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

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.

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FOLLETT HIGHER EDUCATION GROUP v. BERMAN (January 21, 2011)

Berman & Associates (“B&A”) is an Illinois advertising brokerage firm. It places ads in media outlets for a fee. One of its clients is Follett Higher Education Group, a college bookstore management company. Under their contract, Follett agreed to pay B&A 110% of the purchased ads. B&A then paid the outlet directly, retaining the 10% as its fee. In mid-2006, Follett discovered that B&A had not paid for some of the purchased advertising. Follett paid the bills directly. In August of that year, Jay Berman (the sole shareholder of B&A) petitioned for personal bankruptcy. He listed B&A’s debts in his petition. Follett brought an adversary proceeding in bankruptcy, asserting that the debt was non-dischargeable under § 523(a)(4) because Berman had breached a fiduciary duty. The bankruptcy court found for Berman, concluding that Follett had failed to prove that Berman or B&A was a fiduciary. Judge Dow (N.D. Ill.) affirmed. Follett appeals.

In their opinion, Seventh Circuit Judges Kanne, Tinder, and Hamilton affirmed. The Court noted that generally a debtor's debts are discharged in bankruptcy. One of the exceptions to that rule comes in § 523(a)(4), which applies to a "defalcation while acting in a fiduciary capacity." In order to establish the exception, the creditor must establish that the debtor was a fiduciary to the creditor when the debt originated and that the debt was caused by defalcation or fraud. The only issue on appeal was whether Berman or B&A acted as a fiduciary. The Court rejected both of Follett's theories. The first theory was that Berman was a fiduciary and relied on the Illinois principle that a corporate director owes a fiduciary duty to the corporation, its shareholders, and (upon insolvency) its creditors. But the Court noted that not every fiduciary created by state law acts "in a fiduciary capacity" under § 523. The special relationship must have existed before and be unrelated to the alleged wrong. Therefore, a director's fiduciary obligation to a creditor, created upon insolvency, does not transform the pre-insolvency relationships to fiduciary ones. Berman is therefore not a § 523 fiduciary to Follett. Under Follett's second theory, B&A is the fiduciary under the contract and Jay Berman is personally liable under a veil piercing argument. The Supreme Court has cautioned against finding a fiduciary duty in a ordinary commercial transaction, even though most commercial transactions involve some semblance of trust. A § 523 fiduciary should be found only where there is an express trust or an implied fiduciary status imposed by law. The Court addressed each in turn. With respect to an express trust, the Court found nothing in the contracts that supported an intent to create a trust. There were neither separate accounts nor segregation of funds. The Court turned to the implied fiduciary status issue. Generally speaking, contract obligations do not establish a § 523 fiduciary relationship. The Court referred to its decision in Frain, were it found that relationship in the context of a contract among shareholders. But in Frain, the debtor was the corporation's CEO and thus had a natural knowledge advantage. He also had "ultimate power" through his day-to-day control of the business. Here, there are no special confidences, no knowledge or power disparity, and no duties created by law. The relationship is simply a contractual one and does not fit within the § 523(a)(4) exception.

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GREENBERGER v. GEICO GENERAL INSURANCE CO. (January 10, 2011

The day after Stephen Greenberger got into a car accident, a GEICO insurance adjuster inspected his car and gave him a check for over $3200. Greenberger kept the money but never repaired the car. A few months later, in connection with the possible sale of the car, a mechanic estimated that the damage was closer to $5000. Greenberger eventually donated the car to charity. He brought suit against GEICO for breach of contract, fraud, and violation of the Illinois Consumer Fraud and Deceptive Practices Act. His claim is that GEICO purposely understates the value of necessary repairs in its estimates. Although he filed the action as a class action, the court never ruled on class certification. Judge Manning (N.D. Ill) dismissed the statutory fraud claim and granted summary judgment to GEICO on the contract and common law fraud claims. Greenberger appeals.

In their opinion, Seventh Circuit Chief Judge Easterbrook and Circuit Judges Kanne and Sykes affirmed. First, the Court concluded that the breach of contract claim was foreclosed by the Illinois Supreme Court's decision in Avery. That case stands for the proposition that a physical examination of the insured's automobile is necessary to prevail on a claim that one's insurer breached its promise to restore the automobile to its prior condition. Although Avery dealt with an insurer's practice of not using original equipment manufacturer parts, the principle is the same. The Court rejected Greenberger's attempts to distinguish Avery on the ground that he had an actual higher estimate. It also rejected his theory that GEICO failed to meet industry standards. With respect to the former, a higher estimate cannot establish the fact of a breach, although it may be admissible, supporting evidence. With respect to the latter, the Court noted that GEICO's promise was not to repair according to any industry standard. The Court also noted that Greenberger could not prove damages without the automobile. Second, the Court affirmed the district court's dismissal of the statutory fraud claim. The Act prohibits unfair and deceptive practices but does not apply to every simple contract dispute. Again, Avery controls. It held that a deceptive practice must include more than simply a promise and a breach. Here, Greenberger has only that. Finally, the Court addressed the common law fraud claim. That claim fails for the same reason the statutory fraud claim fails. Greenberger cannot identify a fraudulent act other than the breach. The Court noted that the claim also fails to the extent it alleges fraudulent concealment. Fraudulent concealment requires a fiduciary relationship. Insurers are generally not fiduciaries and Greenberger has not alleged with any specificity any reason why they should be considered so here.

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PONSETTI v. GE PENSION PLAN (July 30, 2010)

Ronald Lehn was employed at a General Electric Company facility in Ottawa, Illinois and participated in the company's retirement plan. For many years, his wife Lisa was the primary beneficiary under the plan. Lehn created a trust in 2002 which directed the trustee to distribute 25% shares to his wife, his son, his daughter, with a fourth 25% share going to other family members. He did not attempt to change the designated beneficiary with the Plan, however, until 2005. When he attempted to designate the Trustee as the primary beneficiary, he was told that he needed the signed and notarized consent of his spouse. He submitted a form that purported to contain Lisa's signature that had been notarized by one of his coworkers. The coworker did not witness Lisa's signature. Lehn died later that year. The company advised Lisa that it was aware of his death and that their records indicated that the Trust was the beneficiary of his retirement benefits. Lisa's representative submitted a claim for benefits and advised the company that Lisa had not been competent at the time of her supposed consent. Over the next several months, Lisa's representative submitted substantial additional information and support for her position, including a letter from Lehn himself describing his wife as "profoundly demented." The company advised the Trust of Lisa's claim. The Trust's investigation discovered the absence of a properly notarized consent form. In late 2006, the Plan granted Lisa's claim for benefits and denied the Trust's claim. Following some additional investigation, the Trust indicated its concurrence with the Plan's decision. The Trust nevertheless filed suit against the company and the Plan. Judge Mihm (C.D. Ill) dismissed the § 502(a)(3) and breach of fiduciary duty claims and other state law claims and granted summary judgment on the ERISA § 502(a)(1)(B) claim. The Trust appeals.

In their opinion, Chief Judge Easterbrook, Circuit Judge Flaum, and District Judge Hibbler affirmed. The Court noted that, although there was some confusion in the lower court and in the Trust's briefs, the narrow issue on review was whether the district court erred when it found that the Plan complied with the "full and fair review" ERISA requirement. In that regard, the Court cited the familiar "arbitrary and capricious" standard of review it applies in a situation where the Plan, as here, confers discretionary authority to an administrator. It rejected the Trustee's valiant attempts to convince it otherwise. On the merits of the failure to pay claim, the Court noted that ERISA requires the claimant be given a full and fair review and that reasons for denial of its claim are communicated. The inquiry is fact intensive. The Court had little difficulty in concluding that the evidence overwhelmingly supported the Plan administrator's decision -- a decision, by the way, that the Trust acknowledged being correct. The Court next addressed the "novel" breach of fiduciary duty theory under § 502(a)(1)(B). Section 502 is generally considered a contract claim for Plan benefits while § 510 is a claim to prevent interference with one's ability to collect benefits. In order to state a claim under § 502, a party must have a contractual entitlement under the Plan. Here, the Trust has no such entitlement. The Court affirmed without addressing the underlying merits of the fiduciary duty claim.

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