Glaziers and Glass v. Newbridge Securities , 93 F.3d 1171 ( 1996 )

Opinions of the United
1996 Decisions States Court of Appeals
for the Third Circuit
8-28-1996
Glaziers and Glass v. Newbridge Securities
Precedential or Non-Precedential:
Docket 95-1175,95-1215,95-1283
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 95-1175, 95-1215, 95-1283
GLAZIERS AND GLASSWORKERS UNION LOCAL NO. 252 ANNUITY FUND;
GLAZIERS AND GLASSWORKERS UNION LOCAL NO. 252 VACATION FUND;
GLAZIERS AND GLASSWORKERS UNION LOCAL NO. 252 PENSION FUND;
GLAZIERS AND GLASSWORKERS UNION LOCAL NO. 252 HEALTH FUND;
GLAZIERS AND GLASSWORKERS UNION LOCAL NO. 252 HEALTH AND
WELFARE FUND; GLAZIERS AND GLASSWORKERS UNION LOCAL NO. 252
APPRENTICE FUND; SEAN McGARVEY, in his fiduciary capacity; and
MARTIN ROSENBERG, in his fiduciary capacity,
Appellants
v.
NEWBRIDGE SECURITIES, INC.; JANNEY MONTGOMERY SCOTT, INC.;
RICHARD L. SOCKET; JAMES A. WILLIAMS; JAMES C. ARSENAULT;
JOSEPH T. FALOTICO; EDWARD J. BERKOWITZ; LARRY R. GOLBESKI;
JOSEPH E. DAVIS; BERNARD GELENBERG; JOSEPH T. ASHDALE;
BARRY SHORE; ANTHONY D'ANGELO; JUNGERS, O'CONNEL & BACHELER,
P.C.; JOHN P. JUNGERS, EQUIBANK, INC. (as successor in interest
to LIBERTY SAVINGS BANK); JOHN DOES I-X; AND PROVIDENT NATIONAL
BANK
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
(Civil No. 90-CV-8101)
Argued OCTOBER 26, 1995
Before: STAPLETON, McKEE, Circuit Judges,
and GIBSON, Senior Circuit Judge
(Opinion filed: August 28, l996)
IRA B. SILVERSTEIN, ESQ. (Argued)
LISA B. CARNEY, ESQ.
Fox, Rothschild, O'Brien & Frankel
2000 Market Street, Tenth Floor
Philadelphia, PA 19103
Leslie M. Gerstein, Esq.
One Penn Center at Suburban Station
1617 J.F.K. Boulevard Ste 1100
Philadelphia, PA 19103-1811
Attorneys for Appellants
ELIZABETH H. FAY, ESQ. (Argued)
KAREN P. POHLMANN, ESQ.
Morgan, Lewis & Bockius
2000 One Logan Square
Philadelphia, PA 19103
Attorneys for Appellees
OPINION OF THE COURT
McKEE, Circuit Judge
We are called upon to determine the scope of the fiduciary
duty owed by a broker-dealer of securities under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), 29
U.S.C. §1104(a) in the rather narrow circumstances presented by
this appeal. Various employee benefit funds sued Janney
Montgomery Scott, Inc. ("Janney") alleging that Janney's failure
to disclose information about one of Janney's employees was a
breach of Janney's fiduciary duty under Section 404(a) of ERISA,
and under federal and state common law. The district court
assumed for purposes of summary judgment that Janney was a
"functional" or "limited purpose" fiduciary pursuant to Section
3(21)(A)(ii) of ERISA, 29 U.S.C. § 1002(21)(A)(ii), but held that
any liability that Janney had in such capacity extended only to
its investment advice. Since Janney's alleged breach had nothing
to do with investment advice, the district court granted summary
judgment in favor of Janney and against the Funds on each count
of the complaint. See Glaziers and Glassworkers Union Local 252
Annuity Fund, et al. v. Newbridge Securities, Inc., et al., 877
F.Supp. 948, 953-954 (E.D.Pa. 1995).
For the reasons that follow we will affirm the grant of
summary judgment on the federal common law claim, but reverse the
grant of summary judgment on the ERISA claim, and the state
common law claim.
I. Factual Background
The plaintiffs are numerous funds maintained by Local 252 of
the Glaziers and Glassworkers Union (the Annuity Fund, Pension
Fund, Health and Welfare Fund, Vacation Fund, and Apprentice
Fund), and two individual fiduciaries of those funds - Sean
McGarvey and Martin Rosenberg (collectively, the "Funds"). Each
of the funds are related Employee Benefit Plans managed by a
board of trustees. Historically, the Funds limited the majority
of their investments to federally-insured certificates of deposit
issued by Philadelphia area banks that the Funds' trustees were
familiar with.
The seeds of the instant suit were sown in 1982 when
Richard Socket, the Funds' Administrator, met a Janney employee
named Michael Lloyd. Socket introduced Lloyd to the Funds'
trustees and recommended that the trustees consider and accept
Lloyd's advice on new investments. Socket was particularly
interested in CDs issued by non-Philadelphia area banks with
which Lloyd was familiar and which offered rates of interest
superior to those offered by Philadelphia area banks.
At some point between 1982 and June 1985, Lloyd became a
Vice President at Janney. He also became increasingly involved
with the Funds and their investments. During that period, the
Funds, on Lloyd's advice, purchased a total of 73 CDs and other
investments through Janney. The total value of these investments
was in excess of $3,000,000.
The Funds contend that as time went on Lloyd routinely
attended meetings of the Funds' trustees, offered advice
concerning overall investment strategy, and came to be referred
to as the Funds' "investment consultant." The Funds also allege
that Lloyd would routinely call Socket and recommend a particular
investment as being particularly well-suited to the Funds'
specific investment strategy. According to Socket, it was rare
that the Funds did not accept that advice.
At a meeting held on June 12, 1984 the trustees passed a
motion appointing Lloyd "the financial consultant to all funds."
See Brief of Appellee at 6. His relationship with the Funds can
be gleaned in part from the minutes of the trustees' meeting of
August 28, 1984, which read: "an investment decision may be made
by the [Funds'] administrator with the approval of one trustee
from each side [Employer and Union], to carry out recommendations
of investment consultant, Michael Lloyd." This relationship
continued for sometime to the apparent satisfaction of all
concerned.
However, the plot began to thicken in early June of 1985
when Janney began investigating Lloyd because of suspected
improprieties in Lloyd's personal investments. Lloyd had failed
to make a payment to a partnership in which he was a limited
partner, and Janney had come to suspect that he had tried to
cover-up the late payment by tendering a cashier's check that had
been fraudulently altered to create the appearance that it had
been timely presented. Lloyd failed to explain what had actually
occurred, but he did deny any wrongdoing. Despite Lloyd's
denial, Janney conducted an internal investigation. Pending the
completion of the investigation, and prior to a scheduled meeting
with Lloyd's attorney, Janney informed Lloyd that he was
suspended. Thereafter, on June 17, 1985, Janney informed Lloyd's
attorney of its intent to discharge Lloyd. The following
morning, June 18, 1985, Lloyd resigned from Janney.
Each of the parties to this dispute put their own "spin" on
the circumstances leading to Lloyd's resignation. The Funds
argue that Lloyd continued to obfuscate and prevaricate
throughout Janney's investigation thereby causing Janney to
discharge him. Janney, however, argues that Lloyd was forced to
resign because he was unable to conform to the very high standard
of conduct demanded of Janney employees.
In any event, when Lloyd left, Janney reported his departure
to the National Association of Securities Dealers ("NASD") as
required by the rules of that association. Janney completed the
required "Uniform Termination Notice for Securities Industry
Registration" form, and sent it to the NASD. Question No. 14 on
that form asks:
Is there reason to believe that the
individual while employed or associated with
your firm, may have violated any provision of
any securities law or regulation or any
agreement with or rule of any governmental
agency or self-regulatory body, or engaged in
any conduct which may be inconsistent with
just and equitable principles of trade?
(Joint Appendix at 151a). Janney answered "Yes," and included a
detailed narrative explaining that answer. In relevant part,
Janney's explanation included the following:
In November 1983, Mr. Lloyd purchased one
unit of Austin Investors, L.P., a real estate
limited partnership, at a cost of $39,500.
The terms of the partnership agreement called
for annual contributions to be remitted
directly to Ascott Investment Corp. During
the month of February 1985 our Financial
Services Department became aware that the
payment due February 1, 1985 had not been
received by the Partnership. It is standard
procedure to be notified by them in the event
of apparent late payment by any of Janney's
customers. Enclosed are a series of letters
from Ascott to Mr. Lloyd with respect to the
past due payments.
Upon learning of this, personnel of that
department asked Mr. Lloyd for an
explanation. He reported to them that timely
payment had in fact been remitted by him. In
an effort to resolve any question, Mr. Lloyd
was asked to furnish some evidence of that
payment. In late May, he presented to Firm
personnel a copy of the face of a Cashier's
Check in the amount of $9,980. . . .This
showed a date of "2-21-85" and the payee as
Ascott Investment Corp. In consideration of
this, our Firm contacted Ascott, advised them
of the check copy, and asked that they review
their records. It was subsequently reported
by them that they were unable to find any
record of this check. Mr. Lloyd was asked to
obtain a copy of the reverse side of that
check which should have shown an endorsement
and thus establish whether Ascott had in fact
cashed the check. It was also suggested that
he issue a stop payment on the February
check. On June 6, 1985 Mr. Lloyd did purchase
a Cashier's Check for $9,980 which was
delivered to Austin to cover the payment due
for February.
Our firm then made inquiries at Fidelity
Bank, where the check had been drawn. . .
After a search of their records, they
notified us that they could find no evidence
of a check dated February 21, 1985. However,
based on their further review they identified
that February check as one which was actually
drawn May 21, 1985.
In light of these disclosures it appeared
that the May 21, 1985 check and the February
21, 1985 check were one and the same.
Moreover, there was an inference that the May
21 date may have been altered to represent a
"2-21-85" date on the copy presented as proof
of payment.
(Joint Appendix at 152a-153a).
Janney did not inform the Funds of the circumstances
surrounding Lloyd's departure. Instead, Janney assigned a new
account executive, Mitchell B. Pinheiro, to Lloyd's accounts,
including the Funds' accounts. On June 20, 1985, Pinheiro wrote
a letter of introduction to Socket in which Pinheiro informed the
Funds only that Lloyd had resigned as a Janney representative.
The NASD conducted its own investigation of Lloyd. That
investigation resulted only in the NASD issuing a letter of
caution to Lloyd in which it reminded him that he was obliged to
ensure that his own personal securities transactions were paid in
a timely fashion.
Meanwhile, Lloyd had established Lloyd Securities, Inc.
("LSI"), upon leaving Janney. Six days after Lloyd left Janney,
the Funds decided to follow him and to transfer their accounts to
Lloyd's new firm. Once Lloyd obtained the necessary regulatory
approvals he asked the Funds to transfer their accounts from
Janney to LSI. On June 24, 1985, the Funds' trustees voted to
transfer the Funds' accounts from Janney to Lloyd and his new
firm. However, the transfer was not made until sometime in
September of 1985 when Janney transferred the Funds' accounts to
Provident National Bank (as custodian) pending final transfer to
Lloyd and LSI, in accordance with instructions from Socket.
Janney does not suggest that it did not know that the accounts
were to be transferred to LSI and Lloyd when it transferred the
accounts to Provident pursuant to Socket's instructions. Janney
never told the Funds of the circumstances surrounding Lloyd's
departure from Janney.
After the Funds transferred their accounts to LSI, the Funds
expanded the type and scope of investments which they permitted
Lloyd to make on their behalf. The relationship with Lloyd
continued until March, 1990, when the Funds learned that Lloyd
and LSI were under investigation by the SEC and, concerned over
the handling of their investments, finally terminated their
relationship with Lloyd. However, by that time, Lloyd had stolen
Fund assets in excess of $500,000 and had wasted additional
assets in excess of $2,000,000 in what the Funds refer to as
"bizarre and worthless investments."
Eventually, Lloyd pled guilty to numerous criminal offenses
based upon his fraudulent conduct. In his guilty plea, he
admitted stealing money from customers, including the Funds, and
covering the thefts with forged and bogus documents. He was
sentenced to a prison term and the SEC and other regulatory
authorities shut down LSI and its related companies.
The Funds contend that Janney did not offer the information
about the circumstances of Lloyd's departure out of fear of being
sued by Lloyd. Janney denies this and explains that it did not
inform the Funds of the circumstances of Lloyd's departure
because it had only unproven suspicions that Lloyd never
admitted. Janney thus argues that it "acted prudently in not
volunteering to customers unproven allegations and innuendo,
which might well have been false." Brief of Janney at 8.
II. Procedural History.
The Funds filed a three count complaint against Janney
alleging breach of fiduciary obligations under Section 404(a) of
ERISA (Count I), and breach of fiduciary duties under both
federal and state common law (Counts II and III respectively).
The Funds claimed that Janney was a fiduciary under ERISA and
that Janney breached its fiduciary duty by failing to disclose
the circumstances surrounding Lloyd's departure. The Funds
asserted that had they known about Lloyd's conduct, they would
not have transferred their accounts to Lloyd and LSI, and
incurred the losses that purportedly resulted. After the
pleadings were closed and discovery completed, the Funds and
Janney filed cross-motions for summary judgment, and the district
court granted summary judgment for Janney. In rejecting the
Funds' theory, the district court stated:
We do not today address the issue of
whether Janney is an ERISA fiduciary because
of our conclusion that the circumstances
complained of fall outside the scope of any
fiduciary relationship that may have existed
between Janney and the Funds. Thus, any
fiduciary obligation did not encompass a duty
to inform the Funds of the circumstances
regarding Mr. Lloyd.
Glaziers and Glassworkers Union Local 252 Annuity Fund, et al. v.
Newbridge Securities, Inc., et al, 877 F.Supp. 948, 951 (E.D.Pa.
1995). The court reasoned that any exposure Janney may have had
because of Lloyd's investment advice to the Funds, was limited to
"the substance of the advice provided." Id. at 953.
The district court granted summary judgment to Janney on
Count II (the federal common law claim) because it concluded that
the regulatory scheme of ERISA left no room for the application
of federal common law. Id. at 954. Finally, since any claim the
Funds may have had under state common law was pre-empted by
ERISA, the district court granted Janney's motion for summary
judgment on Count III as well. Id.III. Discussion
A. Standard of Review.
Summary judgment is proper only where there is no genuine
issue of material fact for the fact-finder to decide.
Fed.R.Civ.P. 56(c). In order to demonstrate the existence of a
genuine issue of material fact, it is the burden of the nonmovant
to supply sufficient evidence, not mere allegations, in support
of its position for a reasonable jury to find for the nonmovant.
Coolspring Stone Supply, Inc. v. American States Life Ins. Co.,
10 F.3d 144, 148 (3d Cir. 1993). Our standard of review on an
appeal from a grant of summary judgment is plenary. Id. at 146.
We apply the same test the district court should have used
initially, Public Interest Research Group of New Jersey v. Powell
Dufftyn Terminals, Inc., 913 F.2d 64, 76 (3d Cir. 1990), cert.
denied, 498 U.S. 1109 (1991), and review the facts in the light
most favorable to the party against whom summary judgment was
entered. Coolspring Stone Supply, Inc. v. American States Life
Ins. Co., 10 F.3d at 146.
B. Janney's Failure to Disclose. As noted above, the
district court assumed that the Funds
could establish that Janney was a fiduciary but held that since
it was undisputed that any loss did not result from Janney's
investment advice, the Funds could not recover. The Court
reasoned:
Since it undisputed that Janney was never a
named fiduciary, its liability must be
limited to the function it performed; . . .
The Funds' claims are based not on the
substance of the advice it received from
Janney, but on their contention that subsumed
under the rubric of 'investment advice' is
the right to be informed as to the nature of
the individual providing that advice.
* * *
. . . we must conclude that events
complained of fall outside the scope of the
fiduciary duty Janney may have owed to the
Funds, and that Janney was under no duty to
relate to the Funds the information
concerning Mr. Lloyd.
877 F.Supp. at 953.
Accordingly, we begin with a discussion of the scope of any
fiduciary obligation that may have been owed to the Funds.
However, because the scope of duty owed is, to some extent,
dependent upon the type of fiduciary status one has, we must
briefly discuss how Janney may have become a fiduciary. In doing
so, however, we do not intend to suggest that Janney was or was
not a fiduciary, or that any loss the Funds sustained was caused
by anything Janney did or failed to do. The district court made
no finding on those issues because no finding was necessary given
its reasoning. On remand, the district court will be able to
properly develop a record and determine if Janney's relationship
to the Funds was that of fiduciary, and to what extent the Funds
can establish causation.
There are three ways to acquire fiduciary status under
ERISA: (1) being named as the fiduciary in the instrument
establishing the employee benefit plan, 29 U.S.C. § 1102(a)(2);
(2) being named as a fiduciary pursuant to a procedure specified
in the plan instrument, e.g., being appointed an investment
manager who has fiduciary duties toward the plan, 29 U.S.C. §
1102(a)(2); 29 U.S.C. § 1002(38); and (3) being a fiduciary under
the provisions of 29 U.S.C. § 1002(21)(A), which provides that a
person is a fiduciary
with respect to a plan to the extent (i) he
exercises any discretionary authority or
discretionary control respecting management
of such plan or exercises any authority or
control respecting management or disposition
of assets, (ii) he renders investment advice
for a fee or other compensation, direct or
indirect, with respect to any moneys or other
property of such plan, or has any authority
or responsibility to do so, or (iii) he has
any discretionary authority or discretionary
responsibility in the administration of such
plan.
29 U.S.C. § 1002(21)(A).
The district court correctly referred to regulations of the
Department of Labor that clarify "rendering investment advice"
under ERISA. The regulation provides:
A person shall be deemed to be rendering
"investment advice" to an employee benefit
plan, within the meaning of section
3(21)(A)(ii) of [ERISA][i.e., 29 U.S.C.
1002(21)(A)(ii)] and this paragraph, only if:
(I) Such person renders advice to the plan as
to the value of securities or other property,
or makes recommendation as to the
advisability of investing in, purchasing, or
selling securities or other property; and
(ii) Such person either directly or
indirectly (e.g., through or together with
any affiliate)-
(A) Has discretionary authority or control,
whether or not pursuant to agreement,
arrangement or understanding, with respect to
purchasing or selling securities or other
property for the plan; or
(B) Renders any advice described in
paragraph (c)(1)(I) of this section on a
regular basis to the plan pursuant to a
mutual agreement, arrangement or
understanding, written or otherwise, between
such person and the plan or a fiduciary with
respect to the plan, that such services will
serve as a primary basis for investment
decisions with respect to plan assets, and
that such person will render individualized
investment advice to the plan based on the
particular needs of the plan regarding such
matters as, among other things, investment
policies or strategy, overall portfolio
composition, or diversification of plan
investments.
29 C.F.R. § 2510.3-21(c)(1).
Here, both the Funds and Janney agree that Janney could only
have become a fiduciary under the provisions of 29 U.S.C.
1002(21)(A)(ii), i.e., that Janney "render[ed] investment advice
for . . . compensation" or had "authority or responsibility to do
so." The Funds admit that Janney had no discretionary authority
with respect to "purchasing or selling securities or other
property" for the Funds and, accordingly, alternative "(A)" does
not apply. Therefore, if Janney was an ERISA fiduciary because
it rendered investment advise for a fee, it acquired this status
under alternative "(B)".
C. The Scope of Janney's Duty.
The district court relied in part upon a Department of Labor
regulation, 29 C.F.R. § 2509.75-8 (FR-16), to hold that Janney's
liability as a non-named fiduciary was limited to any investment
advice it may have rendered. That regulation provides:
"The personal liability of a fiduciary who is
not a named fiduciary is generally limited to
the fiduciary functions which he or she
performs with respect to the plan."
Janney cites Blum v. Bacon, 457 U.S. 132 (1982) in arguing that
this regulation is entitled to substantial deference. See Brief
of Janney at 20. However, that is beside the point. First, it
is not as clear as Janney suggests that the alleged breach has no
nexus to any duty it may owe. Lloyd was retained and entrusted
with substantial assets belonging to the Funds. Although his
integrity and honesty may not bear a direct relation to the
caliber of financial advice he gave, it is unrealistic to suggest
that a broker's integrity is irrelevant to how he or she will
dispose of assets of another that have been entrusted to that
broker's care, custody and control. Second, even assuming that
Janney's position in this regard has merit, this case does not
require us to choose between respect for an agency's expertise on
the one hand, and affording de novo review on the other. 29
C.F.R. § 2509.75-8 (FR-16) does not establish a universal
principle that allows for no exceptions. It merely states that
exposure of an unnamed fiduciary is "generally" limited to the
functions it performs. We must determine whether any liability of
Janney should be so restricted under these circumstances. We
conclude that, although, exceptions to this general rule may
often produce results that would be both unworkable and unfair,
this is not such a case.
Section 404(a) of ERISA defines the duty that a fiduciary
owes as follows:
a fiduciary shall discharge his duties
with respect to a plan in the interest of the
participants and beneficiaries and --
(A) for the exclusive purpose of:
(I) providing benefits to participants and
their beneficiaries; and
(ii) defraying the reasonable expenses of
administering the plan;
(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
U.S.C. § 1104(a). "Section 404(a) [29 U.S.C. § 1104] is the
touchstone for understanding the scope and object of an ERISA
fiduciary's duties." Bixler v. Central Pennsylvania Teamsters
Health & Welfare Fund, 12 F.3d 1292, 1299 (3d Cir. 1994). In
Bixler, we reiterated the following pronouncement of Justice
Brennan in Massachusetts Mutual Life Ins. Co. v. Russell, 473
U.S. 134, 153-53 (1985): "Congress intended in § 404(a) to
incorporate the fiduciary standards of trust law into ERISA, and
it is black-letter trust law that fiduciaries owe strict duties
running directly to beneficiaries in the administration and
payment of trust benefits." Bixler, 12 F.3d at 1299. Thus,
section 404(a) "although articulat[ing] a number of fiduciary
duties, is not exhaustive." Id. See also, Central States,
Southeast and Southwest Areas Pension Fund v. Central Transport,
Inc., 472 U.S. 559, 570 (1985) ("Congress relied upon the common
law of trusts to 'define the general scope of [trustees' and
other fiduciaries'] authority and responsibility'").
Under the common law of trusts, a fiduciary has a
fundamental duty to furnish information to a beneficiary. "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." Bixler, at 1300.
See also, Globe Woolen Co. v. Utica Gas and Electric Co., 121
N.E. 378, 380 (N.Y. 1918) ("A beneficiary, about to plunge into a
ruinous course of dealing, may be betrayed by silence as well as
by the spoken word.").
The Funds contend that the evidence shows that Janney knew
that Lloyd's representation about his payment to the limited
partnership was false, and that Janney strongly suspected that
Lloyd had altered a negotiable instrument to cover his tracks.
Although Janney now suggests that it had no proof of Lloyd's own
wrong doing and surmised that he may have been covering up for a
sister, the information Janney gave to the NASD clearly
establishes that Lloyd's integrity was, at best, suspect. Yet,
Janney sat silently by knowing that the Funds were placing their
assets under Lloyd's control. According to the Funds, Janney's
reasons for doing so had nothing to do with a careful, prudent,
or reasoned consideration of what was best for the Funds. They
point to the deposition of Rudolph Sander, a Janney executive, as
instructive. When asked if he thought it "would have been
important for the accounts to know that Mr. Lloyd was involved in
this kind of conduct" he responded:
If I have a suspicion that somebody did
something wrong and he feels he didn't, and I
tell [a] . . . customer that, in our opinion,
we have a suspicion that this man has done
something wrong and it impinges on his
ability to make a living, I think he would
have had a good, very good case against us.
So which side of that would you like to be
on?
Appendix at 269a. This, the Funds argue, shows that Janney
withheld the information from the Funds that it gave to the NASD
out of a fear of being sued, and a concern for its own well
being.
Janney seeks to prevail on two theories. First, Janney
would have us hold that if it was a fiduciary, the Funds' failure
to make a specific request for information about Lloyd somehow
alleviated any obligation Janney would have otherwise had to
disclose the very information the Funds needed in order to
prudently conduct their affairs. Such a result would not only
hoist the beneficiary by its own petard, it is contrary to well
established principles governing the relationship between a
fiduciary and beneficiary. The Restatement (Second) of Trusts
provides:
[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.
Restatement (Second) of Trusts § 173, comment d. (1959).
We have never held that a request is a condition precedent
to such a duty regardless of the circumstances known to the
fiduciary. To the contrary, it is clear that circumstances known
to the fiduciary can give rise to this affirmative obligation
even absent a request by the beneficiary. "[T]he duty to
disclose material information 'is the core of a fiduciary's
responsibility.'" Bixler, 12 F.3d at 1300. Indeed, absent such
information, the beneficiary may have no reason to suspect that
it should make inquiry into what may appear to be a routine
matter. If Janney was a fiduciary, the Funds' failure to request
information concerning Lloyd's departure has no bearing on
whether Janney breached the duties it owed the Funds by not
volunteering the information.
Second, Janney argues that it never had sufficient
information to determine what the Funds needed to know because it
was not certain Lloyd had violated securities regulations or the
law when he left Janney. Since Lloyd's transgression pertained
only to his personal business affairs, Janney maintains that it
discharged him because he did not "'act in a very high standard'"
Janney demands of its employees. Brief of Janney at 8. Janney
insists that Lloyd's refusal to fully explain the circumstances
of the late payment did not meet that standard. Refined to its
essence, Janney argues that there was no reason to tell the Funds
about the circumstances surrounding Lloyd's departure or to
believe that the Funds needed the information to protect itself
in its dealings with Lloyd, because there was only unsupported
suspicion of misconduct that did not appear to involve any
clients' accounts.
Contrary to Janney's assertion, we believe that there is a
genuine issue of material fact concerning the breach of fiduciary
duties. Janney gave the NASD a detailed narrative that supports
an inference that Lloyd altered a check to make it appear that
payment had been duly made. Lloyd was sufficiently compromised
that Janney intended to discharge him. There is a dispute,
however, concerning Janney's motivations and the materiality of
the information not volunteered. From Janney's characterization
of Lloyd's departure, a finder of fact could conclude that there
was no breach of any duty. If, in contrast, the Funds'
characterization of the events prevails, a finder of fact could
properly conclude that Janney's conduct falls within the
boundaries of the Restatement (Second) of Trusts § 173, comment d
set forth above. Moreover, we believe that it might come under
such a responsibility should come as no surprise to Janney. Over
80 years ago Judge Cardozo explained:
The trustee is free to stand aloof, while
others act, if all is equitable and fair. He
cannot rid himself of the duty to warn and
denounce, if there is improvidence or
oppression, either apparent on the surface,
or lurking beneath the surface, but visible
to his practiced eye.
Globe Woolen Co. v. Utica Gas & Electric Co., 121 N.E. at 380. If
Janney was a fiduciary, it could not turn its "practiced eye" to
its self-interest, while turning a blind eye to the interests of
its beneficiary.
We do not, of course, hold that one who may have attained a
fiduciary status thereby has an obligation to disclose all
details of its personnel decisions that may somehow impact upon
the course of dealings with a beneficiary/client. Rather, a
fiduciary has a legal duty to disclose to the beneficiary only
those material facts, known to the fiduciary but unknown to the
beneficiary, which the beneficiary must know for its own
protection. The scope of that duty to disclose is governed by
ERISA's Section 404(a), and is defined by what a reasonable
fiduciary, exercising "care, skill, prudence and diligence,"
would believe to be in the best interest of the beneficiary to
disclose.
Here, Janney provided information to the NASD which
certainly called Lloyd's character and integrity into question.
However, we do not dismiss the fact that the NASD, after being
supplied with that information by Janney and after its own
investigation, chose only to issue a relatively minor reprimand
to Lloyd. Thus, it is certainly conceivable that the Fund would
have transferred assets to Lloyd even if Janney had made a
disclosure to the Fund. Nevertheless, we conclude that Janney's
failure to disclose creates an issue of fact as to whether it
acted with the exercise of "care, skill, prudence and diligence,"
required by Section 404(a), and if not, whether failure to do so
caused Lloyd's subsequent loss.
In summary, we hold that, on remand, if the fact-finder
determines that Janney was an ERISA fiduciary, then Janney, as an
ERISA fiduciary, had a duty to disclose to the Funds any material
information which it knew, and which the Funds did not know, but
needed to know for its protection. Whether the information
contained in the NASD report is that kind of material information
which Janney, in the exercise of "care, skill, prudence and
diligence," was required by Section 404(a) to disclose is a
factual question to be determined by the fact finder. The well
established obligations endemic in the law of trusts requires
nothing less.
C. The Duration of The Relationship. Lloyd's departure
from Janney before the Funds transferred
its accounts to LSI will not relieve Janney of all obligations to
the Funds if Janney was a fiduciary. Assuming arguendo that
Janney became an ERISA fiduciary on August 28, 1984, when the
Funds' trustees named Lloyd their investment consultant, we
believe ERISA fiduciary duty law, and the law of trusts it
incorporates, would require that the duty to disclose material
information continue beyond his departure. If found to be a
fiduciary, Janney cannot realistically argue that despite its
prior fiduciary role, it can disavow all duties to ensure the
sound management of the Funds' assets. Nor does the fact that
little investment activity occurred between the time of Lloyd's
resignation and the transfer of the Funds' accounts to Provident
detract from Janney's fiduciary status. Fiduciary status, once
established, is not dependent solely on the amount of investment
activity.
While fiduciary relationships generally, and under ERISA in
particular, are consensual in the sense that the parties must
voluntarily enter a relationship having the stipulated
characteristics, once a fiduciary relationship exists, the
fiduciary duties arising from it do not necessarily terminate
when a decision is made to dissolve that relationship. Courts
that have considered the issue have held that an ERISA
fiduciary's obligations to a plan are extinguished only when
adequate provision has been made for the continued prudent
management of plan assets. See Chambers v. Kaleidoscope, Inc.,
Profit Sharing Plan and Trust, 650 F. Supp. 359, 369 (N.D.Ga.
1986); Pension Benefit Guaranty Corp. v. Greene, 570 F. Supp.
1483, 1488 (W.D.Pa. 1983), aff'd, 727 F.2d 1100 (3d Cir.), cert.
denied, 469 U.S. 820 (1984); Freund v. Marshall & Ilsley Bank,
485 F. Supp. 629, 635 (W.D.Wis. 1979). This obligation to ensure
that fiduciary obligations will continue to be met is a component
of the prudence imposed by Section 404(a)(1)(B) of ERISA, 29
U.S.C. § 1104(a)(1)(B) ("a fiduciary shall discharge his duties .
. . with the care, skill, prudence and diligence . . . that a
prudent man acting in a like capacity and familiar with such
matters would employ). Chambers, 650 F. Supp at 369; Greene, 570
F. Supp. at 1497-98; Freund, 485 F. Supp at 635.
In this case, the fiduciary relationship existed, if at all,
as the result of an agreement under which Janney undertook for a
fee to provide advice on a regular basis to the Funds that would
"serve as a primary basis for investment decisions with respect
to plan assets" and to "render individualized investment advice
to the plan regarding such matters as . . . investment policies
or strategy, overall portfolio compositions, or diversity of plan
investments." The Funds came to have such a relationship with
Janney only because of their faith in Lloyd. When Lloyd left
Janney, it became uncertain whether that relationship would
continue and, shortly thereafter, the Funds ceased to utilize the
services of Janney in the same way. Accordingly, the fiduciary
status of Janney under ERISA, which was predicated solely on that
relationship, ceased. Under the applicable principle of trust
law, however, Janney's fiduciary duty to advise the Funds of
information they needed for their own protection continued at
least until someone (the Funds themselves or another investment
advisor) undertook to exercise the function that Lloyd had
performed as a Janney vice president. Thus, at the point when
Janney was advised of the Funds' intention of engaging Lloyd's
new firm as a fiduciary, Janney retained a fiduciary duty to
disclose to the Funds material information then in its possession
concerning Lloyd's conduct.
Our holding that a duty to disclose material information may
extend beyond Lloyd's departure finds support in the common law
of trusts. Under the traditional law of trusts, a trustee cannot
relieve himself or herself of duties under the trust simply by
conveying the trust assets to another willing to serve. ii Austin
Wakeman Scott & William Franklin Fratcher, the law of trusts § 106 (4th
ed.
1987). A trustee's resignation is valid under three
circumstances only, i.e., when the trustee resigns with
permission of the appropriate court, with the consent of all the
beneficiaries or in accordance with the terms of the trust. The
Law of Trusts § 106. Further, a resigning trustee is not relieved
of liability for his or her management of the trust until he or
she has accounted to a court for the trust's administration. The
Law of Trusts § 106.1; see also, e.g., Nixon's Estate, 83 A. 687(Pa. 1912) ("The general rule is that a trustee may relieve
himself from liabilities arising from a trust relation by
submitting the administration of the trust to the jurisdiction of
the court.").
Although these common law rules help to guarantee the
continued proper administration of the trust, they are not
completely workable in the ERISA context. For example, ERISA
does not provide for a court accounting procedure for a resigning
fiduciary. Nonetheless, the purpose underlying those principles
is relevant to our inquiry. There are times when "the law of
trusts. . will inform, but will not necessarily determine the
outcome, of an effort to interpret ERISA's fiduciary duties."
Varity Corp. v. Howe, U.S. , 116 S.Ct. 1065, 1070 (1996).
In such a case, the common law of trusts is the "starting point,
after which courts must go on to ask whether, or to what extent,
the language of the statute, its structure, or its purposes
require departing from common law trust requirements." Id.ERISA "protects employee pensions and other benefits. . . by
setting forth certain general fiduciary duties applicable to the
management of both pension and nonpension benefits plans."
Varity Corp. v. Howe, 116 S.Ct. at 1070. Therefore, when "we
apply [ERISA's fiduciary duty section] to the facts of a
particular case, we remain mindful of ERISA's underlying
purposes." In re UNISYS Savings Plan Litigation, 74 F.3d 420,
434 (3d Cir. 1996). The protection which ERISA is intended to
afford private pension and benefit plans would be vitiated if an
ERISA fiduciary was able to simply walk away from the plan under
the circumstances presented to us here. An ERISA fiduciary is
defined "not in terms of formal trusteeship, but in functional
terms of control and authority". Mertens v. Hewitt Assoc., U.S. ,
113 S.Ct. 2063, 2071 (1993).
According to the Funds, the information Janney provided on
the NASD form indicates that Lloyd improperly handled his own
investments, fraudulently altered a commercial instrument and
lied about his actions. If Janney was a fiduciary, and if its
conduct would otherwise be a breach of fiduciary duties, it may
not hide behind Lloyd's departure to shield it from the
consequences of its actions.
IV. Common Law Duty
The Funds argue: "to the extent [they] do not have a
statutory claim against Janney under ERISA, they do have such a
claim either under federal common law or under state common law."
See Brief of the Funds at 39. As noted earlier, the district
court granted Janney's motion for summary judgment as to both
theories. Accordingly, we turn our attention to the Funds'
claims for relief under federal and state common law.
A. Federal Common Law
Congress has authorized federal courts to create common law
in certain instances. Textile Workers Union v. Lincoln Mills,
353 U.S. 448, 456-57 (1957). However (as the learned district
court correctly noted) we do so only to further Congress' intent
by filling gaps in specific legislation.
Since Congress both authorized and expects
that the courts will create a common law
under ERISA, we need not look for a specific
congressional intent to create the remedy at
issue. Instead, the inquiry is whether the
judicial creation of a right in this instance
is 'necessary to fill in interstitially or
otherwise effectuate the statutory pattern
enacted in the large by Congress. . .'
Plucinski v. I.A.M. National Pension Fund, 875 F.2d 1052, 1056
(3d Cir. 1989). We find no such interstices here. Accordingly,
we affirm the district court's grant of Janney's motion for
summary judgment on Count II.
B. State Common Law
Section 514(a) of ERISA pre-empts "any and all State laws
insofar as they may now or hereafter relate to any employee
benefit plan." 29 U.S.C. § 1144(a). "A law 'relates to' an
employee benefit plan, in the normal sense of the phrase, if it
has a connection with or reference to such a plan." Shaw v.
Delta Air Lines, Inc., 463 U.S. 85, 96-97 (1983). The district
court held that the state common law claim was pre-empted by
ERISA and therefore granted Janney's motion for summary judgment
on that claim. The district court premised its preemption
holding on its belief that the state law claim involved the
administration of the Funds' pension and benefits plans.
Glaziers and Glassworkers Union Local 252 Annuity Fund, et al. v.
Newbridge Securities, et al., 877 F. Supp. at 944-945 ("Indeed,
this Court has held that a plaintiff's breach of fiduciary duty
claim relating to the administration of an employee benefit plan
brought under state law is preempted by ERISA. Accordingly, we
must conclude that the Funds' [state law] breach of fiduciary
duty claim is preempted by ERISA. . . .").
The Funds contend that the district court's preemption
finding is dependent upon an initial finding that Janney was an
ERISA fiduciary. If, however, Janney is not ultimately found to
be an ERISA fiduciary, the Funds argue that its state law claim
does not "relate to" an employee benefit plan and that it is,
therefore, not preempted. In that case, the state law claim
would simply be a "commonplace", "run-of-the-mill state law
claim" which, although "affecting and involving" an ERISA plan is
not pre-empted by ERISA. See Mackey v. Lanier Collection Agency
& Service, 486 U.S. 825, 833 (1988). In short, the Funds can
continue to press its state law claim against Janney.
We believe there is merit to the Funds' preemption argument.
Although there is no bright line between a claim which "affects
or involves" an ERISA plan without, at the same time, "relating
to" an ERISA plan, our opinion in United Wire, Metal and Machine
Health and Welfare Fund, et al. v. Morristown Memorial Hospital,
995 F.2d 1179 (3d Cir. 1993), does aptly describe how a state law
relates to an ERISA Plan. We wrote:
A rule of law relates to an ERISA plan if it
is specifically designed to affect employee
benefit plans, it if singles out such plans
for special treatment, or if the rights and
restrictions it creates are predicated on the
existence of such a plan.
**************************
This does not end our inquiry, however. A
state rule of law may be preempted even
though it has no such direct nexus with ERISA
plans if its effect is to dictate or restrict
the choices of ERISA plans with regard to
their benefits, structure, reporting and
administration, or if allowing states to have
such rules would impair the ability of a plan
to function simultaneously in a number of
states.
995 F.2d at 1192-1193.
If, on remand, the district court finds that Janney was not
an ERISA fiduciary, the Funds' state law claim should be
subjected to the analysis in United Wire. It may very well be
that even in the event that Janney is not an ERISA fiduciary, the
state law claim may relate to an ERISA plan and be preempted.
However, if Janney is not found to be an ERISA fiduciary, there
is still room to argue that any fiduciary duty Janney may have
had toward the Funds arises under state law and does not "relate
to", but only "affects and involves" an ERISA plan. That is, the
state law claim may not relate to the administration of an
employee benefit plan at all. For example, the Funds may
successfully argue that there is a fiduciary duty which arises
between a client and a stockbroker and that the duty was breached
by Janney's failure to disclose.
Thus, we cannot, at this juncture, either prevent the Funds
from trying to show that its state law claim is not preempted or
hold as a matter of law that the state law claim is preempted.
Of course, it may be impossible for the Funds to demonstrate that
their claim is not preempted (even if Janney is not an ERISA
fiduciary); however, that finding should be made by the district
court after it makes a finding on Janney's status as a fiduciary
under ERISA.
Finally, if the district court finds that state law claim is
not pre-empted, it will then have to determine if the claim is
time-barred as Janney contends. See Zimmer v. Gruntal & Co.,
Inc., 732 F.Supp. 1330, 1336 (W.D.Pa.1989) ("breach of fiduciary
duty is tortious conduct and subject to two year statute of
limitations period, 42 Pa.C.S.A. § 5524(7)").
VII.
For the foregoing reasons, we will affirm the grant of
summary judgment in favor of Janney on Count II, the federal
common law claim, and will reverse the grant of summary judgment
in favor of Janney on Count I, the ERISA claim, and on Count III,
the state law claim, and remand for further proceedings
consistent with this opinion.
GLAZIERS AND GLASS WORKERS UNION LOCAL 252,
ET AL. v. NEWBRIDGE SECURITIES, INC.,
Nos. 95-1175, 95-1215, 95-1283
STAPLETON, J., Circuit Judge, Concurring:
I join the opinion of the court. I write separately because
I would resolve the issue of whether ERISA preempts a state law
that would impose a fiduciary duty of disclosure on Janney under
the circumstances of this case. The district court properly
addressed and resolved that legal issue, its resolution will not
be affected by further development of the record, and, in the
interest of conserving judicial resources, I would provide the
district court with the benefit of our view on that issue.
Applying the principles that we reviewed in United Wire, I
would hold that if Janney is not an ERISA fiduciary under §
1002(21)(A), a state law imposing a fiduciary duty of disclosure
on it would not be preempted by ERISA. ERISA, by spelling out
who is a fiduciary with respect to a plan and its participants,
defines the area of federal concern in which preemption is
required. Beyond that area, I would hold that a state can
continue, by a generally applicable law, to prescribe the duties,
fiduciary or otherwise, owed to a plan by its broker, just the
way it can continue, by a generally applicable law, to prescribe
the duties owed to a plan by its accountant, its lawyer, a
corporate director of a company it owns, or its plumber.