Farm King Supply, Inc. Integrated Profit Sharing Plan and Trust v. Edward D. Jones & Co.

• Decision Date: 23 August 1989
• Docket Number: No. 88-3382,88-3382
• Citation: 884 F.2d 288
• Parties: , 11 Employee Benefits Ca 1941 FARM KING SUPPLY, INCORPORATED INTEGRATED PROFIT SHARING PLAN AND TRUST, an Employee Benefit Plan, Richard H. Severs, Rick A. Severs, Randall M. Severs, Bradley D. Severs, Azelia M. Severs, Jerry D. Mayo and William A. Oates, Jr., Trustees of the Farm King Supply Incorporated Integrated Profit Sharing Plan and Trust, Plaintiffs-Appellants, v. EDWARD D. JONES & COMPANY, a Partnership, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 288

884 F.2d 288

58 USLW 2164, 11 Employee Benefits Ca 1941

FARM KING SUPPLY, INCORPORATED INTEGRATED PROFIT SHARING

PLAN AND TRUST, an Employee Benefit Plan, Richard H. Severs,

Rick A. Severs, Randall M. Severs, Bradley D. Severs, Azelia

M. Severs, Jerry D. Mayo and William A. Oates, Jr., Trustees

of the Farm King Supply Incorporated Integrated Profit

Sharing Plan and Trust, Plaintiffs-Appellants, v. EDWARD D. JONES & COMPANY, a Partnership, Defendant-Appellee.

No. 88-3382.

United States Court of Appeals, Seventh Circuit.

Argued June 1, 1989.

Decided Aug. 23, 1989.

Edward F. Sutkowski, Dan O'Day, Dean B. Rhoads, Sutkowski & Washkuhn, Peoria, Ill., for plaintiffs-appellants.

Robert V. Dewey, Jr., Mark Howard, Richard Molchan, Timothy L. Bertschy, Heyl, Royster, Voelker & Allen, Peoria, Ill., John M. Clear, Leo J. Asaro, Bryan, Cave, McPheeters & McRoberts, St. Louis, Mo., for defendant-appellee.

Before BAUER, Chief Judge, and CUMMINGS and RIPPLE, Circuit Judges.

CUMMINGS, Circuit Judge.

The Farm King Supply, Inc. Integrated Profit Sharing and Trust (the "Plan"), a qualified employee benefit plan under the Employee Retirement Income Security Act, 29 U.S.C. Secs. 1001 et seq. ("ERISA"), and its co-plaintiff trustees appeal from the decision of the district court which determined that defendant Edward D. Jones & Co. ("Jones"), a brokerage firm, was not a fiduciary of the Plan as defined in ERISA and therefore not liable for losses suffered by the Plan allegedly as the result of Jones' breach of the duty of undivided loyalty owed by a fiduciary to a plan. We affirm.

I. Facts and Proceedings Below

During the time in issue, the Plan was run by six trustees: Richard H. Severs, Rick A. Severs, Randall M. Severs, Bradley D. Severs, Azelia M. Severs, Jerry D. Mayo; William A. Oates was added in 1984. ¹ Apparently the trustees were headed by Richard Severs, at one time the Plan's sole trustee, who was found to be "relatively knowledgeable" and was presumably sophisticated in the broad area of finance, having served as a director of the Citizens National Bank of Macomb, Illinois. Trustees Rick and Bradley Severs, also found to be "relatively knowledgeable" and well read regarding financial matters, both hold degrees in business administration, and the district court found the trustees generally to be aware and capable of respecting their fiduciary obligations. Moreover they were assisted by capable lawyers and accountants. Accordingly, unless there was clear error in the relevant factual finding, it may properly be concluded that the trustees were competent.

Jones is a brokerage firm headquartered in St. Louis, Missouri, and maintains a sales office in Macomb. Jones is an underwriter for issuers of securities, placing the securities with buyers and in return receiving commissions from the issuers. From 1975 through 1980 Jack Cahill was Jones' sales representative in the Macomb area. Consistent with his job, in December 1975 Cahill began calling on the trustees of the Plan regarding potential investments. In March 1978 Cahill first succeeded in selling an investment to the Plan.

Cahill was aware that the Plan's major investments were in certificates of deposit. As part of his sales pitch, Cahill urged the Plan's trustees to diversify its portfolio, citing the diversification requirement of ERISA. The trustees agreed to purchase investments from Cahill provided the investments proved sound. Typically, Cahill would meet with the trustees and, based on their stated preference for safe, profit-sharing investments, present a few securities recommended by him specifically for the Plan and answer any questions the trustees may have had. Generally, the trustees would later meet privately and then advise Cahill as to whether they had decided to make a purchase for the Plan's benefit.

In July 1979 Cahill advised the trustees to open a Kemper Short Term Money Market Fund. In accordance with Kemper's usual routine, Kemper mailed monthly statements to Jones, the broker of record, as well as to the Plan. Consequently, Cahill was able to monitor this amount of money at the Plan's disposal, as well as take note of recent deposits, and thus tailor his recommendations to the extent of the Plan's cash reserves.

Cahill was transferred to Jones' St. Louis office in December 1980. At that time well over half the Plan's investments, both in terms of numbers and value, had been purchased through Jones. Cahill was succeeded by Gary Aleff, who was introduced to the Plan's trustees by Cahill prior to his departure. Aleff began calling on the trustees in December 1980 and tried, apparently without much success, to set up a meeting to solicit the trustees' interest in some more investments for the Plan. The trustees finally agreed to meet with him in June 1981. This meeting, in which Aleff recommended a few securities, resulted in the trustees' decision to purchase through Jones a $100,000 securities investment.

Aleff continued to meet with the trustees, much the same as Cahill had. He would make presentations recapping the performance of those investments purchased through Jones, advising the trustees which to hold and which to sell and offering the trustees a choice of recommended investments, and the trustees would then discuss amongst themselves which, if any, they wanted to purchase. At some point, the date is unclear, the trustees asked Aleff whether there was some way other than typical ledger sheets to track the Plan's investments. Aleff volunteered to provide portfolio summaries, the first of which was dated July 1982, which essentially listed information regarding the Plan's investments ² and also included advice, apparently unsolicited, as to the course of action the Plan should take with respect to each investment.

By June 1982 approximately 99% of the Plan's assets, constituting in excess of $1,000,000, was in investments recommended and purchased through Jones. Unfortunately Aleff proved to be less successful than Cahill and the trustees became dissatisfied with the performance of some of the investments he had recommended. By November 1982 the trustees began purchasing investments through brokers other than Jones, and in fact the Plan purchased its final investment through Jones in December 1982 despite attempts by Aleff to regain the trustees' confidence. Aleff even prepared a portfolio summary in April 1983 and unsuccessfully continued through 1983 to solicit sales to the trustees.

In 1984 and 1985 the Plan suffered significant losses as a result of investments recommended and purchased through Jones in 1982. The losses, which are the subject of this lawsuit, need not be detailed here; suffice to say they arose through three investments made pursuant to Aleff's solicitations in 1982 and total in excess of $300,000. ³

In March 1985 the Plan and its trustees brought this suit, alleging that Jones breached its duty of undivided loyalty to the Plan as a fiduciary under ERISA. ⁴ In response, Jones denied it was a fiduciary or that it breached its duty, and also filed a counterclaim in the alternative seeking indemnification from certain trustees in the event that it was later found to have breached fiduciary duties under ERISA. After a three-day bench trial the district court determined that Jones was not a fiduciary of the Plan within the meaning of ERISA, 29 U.S.C. Sec. 1002(21)(A). Since the district court held that Jones was not a fiduciary, it obviously had no occasion to reach a decision on either any duties putatively owed to the Plan by Jones or on the counterclaim. Judgment was ordered for defendant in November 1983, prompting the Plan and its trustees to appeal.

II. Analysis

The first question to decide is whether Jones is a fiduciary as defined in ERISA. If Jones is not a fiduciary, then of course it cannot be said that it breached any fiduciary duties owed to the Plan, nor is Jones' counterclaim for indemnification cognizable.

The Plan and trustees argue that Jones falls within the definition of a fiduciary under ERISA as a person who " * * * renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other properties of such plan, or has any authority or responsibility to do so * * *." 29 U.S.C. Sec. 1002(21)(A)(ii). The Department of Labor has adopted unassailed regulations further explaining when a person is deemed to be providing investment advice under Section 1002(21)(A)(ii) of ERISA:

(1) A person shall be deemed to be rendering "investment advice" to an employee benefit plan, within the meaning of [29 U.S.C. Sec. 1002(21)(A)(ii) ] only if:

(i) such person renders advice to the plan as to the value of securities or other property, or makes recommendations as to the advisability of investing in, purchasing, or selling securities or other property; and

(ii) such person either directly or indirectly ...

(A) has discretionary authority or control, whether pursuant to agreement, arrangement or understanding, with respect to purchasing or selling securities or other property for the plan; or

(B) renders any advice ... on a regular basis to the plan pursuant to a mutual agreement, arrangement or understanding, written or otherwise, between such person and the plan ... that such services will serve as a primary basis for investment decisions ... and that such person will render individualized investment advice to the plan based on the particular needs of the plan regarding such matters as, among other things, investment policies or strategy, overall portfolio composition, or diversification of plan investments.

29 C.F.R. Sec. 2510.3-21(c)(1). In keeping with the remedial purpose of ERISA, this Court liberally construes the term fiduciary as used in the Act. See Thornton v. Evans, 692 F.2d 1064 (7th Cir.1982); Mutual Life Ins. v. Yampol, 840 F.2d 421 (7th Cir.1988); see also American Federation of Unions v. Equitable Life Assurance Society, 841...