Harley v. Minnesota Min. and Mfg. Co.

• Decision Date: 26 March 2002
• Docket Number: No. 00-2214.,No. 01-1213.,00-2214.,01-1213.
• Citation: 284 F.3d 901
• Parties: Carol HARLEY, et al., Plaintiffs-Appellants, v. MINNESOTA MINING AND MANUFACTURING COMPANY, Defendant-Appellee. Carol Harley, et al., Plaintiffs-Appellants, v. Guillo Agostini, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

284 F.3d 901

Carol HARLEY, et al., Plaintiffs-Appellants, v. MINNESOTA MINING AND MANUFACTURING COMPANY, Defendant-Appellee.

Carol Harley, et al., Plaintiffs-Appellants, v. Guillo Agostini, et al., Defendants-Appellees.

No. 00-2214.

No. 01-1213.

United States Court of Appeals, Eighth Circuit.

Submitted: March 12, 2001.

Filed: March 26, 2002.

COPYRIGHT MATERIAL OMITTED

Alan M. Sandals, Philadelphia, PA, argued (Scott M. Lempert, Philadelphia, PA, Seymour J. Mansfield and Debra S. Nelson, Minneapolis, MN, on the brief), for appellant.

John D. French, Minneapolis, MN, argued (Steven L. Severson, Deborah A. Ellingboe, Minneapolis, and J. Alan Galbraith, Washington, D.C., on the brief), for appellee.

Sara Pikofsky, Office of the Solicitor, US Department of Labor, Plans Benefit Security Division, Washington, D.C., argued (Henry L. Solano, Allen H. Feldman and Karen L. Handorf, U.S. Department of Labor, Washington, D.C., on the brief), for amicus curiae.

Mary Ellen Signorille, AARP Foundation Litigation, and Melvin Radowitz, AARP, Washington, D.C. (on the brief), for amicus curiae on behalf of AARP in support of appellants.

Before LOKEN, MURPHY, and BYE, Circuit Judges.

LOKEN, Circuit Judge.

These are two class actions against Minnesota Mining and Manufacturing Company ("3M") and certain 3M employees by participants and beneficiaries of the 3M Employee Retirement Income Plan (the "Plan"). The Plan is subject to the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001-1461. Plaintiffs allege that 3M breached its fiduciary duties under ERISA by failing to adequately investigate and monitor a $20 million investment of Plan assets in a hedge fund, and by failing to discover and remedy a prohibited transaction involving the fund advisor's compensation. Plaintiffs appeal the district court's¹ grant of summary judgment dismissing their claims. The principal issue is whether the court erred in dismissing plaintiffs' failure to investigate and monitor claims because the Plan is a defined benefit plan with a substantial surplus. We affirm.²

I. Background.

3M is responsible for directing the investment of Plan assets, a responsibility delegated to 3M's Pension Asset Committee (the "PAC"). In exercising this discretionary authority, both 3M and the PAC are Plan fiduciaries. See 29 U.S.C. § 1002(21)(A). This action arose out of a $20 million investment of Plan assets in the Granite Corporation ("Granite"), a hedge fund that invested primarily in collateralized mortgage obligations (CMOs) — fixed income securities that are derived from and secured by pools of private home mortgages.³ Granite was marketed to 3M's pension staff as an investment that would "maximize a consistent rate of return" for its investors while investing in "low risk instruments." Achieving a high rate of return hinged on using leverage, which increased the risk to investors from changes in market interest rates. Granite represented that it would hedge this risk by using sophisticated quantitative models to maintain a market-neutral investment position.

The Plan invested in Granite in 1990. The value of its Granite investment increased to $34 million by February 1994, but a significant rise in interest rates in March 1994 devastated the CMO market. Granite declared bankruptcy in April 1994, and the Plan lost its entire investment.⁴ On the other hand, between 1993 and 1998, 3M's voluntary contributions to the Plan exceeded ERISA's minimum funding requirements by $683 million, and the fair market value of the Plan's assets increased from approximately $3.4 billion in 1995 to over $6.3 billion in 1999. The Plan has never failed to pay benefits to its beneficiaries over its sixty-seven year life.

In investing Plan assets, a fiduciary must act "with the care, skill, prudence, and diligence [of] a prudent man acting in a like capacity and familiar with such matters." Felber v. Estate of Regan, 117 F.3d 1084, 1086 (8th Cir.1997), quoting 29 U.S.C. § 1104(a)(1)(B). A fiduciary that breaches this duty is liable "to make good to such plan any losses to the plan resulting from each such breach." 29 U.S.C. § 1109(a). The Secretary of Labor and plan participants, beneficiaries, and fiduciaries may sue "for appropriate relief under section 1109." 29 U.S.C. § 1132(a)(2).

Plaintiffs filed this action in June 1996, alleging that 3M is liable to the Plan under § 1109 because it breached its fiduciary duties by failing to investigate Granite adequately prior to investing in 1990; by thereafter failing to monitor properly the Granite investment; and by allowing the Plan to enter into a prohibited performance-based compensation agreement with Granite's investment advisor. Following discovery, the district court granted 3M summary judgment on the prohibited transaction claim because plaintiffs presented no evidence that the challenged compensation was unreasonable. Harley v. Minnesota Mining & Mfg. Co., 42 F.Supp.2d 898, 911 (D.Minn.1999). The court denied 3M summary judgment on the failure to investigate and monitor claims because "a reasonable fact finder could conclude that 3M's investigatory and monitoring methods and actions were below ERISA's standard of reasonable care." 42 F.Supp.2d at 907. However, the court ruled that the Plan did not suffer a remediable loss if 3M's voluntary contributions created an offsetting surplus and invited further discovery and a renewed motion for summary judgment on that issue. Id. at 914-15. After this ruling, plaintiffs filed the second action asserting the same claims against seven members of 3M's PAC.

After further discovery on the surplus issue, 3M renewed its motion for summary judgment. The district court concluded that the Plan has a sufficient surplus and dismissed the failure to investigate and monitor claims because the Granite investment caused no "losses to the plan" for purposes of 29 U.S.C. § 1109(a). In a subsequent order, the court held that the claims against the PAC defendants are barred by collateral estoppel and dismissed plaintiffs' second suit. Plaintiffs appeal the dismissal of their claims in both actions.

II. The Failure To Investigate and Monitor Claims.

Plaintiffs allege that 3M violated the prudent-man standard of care when it invested Plan assets in Granite without adequate investigation and monitoring. To recover, plaintiffs must prove a breach of this fiduciary duty and loss to the Plan. See Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 917 (8th Cir.1994). The district court concluded that plaintiffs could not prove the requisite loss to the Plan:

The Court believes, in the unique circumstances of this case, that if 3M indeed has contributed amounts sufficient to put the Plan's portfolio in a surplus position, the Granite investment has not caused [plaintiffs] or the Plan any cognizable harm.

42 F.Supp.2d at 912. The "unique circumstances" to which the court referred are the relevant features of a defined benefit plan, which were recently described by the Supreme Court in Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 439-40, 119 S.Ct. 755, 142 L.Ed.2d 881 (1999) (quotations omitted):

Such a plan, as its name implies, is one where the employee, upon retirement, is entitled to a fixed periodic payment.... [T]he employer typically bears the entire investment risk and — short of the consequences of plan termination — must cover any underfunding as the result of a shortfall that may occur from the plan's investments.... Given the employer's obligation to make up any shortfall, no plan member has a claim to any particular asset that composes a part of the plan's general asset pool.... Since a decline in the value of a plan's assets does not alter accrued benefits, members similarly have no entitlement to share in a plan's surplus....

On appeal, plaintiffs and the Secretary of Labor as amicus vigorously attack the district court's conclusion that there was no loss to the Plan. The Secretary warns that a decision "that an employer-fiduciary is not liable for losses caused by fiduciary breaches when a defined benefit pension plan is overfunded will have a substantial impact on the ability of the Secretary to enforce the statute." We agree that the district court's focus on "losses to the plan" — an essential element of the fiduciary's liability under § 1109(a) — was misplaced. If there is no loss to the plan, then no one may recover from the fiduciary on behalf of the plan, including the Secretary. That is far more than need be decided in this case. Moreover, the district court's conclusion that there was no loss to the Plan seems contrary to the plain meaning of § 1109(a). 3M concedes, as it must, that the Plan's $20 million investment in Granite became worthless after Granite declared bankruptcy in April 1994. This loss reduced the pool of Plan assets. We cannot agree with the court that "the Granite investment has not caused ... the Plan any cognizable harm." 42 F.Supp.2d at 912.

But that does not mean we disagree with the district court's decision to dismiss these claims. In our view, the proper focus is on whether plaintiffs have standing to bring an action under § 1132(a)(2) to seek relief under § 1109 for this particular breach of duty, given the unique features of a defined benefit plan as identified in Hughes Aircraft. In a defined benefit plan, if plan assets are depleted but the remaining pool of assets is more than adequate to pay all accrued or accumulated benefits, then any loss is to plan surplus. As Hughes Aircraft made clear, plaintiffs as Plan beneficiaries have no claim or entitlement to its surplus. If the Plan is overfunded, 3M may reduce or suspend its contributions. See Hughes Aircraft, 525 U.S. at 440, 119 S.Ct. 755. If the Plan's surplus disappears, it is 3M's obligation to make up any underfunding with additional contributions. If the Plan terminates with a surplus, the surplus may be distributed to 3M. See 29 U.S.C. § 1344(d); Dame v. First Nat'l...