Fourth Circuit Requires Causation in ERISA Breach of Fiduciary Duties Suit

Plasterers’ Local Union No. 96 Pension Plan v. Pepper (U.S. Ct. of Apps., 4th Cir., Dec. 1, 2011)

Former trustees of Local Union 96 appealed a district court ruling that they had breached their fiduciary duties regarding investment of plan assets as required under ERISA section 1104(a)(1)(B) and (C). The former trustees presented evidence that in the 1970’s and 80’s the predecessor plan fund had lost substantial amounts of funds and therefore, in 1987 the board implemented the plan with the primary objective to avoid any further losses. From 1992 to 2005 the Plan assets were invested entirely in $90,000 CDs and on-to-two-year Treasury bills. The district court held that the former trustees had failed to investigate its investment options and also failed to diversify its investments. After finding a breach of fiduciary duties to investigate and diversify, the district court turned immediately to damages. The district court awarded damages for a three year period of $432,986.70, $337,935.01 in fees, and $20,014.47 in costs.

The former trustees appealed citing error due to the district court’s failure to make a finding that they held objectively imprudent investments. The Fourth Circuit agreed, stating that a breach of the fiduciary duty to investigate or diversify does not automatically equate to causation of loss and therefore liability. The district court erred in that it did not first determine whether the investments were imprudent and then as required by ERISA, make an independent finding of causation of loss resulting from the breaches identified. The court stated that the failure to investigate alternative options or to diversify does not mean that their actual investments were necessarily imprudent. The Fourth Circuit vacated and remanded the decision with directions to the court that in analyzing the prudence of the former trustees’ actions the court will need to make factual findings of the circumstances that informed the decisions including the Plan’s size and type, the Plan member’s demographics, and the Board’s goals and objectives. The Fourth Circuit stated no opinion on the issue of who has the burden of proving causation although it noted that the circuits are split.

The Fourth Circuit also rejected the district court’s calculation of damages and failure to articulate a reasoned basis for awarding damages based on a three-year period instead of the former trustees urged six year basis. The Court found that the different time periods would result in significantly different awards and therefore “picking a time period out of the air” is clearly not a reasoned basis. Notably, if the six-year period was used, the investments outperformed the expert’s model and so no damages where incurred by the Plan. Additionally, the Court rejected the award of attorney’s fees and costs instructing the district court on remand to first conduct the Hardt analysis and then apply the general guidelines in Quesinberry. The Court cited error in the district court’s finding that an insurance policy would pay the fee award, and so the “Former trustees thus were able to pay any such award” because the policy was not in the record, nor was any evidence of its terms presented.

For a copy of the decision click here

Sarah Delaney and Dan Gerber

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