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

Heading: The Obligations of an ERISA Fiduciary

Text: 17 The central question presented in this case is whether the district court erred when it determined that U.S. Trust failed to satisfy its fiduciary duty. ERISA provides a comprehensive scheme to govern the conduct of ERISA fiduciaries. The general obligations of an ERISA fiduciary are set forth in § 404, which requires that a fiduciary investigate proposed transactions with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. 29 U.S.C. § 1104(a)(1)(B). In determining whether a fiduciary has satisfied this requirement, [t]he court's task is to inquire whether the individual trustees, at the time they engaged in the challenged transactions, employed the appropriate methods to investigate the merits of the investment and to structure the investment. Katsaros v. Cody, 744 F.2d 270, 279 (2d Cir.1984) (citation and internal quotation marks omitted). 18 Section 406 of ERISA supplements the general fiduciary obligations set forth in § 404 by prohibiting certain categories of transactions believed to pose a high risk of fiduciary self-dealing. To this end, § 406 prohibits transactions involving the sale or exchange ... of any property between the plan and a party in interest, including the acquisition, on behalf of the plan, of any employer security. 29 U.S.C. § 1106(a)(1)(A), (E); see also Commissioner of Internal Revenue v. Keystone Consol. Indus., Inc., 508 U.S. 152, 160, 113 S.Ct. 2006, 124 L.Ed.2d 71 (1993) (stating that § 406(a) was enacted to bar categorically a transaction that was likely to injure the pension plan). It is undisputed that each of the sellers in this case was a party in interest, see 29 U.S.C. § 1002(14)(H), (C) (defining a party in interest as an employee, officer, director,... or a 10 percent or more shareholder directly or indirectly of an employer any of whose employees are covered by [the] plan), and that the transaction at issue involved the sale of CommutAir stock to the company's ESOP. Thus, the parties agree that the March 15, 1994 sale of convertible preferred stock was a prohibited transaction under § 406. 19 Doubtlessly recognizing that [the] absolute prohibitions [in Section 406] would significantly hamper the implementation of ESOPs, particularly by small companies, Congress enacted in Section 408 a conditional exemption from the prohibited transaction rules for acquisition of employer securities by ESOPs and certain other plans. Donovan v. Cunningham, 716 F.2d 1455, 1465 (5th Cir.1983). To encourage employees' ownership of their employer company, § 408(e) permits the sale of employer stock by a party in interest to an ESOP if the purchase is made for adequate consideration. 29 U.S.C. § 1108(e). In transactions involving securities with no known market value, as is the case here, ERISA defines adequate consideration as the fair market value of the asset as determined in good faith by the trustee or named fiduciary pursuant to the terms of the plan and in accordance with regulations promulgated by the Secretary [of Labor]. Id. at § 1002(18)(B). 20 In 1988, the Department of Labor (DOL) proposed a regulation that elaborated on the definition of adequate consideration. The proposed regulation states: 21 First, the value assigned to an asset must reflect its fair market value.... Second, the value assigned to an asset must be the product of a determination made by the fiduciary in good faith.... The Department will consider that a fiduciary has determined adequate consideration in accordance with section 3(18)(B) of the Act ... only if both of these requirements are satisfied. 22 See Proposed Regulation Relating to the Definition of Adequate Consideration, 53 Fed.Reg. 17,632, 17,633 (May 17, 1988) (to be codified at 29 C.F.R. § 2510-3(18)(b)) (Proposed Regulation). Although proposed regulations have no legal effect, Sweet v. Sheahan, 235 F.3d 80, 87 (2d Cir.2000), numerous circuit courts have adopted the DOL's proposed definition of adequate consideration. See, e.g., Keach v. U.S. Trust Co., 419 F.3d 626, 636 (7th Cir.2005) (In order to rely on the adequate consideration exemption, a trustee or fiduciary has the burden to establish that the ESOP paid no more than fair market value for the asset, and that the fair market value was determined in good faith by the fiduciary.); Chao v. Hall Holding Co., Inc., 285 F.3d 415, 436 (6th Cir.2002) ([T]he definition of `adequate consideration' has two distinct parts. First, there is the `fair market value' part, then there is the `as determined in good faith by the trustee' part.); Howard v. Shay, 100 F.3d 1484, 1488 (9th Cir.1996) (To enforce [ERISA fiduciary rules], the court focuses not only on the merits of the transaction, but also on the thoroughness of the investigation into the merits of the transaction.). 23 Although fair market value and good faith are often stated as distinct requirements, they are closely intertwined. In keeping with the established meaning of fair market value in the area of asset valuation, the DOL's Proposed Regulation defines the term 24 as the price at which an asset would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, and both parties are able, as well as willing, to trade and are well-informed about the asset and the market for that asset. 25 Proposed Regulation, 53 Fed.Reg. at 17,634. As this definition indicates, fair market value is an imprecise term. See Rhodes v. Amoco Oil Co., 143 F.3d 1369, 1372 (10th Cir.1998) (There is no universally infallible index of fair market value. There may be a range of prices with reasonable claims to being fair market value. (internal quotation marks, citation, and alteration omitted)); Alvary v. United States, 302 F.2d 790, 795 (2d Cir.1962) (noting the inherent inexactness of the concept of fair market value). Whether a fiduciary has made a proper determination of fair market value depends on whether the parties are well-informed about the asset and the market for that asset. Thus, in practice, the fair market value inquiry overlaps considerably with the good faith inquiry; both are expressly focused upon the conduct of the fiduciaries. Cunningham, 716 F.2d at 1467 (emphasis in original). 26 Under ERISA, the fiduciary bears the burden of proving by a preponderance of the evidence that the ESOP received adequate consideration for its purchase of company stock. 29 U.S.C. §§ 1002(18), 1108(e). The role of courts in reviewing the adequacy of consideration in an ERISA case is to determine whether the fiduciary can show that the price paid represented a good faith determination of the fair market value of the asset, not to redetermine the appropriate amount for itself de novo. Chao, 285 F.3d at 437 (internal citation and quotation marks omitted); see also Eyler v. Comm'r, 88 F.3d 445, 455 (7th Cir.1996) (ESOP fiduciaries will carry the burden of proving that adequate consideration was paid by showing that they arrived at their determination of fair market value by way of a prudent investigation in the circumstances then prevailing. Thus, the adequate consideration test focuses on the conduct of the fiduciaries in determining the price, not the price itself. (internal citation and quotation marks omitted)). 27