The essence of fiduciary duties run counter to the arms-length relationships navigated by contracting parties, and so on this occasion, the relinquishing of trustee duties by a regulated bank proved a reversal of fortune for an innocent employee.
While operating his construction company, the sole owner established a Profit Sharing 401(k) Plan for the benefit of his numerous employees. Almost six years later, the company filed for bankruptcy under Chapter 7 of the Bankruptcy Code, after which one of his employees requested payment for the money he had invested during the life of the plan.
With an estimated $14000 owed, the employer agreed to settle the matter with a payment of $21000 to cover court fees incurred while pursuing the debt on grounds of a fiduciary breach. Unfortunately, the employer paid only $18500, after which he escaped jurisdiction and was never seen again.This left the employee with no option other than to claim the remaining $3000 from the now appellant bank, who in accordance with the terms of the plan, was an acting trustee under the Employee Retirement Income Security Act 1974 (ERISA).
At the point of litigation, it became clear that while serving as a trustee, the bank was under duty to inform where possible, all plan beneficiaries of its decision to rescind its appointment, as expressed under art.15.6 of the plan, which allowed the bank to resign by written notice, after which any outstanding funds would be transferred to a successor trustee; however should one not be available, the administrator of the plan would automatically occupy that position.
Unbeknown to the employee, the bank had been struggling to communicate with the employer for a number of months, and after resigning as trustees with the knowledge that the trustee-administrator relationship had broken down, and that the company was now also in financial trouble, the bank had handed $53000 of plan funds to the employer without notifying the beneficiaries of their decision. It was at this point that the employer converted the assets for his own personal use, sometime before part-settling with the employee and disappearing.
When heard in the District Court, the judge awarded in favour of the claimant employee, whereupon the bank appealed to the Court of Appeals, who investigated further, the nature of the plan and associated case precedents. Here it was agreed that under § 106 of the Restatement (Second) of Trusts, a trustee was able to resign in accordance with a trust with express permission of the beneficiaries or consent of the court, yet at no point had the bank alerted the employee(s) of either the decision to resign, or the uncertain future of the employer.
It was also noted that under s.11.4 of the plan, that the bank could be could liable:
“[T]o the extent it is judicially determined that the Trustee/Custodian has failed to exercise the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims.”
While the bank argued that under such circumstances, legal remedy would be sustainable only as a class action involving all the beneficiaries, the Court held that in Varity Corp v Howe, individual remedy was viable under ERISA § 502(a)(3), which provides that equitable relief is granted to individuals in order to “redress any act or practice which violates any provision of this title”. The Court also noted that § 173 of the Restatement (Second) of Trusts provides that:
“[The Trustee] 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.”
It was for these salient reasons that the Court supported the District Court ruling and awarded in favour of the employee for the remaining balance of the plan monies, while adding that had the bank been in a position to hand over money of its own to the employer, things may have taken quite a different turn, especially when considering the vulnerability of the beneficiaries.
“This 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.”
“[A]llowing a fiduciary to resign without notice to the plan beneficiaries in a situation in which the fiduciary has information indicating that the beneficiaries may need protection because of the change of trustee would undermine the goals of ERISA.”