The opinion of the court was delivered by: GREEN
initiated this action pursuant to Sections 409 and 502 of the Employee Retirement Income Security Act of 1974 ("ERISA"), codified at 29 U.S.C. §§ 1001 et seq. (1994), and the Investment Advisors Act of 1940 ("IAA"), codified at 15 U.S.C. §§ 80b-1 et seq. (1994), against Shearson Lehman Brothers, Inc. ("Shearson"), Kent D. Kitchel ("Kitchel"), and William A. Duval ("Duval"). The complaint alleges that the defendants breached their fiduciary duties and engaged in transactions prohibited by ERISA and the IAA. Presently pending are Defendant Shearson's motion to dismiss or, in the alternative, for summary judgment ("Motion for Summary Judgment"); Defendant Kitchel's motion for summary judgment ("Kitchel's Motion for Summary Judgment"); and the plaintiffs' and Defendant Duval's joint consent motion to dismiss and for stipulated agreement ("Consent Motion to Dismiss"). For the reasons explained below, Shearson's motion will be denied in part and granted in part; Kitchel's motion will be granted; and the consent motion to dismiss and for stipulated agreement will not be approved. Partial summary judgment will be entered for Defendant Shearson on Count VII, and summary judgment will be entered for Defendant Kitchel on Counts V, VI and VII. Judgment Orders shall be issued separately this date.
The following facts are undisputed. During all times relevant, Defendant Shearson served as the Plan's investment manager. Defendant William A. Duval was the General President of the International Brotherhood of Painters and Allied Trades, and he acted as a trustee and co-chairman of its $ 1 billion pension trust fund (the Plan), which was established to provide benefits to retired union employees. Defendant Kent D. Kitchel is Duval's wife's son and was, during all times relevant, an employee of Defendant Shearson and the financial consultant to the Plan.
In 1985, the plaintiffs endeavored to identify and select an new investment manager for the Plan. After retaining an expert consultant, the Plan's Investment Committee, which included Duval, engaged in a review of numerous firms and selected two firms as finalists: Dreman & Embry, Inc. ("Dreman") and Defendant Shearson.
On December 12, 1985, after presentations by Dreman and Shearson, the Board of Trustee's selected Shearson. On December 13, 1985, Shearson was notified that it had been retained to manage the plan, and, on December 24, 1985, Shearson advised the depository bank of its fiduciary status. Shearson managed the Plan until approximately November 1991, when the agreement was terminated.
The essence of the complaint arises from Kitchel's connection to Duval. The plaintiffs allege that Duval knew or should have known that Kitchel would receive compensation in connection with Shearson's retention as Plan manager. The plaintiffs contend that the defendants exploited and then improperly concealed Kitchel's connection to Duval and his status as a financial consultant to the Plan, which status allowed Kitchel to derive compensation from fees generated by Shearson's contract to manage the Plan. The plaintiffs allege, and Duval denies, that Duval actively participated in the discussions regarding Shears on's selection and that he actively lobbied for retaining Shearson.
The plaintiffs have filed a nine-count complaint. Counts I-VI allege that the defendants breached their fiduciary duties owed to the Plan and engaged in transactions prohibited by ERISA (Counts I and II are against Duval, Counts III and IV are against Shearson, and Counts V and VI are against Kitchel). Count VII asserts that the defendants are liable for the breach of fiduciary duties by their cofiduciaries to the Plan. Count VIII is an alternative claim for nonfiduciary liability against Kitchel, which claim alleges that Kitchel, as a nonfiduciary, participated in Shearson's and Duval's breaches of their fiduciary duties. Finally, Count IX alleges that Shearson violated the IAA.
In their answers, the defendants counterclaimed against the trustee plaintiffs, seeking contribution and indemnification. Duval also counterclaimed against Trustee A.L. Monroe, claiming that Monroe breached his fiduciary duty because he was aware that Shearson employed a person with a family relationship to Duval, but nevertheless failed to advise the other trustees. In its claim, Shearson also alleged that the Plan was liable for restitution due to the increase in the Plan's value while under Shearson's management.
On April 14, 1994, this Court ruled on the pending motions. The Court granted the plaintiffs' motion to dismiss the defendants' claim for contribution and indemnification; denied Shearson's restitution claim for the increase in the value of the Plan; denied Plaintiff A.L. Monroe's motion for summary judgment on Duval's counterclaim; granted Plaintiff Richard A. Grund's motion for partial summary judgment on the defendants' counterclaims; granted the plaintiffs' motion to amend their name; granted the plaintiffs' motion for limited discovery; and denied Kitchel's motion for judgment on the pleadings. After limited discovery, the instant motions followed.
Summary judgment is appropriate when there is "no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). "The inquiry performed is the threshold inquiry of determining whether there is a need for trial--whether, in other words, there are any genuine issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S. Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986). In considering a motion for summary judgment, the "evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in [its] favor." Id. at 255, 106 S. Ct. at 2513. At the same time, however, Rule 56 places a burden on the nonmoving party to "go beyond the pleadings and by [its] own affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate specific facts showing that there is a genuine issue for trial." Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S. Ct. 2548, 2552, 91 L. Ed. 2d 265 (1986) (internal quotations omitted). A fact is material if its resolution would affect the outcome of the litigation. Anderson, 477 U.S. at 248, 106 S. Ct. at 2510.
To survive a motion for summary judgment, the nonmovant must offer sufficient evidence and designate specific facts to show that there is a reason for trial. The role of the Court is not to weigh the evidence, but to determine whether genuine issues of material fact exist for trial. Abraham v. Graphic Arts Int'l Union, 212 U.S. App. D.C. 412, 660 F.2d 811, 814 (D.C. Cir. 1981). Faced with a motion for summary judgment, the nonmoving party must offer more than mere allegations. Anderson, 477 U.S. at 249, 106 S. Ct. at 2510. If the material facts proffered by the nonmoving party are subject to diverse interpretations, summary judgment is not available. Tao v. Freeh, 307 U.S. App. D.C. 185, 27 F.3d 635, 638 (D.C. Cir. 1994). Any doubts must be resolved in favor of the nonmoving party, Abraham, 660 F.2d at 815, and the nonmoving party is entitled to all justifiable inferences. Anderson, 477 U.S. at 255, 106 S. Ct. at 2513.
Shearson's Motion for Summary Judgment
Shearson seeks summary judgment in its favor on Counts III, IV, VII and IX.
In Count III, the plaintiffs claim that Shearson violated Section 404(a)(1) of ERISA, 29 U.S.C. § 1104(a)(1), because Shearson failed to disclose and deliberately concealed Kitchel's connection to the Fund and by paying Kitchel compensation from Plan assets. Amended Complaint, at P 47. Shearson offers several arguments upon which, it asserts, it is entitled to summary judgment. These arguments are unpersuasive and Shearson's motion will be denied.
First, Shearson contends that because there is no suggestion that the investment portfolio was mismanaged, there can be no liability under Section 404(a)(1). Motion for Summary Judgment, supra, at 24-25. Second, Shearson argues that its liability under ERISA's Section 404(a)(1) arose only after it began to manage the Fund on January 1, 1986, and that it cannot be held liable for any conduct occurring prior to December 31, 1985. Id. at 25. Finally, Shearson avers that because the Fund suffered no investment losses and because the fees that Shears on was paid were reasonable, there can be no Section 404(a)(1) liability. Id. at 25-27.
Under Section 404(a)(1) of ERISA, a fiduciary must discharge its duties in managing an investment plan "solely in the interests of the participants and beneficiaries ... with the care, skill, prudence, and diligence" that would be employed by a "prudent [person] acting in a like capacity and familiar with such matters." ERISA, Section 404(a)(1), codified at 29 U.S.C. § 1104(a)(1); see NLRB v. Amax Coal Co., 453 U.S. 322, 332-33, 101 S. Ct. 2789, 2796, 69 L. Ed. 2d 672 (1981); Fink v. Nat'l Sav. & Trust Co., 249 U.S. App. D.C. 33, 772 F.2d 951, 955 (D.C. Cir. 1985); Leigh v. Engle, 727 F.2d 113, 125 (7th Cir. 1984). The fiduciary's obligations are based on both the specific statutory charge and the common law of trusts. See Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101, 110-11, 109 S. Ct. 948, 954, 103 L. Ed. 2d 80 (1989); Acosta v. Pacific Enterprises, 950 F.2d 611, 618 (9th Cir. 1991); Eddy v. Colonial Life Ins. Co., 287 U.S. App. D.C. 76, 919 F.2d 747, 750 (D.C. Cir. 1990).
The duty of loyalty owed by ERISA fiduciaries is broad, Eddy, 919 F.2d at 750-51, and includes a duty to disclose material information. See Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134, 140-41 n.8, 105 S. Ct. 3085, 3089-90 n.8, 87 L. Ed. 2d 96 (1985) (compiling floor statements by ERISA drafters describing congressional concerns, which include abuses arising from fraud and nondisclosure); Eddy, 919 F.2d at 750 ("the duty to disclose material information is the core of a fiduciary's responsibility"). The fiduciary's duty of disclosure is not limited to those disclosures mandated by the statute, see Acosta, 950 F.2d at 618, and deceptive conduct, such as lying, is clearly inconsistent with the duty of loyalty owed by an ERISA fiduciary. See Varity Corp. v. Howe, U.S. , , 64 U.S.L.W. 4138, 4142 (March 19, 1996). In short, the fiduciary provisions of ERISA were designed to prevent a fiduciary "from being put into a position where [it] has dual loyalties, and, therefore, [it] cannot act exclusively for the benefit of a plan's participants and beneficiaries." Amax Coal Co., 453 U.S. at 334, 101 S. Ct. at 2796.
Based upon the plaintiffs' proffer, a genuine issue of material fact exists as to whether Shearson concealed Kitchel's role and existence from the plaintiffs. The Hagerman memorandum of December 31, 1985, which was drafted shortly after Shearson was first retained, states: "On correspondence, do not cc Kent Kitchel--use blind copies, 'bcc'." Plaintiffs' Opposition, supra, at Ex. 12 (emphasis in original). Drafted by one of Shearson's senior vice presidents after a meeting with Kitchel and Duval, this memo to file supports an inference that Defendant Shearson intended to conceal the Kitchel-Duval connection. Moreover, there is evidence that Shearson's acts to conceal the Kitchel connection were ongoing. Three and a half years after Shearson was retained, Robin Pinkham, Plan Account Manager, stated:
As you know, Kent Kitchel is my source of information on IBPAT. And he implores us never to mention his name in connection with this business. Noone (sic) at the Union knows of his relationship with Mr. Duval and the account, and he would like to keep it that way.
Id. at Ex. 37 (Memorandum of Robin Pinkham of June 26, 1989).
A reasonable factfinder could determine that Kitchel's own words to one of Shearson's account managers speaks volumes as to what Shearson knew and what it did or did not do with that knowledge:
There have been several times throughout the history of this account when events (results) have called for the client to question retaining you (us) as the manager. Each time, including now, you (and I) have been dispatched to put out the fires. You're aware of my rapport with Mr. Duval and we both know it is in our best interests to try and not rock the boat.
Id. at Ex. 39 (Letter of March 12, 1991, from Kent D. Kitchel to Robin Pinkham, Plan Account Manager) (emphasis in original).
The plaintiffs have also offered evidence regarding the negotiations between Shearson and the plaintiffs' lawyer, which evidence is probative of Shearson's intent to conceal the Kitchel connection. During the negotiations and in the presence of Shearson's employees, the plaintiffs' attorney Barr deleted language in the Investment Agreement that would have provided for compensation to a financial consultant. Barr did so, the plaintiffs contend, because Barr believed that no financial consultants, such as Kitchel, would be involved in Shearson's administration of the Plan. Shearson, however, remained silent. While Shearson's silence occurred prior to the time it became a fiduciary, see infra, a reasonable factfinder could believe that it reflected Shearson's intent to conceal the use of Kitchel who had strong, but secret, ties to Duval, Plan co-chair and a fiduciary who played a role in Shearson's selection and continued retention.
While Kitchel may not have actively managed the plan, provided advice or executed any discretionary authority, his role was not insignificant. He was the conduit to Duval, and the plaintiffs have offered evidence that allows for the reasonable inference that Shearson endeavored to exploit this connection and conceal its existence from the trustee plaintiffs. Such exploitation and concealment, if proven at trial, are actions that are facially inconsistent with a fiduciary's duty of loyalty under ERISA, Section 404(a). To meet their burden as nonmovants, the plaintiffs have offered sufficient evidence to establish genuine issues of material fact regarding whether Shearson breached its fiduciary obligations under ERISA by failing to disclose, and then by concealing, the Kitchel-Duval connection and by paying compensation (out of Plan assets) to Kitchel for his services to the Plan.
Shearson's arguments to the contrary are unpersuasive. Shearson contends that there was no investment loss or mismanagement, thus Section 404(a)(1) is inapplicable. Contrary to Shearson's claim, Section 404(a)(1)'s charge is not limited to investment management decisions, but applies to whether Shearson managed the Plan "solely in the interest of the participants and beneficiaries." 29 U.S.C. § 1104(a)(1). It would appear that under Shearson's interpretation, Section 404(a)(1) would not be violated by a fiduciary's intentional misrepresentations to cofiduciaries, participants and beneficiaries as long as the fiduciary's investment management decisions were otherwise sound. Shearson's apparent view is inconsistent with the plain text of the Section 404(a)(1) that a fiduciary "shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries." While the drafters of ERISA were concerned with the misuse and mismanagement of plan assets, see Russell, 473 U.S. at 140 n.8, 105 S. Ct. at 3085 n.8, a fiduciary's duty of loyalty under ERISA is broader than mere plan management. A fiduciary is charged with a duty of undivided loyalty, not just responsibility for sound stock-picking and proper bookkeeping.
The plaintiffs have offered evidence from which a reasonable factfinder could determine that Shearson's loyalties were split and that Shearson's efforts to conceal material facts from the plaintiffs constitute a breach of Section 404(a)(1). Additionally, whether there has been a loss to the Plan because of Shearson's alleged breach of fiduciary duty is an issue that the parties reasonably dispute. If the factfinder were to determine that a breach occurred, the question of damages and remedy would be addressed as appropriate. See, e.g., Etter v. J. Pease Const. Co., Inc., 963 F.2d 1005, 1009 (7th Cir. 1992).
Finally, Shearson argues that it bears no liability as a fiduciary for acts committed prior to the time it became a fiduciary. While citing only to its own brief in which it argues that it is entitled to summary judgment on the Section 406 Count (based on a Department of Labor advisory opinion), Shearson claims that because its fiduciary obligations to the Plan did not arise until January 1, 1986, the date on which it started to manage the Plan, it cannot be held liable under ERISA for acts occurring prior to that date. Shearson's argument appears to suggest that ERISA condones misrepresentation and concealment of material facts by prospective fiduciaries as long as such conduct is well timed. Shearson's argument will be rejected.
Section 404(a) of ERISA imposes liability upon a fiduciary that breaches its fiduciary duty. 29 U.S.C. § 1104(a). While Section 409(b), 29 U.S.C. § 1109(b),
appears to prohibit a fiduciary from being held liable for breaches that occurred prior to the time that the fiduciary attained fiduciary status, this Court is aware of no authority (and Shearson has cited none) that would allow Section 409(b) to be used as a shield to protect a prospective fiduciary from liability arising from its own misconduct, such as the concealment of material facts during the negotiation of an investment management contract which led to fiduciary status. Despite a facially clear command, even Section 409(b) has been construed to allow for fiduciary liability where the conduct bore a sufficient nexus to a person's past or prospective fiduciary status. See, e.g., Mathis v. American Group Life Ins. Co., 873 F. Supp. 1348, 1358 (E.D. Mo. 1994) (recognizing that Section 409(b) may be inapplicable if the fiduciary had knowledge of, or role in, predecessor's acts or omissions before it became fiduciary); McDougall v. Donovan, 552 F. Supp. 1206, 1210 (N.D. ...