Filed: Jan. 04, 1996
Latest Update: Mar. 02, 2020
Summary: Opinions of the United 1996 Decisions States Court of Appeals for the Third Circuit 1-4-1996 IN RE: Unisys Svgs. Plan Litigation v. Unisys Corp. Precedential or Non-Precedential: Docket 95-1156 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1996 Recommended Citation "IN RE: Unisys Svgs. Plan Litigation v. Unisys Corp." (1996). 1996 Decisions. Paper 240. http://digitalcommons.law.villanova.edu/thirdcircuit_1996/240 This decision is brought to you for fre
Summary: Opinions of the United 1996 Decisions States Court of Appeals for the Third Circuit 1-4-1996 IN RE: Unisys Svgs. Plan Litigation v. Unisys Corp. Precedential or Non-Precedential: Docket 95-1156 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1996 Recommended Citation "IN RE: Unisys Svgs. Plan Litigation v. Unisys Corp." (1996). 1996 Decisions. Paper 240. http://digitalcommons.law.villanova.edu/thirdcircuit_1996/240 This decision is brought to you for free..
More
Opinions of the United
1996 Decisions States Court of Appeals
for the Third Circuit
1-4-1996
IN RE: Unisys Svgs. Plan Litigation v. Unisys Corp.
Precedential or Non-Precedential:
Docket 95-1156
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1996
Recommended Citation
"IN RE: Unisys Svgs. Plan Litigation v. Unisys Corp." (1996). 1996 Decisions. Paper 240.
http://digitalcommons.law.villanova.edu/thirdcircuit_1996/240
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 1996 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
Nos. 95-1156, 95-1157 and 95-1186
___________
IN RE: UNISYS SAVINGS PLAN LITIGATION
JOHN P. MEINHARDT, on behalf of himself and
all others similarly situated
v.
UNISYS CORPORATION
(D.C. Civil No. 91-cv-03067)
MICHAEL HECK; JOSEPH MCCARTHY;
ANGELO DEPIETRO, on behalf of themselves
and all others similarly situated
v.
UNISYS CORPORATION; THE ADMINISTRATIVE COMMITTEE
OF THE UNISYS SAVINGS PLAN; THE INVESTMENT COMMITTEE
OF THE UNISYS SAVINGS PLAN; JACK A. BLAINE;
JOHN J. LOUGHLIN; KENNETH MILLER; DAVID A. WHITE;
STEFAN RIESENFELD
(D.C. Civil No. 91-cv-03276)
GARY VALA, individually and on behalf
of all others similarly situated
v.
JACK A. BLAINE; MICHAEL R. LOSEY; KENNETH L. MILLER;
STEFAN C. RIESENFELD; CURTIS A. HESSLER; DAVID A.
WHITE; UNISYS CORPORATION; THE NORTHERN TRUST COMPANY
(D.C. Civil No. 91-03278)
CAROLYN A. GOHLIKE, on behalf of herself and
all others similarly situated
v.
UNISYS CORPORATION
(D.C. Civil No. 91-cv-03321)
DENNIS C. STANGA; JAMES M. COLLINS, on
1
behalf of themselves and all others
similarly situated
v.
UNISYS CORPORATION
(D.C. Civil No. 91-cv-04689)
JOHN H. BURGESS, JR., on behalf
of himself and all others similarly situated
v.
UNISYS CORPORATION
(D.C. Civil No. 91-cv-04696)
John M. Meinhardt, Michael Heck, Joseph McCarthy,
Angelo DiPietro, Gary Vala, Carolyn Gohlike,
Dennis C. Stanga, James M. Collins and John H.
Burgess, Jr.,
Appellants in No. 95-1156
IN RE: UNISYS SAVINGS PLAN LITIGATION
JOHN P. MEINHARDT, on behalf of himself and
all others similarly situated
v.
UNISYS CORPORATION
(D.C. Civil No. 91-cv-03067)
BERNARD MCDEVITT, on behalf of himself
and all others similarly situated
v.
UNISYS CORPORATION
(D.C. Civil No. 91-cv-03126)
PARKER C. KEAN, on behalf of himself
and all others similarly situated
v.
UNISYS CORPORATION
(D.C. Civil No. 91-cv-03164)
2
NADIA F. SOS; FAROUK M. SOS, individually
and on behalf of all others similarly situated
v.
3
UNISYS CORPORATION
(D.C. Civil No. 91-cv-03582)
KENNETH GOERS; JOHN J. CIESLICKI, on
behalf of themselves and all others similarly situated
v.
UNISYS CORPORATION; THE NORTHERN TRUST COMPANY
(D.C. Civil No. 91-cv-04678)
WILLIAM TORKILDSON
v.
UNISYS CORPORATION
(D.C. Civil No. 91-cv-04754)
Bernard McDevitt, Parker Kean, Nadia F. Sos,
Farouk M. Sos, Kenneth Goers, John J. Cieslicki
and William Torkildson,
Appellants in No. 95-1157
IN RE: UNISYS SAVINGS PLAN LITIGATION
JOHN P. MEINHARDT, on behalf
of himself and all others similarly situated
v.
UNISYS CORPORATION
(D.C. Civil No. 91-cv-03067)
HENRY ZYLLA; RICHARD SILVER; RONALD GRIPPO; EDWARD
LAWLER; RICHARD ANDUJAR; CLARENCE MULLER; CHARLES
WAHLER; JAMES MCLAUGHLIN; DONALD RADER; JOSEPH LAU;
JAMES GANGALE; ALFRED CONTARINO; RICHARD COLBY; JOHN
MARCUCCI; JOSEPH FIORE; RICHARD MASTRODOMENICO; NICK
KLEMENZ; PETER SZCZYBEK, on behalf of themselves and
all others similarly situated; ENGINEERS UNION
LOCAL 444 OF THE INTERNATIONAL UNION OF ELECTRONIC,
ELECTRICAL, SALARIED, MACHINE AND FURNITURE
WORKERS, A.F.L.-C.I.O.; LOCALS 445 OF THE INTERNATIONAL
UNION OF ELECTRONIC, ELECTRICAL, SALARIED, MACHINE AND
FURNITURE WORKERS, A.F.L.-C.I.O.; LOCALS 450 OF THE
INTERNATIONAL UNION OF ELECTRONIC, ELECTRICAL,
SALARIED, MACHINE AND FURNITURE WORKERS, A.F.L.-C.I.O.;
4
LOCALS 470 OF THE INTERNATIONAL UNION OF ELECTRONIC,
ELECTRICAL, SALARIED, MACHINE AND FURNITURE WORKERS,
A.F.L.-C.I.O.; LOCALS 165 OF THE INTERNATIONAL UNION OF
ELECTRONIC, ELECTRICAL, SALARIED, MACHINE AND FURNITURE
WORKERS, A.F.L.-C.I.O.; LOCAL 3, INTERNATIONAL
BROTHERHOOD OF ELECTRICAL WORKERS, A.F.L.-C.I.O.
v.
UNISYS CORPORATION; EDWIN P. GILBERT; JOHN J. LOUGHLIN;
THOMAS PENHALE, individually and in their capacities as
members of the Unisys Employee Benefits Executive
Committee and administrators of the Unisys
Retirement Investment Plan; RICHARD H. BIERLY; CURTIS A.
HESSLER; LEON J. LEVEL; KENNETH L. MILLER; DAVID A. WHITE; JACK
A. BLAINE; STEFAN C. RIESENFELD; GEORGE T. ROBSON,
individually and in their capacities as members
of the Investment Committee of the Unisys Retirement
Investment Plan
(D.C. Civil No. 91-cv-03772)
Henry Zylla, Richard Silver, Ronald Grippo, Edward
Lawler, Richard Andujar, Clarence Muller, Charles
Wahler, James McLaughlin, Donald Rader, Joseph Lau,
James Gangale, Alfred Contarino, Richard
Colby, John Marcucci, Joseph Fiore, Richard
Mastrodomenico, Nick Klemenz and Peter Szczybek,
individually and on behalf of the class certified,
Appellants in No. 95-1186
___________
Appeal from the United States District Court
for the Eastern District of Pennsylvania
___________
Argued
September 13, 1995
Before: Mansmann, Scirica and Nygaard, Circuit Judges.
(Filed January 4, 1996)
___________
James R. Malone, Jr., Esquire (Argued)
Michael D. Gottsch, Esquire
Chimicles, Jacobsen & Tikellis
361 West Lancaster Avenue
One Haverford Centre
Haverford, PA 19041
5
Joel C. Meredith, Esquire
Daniel B. Allanoff, Esquire
Meredith, Cohen & Greenfogel
117 South 17th Street
22nd Floor
Philadelphia PA 19103
James I. Wasserman, Esquire
Julian R. Birnbaum, Esquire
Vladeck, Waldman, Elias & Engelhard
1501 Broadway
Suite 800
New York, NY 10036
Counsel for Appellants: John M. Meinhardt, Michael
Heck, Joseph McCarthy, Angelo R. DiPietro, Gary Vala,
Carolyn Gohlike, Dennis C. Stanga, James M. Collins,
John H. Burgess, Jr., Bernard McDevitt, Parker Kean,
Nadia F. Sos, Farouk M. Sos, Kenneth Goers, John J.
Cieslicki, William Torkildson, Henry Zylla, Richard
Silver, Ronald Grippo, Edward Lawler, Richard Andujar,
Clarence Muller, Charles Wahler, James R. McLaughlin,
Donald Rader, Joseph Lau, James Gangale, Alfred
Contarino, Richard Colby, John Marcucci, Joseph A.
Fiore, Richard Mastrodomenico, Nick Klemenz, Peter
Szczybek
Laurence Z. Shiekman, Esquire (Argued)
Pepper, Hamilton & Scheetz
18th & Arch Streets
3000 Two Logan Square
Philadelphia, PA 19103-2799
Joseph A. Teklits, Esquire
Unisys Corporation
P.O. Box 500
M.S. C2NW 14
Blue Bell, PA 19424
Counsel for Appellees: Unisys Corporation,
Administrative Committee of the Unisys Savings Plan,
Investment Committee of the Unisys Savings Plan, Jack
A. Blaine, John J. Loughlin, Kenneth L. Miller, David
A. White, Stefan C. Riesenfeld, Michael R. Losey,
Curtis A. Hessler, Edwin P. Gilbert, Thomas Penhale,
individually and in their capacities as Benefits
Executive Committe and administrators of the Unisys
Retirement Investment Plan; Richard H. Bierly, Curtis
A. Hessler, Leon J. Level, George T. Robson,
6
Marcia E. Bove, Esquire
Room N-4611
United States Department of Labor
200 Constitution Avenue, N.W.
Washington, DC 20210
Counsel for Amicus-appellant Secretary of Labor
Mary Ellen Signorille, Esquire
American Association of Retired Persons
601 E Street, N.W.
Washington, DC 20049
Counsel for Amicus-appellant American Association of
Retired Persons
Robert N. Eccles, Esquire
Karen M. Wahle, Esquire
O'Melveny & Myers
555 13th Street, N.W.
Suite 500 West
Washington, DC 10004
Counsel for Amicus-appellees: ERISA Industry
Committee, American Standard Inc., Bethlehem Steel
Corp., Merck & Co., Inc., Rockwell International Corp.,
Scott Paper Company, and USX Corporation
___________
OPINION OF THE COURT
__________
MANSMANN, Circuit Judge.
This consolidated class action is brought pursuant to
the Employee Retirement Income Security Act of 1974, ("ERISA"),
29 U.S.C. § 1001 et seq. (1985 & Supp. 1995), and arises out of
the collapse in 1991 of the Executive Life Insurance Company of
California. The plaintiffs, participants in individual account
pension plans that Unisys Corporation maintained for its
employees, alleged, inter alia, that the defendants breached
ERISA's fiduciary duties of prudence and diversification by
7
investing plan assets in Executive Life guaranteed investment
contracts, as well as ERISA's fiduciary duty of disclosure by
providing participants with misleading or incomplete
communications regarding these investments and Executive Life's
financial condition. In their defense, the defendants raised a
question of first impression, asserting that section 1104(c) of
the Act, which relieves fiduciaries of liability for losses which
result from a plan participant's exercise of control over
individual account assets, applies. The plaintiffs appeal the
district court's decision to grant the defendants' motion for
summary judgment on the plaintiffs' breach of fiduciary duty
claims.
We conclude that there are genuine issues of material
fact as to whether the defendants breached section 1104(a)'s
fiduciary duties and as to whether the defendants are entitled to
section 1104(c)'s protection. We will, therefore, vacate the
district court's grant of summary judgment in the defendants'
favor and will remand the case to the district court for further
proceedings.
I.
We begin our analysis by reviewing the evidence of
record. In the fall of 1986, Burroughs Corporation and Sperry
Corporation merged to form Unisys. Prior to the merger, both
Sperry and Burroughs had maintained retirement savings plans for
employees known as the Sperry Retirement Program - Part B (the
"Sperry Plan") and the Burroughs Employees Savings Thrift Plan
8
(the "BEST Plan"), respectively. Each plan permitted an employee
to contribute a percentage of his or her compensation into an
individual account and to direct that it be invested in any one
or a number of funds that were comprised of different types of
investments. One of the funds in both of these plans invested in
guaranteed investment contracts ("GICs") issued primarily by
insurers. A GIC is a contract under which the issuer is
obligated to repay the principal deposit at a designated future
date and to pay interest at a specified rate over the duration of
the contract.
Following the merger, the Sperry Plan and the BEST Plan
were consolidated to form the Unisys Savings Plan, which took
effect on April 1, 1988.0 Like its predecessors, the Unisys
Savings Plan established an individual account for each
participant and offered several fund alternatives into which a
0
The parties agree that the Unisys Savings Plan is an
"individual account plan" within the meaning of the Employee
Retirement Income Security Act of 1974, ("ERISA"), 29 U.S.C.
§ 1001 et seq. (1985 & Supp. 1995). Section 1002(34) of the Act
provides:
§ 1002. Definitions
(34) The term "individual account plan" or
"defined contribution plan" means a pension
plan which provides for an individual account
for each participant and for benefits based
solely upon the amount contributed to the
participant's account, and any income,
expenses, gains and losses, and any
forfeitures of accounts of other participants
which may be allocated to such participant's
account.
29 U.S.C. § 1002(34).
9
participant could direct contributions on a tax-deferred basis:
the Diversified Fund, the Indexed Equity Fund, the Active Equity
Fund; the Unisys Common Stock Fund; the Short Term Investment
Fund, and the Insurance Contract Fund.0
The Insurance Contract Fund invested in GICs. The old
Sperry Plan Fixed Income Fund, a vehicle for GICs, continued to
exist, but was closed to new contributions. As GICs matured,
assets invested in the Fixed Income Fund were reinvested in the
new Insurance Contract Fund; assets in the BEST Plan equivalent,
the Guaranteed Investment Contract Fund, were likewise reinvested
in that Fund, unless a participant specified otherwise.0
Contributions to the Insurance Contract Fund were allocated on a
pro rata basis among the various GICs held therein.
The Unisys Savings Plan allowed a participant to
transfer assets from one equity fund to another on a monthly
basis. Due to transfer limitation terms that were included in
the contracts purchased for the GIC Funds, however, asset
transfers involving those Funds were restricted. For example,
all transfers between any of the GIC Funds and the Short-Term
Investment Fund, another low-risk, interest-earning vehicle, were
absolutely prohibited. Moreover, if assets were transferred from
0
The Plan also accepted "after-tax" and "tax-deductible"
contributions that had been made under the prior plans as well as
transfers from other qualified plans or individual retirement
accounts. The Plan further provided for matching company
contributions in the form of shares of Unisys common stock.
0
For the sake of convenience, the BEST Plan Guaranteed
Investment Contract Fund, the Sperry Plan Fixed Income Fund, and
the Unisys Savings Plan Insurance Contract Fund will be referred
to collectively as the "GIC Funds".
10
one of the GIC Funds to the equity or Unisys common stock funds,
a year had to pass before any assets could be transferred to the
Short-Term Investment Fund; similarly, if assets were transferred
from the equity or the Unisys common stock funds to the Short-
Term Investment Fund, a year had to transpire before any assets
could be transferred out of one of the GIC Funds.0
Because the Plan was designed to make final
distribution of a participant's account on retirement, death,
disability or employment termination, withdrawals of tax-deferred
contributions prior to those events were limited to circumstances
of "financial hardship" and were generally taxable as ordinary
income, plus 10%.
In addition to the Unisys Savings Plan, Unisys
established the Unisys Retirement Investment Plan ("RIP") and the
Unisys Retirement Investment Plan II ("RIP II") for unionized
employees, which for all intents and purposes were identical to
the Unisys Savings Plan.0 Contributions to the Plans designated
for investment in the Fixed Income Fund or the Insurance Contract
Fund were invested together.
0
In addition, the Plan placed a six-month restriction on
the transfer of assets to the Insurance Contract Fund from the
equity or Unisys common stock funds if those assets had been
previously transferred from the Short-Term Investment Fund, as
well as several other restrictions of six months or a year's
duration when transfers were made to or from the Best Plan
Guaranteed Investment Contract Fund or the Sperry Plan Fixed
Income Fund.
0
Again, for the sake of convenience, the Unisys Savings
Plan, the Unisys Retirement Plan ("RIP") and the Unisys
Retirement Plan II ("RIP II") will be referred to collectively as
the "Plans".
11
Unisys was the Plans' administrator; the Administrative
Committee, established by the Unisys Board of Directors, carried
out the Plans' provisions; and the Investment Committee, also
established by the Board, was responsible for the Plans'
investments. The Investment Committee delegated day-to-day
investment management responsibility for the GIC Funds to two of
the Investment Committee's members, defendants David White and
Leon Level, and appointed outside managers to manage investments
in the Plans' other funds.
From time to time White and certain members of his
staff, including William Heller, Robert Rehley and Charles
Service, conducted a bid among insurers during which GIC
contracts were selected for the appropriate GIC Fund. These
selections were subject to Level's approval and reported to the
Investment Committee. White and his staff did not have written
guidelines for the bidding process or contract selection; they
did, however, have informal operating policies and procedures. In
particular, they developed a rule that no more than 20% of GIC
Fund assets would be invested with any one issuer.
After the merger in 1986, but before the effective date
of the Plans in April, 1988, two bids for the Fixed Income Fund
were held. The first bid occurred on June 9, 1987, in the
offices of Murray Becker of Johnson & Higgins, a consultant which
Sperry had used to assist in GIC selections. Prior to bid day,
Becker mailed bid specifications on Unisys' behalf to a number of
insurers, including the Executive Life Insurance Company of
California, inviting them to make a GIC proposal. It was Johnson
12
& Higgins' practice to solicit bids only from insurers with a
superior AAA rating as to claims-paying ability from Standard &
Poors Corporation. At the time, Standard & Poors had rated
Executive Life as a AAA company. Likewise, A. M. Best Company,
another rating agency, had assigned Executive Life its highest
rating of A+. According to Becker, however, the A+ from A. M.
Best was of marginal significance since A. M. Best was overly
generous with its ratings.
On the day of the bid, White, his staff and Becker
reviewed material that Executive Life provided concerning the
insurer's financial condition and interviewed Executive Life
representatives about the company's outlook. The group then
discussed the Executive Life GIC proposal. As was his custom,
Becker noted that the prospect of purchasing Executive Life GICs
was "controversial" in light of the "junk bonds" Executive Life
held in its portfolio. Junk bonds are non-investment securities
which carry an above-average credit risk and return. Taking
their cue from Standard & Poors, which was of the view that the
risk generated by Executive Life's junk bond investments was
offset by other conservative aspects of the insurer's investment
strategy, White and his staff were not deterred from investing in
Executive Life. Becker warned, however, that the Standard &
Poors AAA rating was reliable only as long as Executive Life's
junk bond holdings did not exceed 35% of its bond portfolio.
Ultimately, Becker recommended that Unisys consider the purchase
of a three-year GIC from Executive Life. While White accepted
Becker's advice to invest in Executive Life, he rejected Becker's
13
view as to the contract's duration. In order to acquire the
highest interest rate that Executive Life offered, 9.45%, White
purchased a five-year Executive Life GIC for approximately $30
million. GIC bids from Travelers Insurance Company and Seattle
First Bank were also accepted.
Subsequent to the June 9, 1987 bid, White and Level
terminated Johnson & Higgins and did not hire a replacement,
believing that Unisys personnel could select appropriate GICs
without the help of a consultant. A second competitive GIC bid
for the Fixed Income Fund took place on December 2, 1987. Relying
heavily on Executive Life's ratings, which had not changed since
June 9, 1987, White invested just over $135 million into another
five-year Executive Life GIC paying 9.75% in interest. Contracts
were purchased from Seafirst Bank and Travelers Insurance Company
as well, bearing interest rates of 9.25% and 9.15% respectively.
Shortly thereafter, on January 13, 1988, Unisys
sponsored a GIC bid for the Insurance Contract Fund. Once again,
based on the high marks Executive Life continued to receive from
the rating agencies, White invested about $46 million in a third
five-year, 9.48% interest-paying Executive Life GIC, bringing the
total investment in GICs issued by Executive Life to $213
million.
Communications to participants regarding the GIC Funds,
beginning with BEST Plan and Sperry Plan documents, described the
Funds as designed to preserve capital and accumulate interest and
consistently emphasized that investments in GICs were
"guaranteed" by the issuing insurers. BEST Plan materials stated
14
that the goal of the Guaranteed Insurance Contract Fund was "to
preserve the amount invested and to guarantee a rate of return",
and provided that "[i]n addition to the interest earned, the
insurance company guarantees the principal of the fund[] . . .
[and that] your account cannot go down in value; it will always
be worth as much as you put in plus your share of the interest
earned under the contract." Similarly, with respect to the Fixed
Income Fund, Sperry Plan materials declared that "each year's
minimum [interest] rate is guaranteed for an entire year."
Likewise, the prospectuses for the Plans, distributed
in the Spring of 1988, stated that the Insurance Contract Fund
was intended "to preserve capital while earning interest
income[]" and described the Fund as "invested in contracts with
insurance companies and other financial institutions which
guarantee repayment of principal with interest at a fixed or
fixed minimum rate for specified periods. . . ." The Unisys
Savings Plan prospectus noted, however, that "[Unisys] does not
guarantee the repayment of principal or interest." Although the
1988 RIP and RIP II original prospectuses did not include this
caveat, it was subsequently included in a 1988 supplement to
each. Additionally, the Plans' prospectuses pointed out that
assets of the Insurance Contract Fund were invested in contracts
issued by, inter alia, Executive Life.
The 1988 Summary Plan Descriptions ("SPD"s) for the
Plans provided that the investment objective of the Insurance
Contract Fund was to "[p]reserve the amount invested while
earning interest income[]", described the Funds' investment
15
strategy as "[t]ypically contracts of between 3 and 7 years with
various insurance companies and other financial institutions
which guarantee the principal and a specified rate of return for
the life of each contract", and explained that the future
performance of any of the funds was not certain:
[b]enefits available are based on your
savings plan value at the time of
distribution. Your payments from the Plan
are subject to the performance of the funds
in which your accounts are invested. If the
value declines, you may receive less from the
Plan than you and the Company contributed.
With respect to the Employee Retirement Income Security
Act of 1974, ("ERISA"), 29 U.S.C. § 1001 et seq. (1985 & Supp.
1995), the 1988 and 1990 prospectuses for the Plans pointed out:
the Plan is subject to some, but not all, of the provisions of
the [Act] . . . which [a]mong other things . . . set minimum
standards of fiduciary responsibility, establish minimum
standards for participation and vesting, and require that each
member be furnished with an annual report of financial condition
and a comprehensive description of the member's rights under the
Plan.
The Plans' SPDs informed the participants:
you are entitled to certain rights and
protections under [ERISA] . . . . In
addition to creating rights for Plan
participants, ERISA imposes duties upon the
people who are responsible for the operation
of employee benefit plans. The people who
operate the [Unisys Savings Plan, the Unisys
Pension Plan, RIP, and RIP II], called
`fiduciaries' of the Plans, have a duty to
[operate] prudently, in your interest and
that of all members and beneficiaries.
After the prospectuses and the SPDs were distributed,
the Investment Committee received correspondence in 1988 and 1989
from individual participants, including Henry Zylla, the
16
president of one of Unisys' local unions who wrote on behalf of
the union's members, questioning whether Executive Life GICs
should have been purchased for the Plans, given the insurer's
high risk investments. In responding correspondence, Unisys
stated that the Committee did not invite "risky" companies to its
GIC bids, that its GIC selection process continuously emphasized
"safety" and that all of the contracts it selected for the GIC
Funds carried investment-grade credit ratings.
In January of 1990, some two years after Unisys' last
Executive Life GIC purchase, Executive Life announced that it had
written down $515 million in assets due to losses in its bond
portfolio. Following this announcement, Executive Life's credit
ratings were lowered from AAA to A by Standard & Poors; from A+
to A by A. M. Best; and from A1 to BAA2 by a third rating
company, Moody's Investors Service.
Concerned that a flood of policy and other contract
surrenders would cause a liquidity crisis that it would be unable
to overcome, Executive Life began meeting with its investors to
discuss its financial condition. When representatives of
Executive Life and Unisys met on January 31, 1990, Executive Life
articulated reasons for asserting that it would continue to meet
its obligations and survive intact the situation it faced.
The next day, Thomas Penhale, an employee in Unisys'
Human Resources department, sent to defendant Michael Losey, a
Vice President of Human Resources, a copy of a newspaper article
on Executive Life with a hand-written note, stating: "[defendant]
John L[oughlin] got this today. It is not as `comforting' as
17
Exec[utive] Life led us to believe yesterday." In a memorandum to
the Investment Committee dated February 2, 1990, however, White,
who attended the January 31 meeting with Executive Life,
expressed the view that the insurer "appears to be in reasonably
good shape to weather the storm."
On February 5, 1990, members of the Investment
Committee and other interested Unisys personnel met to discuss,
inter alia, the questions Unisys had received from participants
regarding Executive Life's status and the disclosures the company
would make to the Plans' participants about the insurer. After
some debate, the group decided that Unisys would disseminate
information to all participants regarding Executive Life's
condition through an updated prospectus and an accompanying cover
letter.
In late March, 1990, Unisys sent to each participant a
revised prospectus which stated generally that "an investment in
any of the investment funds involves some degree of risk[]" and
that many factors, including the "financial stability of the
institutions in which assets are invested, the quality of the
investment portfolios of those institutions, and other economic
developments will affect . . . the value of a [participant's]
investment in those funds." In bold letters, the prospectuses
added that "[a]s a result, there is no assurance that at any
point in time the value of an investment in any fund will not be
lower than the original amount invested."
As for the Insurance Contract Fund, the revised
prospectus stated that its "objective . . . is to preserve
18
capital while earning interest income[]", characterized its
investments as "contractual obligation[s]" of the issuer, and
pointed out that the "repayment of principal and interest is
necessarily subject to the [issuer's] ability to pay . . . [such
that] a downturn or loss in one or more areas of the [issuer's]
investment portfolio could have an adverse effect on the
stability of the [issuer]." Like the April 1, 1988 prospectus,
the revised prospectus stated that "[Unisys] does not guarantee
the repayment of principal or interest[]"; it also informed
participants that the Investment Committee's guidelines required
that Unisys purchase GICs from insurers rated "Secure" by
Standard & Poors, or "Highest Investment Quality" by Moody's
Invest[ors] Service, or "Superior" or "Excellent" by A. M. Best,
but that "[c]ontracts issued by an insurance company or other
institution whose rating is downgraded subsequent to selection
may continue to be held in the fund." Finally, Executive Life
was identified as one of the companies from which GICs had been
purchased.
With the 1990 prospectus, participants received a
letter from defendant Jack A. Blaine, a Vice President of Human
Resources, encouraging participants to review the prospectus
carefully and reminding them that Unisys would not give advice as
to appropriate investment strategy. The letter responded to
questions concerning the "troubled `junk bond' market and the
effect, if any, that such problems would have on the [GIC Funds]"
by pointing out that the repayment of principal and interest
under GICs necessarily and entirely depended on the ability of
19
the insurer to meet its obligations; that Unisys did not
guarantee the repayment; and that the financial stability of an
insurer depended on the success of its own portfolio, such that
an investment in junk bonds could have an adverse effect on
financial stability. Lastly, the letter provided that only those
institutions with a "secure" credit rating at the time of a
contract bid would be selected for investment.
Although a draft of Blaine's letter had made specific
mention of Executive Life, the letter the participants eventually
received did not. The draft's reference to Executive Life's $515
million asset writedown was removed; a statement disclosing the
magnitude of the proportion of Fixed Income and Insurance
Contract Fund investments in Executive Life was crossed out
because it "could cause panic"; and a statement about informative
news articles was deleted because it "could cause more concern."
A comment on the draft stated: "The overall content and tone do
[not] sooth[e] any fears and may in fact stir more interest in
this subject than it deserves."
Blaine's letter was accompanied by an enclosure that
listed all of the GICs held in the GIC Funds at that time, with
investment value, maturity dates, and the bid day and current
ratings of the issuing insurer. The enclosure revealed that
Executive Life GICs had a combined book value of over $200
million, maturity dates of June, 1991, June and September, 1992,
and March, June and August, 1993. It also showed the recent
decline in ratings that Executive Life had suffered. The 1990
prospectus and the letter from Blaine with the enclosure were the
20
only communications Unisys made to all participants on a
systematic basis subsequent to Executive Life's January, 1990
announcement.
At about the same time, Unisys distributed to its
benefits administration personnel a copy of a February 23, 1990
letter from Fred Carr, Executive Life's Chairman and President,
which portrayed the company as "healthy", "financially strong",
and "capable of providing all the benefits promised[]", and
written responses to specific questions about Executive Life for
use in addressing concerns that individual participants directed
their way. According to Losey's deposition testimony, individual
participants who asked employees in the Human Resources
department "[w]ell, gee, how many people ever lost their money in
this kind of thing[?]" would be told, "I don't remember one time
they even halfway defaulted." In March, 1990, Unisys also met
with union employees and responded to participants' inquiries
about Executive Life's financial status.
Unisys did not, however, disclose two decisions it had
reached: one involving its chairman's retirement annuity and the
second, an Investment Committee resolution. With respect to
the first, a few months after sending the revised prospectus to
participants, Unisys replaced a $500,000 retirement annuity
issued by Executive Life for Unisys' then Chairman, Michael
Blumenthal, with an annuity from another insurer at some expense
to the company. The second matter occurred at an Investment
Committee meeting on August 10, 1990, during which was discussed,
inter alia, the course of action the Plans would take in the
21
event of a Executive Life default. The Committee ultimately
resolved "that in the event of a default in any of the guaranteed
investment contracts . . . distribution to plan participants will
be reduced by that portion of the participant's account held in
the defaulted contract."
Seeking to reduce the waiting period for asset
transfers between "non-competing" funds and the GIC Funds from
twelve months to six, Unisys contacted the issuers from whom GICs
had been purchased and asked that they agree to appropriate
contract modifications. In exchange for Executive Life's consent
to a waiting period reduction in the contracts it had issued to
the Plans, Unisys executed a letter agreement on October 17, 1990
which provided in pertinent part:
Unisys Corporation hereby further agrees that
neither it nor its affiliates, employees,
agents or other representatives will
communicate with Plan participants regarding
the financial condition or prospects of
Executive Life nor issue any other
communication regarding Executive Life which
could be reasonably viewed as attempting to
influence the investment choices of Plan
participants without first obtaining
Executive Life's written approval of such
communication. In the event such prior
written approval is not obtained, Executive
Life may elect to not honor employee requests
for withdrawals or reallocations provided
that Executive Life reasonably believes that
such requests were the direct result of such
communication.
During this time, Executive Life's condition was widely
reported in the financial press. Eventually, on April 11, 1991,
the California Commissioner of Insurance seized Executive Life,
22
placing it in conservatorship, and on April 12, 1991, issued a
moratorium on all payments from the insurer. As a result, Unisys
isolated and froze the balance in any participant account
invested in Executive Life by way of the Fixed Income and/or
Insurance Contract Funds. At this time, 30% of the Fixed Income
Fund and 7% of the Insurance Contract Fund were invested with the
insurer. On December 6, 1991, the Superior Court of California
declared Executive Life insolvent.
In 1991, several classes composed of Unisys employees
who participate in one of the Plans and have account balances
invested in Executive Life and the unions which represent Unisys
employees commenced twelve separate actions against Unisys, the
Investment and Administrative Committees of the Unisys Board of
Directors and individuals who allegedly had served on one or both
of the Committees.
By Pretrial Order dated November 4, 1991, the twelve
cases were consolidated for all purposes, except trial. Pursuant
to this Order, on November 25, 1991, the plaintiffs filed a three
count second amended consolidated class action complaint against
the above-named defendants.0 In Count I, all of the plaintiffs
assert under sections 1045, 1104, 1105, 1109 and 1132 of ERISA,
that Unisys breached fiduciary duties: by investing in Executive
Life GICs; by failing to monitor the investments and divest them
0
In their briefs, the defendants refer to themselves
collectively as "Unisys". We will adopt that designation from
this point forward.
23
from the Plans;0 by failing to diversify the GIC Funds' assets;
and by failing to provide adequate disclosures to participants
regarding "the composition of the portfolios" of the Fixed Income
and Insurance Contract Funds and the "status of Executive Life's
financial condition and the effect of [the insurer's] insolvency
on their investment. . . ." In Count II, they assert that Unisys
violated ERISA's reporting and disclosure requirements set forth
in sections 1021(a), 1022(a)(1),(b) and 1023(b) by not furnishing
an adequate summary plan description and an annual or other
periodic report which would have apprised the plaintiffs that
investments in the Fixed Income and Insurance Contract Funds were
in jeopardy due to Executive Life's financial condition. In
Count III, the union plaintiffs claim that Unisys' decision to
invest in Executive Life and the actions it took when the insurer
was placed in conservatorship breached certain collective
bargaining agreements in violation of section 301 of the Labor
Management Relations Act, 1947, 29 U.S.C. § 141 et seq. (1973 &
Supp. 1995).
In answer to the plaintiffs' ERISA claims, Unisys
denied the allegations in the second amended complaint and
asserted by way of a defense that 29 U.S.C. § 1104(c), which
provides in part that "no person who is otherwise a fiduciary
shall be liable under [Part 4 -- Fiduciary Responsibility] for
any loss, or by reason of any breach, which results from [a]
0
It appears from the plaintiffs' briefs that they no
longer pursue their allegations that Unisys breached fiduciary
duties by failing to monitor the Executive Life investments and
divest them from the Plans.
24
participant's or beneficiary's exercise of control [over the
assets in his account]", relieves it of liability.
On July 22, 1994, Unisys filed a motion for summary
judgment, requesting, inter alia, that judgment be entered in its
favor as to all counts of the second amended complaint.
On January 25, 1995, the district court granted Unisys'
motion on the plaintiffs' ERISA claims (Counts I and II) and
denied the motion as to the union plaintiffs' Labor Relations
Management Act claim (Count III).0 In its opinion, the district
court began its analysis with what it designated as the
plaintiffs' ERISA "`Adequate Information' and Control Claim";
after setting forth the elements of an adequate summary plan
description, the court turned immediately to Unisys' section
1104(c) defense. Considering whether the Plans' SPDs and
0
In its motion for summary judgment, Unisys also
requested that the plaintiffs' jury demand be stricken and argued
that plaintiffs are not entitled to either punitive damages or
other extra-contractual remedies under ERISA. Finding that the
plaintiffs seek equitable relief under ERISA, the district court
ruled that the plaintiffs are not entitled to a jury trial on
Counts I and II. The court retained the union plaintiffs' jury
trial demand on Count III because it held that the union
plaintiffs' claim under the Labor Management Relation Act, 1947,
29 U.S.C. § 141 et seq. (1973 & Supp. 1995), raises a legal
issue.
The plaintiffs did not appeal the court's decision to
grant summary judgment on Count II or its decision to strike the
jury trial demand on Counts I and II. Likewise, Unisys did not
appeal the district court's denial of summary judgment or its
refusal to strike the jury demand as to Count III.
The court did not address Unisys' contention that ERISA
does not allow the plaintiffs to recover punitive or other extra-
contractual damages. The parties have not raised this issue on
appeal.
25
prospectuses provided "the specific warnings required by ERISA
and case law to allow the participants to exercise control over
their investments", the court concluded that Unisys had provided
the "required information and warnings" by advising participants
that "`[Unisys] does not guarantee the repayment of principal or
interest[]'" and "[t]here were no guarantees on their
investments." Noting that the Plans were "voluntary" and that
"consistent with ERISA § 404(c), the plans gave participants the
option to invest their contributions in one or more of six
funds[]," with the SPDs stating that "`[y]ou direct how your
before-tax contributions are invested[]'", the court also
concluded that the participants had control over their assets.
Turning next to the plaintiffs' various claims in Count
I for breach of ERISA's fiduciary duties, the district court
disposed of the failure to disclose claim by holding that even
though "`[t]he duty to disclose material information is the core
of a fiduciary's responsibility'", a "`significant exception to
the rules governing fiduciaries applies to plans that permit
participants to exercise control over individual accounts
assets.'"
With regard to the plaintiffs' assertion that the
investment in Executive Life GICs was imprudent, the court ruled
that "Unisys met the requirements of the `experienced prudent
person[]'" having based its decision to invest in Executive Life
on appropriate grounds:
Unisys examined the financial statements of
Executive Life, all of which indicated that
it was sound. It sought the opinion of an
26
expert, who advised that Executive Life was a
good investment. Most significantly, Unisys
relied on the ratings of Standard & Poors and
Moody's, both of which gave Executive Life
high ratings of A+ or AAA. . . . With all
of the information available to it at the
time, Unisys clearly made prudent business
and investment decisions. Plaintiffs cannot
not now use 20/20 hindsight to impose
liability on Unisys.
The district court did not address the plaintiffs' claim in Count
I that Unisys failed to satisfy ERISA's duty of diversification.
Judgment on Counts I and II of the second amended
complaint was entered on January 26, 1995, and this consolidated
appeal by the plaintiffs followed.0
II.
In examining the issues raised on appeal, we begin with
settled principles of procedure involving summary judgment.0
0
9. Appeals in eleven of the twelve consolidated cases are
from final judgments as the entry of summary judgment in Unisys'
favor in those eleven finally resolved all of the claims between
the parties. In the twelfth action, where the union plaintiffs
assert the Labor Management Relations Act claim, the district
court's grant of summary judgment for the defendants on only the
ERISA claims does not dispose of all the claims between the
parties. Accordingly, for purposes of appeal, the plaintiffs in
that action sought the district court's certification pursuant to
Fed. R. Civ. P. 54(b), which was granted.
Because the twelve cases were not consolidated for
trial, even though the district court's order granting summary
judgment to Unisys on Counts I and II of the second amended
consolidated complaint does not dispose of all of the claims in
the twelve consolidated actions, it is a final, appealable order
within the meaning of 28 U.S.C. § 1291. Hall v. Wilkerson, 926
F.2d 311, 314 (3d Cir. 1991) (holding that the dispositive factor
in determining whether an order disposing of less than all claims
in a consolidated case is appealable is whether the consolidation
was for all purposes).
27
Summary judgment should be granted where the record reveals that
no genuine issue of material fact exists for resolution at trial
and the moving party is entitled to judgment as a matter of law.
Fed. R. Civ. P. 56(c). On summary judgment, the moving party
need not disprove the opposing party's claim, but does have the
burden to show the absence of any genuine issues of material
0
On review of the district court's award of summary
judgment, we are required to apply the same test the district
court should have used initially. Goodman v. Mead Johnson & Co.,
534 F.2d 566, 573 (3d Cir. 1976), cert. denied,
429 U.S. 1038
(1977). When deciding a motion for summary judgment, a district
court's role remains circumscribed in that it is inappropriate
for a court to resolve factual disputes and to make credibility
determinations. Country Floors Inc. v. Partnership Composed of
Gepner and Ford,
930 F.2d 1056, 1061 (3d Cir. 1991). Even where
a case will be heard without a jury, the court on summary
judgment does not sit as the trier of fact; it only determines
whether there are issues which must be tried. Medical Inst. of
Minnesota v. National Ass'n of Trade and Technical Schools,
817
F.2d 1310, 1315 (8th Cir. 1987). To raise a genuine issue of
material fact the opponent need not match, item for item, each
piece of evidence proffered by the movant. Big Apple, BMW, Inc.
v. BMW of N. Am. Inc.,
974 F.2d 1358, 1362-63 (3d Cir. 1992),
cert. denied, ___ U.S. ___,
113 S. Ct. 1262 (1993). In practical
terms, if the opponent has exceeded the "mere scintilla"
threshold and has offered a genuine issue of material fact, then
the court cannot credit the movant's version of events against
the opponent, even if the quantity of the movant's evidence far
outweighs that of its opponent.
Id. It thus remains the
province of the factfinder to ascertain the believability and
weight of the evidence.
Id.
The party opposing the motion is entitled to have his
allegations taken as true, to receive the benefit of doubt when
his assertions conflict with those of the movant and to have
inferences from the underlying facts drawn in his favor. Big
Apple,
BMW, 974 F.2d at 1362-63. Ambiguities and conflicts in a
deponent's testimony are generally matters for the fact-finder to
sort out. Wilson v. Westinghouse Elec. Corp.,
838 F.2d 286, 289
(8th Cir. 1988). Any "unexplained gaps" in materials submitted
by the moving party, if pertinent to the material issues of fact,
justify denial of the motion. O'Donnell v. United States,
891
F.2d 1079, 1082 (3d Cir. 1989).
28
fact. Celotex Corp v. Catrett, 477 U.S. 317, 323 (1985). If the
movant meets this burden, then the opponent may not rest on
allegations in pleadings, but must counter with specific facts
which demonstrate that there exists a genuine issue for trial.
Id. Further, even if the facts are undisputed, summary judgment
may not be granted where there is disagreement over inferences
that can be reasonably drawn from those facts. As in this case,
when the nonmoving party will bear the burden of proof at trial,
the moving party may meet its burden by showing that the
nonmoving party has not offered evidence sufficient to establish
the existence of an element essential to its case.
Id. at 322.
With these principles in mind, we turn first to the
plaintiffs' claim that Unisys committed several breaches of
ERISA's fiduciary duties. We turn second to Unisys' assertion
that the defense set out in section 1104(c) applies in this case.
III.
Our analysis commences with the fiduciary
responsibility provision of the Employee Retirement Income
Security Act of 1974, ("ERISA"), 29 U.S.C. § 1001 et seq. (1985 &
Supp. 1995). Section 1104(a) imposes several duties upon
fiduciaries which include the duty of loyalty, the duty to act
prudently, and the duty to diversify plan investments. Section
1104(a) provides in pertinent part:
§ 1104. Fiduciary duties
(a) Prudent man standard of care
29
(1) Subject to sections 1103(c) and (d),
1342, and 1344 of this title, a fiduciary
shall discharge his duties with respect to a
plan solely in the interest of the
participants and beneficiaries . . .
. . . .
(B) with the care, skill, prudence, and
diligence under the circumstances then
prevailing that a prudent man acting in a
like capacity and familiar with such matters
would use in the conduct of an enterprise of
a like character and with like aims;
(C) by diversifying the investments of
the plan so as to minimize the risk of large
losses, unless under the circumstances it is
clearly prudent not to do so[] . . .
29 U.S.C. § 1104(a)(1)(B),(C).
When we apply section 1104(a) to the facts of a
particular case, we remain mindful of ERISA's underlying
purposes: to protect and strengthen the rights of employees, to
enforce strict fiduciary standards, and to encourage the
development of private retirement plans. 29 U.S.C. § 1001; H.R.
Rep. No. 533, 93d Cong. 2d Sess. (1974), reprinted in 1974 U.S.
Code Cong. & Admin. News 4639, 4639-43. We also bear in mind
that Congress has instructed that section 1104 "in essence,
codifies and makes applicable to . . . fiduciaries certain
principles developed in the evolution of the law of trusts." S.
Rep. No. 127, 93 Cong., 2d Sess. (1974), reprinted in 1974 U.S.
Code Cong. & Admin. News 4838, 4865.
A.
30
In Count I of the second amended complaint, the
plaintiffs allege, inter alia, that Unisys breached section
1104(a)(1)(B) by making imprudent investments of plan assets in
Executive Life. Unisys contends that, to the contrary, the
evidence establishes that the purchases of the Executive Life
GICs were prudent under ERISA as a matter of law, thereby
entitling it to summary judgment.
Under the common law of trusts, a trustee is duty-bound
"to make such investments and only such investments as a prudent
[person] would make of his own property having in view the
preservation of the estate and the amount and regularity of the
income to be derived. . . ." Restatement (Second) of Trusts §227
(1959). Further, a trustee is required to use due care, which
means he must investigate the safety of the investment and its
potential for income by securing reliable information, and may
take into consideration the advice of qualified others, as long
as he exercises his own judgment; to use the skill of a man of at
least ordinary intelligence; and to use caution, with a view to
the safety of the principal and to the securing of a reasonable
and regular income. Id. cmts. (a) - (c), (e). Whether a trustee
has acted properly in selecting an investment depends upon the
circumstances at the time when the investment is made and not
upon subsequent events. Thus, if at the time an investment is
made, it is an investment a prudent person would make, there is
no liability if the investment later depreciates in value.
Id.
cmt. o.
31
Consistent with these common law principles, the courts
measure section 1104(a)(1)(B)'s "prudence" requirement according
to an objective standard, focusing on a fiduciary's conduct in
arriving at an investment decision, not on its results, and
asking whether a fiduciary employed the appropriate methods to
investigate and determine the merits of a particular investment.
Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 917-18 (8th Cir.
1994); Fink v. National Savings and Trust Co.,
772 F.2d 951, 955-
56 (D.C. Cir. 1985); Katsaros v. Cody,
744 F.2d 270, 279 (2d
Cir.), cert. denied,
469 U.S. 1072 (1984); Donovan v. Mazzola,
716 F.2d 1226, 1232 (9th Cir. 1983), cert. denied,
464 U.S. 1040
(1984). In addition, the prudence requirement is flexible, such
that the adequacy of a fiduciary's independent investigation and
ultimate investment selection is evaluated in light of the
"`character and aims'" of the particular type of plan he serves.
Donovan v. Cunningham,
716 F.2d 1455, 1467 (5th Cir. 1983), cert.
denied,
467 U.S. 1251 (1984).0
In this case, our in-depth analysis of the evidence
convinces us that Unisys has failed to carry its burden on
summary judgment of showing the absence of any genuine issue of
0
Similarly, the Department of Labor regulation
concerning the investment duties of ERISA fiduciaries provides
that the requirements of section 1104(a)(1)(B) of the Employee
Retirement Income Security Act of 1974, ("ERISA"), 29 U.S.C.
§1001 et seq. (1985 and Supp. 1995), are satisfied if fiduciaries
give "appropriate consideration to those facts and circumstances
that, given the scope of such fiduciary's investment duties, the
fiduciary knows or should know are relevant to the particular
investment or investment course of action involved, including the
role the investment plays in that portion of the plan's
investment portfolio. . . ." 29 C.F.R. § 2550.404a-1(b)(i).
32
material fact as to whether its course of conduct and decision to
invest in five-year Executive Life GICs in June and December of
1987 and January of 1988 for the Fixed Income and Insurance
Contract Funds satisfied ERISA's duty of prudence.
We begin with the most basic of ERISA's investment
fiduciary duties, the duty to conduct an independent
investigation into the merits of a particular investment. When
David White, Unisys' Vice President of Capital Management and
Trust Investments, was asked at his deposition to describe the
evaluation he and his staff performed at the time of the June 9,
1987, bid to satisfy themselves that Executive Life was
financially sound, he responded that they depended on the
research that he "believed" Unisys' consultant, Johnson &
Higgins, had completed:
Q. Other than the financial information
provided to you by the companies and the
ratings of the agencies of which you
just spoke, did you have any other
review done of the financial status of
the insurance companies that were
bidding?
A. I don't know how to answer that clearly,
but what was done was we relied on
Murray's staff, also. It was conducted
at his office. He, in this case -- we
had never bid Executive Life, you know,
for the Burroughs plan and it was
Murray's relationship in effect and he
had done, I believe, independent
research. Otherwise, he would not have
recommended Executive Life to us. So we
had that recommendation.
33
In his deposition, however, Murray Becker of Johnson &
Higgins did not confirm that Johnson & Higgins provided research
to White and his staff:
Q. Did you have a research staff at Johnson
& Higgins?
* * *
A. Research as to what?
* * *
Q. As to the insurance companies?
A. Johnson & Higgins had a committee that I
was not involved in that approved
insurance companies that Johnson &
Higgins was permitted to use. This was
general for property casualty and life
companies across the board.
* * *
Q. Were there individuals at the company
whose responsibility it was to analyze
the credit worthiness of various
insurance companies?
* * *
A. Johnson & Higgins didn't represent
itself as a credit-rating agency so it
did not provide a credit research
service. And in my part of Johnson &
Higgins, we simply adopted a standard of
recommending companies that were
recommended -- that a client consider
companies that had a Triple A rating,
and not consider companies that didn't
have a rating, or were rated below
Triple A.
While we would encourage fiduciaries to retain the
services of consultants when they need outside assistance to make
prudent investments and do not expect fiduciaries to duplicate
34
their advisers' investigative efforts, we believe that ERISA's
duty to investigate requires fiduciaries to review the data a
consultant gathers, to assess its significance and to supplement
it where necessary. In our view, a reasonable factfinder could
infer from this evidence that Unisys failed to analyze the bases
underlying Johnson & Higgins' opinion of Executive Life's
financial condition and to determine for itself whether credible
data supported Johnson & Higgins' recommendation that Unisys
consider investing plan assets with the insurer. A reasonable
factfinder could also conclude that Unisys passively accepted its
consultant's positive appraisal of Executive Life without
conducting the independent investigation that ERISA requires.
Likewise, the record calls into question the
sufficiency of the investigation that White and William Heller
and Robert Rehley, members of White's staff, conducted prior to
the Executive Life GIC purchases that were made in December of
1987 and January of 1988. Although the services of Johnson &
Higgins had been terminated and another consultant had not been
hired, White testified he did "nothing new" by way of research
into Executive Life's finances between June and December of 1987.
Heller and Rehley, when deposed, indicated that in connection
with these purchases, their task was to keep current Unisys files
on bidding insurers up-to-date. If, as the record suggests,
Unisys' investigation consisted of nothing more than confirming
that Executive Life's credit ratings had not changed since June,
1987, a reasonable factfinder could find that the investigations
for the second and final GIC purchase were deficient.
35
Of course, the thoroughness of a fiduciary's
investigation is measured not only by the actions it took in
performing it, but by the facts that an adequate evaluation would
have uncovered. Fink, 772 F.2d at 962 (Scalia, J., concurring in
part and dissenting in part) ("[T]he determination of whether an
investment was objectively prudent is made on the basis of what
the trustee knew or should have known; and the latter necessarily
involves consideration of what facts would have come to his
attention if he had fully complied with his duty to investigate
and evaluate." (emphasis in original)). In this regard, the
plaintiffs presented evidence which showed that one who
investigated Executive Life in 1987 and 1988 would have found,
for example, that Moody's Investors Service had given Executive
Life a rating which was notably lower than those assigned by
Standard & Poors and A. M. Best; that the higher ratings that
Executive Life had received were being questioned in some
financial circles; that at least one reputable consultant had
strongly recommended against investments in Executive Life
annuity contracts; and that Executive Life's reinsurance
practices were under scrutiny by state regulators. The record,
however, does not reveal which of these items Unisys may have
considered, and raises a question as to what conclusion
concerning an investment in Executive Life a prudent fiduciary
would have reached had they come to its attention.
Turning to the credit ratings upon which Unisys
admittedly relied in large measure to make and defend its
decisions to invest in Executive Life, we observe that here, too,
36
the record raises genuine issues as to whether Unisys' reliance
was justified and informed. As noted earlier, Becker advised
White and his staff that a AAA rating from Standard & Poors was a
valid indicator of Executive Life's economic vitality only if
junk bonds did not exceed 35% of its bond portfolio. When
deposed, Becker testified that Executive Life's representatives
had reported in June of 1987 that the insurer met this standard;
White, who was ultimately responsible for assessing Executive
Life's prospects, however, was unable at his deposition to recall
the percentage of the insurer's junk bond holdings at relevant
times and guessed that the percentage was under "forty or fifty".
Thus, whether White was, in fact, cognizant of this significant
item of information when he decided to invest in Executive Life
is for the factfinder to decide. Moreover, when Heller was asked
during his deposition what he knew about the bases underlying
Standard & Poors ratings, he testified to a limited
understanding, stating that "[Murray Becker] was the most
knowledgeable of anyone . . . of the methodology of Standard &
Poors. We would not have been knowledgeable in that area."
Whether the rating was a reliable measure of Executive Life's
financial status under the circumstances and whether Unisys was
capable of using the rating effectively are, therefore, matters
which must be decided at trial. See Donovan v. Cunningham, 716
F.2d at 1474 ("An independent appraisal is not a magic wand that
fiduciaries may simply waive over a transaction to ensure that
their responsibilities are fulfilled. It is a tool and like all
tools, is useful only if used properly.").
37
When we focus on the five-year duration and interest
terms of the Executive Life GICs, we find additional issues for
trial. The record is uncontroverted that, in June of 1987,
Becker advised in favor of the purchase of an Executive Life GIC
of only three-years duration and that White did not heed his
advice as to the contract's duration; the record does not
resolve, however, whether the relative merits of these different
maturity dates, which could have had a significant impact on the
risk associated with the investment, were debated and to what
result. Rehley recalled some discussion on the issue; Heller did
not believe that such a discussion took place; and Becker could
not remember whether any consideration, one way or the other, was
given to the matter. We believe that if this debate did not take
place, a reasonable factfinder could conclude that Unisys did not
adequately deliberate its investment decision and that had it
done so, it would have rejected a long-term investment in
Executive Life. Moreover, that White sought to maximize interest
rates by investing in the five-year GICs is not disputed; whether
he inappropriately sacrificed security in making investments for
Funds where the preservation of capital was of paramount concern
is yet another issue for trial. The dramatic disparity between
the interest rates that Executive Life offered and those offered
by other successful bidders could lead a factfinder to infer that
the risk accompanying Executive Life's yields was unacceptably
high.
The record also raises a question as to whether Unisys
was equipped to conduct GIC bids unassisted and whether the
38
absence of written guidelines for the bidding process impeded its
ability to make prudent investment decisions. As noted, when
questioned about credit ratings, Heller testified that he and his
colleagues lacked a certain expertise, and when questioned about
the "negative consequence" of the absence of written guidelines,
he testified: "[T]here was the possibility that we would be
placing money with companies that would subsequently run into
trouble. There was also the fear that too much money could be
with any one issuer."
Finally, we note a report prepared by George M.
Gottheimer, Jr., an expert retained by the plaintiffs, opining
that the purchases of long-term Executive Life GICs in 1987 and
1988 were imprudent.0 According to Mr. Gottheimer, Unisys
breached its fiduciary duties by not adequately investigating the
financial condition of Executive Life, by not having guidelines
against which to measure the insurer; by relying solely on the
credit ratings Executive Life had received; by placing almost
0
Unisys argues that we may not consider Mr. Gottheimer's
report because it was not in the form of a sworn affidavit as
required by the Fed. R. Civ. P. 56(e). Unisys, however, did not
move to strike nor did it otherwise object to Dr. Gottheimer's
report in the district court. Indeed, Unisys placed the report
in the record.
We agree with the plaintiffs and our sister courts of
appeals that Rule 56 defects are waived where they are not raised
in the district court. See, e.g., Humane Soc. of The United
States v. Babbitt, 46 F.3d 93, 96 n. 5 (D.C. Cir. 1995) (Rule 56
defects are waived where motions to strike are not filed);
DeCintio v. Westchester County Medical Center,
821 F.2d 111, 114
(2d Cir.), cert. denied,
484 U.S. 965 (1987) (citing "unanimous
accord" on the question in five other courts of appeals). We
think this rule is especially applicable given that it was Unisys
which submitted the report to the district court.
39
exclusive emphasis on yield; and by not employing the services of
a consultant for all of the purchases in view of its lack of
knowledge and skill. Mr. Gottheimer's opinion, based on his
interpretation of the deposition testimony and exhibits he
reviewed, is itself some evidence of Unisys' imprudence, capable
of defeating Unisys' motion for summary judgment.
We thus conclude that in response to Unisys' motion for
summary judgment, the plaintiffs raised genuine issues of
material fact to support their claim that the investment of plan
assets in Executive Life GICs violated section 1104(a)(1)(B)'s
duty of prudence.
B.
We turn next to the plaintiffs' claim in Count I that
Unisys violated ERISA's fiduciary duty set forth in 29 U.S.C.
§1104(a)(1)(C), to "diversify[] the investments in the plan so as
to minimize the risk of large losses", by placing an excessive
amount of plan assets in Executive Life GICs.
As a general proposition, ERISA's duty to diversify
prohibits a fiduciary from investing disproportionately in a
particular investment or enterprise. A Congressional Committee
report on the Act's diversification provision provides:
A fiduciary usually should not invest the
whole or an unreasonably large proportion of
the trust property in a single security.
Ordinarily the fiduciary should not invest
the whole or an unduly large proportion of
the trust property in one type of security or
in various types of securities dependent upon
the success of one enterprise or upon
40
conditions in one locality since the effect
is to increase the risk of large losses.
H.R. Conf. Rep. No. 1280, 93d Cong., 2d Sess. (1974), reprinted
in 1974 U.S. Code Cong. & Admin. News 5038, 5085.0
ERISA's duty to diversify is not measured by hard and
fast rules or formulas. Congress has instructed that "[t]he
degree of investment concentration that would violate this
requirement to diversify cannot be stated as a true percentage,
because a prudent fiduciary must consider the facts and
circumstances of each case. The factors to be considered include
(1) the purposes of the plan; (2) the amount of the plan assets;
(3) financial and industrial conditions; (4) the type of
0
Section 1104(a)(1)(C) of ERISA in large part reflects
the fiduciary duty set forth in the Restatement (Second) of
Trusts:
§228. Distribution of Risk of Loss
Except as otherwise provided by the terms of
the trust, the trustee is under a duty to
distribute the risk of loss by reasonable
diversification of investments, unless under
the circumstances it is prudent not to do so.
* * *
Comment:
a. Duty to diversity investments. The
trustee is under a duty to the beneficiary to
exercise prudence in diversifying the
investments so as to minimize the risk of
large losses, and therefore he should not
invest a disproportionately large part of the
trust estate in a particular security or type
of security. It is not enough that each of
the investments is a proper investment. . . .
Restatement (Second) of Trusts, § 228, cmt. a (1959).
41
investment, whether mortgages, bonds or shares of stock or
otherwise; (5) distribution as to geographic location; (6)
distribution as to industries; (7) the dates of maturity." Id.
at 5085. Further, the Act's legislative history informs that a
plan may invest wholly in insurance or annuity contracts, since
generally an insurance company's assets are to be invested in a
diversified manner.
Id. Finally, if a plaintiff proves a
failure to diversify, the burden shifts to the defendant to
demonstrate that nondiversification was nonetheless prudent.
Id.
at 5084.
Before we consider the substance of the plaintiffs'
failure to diversify charge and whether summary judgment was
properly entered in Unisys' favor, we must determine how the duty
set forth in section 1104(a)(1)(C) is measured in the context of
the kind of Plans before us, which are comprised of a number of
discrete funds, each with its own distinct type of investment.
Not surprisingly, the parties maintain diametrically-opposed
positions on the issue: Unisys argues that we must measure
diversification by considering all of the investments the Plans
hold, and the plaintiffs urge evaluation of diversification by
considering the investments solely in the Fixed Income and
Insurance Contract Funds.
Looking first to ERISA's language, we find little
guidance; the Act refers only to a fiduciary's duty to diversify
the "plan's" investments. 29 U.S.C. § 1104(a)(1)(C). ERISA's
legislative history, however, indicates that a fiduciary's
performance of the duty may be measured by the diversity it has
42
achieved in a particular investment vehicle and, where the
management of a plan's investments is distributed among several
managers, in the segment of the plan for which it has
responsibility. Congress stated:
[A]lthough the fiduciary may be authorized to
invest in industrial stocks, he should not
invest a disproportionate amount of the plan
assets in the shares of corporations engaged
in a particular industry. If he is investing
in mortgages on real property he should not
invest a disproportionate amount of the trust
in mortgages in a particular district or on a
particular class of property so that a
decline in property values in that district
or of that class might cause a large loss.
An investment manager, A, is responsible for
10% of the assets of a plan and is instructed
by the named fiduciary or trustee to invest
solely in bonds; another investment manager,
B, is responsible for a different 10% of the
assets of the same plan and instructed to
invest solely in equities. . . . In these
circumstances, A would invest solely in bonds
in accordance with his instructions and would
diversify the bond investments in accordance
with the diversification standard, the
prudent man standard, and all other
provisions applicable to A as a fiduciary.
Similarly, B would invest solely in equities
in accordance with his instructions and these
standards.
H.R. Cong. Rep. No. 1280, reprinted in 1974 U.S. Code Cong. &
Admin. News at 5084.
In addition to Congress' direction, we believe the case
of GIW Indus., Inc. v. Trevor, Stewart, Burton & Jacobsen, Inc.,
895 F.2d 729, 733 (11th Cir. 1990), is instructive. There the
plaintiff maintained a profit sharing plan for its employees
which consisted of three funds. Plan participants allocated
43
their respective account balances among the funds and were
permitted to change their investment election or to withdraw from
the plan once a year. The plaintiff hired the defendant to
manage the investments of Fund A, an asset allocation account
which was invested in fixed income securities, equities of
publicly traded companies and money market instruments. The
defendant adopted a strategy to invest Fund A assets in primarily
long-term government bonds, which were highly liquid and carried
a minimal credit risk. Due to a series of required cash
disbursements, however, the defendant was required to sell Fund A
assets at a loss. The plaintiff filed suit, alleging that, inter
alia, the defendant breached its fiduciary duty under ERISA to
diversify the Fund's investments.
On appeal from the judgment entered against it, the
defendant argued that its obligation to diversify was properly
measured by considering the investments of the entire plan, not
merely the investments in Fund A. The court of appeals disagreed
and affirmed the judgment, reasoning:
It is undisputed, though, that [the
defendant] exercised no control over any fund
other than Fund A. Moreover, Fund A could
not draw upon the other funds for the purpose
of cash pay-outs. Even if the entire plan
were to be considered in determining whether
the diversification requirement has been met,
[the defendant] made no investigation of the
other funds, either. Mr. Burton, whose
testimony the district court credited,
declared that the existence of Fund D did not
influence how [the defendant] invested the
assets of Fund A.
Id. at 733.
44
Although the facts in this case and GIW Industries
differ in certain respects,0 we find the approach taken by the
Court of Appeals for the Eleventh Circuit applicable, persuasive,
and in keeping with Congress' intent in section 1104(a)(1)(C).
Here, as there, Unisys was responsible for investing a portion of
the Plans' assets in designated investments. Similarly, the
investments that other managers made for the Plans in other
investment areas had no bearing on the investment choices Unisys
made for the Funds it managed. Moreover, plan-wide investments
were not available (and it would appear could not be available)
to offset losses sustained by the Fixed Income and Insurance
Contract Funds as a result of Executive Life's failure. Thus,
the risk of loss which section 1104(a)(1)(C) aims to minimize was
not distributed among the Plans' total holdings; it was, instead,
spread only among the GIC Funds' contracts. We, therefore,
conclude that under these circumstances, Unisys' satisfaction of
the duty to diversify is properly assessed by examining the
concentration of Executive Life investments in the Fixed Income
and Insurance Contract Funds.
Because the record is incomplete in critical respects,
however, we cannot determine whether Unisys is entitled to
0
We note that the fund at issue in GIW Indus., Inc. v.
Trevor, Stewart, Burton & Jacobsen, Inc., 895 F.2d 729 (11th Cir.
1990), in contrast to the GIC Funds here, was, by definition, to
include a variety of investment types -- fixed income securities,
equities of publicly traded companies and money market
instruments.
Id. at 730. Thus, it would seem that the
defendant's investment strategy -- to invest primarily in long-
term bonds -- violated the funds inherent diversification
requirement. In our view, this fact difference is not
significant to our analysis.
45
summary judgment on this aspect of the plaintiffs' case. For
example, as the record does not reveal the rationale for Unisys'
rule not to place more than 20% of GIC Fund assets with a single
issuer, the process by which Unisys may have applied the rule to
the GIC purchases at issue, or the analysis that Unisys may have
undertaken of the factors Congress has directed prudent
fiduciaries to consider, we cannot decide whether reasonable
minds could differ as to the adequacy of Unisys' actions with
regard to diversification. We are also left to ponder how Unisys
attempted to maintain a steady degree of diversification where
due to the reinvestment of proceeds from the Fixed Income into
the Insurance Contract Fund, the percentage of assets in
Executive Life contracts in each Fund changed over time or why,
as White testified, Unisys assessed diversification according to
the Funds' aggregate exposure to Executive Life, and not
according to the exposure in each Fund.0 Moreover, assuming that
the concentration of assets placed with Executive Life in the
Fixed Income or the Insurance Contract Fund was excessive, the
record does not reveal whether, as section 1104(a)(1)(C) permits,
there may have been special circumstances excusing Unisys from
diversifying GICs. Finally, by its terms, ERISA requires a
fiduciary to diversify so as to avoid "large losses". Because the
0
In December of 1988, the record shows that 21.7% of the
Fixed Income Fund and 19.18% of the Insurance Contract Fund were
invested in Executive Life; as of March 31, 1991, shortly before
the plaintiffs' account balances were frozen, 30% of the Fixed
Income Fund and 7% of the Insurance Contract Fund were invested
in the insurer, with exposure on an aggregate basis at about 15%.
46
amount of losses the Fixed Income and Insurance Contract Funds
will ultimately suffer has remained uncertain, the district court
stayed discovery on the issue of damages; the summary judgment
materials submitted to the district court by the parties were, by
order, limited to liability issues. We further understand that
discovery on damages issues proceeded after Unisys' summary
judgment motion was filed. Obviously, whether "large losses"
were avoided and in turn, whether Unisys satisfied its burden on
summary judgment as to the duty to diversify, cannot be
determined on the record before us.
We, therefore, conclude that Unisys' request for
summary judgment in its favor on the plaintiffs' section
1104(a)(1)(C) failure to diversify claim was premature. Upon
remand, the record may be developed and a motion for summary
judgment may be judged on the basis of the principles we have set
forth.
C.
We now turn our attention to the plaintiffs' claim in
Count I that Unisys breached section 1104(a)'s fiduciary duty to
disclose. As we understand it, the plaintiffs' claim is that
Unisys misrepresented the risks associated with investing monies
in the Fixed Income and Insurance Contract Funds through
misleading or incomplete communications regarding the Funds'
portfolio once the Executive Life GICs had been purchased, as
well as Executive Life's financial condition in 1990. In view of
the district court's ruling that Unisys' disclosure obligations
47
are defined solely by section 1104(c), the threshold issue we
must consider is whether the plaintiffs' claim under section
1104(a) may continue.
Looking for guidance to our cases regarding ERISA's
fiduciary duty to inform, we note that we have repeatedly held
that a fiduciary may not materially mislead those to whom section
1104(a)'s duties of loyalty and prudence are owed. In re Unisys
Corp. Retiree Medical Benefit "ERISA" Litigation, 57 F.3d 1255,
1261 (3d Cir. 1995); Curcio v. John Hancock Mut. Life Ins. Co.,
33 F.3d 226, 238 (3d Cir. 1994); Bixler v. Central Pennsylvania
Teamsters Health and Welfare Plan,
12 F.3d 1292, 1300 (3d Cir.
1994); Fisher v. Philadelphia Elec. Co.,
994 F.2d 130, 135 (3d
Cir.), cert. denied, ___ U.S. ___,
114 S. Ct. 622 (1993). Thus,
in Fisher, where the plaintiffs alleged that the defendant
misrepresented its intention to establish a "retirement
sweetener", we held that under section 1104(a) "[a] plan
administrator may not make affirmative material
misrepresentations to plan participants when asked about changes
to an employee pension benefits plan. Put simply, when a plan
administrator speaks, it must speak
truthfully." 994 F.2d at
135. We also concluded that a misrepresentation was "material"
if there was a "substantial likelihood that it would mislead a
reasonable employee in making an adequately informed decision
about if and when to retire."
Id. Because the content of the
communications at issue and whether such communications
constituted affirmative, material misrepresentations were
48
questions of fact, we reversed the summary judgment that had been
entered for the defendant and remanded the case for trial. Id.
Shortly thereafter, in Bixler v. Central Pennsylvania
Teamsters Health and Welfare Fund,
12 F.3d 1292 (3d Cir. 1994),
where the plaintiff claimed that her deceased husband's employer
had engaged in repeated misrepresentations that prevented her
from electing to continue medical coverage under COBRA, we
considered "to what extent a fiduciary's alleged misinformation
or failure to provide relevant information constitutes a breach
of fiduciary duty under § [11]04(a)."
Id. at 1300. Guided by,
inter alia, section 173 of the Restatement (Second) of Trusts,0
we concluded that "[the] duty to inform is a constant thread in
the relationship between beneficiary and trustee; it entails not
only a negative duty not to misinform, but also an affirmative
duty to inform when the trustee knows that silence might be
harmful."
Id. We acknowledged that "the duty recognizes the
disparity of training and knowledge that potentially exists
0
Under the Restatement (Second) of Trusts:
d. Duty in the absence of a request by
the beneficiary. Even if the trustee is
not dealing with the beneficiary or the
trustee's own account, he is under a
duty to communicate to the beneficiary
material facts affecting the interest of
the beneficiary which he knows the
beneficiary does not know and which the
beneficiary needs to know for his
protection in dealing with a third
person.
Restatement (Second) of Trusts § 173, cmt. d, cited in, Bixler v.
Central Pennsylvania Teamsters Health and Welfare Fund, 12 F.3d
1292, 1300 (3d Cir. 1994).
49
between a lay beneficiary and a trained fiduciary[]", and we
further concluded that "the fiduciary's obligations will not be
excused merely because [the beneficiary] failed to comprehend or
ask about a technical aspect of the plan." Id. Finding evidence
from which a trier of fact could have inferred that the employer
knew that the plaintiff was left with substantial unpaid medical
expenses and that she could have received reimbursement for those
expenses under the employer's plan by signing and returning the
COBRA notice her husband received, we viewed the employer's
failure to advise the plaintiff of COBRA coverage as a potential
breach of fiduciary duty. This was so even though the plaintiff
contacted the employer while the COBRA election period was open
and inquired only about the availability of death benefits.
Id.
at 1302. Thus, we held: "[I]f indeed [the employer] was acting
in a fiduciary capacity, it acted under a duty to convey complete
and accurate information that was material to [the plaintiff's]
circumstance. Her circumstance was clearly broader than her
inquiry".
Id. at 1302-03. Reversing the grant of summary
judgment for the defendant and remanding, we instructed the
district court to determine whether "`material information' may
have included more than the mere fact that the [employer] did not
offer life insurance . . . ."
Id. at 1303.
Most recently, In re Unisys Corp. Retiree Medical
Benefit "ERISA" Litigation,
57 F.3d 1255 (3d Cir. 1995), we
reaffirmed that an ERISA fiduciary has a duty under section
1104(a) to convey complete and accurate information when it
speaks to participants and beneficiaries regarding plan benefits.
50
There retired employees were informed by summary plan
descriptions and company representatives that they had lifetime
medical benefits. Nonetheless, relying on a reservation of
rights clause in the plans that gave it the right to terminate
"at any time" or for "any reason", the company announced its
decision to terminate all existing medical benefits plans and
replace them with a new plan that altered post-retirement medical
benefits in substantial measure. The retirees filed a class
action against the company, asserting, inter alia, that the
company breached its fiduciary duty under ERISA by affirmatively
misleading plan participants about the duration of their retiree
medical benefits. Noting that our prior decisions "firmly
establish that when a plan administrator affirmatively
misrepresents the terms of a plan or fails to provide information
when it knows that its failure to do so might cause harm, the
plan administrator has breached its fiduciary duty to individual
plan participants and beneficiaries", id. at 1264, we upheld the
district court's decision to permit the plaintiffs' breach of
fiduciary duty claim to proceed where the evidence established
"that the [defendant] company actively misinformed its employees
by affirmatively representing to them that their medical benefits
were guaranteed once they retired, when in fact the company knew
this was not true and that employees were making important
retirement decisions relying upon this information . . . ."
Id.
at 1266-67.0
0
In In Re Unisys Corp. Retiree Medical Benefit "ERISA"
Litigation, 57 F.3d 1255 (3d Cir. 1995), we also reaffirmed our
51
Contrary to the district court's ruling, we believe
these principles may apply in the instant case, even if the Plans
fall within the purview of 29 U.S.C. § 1104(c). By its terms,
section 1104(c) relieves fiduciaries of liability for breaches of
fiduciary duty which result from a participant's or a
beneficiary's exercise of control; it does not define nor does it
relieve fiduciaries of section 1104(a)'s duties in the first
instance. Therefore, the question we face at this juncture is
not whether section 1104(c), even assuming it applies, exempts
Unisys from section 1104(a)'s disclosure duty; it is whether the
duty as we have defined it extends to the circumstances presented
in this case. Although our prior decisions concerned allegations
of material misrepresentations relating to the terms of a plan or
the benefits to which participants or beneficiaries were
entitled, we hold that their underlying rationale applies with
the same force here. We can discern no reason why our
admonitions that "when a [fiduciary] speaks, it must speak
truthfully[]", Fisher, 994 F.2d at 135, and when it communicates
with plan participants and beneficiaries it must "convey complete
and accurate information that [is] material to [their]
circumstance[]",
Bixler, 12 F.3d at 1302-03, should not apply to
alleged material misrepresentations made by fiduciaries to
participants regarding the risks attendant to a fund investment,
where, as here, the participants were charged with directing the
conclusion in
Bixler, 12 F.3d at 1298, that under section
1132(a)(3) of ERISA, equitable relief is available to an
individual harmed by a breach of fiduciary
duty. 57 F.3d at
1266-69. The issue of relief is not raised in this appeal.
52
investment of their contributions among the Plans' various funds
and the benefits they were ultimately provided depended on the
performance of their investment choices. We also hold that in
this context, a misrepresentation is "material" if there was a
substantial likelihood that it would have misled a reasonable
participant in making an adequately informed decision about
whether to place or maintain monies in the Fixed Income and/or
Insurance Contract Funds. See Fisher, 994 F.2d at 135.
It is important to note what we have not decided. As
the uncontroverted record reveals that Unisys elected and indeed
intended to communicate with participants about the risks
accompanying investments in the Fixed Income and Insurance
Contract Funds and Executive Life's financial condition in 1990,0
we have not determined whether Unisys had a duty under section
1104(a) to communicate anything at all to the Plans' participants
about these matters in the first place. We also note that we do
not view the plaintiffs as claiming, nor do we hold, that Unisys
was obligated to give investment advice, to opine on Executive
Life's financial condition or to predict Executive Life's
eventual demise. See id. at 135 (citations omitted) ("[W]e
0
Unisys does not dispute that it made disclosures to
participants, and describes the information it disseminated as
intended to disclose the "nature of the [Plan's Executive Life
holdings] and the attendant risks" and the "developments
surrounding Executive Life . . . ." (See Memorandum in Support
of Defendants' Motion for Summary Judgment and to Strike Jury
Demand, pp. 17, 24). As in the district court, on appeal Unisys
discusses the adequacy of its disclosures only in terms of
section 1104(c).
53
hasten to add that ERISA does not impose a `duty of clairvoyance'
on fiduciaries.").
Turning our attention to the record, we find a number
of triable issues. Clearly there is evidence of several
communications made by Unisys to plan participants on an
individual, group or systematic basis regarding the nature of and
risks associated with investments in the Fixed Income and
Insurance Contract Funds and Executive Life's downturn.0 Whether
the communications constituted misrepresentations and whether
they were material under the principles we have articulated are
questions of fact that are properly left for trial. Id. at 135.
See
Curcio, 33 F.3d at 236 (holding that misleading summary plan
description coupled with misrepresentations in an audiotape and a
pamphlet supported a claim for breach of fiduciary duty). At
this point, we observe that what was stated, as well as what was
left unstated, by Unisys in its communications to plan
participants is relevant. In our view, while Unisys was not
obligated to share with participants everything it knew about
GICs and Executive Life, it was obligated to impart to
participants material information of which it had knowledge that
was sufficient to apprise the average plan participant of the
risks associated with investing in the Fixed Income and Insurance
0
For the first time on appeal Unisys asserts that the
plaintiffs "have submitted no cognizable proof of detrimental
reliance." Because Unisys did not proffer this issue in the
district court, we decline to address it. See Selected Risks
Ins. Co. v. Bruno, 718 F.2d 67, 69 (3d Cir. 1983) (federal
appellate court generally does not consider issues not raised in
the district court).
54
Contract Funds in view of the purchases of the Executive Life
GICs and the financial condition Executive Life presented in
1990. Moreover, in this regard, we do not, as Unisys urges,
distinguish between "public" and "non-public" information nor do
we limit Unisys' duty to disclose to the latter. We do not see
any reason under the circumstances for doing so, and at any rate,
Unisys included public data, (credit ratings, for example), in
its communications to plan participants.
Accordingly, we conclude that the plaintiffs raise
genuine issues of material facts on their section 1104(a) failure
to disclose claim.
IV.
Lastly, we address Unisys' assertion that section
1104(c) of the Employee Retirement Income Security Act of 1974,
("ERISA"), 29 U.S.C. § 1001 et seq. (1985 & Supp. 1995), applies
in this case.
Generally speaking, ERISA holds fiduciaries who commit
breaches of duty liable for resulting losses. 29 U.S.C. §1109.0
0
Section 1109 of the Employee Retirement Income Security
Act of 1974, ("ERISA"), 29 U.S.C. § 1001 et seq. (1985 & Supp.
1995), states in pertinent part:
§ 1109. Liability for breach of fiduciary duty
(a) Any person who is a fiduciary with
respect to a plan who breaches any of the
responsibilities, obligations, or duties
imposed upon fiduciaries by this subchapter
shall be personally liable to make good to
such plan any losses to the plan resulting
from each such breach. . . .
55
Under section 1104(c) of the Act, however, a fiduciary is not
liable for any loss or breach which results from a participant's
exercise of control over the assets in his or her individual
account. Moreover, a participant who exercises such control is
not deemed a fiduciary. Section 1104(c) states:
§ 1104. Fiduciary Breaches
(c) Control over assets by participant or beneficiary
In the case of a pension plan which
provides for individual accounts and permits
a participant or beneficiary to exercise
control over the assets in his account, if a
participant or beneficiary exercises control
over the assets in his account (as determined
under regulations of the Secretary0)--
29 U.S.C. § 1109(a).
0
Recognizing that "there may be difficulties in determining
whether the participant in fact exercises control over his
account[,]" Congress directed that "whether participants and
beneficiaries exercise independent control is to be determined
pursuant to regulations prescribed by the Secretary of Labor."
H.R. Conf. Rep. No. 1280, 93d Cong., 2nd Sess. (1974), reprinted
in 1974 U.S. Code Cong. & Admin. News 5038, 5086.
The Secretary of Labor issued a final regulation for 29
U.S.C. §1104(c) in October, 1992. 29 C.F.R. § 2550.404c-1. The
regulation sets forth in considerable detail the "kinds of plans
that are 'ERISA section [1104(c)] plans,' the circumstances in
which a participant or beneficiary is considered to have
exercised independent control over the assets in his account as
contemplated by section [1104(c)], and the consequences of a
participant's or beneficiary's exercise of control." Id.
§2550.404c-1(a).
Briefly, under the regulation, a plan must inform
participants or beneficiaries that the plan is intended to
constitute a plan described in section 1104(c) of ERISA and Title
29 of the Code of Federal Regulations and that "the fiduciaries
of the plan may be relieved of liability for any losses which are
the direct and necessary result of investment instructions given
by such participant or beneficiary."
Id. § 2550.404c-
1(b)(2)(1)(i). The plan must also allow participants the
opportunity to choose from a broad range of investment
56
(1) such participant or
beneficiary shall not be deemed to
be a fiduciary by reason of such
exercise, and
(2) no person who is
otherwise a fiduciary shall be
liable under this part for any
loss, or by reason of any breach,
which results from such
participant's or beneficiary's
exercise of control.
29 U.S.C. § 1104(c) (footnote added).
Finding that the Plans gave the plaintiffs the
authority to determine into which Funds their respective
contributions were directed and that Unisys advised them of the
"non-guaranteed" nature of the investments in the Fixed Income
and Insurance Contract Funds, the district court held that the
plaintiffs had "control" over their assets under section 1104(c)
and that, therefore, Unisys was freed from section 1104(a)'s
disclosure duties. Because the court concluded that Unisys was
entitled to summary judgment on the plaintiffs' breach of
fiduciary duty claims, it did not reach Unisys' assertion that
alternatives, give investment instruction with appropriate
frequency, diversify investments, and obtain sufficient
information to make informed investment decisions. Id.
§2250.404c-1(a)-(c).
Generally, the regulation "is effective with respect to
transactions occurring on or after the first day of the second
plan year beginning on or after October 13, 1992."
Id.
§2250.404c-1(g)(1). Transactions occurring before this date are
governed by section 1104(c) of the Act without regard to the
regulation.
Id. § 2250.404c-1(g)(3).
As the regulation was not in effect when the
transactions at issue occurred, it does not apply or guide our
analysis in this case.
57
section 1104(c) applies to relieve it of liability for the
plaintiffs' alleged losses. We have already determined that the
court erred in granting summary judgment to Unisys on the
plaintiffs' breach of fiduciary duty claims and in using section
1104(c) to excuse Unisys from the duty to inform that ERISA
imposes upon fiduciaries. We must now determine whether the
district court's decision to grant Unisys summary judgment should
nonetheless be affirmed because Unisys urges that section 1104(c)
provides it with a complete defense to the plaintiffs' claims.
Our task in interpreting section 1104(c) and applying
it here is, of course, to effectuate Congress' intent. Negonsott
v. Samuels, ___U.S.___, 113 S. Ct. 1119, 1122-23 (1993). As with
any inquiry of statutory construction, we start with the text of
the statute, Pension Benefit Guar. Corp. v. White Consolidated
Indus., Inc.,
998 F.2d 1192, 1198 (3d Cir. 1993), cert. denied,
___ U.S. ___,
114 S. Ct. 687 (1994); "where [Congress'] will has
been expressed in reasonably plain terms, that language must
ordinarily be regarded as conclusive." Griffin v. Oceanic
Contractors, Inc.,
458 U.S. 564, 570 (1982). If the statutory
language is unclear, we then look to the Act's legislative
history. Blum v. Stenson,
465 U.S. 886, 896 (1984).
It is Unisys' position that even if it failed to
satisfy ERISA's duties of prudence and diversification in the
first instance by purchasing the Executive Life GICs for the
Plans, the losses allegedly sustained in this case resulted from
the "control" each plaintiff as a plan participant exercised --
the decision to invest in Executive Life by making an informed
58
choice to contribute to and maintain assets in the Fixed Income
and Insurance Contract Funds. The plaintiffs' control, according
to Unisys, emanated from two sources: the information Unisys
distributed to plan participants regarding the personal
responsibility they assumed for investment decisions, the nature
of investments in the Fixed Income and Insurance Contract Funds
in general and the Funds' holdings in Executive Life in
particular,0 as well as the Plans' contribution and transfer
terms, which allowed each participant the freedom to allocate his
or her assets among the various investment funds as he or she saw
fit.
Given Unisys' position, the first question we must
answer regarding section 1104(c) is whether the statute allows a
fiduciary, who is shown to have committed a breach of duty in
making an investment decision, to argue that despite the breach,
it may not be held liable because the alleged loss resulted from
a participant's exercise of control. In light of section
1104(c)'s plain language, we believe that it does. There is
0
The information which Unisys contends is a source of
the plaintiffs' control includes representations that the
plaintiffs allege were materially misleading in violation of
section 1104(a)'s fiduciary duty to disclose. Obviously, given
the role these representations play in Unisys' section 1104(c)
defense, Unisys cannot claim that section 1104(c) would relieve
it from liability in the event that the representations are found
to constitute breaches of ERISA's disclosure duties. It is also
obvious that in the event these representations are found to have
materially misled the plaintiffs, Unisys' theory of control under
section 1104(c) would fail. Indeed, the parties do not dispute
that accurate and complete information regarding the investments
Unisys made for Fixed Income and Insurance Contract Funds is
essential to the section 1104(c) control Unisys contends the
plaintiffs exercised in this case.
59
nothing in section 1104(c) which suggests that a breach on the
part of a fiduciary bars it from asserting section 1104(c)'s
application. On the contrary, the statute's unqualified
instruction that a fiduciary is excused from liability for "any
loss" which "results from [a] participant's or [a] beneficiary's
exercise of control"0 clearly indicates that a fiduciary may call
upon section 1104(c)'s protection where a causal nexus between a
participant's or a beneficiary's exercise of control and the
claimed loss is demonstrated. This requisite causal connection
is, in our view, established with proof that a participant's or a
beneficiary's control was a cause-in-fact, as well as a
substantial contributing factor in bringing about the loss
incurred. See Willett v. Blue Cross and Blue Shield of Alabama,
953 F.2d 1335, 1343 (11th Cir. 1992) ("Section [1109] of ERISA
establishes that an action exists to recover losses that
`resulted' from the breach of fiduciary duty; thus the statute
does require that the breach of the fiduciary duty be the
proximate cause of the losses claimed . . . ."); Brandt v.
Grounds, 687 F.2d 895, 898 (7th Cir. 1982) (Under 29 U.S.C.
§1109, where "a fiduciary . . . who . . . breaches . . . shall be
personally liable to make good . . . any losses resulting from
each such breach", a causal connection is required between the
breach of the fiduciary duty and the losses alleged.).
0
In this regard, section 1104(c) operates in alternative
circumstances, excusing a fiduciary from liability for "any loss"
or "by reason of any breach" which "results from [a]
participant's or [a] beneficiary's exercise of control." 29
U.S.C. § 1104(c).
60
Section 1104(c)'s text, however, neither defines nor
clarifies its central element -- the "control" a pension plan may
permit a participant or a beneficiary to exercise. 29 U.S.C.
§1104(c). Accordingly, we look to ERISA's legislative history
for assistance. From a House Conference Report, we learn that
section 1104(c) established a "special rule" for plans which
allow a participant or a beneficiary "independent control" over
individual account assets:
Certain individual account plans. [A]
special rule is provided for individual
account plans where the participant is
permitted to, and in fact does, exercise
independent control over the assets in his
individual account. In this case, the
individual is not to be regarded as a
fiduciary and other persons who are
fiduciaries with respect to the plan are not
to be liable for any loss that results from
the exercise and control by the participant
or beneficiary.
H.R. Conf. Rep. No. 1280, reprinted in 1974 U.S. Code Cong. &
Admin. News at 5085-86.
From that same Report, we further learn that Congress
conceptualized control in terms of authority on the part of a
participant or a beneficiary to issue investment instructions to
a fiduciary:
Therefore, if the participant instructs the
plan trustee to invest the full balance of
his account in, e.g., a single stock, the
trustee is not be liable for any loss because
of a failure to diversify or because the
investment does not meet the prudent man
standards. However, the investment must not
contradict the terms of the plan, and if the
plan on its face prohibits such investments,
61
the trustee could not follow the instructions
and avoid liability.
Id. at 5086.
Finally, the Report tells us that a section 1104(c)
plan must offer a "broad range of investments". Id.0
Before we turn to section 1104(c)'s application to the evidence
in this case, we have several observations to make. First, our
analysis of the statute and Congress' statements of legislative
intent lead us to believe that while all plans which qualify
under section 1104(c) have certain elements in common, each
section 1104(c) plan is unique, depending on the control a plan
permits participants and beneficiaries to exercise by way of the
investment instructions they may give. Second, because section
1104(c) speaks in terms of a plan which permits control to a
participant or a beneficiary, a participant's or a beneficiary's
0
In accordance with Congress' direction that we consult
the common law of trusts for additional insight into ERISA's
provisions, we note that a trustee may under certain
circumstances be discharged from liability for losses that arise
out of a particular transaction which represents a breach of
trust. According to sections 216, 217 and 218 of the Restatement
(Second) of Trusts respectively, where a beneficiary consents to,
subsequently affirms or releases a trustee's breach of trust, he
cannot thereafter hold the trustee liable for losses, unless at
the time of consent, affirmance or release, the beneficiary was
incompetent, not informed by the trustee of his rights and the
material facts, subjected to the trustee's improper influence or
made party by an interested trustee to an unfair or unreasonable
bargain. Restatement (Second) of Trusts, §§ 216, 217, 218
(1959). In addition, under section 219 of the Restatement, a
beneficiary may be barred from holding a trustee liable for
losses by laches. Id. § 219.
We have not found, however, a common law trust
principle that is analogous to the scheme that Congress
established in 29 U.S.C. § 1104(c) as we understand it.
62
control under section 1104(c) stems from a plan's specific
provisions, not from elements which lie outside the plan's
structure and which may arguably amount to control in connection
with a single transaction. Finally, section 1104(c) is akin to
an exemption from or a defense to ERISA's general rule, relieving
fiduciaries in the appropriate circumstances of the liability to
which they would otherwise be exposed under 29 U.S.C. § 1109.
Accordingly, a fiduciary which seeks section 1104(c)'s protection
bears the burden of showing its application. See Lowen v. Tower
Asset Management, Inc., 829 F.2d 1209, 1215 (2d Cir. 1987)
(holding that the defendant is in the best position to prove and
should bear the burden of establishing its entitlement to an
exemption under 29 U.S.C. §1108 from 29 U.S.C. §1106(b), ERISA's
prohibited transactions provision); Donovan v. Cunningham,
716 F.
2d 1455, 1467-68 (5th Cir. 1983), cert. denied,
467 U.S. 1251
(1984) (ESOP fiduciaries charged with violations of section
1104(a)'s duty of prudence bear the burden of proving the
"statutory defense" of adequate consideration under 29 U.S.C.
§1108(e)).
Having carefully reviewed the record with this
background in mind, we conclude that Unisys is not entitled to
summary judgment on its section 1104(c) defense. The record is
inadequately developed as to critical facts and demonstrates the
existence of disputed material facts as to whether the Plans fall
within the statute's coverage.
Starting with Congress' mandate that a section 1104(c)
plan provide "a broad range of investments", we look to see
63
whether the uncontroverted evidence Unisys submitted establishes
that the Plans gave participants a wide array of investments with
materially different risk and return characteristics. Given
Unisys' theory of control, we also look to see whether the
evidence establishes that a participant could remove his or her
assets from, in this instance, the Fixed Income or Insurance
Contract Funds and place them in a comparable investment vehicle.
In our view, if the Plans did not offer an acceptable alternative
to GIC investments, a participant did not have the freedom and,
in turn, the control to decide how his or her assets were
ultimately invested. In this regard, we find the evidence
lacking. The record includes documents which give a general
description of the six funds the Plans offered; it does not,
however, include evidence sufficient to measure the breadth of
actual plan investments or assess all of the investment
alternatives available to participants.
As stated, Unisys' contention that the plaintiffs were
permitted control under section 1104(c) and indeed exercised it
is premised, in part, on the information Unisys allegedly
disseminated to participants regarding "his or her investment
options[,] [his or her] obligation to manage his or her own
investments[,] the risks associated with th[e] election to invest
in GICs[,] and developments surrounding Executive Life. . . ."
(See Defendants' Memorandum of Law in Support of their Motion for
Summary Judgment and to Strike Jury Demand, pp.15-17). We agree
that information, both general and relating specifically to
Executive Life, is an essential element of Unisys' section
64
1104(c) theory that the plaintiffs themselves ultimately
controlled whether their respective assets were invested in
Executive Life GICs, even though Unisys chose the investment in
the first place. For Unisys to prevail under section 1104(c),
however, it must establish that the Plans provided information
sufficient for the average participant to understand and assess:
the control the Plans permitted a participant to exercise and the
financial consequences he or she assumed by exercising that
control; the rights that ERISA provided to participants and the
obligations that the Act imposed upon fiduciaries; the Plans'
terms and operating procedures; the alternative funds the Plans
offered; the investments in which assets in each fund were
placed; the financial condition and performance of the
investments; and developments which materially affected the
financial status of the investments.
Based on our careful review of the record, we find that
Unisys has not satisfied its burden on summary judgment to show
that this necessary information was provided to the Plans'
participants. Significantly, the written documents which
establish and maintain the Plans are conspicuously missing from
the record. Thus, we cannot determine what information the Plans
made available to participants as a matter of course. If Unisys'
dissemination of the information it relies upon to assert section
1104(c)'s application in this case was not performed pursuant to
a plan term but was merely situational, an isolated response to a
crisis in one investment, then the control that Unisys contends
the plaintiffs had was not permitted by the Plans as section
65
1104(c) requires and the statute's relief would be unavailable.
As for the disclosures that Unisys included in the record,
whether they communicated to the average participant the
information we have decided is critical to Unisys' section
1104(c) defense are questions of fact properly left to the
factfinder to decide at trial.
Moving to the second component of Unisys' position
regarding the plaintiffs' control -- the Plans' contribution and
transfer terms -- we agree with Unisys that the evidence is
uncontroverted that for all intents and purposes, a participant's
ability to make initial contributions to the Plans' various
investment funds was unfettered. The transfer restrictions that
the Plans imposed upon participants, however, are problematic.
The record reveals that the Plans restricted transfers which
involved all of the GIC Funds and the Short-Term Investment Fund
in order to obtain higher interest rates from GIC issuers.0 While
we have no quarrel with the reason for the transfer restrictions
or with the notion that the frequency with which a participant
issues investment instructions may be restricted without
necessarily eliminating the control that section 1104(c)
contemplates, we believe that a reasonable factfinder could
conclude that the duration and pervasiveness of the restrictions
imposed upon participants by the Plans so significantly limited
0
Charles Service, a member of Unisys Corporation's Capital
Management Trust Investment Department explained: "These
restrictions allow the insurance companies to forecast their cash
flows with greater certainty, thereby reducing their risk. With
their risk reduced, the insurance companies which bid for our
GICs can offer significantly higher yields."
66
their ability to decide in which Funds their respective assets
were allocated, that the restrictions are antithetical to the
concept of "independent control" that Congress enacted in section
1104(c). Moreover, assuming that control existed at the Plans'
inception, the factfinder could conclude that when Unisys agreed
on October 17, 1990, to give Executive Life the right under
certain circumstances "to not honor employee requests for
withdrawal" in exchange for Executive Life's consent to a
reduction in the waiting period for asset transfers between "non-
competing" funds and the GIC Funds, control within the meaning of
section 1104(c) was no longer available to the participants under
the Plans from that point forward.
Thus, we conclude that Unisys is not entitled to
summary judgment on its section 1104(c) defense to the
plaintiffs' breach of fiduciary duty claims.
Finally, we observe that in the event the plaintiffs
prove that Unisys breached section 1104(a)'s duty of prudence
and/or duty of diversification and Unisys proves that section
1104(c) applies as a defense, the losses for which Unisys would
not be liable are those which, as to each plaintiff, occurred
after he or she, free under the Plans' transfer terms to place
the assets in any of the Plans' investment vehicles, exercised
control by making the informed decision to contribute to and/or
maintain assets in the Fixed Income Fund or the Insurance
Contract Fund.
V.
67
For the foregoing reasons, we will vacate the district
court's order of January 25, 1995 granting summary judgment to
the defendants on Count I of the second amended consolidated
class action complaint and remand for further proceedings on the
plaintiffs' breach of fiduciary claims under section 1104(a) of
the Employee Retirement Income Security Act of 1974, 29 U.S.C.
§1001 et seq. (1985 & Supp. 1995).
68
