After making my way through most of the 331-page decision in Tittle v. Enron Corp., 2003 WL 22245394 (S.D. Tex. Sept. 30, 2003), the part of the opinion that stands out the most is the directed trustee discussion which may,…
After making my way through most of the 331-page decision in Tittle v. Enron Corp., 2003 WL 22245394 (S.D. Tex. Sept. 30, 2003), the part of the opinion that stands out the most is the directed trustee discussion which may, in the end, have the most far-reaching impact in the benefits arena. In Count II of the case, Plaintiff-participants of the Enron 401(k) plan and the ESOP, have sued a trust company for breach of its fiduciary duties based on the lockdown (freeze, blackout) of the two plans, alleging inadequate notice to participants. The reason for the lockdown was that the plans were switching to a new record keeper and the trust company was in the process of transferring the business to a new trustee. Count III also alleges a failure to diversify the 401(k) plan’s assets. As part of the allegation, the complaint alleges that the trust company should not have followed the plan administrative committee’s directions that were contrary to ERISA.
The “Directed Trustee Liability” discussion (beginning on page 109 of the opinion) begins with the “factual dispute” over whether the trust company was a “directed” trustee or a “discretionary trustee.” Plaintiffs argued that it was the latter and the trust company argued it was the former:
The complaint alleges that [the trust company] was the trustee of the Savings Plan and exercised discretionary authority and control over plan assets when it imposed the lockdown, in spite of the fact that it had the power to postpone the lockdown until the price of Enron stock stabilized to avoid injury to the participants, and that numerous red flags should have alerted [the trustee company] to the dangers of proceeding with the scheduled lockdown. Furthermore, the complaint asserts, plan documents and the trust agreement gave [the trust company] discretionary authority and control over plan assets and plan administration where there was no direction by the Administrative Committee. Alternatively, the complaint asserts that if [the trust company] was a directed trustee and if the Administrative Committee gave written instructions to [the trust company] regarding the lockdown, [the trust company] breached its fiduciary duties in following the lockdown instructions because the directions were contrary to ERISA and [the trust company] knew or should have known that the lockdown instructions violated ERISA.
[The trust company] contends that it was a “directed trustee,” as opposed to a “discretionary” trustee, under provisions in the plan documents and trust agreement that subject it to direction by the Administrative Committee, that the Administrative Committee exercised total authority and discretion over the plan assets and management, and that [the trust company] thus had no responsibility or liability for the lockdown.
The court first notes the fact that caselaw addressing the duties of a directed trustee is “minimal” and also “in conflict” and then goes on to try to interpret the confusing provisions of ERISA pertaining to the subject, beginning with section 403(a)(2) of ERISA:
All assets of an employee benefit plan shall be held in trust by one or more trustees. Such trustee or trustees shall be either named in the trust instrument or in the plan instrument described in section 402(a) or appointed by a person who is a named fiduciary, and upon acceptance of being named or appointed, the trustee or trustees shall have exclusive authority and discretion to manage and control the assets of the plan, except to the extent that –
(1) the plan expressly provides that the trustee or trustees are subject to the direction of a named fiduciary who is not a trustee, in which case the trustee shall be subject to proper directions of such fiduciary which are made in accordance with the terms of the plan and which are not contrary to [ERISA].
The court then seeks to provide meaning to the terms “proper” and “made in accordance with the terms of the plan” and “not contrary to ERISA” and places great emphasis upon the statutory construction of section 403(a)(2) of ERISA espoused in Patricia W. Hatamyar‘s article See no Evil? The Role of the Directed Trustee under ERISA, 64 Tennessee Law Review 1-90 (1996):
The Court has found Ms. Hatamyar’s article to be the most extensive and authoritative source regarding construction of statutory provisions in ERISA relating to the directed trustee. The article is cited as persuasive authority by most of the few courts addressing the directed trustee issue.
Defendants argued that a directed trustee was only required “to determine whether the directed action facially complies with the terms of the plan and of ERISA and relied on this paragraph in the legislative history of ERISA section 403(a)(1) as its main authority:
If the plan provides that the trustees are subject to the direction of named fiduciaries, then the trustees are not to have the exclusive management and control over the plan assets, but generally are to follow the directions of the named fiduciary. Therefore, if the plan sponsor wants an investment committee to direct plan investments, he may provide for such an arrangement in the plan. In addition, since investment decisions are basic to plan operations, members of such an investment committee are to be named fiduciaries . . . . If the plan so provides, the trustee who is directed by an investment committee is to follow that committee’s directions unless it is clear on their face that the actions to be taken under those directions would be prohibited by the fiduciary responsibility rules of the bill or would be contrary to the terms of the plan or trust.
The American Bankers Association also supported this position in its Amicus Brief (link via Benefitslink.com) and placed great importance on the fact that “the banking and trust industry has relied on this facial compliance standard since ERISA was enacted in 1974.” The Court rejected this argument.
Instead, the court cited “rules of statutory construction, the common law roots of the directed trustee concept, the Department of Labor’s interpretation, as well as some of the case law, in support for its position” and held:
After extensive research, this Court concludes for the reasons discussed supra that even where the named fiduciary appears to have been granted full control, authority and/or discretion over that portion of activity of plan management and/or plan assets at issue in a suit and the plan trustee is directed to perform certain actions within that area, the directed trustee still retains a degree of discretion, authority, and responsibility that may expose him to liability, as reflected in the structure and language of provisions of ERISA. At least some fiduciary status and duties of a directed trustee are preserved, even though the scope of its “exclusive authority and discretion to manage and control the assets of the plan” has been substantially constricted by the directing named fiduciary’s correspondingly broadened role, and breach of those duties may result in liability.
In any ERISA retirement plan, where the plaintiffs, as in Tittle, allege with factual support that the directed trustee knew or should have known from a number of significant waving red flags and/or regular reviews of the company’s financial statements that the employer company was in financial danger and its stock greatly diminished in value, yet the named fiduciary, to which the plan allocated all control over investments by the plan, directed the trustee to continue purchasing the employer’s stock, there is [a]factual question whether the evidence is sufficient to give rise to a fiduciary duty by the directed trustee to investigate the advisability of purchasing the company stock to insure that the action is in compliance with ERISA as well as the plan.
Finally, even if the Court construed section 403(a) to require only that the trustee find that the directions he received from the named fiduciary are “proper” and facially in compliance with the terms of the plan and of ERISA, it finds that the Tittle Plaintiffs still state a claim: “Plaintiffs submit that any order to proceed with lockdowns on its face violated the duties of prudence and circumstances, laid out in the complaint, made its timing highly suspect and clearly injurious to plan participants and beneficiaries.
It is interesting that the court went through pages and pages of discussion over why it believed the standard was not the “facial compliance standard”, but then in the end concluded that even if that had been the standard, it would have ruled that plaintiffs had stated a claim.
Also, please note that the WorldCom decision discussed in a previous post here also seems to reject the “facial compliance standard,” but did not seem to go as far as the court did in the Enron case. (Interestingly enough, footnote 8 of the case notes that the directed trustee in that case argued that the “facial compliance standard” should apply, but the court said that it was “not an issue that must be resolved at this stage of the litigation.”) In WorldCom, the court ruled that the directed trustee “was not required to exercise its independent judgment in deciding how and whether to [invest employee funds as directed]. It only had to make sure [that WorldCom’s] directions were proper, in accordance with the terms of the plan, and not contrary to ERISA.” The court in WorldCom went on to say that if the directed trustee in the case “followed instructions to invest employee funds in WorldCom stock when a prudent trustee would know that WorldCom’s decision to continue to offer its own stock to its employees as an investment option was imprudent, or otherwise in violation of WorldCom’s obligation under ERISA,” then the directed trustee might be liable as an ERISA fiduciary. In other words, the standard in WorldCom seems to be that the directed trustee is only liable if it “knows” the direction is not proper, in accordance with the terms of the plan, or contrary to ERISA, whereas the standard promulgated in the Enron case seems to be that the directed trustee will be liable if it “should have known.”
Are there any flaws to this reasoning? And what is the impact of this decision and the WorldCom decision on those entities serving as directed trustees? Stay tuned for Part II of this discussion . . .