Plasterers' Local Union No. 96 Pension Plan v. Pepper

Decision Date01 December 2011
Docket NumberNo. 10–1364.,10–1364.
Citation52 Employee Benefits Cas. 1035,663 F.3d 210
PartiesPLASTERERS' LOCAL UNION NO. 96 PENSION PLAN; Cherie Pleasant, Trustee on behalf of the Plasterers' Local Union No. 96 Pension Plan; James Miller, Trustee on behalf of the Plasterers' Local Union No. 96 Pension Plan, Plaintiffs–Appellees, v. Edgar PEPPER; James S. Lertora, Defendants–Appellants,andHarold Perry, Defendant.
CourtU.S. Court of Appeals — Fourth Circuit

OPINION TEXT STARTS HERE

ARGUED: John Carney Hayes, Jr., Nixon Peabody, LLP, Washington, D.C., for Appellants. Jonathan Rose, Alston & Bird, LLP, Washington, D.C., for Appellees. ON BRIEF: Richard S. Siegel, Sheppard Mullin Richter & Hampton LLP, Washington, D.C., for Appellees.

Before DUNCAN and AGEE, Circuit Judges, and DAMON J. KEITH, Senior Circuit Judge of the United States Court of Appeals for the Sixth Circuit, sitting by designation.

Vacated and remanded by published opinion. Judge AGEE wrote the opinion, in which Judge DUNCAN and Senior Judge KEITH concurred.

OPINION

AGEE, Circuit Judge:

Edgar Pepper and James Lertora (collectively the Former Trustees), former trustees of the Plasterers' Local Union No. 96 Pension Plan (“the Plan”), appeal from the judgment of the United States District Court for the District of Maryland in favor of the current trustees of the Plan (“the Current Trustees). The district court's judgment was based on its finding that the Former Trustees breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq., regarding the investment of Plan assets as set forth under 29 U.S.C. § 1104(a)(1)(B) and (C). On appeal, the Former Trustees challenge the district court's determination as to liability, its method of calculating damages, and the award of attorneys' fees. We conclude that the district court erred as to each of these issues, and therefore vacate the judgment and remand the case for further proceedings.

I.

The Plan is a multiemployer pension plan subject to the provisions of ERISA and established for the benefit of union members. A Board of Trustees (“the Board”) administers the Plan and is comprised of union-appointed and employer-appointed members. All members of the Board are fiduciaries as set forth under §§ 1002(21)(a) and 1103(a).1 Lertora was a contributing employer to the Plan and its predecessor plan for approximately 30 years, and he served on the Board from the 1960s until 2004. At the time of trial, he was 80 years old and retired. Pepper spent most of his career working in the plastering industry, and served as a trustee from approximately 1990 to 2005. At the time of trial, Pepper was 74 years old and semi-retired.

After a predecessor pension fund plan sustained substantial financial losses in the 1970s and 1980s, the Board implemented the Plan in January 1987. The Board's primary objective was to avoid further losses to the Plan's assets. Toward that end, in February 1992, the Board voted to invest in certificates of deposit (“CDs”) “of less than $100,000 to get better rates,” investing a maximum of $90,000 in any one issuing bank. (J.A.2 3076.) At a meeting held in the fall of 1995, the Board approved a suggestion that part of the Plan's assets “be invested in staggered one and two year term Treasury bills as [CDs] mature.” (J.A. 3078.) From that point through 2005, Plan assets were invested entirely in $90,000 CDs and one-to-two-year Treasury bills.

The Former Trustees and other former Board members testified that the Board's objective from the 1990s forward was “to avoid the risk of losing money” again because they did not “want to lose a dime of the men's money.” (J.A. 2433.) They “didn't want to hear [about] loss[es],” and they chose and remained with an investment policy with “guaranteed profit.” (J.A. 2465.) With one exception, neither the Former Trustees nor the other Board members recalled discussing alternative investment plans or whether they should create a written investment plan.

The one exception was a June 2001 Board meeting, at which a financial advisor with Morgan Stanley was scheduled to make an investment presentation. Lertora “objected” and the advisor was “asked to leave” without making the presentation. (J.A. 3204.) The Board then had the advisor draft a portfolio proposal setting forth alternative investment strategies. The record does not reflect that the proposal was discussed at subsequent Board meetings, although the Board later unanimously voted not to change investments because they were pleased with the security of the investments.” (J.A. 3200.)

Between 2004 and 2005, the Former Trustees and other Board members were removed from their positions. The Current Trustees then filed a complaint in the district court alleging the Former Trustees and others breached various fiduciary duties regarding the Plan investments.3 Eight of the original nine causes of action were dismissed prior to trial and are not at issue in this appeal. The sole remaining cause of action (“Count V”) alleged that the Former Trustees violated § 1104(a)(1)(B) for “fail[ure] to research the investment vehicles within which Plan assets were invested to reasonably assure that investment in such vehicles was prudent when measured against investment in other vehicles of similar class,” or “to adequately review the investment strategy being executed on behalf of the Plan to ensure that such strategy was reasonable and prudent in relation to the funding requirements of the Plan, administrative costs incurred by the Plan, and real rate of return being earned under such a strategy.” (J.A. 39–40.)

During a three-day bench trial, the Former Trustees and other witnesses testified about the Board decisions described above. In addition, the parties each called an expert witness to testify about investment strategy, prudent investment decision-making considerations, and how the actual Plan investments measured against those principles.4

The Current Trustees' expert witness, Michael Cairns, testified that a prudent investment strategy would have been a 50/50 mix of S & P 500 and Barclays Capital Aggregate Bond Index investments. He testified that when looking at the period from December 31, 2002 to December 31, 2005, such an investment would have been valued at $432,986.70 more than the actual value of the Plan's investments at the end of 2005.5 On cross- examination, Cairns acknowledged that market performance is unpredictable, and that looking at a six-year period from 1999 to 2005, his proposed investment plan resulted in a valuation differential of only $103,859.01 more than the actual Plan investments. He also testified that his analysis did not depend on “the specific circumstances of” the Plan members, such as their age or the number of Plan members, because be believed those factors were irrelevant as to how to prudently invest a mature fund of the Plan's size. (J.A. 2730–31.)

The Former Trustees' expert, Frederick Taylor, testified that the actual investment policy could be considered a prudent investment strategy given the particular characteristics affecting the Plan, including the declining union membership, that it was a defined contribution plan, the uncertainties of the market in the early and mid–2000s, and the Board's conservative set of objectives. On cross-examination, Taylor agreed that the Plan's assets had not been diversified and that prudent strategy would entail discussing investment objectives and reviewing those investments “periodically.” (J.A. 2987–88.)

At the conclusion of the evidence, the district court awarded judgment in favor of the Current Trustees. In ruling from the bench, the court observed that after the Board authorized purchase of the CDs and Treasury bills,

[T]hat's it. That's the investment strategy, if you will, that goes back to 1991. There's one investigation, one consideration, if you will, if there was any investigation, indeed, and then in 1995 another investment decision. And it isn't really until 2002 with the whole Morgan Stanley transaction that there's even the possibility of considering a different investment strategy. We're talking about seven years from the last so-called investment decision that's made to reconsider and, frankly, the evidence is somewhat perplexing in that regard because it does not appear, notwithstanding what the minutes say, that there was any reasonable consideration given to the Morgan Stanley plan, that the [advisor] didn't really get to make his presentation ... and basically—and I'm referring specifically to Mr. Lertora here, he just was not of a mind to consider this plan.

(J.A. 3068.) The court then stated that the Board's “unfavorable” experience with the stock market in the seventies, “seemed to inform all investment decisions for the next ... 20, 30 years.” (J.A. 3068.)

The district court discussed a variety of steps the Board could have taken to satisfy its duty to investigate investment options, but observed that the Board failed to do anything of that nature, which led it to conclude “there is some suggestion that [they] were not even aware that they had an obligation to diversify and investigate.” (J.A. 3062–63.) Consequently, the court held

there was a failure to investigate, there was a failure to diversify and that certainly the message is that in the future within reasonable periodic spaces, this board of trustees has to investigate what the investment options are, to make sure that their decisions are still viable, which it did not do here.6

(J.A. 3070–71.)

Having found a breach of fiduciary duties to investigate investment options and to diversify investments, the district court turned immediately to “what the damages should be.” (J.A. 3071.) The district court adopted Cairns' testimony about what a “prudent” investment would have yielded for the three-year period between 2003 and 2005, and concluded that $432,986.70 was the proper amount of damages. In so doing, ...

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