Opinion ID: 778983
Heading Depth: 3
Heading Rank: 1

Heading: Hancock's Refusal to Allow Sperry to Withdraw Free Funds

Text: 39 Hancock first argues that the fact that [it] has certain fiduciary duties as to the free funds does not mean that it had a fiduciary obligation to agree to an extra-contractual transfer of them. We agree. 40 It is law of the case that Hancock stood in a fiduciary relationship to Sperry with respect to the free funds. In affirming our decision so concluding, the Supreme Court squarely held that ERISA's fiduciary obligations bind Hancock in its management of [the free] funds. Supreme Court, 510 U.S. at 94, 114 S.Ct. 517. Thus, it is incontrovertible that Hancock was required to exercise its managerial discretion with respect to the free funds in accordance with ERISA's fiduciary duty provisions. The primary question presented on this appeal is whether Hancock's general fiduciary duty includes an obligation to release free funds to Sperry in a manner different from that specified in the Contract. We conclude that neither the language nor the policy of ERISA support the imposition of a duty that would require Hancock to agree to Sperry's request for an extra-contractual rollover. Indeed, we find that the establishment and administration of employee retirement plans would be undermined by the district court's determination. 41 ERISA does not expressly address whether a fiduciary under the statute has an obligation to agree to a request by a plan trustee or settlor that contradicts specific bargained-for provisions of the plan's governing documents. ERISA instead merely states that a person is a fiduciary with respect to a plan to the extent that he or she exercises discretion over the management of the plan. 29 U.S.C. § 1002(21). We find that this language and case law interpreting ERISA fiduciary standards generally lead to the conclusion that Hancock was not acting in a fiduciary capacity when it refused Sperry's request for an extra-contractual rollover of free funds. 42 The district court reached the opposite conclusion, reasoning as follows: 43 Hancock refused to return Plan assets to the Trust when the Trust sought to use the rollover procedure in 1982 to withdraw accumulated free funds. The Trust felt it could get a better return by investing the excess funds elsewhere, but Hancock refused to return the Plan assets because of its cash flow problems. Instead, Hancock exercised its discretion to terminate the rollover procedures that had enabled the Trust to withdraw a total of $12 million prior to 1982. Clearly, Hancock put its own interests and cash flow needs ahead of the interests of the Plan and its beneficiaries. By doing so, Hancock violated its obligations under ERISA. 44 Judgment Opinion, 122 F.Supp.2d at 459-60. The district court's conclusion is flawed in three respects. 45 First, the district court is implicitly defining ERISA's use of the word discretion to include any decision a plan administrator could conceivably make. In other words, the court found Hancock's refusal to consent, because it could have consented, to be a discretionary act. We disagree with this interpretation. Here, Hancock did not contractually or otherwise retain discretion over whether or on what terms to permit a rollover of free funds; instead, the opposite is true: Hancock surrendered that discretion when it agreed to the provision in the amended Contract that provided for a specific rollover mechanism. Of course, Hancock could choose to waive the contractual requirement, just as could any party to any contract, but that cannot mean that Hancock had an obligation to do so. Were we to accept the district court's conclusion, there would be no limit to the scope of a fiduciary's duties under ERISA because a plan administrator would be in breach of his duties whenever he rejects a request by a plan trustee that is contrary to the parties' agreed-upon terms for operation of the plan. We cannot countenance such a broad reading of the scope of ERISA's fiduciary duties. 46 As this Court has observed, a person may be an ERISA fiduciary with respect to certain matters but not others, for he has that status only `to the extent' that he has or exercises the described authority or responsibility. F.H. Krear & Co. v. Nineteen Named Trustees, 810 F.2d 1250, 1259 (2d Cir.1987); see also Siskind v. Sperry Ret. Program, Unisys., 47 F.3d 498, 505 (2d Cir.1995) ([O]nly when fulfilling certain defined functions, including the exercise of discretionary authority or control over plan management or administration, does a person become a fiduciary under ERISA.). We do not believe that discretionary authority can be read to include any concession a plan administrator could gratuitously make to a plan's trustee. We conclude instead that [t]he `management or disposition' language in ERISA refers to the common transactions in dealing with a pool of assets: selecting investments, exchanging one instrument or asset for another, and so on. Johnson v. Georgia-Pacific Corp., 19 F.3d 1184, 1189 (7th Cir.1994). Thus, we find that Hancock's refusal to permit Sperry's request for an extra-contractual rollover of free funds was not an exercise of discretionary authority over the Plan and therefore did not implicate its fiduciary duties under ERISA. 3 47 The second problem with the district court's holding is its characterization of Hancock's refusal to permit the extra-contractual rollover as a terminat[ion of] the rollover procedures. Judgment Opinion, 122 F.Supp.2d at 459. Hancock's gratuitous acquiescence to Sperry's three prior requests for an extra-contractual rollover cannot be construed as having established a rollover procedure. In point of fact, the only rollover procedure in place was the one agreed to contractually by the parties, which Sperry sought to avoid by its requests. Therefore, Hancock's refusal to permit a fourth extra-contractual rollover could not have been the termination of a procedure; it was instead merely adherence to the terms of the Contract, entered into freely by both parties. 48 Third, Hancock's stated reason for refusing Sperry's fourth request for an extra-contractual rollover — its own cash flow problems — does not constitute, as found by the district court, a breach of its fiduciary duty of loyalty. Again, we reject such a broad interpretation of ERISA's fiduciary duties. A plan administrator must be permitted to consider its own legitimate business interests when deciding whether to gratuitously grant a request by a plan trustee, particularly when the request diverges from the terms agreed to by the parties. ERISA's fiduciary duty provisions cannot be interpreted as requiring plan administrators to agree to any and all requests made by a plan trustee because the economy has moved in a direction that, at a given moment, makes adherence to bargained-for contract provisions less attractive. 49 The essential difficulty of this case, unresolved explicitly by ERISA, is the relationship between provisions contained within a retirement plan's governing documents and the fiduciary obligations imposed on plan administrators by the statute. One statutory provision touches on this question: ERISA provides that a fiduciary shall discharge his duties ... in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the [fiduciary duty] provisions of [ERISA]. 29 U.S.C. § 1104(a)(1)(d); see also Cent. States v. Cent. Trans., Inc., 472 U.S. 559, 568, 105 S.Ct. 2833, 86 L.Ed.2d 447 (1985) ([T]rust documents must generally be construed in light of ERISA's policies.). We find nothing in the Contract that is inconsistent with ERISA's fiduciary duty obligations. As the Seventh Circuit has explained, 50 [I]f a specific term (not a grant of power to change terms) is bargained for at arm's length, adherence to that term is not a breach of fiduciary duty. No discretion is exercised when an insurer merely adheres to a specific contract term. When a contract, however, grants an insurer discretionary authority, even though the contract itself is the product of an arm's length bargain, the insurer may be a fiduciary. 51 Ed Miniat, Inc. v. Globe Life Ins. Group, Inc., 805 F.2d 732, 737 (7th Cir.1987). 52 We agree that where parties negotiate the terms of a contract governing a retirement plan, the adherence to those terms by a plan administrator cannot constitute a breach of its fiduciary duties, barring a grant of discretionary authority to the fiduciary. Here, the Contract did not grant to Hancock the discretionary authority to permit or refuse withdrawal of the free funds whenever requested by Sperry. In fact, by specifically providing the sole means for withdrawal of free funds in accordance with the mark-to-market formula, the Contract stripped Hancock of any discretionary authority it might otherwise have had in this respect. Hancock could not, for instance, refuse to permit Sperry to withdraw free funds in accordance with the contractual provision. Similarly, Hancock could not insist on book value or some other extra-contractual means of valuation for such withdrawal. Neither can Sperry. 53 Sperry and Hancock agreed at arm's length to the formula under which Sperry could withdraw free funds. The exercise of that provision became unattractive to Sperry through no fault of Hancock: the free funds became more valuable simply as a result of outside market forces. We conclude, in accord with the Seventh Circuit, that the scope of an insurer's fiduciary duty is defined by the contract entered into at arm's length unless that contract vests in the insurer discretionary authority. 54 It is important to understand the practical consequences of a ruling affirming the district court's conclusion on this issue. To adopt a rule by which ERISA fiduciaries have a duty to agree to requests that are contrary to the provisions of plan documents would render meaningless the negotiation of the terms of the agreement between the parties and would likely destroy the market for long-term ERISA contracts. Plan trustees, such as Sperry, would have no reciprocal obligation to grant requests of plan administrators, such as Hancock, when the economic climate moved in a way that disadvantaged the latter. Fiduciaries therefore would be unwilling to enter into contracts for retirement plans governed by ERISA because of the potential economic losses they would face. Public policy would not be served by the definition of fiduciary duties articulated by the district court. 55 For all these reasons, we find that Hancock's refusal to permit Sperry to roll over free funds under a formula different from that called for in the Contract did not constitute a breach of its fiduciary duties under ERISA. 56