223 F.3d 286 (5th Cir. 2000), 98-20867, Bussian v R.J.R. Nabisco Incoporated

Docket Nº:98-20867
Citation:223 F.3d 286
Party Name:ROBERT A BUSSIAN; JAMES J KEATING Plaintiffs - Appellants v. RJR NABISCO INCORPORATED Defendant - Appellee
Case Date:August 14, 2000
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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223 F.3d 286 (5th Cir. 2000)




No. 98-20867


August 14, 2000

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[Copyrighted Material Omitted]

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Appeal from the United States District Court for the Southern District of Texas

Before KING, Chief Judge, and REYNALDO G. GARZA and EMILIO M. GARZA, Circuit Judges.

KING, Chief Judge:

Plaintiffs-Appellants Robert A. Bussian and James J. Keating appeal from the district court's grant of summary judgment to Defendant-Appellee RJR Nabisco, Inc. and its denial of class certification. We reverse in part, vacate in part, and remand for further consideration by the district court.


This case is yet another litigating who must bear the cost of the collapse of Executive Life Insurance Company of California ("Executive Life") in the late 1980s and early 1990s. The issue before us is whether Defendant-Appellee RJR Nabisco, Inc. ("RJR") acted consistently with its fiduciary obligations under § 1104 of the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq. (1994) ("ERISA"), when it chose to purchase a single-premium annuity from Executive Life in August, 1987.

Because this case comes to us from a grant of RJR's motion for summary judgment, our presentation of the facts reflects in part the requirement that we view the evidence in the light most favorable to Plaintiffs-Appellants Robert A. Bussian and James J. Keating ("Appellants"). Many of the underlying facts are uncontested. RJR's involvement in this case comes about through its purchase, in 1976, of Aminoil USA, Inc. ("Aminoil"), a Houston-based oil company. Aminoil administered a pension plan for its employees that

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was governed by ERISA. RJR sold Aminoil in 1984, and the purchaser assumed the pension obligations for all then-current employees. At the time of the sale, other employees had ceased employment with the oil company and were either already receiving pension benefits or were vested in the Aminoil pension plan but were not yet eligible to receive benefits. RJR retained the obligation of administering pension benefits for these former employees, including Appellants, under an ERISA-defined benefit pension plan ("the Plan").1

On October 16, 1986, RJR's Board of Directors approved resolutions authorizing the termination of the Plan and several other plans of former RJR subsidiaries. The Board also approved the purchase of an annuity to cover all pension obligations to the participants and beneficiaries of all the plans. The Plan's documents provided that upon termination any excess funds would revert to RJR.2 At the time the decision to terminate was made, the Plan was over-funded, and the Board was informed that a reversion could be expected. By December 1986, RJR was assuming that an annuity would cost about $62.5 million, and allowing for a $10 million cushion, was anticipating a reversion of about $55 million.

Members of RJR's Pension Asset Management Department were given the responsibility of selecting an annuity provider. Paul Tyner was involved from the beginning; Robert Shultz, hired in March, 1987 as RJR's Vice President of Pension Asset Management, had responsibility for making the final decision. In October, 1986, RJR hired Buck Consultants, Inc. ("Buck") to assist in the endeavor. William Overgard, an investment consultant with Buck Pension Funds Services, was asked to participate in the process in January, 1987.

Overgard was told that his role in the transaction was to identify insurance companies and to provide those companies with appropriate information in order to solicit the best bid from each one that was interested in the business so that RJR could select the carrier that was appropriate to its needs. Overgard compiled an initial list of insurance companies that could provide the annuity. That list included providers with which Buck was familiar, that had a reputation for providing good service to their clients, and that would have the capacity for a placement covering approximately 10,000 individuals. In January, 1987, a letter was sent to thirteen companies inviting comments on several issues related to the purchase of the annuity. In the letter, RJR was not identified as the buyer of that annuity.

Executive Life was not among those receiving the January letter.3 This was because it was involved in a nontraditional investment strategy: its portfolio had a higher percentage of low-quality bonds and a lower percentage of other investments than other insurance companies. Low-quality bonds, which are also referred to as "high-yield" or "junk" bonds, are rated below investment grade, i.e., ratings agencies have determined that the issuing entity is a greater than average credit risk. In order to compensate for the increased risk of default, such bonds must offer a higher interest rate. See, e.g., Levan v. Capital Cities/ABC, Inc., 190 F.3d 1230, 1235 (11th Cir. 1999). After Overgard discussed Executive Life's strategy with one of his colleagues, the two decided that the

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company should not be included on the initial list.

Overgard understood that by 1987, over 50% of Executive Life's portfolio was in low-quality bonds. In this Executive Life was indeed unusual compared to its competitors in the insurance industry. Information in the record suggests that the average percentage of low-quality bond holdings was on the order of 6% to 7%. Executive Life allegedly held the largest original issue low-quality bond portfolio ever assembled, with most of its acquisitions coming through Drexel Burnham Lambert ("Drexel"). Overgard understood Executive Life's low-quality bond holdings to be broadly diversified.

Based on his experience with Executive Life in the course of bidding he conducted for guaranteed investment contracts, and his desire to increase the competitiveness of the final bidding for the annuity contract, on or about April 3, 1987, Tyner requested that Executive Life be added to the list of carriers. In Tyner's opinion, Executive Life's inclusion would facilitate bringing other bidders down in price because it would come in with a lower quote. According to William J. Wolliver, a former Manager of Annuity Pricing for Prudential Insurance Company, Executive Life's low-quality bond portfolio enabled the company to underbid his firm. At the time he requested that Executive Life be added, Tyner did not think that the provider would be seriously considered in the final bidding process. Instead, he believed that RJR would go with a more well-known company.

To check up on Executive Life's solvency and financial health, Overgard reviewed the reports and ratings of four rating agencies (Standard & Poor's Corp. ("S&P"), Moody's Investor's Services ("Moody's"), A.M. Best ("Best"), Conning & Company ("Conning")). He reviewed the pros and cons of including Executive Life on the list of carriers to be contacted with Henry Anderson, an actuarial expert with Buck who, as the account executive, had brought Overgard in on the RJR purchase. They discussed the high-quality ratings that Executive Life had received, the company's interest in doing business, its reputation for providing good service and for being knowledgeable in the business, and its nontraditional investment portfolio. Overgard believed that a broadly diversified portfolio of low-quality bonds was a viable investment strategy. Based on his investigation, Overgard determined that Executive Life should be included on the bid list because the ratings the company received from S&P, Best, and Conning were high; its low-quality bond portfolio was broadly diversified and its investment strategy sound; and its administrative capabilities and reputation in the annuity business were strong.

On April 8, 1987, Buck solicited bids from fourteen potential annuity providers, including Executive Life. Buck had previously explained to RJR that companies would make initial bids and that Buck would select possibly three companies from which final bids would be solicited. In May, five potential providers submitted preliminary bids: AIG Life Insurance Company ("AIG"), Aetna Life Insurance ("Aetna"), Executive Life, Mutual Life Insurance Company of New York, and Prudential Asset Management Company ("Prudential").4 The other companies declined to participate, primarily because of the complexity associated with the numerous plans.

Between May and August, Overgard provided additional information to the companies interested in bidding. The bulk of his time was spent working with the companies to make sure they had correct data and enough data to enable them to submit a qualified bid, testing whether alternative strategies might be available for placing the bid on the final bid day, and assessing how hard he could push the companies in final negotiations.

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Sometime prior to August, 1987, Overgard learned that Moody's had given Executive Life a rating of A3, which was two grades below that of S&P's AAA rating for the company.5 He also read media reports speculating that problems in the market for low-quality bonds might affect Executive Life. Overgard determined from a discussion with an individual at Moody's that the rating agency had not talked with Executive Life management prior to issuing its rating, and he pursued "industry intelligence" regarding the company. Overgard concluded that the lower Moody's rating was an attempt on the part of the agency to gain publicity, but did not recall a specific discussion with the individual at Moody's regarding why the agency rated Executive Life as it did, or how the agency viewed the provider's nontraditional portfolio. He found that the opinions of other insurance companies were mixed: "some were not concerned about Executive Life and some were...

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