UNITED
STATES DISTRICT COURT
NORTHERN DISTRICT OF NEW YORK
Defendants.
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5:03-CV-1060 (HGM/GJD)
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BRIEF OF THE SECRETARY OF LABOR AS
AMICUS CURIAE
IN OPPOSITION TO MOTIONS TO DISMISS
HOWARD M. RADZELY
Solicitor of Labor
TIMOTHY D. HAUSER
Associate Solicitor
Plan Benefits Security Division
ELIZABETH HOPKINS
Counsel for Appellate and Special Litigation
Plan Benefits Security Division
SUSAN J. LUKEN
Trial Attorney
U.S. Department of Labor
Office of the Solicitor
Plan Benefits Security Division
P.O. Box 1914
Washington, DC 20013
Phone: (202) 693-5600
TABLE OF CONTENTS
TABLE OF AUTHORITIES
INTRODUCTION
ARGUMENT
I. STANDARD OF REVIEW
II. FIDUCIARY STATUS AND FIDUCIARY DUTIES UNDER ERISA
A. ERISA Fiduciaries, In General
B. A Named Fiduciary Is Not a Fiduciary for All Purposes
C. ERISA's Fiduciary Duties, In General
III. THE AMENDED COMPLAINT STATES CLAIMS AGAINST THE COMMITTEE DEFENDANTS
A. The Investment Committee Defendants
1. Plan Language and Allegations Regarding the Investment Committee
2. Plan Language Does Not Abrogate Fiduciary Duties With Respect to Investment in Company Stock
3. The Moench/Kuper Presumption Does Not Apply
B. The Administration Committee Defendants
1. Plan Language and Allegations Regarding the Investment Committee
2. Fiduciary Duty Not to Make Misrepresentations and to Provide Information
3. The Federal Securities Laws Do Not Shield Plan Fiduciaries
IV. PLAINTIFFS STATE A CLAIM AGAINST BOSTON SAFE
V. THE AMENDED COMPLAINT STATES A CLAIM AGAINST THE DIRECTOR DEFENDANTS
A. Under ERISA Section 409, Members of a Board of Directors May Be Individually Liable For Breaches of Fiduciary Duty
B. Directors Who Appoint Have a Duty To Monitor
VI. COFIDUCIARY LIABILITY
CONCLUSION
TABLE
OF AUTHORITIES
Cases
Anderson v. Coughlin, 700
F.2d 37 (2d Cir. 1983)
Ballone v. Eastman Kodak Co., 109 F.3d 117 (2d Cir.
1997)
Becker v. Eastman Kodak Co.,
120 F.3d 5 (2d Cir. 1997)
Beddall v. State Street Bank
& Trust Co., 137 F.3d 12 (1st Cir. 1998)
Berlin v. Mich. Bell Tel. Co.,
858 F.2d 1154 (6th Cir. 1988)
Boston v. Stanton, 450 F.
Supp. 1049 (W.D. Mo. 1978)
Bridgeway Corp. v. Citibank,
N.A., 132 F. Supp. 2d 297 (S.D.N.Y. 2001)
Bussian v. RJR Nabisco, Inc.,
223 F.3d 286 (5th Cir. 2000)
Canale v. Yegan, 789 F.
Supp. 147 (D.N.J. 1992)
Central States, Southeast & Southwest Areas Pension
Fund v. Central Transp. Inc., 472 U.S. 559 (1985)
Central Trust Co., N.A. v. American Avents Corp., 771
F. Supp. 871 (S.D. Ohio 1989)
Chance v. Armstrong, 143 F.3d 698 (2d Cir. 1998)
Chao v. Hall Holding Co.,
285 F.3d 415 (6th Cir. 2002)
Chicago Hous. Auth. v. J.A. Hannah Inv. Advisory Serv.
Inc., Civ. No. 95 C 5251, 1996 WL 328033 (N.D. Ill. May 9, 1996)
Condus v. Howard Sav. Bank,
781 F. Supp. 1052 (D.N.J. 1992)
Conley v. Gibson, 355 U.S.
41 (1957)
Cooper v. Parsky, 140 F.3d 433 (2d Cir. 1998)
Crowley v. Corning, Inc., 234 F. Supp. 2d 222 (W.D.N.Y. 2002)
Crowley v. Corning, Inc., No. 02-CV-6172 CJS, 2004 WL 763873 (W.D.N.Y. Jan. 14, 2004)
Daniels v. Nat'l Employee Benefit Servs., Inc., 858 F. Supp. 684
(N. D. Ohio 1994)
Davis
v. Bowman Apple Prods. Co., No. CIV.A. 5:00CV00033, 2002 WL 535068 (W.D. Va. Mar. 29, 2002), aff'd, 50
Fed. Appx. 138 (4th Cir 2002)
Devlin v. Empire Blue Cross & Blue Shield, 274 F.3d 76 (2d
Cir. 2001)
Dirks v. SEC, 463 U.S. 646 (1983)
Donovan v. Bierwirth, 680 F.2d 263 (2d Cir.1982)
Donovan v. Cunningham, 716 F.2d 1455 (5th Cir. 1983)
Eaves v. Penn, 587 F.2d 453
(10th Cir. 1978)
EEOC v. Staten Island Sav. Bank, 207 F.3d 144 (2d Cir. 2000)
Ershick v. Greb X-Ray Co., 705 F. Supp. 1482 (D. Kan. 1989), aff'd,
948 F.2d 660 (10th Cir. 1991)
Fink v. Nat'l Sav. Bank & Trust Co., 772 F.2d 951 (D.C. Cir.
1985)
Fischer v. Phila. Elec. Co., 994 F.2d 130 (3d Cir.1993)
Franklin v. First Union Corp., 84 F. Supp. 2d 720 (E.D. Va. 2000)
Griggs v. E.I. DuPont de Nemours & Co., 237 F.3d 371 (4th Cir.
2001)
Hernandez v. Coughlin, 18 F.3d 133 (2d Cir. 1994)
Howard v. Shay, 100 F.3d 1484 (9th Cir. 1996)
Hudson v. Gen. Dynamics Corp., 118 F. Supp. 2d 226 (D. Conn. 2000)
Hull v. Policy Mgmt. Sys. Co., No. CIV A 3:00-778-17, 2001 WL
1836286 (D.S.C. Feb. 9, 2001)
In re Bidermann Indus. U.S.A., Inc., 241 B.R. 76 (Bankr. S.D.N.Y.
1999)
In re CMS Energy ERISA Litig., 312 F. Supp. 2d 898 (E.D. Mich.
2004) passim
In the Matter of Cady, Roberts
& Co., No. 8-3925, 1961 WL 60638, 40 SEC 907, Release No. 6668 (Nov. 8,
1961)
In re Duke Energy ERISA Litig., 281 F. Supp. 2d 786 (W.D.N.C.
2003)
In re Dynegy, Inc. ERISA Litig., 309 F. Supp. 2d 861 (S.D. Tex.
2004)
In re Electronic Data Sys. Corp ERISA Litig., 305 F. Supp. 2d 658 (E.D. Tex. 2004) passim
In re Enron Corp. Sec., Derivative & ERISA Litig., 284 F.
Supp. 2d 511 (S.D. Tex. 2003) passim
In re McKesson HBOC, Inc. ERISA Litig., No.
C00-200308RMW, 2002 WL 31431588, (N.D. Cal. Sept. 30, 2002)
In re Sears, Roebuck & Co. ERISA Litig., No. 02 C
8324, 2004 WL 407007, (N.D. Ill. Mar. 3, 2004)
In re Sprint Corp. ERISA Litig., No. 03-2202-JWL,
2004 WL 1179371, (D. Kan. May 27, 2004)
In re Unisys Savings Plan Litig., 173 F.3d 145 (3d Cir. 1999)
In re Unisys Corp. Retiree Med. Benefit ERISA Litig., 57 F.3d 1255
(3d Cir. 1995)
In re Williams Co. ERISA Litig., 271 F. Supp. 2d 1328 (N.D. Okla.
2003)
In re WorldCom, Inc., 263 F. Supp. 2d 745 (S.D.N.Y. 2003)
In re XCEL Energy, Inc. Secur., Derivative & ERISA Litig.,
2004 WL 758990 (D. Minn. March 10, 2004)
Jackson v. Truck Drivers' Union Local 42 Health & Welfare Fund,
933 F. Supp. 1124 (D. Mass. 1996)
Keach v. U.S. Trust Company, 240 F. Supp. 2d 832 (C.D. Ill. 2002)
Kerns v. Benefit Trust & Life Ins. Co., 992 F.2d 214 (8th Cir.
1993)
Koch v. Dwyer, No. 98 Civ. 5519 (RPP), 1999 WL 528181 (S.D.N.Y.
1999), clarified on other grounds, 2000 WL 174945 (S.D.N.Y. Feb. 15,
2000)
Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 1995)
Laborer's Nat'l Pension Fund v. Northern Trust Quantitative Advisors,
Inc., 173 F.3d 313 (5th Cir. 1999)
LaLonde v. Textron, Inc., Nos. 03-2033, 03-2039, 2004 WL 1039844 (1st
Cir. May 7, 2004)
LaLonde v. Textron, Inc., 270 F. Supp. 2d 272 (D.R.I. 2003), overruled
in part, Nos. 03-2033, 03-2039, 2004 WL 1002986 (1st Cir. May 7, 2004)
Landry v. Air Line Pilots Ass'n Inter. AFL-CIO, 901 F.2d 404 (5th
Cir. 1990)
Lee v. Burkhart, 991 F. 2d 1001 (2d Cir. 1993)
Leigh v. Engle, 727 F.2d 113 (7th Cir. 1984)
Liss v. Smith, 991 F. Supp. 278 (S.D.N.Y. 1998)
Lopresti v. Terwilliger, 126 F.3d 34 (2d Cir. 1997)
Martin v. Feilen, 965 F.2d
660 (8th Cir. 1992)
Martin v. Schwab, No. CIV.A.91-5059-CVSW-1, 1992 WL
266531 (W.D. Mo. Aug. 11, 1992)
Mehling v. New York Life Ins.
Co., 163 F. Supp. 2d 502 (E.D. Pa. 2001)
Moench v. Robertson, 62 F.3d
553 (3d Cir. 1995)
Mullins v. Pfizer, 23 F.3d
663 (2d Cir. 1994)
Phelps v. Kapnolas, 308 F.3d 180 (2d Cir. 2002)
Phillip v. Univ. of Rochester,
316 F.3d 291 (2d Cir. 2003)
Rankin v. Rots, 278 F. Supp.
2d 853 (E.D. Mich. 2003)
Reich v. Lancaster, 55 F.3d
1034 (5th Cir. 1995)
Ryder Energy Distribution Corp. v. Merrill Lynch
Commodities, Inc., 748 F.2d 774 (2d
Cir. 1984)
Silverman v. Mut. Benefit Life
Ins. Co., 138 F.3d 98 (2d Cir 1998)
Simeon v. Mt. Sinai Med. Ctr.,
150 F. Supp. 2d 598 (S.D.N.Y. 2001)
Stein v. Smith, 270 F. Supp. 2d 157 (D. Mass. 2003)
Stewart v. Thorpe Holding Co.
Profit Sharing Plan, 207 F.3d 1143 (9th Cir. 2000)
Swierkiewicz v. Sorema, N.A.,
534 U.S. 506 (2002)
Ulico Casualty Co. v. Clover Capital Mgmt., Inc., 217
F. Supp. 2d 311 (N.D.N.Y. 2002)
Varity Corp.v. Howe, 516 U.S
489, 506 (1996)
Vivien
v. WorldCom, No. C02-01329 WHA, 2002 WL 31640557 N.D. Cal. July 26, 2002)
Wright v. Oregon
Metalurgical Corp., 222 F. Supp. 2d 1224 (D. Ore. 2002)
Statutes
29 U.S.C. § 1001
29 U.S.C. § 1002(9) 29
29 U.S.C. § 1002(21) passim
29 U.S.C. § 1102(a) 4
29 U.S.C. § 1104(a) passim
29 U.S.C. § 1104(b)
29 U.S.C. § 1105
29 U.S.C. § 1109
Other Authority
29 C.F.R. § 2509.75-8 passim
29 C.F.R. § 2510.3-21(c)(1)
DOL Opinion Letter 76-65A, 1976 WL
5090 (June 7, 1976)
DOL Opinion Letter 83-6A,
1983 WL 22495 (Jan. 24, 1983)
DOL Opinion Letter 90-05A,
1990 WL 172964 (March 29, 1990)
H.R. Rep. No. 93-533
(1973), reprinted in 1974 U.S.C.C.A.N. 4639
Restatement (Second) of
Trusts § 184 (1987 App.).
Rule 8, Fed. R. Civ. P.
Rule 9, Fed. R. Civ. P.
S.
Rep. No. 93-127 (1973), reprinted in 1974 U.S.C.C.A.N. 4639
BRIEF OF THE SECRETARY OF LABOR AS
AMICUS CURIAE
IN OPPOSITION TO MOTIONS TO DISMISS
INTRODUCTION
Beginning in 1997,
Agway, Inc. operated under an expanding burden of debt. Amended Complaint at ¶¶ 90-91. To meet the increasingly drastic demands of
their senior lenders, made in response to Agway's repeated violations of
financial covenants of the outstanding loans, Agway was required to place a
large amount of subordinated debt with non-institutional investors. Id. at ¶¶ 92-94. The plaintiffs in this case – Agway
Employees' 401(k) Thrift Plan (the "Plan") and State Street Bank
& Trust Co. ("State Street"), an independent fiduciary to the
Plan's Company Security Fund – allege that the Plan bought and held
increasingly imprudent amounts of Agway securities during the period in which
Agway's financial condition was rapidly deteriorating. Plaintiffs seek to hold the Plan's
fiduciaries liable under the Employee Retirement Income Security Act
("ERISA"), 29 U.S.C. § 1001, et seq., for failing to
take any action to protect the Plan and its participants and
beneficiaries.
As discussed at length below, the Amended Complaint
alleges that the Defendant fiduciaries failed to consider the prudence of Plan
investment in Agway securities, failed to properly determine the value of those
securities and thus repeatedly paid more than appropriate, improperly touted
investment in, and failed to disclose material information about, Agway
securities to the Plan's participants and beneficiaries, and failed to monitor
the fiduciaries they appointed. These
allegations state claims under ERISA upon which relief can be granted against
the members of the Plan's Administration Committee and Investment Committee
(the "Committee Defendants"), the Plan's trustee, Boston Safe Trust
& Deposit Co. ("Boston Safe") and the Agway, Inc. board of
directors (the "Director Defendants") (collectively, the "Moving
ERISA Defendants").
In their
memoranda, the Moving ERISA Defendants collectively suggest that none of them
had any responsibility for the Plan's assets, that none of them had any
responsibility to the Plan's participants to ensure that the investment options
made available were prudent, and that none of them should or even could have
provided the participants with information regarding the true value of Agway
securities, and of Agway's and the Plan's financial condition. These positions are untenable. Each Moving ERISA Defendant was an ERISA
fiduciary to the Plan, with specific responsibilities relating to the conduct
that is the basis for Plaintiffs' allegations.
ERISA's fiduciary duties are among the "highest known to the
law." See Donovan v.
Bierwirth, 680 F.2d 263, 272 n.2 (2d Cir. 1982); Ulico Casualty Co. v.
Clover Capital Mgmt., Inc., 217 F. Supp. 2d 311, 315 (N.D.N.Y. 2002); Bussian
v. RJR Nabisco, Inc., 223 F.3d 286, 294 (5th Cir. 2000). They do not permit fiduciaries to ignore
grave risks to plan assets and abdicate their responsibilities to plan
participants. The allegations of the
Amended Complaint are sufficient to withstand motions to dismiss, and the
Plaintiffs should be allowed to conduct discovery to prove those allegations.
ARGUMENT
I.
STANDARD OF REVIEW
A complaint should not be dismissed pursuant to Rule
12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim
upon which relief can be granted "unless it appears beyond doubt that the
plaintiff can prove no set of facts in support of his claim which would entitle
him to relief." Conley v.
Gibson, 355 U.S. 41, 45-46 (1957); Phillip v. Univ. of Rochester,
316 F.3d 291, 293 (2d Cir. 2003); Cooper v. Parsky, 140 F.3d 433, 440
(2d Cir. 1998); Bridgeway Corp. v. Citibank, N.A., 132 F. Supp. 2d 297,
302-03 (S.D.N.Y. 2001). In deciding
whether a complaint states a claim, a court must accept the material facts
alleged in the complaint as true and construe all reasonable inferences in the
plaintiff's favor. EEOC v. Staten
Island Sav. Bank, 207 F.3d 144, 148 (2d Cir. 2000); Hernandez v.
Coughlin, 18 F.3d 133, 136 (2d Cir. 1994).
A court's task
"in ruling on a Rule 12(b)(6) motion 'is merely to assess the legal
feasibility of the complaint, not to assay the weight of the evidence which
might be offered in support thereof.'"
Cooper, 140 F.3d at 440 (quoting Ryder Energy Distribution
Corp. v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir.
1984)). Thus, the fundamental issue at
the dismissal stage "'is not whether a plaintiff is likely to prevail
ultimately, but whether the claimant is entitled to offer evidence to support
the claims. Indeed it may appear on the
face of the pleading that a recovery is very remote and unlikely but that is
not the test.'" Chance v.
Armstrong, 143 F.3d 698, 701 (2d Cir. 1998) quoted in Phelps v.
Kapnolas, 308 F.3d 180, 184-85 (2d Cir. 2002).
The notice
pleading principles embodied in Rules 8 and 12 of the Federal Rules of Civil
Procedure are intended to remove technical obstacles impeding access to the
federal courts. Anderson v. Coughlin, 700 F.2d 37, 43 (2d Cir. 1983); Boston
v. Stanton, 450 F. Supp. 1049, 1053 (W.D. Mo. 1978). A complaint need only "give the
defendant fair notice of what the plaintiff's claim is and the grounds upon
which it rests." Conley, 355 U.S. at 47; see Swierkiewicz v. Sorema, N.A., 534
U.S. 506, 512 (2002). Thus, the federal
rules allow simple pleadings and "rel[y] on liberal discovery rules and
summary judgment motions to define disputed facts and issues and to dispose of
unmeritorious claims." Swierkiewicz,
534 U.S. at 512.
II.
FIDUCIARY STATUS AND FIDUCIARY DUTIES UNDER ERISA
A.
ERISA Fiduciaries, in General
ERISA section 404(a)(1) imposes broad obligations on ERISA
fiduciaries for the protection of plan participants and beneficiaries. 29 U.S.C. § 1104(a)(1). ERISA section 402 requires that every plan
have at least one "named fiduciary."
29 U.S.C. § 1104(a) ("Every employee benefit plan shall … 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."). In this case, the Plan
names the Board of Directors and both Committees as named fiduciaries. See Plan at § 5.03 (attached as
Exhibit A to the Amended Complaint); Amended Complaint at ¶¶ 9-11. In addition, individuals serving in certain
positions, such as trustees, are always fiduciaries. See 29 C.F.R. § 2509.75-8 at D-2. Thus, all the Moving ERISA Defendants were fiduciaries
to the Plan.
In this case, and
as will be discussed at length below, the Plan divides the fiduciary
obligations among the named fiduciaries:
the Investment Committee has responsibility for managing the assets of
the Plan, the Administration Committee has responsibility for all other aspects
of the administration of the Plan, and the Director Defendants appoint the
Committees and the trustee. The Plan's
trustee is responsible for inter alia, investing the Company
Security Fund and valuing its assets. See
Plan at §§ 15.01-15.03; Amended Complaint at ¶¶ 9-11, 12. These designated responsibilities correspond
to the fiduciary breaches alleged by Plaintiffs: failure to consider prudence of Agway securities and determine
their proper value and price (Investment Committee Defendants and Boston Safe),
failure to provide complete and non-misleading information to Plan participants
(Administration Committee Defendants), and failure to monitor the Committees
(Director Defendants). In addition,
ERISA section 405 permits fiduciaries to be held liable for fiduciary breaches
committed by their co-fiduciaries if they partake in or conceal the breach,
cause the breach by their own actions, or have knowledge of the breach and do
nothing. 29 U.S.C. § 1105(a). Plaintiffs have alleged that the Moving
ERISA Defendants are all liable for each other's breaches under section
405(a). Amended Complaint at ¶¶ 163-64,
187-88, 207-09, 236.
B.
A Named Fiduciary Is Not A Fiduciary For All Purposes
The Secretary does
not agree with Plaintiffs' assertion that a named fiduciary is necessarily a
fiduciary for all purposes. See
Plaintiffs' Memorandum at 24-31.
ERISA contains
provisions for dividing fiduciary functions among various fiduciaries. Section 404(b)(2) requires a plan to
"describe any procedure under the plan for the allocation of
responsibilities for the operation and administration of the plan." 29 U.S.C. § 1104(b)(2); e.g., ERISA
§ 3(21)(A)(i) and (iii), 29 U.S.C. § 1002(21)(A)(i) and (iii) (a person not
otherwise named as a fiduciary is nonetheless a fiduciary "to the
extent" he engages in fiduciary activities). Thus, in a regulation at 29 C.F.R. 2509.75-8 D-13 and 14, the
Secretary has stated that, if the plan allocates responsibilities among named
fiduciaries, they will not be liable for acts and omissions of other named
fiduciaries in carrying out fiduciary responsibilities which have been
allocated to them, except for co-fiduciary liability under ERISA section
405(a).
As noted in the
preceding section, the Plan allocates responsibility among its named
fiduciaries, with the Investment Committee responsible for managing the assets
of the Plan, the Administration Committee responsible for all other aspects of
the administration of the Plan, and the Director Defendants responsible for
appointing and monitoring the Committees and the trustee. See Plan at §§ 14.01, 15.01-15.03;
Amended Complaint at ¶¶ 9-11, 12. Thus,
despite the fact that each named fiduciary is not subject to blanket liability
for all aspects of the Plan, Plaintiffs have stated claims upon which relief
can be granted against all the Moving ERISA Defendants for both direct and
co-fiduciary liability, as discussed below.
C.
ERISA's Fiduciary Duties, In General
ERISA section 404(a)(1)(A) and
(B) provides:
[A]
fiduciary shall discharge his duties with respect to a plan solely in the
interest of the participant and beneficiaries and - -
(A)
for the exclusive purpose of:
(i)
providing benefits to participants and their beneficiaries; and
(ii)
defraying reasonable expenses of administering the plan;
(B)
with the care, skill, prudence, and diligence under the circumstances then
prevailing that a prudent man acting in a like capacity and familiar with such
matters would use in the conduct of an enterprise of a like character and with
like aims.
29 U.S.C. § 1104(a)(1)(A) and
(B). Section 404(a)(1)(A)'s "duty of loyalty" requires
fiduciaries to act with "complete and undivided loyalty to the beneficiaries
of the trust" and with an "eye single to the interests of the
participants and beneficiaries." Donovan
v. Bierwirth, 680 F.2d at 271; see, e.g., Leigh v. Engle,
727 F.2d 113, 123 (7th Cir. 1984).
ERISA's "duty of care" requires each fiduciary 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 employ. 29
U.S.C. § 1104(a)(1)(B). These
duties originate in the common law of trusts, to which Congress specifically
looked when legislating ERISA's fiduciary duties. Central States, Southeast & Southwest Areas Pension Fund
v. Central Transp. Inc., 472 U.S. 559, 571 n.10 (1985) (citing S. Rep. No.
93-127, p. 29 (1973), reprinted in 1974 U.S.C.C.A.N. 4639, 4865
("'The fiduciary responsibility section, in essence, codifies and makes
applicable to these fiduciaries certain principles developed in the evolution
of the law of trusts.'"); H.R. Rep. No. 93-533, p. 11 (1973), reprinted
in 1974 U.S.C.C.A.N. 4639, 4649 (identical language).
III. THE AMENDED COMPLAINT STATES CLAIMS
AGAINST THE COMMITTEE DEFENDANTS
A.
The Investment Committee Defendants
1.
Plan Language and Allegations Regarding the Investment
Committee
Section 15.02 of the Plan grants to the Investment Committee broad
responsibility: "the responsibility for the management of the assets of
the Plan shall be placed with the Investment Committee." See also Plan § 15.06
("[T]he Investment Committee shall be responsible for managing the assets
under the Plan."). The Plan itself
recognizes that, in managing the Plan's assets, the Investment Committee was
acting as a fiduciary subject to ERISA's fiduciary duties:
The members of the Committees
shall use that degree of care, skill, prudence, and diligence under the circumstances
then prevailing that a prudent person 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 in accordance with the documents and instruments governing
the Plan and Title I of [ERISA].
Id.
at § 15.08. The Committee Defendants'
claim that they only had the duty to provide direction to the trustee and hire
investment managers, see Committee Defendants' Memorandum at 7,
conflicts starkly with the terms of the Plan.
In any case, in the context of this motion, the allegations of the
Amended Complaint, drawn from the Plan language itself, must prevail.
The Amended Complaint alleges two interrelated fiduciary
breaches by the Investment Committee:
the failure to adequately determine the value of Agway securities, both
before and after purchase, and the failure to even consider, at any point, the
prudence of Plan investment in Agway securities. At all relevant times, the Plan purchased and held Agway
preferred stock and debt instruments called "money market
certificates" ("MMCs") at prices set by Agway. Amended Complaint at ¶ 42. Plaintiffs allege that the Investment Committee
(along with Boston Safe, as discussed below) was responsible for the Plan's
investments in Agway securities. Id.
at ¶¶ 38-59. Plaintiffs allege that the
prices paid by the Plan (par value for the preferred stock and face principal
value for MMCs) were substantially higher than the securities' fair market
value. Id. at ¶¶ 46-47.
Plaintiffs assert that the difference between the price paid and value
arose from factors that increased the risk of investing in Agway securities to
a level that the market normally correlates with lower prices and/or a higher
rate of return than provided by the Agway securities. Id. at ¶ 47. Those
risks, which Plaintiffs allege the Investment Committee failed to consider,
included the following:
·
Agway was in a precarious financial condition, and its
cash flow was insufficient to meet its debt obligations;
·
The securities were unsecured instruments, subordinated
to Agway's burgeoning debt; and
·
There was no public trading market for Agway
securities, the Plan had no right to put the securities back to Agway, and
Agway's "repurchase practice," by its terms, could be terminated at
any time (as it was on June 14, 2002) and was, in any case, not applicable to
approximately half of the MMCs held by the Plan.
Id. Plaintiffs further allege that the
Investment Committee compounded this fiduciary breach by carrying Agway securities
on the Plan's books at the inflated face value, rather than fair market value,
as was required by the Plan. Id.
at ¶¶ 50-53, 65-67.
Plaintiffs also allege that the Investment Committee failed to consider
the prudence of investing Agway in securities at any price. They allege that Agway's earnings had
plunged from $41 million in 1998 to -$98 million in 2002, that Agway had
repeatedly violated debt covenants with its lenders, and that its worsening
financial condition called into question Agway's ability to maintain its
repurchase practice for certain securities, which Plan fiduciaries had relied
upon in accepting the face value of Agway securities in the Plan. Id. at ¶¶ 91-94. The Amended Complaint alleges that the
Investment Committee members knew of these problems. Id. at ¶¶ 96-98.
Plaintiffs contend that, despite these serious warning signs, the
Investment Committee failed to investigate the prudence of Plan investment in
Agway securities. Id.
2.
Plan Language Does Not Abrogate Fiduciary Duties
With Respect
to Investment in Company Stock
The Plan states that the Company
Security Fund shall be invested in Agway securities and that Agway
contributions shall be invested in the Company Security Fund. Plan at §§ 4.01, 7.01. From this, the Committee Defendants argue,
"[n]o breach of fiduciary duty claim can be made against a fiduciary for
failing to overrule the terms of a plan," and that "plaintiffs cannot
argue that the Committee Defendants had a duty to overrule settlor decisions
regarding investment options under the Plan." Committee Defendants' Memorandum at 15-16, 19; see also
Director Defendants' Memorandum at 13-15.
This argument misapprehends the Committee Defendants' duties under
ERISA.
ERISA section 404(a)(1)(D) requires fiduciaries to follow the terms of
the plan document only "insofar as such documents and instruments are
consistent with the provisions of [title I] and title IV" of ERISA. 29 U.S.C. § 1104(a)(1)(D). Thus, fiduciaries have a duty under section
404(a)(1)(D) to decline to follow the terms of the plan document where those
terms require them to act imprudently in violation of ERISA section
404(a)(1)(B). Central States,
Southeast & Southwest Areas Pension Fund v. Central Transp. Inc., 472
U.S. at 568 ("trust documents cannot excuse trustees from their duties
under ERISA"); Fink v. Nat'l Sav. Bank & Trust Co., 772 F.2d
951, 955-56 (D.C. Cir. 1985) (ERISA's prudence and loyalty requirements apply
to all investment decisions made by employee benefit plans, including those
made by plans that may invest 100% of their assets in employer stock). Accordingly, plan fiduciaries are obligated
to act prudently and solely in the interest of the participants and
beneficiaries in deciding whether to purchase or retain employer securities
despite language requiring the plan to purchase employer securities. See, e.g., Laborer's Nat'l
Pension Fund v. Northern Trust Quantitative Advisors, Inc., 173 F.3d 313,
322 (5th Cir. 1999) (investment manager must disregard plan if investing plan
assets as required by plan would violate its duty of prudence); Kuper v.
Iovenko, 66 F.3d 1447, 1457 (6th Cir. 1995); Moench v. Robertson, 62
F.3d 553, 569 (3d Cir. 1995); see also DOL Opinion Letter No.
90-05A, 1990 WL 172964, at *3 (Mar. 29, 1990) (despite plan provisions to
contrary, it is responsibility of fiduciaries to determine, based on all the
relevant facts and circumstances, the prudence of investing large percentage of
plan assets in qualifying employer securities); DOL Opinion Letter No. 83-6A,
1983 WL 22495, at **1-2 (Jan. 24, 1983) (same).
Thus, while a fiduciary "may
be released from certain Per se violations on investments in
employer securities . . . in making an
investment decision of whether or not a plan's assets should be invested in
employer securities, an ESOP fiduciary, just as fiduciaries of other plans, is
governed by the 'solely in the interest' and 'prudence' tests of §§
404(a)(1)(A) and (B)." Eaves v.
Penn, 587 F.2d 453, 459-60 (10th Cir. 1978); see also Canale
v. Yegan, 789 F. Supp. 147, 154 (D.N.J. 1992); Ershick v. Greb X-Ray Co.,
705 F. Supp. 1482, 1486-87 (D. Kan. 1989) (plan terms authorizing ESOP
fiduciary to invest up to 100% of plan assets in employer stock could be
followed only if the investment decision was prudent), aff'd, 948 F.2d
660 (10th Cir. 1991); Central Trust Co., N.A. v. American Avents Corp.,
771 F. Supp. 871, 874-76 (S.D. Ohio 1989) (ESOP trustee properly ignored
pass-through voting provisions that would have prevented sale of an ESOP's
stock where the trustee determined that such a sale would be prudent).
Numerous recent cases recognize that, under section 404(a)(1)(D), ERISA's
requirement of prudence takes precedence over plan language. While some of these cases involve plans that
permitted, but did not require, investment in employer stock, as the Committee
Defendants argue, Committee Defendants' Memorandum at 17-18, the courts'
decisions did not turn on this fact, but generally recognized the broader
principle that section 404(a)(1)(D) requires fidelity to ERISA's requirements
over conflicting plan language. See
In re WorldCom, Inc., 263 F. Supp. 2d 745, 764 (S.D.N.Y. 2003); In re
Williams Co. ERISA Litig., 271 F. Supp. 2d 1328, 1343 (N.D. Okla. 2003); Rankin
v. Rots, 278 F. Supp. 2d 853, 857 (E.D. Mich. 2003); In re Enron Corp.
Sec., Derivative & ERISA Litig., 284 F. Supp. 2d 511, 549 n.51, 656
(S.D. Tex. 2003).
In this case, Plaintiffs allege that the Investment Committee caused the
Plan to acquire risky Agway securities at prices more appropriate for much
safer instruments. They allege that,
after acquisition, the Investment Committee accepted and reported the
securities' face amounts as fair market value, although an investigation would
have revealed that the value was far lower than the face amount. Plaintiffs also allege that the Investment
Committee was aware of numerous red flags highlighting Agway's deteriorating
financial condition. Amended Complaint
at ¶¶ 91-98. Plaintiffs allege that,
despite these serious warning signs, the Investment Committee failed to investigate the prudence of Plan investment
in Agway securities. Id. As the authorities above establish, ERISA
section 404(a)(1)(D) permits plan fiduciaries to follow plan language only to the
extent it is consistent with ERISA's prudence requirements. The Investment Committee cannot hide behind
the Plan's language. Plaintiffs' Count II states a claim against
the Investment Committee.
3. The Moench/Kuper
Presumption Does Not Apply
The Investment Committee Defendants also argue that they are entitled to
a presumption that investment in Agway securities was prudent, and that
Plaintiffs were obligated to plead specific facts overcoming such a
presumption. See Committee
Defendants' Memorandum at 22-25 (citing Moench v. Robertson, 62 F.3d
553, 569 (3d Cir. 1995) and Kuper v. Iovenko, 66 F.3d 1447, 1457 (6th
Cir. 1995)). The Committee Defendants'
arguments are unavailing, because the Moench/Kuper presumption does not
apply in the circumstances alleged by Plaintiffs and, in any case, is not
properly considered at this stage of the proceedings.
In Moench, a plan participant sued an employee
stock ownership plan ("ESOP") committee for breach of fiduciary duty based
on the committee's decision to invest solely in employer stock during a period
in which the employer's financial condition deteriorated. 62 F.3d at 558-59. The plaintiff alleged that, although various corporate
insiders/committee members began to have doubts about the wisdom of
concentrating the plan's investments in employer stock, they collectively did
nothing. Id. The Third Circuit confirmed that fiduciaries
of ESOPs (which by definition hold company securities) must act prudently and
solely in the interest of the participants and beneficiaries in deciding
whether to purchase or retain employer securities. Id. at 569. This
decision is in accord with the weight of authority, as cited above. See supra at 10-11. Thus, while finding that an ESOP fiduciary
that invested plan assets in employer stock is entitled to a presumption that
he acted consistently with ERISA, the Third Circuit held that the presumption
can be overcome by establishing that the fiduciary abused his discretion. 62 F.3d at 571. The court held that the factors Moench alleged (precipitous drop
in stock prices, committee members' knowledge of the impending collapse, and
their conflicted loyalties as corporate insiders and fiduciaries), if proven,
could overcome the presumption, and reversed summary judgment for the
defendants. Id. at 572. The court also recognized the paramount
importance of "vigorously
enforcing standards of fiduciary responsibility." Moench, 62 F.3d at 569 (quoting Donovan
v. Cunningham, 716 F.2d 1455, 1466 (5th Cir. 1983)). The Sixth Circuit subsequently adopted the Moench
court's reasoning in Kuper, 66 F.3d at 1457.
Moench does not support the Investment Committee Defendants'
contention that the Plaintiffs are required to plead specific facts to overcome
a presumption of prudence. First, Moench's
presumption of prudence does not apply when the fiduciaries have made no
attempt to determine whether it is prudent for the plan to retain and continue
to purchase employer stock. Absent
evidence that the fiduciary actually deliberated or discussed the issue in any
formal way, the fiduciary will not be entitled to deferential review. 62 F.3d at 567. The ESOP committee in Moench made no attempt to determine whether
the plan or ERISA required it to diversify the plan's investment in employer
stock. Id. at 567-68. In the absence of such actions, the
fiduciaries' decisions were not entitled to deference. In this case, Plaintiffs allege that the
Investment Committee completely failed to investigate the prudence of investing
in Agway securities, or even what fair market value of those securities
was. Amended Complaint at ¶ 46-47,
91-98. Accepting those allegations as
true for purposes of Defendants' motions to dismiss, the Investment Committee
Defendants are not entitled to a presumption under Moench and Kuper.
Further, by its terms, Moench is limited to
ESOPs. ESOPs are only one type of
"eligible individual account plan" ("EIAP"), as defined in
ERISA section 407(d)(3)(A), 29 U.S.C. § 1107(d)(3)(A). In a more recent case, the Third Circuit has
indicated that its holding in Moench was limited to ESOPs:
We were careful to point out in Moench,
however, that our holding was limited to the specific type of plan involved in
that case, an Employee Stock Ownership Plan ("ESOP"). Here, of course, the Unisys Plan was not an
Employee Stock Ownership Plan.
Furthermore, Moench specifically held its analysis was in
"complete harmony with the prudent man standard of care obligations
imposed by 29 U.S.C. § 1104 on fiduciaries, as our holding implicates only the
standard of review of the conduct of a fiduciary and not the standards
governing that conduct,"… as is the case here.
In re Unisys Savings Plan Litig., 173 F.3d 145, 155 (3d Cir. 1999)
(emphasis in original) (citations omitted).
Like the Unisys plan, the Agway Plan is not an ESOP, and the
applicability of the Moench presumption here is therefore questionable.
Moreover, it is premature, and contrary to Rule 8(a), to
consider the Moench/Kuper presumption on a motion to dismiss. Neither addressed the requirements to
survive a motion to dismiss under Rule 12.
Moench involved a review of a summary judgment, 62 F.3d at 556,
572; Kuper involved review of a judgment, 66 F.3d at 1452. Instead, Moench and Kuper
addressed the type of evidence a plaintiff needed to rebut the
presumption of prudence. Moench,
62 F.3d at 571 (presumption can be overcome by "establishing that
the fiduciary abused its discretion by investing in employer
securities") (emphasis
added). To rebut the presumption, "[P]laintiff
may introduce evidence that 'owing to circumstances not known to the
settlor and not anticipated by him [the making of such investment] would defeat
or substantially impair the . . . purposes of the trust.'" Id. (quoting Restatement (Second) of
Trusts § 227 comment g) (emphasis added).
By its nature, a presumption involves a shifting of a burden of proof –
an evidentiary matter – not a pleading requirement. There is no logical reason to insert Moench or Kuper
into the pleading stages of the litigation, and numerous cases have refused to
do so. See In re Electronic
Data Sys. Corp. ERISA Litig, 305 F. Supp.2d 658, 670 (E.D. Tex. 2004)
("EDS") ("The Court holds that requiring Plaintiffs to
affirmatively plead facts overcoming the ESOP presumption violates Rule 8(a)'s
notice pleading requirement. … Thus the Court rejects … Defendants'
argument that Plaintiffs must plead facts rebutting the ESOP
presumption."); In re XCEL Energy, Inc. Secur., Derivative & ERISA
Litig., 2004 WL 758990, at *8 (D. Minn. March 10, 2004); Stein v. Smith, 270 F. Supp. 2d 157, 172 (D. Mass. 2003); see
In re Sprint Corp. ERISA Litig., No. 03-2202-JWL, 2004 WL 1179371, at
**11-12 (D. Kan. May 27, 2004).
One of the cases cited by Defendants, LaLonde v.
Textron, Inc., 270 F. Supp. 2d 272 (D.R.I. 2003), was recently overruled in
relevant part by the First Circuit. LaLonde
v. Textron, Inc., Nos. 03-2033, 03-2039, 2004 WL 1039844 (1st Cir. May 7,
2004). The First Circuit rejected the district
court's application of the Moench/Kuper presumption on a motion to
dismiss. 2004 WL 1039844, at *3. The court cautioned against "the very
high risk of error" inherent in application at the pleading stage of a
hard-and-fast rule about what constitutes fiduciary breach. Id.
Similarly, in this case, Plaintiffs' allegations against the Investment
Committee are sufficient to survive a motion to dismiss.
B.
The Administration Committee Defendants
1. Plan
Plan Language and Allegations Regarding the Administration Committee
The Plan gives the Administration Committee broad discretion
over all aspects of Plan administration other than management of Plan
assets. E.g., Plan at §§ 15.01
("The responsibility for carrying out all phases of the administration of
the Plan, except those phases connected with the management of assets, shall be
placed with the Administration Committee."); 15.07 (Administration
Committee has "exclusive authority and control to interpret, construe and
apply all terms of the Plan, including any uncertain or disputed term or
provision in the Plan"); 6.01 (Administration Committee to determine in
what increments participants could allocate their contributions); 6.02
(Administration Committee responsible for implementing participants' changes in
investment options); 6.04 (Administration Committee responsible for
implementing transfers of participants' investments in the Plan). As noted above, the Plan requires that in
fulfilling these duties the members of the Administration Committee act as
ERISA fiduciaries. See Plan at §
15.08 ("The members of the Committees shall use that degree of care,
skill, prudence, and diligence under the circumstances then prevailing that a
prudent person 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 in
accordance with the documents and instruments governing the Plan and Title I of
[ERISA].").
Most importantly, the Administration Committee was
responsible for providing Plan participants with information regarding their
investment options and implementing the choices they made based on such
information. Consistent with the Plan's
language, Plaintiffs allege that the Administration Committee was responsible
for, inter alia, "timely communicating material information
about the Plan and its assets to Participants," and "ensuring that
all communications to Participants regarding the Plan and its assets were
factually accurate and not materially misleading." See Amended Complaint at ¶ 153. Despite playing down the Administration
Committee's responsibilities, the Committee Defendants implicitly concede this
point. See Committee Defendants'
Memorandum at 12 ("[T]he authority of the Administration Committee
concerns enrolling participants in the Plan [and] providing a mechanism for
Participant investment election").
Plaintiffs allege that the Plan's fiduciaries breached their
duties to the Plan's participants and beneficiaries by misrepresenting the
risks of the Company Security Fund and by failing to disclose material
information regarding Agway and its securities. Amended Complaint at ¶¶ 72-87.
Specifically, they allege that the Administration Committee
affirmatively provided false information to the participants about the risks of
investment in Agway securities for the purpose of inducing them to allocate
their contributions to the Company Security Fund, by, inter alia:
·
describing the Company Security Fund's returns as
"competitive with bonds" (id. at ¶¶ 73, 75);
·
minimizing the risks of the Company Security Fund by
comparing it to a cash fund, stating "Like the Cash Fund, the Company
Security Fund is highly unlikely to have negative returns over any short or
intermediate time period…" (id.); and
·
stating that the Company Security Fund had a greater
growth potential than the Cash Fund and less risks than the Bond Fund (id.
at ¶¶ 77-78).
Plaintiffs
allege that these statements were false, and that the Administrative Committee
either knew they were false or failed to investigate their truth. Id. at ¶¶ 74, 79-80. In addition, Plaintiffs allege that the
Administration Committee failed to inform Plan participants regarding the
increasing risk of investment in Agway securities resulting from Agway's
deteriorating financial condition, and failed to correct misrepresentations
made by others. Id. at ¶¶ 80-81,
84.
2.
Fiduciary Duty Not to Make Misrepresentations
and to Provide
Information
ERISA imposes upon
plan fiduciaries a duty to provide truthful information to participants and
beneficiaries. A fiduciary's duty of
loyalty to plan participants under ERISA includes an obligation not to
materially mislead plan participants and beneficiaries. See, e.g., Devlin v. Empire
Blue Cross & Blue Shield, 274 F.3d 76, 88 (2d Cir. 2001) (a fiduciary
has "'a duty to deal fairly and honestly with its beneficiaries'")
(quoting Ballone v. Eastman Kodak Co., 109 F.3d 117, 123-24 (2d Cir.
1997); Mullins v. Pfizer, 23 F.3d 663, 669 (2d Cir. 1994) ("'when a
plan administrator speaks, it must speak truthfully'") (quoting Fischer
v. Phila. Elec. Co., 994 F.2d 130, 135 (3d Cir. 1993)); Berlin v. Mich.
Bell Tel. Co., 858 F.2d 1154, 1163 (6th Cir. 1988). This duty includes a prohibition against
lying: "[L]ying is inconsistent
with the duty of loyalty owed by all fiduciaries and codified in section
404(a)(1) of ERISA." Varity
Corp. v. Howe, 516 U.S 489, 506 (1996) (citation omitted). Fiduciaries can also violate their duty of
loyalty by misleading participants and beneficiaries, whether through action,
inaction or silence. See, e.g.,
Devlin, 274 F.3d at 88-89 (trial court must be permitted to determine
whether defendants either made affirmative misrepresentations or failed to
provide completely accurate plan information) (citing In re Unisys Corp.
Retiree Med. Benefit ERISA Litig., 57 F.3d 1255, 1264 (3d Cir. 1995)
("[W]hen a plan administrator affirmatively misrepresents the terms of a
plan or fails to provide information when it knows that its failure to do so
might cause harm, the plan administrator has breached its fiduciary
duty.")); Becker v. Eastman Kodak Co., 120 F.3d 5, 9 (2d Cir. 1997)
(because summary plan description and benefits counselor's advice together
amounted to materially misleading information, fiduciary breached its duty to
provide participants with complete and accurate information); Simeon v. Mt.
Sinai Med. Ctr., 150 F. Supp. 2d 598, 604 (S.D.N.Y. 2001); In re
Bidermann Indus. U.S.A., Inc., 241 B.R. 76, 90 (Bankr. S.D.N.Y. 1999).
In fact, ERISA fiduciaries are charged with more than
the duty to refrain from misleading plan participants or to correct their own
misstatements. They also have a duty to
protect plan participants from misleading information. Thus, if a fiduciary is aware that
participants have been misinformed about facts that implicate the stability of
their retirement assets, he must take action to protect the participants. In some circumstances, this duty of loyalty
may require the fiduciary to correct the inaccurate or misleading information so
that the participants and beneficiaries will not be injured as a result of
it. See Franklin v. First
Union Corp., 84 F. Supp. 2d 720, 735 (E.D. Va. 2000) (fiduciary had "a
duty to notify the plaintiffs of the changes in the investment funds in such a
manner as to prevent any misinformation to and misleading of the plaintiffs
regarding their options"); Hudson v. Gen. Dynamics Corp., 118 F.
Supp. 2d 226, 256 (D. Conn. 2000) (recognizing a "'duty to correct,' in
the face of a statement demonstrating a material misunderstanding of benefits
information, on plan fiduciaries in certain situations"); Mullins v.
Pfizer, Inc., 899 F. Supp. at 77
("If such misrepresentations were made and defendant knew of them,
defendant had an affirmative duty to correct material misrepresentations that
it knew or should have known plaintiff would rely on."). An "ERISA fiduciary that knows or
should know that a beneficiary labors under a material misunderstanding of plan
benefits that will inure to his detriment cannot remain silent – especially
when that misunderstanding was fostered by the fiduciary's own material
representations or omissions." Griggs
v. E.I. DuPont de Nemours & Co., 237 F.3d 371, 381 (4th Cir. 2001)
(citation omitted); see also Davis v. Bowman Apple Prods. Co.,
No. CIV.A. 5:00CV00033, 2002 WL 535068, at **6-7 (WD. Va. Mar. 29, 2002)
(citing Griggs for "duty to correct"), aff'd, 50 Fed.
Appx. 138 (4th Cir 2002).
The Administration Committee Defendants do not dispute these
duties. Instead, they simply claim that
Plaintiffs' allegations of affirmative misrepresentations and failures to
inform are "conclusory" and do not meet the requirements of Rule 8(a)
and 9(b) of the Federal Rules of Civil Procedure. Committee Defendants' Memorandum at 20-21. As discussed above, however, Rule 8(a)
requires only a comprehensible description of the claims made. Rule 8(a) does not require Plaintiffs to
state, for each alleged misrepresentation, "who made the
representations, what specific representations were made, how the
Committee Defendants obtained knowledge pertaining to the substance of the
alleged misrepresentations, and when they obtained specific
knowledge." Committee Defendants'
Memorandum at 21 (emphasis in original).
Moreover, in any event, the Amended Complaint identifies specific, written
communications to participants by date, specifies why the statements were
false, and alleges that the Administration Committee knew or should have known
of the false representations. See
Amended Complaint at ¶¶ 72-87.
Plaintiffs also allege that the Administration Committee failed to
notify participants regarding the increasing risk of investment in Agway
securities resulting from Agway's deteriorating financial condition, and failed
to correct misrepresentations made by others, id. at ¶¶ 80-81, 84, and
identifies the "red flags" known to the Administrative Committee
members that should have alerted them
to the increased risks, id. at ¶¶ 91-94, 96-98.
The Administration Committee
Defendants' suggestion that Rule 9(b) applies to Plaintiffs' claims is also
mistaken. Committee Defendants'
Memorandum at 20-21. Rule 9(b) requires
that "[i]n all averments of fraud or mistake, the circumstances
constituting fraud or mistake shall be stated with particularity." Fed. R. Civ. P. 9(b). An ERISA fiduciary duty claim based on
misrepresentations or a failure to provide truthful information does not sound
in fraud, however. See, e.g.,
Crowley v. Corning, Inc., 234 F. Supp. 2d 222, 230-31 (W.D.N.Y. 2002)
(allegations that plan fiduciary breached its duty by failing to provide
truthful information to participants is fiduciary claim, not fraud claim, and
not subject to Rule 9(b)'s requirements).
Instead, any such claim is grounded, not in generalized principles of
detrimental reliance, but in the specific duties of prudence and loyalty that
an ERISA fiduciary owes plan participants and beneficiaries under section 404
of ERISA. 29 U.S.C. §§ 1104(a)(1)(A)
and (B); Varity, 516 U.S at 506.
Thus, ERISA
breach of duty claims for misrepresentations to participants and beneficiaries
are not based, like fraud, on the general duty to refrain from harming others,
but rather in the affirmative duty to protect and serve plan participants with
prudence and loyalty as set forth in the text of ERISA. In EDS, the court held:
In this case, Plaintiffs have alleged breach
of a fiduciary duty to inform. The sole
basis of Defendants' potential liability is a breach of that fiduciary duty,
not a common law or statutory fraud theory.
Although fraud and breach of fiduciary duty to inform may both involve
an omission, the Court does not find that every breach of a fiduciary duty to
inform is a scheme to defraud. Thus,
Rule 9(b) does not apply to these proceedings.
305 F. Supp. 2d at
672. Even in cases in which plaintiffs
allege underlying corporate fraud, the fiduciary breach claims are not held to
Rule 9(b)'s standards. See e.g., XCEL, 2004 WL 758990, at *6
("Here plaintiffs' breach of fiduciary duty claims are premised on
defendants' failure to act in light of the adverse circumstances that were
hidden by fraudulent conduct.
Defendants' duty to act arose as a result of the adverse conditions, not
the alleged fraud."); In re CMS Energy ERISA Litig., 312 F. Supp.
2d 898, 909 (E.D. Mich. 2004); Rankin, 278 F. Supp. 2d at 866 ("The
heightened pleading requirement under Rule 9(b) will not be imposed where the
claim is for a breach of fiduciary duty under ERISA."); Stein v. Smith,
270 F. Supp. 2d 157, 167 (D. Mass. 2003) (holding that Rule 8(a)'s lenient
pleading standard and not Rule 9(b)'s standard applies to claim that defendant
had fiduciary duty to monitor and evaluate performance of company stock). To the extent that courts have treated
fiduciary claims based on misrepresentations as fraud claims, they have been in
error. Crowley, 234 F. Supp. 2d
at 230-31; Vivien v. WorldCom, No. C02-01329 WHA, 2002 WL 31640557, at
**6-7 (N.D. Cal. July 26, 2002). In
any case, as described above, the detailed allegations of the Amended Complaint
sufficiently identify the misrepresentations made to meet the requirements of
Rule 9(b), even if it applied.
3.
The Federal Securities Laws Do Not Shield Plan Fiduciaries
The Committee Defendants (and Director Defendants) argue that
if they had made the disclosures sought by the Plaintiffs, they would have
violated the federal securities laws. See
Committee Defendants Memorandum at 25-27.
Similarly, the Director Defendants argue that, as fiduciaries, the board
had no obligation to disclose "general information about business activity
or the financial health of the employer."
Director Defendants' Memorandum at 17.
They further argue that the only information that would have been useful
to an investor-participant, was "by definition," material non-public
information that they could not have selectively disclosed to participants. Director Defendants' Memorandum at
16-19. Essentially the Defendants
suggest that their ERISA fiduciary duties described above are somehow subsumed
by, or inconsistent with, the federal securities laws. Defendants are wrong.
First, Plaintiffs allege not only a failure to disclose, but
also affirmative misrepresentations by the Administration Committee
Defendants. Amended Complaint at ¶¶
73-80. Defendants cannot claim that the
federal securities laws compelled them to lie.
Even with respect to the claim based on the Defendants'
failure to disclose, the argument made by Defendants has been rejected in
numerous recent ERISA cases involving corporate malfeasance. In Enron, Judge Harmon held:
As a matter of
public policy, the statutes should be interpreted to require that persons
follow the laws, not undermine them.
They should be construed not to cancel out the disclosure obligations
under both statutes or to mandate concealment, which would only serve to make
the harm more widespread; the statutes should be construed to require, as they
do, disclosure by [company] officials and plan fiduciaries of [the
company's] concealed, material
financial status to the investing public generally, including plan participants,
whether "impractical" or not …
284 F. Supp. 2d at 265-66; accord Rankin,
278 F. Supp. 2d at 877; EDS, 305 F. Supp. 2d at 673; XCEL, 2004
WL 758990, at *9; CMS, 312 F. Supp. 2d. 915-16.
As the Secretary argued in Enron, the securities laws
simply impose a "duty to abstain" from trading on material,
non-public information. In the
Matter of Cady, Roberts & Co.,
No. 8-3925, 1961 WL 60638, 40 SEC 907, Release No. 6668 (Nov. 8, 1961). There were numerous steps Defendants could
have taken to protect Plan participants from the implosion of Agway, none of
which were prohibited by the securities laws.
First and foremost, Defendants could have simply disclosed the
information to other shareholders and the public at large, or forced Agway to
do so. See Cady, Roberts,
1961 WL 60638, at *3. The duty to
disclose the relevant information to the plan participants and beneficiaries,
which the Plaintiffs assert these Defendants owed as ERISA fiduciaries, is
entirely consistent with the premise of the insider trading rules: that corporate insiders owe a fiduciary duty
to disclose material nonpublic information to the shareholders and trading
public. See id.
(incorporating common law rule that insiders should reveal material inside
information before trading).
Second, it would have been consistent with the securities law
to have eliminated the Company Security Fund as an investment option for
participants. The insider trading rules
require corporate insiders to refrain from buying (or selling) stock if they
have material, nonpublic information about the stock. Thus, the "disclose or abstain" securities law rule is
consistent with, and indeed contemplates, a decision not to purchase a
particular stock. See Condus
v. Howard Sav. Bank, 781 F. Supp. 1052, 1056 (D.N.J. 1992) (it is perfectly
legal to retain stock based on inside information; violation of insider trading
requires buying or selling of stock).
It would have been entirely consistent with the securities laws for the
fiduciaries to have eliminated the Company Security Fund as a participant
option.
Another option would have been to alert the appropriate
regulatory agencies, such as the SEC and the Department of Labor, to the
misstatements.
The duty to "disclose or abstain" under the
securities laws does not immunize Defendants from a claim that they failed in
their conduct as ERISA fiduciaries. To
the contrary, while their Securities Act and ERISA duties may conflict in some
respects, they are congruent in others, and there are numerous steps Defendants
could have taken that would have satisfied both duties to the benefit of the
plans.
Of the two cases cited by Defendants, one is
distinguishable, and the other is not to the contrary of the position the
Secretary advocates. In Hull v.
Policy Mgmt. Sys. Co., No. CIV A 3:00-778-17, 2001 WL 1836286, at *2
(D.S.C. Feb. 9, 2001), the court noted that the plaintiffs did not allege that
the fiduciaries had any knowledge of any misinformation concerning the company
stock or that they participated in the dissemination of information they knew
or should have known was misleading. In
this case, Plaintiffs explicitly allege that Defendants knew of, and took part
in, the dissemination of misleading information. See Amended Complaint at ¶¶ 69, 71-87. Moreover, to the extent that the Hull
court suggested that fiduciaries of employee benefit plans holding employer
stock might be in violation of securities laws if they refrained from
additional purchases, the decision is simply wrong. Dirks v. SEC, 463 U.S. 646 (1983) (viewing the Cady,
Roberts rule as requiring insiders to disclose the insider information or
refrain from trading the stock). On the
other hand, the court in In re McKesson HBOC, Inc. ERISA Litig., No.
C00-200308RMW, 2002 WL 31431588, at *6-8 (N.D. Cal. Sept. 30, 2002), held that
while ERISA would not require the defendants to violate the insider trading
laws by divesting company stock, it did not preclude an action based on the
plan's continued investment in the stock.
The McKesson decision is thus consistent with the notion that the
securities laws permit a fiduciary to abstain from purchasing stock or allowing
the purchase of stock.
In sum,
Defendants had several options available to them to protect plan participants
and beneficiaries, none of which violated the securities laws. Rather than taking or even considering any
of these options, Plaintiffs allege that Defendants did nothing, and thereby
allowed the Plan to continue to offer the Company Security Fund as an
investment option, resulting in millions of dollars in losses to the accounts
of Plan participants and beneficiaries.
The prohibition against selling the Plan's Agway securities without full
market disclosure is irrelevant to the other courses of action that Defendants
eschewed. Defendants were neither
allowed under ERISA nor required under securities law to do nothing.
IV. PLAINTIFFS STATE A CLAIM AGAINST BOSTON
SAFE
Defendant Boston Safe argues that,
as a directed trustee, it had no fiduciary responsibilities with respect to the
Plan, and cannot be held liable for any fiduciary breaches. See Boston Safe's Memorandum at
6-20. If, as Plaintiffs allege, Boston
Safe was responsible for valuing the Agway securities as part of the investment
fiduciary's process of buying and holding, it may be a discretionary trustee,
rather than a directed trustee. See
29 U.S.C. § 1002(21)(a) (a person is a fiduciary if "he renders investment
advice for a fee"); 29 C.F.R. § 2510.3-21(c)(1) (a person renders
investment advice for a fee if he "renders advice to the plan as to the
value of securities or other property" on a regular basis and pursuant to
an agreement that "such services will serve as a primary basis for
investment decisions with respect to plan assets."). Thus, on this basis alone, Plaintiffs have
stated a claim upon which relief may be granted against Boston Safe.
Plaintiffs allege
that the Boston Safe (along with the Investment Committee) was responsible for
valuing the Plan's investments in Agway securities. Amended Complaint at ¶¶ 43-44.
As discussed above, Plaintiffs allege that the prices paid by the Plan
were substantially higher than the securities' fair market value, as the result
of various risks that Boston Safe failed to consider. Id. at ¶¶ 46-47.
Plaintiffs further allege that Boston Safe compounded this fiduciary
breach by continuing to value and report the Agway securities at the inflated
face value, rather than fair market value, as was required by the Plan. Id. at ¶¶ 51-59, 65, 67-68.
Boston Safe argues that, pursuant to the Trust Agreement, it
was a directed trustee with "little authority" who cannot be liable
for breaches of fiduciary duty with respect to the valuation of Plan
assets. Boston Safe's Memorandum at
7-9. Boston Safe also argues that it
did not have the duty to value the Plan assets. Plaintiffs cite to section 1.16 of the Plan, which provides that
the trustee was obligated to "appraise at 'fair market value' any
investment in the [plan] that was not listed, dealt in any exchange, or quoted
by a reputable dealer in such securities." Amended Complaint at ¶ 12.
Similarly, Plaintiffs allege, Article Tenth of the Trust Agreement
(attached to the Amended Complaint as Exhibit B) requires the trustee to render
to the Investment Committee a "statement of the Trust assets and their
values." Id. Boston Safe, however, highlights sections of
the Trust Agreement that purportedly insulate Boston Safe from liability. Boston Safe's Memorandum at 7-9 (citing
Articles Fourth, Ninth and Eleventh of the Trust Agreement). Thus, Boston Safe argues that the language
of the Plan relied upon by Plaintiffs conflicts with the language of the Trust
Agreement. Id. at 9. Even without such conflict, Boston Safe
suggests the word "render" in Article Tenth of the Trust Agreement
merely requires "reporting" the value of the Agway securities, rather
than "determining" such value.
Boston Safe's Memorandum at 8-9.
Neither argument can prevail at this stage of the litigation. The question whether a trustee is in fact a
directed trustee, and conflicts between the Plan and Trust Agreement and
disputed interpretation of terms, cannot be resolved on a motion to
dismiss. E.g., Lopresti v.
Terwilliger, 126 F.3d 34, 39 (2d Cir. 1997); Reich v. Lancaster, 55
F.3d 1034, 1044 (5th Cir. 1995).
Boston Safe also
argues that valuation of Plan assets is not a fiduciary act, citing Keach
v. U.S. Trust Company, 240 F. Supp. 2d 832 (C.D. Ill. 2002), and DOL
Advisory Opinion 76-65A, 1976
WL 5090 (June 7, 1976). Boston Safe's Memorandum at __. Although merely rendering a valuation
opinion is not necessarily a fiduciary act, even if other fiduciaries may
consider the opinion in making investment decisions, if an entity has the
authority to make the ultimate determination as to the price at which an asset will
be bought, held or sold, this authority is fiduciary in nature. See 29 C.F.R. § 2510.3-21(c)(1)
(giving advice to plan as to the value of securities may render one a
fiduciary); e.g., Chao v. Hall Holding Co., 285 F.3d 415, 429-34
(6th Cir. 2002) (defendants breached their fiduciary duty when determining the
price at which ESOP would purchase company stock); Howard v. Shay, 100
F.3d 1484, 1487-90 (9th Cir. 1996) (same); Cunningham, 716 F.2d at
1467-72 (same). At this stage of the
proceedings, Plaintiffs have adequately alleged that Boston Safe had a broad
duty to value the Agway securities that may have established the prices at
which the investment fiduciaries and participants bought, sold or held Agway
securities, as well as other plan assets.
Amended Complaint at ¶¶ 12, 43-44.
V.
THE AMENDED COMPLAINT STATES A CLAIM AGAINST THE DIRECTOR
DEFENDANTS
A.
Under ERISA Section 409, Members of
a Board of Directors May Be Individually Liable For Breaches of Fiduciary
Duty
The Director
Defendants argue that the Agway Board of Directors is a "body," and
that the individual directors themselves cannot be held individually
liable. Although they cite Hull,
2001 WL 1836286, at *6, for this proposition, they also concede that the Hull
court did not rule on the issue.
Director Defendants' Memorandum at 8.
The Director
Defendants argument is contrary to the text of ERISA, which expressly assigns
fiduciary responsibility to any "person . . . to the extent (i) he
exercises any discretionary authority or discretionary control respecting
management of such plan or exercises any authority or control respecting
management or disposition of its assets."
ERISA § 3(21) (A), 29 U.S.C. § 1002(21) (A). Because the statute defines "person" to include an
"individual" as well as a corporation, ERISA § 3(9), 29 U.S.C. §
1002(9), it is clear that individuals who meet the definition of fiduciaries
are liable as such if they breach their duties. See also ERISA § 409, 29 U.S.C. § 1109 (imposing
individual liability on any breaching fiduciary). Thus, numerous cases have recognized that members of boards of
directors or committees that were fiduciaries may themselves be sued as
individuals. See Stewart v.
Thorpe Holding Co. Profit Sharing Plan, 207 F.3d 1143, 1156 (9th Cir. 2000)
(where "Committee or entity is named as fiduciary, the corporate officers
of trustees who carry out the fiduciary functions are themselves fiduciaries
and cannot be shielded from liability by the company"); Landry v. Air
Line Pilots Ass'n Inter. AFL-CIO, 901 F.2d 404, 408 (5th Cir. 1990); Moench
v. Robertson, 62 F.3d 553, 560 (3d Cir. 1995) (plan's individual committee
members were fiduciaries); Enron, 284 F. Supp. 2d at 569.
The Secretary has
successfully brought such claims against individual members of a fiduciary
board of directors. E.g., Martin
v. Feilen, 965 F.2d 660, 669 (8th Cir. 1992); Martin v. Schwab, No.
CIV.A.91-5059-CVSW-1, 1992 WL 296531, at ** 3-4 (W.D. Mo. Aug. 11, 1992). In Schwab, the director defendants
argued, inter alia, that "they were not fiduciaries because,
individually, they did not have discretionary authority to appoint"
members of the committee. 1992 WL
296531, at *3. The court disagreed,
stating, "Defendants' contention
that they have no individual exposure as fiduciaries is clearly at odds with
the language of the statute [section 409] …Thus, it makes no difference that
defendants were fiduciaries by reason of their status as Board
directors." Id. at ** 3-4
(emphasis in original).
B.
Directors Who Appoint Have a Duty
To Monitor
In this case, Plaintiffs allege that the Director Defendants
were responsible for appointing and monitoring the performance of the committee
members and the trustee. Amended
Complaint at ¶¶ 11, 34, 194, 196. The Plan
itself specifically states that the members of the Investment Committee,
Administration Committee and the trustee are to be appointed by, and serve at
the pleasure of, the board. Plan at §§ 14.01, 15.01, 15.02. The Amended Complaint alleges that the board
failed to adequately monitor and supervise those they appointed. Id. at ¶¶ 196-98, 207. Specifically, Plaintiffs allege that
"the Board Defendants had actual or constructive knowledge of the
[Investment Committee's and Boston Safe's ] purchases and retention of Agway
Securities at inflated prices and the Plan's reporting the values of the Agway
Securities at their inflated Face Amounts but, despite this knowledge, failed
to take any corrective measures." Id.
at ¶ 71. Similarly, Plaintiffs allege
that "the Board Defendants had actual or constructive knowledge of the
material misrepresentations and other failures of the Committee Defendants but,
despite this knowledge, failed to take corrective measures." Id. at ¶ 87.
The Director
Defendants argue, however, that "as a matter of law, they cannot be held
liable for any alleged breach of fiduciary duty relating to the monitoring of
the Committees, Trustee, the Plan, or its assets or investments; the disclosure
of information to participants; the duty to investigate or independently value
Agway securities; or otherwise opine on whether it was prudent to invest in the
Company Security Fund." Director
Defendants' Memorandum at 10. They rely
on ERISA section 3(21), 29 U.S.C. § 1002(21), which provides that one is a
fiduciary only "to the extent" he has or exercises fiduciary
authority. The Director Defendants
concede, however, that, under the plan and the Trust Agreement, the board had
the authority to appoint and remove the trustee and the committee members, and
it in fact exercised the authority.
Director Defendants' Memorandum at 2 (citing Plan §§ 14.01, 15,01,
15.02, other citations omitted).
The Secretary has long recognized
that those responsible for appointing other fiduciaries have fiduciary responsibility
with regard to the selection and retention of their appointees. See 29 C.F.R. § 2509.75-8 at D-4. The Secretary has further addressed the
"ongoing responsibilities of a fiduciary who has appointed trustees or other
fiduciaries with respect to these appointments" and concluded that:
At
reasonable intervals the performance of trustees and other fiduciaries should
be reviewed by the appointing fiduciary in such manner as may be reasonably
expected to ensure that their performance has been in compliance with the terms
of the plan and statutory standards, and satisfies the needs of the plan. No single procedure will be appropriate in
all cases; the procedure adopted may vary in accordance with the nature of the
plan and other facts and circumstances relevant to the choice of the procedure.
29 C.F.R. § 2509.75-8 at FR-17.
This interpretation is in line with well-established case law
recognizing the ongoing duties of appointing fiduciaries. The courts have long recognized that
"[t]he power to appoint and remove trustees carries with it the
concomitant duty to monitor those trustees' performance." Liss v. Smith, 991 F. Supp. 278, 311
(S.D.N.Y. 1998); accord Leigh v. Engle, 727 F.2d 113, 135 (7th
Cir. 1984); Martin v. Feilen, 965 F.2d 660, 669-70 (8th Cir. 1992); Mehling
v. New York Life Ins. Co., 163 F. Supp. 2d 502, 510 (E.D. Pa. 2001). "[I]mplicit in [the appointing
fiduciary's] power to select the Plans' named fiduciaries is the duty to
monitor the fiduciaries' actions, including their investment of Plan
assets." Mehling, 163 F.
Supp. 2d at 510 (citing Leigh, 727 F.2d at 134-35).
A number of more recent cases have also upheld the
Secretary's position with respect to the duty to monitor fiduciaries after they
are appointed. In the Enron
litigation, Judge Harmon held that the plaintiffs had stated claims against the
corporate defendants for having, inter alia, "exercised, but
in specific cases not well, their explicit duties to select and appoint
fiduciaries … and failed to monitor or remove their appointees for
incompetence." 284 F. Supp. 2d at
659-61; see also Sprint, 2004 WL 117937, at *19; CMS,
312 F. Supp. 2d at 916-17; EDS, 305 F. Supp. 2d at 670-71; In re
Sears, Roebuck & Co. ERISA Litig., No.02 C 8324, 2004 WL 407007, at *8
(N.D. Ill. Mar. 3, 2004).
Thus, the Director Defendants' contention that "the
courts have routinely held that the board's fiduciary duties cannot extend
beyond the acts set forth in the plan," Director Defendants' Memorandum at
10-11, misses the mark. The weight of
precedent supports the Secretary's view that the duty to monitor appointed
fiduciaries is part and parcel of the power and authority to appoint, retain
and remove those fiduciaries. Most of
the cases cited by the Director Defendants stand only for the unremarkable
proposition that a fiduciary can be liable only for matters over which he
serves as a fiduciary. LaLonde v.
Textron, Inc., 270 F. Supp. 2d at 281; Beddall v. State Street Bank
& Trust Co., 137 F.3d 12, 18 (1st Cir. 1998); Kerns v. Benefit Trust
& Life Ins. Co., 992 F.2d 214, 216 (8th Cir. 1993); Crowley v.
Corning, Inc., No. 02-CV-6172 CJS, 2004 WL 763873 (W.D.N.Y. Jan. 14, 2004);
Daniels v. Nat'l Employee Benefit Servs., Inc., 858 F. Supp. 684, 690
(N. D. Ohio 1994). In this case,
Plaintiffs' claims are premised upon the specific Plan language authorizing the
board to appoint and remove the committee members and trustee.
Only one district court opinion cited by the Director
Defendants holds that the duty to appoint and remove ERISA fiduciaries does not
implicate a concomitant duty to monitor those appointed. See Williams, 271 F. Supp. 2d
at 1339. The decision is simply wrong on this
point. As recognized by the authority
cited above, absent a sensible process for monitoring their appointees, the
appointing fiduciaries would have no basis for concluding that their appointees
were faithfully and effectively performing their obligations, or for deciding
whether to retain or remove them. See
Leigh v. Engle, 727 F.2d at 135 (fiduciaries cannot "abdicate their
duties under ERISA merely through the device of giving their [appointees]
primary responsibility for day-to-day administration of the trust" but
were "obligated to act with appropriate prudence and reasonableness in
overseeing" the appointees' performance).
The scope of the duty to monitor is dependant on the
applicable facts and circumstances; as the Secretary noted in the regulation at
29 C.F.R. § 2509.75-8 at FR-17, the facts and circumstances will determine what
procedure for monitoring will be appropriate.
See Enron, 284 F. Supp. 2d at 514; e.g., EDS,
305 F. Supp. 2d at 670 ("at this stage of the proceedings [a motion to
dismiss] the Court will not endeavor to define the duty to monitor's outer
edges with no factual record to indicate how far this case may or may not push
those edges").
In this case, the Plan gives the board the authority to
appoint and replace the trustee and members of the Committees. Plan at §§ 14.01, 15.01, 15.02. As discussed at length above, Plaintiffs
allege that Boston Safe and the Committee Defendants breached their fiduciary
duties to the Plan by, inter alia, failing to properly value the
Agway securities purchased by the plan, by failing to even consider the
prudence of making such an investment, and by materially misleading Plan
participants and beneficiaries about the risks of the Company Security Fund.
Plaintiffs further allege that the Board Defendants knew of these breaches and
failed to take corrective action.
Amended Complaint at ¶¶ 71, 87.
These allegations state a claim against the Director Defendants.
VI.
CO-FIDUCIARY LIABILITY
In addition to alleging that the Moving ERISA Defendants
were directly liable for their own breaches of fiduciary duty, Plaintiffs
allege that each is liable for participating in the other Defendants'
breaches. See Amended Complaint
at ¶¶ 163-64, 187-88, 207-09, 236. Such
allegations state a claim upon which relief can be granted, and Plaintiffs'
co-fiduciary breach claims should not be dismissed.
Under ERISA
section 405(a), 29 U.S.C. § 1105(a), a fiduciary is responsible for his
co-fiduciaries' breaches if he knowingly participated in or concealed knowledge
of a breach by the other fiduciaries, unless he made reasonable efforts under
the circumstances to remedy the breach.
See Silverman v. Mut. Benefit Life Ins. Co., 138 F.3d 98,
103-04 (2d Cir. 1998); Lee v. Burkhart, 991 F.2d 1004, 1010 (2d Cir.
1993). Fiduciaries have a duty to
"use reasonable care to prevent a co-trustee from committing a breach of
trust or to compel a co-trustee to redress a breach of trust." Restatement (Second) of Trusts § 184 (1987
App.). A fiduciary's inaction and
failure to act promptly to halt another fiduciary's breach can give rise to
co-fiduciary liability. See, e.g.,
Chicago Hous. Auth. v. J.A. Hannah Inv. Advisory Serv. Inc., No. 95 C
5251, 1996 WL 328033, at *5 (N.D. Ill. May 9, 1996) (rejecting investment
advisor's argument that it cannot be liable for another fiduciary's theft from
plans, which advisor knew about for months; advisor may have enabled fiduciary
breach); Jackson v. Truck Drivers' Union Local 42 Health & Welfare Fund,
933 F. Supp. 1124, 1141 (D. Mass. 1996) ("A fiduciary who becomes aware
that a co-fiduciary has breached a fiduciary duty to plan beneficiaries may not
escape liability by simply casting a blind eye toward the breach.").
The Moving ERISA Defendants' arguments against the
co-fiduciary liability claims echo their arguments regarding direct liability
under sections 404 and 409. First, they
each claim that the were not fiduciaries with respect to the actions and
inactions alleged, and thus cannot be liable as co-fiduciaries. See Director Defendants' Memorandum
at 19-22; Committee Defendants' Memorandum at 27-28; Boston Safe's Memorandum
at 18-20. As discussed above, the
Amended Complaint adequately alleges, and the Plan establishes, that each of
the Moving ERISA Defendants was a fiduciary to the Plan under ERISA.
The Moving ERISA Defendants also claim that the co-fiduciary
allegations are too conclusory to survive a motion to dismiss. Id.
The Committee Defendants resurrect their "who, where, when and
why" formulation. Committee
Defendants' Memorandum at 29. For
reasons stated above, Defendants' attempt to impose a summary judgment standard
on a motion to dismiss should be rejected.
Further, Defendants misconstrue the Plaintiffs' allegations. For example, the Director Defendants claim
the Plaintiffs "merely allege, in a conclusory manner, that '[t]he Director
Defendants knowingly participated in, concealed, enabled, failed to remedy,
and/or abetted one or more breaches committed by their co-fiduciaries,
including without limitations the other ERISA Defendants.'" Director Defendants' Memorandum at 21
(citing Amended Complaint at ¶ 208).
This argument overlooks numerous other allegations by Plaintiffs against
the Director Defendants alleging co-fiduciary liability. See Amended Complaint at ¶ 71
("The Board Defendants had actual or constructive knowledge of the Plan's
purchases and retention of Agway Securities at their inflated Face Amounts, but
despite this knowledge, failed to take any corrective measures."); id.
at ¶ 87 ("The Board Defendants had actual or constructive knowledge of the
material misrepresentations and other failures of the Committee Defendants, but
despite this knowledge, failed to take any corrective measures."); id.
at ¶¶ 95, 207-09. Plaintiffs'
co-fiduciary allegations are sufficient to survive a motion to dismiss.
CONCLUSION
For
the reasons stated above, the Secretary urges the court to deny the motions to
dismiss.
Respectfully submitted,
HOWARD
M. RADZELY
Solicitor of Labor
TIMOTHY
D. HAUSER
Associate
Solicitor
Plan
Benefits Security Division
ELIZABETH HOPKINS
Counsel for Appellate
and Special Litigation
Plan
Benefits Security Division
SUSAN J. LUKEN
Trial
Attorney
U.S.
Department of Labor
Office
of the Solicitor
Plan
Benefits Security Division
P.O.
Box 1914
Washington,
DC 20013
Phone: (202) 693-5600
Fax: (202) 693-5610
CERTIFICATE OF SERVICE
I
hereby certify that a copy of the foregoing was served upon the following by
regular U.S. mail, this __ day of June, 2004.
____________________________
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COUNSEL FOR PLAINTIFFS:
John S. Summers
Hangley, Aronchick, Segal & Pudlin
One Logan Square, 27th Floor
Philadelphia, PA
19103-6933
Jules L. Smith
Blitman & King
16 West Main Street,
Suite 207
The Powers Building
Rochester, NY 14614
COUNSEL FOR THE
DIRECTOR DEFENDANTS:
Edward Cerasia II
Proskauer Rose LLP
One Newark Center
Newark, NJ 07102-5211
COUNSEL FOR THE
COMMITTEE DEFENDANTS:
Mark Casciari
Seyfath Shaw LLP
1270 Avenue of the Americas, Suite 2500
New York, NY 10020
COUNSEL FOR DEFENDANT
BOSTON SAFE DEPOSIT & TRUST CORPORATION:
Robert Eccles
O'Melveny & Myers LLP
1625 Eye Street, NW
Washington, DC 20006
James L. Sonneborn, Esq.
Sonneborn, Spring & O'Sullivan
241 West Fayette Street
Syracuse, NY 13202
COUNSEL FOR DEFENDANT
PRICEWATERHOUSECOOPERS LLC:
Diana L. Weiss
Orrick, Harrington &
Sutcliffe LLP
666 Fifth Avenue
New York, NY 10103
Daniel B. Berman
Hancock &
Eastabrook, LLP
1500 MONY Tower I
Syracuse, NY 13221
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Defendants counter that plan amendment is a
non-fiduciary, settlor function. See
Committee Defendants Memorandum at 15; see also Director
Defendants' Memorandum at 14-15.
Plaintiffs, however, do not allege that the Plan should have been
amended. Instead, they allege that the
Plan's fiduciaries were required under ERISA section 404(a)(1)(D) to determine
whether the Plan's terms were consistent with ERISA's fiduciary duties – i.e.,
whether continued investment in Agway securities was prudent. In In re CMS Energy ERISA Litig., 312
F. Supp. 2d 898, 907-08 (E.D. Mich. 2004), the court recently rejected a
similar argument:
Although the court agrees with the
defendants' position that an amendment of the Plan would not be a fiduciary
act, it appears that plaintiffs' claim … does not solely complain of a lack of
Plan amendment, as defendants suggest.
Rather, plaintiffs complain about the lack of any action taken by
Plan fiduciaries, which might include other measures to protect participants'
assets, such as suspension of investment in CMS stock funds, or requiring
investments in the ESOP to be held in cash until an assessment of the prudence
of the CMS stock investment could be made.
Therefore … the court will not dismiss Count I for failure to state a
claim.
(emphasis in original); see also In re
Sprint Corp. ERISA Litig., No. 03-2202-JWL, 2004 WL 1179371, at *8 (D. Kan.
May 27, 2004). Likewise, Plaintiffs in this
case do not contend that a plan amendment was needed, but rather allege that
the Investment Committee Defendants failed to consider the prudence of
investment in Agway securities or to diversify the Company Security Fund when
holding Agway securities became imprudent, in accordance with ERISA section
404(a)(1)(D). Amended Complaint at ¶¶
91-98.
The other district court decisions cited by Defendants
erred by applying the presumption at the Rule 12(b)(6) stage. See In re Duke Energy ERISA Litig.,
281 F. Supp. 2d 786 (W.D.N.C. 2003); Wright v. Oregon Metalurgical Corp.,
222 F. Supp. 2d 1224 (D. Ore. 2002).
The dispute over Boston Safe's status as a
directed fiduciary obviates the need to consider its argument that a directed
trustee must follow instructions unless it is "clear on its face"
that the instructions violate ERISA or the plan. See Boston Safe's Memorandum at 14-15. Nonetheless, the Secretary notes that she
agrees with Judge Harmon's decision in Enron, rejecting this exact
argument. 284 F. Supp. 2d at 585-593
(citing Koch v. Dwyer, No. 98
Civ. 5519 (RPP), 1999 WL 528181, at *10 (S.D.N.Y. 1999) (neither the statute
nor the case law uses a "clear on their face" test; directed trustee
can be held liable for following a direction that he knew was imprudent), clarified
on other grounds, 2000 WL 174945 (S.D.N.Y. Feb. 15,
2000)).
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