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Is Fiduciary Responsibility Retroactive?

ERISA

A federal judge has weighed in on a question relevant to new plan committee fiduciaries: When and how does their liability for the decisions of previous committee members begin?

This case (Fuller v. SunTrust Banks, Inc., N.D. Ga., No. 1:11-cv-00784-ODE, 7/16/19) arises out of a suit brought by five former SunTrust participants who alleged violations of ERISA's fiduciary duty provisions as to the SunTrust Banks, Inc. 401(k) Plan, generally that (as many of the proprietary fund/excessive fee suits have alleged) that the defendant fiduciaries “improperly furthered SunTrust Banks, Inc.’s corporate interests – in lieu of interests of the Plan’s participants – by favoring investment options that were affiliated with and enriched SunTrust Banks, Inc.” 

However, the specific motion considered here alleged that certain specific members of the committee "were aware that their predecessor fiduciaries had breached their duties” in selecting funds and thus breached their own duties “by failing to take adequate steps to remedy, within the Class Period, their predecessors’ breaches in selecting the funds at issue.” The so-called “Successor Fiduciary Defendants” were members of the Benefits Plan Committee and/or the later Benefits Finance Committee during the March 11, 2005, to Dec. 31, 2012, Class Period.

‘Actual’ Knowledge

Judge Orinda D. Evans of the U.S. District Court for the Northern District of Georgia first considered whether the Successor Fiduciary Defendants needed “actual knowledge” of their predecessors’ imprudent selections for liability to attach, or whether constructive knowledge was sufficient. And then, the court looked to determine whether the plaintiffs in the case had “sufficiently demonstrated the Successor Fiduciary Defendants had the requisite state of mind” regarding their predecessors’ selection process.

Judge Evans then turned to 29 U.S.C. §§ Section 1109(b), which he noted “makes clear that [n]o fiduciary shall be liable with respect to a breach of fiduciary duty under this subchapter if such breach was committed before he became a fiduciary or after he ceased to be a fiduciary.” However, she noted that this “ban on vicarious liability for fiduciary breaches committed outside one’s fiduciary tenure does not prevent a successor fiduciary from being held liable for his independent fiduciary breach in failing to remedy the continuing effect of a predecessor fiduciary's breach.”

Judge Evans then cited language from the Labor Department (DOL Opinion No. 76-95), and noted that, while the DOL didn’t explain whether the duty for successor fiduciaries arises by application of ERISA’s “general fiduciary provisions” (Plaintiffs’ argument), or by application of Section 1105(a)(3) for co-fiduciaries (Defendants’ argument), “the outcome appears to be the same: predecessor fiduciaries have a duty to remedy the continuing effect of breaches by predecessor fiduciaries’ if they know of them.” 

She went on to note that “courts and the Department of Labor alike have demonstrated that a successor fiduciary must have actual knowledge of a predecessor's breach to be liable for failing to remedy said breach.”

Deconstructing Constructive

In response to the position taken by the plaintiffs that “constructive knowledge” is the proper standard, Judge Evans noted that “none of the cases cited by Plaintiffs quote or otherwise use constructive knowledge language,” and “the cases do not appear to otherwise suggest constructive knowledge is the appropriate standard.” She did note the plaintiffs’ citation of “…one unreported district court case, Martin v. Harline, that suggests constructive knowledge is sufficient…”, but concluded that “…this cursory approval of constructive knowledge is, to this Court’s knowledge, the only of its kind; the Court finds more persuasive the many cases requiring actual knowledge and the Department of Labor’s indication that actual knowledge is the appropriate standard.”

Thus, in short, the Court agrees with Defendants that Plaintiffs must present evidence creating a genuine issue of material fact that the Successor Fiduciary Defendants had actual knowledge of their predecessors’ alleged breaches in selecting the Affiliated Funds.

‘Familiar’ Places 

That wasn’t the end of it for the plaintiffs, who went on to cite testimony of the defendant fiduciaries that they note indicate that the successor fiduciaries “familiarized themselves with Plan affairs upon becoming committee members by being briefed by other committee members and reviewing prepared documents.” Additionally, the plaintiffs noted that the Benefits Plan Committee “created documents summarizing key [Benefits Plan Committee] decisions, including some of the initial selection events.” 

But Judge Evans noted that there was no indication that these successor members ever saw a key document, and “even if they had, the document itself hardly provides knowledge of any breach by predecessor fiduciaries; rather, the document frames the Benefits Plan Committee’s actions in a positive light, stating, for example, that the Benefits Plan Committee selected the Affiliated Funds in 1999 to provide continuity and further diversification,” she wrote. “Thus, even if the Successor Fiduciary Defendants saw this document, it could hardly be said to provide them actual knowledge of their predecessors' alleged fund selection breaches.” 

Judge Evans went on to note that, “the mere fact that some of the Successor Fiduciary Defendants familiarized themselves with the Plan and spoke with other Plan Committee members upon appointment does not show that they had actual knowledge of the alleged prior breaches.” All in all, she summed it up: “Plaintiffs have failed to produce any evidence such as would create a genuine issue of material fact as to whether Defendants had actual knowledge of their predecessors’ alleged breaches in selecting the Affiliated Funds.”

In making the decision for summary judgment, Judge Evans reminded the parties that “the Court is not weighing conflicting evidence related to Defendants' state of mind but simply looking to see if, in fact, Plaintiffs failed to present evidence of actual knowledge.”

‘Constructive’ Received?

In arguing that the defendants had sufficient awareness, the plaintiffs claimed that:

  • there was a clear conflict of interest in offering proprietary funds;
  • a “cursory review” of meeting minutes for the meetings in which the Affiliated Funds were selected would have revealed the improper selection process used;
  • the defendants had a “duty to familiarize themselves with the Plan (including reviewing past committee minutes” and talking with other Benefits Plan Committee members); and
  • the defendants should have known “no fund company offers the best funds in every asset class.”

Unfortunately for the plaintiffs, “the Court disagrees.”

Ultimately, Judge Evans agreed with the defendants that “Plaintiffs’ alleged showing of constructive knowledge assumes Defendants had a duty to scour past meeting minutes and interrogate Benefits Plan Committee members for any indication of prior breaches,” but “fail to cite any case justifying such a stringent obligation for Defendants,” going on to explain that “the availability of meeting minutes to Defendants does not give them constructive knowledge of everything therein.”

“Moreover,” she wrote (agreeing with the defendants), “there is nothing inherently improper about the inclusion of proprietary funds in the Plan,” and “the mere fact that the Plan included the Affiliated Funds – and Defendants were aware of that fact – is not sufficient to charge them with constructive knowledge of their predecessors’ alleged improper selection process.” 

All of which Judge Evans said that the “plaintiffs have failed to adduce evidence that Defendants had actual knowledge of their predecessors’ breach; Defendants thus cannot be liable for failing to remedy the allegedly imprudent selection process for the Affiliated Funds,” and that “even if willful blindness or constructive knowledge were enough for liability to attach, Defendants’ motion would still be successful because Plaintiffs did not produce sufficient evidence.”

What This Means 

The decision will surely be good news for newly minted committee members, providing a level of respite from committee moves that predated their participation, at least to the extent they lack actual knowledge of imprudence. The 24-page decision also provides an interesting read regarding the various committee members’ depositions as to their respective recollections of the training and information they received upon joining the committee. We’ll have more about that in a future post.  

It’s also worth noting that this is only one claim resolved from the 30,000-person class action targeting the affiliated investment funds in SunTrust’s 401(k) plan – and a reminder that the causes of action in this kind of litigation can have tentacles that are long-standing and far-reaching.

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