear that a procedure like the VBG was not covered, it concluded that the "related to" exclusion was not clear. In addition to the fact that the language itself was not clear, the Court also referred to the fact that Dean had already paid for a procedure to address a complication of the original surgery. Finally, the Court had no difficulty in finding an injury caused by Dean's breach of its fiduciary duty. Having found a breach and an injury, the Court turned to the remedy. It emphasized that Kenseth's claim was not a denial of benefits claim under section 1132(a)(1)(B) nor was it a representative action under section 1109 (a). Instead, it was an individual action under section 1132 (a)(3). But that section allows only equitable relief, not damages. The Court remanded to allow Kenseth an opportunity to identify, if possible, an appropriate form of equitable relief.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

IN RE: MARCHFIRST (December 21, 2009)

CIT Communications Finance Corp. leased telephone equipment to marchFIRST beginning in 2000. After marchFIRST filed for bankruptcy in 2001, CIT sought the return of its equipment. The Trustee denied that marchFIRST held any CIT property. In 2002, CIT filed an administrative claim, asserting that the Trustee breached his fiduciary duty. In May of 2007, CIT filed a lawsuit against the Trustee for breach of fiduciary duty. The bankruptcy court, and the district court, both agreed that the suit was barred by the statute of limitations. CIT appeals.

In their opinion, Judges Bauer and Sykes and District Judge Simon affirmed. Everyone agreed that the claims were governed by the five-year statute of limitations -- they did not agree on when the claim accrued. The Court cited the general rule that tort claims accrue when a party sustains an injury but added that Illinois recognizes the discovery rule. That principle extends the time of accrual until the time when a party both knows he is injured and that the injury was wrongfully caused. Here, CIT begin demanding its equipment back as early as July of 2001 and the Trustee refused to return it as early as November of 2001. CIT was on notice of its injury and its claim. Even if the Trustee's breach of his fiduciary duty continued into the five-year period before the filing of the complaint, this is not the type of tort where a limitations period begins to run only after the cessation of the tortious conduct. When a tort arises out of a breach of contract, the statute begins to run at the time of the breach or its discovery.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

HECKER v. DEERE & COMPANY (February 12, 2009)

Deere & Co. sponsors 401(k) plans for its employees. It engaged Fidelity Management Trust Co. (“Trust”) to serve as trustee of two of the plans. Trust administered employees’ accounts, maintained records, and advised Deere regarding investment options to include in the plans. Both plans offered many different investment choices – Fidelity mutual funds, two investment funds managed by Trust, a Deere stock option, and an option that provided a link to over 2500 funds managed by different companies. The plan’s participants managed their own funds from among the choices. Each of the funds imposed a percentage of assets fee upon participants. Fidelity Management & Research Co. (“Research”) is the investment advisor for the Fidelity mutual funds. Research earned revenue from the mutual fund fees and shared it with Trust. Trust’s only compensation for managing Deere’s plans was the fee from Research. Dennis Hecker and other plan participants brought this class action against Deere, alleging that Deere violated its fiduciary duty under ERISA by providing options in the plans that charged excessive fees and by not disclosing the fee structure between Trust and Research. Hecker also sued Trust and Research as functional fiduciaries. The district court granted defendants’ motions to dismiss without addressing the class issue. Hecker appeals.

In their opinion, Judges Manion, Wood and Tinder affirmed. The Court addressed several issues on appeal:
     1) Defendants’ motions to dismiss included hundreds of pages of documents related to the plans. The documents were either referred to in the complaint or were publicly available. The Court rejected Hecker’s argument that the district court improperly considered documents outside the complaint. The documents were used only to show the disclosures that had been made to plaintiffs. The district court was within its discretion to consider them without converting the motion to one for summary judgment.
     2) Deere admits that it owed some fiduciary duties to plaintiffs. Trust and Research, however, deny that they are fiduciaries. The district court agreed. Hecker argues only that they are “functional fiduciaries.” In order to be a functional fiduciary, the Court stated, one must exercise some discretionary management or control over the plan. The Hecker complaint alleged that Trust and Research “played a role,” not that they exercised control. The Court held Hecker to his complaint and rejected his attempts to change his theory on appeal.
     3) Even if Deere left an inaccurate impression that it was paying for the management of the fund, the Court agreed with the district court that there was nothing illegal about the revenue sharing agreement described in the complaint. The participants were fully informed of the amount of fees imposed by each fund and were free to direct their assets to whichever fund they chose. In order for there to be a breach of a fiduciary duty, there must have been a material omission. How Research distributed its fee is not material to plaintiffs – and they cannot make out a breach of fiduciary duty claim for that omission.
     4) Hecker also asserts that Deere breached its fiduciary duty by selecting investment options with excessive fees. The Court held that no rational trier of fact could conclude that Deere failed to offer a sufficient array of vehicles – it offered over 2500 different vehicles with varying fees, all of which were also available to the public. The Court could find nothing in ERISA that required any particular mix of plans – so Deere’s decision may not even be within its fiduciary responsibilities. Even if it is, the Court found no breach. 
     5) The Court also addressed the ERISA “safe harbor” provision as an alternative grounds for affirmance. The normal ERISA imposition of a fiduciary duty on a plan manager is modified when the participants: exercise independent control of their assets, can choose from a broad range of alternatives, and have sufficient information to make informed choices. Then, a fiduciary is not liable for a participant’s loss resulting from that exercise of control. Although this “safe harbor” provision is an affirmative defense normally not applied on a Rule 12(b)(6) motion, the Court noted that it can be applied when the complaint establishes the very elements of the defense. Here, the 2500+ options to plan participants with fees ranging from .07% to 1% establish the elements of the safe harbor for Deere and Trust and Research.
     6) The Court summarily rejected Hecker’s complaints with respect to the court’s refusal to entertain an amended complaint and its award of costs.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

WOOLARD v. WOOLARD (October 29, 2008)

John F. Woolard established a trust in 1983. His infant son, John C. Woolard, was the sole beneficiary. John F. named his brother Robert as trustee. The Trust Agreement allowed Robert to distribute its assets for the sole benefit of John C. The trust allowed Robert to apply payments directly for John C.’s benefit or, in his sole discretion, directly to John C. , to John C.’s legally appointed guardian, or to a Uniform Gifts to Minors Act custodian. It did not specifically allow direct payments to John F., although it did prohibit loans to him. John F. initially funded the trust with $500. At one point, it contained over $800,000. When John F. died in 2002, the value of the trust was $18,000. Between 1990 and 2001, Robert distributed more than $850,000 directly to John F. Robert kept no record of the purpose of the distributions and never asked John F. for receipts. John C. brought an action against Robert for mismanagement of the trust. The district court granted John C.’s motion for summary judgment. The court found that Robert had breached the express terms of the trust and had violated his statutory and fiduciary duties. Robert appeals.

In their opinion, Judges Bauer, Cudahy, and Williams affirmed. The Court found that Robert’s reliance on certain aspects of the Illinois Trusts and Trustees Act (“Act”) was misplaced. The Act simply provides default rules applicable to a trust that otherwise does not specify the trustee’s rights and duties. John F.s trust did specifically limit the trustee’s powers. Robert’s distributions to John F. were not allowed. In making those distributions, Robert breached the express terms of the trust. The Act requires a trustee to provide an annual accounting to the beneficiaries. The accounting must give the status of the funds, list all receipts and disbursements, and provide the source and purpose of all payments. A trustee’s failure to provide an accounting, observed the Court, is an independent cause of action. The Court rejected Robert’s argument that the monthly brokerage account statements were sufficient to constitute the accounting. The brokerage records did not indicate the purpose of any distribution from the account. Therefore, they cannot constitute an adequate accounting under the Act. Finally, the Court agreed that the record amply supported the finding that Robert breached his fiduciary duty. A trustee has an obligation to manage the trust pursuant to its terms and be as diligent as he would with his own affairs. The Court noted that Robert never even asked John F. for receipts or for an explanation of what he was doing with the money. The Court made a special note of the six months when John C. was seventeen when Robert distributed over $300,000 to John F. The record did not support any semblance of diligence by Robert.

• Email This
• Print
• Comments
• Trackbacks
• Share Link