Scardelletti v. Bobo

• Decision Date: 21 August 1995
• Docket Number: No. JFM-95-52.,JFM-95-52.
• Citation: 897 F. Supp. 913
• Parties: R.A. SCARDELLETTI, et al. v. Donald A. BOBO, et al.
• Court: U.S. District Court — District of Maryland

897 F. Supp. 913

R.A. SCARDELLETTI, et al. v. Donald A. BOBO, et al.

No. JFM-95-52.

United States District Court, D. Maryland.

August 21, 1995.

Lonie A. Hassel, Robert P. Gallagher, Groom & Nordberg, Washington, DC, for plaintiffs.

Marc G. Rifkind, Slevin & Hart, Washington, DC, Patrick J. Szymanski, Baptiste & Wilder, P.C., Washington, DC, for defendants.

MEMORANDUM

MOTZ, Chief Judge.

This action arises out of a dispute between the current trustees of the Transportation Communications International Union Staff Retirement Plan ("Plan")¹ and its former trustees and actuary concerning the adoption of a cost of living adjustment ("COLA") in 1989 and 1991. In an effort that they assert is necessary to save the Plan from termination and resulting loss of pension benefits to Plan participants, the current trustees, R.A. Scardelletti, Frank Ferlin, Jr., R.P. Wojtowicz, and Jack Boyce, allege that the former trustees, Donald A. Bobo, R.I. Kilroy, F.T. Lynch, and Frank Mazur, breached their fiduciary duty under various sections of the Employee Retirement Income Security Act of 1974, as amended 29 U.S.C. § 1001 et seq. ("ERISA"), when they recommended to the Executive Council of the Transportation Communications International Union ("TCU" or "the Union") Executive Council to adopt the 1989 and 1991 COLA amendments. The current trustees also assert state law tort claims and ERISA violations against the Plan's actuary, Robert E. Nemann and Robert E. Nemann & Associates.

The former trustees have jointly moved for dismissal pursuant to Fed.R.Civ.P. 12(b)(6), arguing that their alleged imprudence in recommending a plan amendment does not constitute a fiduciary act susceptible to review under ERISA's fiduciary standards.² In addition, defendants argue that this Court does not have jurisdiction to order the damages sought by plaintiffs.

I.

The Plan is an employee benefit plan established under ERISA to provide retirement benefits to employees of TCU.³ Approximately 400 retirees receive retirement benefits under the Plan and approximately 300 active employees of the Union are accruing benefits. Under the Plan, five union officers serve as the Plan's Board of Trustees and are responsible for its administration. Defendants Kilroy, Bobo, Lynch, and Mazur were trustees of the Plan until September 1, 1991. They were then succeeded by plaintiffs Scardelletti, Ferlin, Wojtowicz, and Boyce.⁴

The former trustees were also members of the Union's Executive Council. The Executive Council is the governing body of the organization and has authority to amend the Plan on the employer's behalf.⁵ The Plan has been amended several times since it was established in 1955. The amendments challenged in this case became effective in 1989 and 1991.

A. The 1989 COLA Amendment

At a meeting of the Plan's Board of Trustees on September 20, 1988, the former trustees discussed whether the Board should recommend a cost of living adjustment. The Plan's actuary Robert E. Nemann of Nemann & Associates presented a report and advised the former trustees of the effects of such a proposal. The former trustees considered first an automatic annual COLA that would increase at the rate of inflation similar to Social Security. At that time, Nemann advised that such a proposal would be too costly and recommended instead a one-time 10% benefit adjustment. Relying on Nemann's advice, the former trustees recommended to TCU's Executive Council that the employer could amend the Plan providing for a one-time 10% COLA after five years of retirement. The Executive Council adopted the amendment and it became effective on January 1, 1989.

B. The 1991 COLA Amendment

On February 9, 1990, the former trustees, responding to a request by a Plan participant, asked Nemann to determine whether the Plan could at that time afford an automatic COLA. At a joint meeting of the Executive Committee and Finance Committee on September 19-22, 1990, Bobo reported that the former trustees planned to consider an automatic COLA at their next meeting. Bobo also indicated that they would have a report from the Plan's actuary at that time.

On October 12, 1990, the former trustees considered a proposal to recommend an amendment adding an automatic COLA that would increase retirement benefits under the Plan every three years in an amount equal to the increase in the cost of living during each three year period, up to a maximum of 10% for each three year period. Allegedly, Nemann orally advised the former trustees that the Plan could be amended to add this limited, automatic COLA without increasing the employer's contribution rate. Therefore, the former trustees, except for Mazur who was absent from the meeting, voted to recommend to the Executive Council that the employer amend the Plan adopting the proposed COLA without increasing the contribution rate. Plaintiffs allege that the former trustees took this action without adequately questioning Nemann's recommendations or asking him for a copy of his report. Plaintiffs further maintain that Nemann never prepared the actuarial study requested at the February 9, 1990 meeting or presented any study at the October 12, 1990 meeting.

The next day on October 13, 1990, the Executive Council voted to adopt the proposed amendment in reliance on the former trustees' recommendations and representations regarding the advice given by Nemann. The amendment became effective on January 1, 1991. Less than one year later, on September 1, 1991, the former trustees retired and began receiving benefits from the Plan, including the benefit increases provided by the automatic COLA.

C. Alleged Effect of, and Alleged Damages Caused By the Amendments

Plaintiffs allege that the cost of funding the COLA more than doubled the required contribution to the Plan, from 17.5% of payroll to over 40% of payroll, and that the present value cost of this benefit is about $14,000,000. This contribution level required to fund the automatic COLA cannot be sustained and, therefore, plaintiffs maintain that the Plan will terminate as a result of the failure to meet ERISA's minimum funding requirements. Plan termination will cause serious harm to active and retired Plan participants because all future benefit accruals and all benefit increases under the COLA amendment will cease. Unfortunately, the current trustees are caught between a rock and a hard place to remedy this situation because ERISA prohibits amendments of the Plan repealing an automatic COLA.

II.

In Claim I, plaintiffs allege that Kilroy, Bobo, and Lynch breached their fiduciary duty under 29 U.S.C. § 1104(a)(1)(B)⁶ when they: (1) neglected to consider or investigate the feasibility of the COLA amendments; (2) voted to recommend the adoption of the COLA amendments without referring to an actuarial study analyzing the effects of the amendments; and (3) failed to supervise the Plan's service provider or require the completion of an actuarial study. In Claim II, plaintiffs allege that Mazur breached his duty as a co-fiduciary under 29 U.S.C. § 1105(a)(3)⁷ by failing to investigate the recommendation and adoption of the COLA amendments and by failing to take corrective action against this recommendation. The former trustees gloss over these isolated events and argue that their single act of recommending the amendment for adoption, however imprudent, constitutes a settlor's act to which no fiduciary liability attaches.

A. Breach of Fiduciary Duty

The former trustees as fiduciaries of the Plan are charged under ERISA with the duty to discharge their responsibilities "with the care, skill, prudence, and diligence that a prudent man ... would use." 29 U.S.C. § 1104(a)(1)(B); Bidwill v. Garvey, 943 F.2d 498, 507 (4th Cir.1991), cert. denied, 502 U.S. 1099, 112 S.Ct. 1182, 117 L.Ed.2d 425 (1992). ERISA's fiduciary duties, however, attach not to the particular person, but to the particular person performing a particular function. John Hancock Mut. Life Ins. Co. v. Harris Trust & Sav. Bank, ___ U.S. ___, ___ - ___, 114 S.Ct. 517, 523-24, 126 L.Ed.2d 524 (1993); Coleman v. Nationwide Life Ins. Co., 969 F.2d 54, 61 (4th Cir.1992), cert. denied, ___ U.S. ___, 113 S.Ct. 1051, 122 L.Ed.2d 359 (1993); Johnson v. Georgia-Pacific Corp., 19 F.3d 1184, 1188 (7th Cir. 1994); Hozier v. Midwest Fasteners, Inc., 908 F.2d 1155, 1158 (3rd Cir.1990).

Specifically, ERISA provides that:

a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.

29 U.S.C. § 1002(21)(A). Under this provision, employers are permitted to wear "two hats" and assume fiduciary status only "to the extent" that they function in their capacity as plan administrators or managers. See, e.g., Bidwill, 943 F.2d at 505; Dzinglski v. Weirton Steel Corp., 875 F.2d 1075, 1077-78 (4th Cir.), cert. denied, 493 U.S. 919, 110 S.Ct. 281, 107 L.Ed.2d 261 (1989); Johnson, 19 F.3d at 1187; Northwest Airlines, Inc. v. Federal Ins. Co., 32 F.3d 349, 353 (8th Cir. 1994); Schaefer v. Arkansas Medical Soc., 853 F.2d 1487, 1491 (8th Cir.1988). The question that must be decided here is which hat the former trustees were wearing when they allegedly: (1) neglected to consider or investigate the feasibility of the COLA amendments; (2) voted to recommend the adoption of the COLA amendments without referring to an actuarial study analyzing the effects of the amendments; and (3) failed to supervise the Plan's service provider or require the completion of an actuarial study.

The former trustees rely...