Opinion ID: 794065
Heading Depth: 2
Heading Rank: 3

Heading: U.S. Trust's Conduct as an ERISA Fiduciary

Text: 28 The district court found that U.S. Trust failed to demonstrate that it had satisfied its obligations as an ERISA fiduciary because it produced insufficient documentation of the investigation it undertook in the months leading up to the ESOP transaction on March 15, 1994. See Henry II, 334 F.Supp.2d at 272-73. The court's analysis focuses entirely on the February 28, 1994 meeting between U.S. Trust and HLHZ. Detailed notes taken at this meeting by Andrew Stull indicate that the parties discussed numerous aspects of HLHZ's preliminary valuation, including, inter alia, the concerns Goldberg noted on his copy of the preliminary valuation. The district court did not challenge the authenticity of Stull's notes. Rather, the court found that Stull's notes did not prove that representatives of U.S. Trust had raised the issues contained therein. See id. at 272 ([T]he notes themselves do not state that they were made in response to any question from Goldberg or Shea.). The court further found that because Goldberg and Shea did not keep any notes, they had no evidence, created by themselves, that they actually posed the question to HLHZ about these issues. Id. In the final analysis, the court determined that Goldberg's notes on the preliminary valuation and the notes Shea made on the revised projections and in connection with the due diligence meeting, in addition to the word of U.S. Trust and its witnesses, were insufficient to demonstrate a good-faith investigation and disqualified the CommutAir ESOP transaction from the ERISA § 408 exemption. Id. at 272-73. 29 The district court erred as a matter of law when it found that U.S. Trust failed to qualify for the § 408 exception as a result of its failure to produce notes showing that it properly evaluated HLHZ's report, asked the difficult questions, and assessed the responses to those questions. Id. at 272. The focal point of our inquiry under ERISA is not whether a fiduciary took adequate notes of its investigation, but whether it acted with the prudence required of a fiduciary under the prevailing circumstances at the time of the transaction. See 29 U.S.C. § 1104(a)(1)(B); Katsaros, 744 F.2d at 279. It is impossible to determine, solely on the basis of Goldberg and Shea's lack of notes, whether U.S. Trust at the time [it] engaged in the challenged transactions, employed the appropriate methods to investigate the merits of the investment and to structure the investment. Katsaros, 744 F.2d at 279 (citation and internal quotation marks omitted). First, the fact that the issues Goldberg identified as areas of concern on his copy of the preliminary valuation are echoed in Stull's notes from the February 28th meeting gives rise to a strong inference that U.S. Trust raised these issues at the meeting. Even if Stull generated these questions himself, however, that fact alone would not suggest that U.S. Trust was an inadequate fiduciary. Regardless of who raised the questions at the February 28th meeting, the district court recognized that U.S. Trust: (1) reviewed HLHZ's preliminary valuation report; (2) met with HLHZ to discuss its concerns; and (3) saw the report changed in ways that reflected those concerns. The court recognized also that U.S. Trust witnessed significant improvements in the ESOP's position over the course of its trusteeship and that these improvements were incorporated into the final valuation of CommutAir. Under these circumstances, U.S. Trust's failure to produce notes documenting the steps it took during its investigation of CommutAir does not in and of itself permit a determination that U.S. Trust failed to engage in a good-faith determination of the fair market value of the security at issue. 30 To qualify as a prudent fiduciary under § 408, U.S. Trust must show that the CommutAir ESOP paid no more than the fair market value of the asset as determined in good faith by the trustee or named fiduciary. . . . 29 U.S.C. § 1002(18)(B). As we noted above, there is considerable overlap between the fair market value inquiry and the good faith inquiry: Whether a fiduciary has made a proper determination of the fair market value of an asset purchased by an ESOP depends on whether the parties are well-informed about the asset and the market for that asset. Proposed Regulation, 53 Fed.Reg. at 17,634. The district court in this case did not identify any area where U.S. Trust was ill-informed about the CommutAir security or the market for that security. Nor did it identify any flaws that U.S. Trust should have detected in the assumptions or methodologies HLHZ used to determine the fair market value of the CommutAir stock. In the absence of such findings, we cannot conclude that U.S. Trust failed to satisfy its burden of demonstrating a good faith investigation. In fact, the findings actually made by the district court tend to show that U.S. Trust conducted a good faith investigation. 31 The court's failure to pinpoint any errors in HLHZ's valuation of CommutAir makes it impossible for us to determine whether U.S. Trust should have detected those errors in the course of a good faith investigation. Thus, until the district court identifies which, if any, errors in HLHZ's valuation U.S. Trust failed to ascertain that a prudent fiduciary would have ascertained in the months leading up to the CommutAir ESOP transaction, it will not be possible to determine whether U.S. Trust qualifies for the § 408 exception. We remand this case to the district court to identify the specific errors, if any, in HLHZ's valuation of CommutAir and to determine whether a prudent fiduciary would have detected these errors under the circumstances prevailing at the time of the ESOP transaction. 3