Opinion ID: 781284
Heading Depth: 3
Heading Rank: 2

Heading: Frankford's Fiduciary Status

Text: 31 ERISA `defines fiduciary not in terms of formal trusteeship, but in functional terms of control and authority over the plan....' Mertens v. Hewitt Assocs., 508 U.S. 248, 262, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993). ERISA creates liability for breaches of fiduciary duty to the extent that a person functions in a fiduciary capacity. 29 U.S.C. § 1002(21)(A); see also Glaziers & Glassworkers Union Local No. 252 v. Newbridge Secs., Inc., 93 F.3d 1171, 1180 (3d Cir.1996). Fiduciary status attaches to a person managing an ERISA plan under subsection (i) of § 1002(21)(A) if that person exercises discretion in the management of the plan, or if the person exercises any authority or control over the management or disposition of the plan's assets. See Bd. of Trs. of Bricklayers and Allied Craftsmen Local 6 of New Jersey Welfare Fund v. Wettlin Assocs. Inc., 237 F.3d 270, 273 (3d Cir.2001). This Court recognizes that the significant difference between the two clauses [of subsection (i)] is that discretion is specified as a prerequisite to fiduciary status for a person managing an ERISA plan, but the word `discretionary' is conspicuously absent when the text refers to assets. Id.; see also IT Corp. v. General Am. Life Ins. Co., 107 F.3d 1415, 1421 (9th Cir.1997). It has been well said that [f]iduciary status under § 1002(21)(A) is not an all or nothing concept ... [A] court must ask whether a person is a fiduciary with respect to the particular activity in question. Maniace v. Commerce Bank of Kansas City, N.A., 40 F.3d 264, 267 (8th Cir.1994), cert. denied, 514 U.S. 1111, 115 S.Ct. 1964, 131 L.Ed.2d 854 (1995) (internal quotations omitted). 32 Here, we accept, as we must, the District Court finding that Srein directed, and Frankford exercised no discretion with respect to, the decisions to invest in the Participation Agreements for the Madsen and Chamness policies. But it is obvious that Srein did not direct the placement of the several agreements in the Frankford vault without cross-referencing one to the other, the assignment of random numbers to the agreements, or the payment for and acceptance of participation agreements for other Frankford customers with respect to a policy already the subject of one of R.J. Srein Corporation's participation agreements. 6 Nor did Srein direct Frankford to accept and distribute to the Richards' plan twenty-eight percent of the proceeds of the Madsen policy. Without inquiry or investigation, Frankford came to know that Madsen died. Proceeds of the policy on his life came into its possession. It was in control of those proceeds and, for whatever reason, erroneously distributed them to another of its customers. That was, by any definition, the exercise of control 7 (if not authority) respecting disposition of [plaintiff's] assets. In this case Frankford exercised direction over the Madsen policy when it placed that asset in the Richards' plan account, and therefore, diverted the value of that asset from the Srein Plan account. 33 We conclude as a matter of law that the facts found by the District Court establish that Frankford exercised undirected authority and control over plaintiffs' valuable interests in the Madsen life insurance policy and therefore functioned as a fiduciary with respect to the Srein Plan's interests in the Madsen policy. 34 We find strong support for this conclusion in the Sixth Circuit's decision in Smith v. Provident Bank, 170 F.3d 609 (6th Cir.1999). The Smith court found that a directed trustee acted as an ERISA fiduciary to the extent that it exercised control over plan assets. In that case, Provident Bank, as trustee for two benefit plans, had no authority to make investments for the plans unless directed to do so by the plan fiduciary, Robert Stauter. In 1990, Stauter instructed Provident to purchase approximately $10,000 worth of Ameritrust stock, and to hold that stock in trust for the plan. As instructed, Provident made the purchase and recorded the stock acquired in the account for the plan. A second trust client of Provident, the Catholic Archdiocese of Cleveland, also instructed the bank to purchase $10,000 worth of Ameritrust stock. Provident failed to purchase the stock for the Archdiocese. Subsequent to these transactions, Stauter removed Provident as plan trustee and directed it to transfer the plan's assets to a new trustee, Society Bank. To correct its original mistake, Provident placed the Ameritrust shares into the account of the Archdiocese, and delivered to the new trustee of the Stauter plans ten thousand dollars in cash. The Smith court held that Provident functioned as fiduciary for the Stauter plan when it removed the Ameritrust shares from the plan account and placed them elsewhere. Id. at 613-614. 35 Defendant's reliance on the Beddall and Maniace cases, from the First and Eighth Circuits respectively, is misplaced. In each of those cases the plaintiff attempted to state a claim against the trustee bank for actions taken (or not taken) clearly at the direction of another. In Maniace, the plaintiffs charged that the defendant bank violated a fiduciary duty to the plaintiff's Employee Stock Ownership Plan because it improvidently retained a plan owned stock as its value declined. See Maniace, 40 F.3d at 267. The Maniace court explained that the bank was specifically directed to retain employer stock in the ESOP plan by a committee authorized to give such a direction. Therefore, it had neither discretionary authority, nor control of that plan asset. Id. Similarly, in Beddall v. State Street Bank & Trust Co., 137 F.3d 12 (1st Cir.1998), Plan documents placed in an investment advisor responsibility for determining the value of plaintiff's retirement plan assets. The First Circuit concluded that the appointment of the investment advisor divested the bank of any control or authority over the valuation of the plan's investments. Id. at 21. 36 In reaching our conclusion we have considered whether Frankford was a mere custodian of plan assets. We recognize that ERISA does not consider as a fiduciary an entity such as a bank when it does no more than receive deposits from a benefit fund on which the fund can draw checks. See, e.g., Wettlin, 237 F.3d at 275; see also Brandt v. Grounds, 687 F.2d 895, 898 (7th Cir.1982) (non-trustee bank acting as mere custodian of funds not liable for failing to prevent plan trustee's embezzlement). However, in this case, Frankford acted as more than a plain vanilla custodian of assets. Frankford charged Srein a fee, in part, for having a financial institution act as trustee. (JA 1306.) As trustee, Frankford made representations to Srein regarding its ability and willingness to manage plans holding unregistered investments after the then-incumbent trustee declined to do so. These factors, together with Frankford's actual control of the Madsen policy assets, lead us to the conclusion that Frankford was more than a mere custodian of assets performing only administrative and ministerial duties. 37 Neither Arizona State Carpenters Pension Trust Fund v. Citibank, 125 F.3d 715, 722 (9th Cir.1997) nor Beddall, cited by the dissent, require a different result. In each of those cases the banks in question performed no more than administrative responsibilities at the direction of a plan trustee. Neither bank took on the responsibility of acting as a trustee, directed or undirected, for the plan, nor solicited business from the plaintiffs on the representation that it was sufficiently able to perform such duties. Frankford's functions were not so limited. When, as here, a trustee bank is entrusted with and performs duties to control, manage, hold, safeguard and account for [a] fund's assets and income, it functions as a fiduciary under ERISA. Wettlin, 237 F.3d at 275. 38 Accordingly, we conclude that the District Court erred in concluding that Frankford was not a fiduciary with respect to the Madsen investment. 39 A question remains as to whether Frankford was a fiduciary with respect to the Chamness policy. On the one hand, it took custody of the Chamness Participation Agreement, gave it only a random number, maintained a record of it on its books and collected fees long after the insured died and the proceeds were distributed elsewhere. However, Frankford did not exercise control over the Plan's Chamness investment to the extent that it did with respect to the Madsen one. Moreover, Frankford had no duty to make any inquiry or investigation with respect to whether Chamness was alive. See Trust Agreement § 2.1. Nor did it have in-house information (as it did with respect to the Madsen investment) about the double sale of that policy to the D.P. Partnership plan. We conclude that Frankford was not a fiduciary with respect to the Chamness Participation Agreement or the policy interest which it evidenced.