Opinion ID: 532526
Heading Depth: 2
Heading Rank: 1

Heading: Scope of Fiduciary Duty Under Section 1104(a)(1)

Text: 11 GCI raises two principal objections to the District Court's liability holding. First, it maintains that the Court erred in concluding, at the summary judgment stage, that GCI violated the Guidelines because there was a dispute as to whether the parties intended the 50% ceiling to be a strict limit or only a rough benchmark, as GCI maintains is the custom in the industry. Second, it argues that a fiduciary's failure to abide by the plan documents is not necessarily a breach of duty, but that liability requires conduct that was not prudent under the circumstances. The District Court correctly rejected both of these arguments. 12 With respect to the character of the 50% ceiling, the Agreement plainly stated that GCI would manage the account in strict conformity with the investment guidelines promulgated by the Trustees. We need not consider whether such language in a plan document covered by section 1104 requires a finding of liability even for small percentage deviations from a prescribed limit. In this case, GCI greatly exceeded the 50% ceiling during a 16-month period preceding its termination in October 1984. For most of this period, the portfolio's equity holdings exceeded 65%; for the last five months these holdings exceeded 75%. In light of these undisputed facts, the District Court correctly ruled that no reasonable fact-finder could conclude that GCI had complied with the Guidelines. 13 Nor does the defendant's claim that the parties agreed not to regard shares of preferred stock as equities for purposes of the ceiling preclude summary judgment as to liability. As the District Court noted, the percentage of preferred stock in the portfolio was only 4%. Even if this 4% were subtracted from the total equity percentages relied upon by the District Court, the fact remains that GCI allowed the portfolio, over an extended period of time, to hold a percentage of common stock far in excess of 50%. 14 The District Court was also correct to reject defendant's argument that the Trustees' awareness that GCI had exceeded the 50% limit without voicing any objection raised a factual issue precluding summary judgment. As the District Court noted, ERISA's requirements that employee benefit plans be put in writing, 29 U.S.C. Sec. 1102, and that fiduciaries comply with the written documents serve to protect the participants and the beneficiaries. ERISA was deliberately structured so that legal responsibility for management of ERISA plans would be clearly located. Lowen v. Tower Asset Management, Inc., 829 F.2d 1209, 1218 (2d Cir.1987). A rule of state contract law that would effectively vary the terms of the written document or permit trustees to waive the right of beneficiaries to strict adherence by fiduciaries would impair these federal policies. Cf. Miller v. Lay Trucking Co., Inc., 606 F.Supp. 1326, 1333 (N.D.Ind.1985) (state contract law preempted by ERISA where common law claim goes to the terms of [a] pension agreement and would directly infring[e] on the federal scheme). Unlike ordinary breach of contract actions in New York, in which the right to strict adherence may be waived by failure to object to performance that deviates from the written document, see, e.g., Mississippi Shipbuilding Corp. v. Lever Brothers Co., 237 N.Y. 1, 142 N.E. 332 (1923), the trustees of an ERISA plan cannot waive the right of the beneficiaries to have fiduciaries comply with section 1104(a)(1)(D). Cf. Nachwalter v. Christie, 805 F.2d 956, 959-61 (11th Cir.1986) (rejecting applicability of common law principle of estoppel under section 1102); Saret v. Triform Corp., 662 F.Supp. 312, 315-16 (N.D.Ill.1986) (refusing to apply principles of estoppel and waiver). 15 To the extent that plan trustees are negligent in enforcing the rights of beneficiaries, they might be subject to separate suit by those beneficiaries or, perhaps, to suit by co-fiduciaries for indemnification or contribution. See 29 U.S.C. Sec. 1105 (1982); Alton Memorial Hospital v. Metropolitan Life Insurance Co., 656 F.2d 245, 250 (7th Cir.1981). But see Mutual Life Insurance Co. v. Yampol, 706 F.Supp. 596 (N.D.Ill.1989) (dismissing trustee's claim for contribution under section 1105). Such potential actions against trustees, however, do not prevent them from recovering, on behalf of the plan, losses caused by the actions of other fiduciaries. We do not understand the District Court's opinion, in rejecting GCI's waiver defense, to say that section 1104(a)(1)(D) displaces all of state contract law with respect to interpreting ERISA plan documents, but only that where such documents are clear, state law defenses are invalid when they would frustrate important policies underlying a statutory scheme so broadly preemptive as ERISA. 16 GCI argues, nevertheless, that a failure to act in accordance with plan documents, as required by section 1104(a)(1)(D), does not necessarily constitute a breach of fiduciary duty under section 1109(a). GCI argues that the issue of breach of the fiduciary duties specified in section 1104(a)(1) must be evaluated under an overall prudence standard and that the district court was obligated to review all of the facts concerning the entire three-year relationship between the Trustees and GCI before concluding that exceeding the 50% limit was imprudent and, therefore, a breach of fiduciary duty. 17 This argument ignores the independent significance of the subdivisions of section 1104(a)(1). Subdivision (B) of section 1104(a)(1) imposes a general duty to act with care, skill, prudence, and diligence. 29 U.S.C. Sec. 1104(a)(1)(B). Under GCI's interpretation, this duty to act with prudence would be the only duty imposed by subsection 1104(a)(1). But subdivisions (A), (C), and (D) impose more specific duties, such as acting for the exclusive purpose of providing benefits to participants and beneficiaries, id. Sec. 1104(a)(1)(A), acting so as to diversify plan investments in order to minimize risk, id. Sec. 1104(a)(1)(C), and acting in accordance with plan documents, id. Sec. 1104(a)(1)(D). A fiduciary's failure to meet these specific requirements of section 1104(a)(1) is not merely evidence of imprudent action but may, in itself, be a basis for liability under section 1109. See e.g., Brock v. Citizens Bank of Clovis, 841 F.2d 344, 346 (10th Cir.), cert. denied, --- U.S. ----, 109 S.Ct. 82, 102 L.Ed.2d 59 (1988) (failure to diversify). 18 The Supreme Court's decision in Central States, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc., 472 U.S. 559, 105 S.Ct. 2833, 86 L.Ed.2d 447 (1985), is not to the contrary. In that case, plan trustees relied on a statement in the plan documents granting presumptive validity to their interpretations of the plan's provisions. The Court noted that section 1104(a)(1)(D) does not go so far as to excuse fiduciaries from their duties under other provisions of ERISA merely because they are acting pursuant to a provision of a plan document. See 472 U.S. at 568, 105 S.Ct. at 2839. The Court went on to say, however, that absent an inherent inconsistency between a provision in a plan document and a fiduciary duty expressed elsewhere in ERISA, the trustees' assertion of contractual rights pursuant to the plan documents was valid. Id. In the present case, although GCI attempted to persuade the District Court that its investment decisions were prudent, it made no showing that it would have been imprudent to comply with the 50% ceiling or that such compliance would have required it to breach a fiduciary duty imposed by any provision of ERISA distinct from that of section 1104(a)(1)(D). The District Court was correct in holding that GCI's disregard for the 50% ceiling made it liable for any losses to the plan resulting from the breach, as provided in section 1109(a), without regard to whether the investment decisions seemed prudent at the time.